Broad Market Tone:

• Advance/Decline Line: Slightly Higher
  
• Sector Performance: Most Sectors Rising
  
• Volume: Around Average
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 35.60 -11.25%
  
• ISE Sentiment Index 119.0 +85.94%
  
• Total Put/Call .88 -33.83%
  
• NYSE Arms 1.15 +241.58%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 118.39 bps -4.13%
  
• European Financial Sector CDS Index 148.80 bps +5.27%
  
• Western Europe Sovereign Debt CDS Index 137.0 bps +8.59%
  
• Emerging Market CDS Index 299.42 bps -1.62%
  
• 2-Year Swap Spread 47.0 +4 bps
  
• TED Spread 36.0 +1 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .15% unch.
  
• Yield Curve 245.0 -4 bps
  
• China Import Iron Ore Spot $148.30/Metric Tonne -2.37%
  
• Citi US Economic Surprise Index +20.50 +1.1 points
  
• 10-Year TIPS Spread 1.95% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +12 open in Japan
• DAX Futures: Indicating +13 open in Germany

Portfolio:

• Higher: On gains in my Technology, Medical and Biotech long positions
  
• Disclosed Trades: Added to (GOOG) long and took profits in another long
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 is hugging the flat line, cutting morning losses, despite another disorderly decline in the euro and meaningful rises in some gauges of credit angst. On the positive side, Gaming, Road&Rail, HMO, Biotech, Medical, Internet and Gold stocks are especially strong, rising .75+%. The Spain sovereign cds is falling -2.4% to 197.0 bps, the Japan sovereign cds is falling --4.5% to 90.0 bps and the Russia sovereign cds is dropping -7.1% to 186.4 bps. The Shanghai Composite gained another +3.5% overnight and European equities stabilized despite the large drop in the euro. On the negative side, Oil Tanker, Oil Service, Energy, Bank and Construction shares are under pressure, falling 1%+. Several important gauges of credit angst are moving higher again despite the bounce in stocks off morning lows. (XLF) has been a bit heavy throughout the day. The bulls have been unable to gain upside traction as a result. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, short-covering and diminishing economic fear.

Today's Headlines

Bloomberg:

