Bear Radar

Style Underperformer:

• Large-Cap Value (+.55%)

Sector Underperformers:

• Coal (-3.76%), Steel (-1.0%) and Agriculture (-.76%)

Stocks Falling on Unusual Volume:

• PCLN, IVN, CLF, MTL, NUAN, IBA, MR, NTY and GTY
  

Stocks With Unusual Put Option Activity:

• 1) LCC 2) MBI 3) ONN 4) CHK 5) PCLN
  

Stocks With Most Negative News Mentions:

• 1) AEP 2) TM 3) BP 4) MNTG 5) RIG
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (+.43%)

Sector Outperformers:

• Gold (+4.98%), HMOs (+1.03%) and Biotech (+.93%)

Stocks Rising on Unusual Volume:

• SA, IAG, SLXP, SGEN, WG, ETM, DTV, CRUS, VIV, TSU, NANO, CLMT, FOSL, STST, AFFY, IPXL, SATS, DNDN, SCVL, WINN, SSRI, GOLD, VVUS, SGEN, RGLD, SVNT, ZEUS, PAAS, GILD, CAKE, JBHT, ASA, MFB, SCX, LM, SLV and VIV
  

Stocks With Unusual Call Option Activity:

• 1) DF 2) ESI 3) ILMN 4) PCLN 5) CEPH
  

Stocks With Most Positive News Mentions:

• 1) NOK 2) VZ 3) AAPL 4) MRK 5) ABT

Tuesday Watch

Evening Headlines
Bloomberg:

• Bank Swaps, Libor Show Doubts on Europe Bailout: Credit Markets. The cost to protect bank bonds from losses and money markets show investors are concerned that the almost $1 trillion rescue package announced by European leaders may not be enough to contain the region’s sovereign debt crisis. A credit-default swaps index linked to European banks is trading 30 basis points higher than an investment-grade benchmark, according to CMA DataVision. While the gap narrowed from 58 basis points before European leaders agreed to the rescue plan, the bank index on average traded 10 basis points tighter than the benchmark for three years. A measure of banks’ reluctance to lend stayed at three times the level from March. “Sovereign risk hasn’t gone away in the slightest,” said Jim Reid, head of fundamental strategy in London for Deutsche Bank AG, Germany’s biggest bank. “What this package has done is massively reduced the tail risk in European markets without necessarily changing the medium- to long-term dynamics of financial markets.”
• IMF's Lipsky Signals Spain, Portugal Must Step Up Deficit Cuts. European countries saddled with debt should focus on cutting deficits in the wake of policy makers’ unprecedented efforts to contain the region’s sovereign-debt crisis, the International Monetary Fund’s No. 2 official indicated. The rescue package “is an important step,” John Lipsky, the first deputy director at the fund, said in an interview with Bloomberg Television. “Now let’s see what happens in other countries that need to undertake adjustment programs.”
• Largest Banks Would Face Stricter Capital Rules in Senate Plan. Bank of America Corp.(BAC), Citigroup Inc.(C) and other large banks would face higher capital standards under a proposed change to the financial-overhaul bill aimed at containing risk-taking at big institutions. Lenders with more than $250 billion in assets would have to meet capital standards that are at least as strict as those that apply to smaller banks, under an amendment offered by Senator Susan Collins, a Maine Republican. “It makes no sense that capital and risk standards for our nation’s largest financial institutions are more lenient than those that apply to small depository banks when the failure of larger institutions is much more likely to have a broad economic impact,” Collins said today on the Senate floor. The Collins amendment is the latest in a series of changes offered to the financial-overhaul bill proposed by Senate Banking Committee Chairman Christopher Dodd to prevent large institutions from taking on so much risk they could threaten U.S. financial stability. The Collins amendment directs federal regulators to impose minimum leverage and risk-based capital requirements on financial firms that the proposed systemic-risk council identifies for Federal Reserve oversight.Banking groups criticized the amendment, saying Congress shouldn’t set capital standards.
• Euro Package Leaves Governments Out of Ammunition: Matthew Lynn. Big problem, big number. The leaders of the euro-area countries have thrown 750 billion euros ($963 billion) at shoring up confidence in the single currency. But it doesn’t matter how many zeros you put on the end of a bad idea. It’s still a bad idea. In reality, you can’t stabilize a sinking ship. The new stability package suffers from the same problem as all the other ones the European Union has come up with in the months since the Greek crisis started rattling the markets last year: It tries to fix the symptoms, not the causes. Greece has exposed deep structural problems within the euro. There is no mechanism to stop governments breaking the rules. There is no popular support for massive fiscal transfers between countries. The rules for the euro area have turned out to be unreliable. And there is no way to start stimulating economic growth again in the heavily indebted nations.
• Dollar May Extend Rally After Greece Rescue, Deutsche Bank Says. The dollar may extend this year’s 12 percent climb against the euro even after Europe crafted a $1 trillion plan to rescue Greece and other debt-laden governments, said Deutsche Bank AG, the world’s biggest currency trader. “The risk of default has receded for the time being, but emergency measures alone will not be enough to lift the euro,” said Koji Fukaya, a senior currency strategist in Tokyo at Deutsche Bank. Europe needs sustained efforts to rebuild the finances of indebted nations, not just emergency loans, he said. “The euro is still overvalued” based on the gap in bond yields and in the differing degrees of economic recovery between the U.S. and Europe, he said. “It wouldn’t be surprising if the currency fell below $1.25 by the middle of the year.” Purchasing power parity, a measure of the relative cost of goods, shows the euro’s long-term neutral level at $1.15 to $1.20, he said.
• Greece Crisis Has Roots in Indulgent U.S. Policy: Amity Shlaes.
• Biggs Says U.S. Stocks May Surge 20%, Led by Technology Shares. U.S. stocks could jump as much as 20 percent, led by technology companies, as the global economy rebounds from Europe’s debt crisis, said Barton Biggs. “I’m betting the next move in the U.S. market is going to be up 15 to 20 percent,” Biggs, who runs New York-based hedge fund Traxis Partners LP and whose flagship fund returned three times the industry average last year, said in a Bloomberg Television interview today.
• China's April Inflation Accelerates, Lending Surges. China’s inflation accelerated, new lending topped economists’ estimates and property prices rose by a record, highlighting the threat of overheating in the fastest- growing major economy. Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.