• Euro Breakup Talk Increases as Germany Loses Proxy.
• Euro Falls to Lowest Since Lehman as Breakup Concern Increases. The euro fell to its lowest level since the collapse of Lehman Brothers Holdings Inc. on concern that the 16-nation currency may be headed for disintegration. The shared currency fell through $1.24 for the first time since November 2008 as German Chancellor Angela Merkel said that Europe is in a “very, very serious situation.”
• Moody's(MCO) Says 80% Chance Greek Credit Rating Will Be Cut Again. Moody’s Investors Service said there is a “greater than” 80 percent chance it will cut its rating on Greece’s debt again as the government struggles to push through measures to reduce its budget deficit. “A multi-notch downgrade is likely,” Moody’s said in a statement. The rating company cut Greece to A3 from A2 on April 22 and said today that an upgrade is “unrealistic in the foreseeable future.” “The specific magnitude of the downgrade depends on the likelihood that Greece adheres to the conditions of the euro area/IMF package and the levels at which debt will stabilize or reverse,” Moody’s said. “The scale of the current fiscal austerity program has increased political risk as the Greek population is being asked to accept very demanding conditions.” “While Greece is now sheltered from the capital markets, the success of its budgetary consolidation will depend ultimately on the resolve of politicians and citizens,” said Peter Vanden Houte, an economist at ING in Brussels. “Since some ‘consolidation fatigue’ is likely to occur, we still do not entirely exclude the possibility of a Greek debt restructuring. This would imply that bouts of market unrest are still likely to occur over the next two years or so.”
• Greece Leads Surge in Credit Risk as Ackermann Doubts Debt Plan. Greece led a jump in the cost of insuring against losses on government bonds after Deutsche Bank AG Chief Executive Josef Ackermann said he doubted whether the nation would be able to pay its debts in full. Credit-default swaps on bank and company borrowings also rose as the debt rally triggered by the European Union’s $1 trillion pledge to ease the region’s deficit crisis faded. Swaps on Greece jumped 79.5 basis points to 608, Portugal increased 47 to 248, Spain rose 25 to 180, Ireland climbed 27 to 197 and Italy was up 10.5 at 140 basis points. It will require “incredible efforts” by Greece to meet its borrowing commitments, Ackermann said in an interview with ZDF television. Investor concern that debt-reduction measures by governments in the region will undermine economic growth today drove the euro below $1.25 for the first time since March 2009. “There are still major doubts about the euro-zone’s ability to produce the kind of growth required to get back onto a more stable footing,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. Confidence in bank debt was also weakened by concerns federal investigations into bank practices in the U.S. may lead to more regulations that will hurt profits. European banks may face 244 billion euros ($302 billion) in lost earnings and increased capital requirements because of stricter rules, Credit Suisse Group AG analysts estimated. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers jumped 15 basis points to 147 and the subordinated index rose 19 to 215, JPMorgan prices show. Contracts on the Markit iTraxx Crossover Index of default swaps linked to 50 companies with mostly high-yield credit ratings increased 46 basis points to 506.5, the first rise this week, according to JPMorgan Chase & Co. prices. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 11.5 basis points to 109, JPMorgan prices show.
• Visa(V), MasterCard(MA) Fall on 'Surprising' Debit-Card Vote. Visa Inc. fell as much as 9.4 percent and MasterCard Inc. slid 7.9 percent in New York trading after the U.S. Senate included limits on debit-card fees in the financial-overhaul bill. The Federal Reserve would be empowered to curb debit-card interchange, or “swipe” fees, charged to merchants on each transaction under rules approved by the Senate. Visa, the world’s biggest payment network, dropped $6.46, or 7.5 percent, to $79.27 at 10:47 a.m. in New York Stock Exchange composite trading, and has fallen 18 percent since its record closing high of $96.59 on April 23. MasterCard fell $16.30, or 7 percent, to $216.01, and has tumbled 15 percent in three weeks. Shares of payment networks and banks came under pressure last week as Senate Majority Whip Richard Durbin pushed curbs on debit interchange fees. The limits may crimp revenue at Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., the biggest U.S. debit-card issuers.
• Oil Falls to a Three-Month Low on European Debt Concern. Crude oil declined to a three-month low in New York on concern that Europe’s sovereign-debt crisis will reduce global economic growth and fuel consumption. Oil fell as much as 4.5 percent, the biggest one-day drop since Feb. 4, and the euro tumbled after the Spanish daily El Pais reported that French President Nicolas Sarkozy threatened to pull out of the currency. Supplies at Cushing, Oklahoma, where New York-traded West Texas Intermediate oil is delivered, rose to a record last week, according to the Energy Department. “The sovereign debt crisis and the fact that the Saudis don’t want to see $90 oil are responsible for the drop in oil prices,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “The only problem for the Saudis is there’s no fine-tuning of the oil price.” “We’re still in this phase of deleveraging,” said Tobias Merath, head of commodity research at Credit Suisse Group AG in Zurich. “We’re seeing concerns about the bailout package. With the European sovereign debt problems, banks need to reduce their risky activities. What’s also getting everyone’s attention is the development in the inventories.” Crude-oil stockpiles at Cushing increased 784,000 barrels last week to 37 million, the highest level since the Energy Department started keeping records at the storage hub in 2004. “Cushing supplies keep going up, and the contango tells you to continue to do more,” said Kyle Cooper, managing director at IAF Advisors in Houston. “It’s self-reinforcing.”
• Copper, Aluminum, Zinc Drop on Growth Risk in China. Copper, aluminum and zinc tumbled on concern that demand may weaken as economic growth cools in China, the world’s largest metals consumer, and European nations slash budgets to curb deficits.
• Thai Troops Clash With Bangkok Protesters; 5 Killed.
• BP(BP) Trying to Insert Tube Into Leaking Gulf Oil Pipe. BP Plc, the largest oil and natural- gas producer in the Gulf of Mexico, is trying to insert a tube into a leaking pipe at a well off Louisiana, advancing a plan to divert much of the crude into a ship on the surface. “We’ll try to keep this oil from entering” the Gulf, Doug Suttles, BP’s chief operating officer for exploration and production, said today in an interview on CNN. The company may know the results of the effort in 24 hours, Mark Proegler, a company spokesman, said in an interview.
• Spain's Core Inflation Turns Negative for First Time. Spain’s underlying inflation rate turned negative in April for the first time on record, just as Prime Minister Jose Luis Rodriguez Zapatero pushes through the country’s biggest budget cuts in more than three decades. Core consumer prices, which exclude energy and fresh food, fell 0.1 percent from a year earlier, after rising 0.2 percent in March, the National Statistics Institute in Madrid said today. That’s the first annual decline since the data were first collected in 1986.
• Swap Spreads Widen as European Debt Crisis Buoys Dollar Libor. U.S. interest-rate swap spreads widened as the cost for three-month dollar loans in London rose to the highest since August while the European debt crisis sent the euro tumbling, global shares lower and Treasury yields down. The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened 4.19 basis points, or 13.5 percent, to 35.13 basis points. The spread has increased from this year’s low of 9.63 basis points on March 24, the narrowest since 1993. The spread is based in part on expectations for the London interbank offered rate, or Libor, and is used as a gauge of investor perceptions of credit risk. “There is a bit of a scramble now for dollar funding, and that is putting some upward pressure on spreads,” said Michael Darda, the chief economist at MKM Partners LP in Greenwich, Connecticut. “The origin of the pressure is that you have this weakness that is being played out in the sovereign debt markets in Europe. The European banks are very much exposed to that debt.”

Wall Street Journal:

• New York Times to Begin Website Charges in January.

CNBC:

• Goldman Sachs(GS) Did Nothing Illegal: Clinton Says.
• Is Ending Home Mortgage Interest Deduction in Play?
  

NY Post:

• Lloyd Blankfein Pays for New Home With Cash. Goldman Sachs overlord Lloyd Blankfein is so rich, he bought his $26 million "Master of the Universe" duplex at 15 Central Park West in cash before finally selling his five-bedroom, seven-bath prewar duplex at 941 Park Ave. Blankfein just accepted an offer on that apartment, reports The Post's Jennifer Gould Keil. The luxurious abode, asking $15 million last year, was most recently listed for $13.5 million -- on top of which a buyer must pay $11,327 a month maintenance.

Business Insider:

• Surprise! Cost of Healthcare Bill Already Spiraling Beyond Estimates, And Democrats Are Ignoring The Reasons Why. There's been a spate of bad news recently about the health care bill. Henry Waxman canceled his War on Accounting, not because there was a sudden breakout of common sense on Capitol Hill, but because his committee's investigation revealed that companies had begun exploring whether they should drop their health insurance plans entirely--a move that would cost over $100 billion dollars thanks to the huge new subsidies the government would have to dole out.
• 8 Huge European Banks That Got Hammered Today.
  

The Detroit News:

• Failure to Rein in Fannie Mae, Freddie Mac Weakens Financial Reform. Two of the biggest players in the mortgage meltdown of the last two years are Fannie Mae and Freddie Mac, which held or guaranteed about $5 trillion in mortgages when they imploded in 2008. Any reform of the financial markets that doesn't deal with them is not serious. Senate Democrats had a chance to act on reform this week and instead punted, ordering the Obama administration to study what to do about them. The two mortgage giants have consumed about $145 billion in federal bailouts -- and according to congressional projections that total could reach more than $380 billion over the next decade. Fannie Mae this week asked for another $8 billion in federal assistance; Freddie Mac last week asked for close to $11 billion in such assistance.

Philadelphia Inquirer:

• Philly City Council Approves Proposed Real Estate Tax Hike. A divided City Council approved a temporary 9.9 percent property-tax hike Thursday, but balked at Mayor Nutter's sugary-drinks tax and seemed ready instead to pass a budget that would deplete the already meager cash reserves Nutter had set aside for next year. Yet as far as Nutter is concerned, the $3.85 billion budget is far from done. The drinks tax could still return. It was only tabled, not rejected. And Nutter - who has lobbied hard for it - has not given up on the bill, which he considers essential to fully fund his 2010-11 budget and five-year plan. "We still have a great amount of work left to do. My primary concern at the moment is we run the very, very serious risk of not being able to pay for core services, whether it's foster care or health-care services or the seasonal workers at recreation centers," he said.

L.A. Times:

• Insurers Shun California's Request to Stop Investing in Iran-Related Companies. Reporting from Sacramento. Nearly 300 insurance companies licensed to do business in California have refused to comply with a state regulator's request that they stop making new investments in corporations engaged in energy or defense-related work in Iran. The insurers, including more than a dozen major firms such as State Farm, Geico and Prudential, are questioning the authority of state Insurance Commissioner Steve Poizner to impose sanctions. The U.S. government has identified Iran's government as a sponsor of terrorism. Poizner estimates that as of the end of 2008 insurers that do business in California held about $6 billion worth of stock in foreign-owned corporations that operate in the Islamic Republic of Iran in the areas of defense and energy, including nuclear power and petroleum.

Politico:

• President Obama Rips, Raises Cash from Wall Street. President Barack Obama Wednesday went from his White House to Main Street tour of Buffalo to raising money for Democrats from Wall Street executives in Manhattan, even as he continued to blame them for the economic crisis and to seek sweeping industry reforms in Congress. “We’re engaged in a debate right now about common-sense Wall Street reform,” Obama said at the $15,000-a-person fundraiser Thursday night.
• Pence: No European Bailouts. Seizing on conservative anger toward the federal government’s financial assistance for U.S. banks and auto companies and the recent headlines about Greece’s economic woes, Pence and a group of other House Republicans have introduced symbolic legislation that would halt American involvement in any International Monetary Fund aid to European Union nations. “I just don’t believe American taxpayers should be forced to bear the risk of nations that have avoided making tough choices,” Pence said in an interview previewing his remarks to the gun-rights group’s convention in Charlotte. There is little the U.S., as only one member of the IMF, can do to stop the bail out of Greece.
• Senator Dick Durbin, Moderates Clash on Bank Bill. Democratic Sen. Dick Durbin came out swinging against big banks Thursday — and it forced some of his colleagues to duck. A Durbin amendment to the Wall Street reform bill — regarding how much banks can charge merchants for taking debit cards — passed 64-33 Thursday, with 10 Democrats voting no. And in the process, the vote pit Durbin against moderates in the Democratic Caucus — a particularly uncomfortable place to be for a man who is No. 2 in the Senate Democratic leadership.

Reuters:

• Exclusive: Waddell is Mystery Trader in Market Plunge. A big mystery seller of futures contracts during the market meltdown last week was not a hedge fund or a high frequency trader as many have suspected, but money manager Waddell & Reed Financial Inc, according to a document obtained by Reuters. Waddell sold on May 6 a large order of e-mini contracts during a 20-minute span in which U.S. equity markets plunged, briefly wiping out nearly $1 trillion in market capital, the internal document from CME Group Inc said. The e-minis are one of the most liquid futures contracts in the world, providing holders exposure to the benchmark Standard & Poors 500 Index. The contracts can act as a directional indicator for the underlying stock index. Regulators and exchange officials quickly focused on Waddell's sale of 75,000 e-mini contracts, which the document said "superficially appeared to be anomalous activity."
• Obama Was Target of Indonesia Militants. Indonesian militants captured in recent police raids were planning a series of attacks including a Mumbai-style hotel siege targeting foreigners and an assault on the president at an independence day ceremony, police said on Friday. The men also planned to target U.S. President Barack Obama, who is scheduled to visit the country later this year, and plotted the attacks to install sharia law in the world's most populous Muslim nation, officials said.
• FACTBOX - S&P 500 Exposure to European Economies.
• US Future Economic Growth Gauge Shows Recovery Slowing.
  

Financial Times:

• IMF Warns Rich Countries on Debt. The world’s rich economies are continuing to pile up public debt in spite of a recovery in the global economy, according to the International Monetary Fund. In a regular report on public finances released on Friday, the fund suggested increases in value added taxes and excise duties as a way to plug the deficits.

Frankfurter Rundschau:

• The combined deficit of German cities such as Frankfurt and Hamburg will rise to a record in 2010, citing data of the DST association of local authorities. The shortfall will increase to 15 billion euros after a deficit of 7 billion euros in 2009, Petra Roth, mayor of Frankfurt and president of the association, said.

El Economista:

• Spain's government is considering raising the top rate of income tax, as well as increasing tax on investment vehicles for the wealthy and applying a banking levy.

El Pais:

• French President Nicolas Sarkozy threatened to pull out of the euro unless German Chancellor Angela Merkel agreed to back the European Union's bailout plan at a meeting last weekend in Brussels, citing comments that Spain's premier Jose Luis Rodriguez Zapatero made at a meeting of socialist politicians.