Wall Street Journal:

• Some Think One Big Bet Helped Spur Giant Selloff. Shortly after 2:15 p.m. Eastern time last Thursday, hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines. On any other day, this $7.5 million trade for 50,000 options contracts might have briefly hurt stock prices, though not caused much of a ripple. But coming on a day when all varieties of financial markets were deeply unsettled, the trade may have played a key role in the stock-market collapse just 20 minutes later.The trade by Universa, a hedge fund advised by Nassim Taleb, author of "Black Swan: The Impact of the Highly Improbable," led traders on the other side of the transaction—including Barclays Capital, the brokerage arm of British bank BarclaysNYSE Euronext's electronic ARCA exchange started to appear questionable, say traders. In the disarray, some huge superfast-trading hedge funds that now provide much of the liquidity for the stock market pulled to the sidelines. The working theory among traders and others involved in the exchange meltdown is that the "Black Swan"-linked fund may have contributed to a "Black Swan" moment, a rare, unforeseen event that can have devastating consequences. "Universa alone couldn't have caused the meltdown," said Mark Spitznagel, Universa's founder. "We had reached a critical point in the market and it was poised to collapse." Barclays Capital declined to comment. As more details of last Thursday's dizzying collapse become clear, there is less evidence to suggest a "fat-finger" data-entry error caused the collapse. Instead, the picture is one of a highly rare confluence PLC—to do their own selling to offset some of the risk. Then, as the market fell, those declines would have forced even more "hedging" sales, creating a tsunami of pressure that spread to nearly all parts of the market. The tidal wave appears to have jarred the flow of data going into brokerage firms, such as Barclays Capital, according to people familiar with the matter. Exchanges, in turn, were clogged by huge volumes of offers to buy and sell stocks, say traders and exchange executives. Even before some individual stocks collapsed to just a penny a share, data from the of events, some linked, some unrelated, that exposed structural flaws in the stock market large and small.
• Two Oil Firms Tie Rig Blast to 'Plug'. Executives from BP PLC(BP), Transocean Ltd.(RIG) and Halliburton Co.(HAL) began pointing fingers on Monday over who bears ultimate responsibility for the April 20 oil-rig explosion that took 11 lives and is spilling oil into the Gulf of Mexico. The question will loom large at a Senate hearing Tuesday that will hear from executives of the three companies.
• Fannie Mae Needs $8.4 Billion More. Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing-market bust. Fannie's losses reflected continuing weakness in the housing market and would have been worse without accounting changes that reduced its deficit.