La Tribune:

• The U.S. plans to adopt Basel II capital rules next year, European Union Financial Services Commissioner Michel Barnier said. "That's what I have been told," Barnier said, after a three-day U.S. visit, during which he met Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and the heads of Goldman Sachs Group Inc.(GS) and JPMorgan Chase(JPM).

MEES:

• Iraq aims to boost oil production capacity by more than 20% to 3.2 million barrels a day by the end of next year, citing an interview with an oil ministry official. The country expects to add 600,000 barrels a day of output capacity from projects signed last year with international oil companies, citing an interview with Iraq's deputy minister for upstream, Abd al-Karim Laibi.

Bear Radar

Style Underperformer:

• Small-Cap Growth (-3.0%)

Sector Underperformers:

• Alternative Energy (-4.14%), Steel (-3.87%) and Semis (-3.79%)

Stocks Falling on Unusual Volume:

• CGX, IAG, CKP, NVDA, TKC, TSL, TCB, STD, REP, BCS, TI, E, SLRC, TIVO, AGNC, VRUS, CRUS, CA, CATM, SPWRB, ISIL, WPPGY, MRVL, AFAM, ALKS, VOD, NFLX, LBTYK, IPHS, HMIN, GTY, HIT, MA, EWI, WDR, JXI, EMM, YPF, CA, FTE, BMA, TOT, TEF, FEU and MDR
  

Stocks With Unusual Put Option Activity:

• 1) MA 2) V 3) XL 4) CHL 5) AMD
  

Stocks With Most Negative News Mentions:

• 1) BP 2) TM 3) MEE 4) NFLX 5) FRE
  

Bull Radar

Style Outperformer:

• Large-Cap Value (-1.89%)

Sector Outperformers:

• Retail (-.42%), Utilities (-.42%) and Telecom (-.80%)

Stocks Rising on Unusual Volume:

• ASIA, DISH, OSIP, HAIN and DDS
  

Stocks With Unusual Call Option Activity:

• 1) YUM 2) DISH 3) CELG 4) DTG 5) CVS
  

Stocks With Most Positive News Mentions:

• 1) JCP 2) 3) GOOG 4) AAPL 5) OI

Friday Watch

Evening Headlines
Bloomberg:

• Euro Breaks 14-Month Low as Debt-Cutting Steps May Hurt Growth. The euro headed for a fourth weekly decline, breaking through the 14-month low reached against the dollar last week, on concern European nations’ debt-cutting measures will undermine economic growth. The 16-nation currency touched the lowest in a week versus the yen before Greece submits a progress report tomorrow to the European Commission on the implementation of a deficit-reduction plan. New Zealand’s dollar was set for a second weekly loss against the greenback after government data showed retail sales rose in March at less than half the pace economists forecast. “The roots of the debt crisis in Europe have yet to be solved,” said Yoh Nihei, a Tokyo-based trading group manager at Tokai Tokyo Securities Co. “People have reservations about the effectiveness of the loan package. I remain negative on the euro from a long-term perspective.” “Investors are still concerned widespread fiscal tightening could derail the already weak European economic recovery,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “A test of the euro’s 2008 low of $1.2330 looks likely in coming sessions.”
  
• Senate Approves Plan to Raise Capital Standards for Big Banks. The Senate approved a proposal that would require Citigroup Inc., Bank of America Corp. and other large U.S. banks to comply with higher capital standards, a change intended to limit their risk-taking. Lawmakers agreed to add the amendment to the financial- overhaul bill. The proposal, offered by Senator Susan Collins, a Maine Republican, would require lenders with more than $250 billion in assets to meet capital standards that are at least as strict as those that apply to smaller banks. The amendment “addresses the root cause of the financial crisis and that is excessive leverage and inadequate capital ratios,” Collins told reporters today. “It also strikes me as fundamentally unfair that small banks have to meet stricter capital requirements than large bank-holding companies.”
• Senate Approves Debt-Card Swipe-Fee Limits in Financial Bill. The U.S. Senate today approved an amendment that would empower the Federal Reserve to impose limits on debit-card fees collected by the biggest banks as part of the financial-overhaul bill. Visa Inc.(V) and MasterCard Inc.(MA), the world’s biggest payment networks, set the fees and pass along that money to the banks that issue their cards.
• Insurers Drag Bonds to Worst Since December: Credit Markets. Insurers are leading the first monthly decline for corporate bonds since December on speculation they face losses on sovereign debt just as cleanup costs for the Gulf of Mexico oil spill loom. American International Group Inc. and Axa SA are among insurers whose bonds lost 1.09 percent including reinvested interest, according to Bank of America Merrill Lynch index data. That compares with the negative 0.83 percent return on debt issued by energy companies hit by BP Plc’s oil rig explosion and the 0.68 percent loss on notes from banks, also big holders of debt of troubled European nations.
• China to Crack Down on Commodities Price Speculation, NDRC Says. China will crack down on some commodities price speculation and hoarding to curb rising prices, the National Development and Reform Commission said in a statement on its website.
• Oil Poised for Second Weekly Drop on Dollar's Gain Against Euro. Crude oil is poised for a second weekly decline as the strengthening dollar curbed the appeal of commodities and U.S. supplies increased. Oil dropped for a fourth day as the U.S. currency climbed against the euro after Portugal announced austerity measures, spurring concern that fiscal tightening across Europe will limit economic growth. The Energy Department said May 12 that crude inventories at Cushing, Oklahoma, where New York-traded West Texas Intermediate oil is stored, rose to a record. “It looks like the Eurozone economy is going to slow by quite a bit, not helping the overall global economy, or that of crude oil demand,” said Mike Sander, an investment adviser at Sander Capital Advisors in Seattle. “Oil is currently fighting a losing battle against the dollar. On the fundamental side, U.S. inventory levels are still at very high levels.” Stockpiles of crude oil at Cushing rose 784,000 barrels to 37 million, the highest level since the Energy Department began reporting on inventories at the hub in April 2004. Nationwide U.S. oil supplies gained 1.95 million barrels to 362.5 million, the 14th increase in 15 weeks, according to the department. That left stockpiles 6.1 percent above the five-year average for the period, up from 5.4 percent the previous week. “Builds will continue,” said Jonathan Barratt, managing director at Commodity Broking Services Pty in Sydney.
• Greenhouse-Gas Rules Made Final by EPA as Alternative to Bill. The U.S. Environmental Protection Agency issued final rules today to regulate greenhouse-gas emissions as an alternative if Congress fails to act. The EPA plans to regulate about 70 percent of U.S. greenhouse gases from stationary sources such as power plants, refineries and factories, the agency said today in a statement. “The Obama administration has again reminded Washington that if Congress won’t legislate, the EPA will regulate,” Kerry said today in a statement. “Those who have spent years stalling need to understand: killing a Senate bill is no longer success.” Next year, the EPA will begin consideration of a rule to extend the restrictions to smaller emitters. Today’s rules would rewrite the Clean Air Act, which only Congress can do, according to Gregory Scott, executive vice president of the refiner’s group. “EPA has adopted a tortured and legally unsupportable interpretation of the plain wording of the Clean Air Act in an effort to escape a regulatory train wreck of its own creation,” Scott said in a statement. “If EPA is allowed to get away with this, it sets a dangerous precedent for unelected officials in federal agencies to change laws approved by the elected representatives of the American people.”
• Ford's(F) Mulally Says Profit Revival to Pick Up in 2011. Ford Motor Co. Chief Executive Officer Alan Mulally, who ended three years of losses in 2009 as rivals slid into bankruptcy, said the automaker’s earnings next year will improve on “solid” profit in 2010. “We expect to see continued improvement in 2011,” Mulally told shareholders today at their annual meeting in Wilmington, Delaware. “We’re clearly on a path now of profitable growth.”
• CA Inc.(CA), 2011 Revenue Forecast Misses Analysts' Estimates. CA Inc., the second-largest maker of software for mainframe computers, forecast full-year sales that missed analysts’ projections as it invests in a new software market.
• Sony(SNE) Tumbles After Forecasts Miss Analyst Estimates. Sony Corp. fell the most in a year in Tokyo trading after the maker of Bravia televisions and Cyber- shot cameras forecast earnings that missed analyst estimates. Sony dropped 6.5 percent to 2,958 yen at the 11 a.m. break on the Tokyo Stock Exchange, its biggest decline since May 2009.
• Morgan Stanley's(MS) Doomed Baldwin CDOs Thwarted 'Natural Process'. In June 2006, a year before the subprime mortgage market collapsed, Morgan Stanley created a cluster of investments doomed to fail even if default rates stayed low -- then bet against its concoction.
• Bond, Emerging-Market Stocks Lose Funds on Greece. High-yield bond funds posted the largest outflows in five years and emerging-market equity funds had a second straight week of redemptions as Europe’s sovereign- debt crisis dented demand for riskier assets, EPFR Global said.

Wall Street Journal:

• Tokyo Grows Wary of China Military. Japan's foreign minister expressed concern about China's growing military muscle—a development he said raised the urgency for Washington and Tokyo to resolve their standoff over where to station U.S. troops in Japan. "I wouldn't use the word 'threat'—but we certainly will need to watch very carefully the nuclear arsenal and naval capabilities of China," Katsuya Okada said in an interview Thursday with The Wall Street Journal. "And it is because of this that, all the more, the Japan-U.S. alliance would be important."
• Scrutiny for Bets on Municipal Debt. Federal regulators and state officials are examining Wall Street's role in trading derivatives that essentially bet the municipal bonds they sold would go bust. The Securities and Exchange Commission has launched a preliminary inquiry into banks' trades of municipal credit-default swaps that allow investors to short-sell, or bet against, municipal bonds, according to people familiar with the matter. The probe is exploring potential conflicts of interest by banks that sell municipal bonds and then poise themselves to profit if those bonds fail, these people said. A main thrust of their investigation is whether firms use their own money to bet against the bonds they sell and, if so, whether that activity is properly disclosed to bond buyers.
• China Rights Group Roll Out Strategy. Chinese activists, up in arms over what they say is the Obama administration's failure to make human rights a priority in its dealings with Beijing, are seeking to join forces as the two nations discuss the topic in Washington.
• Google(GOOG) CEO Tries to Reassure Investors. Google Inc. Chief Executive Eric Schmidt tried to reassure his shareholders Thursday, saying the company's business in China was stable and he expects the acquisition of mobile advertising company AdMob Inc. to pass regulatory muster.

Bloomberg Businessweek:

• New Crisis, Record Yen Still Possible After Bailout, BTM Says. Europe’s unprecedented lending package to debt-ridden nations hasn’t eliminated the chance of a new financial crisis, which may drive the yen to 80 versus the dollar and euro, according to Bank of Tokyo-Mitsubishi UFJ Ltd. There remains a 10 percent chance of renewed turmoil, said Kazuto Uchida, chief economist at the unit of Japan’s largest banking group, Mitsubishi UFJ Financial Group Inc. Under this scenario, the credit ratings of Spain and Italy would be cut to near junk level, with losses spreading to banks in Germany, France and the U.K. “Europe’s economy would contract as much as 5 percent, and the global economy would suffer negative growth over the next two to three years,” Uchida said. The euro may plunge to parity with the dollar, while the Dow Jones Industrial Average may decline to as low as 7,000, he said. Greece’s fiscal recovery is hampered by the fact that it can’t weaken its own currency or change monetary policy that is guided by the European Central Bank under the euro system, Uchida said. Austerity measures face strong opposition from the nation’s citizens and may unleash a vicious cycle whereby the economy is dragged down by labor strikes, he said.
• Euro Will Drop to 7-Year Low on ECB, Slowing Growth, UBS Says. The euro will drop more than 8 percent by December to its least since 2003 on spending cuts by currency members and as the European Central Bank lags behind the Federal Reserve in interest-rate increases, UBS AG said. The euro will reach $1.15 by December and $1.10 by the end of 2011, UBS said, trimming its previous forecasts for the currency to trade at $1.30 and $1.25, respectively.