Bloomberg Businessweek:

• Former PBOC Adivsor Says Too Early for Stable EU, Daily Reports. It’s still too early to suggest that Europe has stabilized after the European Union approved a bailout for Greece, China Daily reported today, citing former Chinese central bank advisor Yu Yongding. The Greek crisis “fully exposed” the weakness of the global economic recovery, the Beijing-based newspaper cited Yu as saying. The euro will likely remain weak as the dollar strengthens, Yu was cited as saying. The Greek crisis also challenges Chinese policymakers who have wanted to diversify the nation’s overseas holdings away from the dollar, the newspaper cited Yu as saying. China’s exports are also set to suffer, China Daily cited Yu as saying. That shouldn’t stop policymakers from tightening policy, Yu was cited as saying. Tightening will likely result in slower Chinese economic growth this year, the newspaper cited Yu as saying.

Business Insider:

• Suddenly, People Recognizing Real Estate Bubbles Well Beyond China's Big Cities.

Zero Hedge:

• Fed Pretends It Is Preparing to Soak Up Excess Reserves, Even As Currency Swaps Are Sure to Add About $500 Billion to Fed's Assets.

Forbes:

• New College Loan Rules Put Taxpayers at Risk. They'll only exacerbate the tuition bubble and encourage more student debt.

Engadget:

• Confirmed: Apple(AAPL) and AT&T(T) Signed Five-Year iPhone Exclusivity Deal - But Is It Still Valid? The term of Apple and AT&T's iPhone exclusivity deal has long been a mystery -- although USA Today reported a five-year arrangement when the original iPhone came out in 2007, that number has never been independently confirmed, and it's been looking suspect in recent weeks as Verizon iPhone chatter has gotten louder. But we've been doing some digging and we can now confirm that Apple and AT&T entered into a five-year iPhone exclusive in 2007, based on court documents filed by Apple in California.

The Hill:

• Reform Fallout Vexes Small Hedge Funds. There are thousands of small funds that worry they’ll suffer from Washington’s effort to rein in the big players.

Politico:

• Kagan's Scant Writings Spark Concern. The Senate is about to embark on something it hasn’t done in nearly four decades: vet a candidate for the Supreme Court — Solicitor General Elena Kagan — who has no paper trail as a judge. A thin paper trail can be a good thing for a nominee, meaning few past legal writings to untangle at a confirmation hearing. But so far it hasn't shielded Kagan from attack. President Barack Obama’s supporters on the left are questioning whether Kagan is liberal enough — and the shortage of past writings has given conservatives ammunition to attack Kagan’s qualifications for the high court. “She basically has such a scanty academic record, and she hasn’t written anything at all outside the strictly academic context. And she hasn’t been a judge. There’s no public record at all to speak of to evaluate her on, which is really a very strange situation,” said Paul Campos, a liberal law professor at the University of Colorado. Or as liberal blogger Jane Hamsher of Firedoglake put it: “Accepting Kagan just because people like Obama is wrong. That’s appropriate for ‘American Idol,’ not the Supreme Court. Nobody knows what she stands for but him.”
• Wellpoint(WLP) to Obama: Stop 'False' Info. WellPoint CEO Angela F. Braly has fired the latest shot in an escalating battle between the Obama administration and one of America’s largest health insurers. In a letter to President Barack Obama, Braly accused Obama of repeating “false information” about the company cutting off insurance for breast cancer patients and “grossly misrepresent[ing]” the company’s work to treat breast cancer patients. Braly’s letter was prompted by President Barack Obama’s address on Saturday.

Reuters:

• US Audit Urges Controls on Treasury Warrant Deals. The U.S. Treasury has managed to negotiate prices for warrants from bailed out banks at prices largely at or above estimated values, but it needs better controls over its bargaining process, a government watchdog said on Tuesday. The Special Inspector General for the Troubled Asset Relief Program said in a new audit report that Treasury has failed to document decisions of the internal panel that makes decisions on banks' offers to repurchase warrants from Treasury. It also said Treasury does not document the substance of its conversations and negotiations with banks, potentially jeopardizing the return realized by taxpayers.
• Priceline(PCLN) Sees Weaker 2nd Quarter, Shares Fall.
  