CNBC.com:

• Video Game Sales Make Surprise Plunge in April. Sales of video game software and hardware plummeted in April, shocking industry observers who were expecting the numbers to be slightly positive or, worst case, down just slightly. That could mean a rough Friday for video game stocks.
• Size of Oil Spill in Gulf Underestimated, Scientists Say.
  

IBD:

• Discounter Gains Mileage From Its Everyday Bargains. Off-price apparel retailer Ross Stores (ROST) is one outfit that's gotten a lot of mileage out of touting bargain prices, in good times and bad.

Business Insider:

• Lloyd Blankfein Saves Chicago Community Bank That Just Happens To Have Ties To Obama and Bill Clinton. Look! Goldman Sachs (GS) is committing an act of generosity. The much-reviled Wall Street firm is in discussions to make an investment in South Side Chicago-based community bank ShoreBank, according to WSJ. Apparently the bank has one more day to become adequately capitalized, or else. As the article notes, though, there appears to be a political angle. ShoreBank is from Obama's old neighborhood, and in fact the bank is involved in microcredit, and Barack Obama once traveled to Kenya to promote the bank's microcredit mission. A video of his trip is posted on ShoreBank's website (and embedded below ht). Bill Clinton has also talked up the bank's work. ShoreBank co-founder and adviser to the board Ronald Grzywinsk testified in Congress in support of the 1977 Community Reinvestment Act, landmark legislation that requires some banks to make a portion of their loans in economically needy communities.
• CHART OF THE DAY: Leading Indicators Around the World Rolling Over.
• Another Sign The Bailout Has Done Very Little to Calm Banking Fears. Here's the latest look at the TED Spread, an indicator that became popular to look at during the crisis, as it shows the gap between LIBOR (what banks borrow at) and the risk-free rate. We posted a version of the chart right before the bailout to show that it had recently doubled. And now look. It dipped a little, but still remains quite elevated.

Zero Hedge:

• When All Else Fails, Monger Fear: Bernanke Says Swap Detachment Rule Would "Weaken Financial System".
• First Fed Invoice for Bailing Out Europe Is In: The Damage - $9.2 Billion. The first bill to US taxpayers for volunteering to bail out Europe is in. It appears in the past week the New York Fed executed an FX swap with the ECB for $9.2 billion notional of FX swaps. As we reported earlier by demonstrating the lack of bids for the BOE's dollar repo operation, only the ECB is (currently) in need of dollars. Yes America, in addition to the IMF contribution of ~$50 billion, with each passing week you will see more and more billions of dollars collateralized by a rapidly devaluing foreign currency serve as the backstop for your currency.

CNNMoney:

• Hedge Fund Vote Threatens EU-US Rift. European countries led by France and Germany plan to push through controversial hedge fund regulations next week after turning down British pleas to defer a vote in Brussels. The directive has also caused concern in the US. Tim Geithner, Treasury secretary, wrote to EU officials in March warning that, if unchanged, the new regulations could trigger a transatlantic rift by unfairly locking US funds out of European markets. "The Americans are going absolutely ape," said a person involved in the negotiations. "There's this overwhelming belief now in Europe that if we legislate first, then the US will follow what we do."

Institutional Investor:

• World's Largest Hedge Funds Have Their Sights Firmly On Institutional Dollars.

American Petroleum Institute:

• Oil, Natural Gas Industry Warns Lawmakers to Protect Oil Spill Trust Fund, Energy Security. Congressional action to raise the limit on the oil spill liability trust fund by more than 10,000 percent could threaten the economic viability of all Gulf of Mexico operations, according to a statement by American Petroleum Institute President and CEO Jack Gerard:

Rasmussen Reports:

• Immigration Jumps in Importance, But Economy, Corruption Still Top Voter Issues.

Politico:

• Reid Subpoenaed in Blago Case. The upcoming corruption trial for former Illinois Democratic Gov. Rod Blagojevich is becoming a political nuisance for top Senate Democrats. Blagojevich attorneys have subpoenaed Senate Majority Leader Harry Reid (D-Nev.) to testify in the trial, and Majority Whip Dick Durbin (D-Ill.) was subpoenaed last month and has been interviewed by FBI agents. It’s not clear that either Senate Democrat will actually ever appear at the Blagojevich trial or even be interviewed by his attorneys. The Senate’s legal counsel is examining whether the two lawmakers will comply with the subpoenas. A federal judge has already ruled that Blagojevich cannot call President Barack Obama in the case.

USA Today:

• Thousands of Non-Profits Could Unwittingly Lose Tax Status. Hundreds of thousands of small non-profits, from Little League teams to community soup kitchens, could lose their tax-exempt status on Monday because of an IRS filing requirement. The 2006 Pension Protection Act included a provision requiring all non-profits to file an annual return with the IRS. Previously, non-profits with annual revenue of less than $25,000 were excluded. Non-profits that fail to file a return for three consecutive years lose their tax-exempt status. On May 17, the three-year clock runs out for non-profits that haven't filed a return since 2007. The Urban Institute estimates that up to 365,000 non-profits could lose their tax-exempt status if they fail to file by Monday.

Reuters:

• Q+A With Oracle(ORCL) CEO Larry Ellison. In a recent interview with Reuters, Oracle CEO Ellison talked about competing against IBM(IBM) and EMC Corp(EMC), plans for more acquisitions, how Salesforce.com(CRM) is too expensive, litigation against SAP(SAP) and possible succession plans at Oracle:
• Nvidia(NVDA) Sales Outlook Below Street, Shares Slip. Nvidia Corp (NVDA) reported better-than-expected results, but the graphics chipmaker's sales forecast for the current quarter was below Wall Street's target, and shares fell 3 in extended trading on Thursday.
• Nordstrom(JWN) 1st-Qtr Net Rises, But Misses Street View. Nordstrom Inc (JWN) said its first-quarter net profit rose 43 percent over last year, but it missed analysts' forecasts and shares fell after hours.

Financial Times:

• Spanish Finance Minister Elena Salgado said it is "very important" for Spain to generate confidence in the markets, citing an interview. The "difficulties" in the markets in the past two weeks for Spain and other countries has meant that the balance between growth and "fiscal consolidation has moved towards fiscal consolidation in the short term," Salgado said.
• Europe Enters Era of Belt-Tightening. Amid cries of outrage and expressions of disbelief, a new age of austerity has arrived in Europe. As governments across the eurozone impose cuts on a scale unseen in decades, Greece – widely seen as the centre of the crisis – has already seen violent demonstrations and general strikes. Now there is growing concern that such displays of public anger will become more widespread. Spanish trade unions were on Thursday threatening nationwide walkouts and protests. The shock is palpable in countries which have moved from poverty to prosperity during the decades of almost uninterrupted growth since the second world war and have always enjoyed the material benefits of European Union membership. “Two things are hard to believe: I can get laid-off and that I’ll have to work to 65 to get a pension,” says Yannis Adamopoulos, who is a security guard at a state-controlled Greek corporation. Another Greek, Fotis Magriotis, a self-employed civil engineer, has put his sports utility vehicle up for sale. Work is hard to find and taxes on petrol have twice been increased. “There’s no alternative to downsizing,” he says. For the first time since EU aid started flowing freely in the 1980s, Greeks face a significant drop in living standards, with the economy set to shrink 4 per cent this year and another 2.6 per cent in 2011. The new reality being imposed by the Greek socialist government – a 12 per cent wage cut for civil servants, reductions in pensions and looming job losses in public sector corporations – stuns workers in the bloated state sector. A similar, if less severe, adjustment is being imposed by the socialist government of Spain.

TimesOnline:

• Osborne Faces EU Defeat on Hedge Funds. David Cameron’s fledgling coalition Government faced its first major test in Europe last night as European regulators looked set to push through controversial new hedge fund and private equity regulations despite fierce opposition from the new administration. In the face of last-ditch lobbying by UK officials during the past two days, the European Parliament looks set to go ahead with a draconian crackdown on alternative investment fund managers early next week. George Osborne, the Chancellor, is likely to be in Brussels for the agreement on the new rules, which are being driven by France and Germany. He is expected to try to extract a compromise but is resigned to the vote going against him, as he believes that the process is too far advanced for him to intervene. The new rules, which have also provoked outrage in Washington, will be put before EU finance ministers next week. The UK and the US argue that the regulations are protectionist and will make it harder for hedge funds and private equity investors based outside Europe to trade in the eurozone. It is thought that the new rules will require hedge funds outside the EU to qualify under a new “passport system” that will enable them to carry out business only if they meet rigorous EU standards. These are expected to include providing extensive details about investment positions to regulators. Fund managers are also likely to have their pay capped or be forced to defer as much as 50 per cent of their bonuses over two or three years. Limits on the ability of private equity companies to withdraw capital from the companies in which they invest are also expected to be imposed. Critics of the directive in the UK have argued that it will force funds out of Britain and into offshore locations not covered by the rules. The UK is home to 80 per cent of Europe’s hedge funds.
  

BrazzilMag:

• Lula Blames "Wise Guys" from Rich Countries for Global Crisis. The president of Brazil, Luiz Inácio Lula da Silva thanked, the United Nations for the two prizes awarded for his leadership in fighting hunger and poverty with a strong speech condemning rich countries, global speculation and "capitalist myopia". The Brazilian President recalled that in 2008 the world was taken by surprise by the soaring prices of food for which first the Chinese were blamed "for eating too much"; then oil and the Arabs, but later it was plain clear it was all to blame on a few "wise guys" from the rich countries making fortunes with papers and speculating with food". Lula went on to say that when the sub-prime crisis blew up in the United States, it was discovered that the serious financial disorders caused by fraudulent manipulation with these toxic mortgages was mostly behind the global speculation that ended punishing the poorest peoples of the world.

The Standard:

• HSBC Chief Plays Cool Before AGM. "We know we have more to do to justify the support shareholders have given us," said group chief executive Michael Geoghegan. "We face headwinds, in common with the rest of the industry. HSBC Holdings expects return on equity to be at the lower end of its medium-term target range of 15 to 19 percent this year.

South China Morning Post:

• Foxcomm Technology Group, the world's biggest maker of electronics and computer parts, has prevented almost 30 suicides attempts in less than a month, citing a company spokesman. A woman who worked at Foxconn died on Tuesday in an apparent suicide, the eighth such death at its Shenzhen plant this year. Foxconn set up a special suicide prevention hotline at its main Shenzhen factory in April and has been flooded with calls for help, spokesman Liu Kun said.