Telegraph:

• Shock and Awe May Not Be Enough to Save Europe.

Beijing News:

• Beijing property prices fell 31.4% for the week ending May 9 from the week ending April 11, to a average price of 16,898 yuan per square meter, citing statistics from consulting firm Comprehensive Real Estate Services Corp.

21st Century Business Herald:

• Chinese banks can withstand a 30%-50% decline in home prices, citing bank officials. The nation's banks have completed stress test on their exposure to mortgages. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. can withstand about a 35% decline in home prices. Bank of Communications Co. can withstand a 30% decline in prices and Agricultural Bank of China can take a 20% drop. China Minsheng Banking Corp. can withstand a decline of 40%. China Merchants Bank Co. can withstand a drop of 37%.
  

The Chosun Ilbo:

• Clinton Mulls Seoul Visit Over Cheonan Findings. South Korea and the U.S. are discussing a visit by Secretary of State Hillary Clinton to Seoul once the findings of an investigation into the sinking of the Navy corvette Cheonan are announced late this month. A diplomatic source in Washington on Monday said Clinton is to reaffirm the strong alliance "and send a solemn warning message to the North if findings of the Cheonan's sinking point clearly to North Korea's involvement."

Evening Recommendations
Citigroup:

• Reiterated Buy on (AGU), target $76.

Night Trading

• Asian indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 108.0 -7.0 basis points.
• S&P 500 futures -.67%.
  
• NASDAQ 100 futures -.71%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GBE)/-.41
• (FOSL)/.32
• (DIS)/.46
• (SPWRA)/.11
• (ERTS)/.05
• (ASEI)/1.04
• (CHD)/1.08

Economic Releases
10:00 am EST

• Wholesale Inventories for March are estimated to rise +.5% versus a +.6% gain in February.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lacker speaking, Fed's Lockhart speaking, Fed's Plosser speaking, $38B 3-year Treasury Note Auction, weekly retail sales reports, ABC consumer confidence reading, IDB/TIPP Economic Optimism Index, NFIB Small Business Optimism Index, (PBI) investor meeting, UBS Global Financial Services Conference, Deutsche Bank Alt Energy/Utilities/Power Conference, BofA Merrill Lynch Healthcare Conference, Jeffries Internet/Media/Telecom Conference, BofA Merrill Metals/Mining Conference, (CE) analyst meeting, (FAF) analyst meeting, (WMB) analyst meeting, (WPZ) analyst meeting, (RADS) investor day, (INTC) analyst meeting, (BMR) analyst meeting and the (TDSC) investor day could also impact trading today.
  

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

Stocks Sharply Higher into Final Hour on Less Sovereign Debt Fear, Diminishing Financial Sector Pessimism, Short-Covering, Bargain-Hunting

Broad Market Tone:

• Advance/Decline Line: Substantially Higher
  
• Sector Performance: Every Sector Rising
  
• Volume: Above Average
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 30.04 -26.67%
  
• ISE Sentiment Index 80.0 +35.59%
  
• Total Put/Call 1.05 -12.50%
  
• NYSE Arms .91 -61.08%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 102.45 bps -21.08%
  
• European Financial Sector CDS Index 118.48 bps -27.84%
  
• Western Europe Sovereign Debt CDS Index 119.0 bps -26.84%
  
• Emerging Market CDS Index 241.23 bps -17.87%
  
• 2-Year Swap Spread 28.0 -10 bps
  
• TED Spread 28.0 -3 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .15% +3 bps
  
• Yield Curve 268.0 +7 bps
  
• China Import Iron Ore Spot $175.50/Metric Tonne +.29%
  
• Citi US Economic Surprise Index +14.70 +3.2 points
  
• 10-Year TIPS Spread 2.24% +9 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +140 open in Japan
• DAX Futures: Indicating -42 open in Germany

Portfolio:

• Slightly Higher: On gains in my Biotech, Retail, Medical and Tech long positions
  
• Disclosed Trades: Covered some of my (IWM), (QQQQ) hedges and some of my (EEM) short
  
• Market Exposure: Moved to 75% Net Long

BOTTOM LINE: Today's overall market action is bullish as equities trade substantially higher on decent volume despite a very muted bounce in the euro. On the positive side, Homebuilding, Steel, Oil Tanker, Coal and Airline stocks are especially strong, rising 6.0%+. The Spain sovereign cds is falling -31.77% to 162.90 bps and the eurozone investment grade cds index is plunging -22.2% to 94.66 bps, which are large positives. Oil is only 2.3% higher despite its recent decline and huge equity move higher. This is likely due to continuing worries over slowing global demand and the muted bounce in the euro. On the negative side, Telecom, Gold, Defense, Utility, Oil Service, Ag, Medical, Biotech, Drug and Education shares are underperforming today. The Shanghai Composite continues to trade poorly, just barely rising last night. The Japan sovereign CDS is up +9.2% today to 76.75 bps. The Libor-OIS spread is rising another +1 bp today to 19.0 bps. The 30-day asset-backed commercial paper yield is rising 2 bps to 31 bps, which is the highest since Dec. 4, 2009. Today's equity market reaction to Europe's actions is about what I would have expected, but the small rise in the euro is a large red flag, especially given how short traders are positioned against the currency. Part of the market's recent sell-off was related to the euro's disorderly decline. This bares close monitoring. Over the longer-term I still expect more weakness in the euro and significant debt-related issues to resurface. Given I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less sovereign debt fear, diminishing financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:

• Stocks, Commodities, Greek Bonds Rally on European Loan Package. Stocks rallied around the world, sending the MSCI World Index up the most in 13 months, while Greek, Spanish and Portuguese bonds soared after European policy makers announced an almost $1 trillion loan package to end the region’s sovereign-debt crisis. The euro pared an earlier rally. The MSCI World gauge of stocks in 23 developed nations jumped 4.5 percent at 1:04 p.m. in New York, while the Standard & Poor’s 500 Index rose 3.9 percent and Spain’s IBEX 35 Index surged a record 14 percent.
  