China Daily:

• China Premier Pledges to Address Root Causes of School Attacks on Children. Security has been stepped up around schools across the country amid calls by sociologists that solutions be found to deep-seated social problems that have led to a spate of attacks around campuses. Minister of Public Security Meng Jianzhu ordered police forces to ensure criminals "dare not and cannot" get their hands on children. He stressed that security measures in privately-run schools and kindergartens as well as those in remote areas and rural regions should be reassessed to stem risks. The directive followed Wednesday's deadly attack in Northwest China's Shaanxi province, the fifth on children in the past month. A 48-year-old local farmer stabbed seven children and two adults to death - the youngest victim aged only 3 - before he killed himself. "In rural areas, especially remote villages, it is impossible for every kindergarten to be guarded by a police officer," said Guo Taisheng, professor and dean of the public security department of the Chinese People's Public Security University. Law professor Li Yunlong said the five attacks on children in the past month share some common characteristics, such as the attackers were jobless men in their 30s to 40s. "Their motives are to exact revenge on society and expose social problems, such as unemployment and unfair distribution of wealth," he said. Fang Changchun, associate professor at the sociology department of Nanjing University, said this group needs a way to vent long-suppressed frustration, which the attackers in the five cases apparently did not find. "They turned to children to express their resentment because they had no direct targets to do so, and compared to other places, schools and kindergartens are not as heavily guarded," he said. But before such social problems are resolved, placing schools under police protection is necessary, he said. In Beijing, 800 well-trained security guards, clad in helmets and armed with tear gas and batons, made their presence felt in primary schools and kindergartens. The municipality aims to equip each school with at least two such security guards. In Shanghai and Guangzhou, parents need passes to enter school. Despite all the security measures, a woman in her 30s carrying a long knife was caught on Thursday by security guards and traffic police when she ran into a children's activity center in Hangzhou, Zhejiang province, local newspaper City Express reported. No casualty was reported.
• General Electric(GE) and China National Offshore Oil Corp., the parent of CNOOC Ltd., are considering setting up a 3 billion yuan private equity fund.
  

21st Century Business Herald:

• China's tax bureau may announce by May 20 the expansion of its property tax on commercial-use properties to residences.

Evening Recommendations
Citigroup:

• Reiterated Buy on (ETN), target $88.
• Reiterated Buy on (AKAM), target $44.
• Upgraded (PH) to Buy, boosted target to $82.
• Reiterated Buy on (URBN), target $42.
• Downgraded (NFLX) to Hold, target $110.
  

Night Trading

• Asian indices are -1.0% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 114.0 +9.0 basis points.
• S&P 500 futures +.13%.
  
• NASDAQ 100 futures +.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JCP)/.25
• (DDS)/.51
• (VSAT)/.43
  

Economic Releases
8:30 am EST

• Advance Retail Sales for April are estimated to rise +.2% versus a +1.6% gain in March.
• Retail Sales Less Autos for April are estimated to rise +.4% versus a +.6% gain in March.
• Retail Sales Ex Auto & Gas for April are estimated to rise +.3% versus a +.7% gain in March.

9:15 am EST

• Industrial Production for April is estimated to rise +.7% versus a +.1% gain in March.
• Capacity Utilizati0n for April is estimated to rise to 73.8% versus 73.2% in March.

9:55 am EST

• Preliminary Univ. of Mich. Consumer Confidence for May is estimated to rise to 73.5 versus a reading of 72.2 in April.

10:00 am EST

• Business Inventories for March are estimated to rise +.4% versus a +.5% gain in February.

Upcoming Splits

• (GMCR) 3-for-1
  

Other Potential Market Movers

• The Fed's Evans speaking, (ISIL) analyst day could also impact trading today.
  

BOTTOM LINE: Asian indices are 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 Lower into Final Hour on Profit-Taking, Rising Financial Sector Pessimism, Technical Selling, More Shorting

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Almost Every Sector Declining
  
• Volume: Around Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 25.38 -.55%
  
• ISE Sentiment Index 106.0 -8.62%
  
• Total Put/Call .79 -8.14%
  
• NYSE Arms 1.36 +68.39%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 98.98 bps +1.84%
  
• European Financial Sector CDS Index 118.15 bps +7.86%
  
• Western Europe Sovereign Debt CDS Index 106.66 bps -2.88%
  
• Emerging Market CDS Index 233.83 bps +1.18%
  
• 2-Year Swap Spread 30.0 +3 bps
  
• TED Spread 28.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .15% unch.
  
• Yield Curve 271.0 +1 bp
  
• China Import Iron Ore Spot $169.50/Metric Tonne -1.22%
  
• Citi US Economic Surprise Index +13.90 -.5 point
  
• 10-Year TIPS Spread 2.30% -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -135 open in Japan
• DAX Futures: Indicating -15 open in Germany

Portfolio:

• Slightly Lower: On losses in my Biotech, Retail and Technology long positions
  
• Disclosed Trades: Added to my (IWM), (QQQQ) hedges and added to my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is bearish as equities trade near session lows this afternoon despite gains in most overseas markets. On the positive side, Oil Tanker and Food stocks are slightly higher. Sovereign debt angst is lower today with the Spain sovereign cds falling -2.46%, which is a positive. Oil is lower again on more euro weakness, rising supply and worries over China demand. Despite a calming of eurozone debt fears, the euro still trades very poorly and likely has further meaningful downside. On the negative side, Homebuilding, Semi, Disk Drive and Networking shares are under meaningful pressure, falling 2.0%+. Lumber prices have fallen -7.0% over the last five days. Some broad gauges of credit angst are moving higher again today. The eurozone investment grade cds index is jumping +6.5% today to 89.66 bps. As well, the California municipal cds is rising another +4.3% to 265 bps. The AAII % Bulls fell to 36.6 this week, while the % Bears rose to 36.6. Some gauges of investor angst are once again registering a bit too much complacency. The decline in the euro today is starting to take on a disorderly feel again and the S&P 500 failed again to break above its 50-day moving average. I will closely monitor Asia's reaction to our afternoon weakness tonight before further shifting market exposure. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, more shorting, rising financial sector pessimism and technical selling.