• Greece May Have Rating Lowered to Junk, Moody's Says. Greece may have its credit rating lowered to junk within the next month, Moody’s Investors Service said, citing the country’s “dismal” economic prospects. “We expect to conclude our review in the coming four weeks,” Moody’s, which currently has the nation’s A3 rating on review for a downgrade, said in a report today. “The migration will most likely be substantial, probably within the Baa range; but an adjustment to below investment grade is also possible.” Portugal’s rating, which is also on review for a downgrade, will probably be lowered one level to Aa3 from Aa2, though an “adjustment” of two steps to A1 can’t be ruled out, Moody’s said. No “significant” rating action is likely “in the short run” for Ireland, which has a negative outlook on its Aa1 rating, the company said. Cutting Greece to junk would be a downgrade of at least four steps. Standard & Poor’s already rates Greece BB+, one level below investment grade. A downgrade “will depend on developments in the Greek economy once the fog of financial panic, support-mobilization and street demonstrations dissipates,” Moody’s said.
• Exchanges Seek Faster Circuit Breakers After May 6 Stock Plunge. The biggest U.S. equity exchanges said they must align trading rules to prevent conflicting systems from repeating the failures of handling buy and sell orders that worsened last week’s rout. Circuit breakers designed to slow trading or shut markets during volatile periods may have prevented the biggest losses on May 6, when the Dow Jones Industrial Average fell 998.5 points intraday, according to Bats Global Markets Inc., Direct Edge Holdings LLC and White Cap Trading LLC. The Securities and Exchange Commission is studying changes to calm markets when prices tumble, people familiar with the matter said May 7.
• Euro Rally Temporary, Will Resume Decline, UBS Says. The euro’s rally after European policy makers announced a loan package worth nearly $1 trillion as well as government-bond purchases will be “temporary,” according to UBS AG, the second-largest currency trader. Policy in the region is becoming “very unfavorable,” said Mansoor Mohi-uddin, Singapore-based global head of currency strategy at UBS. The European package may drive a “temporary rally” in the euro toward $1.35 before it resumes its decline, said Mohi- uddin. “The euro will definitely hit what we call its long-term fair value at $1.20 and it may easily overshoot that if difficulties in Europe persist,” he said. “The policy mix in Europe is becoming very unfavorable to the currency.”
• Default Swaps Tumble After EU Goes 'All In': Credit Markets. Credit markets rallied around the world after the European Union agreed on an aid package worth almost $1 trillion to halt the sovereign debt crisis. “There has been a poker game going on between the markets and the EU,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. “This is probably reaching a climax as the EU has just gone ‘all in.’” Credit-default swaps on the Markit iTraxx Europe Index of 125 investment-grade companies tumbled 32 basis points to a mid- price of 101 as of 4:46 p.m. in London, with banks leading the biggest ever one-day decline, according to Markit Group Ltd. Swaps on Greece fell 358.5 basis points to 557, Portugal dropped 178 to 247 and Spain declined 82.5 to 156 basis points, according to CMA DataVision. The Markit CDX North America Investment Grade Index, an indicator of perceived credit risk linked to 125 companies in the U.S. and Canada, fell 17.3 basis points to a mid-price of 101.4 basis points as of 11:49 a.m. in New York, Markit prices show. Swaps on JPMorgan Chase & Co., the second-biggest U.S. bank by assets, fell about 10 basis points to 105, according to broker Phoenix Partners Group. Contracts on Goldman Sachs Group Inc., the bank facing fraud allegations from the U.S. Securities and Exchange Commission, fell 18 basis points to a mid-price of 195 basis points, Phoenix prices show. The Markit iTraxx Financial Index of credit-default swaps on 25 European banks and insurers fell 42 basis points to 135 basis points and earlier dropped to 119, the biggest one-day drop ever, JPMorgan prices show. That’s still only the lowest in a week and is higher than the 87 basis-point level on April 13. The difference between three-month dollar Libor and the overnight indexed swap rate, the so-called Libor-OIS spread that’s a barometer of the reluctance of banks to lend, jumped to 19.13 basis points today from 18.11 basis points on May 7. The spread, which earlier reached 20 basis points, is more than three times the 6 basis-point spread on March 15 and is at the highest levels since August. “Credit investors should not overlook that this is more of a sovereign bailout rather than a private-sector bailout,” Philip Gisdakis, the head of credit strategy at UniCredit SpA in Munich, wrote in a note to investors. “The austerity measures that will be part of the program will have a negative impact on corporate spreads.”
• Fannie Mae Seeks $8.4 Billion in New Aid After Loss. The company lost $11.5 billion in the first three months of this year, it said today in a Securities and Exchange Commission filing. Fannie Mae had posted $136.8 billion in losses in the preceding 10 quarters, and the new aid request would bring its total draw from the Treasury to $84.6 billion since April 2009. Even with the assistance, Fannie Mae increased foreclosures to almost 62,000 homes from about 47,000 in the prior quarter, according to the filing. The company’s foreclosure rate increased and its inventory of homes grew from $8.5 billion to $11.4 billion during the first quarter. “We expect our foreclosures to increase in 2010 as a result of the adverse impact that the weak economy and high unemployment have had and are expected to have on the financial condition of borrowers,” the company said in a press release. Credit-related expenses, including home-loan delinquencies and defaults, increased to $5.1 billion in the first quarter from $4.1 billion three months earlier, the company said. Non- performing loans were $223.9 billion as of March 31, up from $216.5 billion at the end of December.
• Dollar Libor Holds Near 9-Month High After EU Aid. The rate banks say they pay for three-month loans in dollars stayed near the highest level in about nine months on concern an almost $1 trillion European loan plan may not be enough to restore confidence in markets. The London interbank offered rate, or Libor, for such loans slipped to 0.421 percent today, from 0.428 percent on May 7, the highest since Aug. 17, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, widened more than 1 basis point to 19.2 basis points.
• EU Hedge-Fund Legislation Vote is Postponed, Lawmaker Says. European Union lawmakers postponed a vote on hedge-fund legislation that would have stopped EU investors from sending money to funds based in off-shore tax havens. Members of the European Parliament’s Economic and Monetary Affairs Committee postponed a scheduled vote that could have seen European authorities bar hedge funds from countries that don’t meet tax disclosure rules. The parliament will now vote on the proposals May 17, said Sharon Bowles, the chairwoman of the committee. “More time is needed” to resolve differences, Bowles told the lawmakers at a hearing today. The vote was postponed to give “more consideration” to the Parliament’s legal affairs committee, the EU institution later said in a statement.
• Goldman Sachs(GS) Says It Expects More Lawsuits Over CDOs.
• Kocherlakota Says Bailouts Are Inevitable, Backs Taxes on Firms. Narayana Kocherlakota, the Federal Reserve’s newest policy maker, said financial firms should be taxed as a way to limit the size of future bailouts because legislation won’t eliminate the prospect of such rescues. “Bailouts are inevitable,” he said in the text of a speech today in Minneapolis. “Policy makers inevitably resort to bailouts even when they have explicitly resolved, in the strongest possible terms, to let firms fail” because governments can’t risk a systemic collapse. He suggested imposition of a tax based on the government’s estimated, discounted cost for bailing out a firm any time over the next one to 30 years.
• China's Stocks Rebound After Briefly Entering a Bear Market. China’s stocks rebounded after briefly entering a bear market on speculation a slowdown in the economy may delay increases in borrowing costs and a Europe loan package will keep the region’s credit crisis from spreading. The Shanghai Composite Index added 10.38, or 0.4 percent, to 2,698.76 at the close after falling as much as 1.6 percent. The measure briefly slid more than 20 percent from the close of 3,338.66 on Nov. 23, a sign analysts say is a bear market.
• Goldman Sachs(GS) Has First Quarter With No Trading Loss. Goldman Sachs Group Inc.’s traders made money every single day of the first quarter, a feat the firm has never accomplished before. Daily trading net revenue was $25 million or higher in all of the first quarter’s 63 trading days, New York-based Goldman Sachs reported in a filing with the U.S. Securities and Exchange Commission today. The firm reaped more than $100 million on 35 of the days, or more than half the time. Trading accounted for 76 percent of first-quarter revenue. The lack of trading losses could add to the perception that Goldman Sachs has an unfair advantage in the markets, said one shareholder. “It will reinforce the heads we win, tails you lose mentality that people think actually exists and promotes the concept of an unfair advantage,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas, which oversees about $2 billion in assets including Goldman Sachs shares. “It’s too politically charged not to, how is that possible that they only make money?”
• N.J. Democrats Want Tax on Rich, Christie Seeks Curbs. New Jersey's Democratic lawmakers called for an income-tax surcharge on residents who earn at least $1 million a year, as Republican Governor Chris Christie proposed limits on spending by state and local government.
• Chavez's Threats May Make Economy Worse, Ramos Says. Venezuelan President Hugo Chavez’s threats to stem currency speculation will likely deepen an economic slump and force the government to spend more dollars in the foreign-exchange market to slow a rout in the bolivar, Goldman Sachs Group Inc. said. “Chavez continues to misdiagnose the problem and feels the solution is more socialism and less speculation,” Goldman Sachs economist Alberto Ramos said in a telephone interview from New York.

Wall Street Journal:

• Real Estate's Far Reach Will Continue to Pinch. Highflying property prices drove the most-recent economic boom, and a collapse in real-estate values hammered it back down. Now, as the economy struggles to regain strength, real estate is expected to continue to act as a brake, rather than an accelerator. Despite clear signs of revival in the larger economy, including upturns in manufacturing and consumer spending, the nation's market for homes and office buildings remains mired in foreclosures and oversupply. That imbalance will be worked out over time, but in the meantime, it is slowing the recovery in myriad ways. Here's how it breaks down: Less construction means fewer jobs. Home owners who once felt rich are feeling poorer. Small businesses aren't borrowing as much. Lower real-estate values translate into lower property taxes, crimping government spending.
• Skype to Offer Group Video Chat, for a Fee. Internet calling service Skype Ltd. unveiled a new group video chat service and subscription plans, as it builds out its strategy of offering a free service that makes money by charging for extras. Skype will next week launch a free trial of an upgrade to its PC-based calling software that lets up to five people make a video call at the same time. The trial will be free, but the company will begin charging for the group feature — one of its users' biggest requests — later in the summer.
• IDC: Cloud Computing Server Sales to Reach $12.6 Billion by 2014. Server sales related to cloud computing are expected to jump to $12.6 billion in the next five years as more businesses embrace the era of automated and virtualized data centers.
• Fed's Swap Decision Could Ratchet Up Political Pressure. The U.S. Federal Reserve's decision to reopen swap lines with the European Central Bank and central banks in Japan, Switzerland, England and Canada puts it in a delicate political position. The U.S. Congress is in the midst of rewriting a financial regulatory overhaul that could rein in the Fed amid sharp criticism of its actions before and during the financial crisis. The overseas lending program it reopened Sunday in response to pleas from Europe has been among the programs lawmakers have criticized, with some suggesting it is bailout out foreign banks and other saying the Fed is too secretive about details. Under the swap lines, the Fed makes loans to foreign central banks, which in turn use the funds to make U.S. dollar loans to financial institutions in their home markets. Fed officials say they face little risk in these loans, because their counterparties are central banks and not foreign financial institutions.
• Obama Nominates Kagan to Seat on Supreme Court. President Barack Obama announced the nomination of Solicitor General Elena Kagan to the Supreme Court, calling her a "trailblazing leader" who could build consensus across ideological lines. If confirmed by the Senate, Ms. Kagan would be the first justice in nearly 40 years to join the court without previous experience as a judge.

CNBC:

• Housing Prices to Rise 3-5% This Year: John Paulson. John S. Paulson, the hedge fund manager who made $15 billion shorting the real estate market, said Monday that he expects housing prices to rise between 3 percent and 5 percent this year and another 8 to 12 percent in 2011. He also said he expects a strong V-shaped economic recovery.

Fox News:

• Paulson to Close Biggest Funds to New Investors. Paulson & Co. said Monday that it will close the firm's largest hedge funds to new investors later this year. The Advantage funds, which oversee roughly $19 billion in assets, will only allow new investors in if current investors redeem, creating space, John Paulson, head of Paulson & Co., explained during a conference call with clients. Paulson & Co.'s other hedge funds - the Credit, Merger, Recovery and Gold funds - aren't affected and will remain open to new investors, Paulson added.

NY Times:

• Banks Lobby Against Ban on Derivatives Trading. Cory Strupp, who represents Wall Street in Washington, spent the last six months lobbying for more than two dozen changes in the derivatives chapter of the Senate’s financial legislation. He has spent the last two weeks focused on one: eliminating a new provision that would require banks to leave the lucrative business of derivatives trading, Binyamin Appelbaum and Eric Lichtblau report in The New York Times.

Business Insider:

• Moody's(MCO) CEO Dumped Shares The Day SEC's "Well's Notice" Arrived -- And So Did Buffett!. We suspect Moody's investors will also be interested to know that CEO Raymond McDaniel dumped 100,000 shares of stock at $29 a share the day the Wells Notice arrived. And that Berkshire Hathaway (BRK) sold ~678,000 shares that day and another ~300,000 or so in the week that followed. Did Raymond McDaniel and Berkshire know about the Wells Notice when they sold their stock? If so, couldn't this be trading while in possession of material non-public information?

SafeHaven:

• The Dangers of Quant Trading Models: Dow's 1,000 Point Drop a Prime Example.

Reuters:

• BP(BP) Says Oil Spill Costs $350 Million So Far, Shares Hit. Oil major BP Plc said the oil spill in the Gulf of Mexico had cost it $350 million so far, suggesting the final bill could be much higher than many analysts predicted and sending its shares to a six-month low.

TV2:

• The Danish People's Party broke with Denmark's ruling coalition, to which it provides parliamentary support, over European finance ministers' package to strengthen the euro, calling it "unacceptable," citing Pia Adelsteen, a spokesman for the People's Party. Getting rid of the euro and allowing countries to devalue their old currencies is the best solution to the current crisis, Adelsteen said.

Bear Radar

Style Underperformer:

• Large-Cap Value (+3.06%)

Sector Underperformers:

• Education (+1.57%), Telecom (+1.64%) and Gold (+1.71%)

Stocks Falling on Unusual Volume:

• BP, IPSU, PSYS, HWCC, RADS, GOLD, SPMD, BWLD, DF, MHP and MCO
  

Stocks With Unusual Put Option Activity:

• 1) CMCSA 2) STD 3) AGN 4) M 5) ACF
  

Stocks With Most Negative News Mentions:

• 1) BP 2) RBS 3) DF 4) HAL 5) SSP