North American Investment Grade CDS Index 119.08 bps +10.47%
European Financial Sector CDS Index 141.89 bps +3.23%
Western Europe Sovereign Debt CDS Index 114.83 bps +.44%
Emerging Market CDS Index 278.21 bps +3.61%
2-Year Swap Spread 37.0 -1 bp
TED Spread 32.0 +1 bp
Economic Gauges:
3-Month T-Bill Yield .16% unch.
Yield Curve 259.0 -4 bps
China Import Iron Ore Spot $155.90/Metric Tonne -4.3%
Citi US Economic Surprise Index +20.70 -2.1 points
10-Year TIPS Spread 2.08% -10 bps
Overseas Futures:
Nikkei Futures: Indicating -100 open in Japan
DAX Futures: Indicating +22 open in Germany
Portfolio:
Slightly Lower: On losses in my Technology 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 bearish as the bulls are unable to gain upside traction despite a bounce in the euro, positive action in (XLF) and the S&P's reversal off its 200-day moving average. On the positive side, Semi, I-Banking, Drug and Education stocks are higher on the day. The rise in the euro, profit-taking and plunging inflation expectations are weighing on gold. On the negative side, Gaming, Construction, Paper, Gold, Oil Tanker, Alt Energy, Coal, Homebuilding and Steel shares are under meaningful pressure, falling 1.75%+. Cyclicals and Small-caps are underperforming. Most CDS indices are surging meaningfully again today. The Asia Ex Japan High Yield CDS Index is soaring +18.3% today to 505.0 bps. CDS indices need to begin coming in for a durable bottom in stocks to take hold. It is a negative to see the NSYE Arms at a low level despite today's losses. However, some other gauges of investor angst are now elevated, the S&P 500 held technical support this morning, (XLF) is trading better, the euro is bouncing and stocks are very oversold, which could lead to a significant rally at any time. I expect US stocks to trade mixed-to-higher into the close from current levels on technical buying, short-covering, a euro bounce and bargain-hunting.
Merkel Isolated After Short-Selling Ban Fails to Win Backers. German Chancellor Angela Merkel’s curbs on government-bond trading proved a step too far for European allies, leaving her isolated as she pushes for a crackdown on euro-area states that flout budget-deficit rules. Merkel’s unilateral effort to control what she called “destructive” markets came 10 days after voters angry at aid for Greece dealt her a regional election setback that cost her control of the federal upper house of parliament. She’s now trying to win public support for another loan package, this time Germany’s share of a $1 trillion bailout to backstop the euro.
Gold Falls Below $1,200 on Euro's Rebound; Palladium Plunges. Gold tumbled below $1,200 an ounce as the euro rebounded from the lowest level in four years against the dollar, eroding demand for the metal as a haven. Palladium and platinum headed for the biggest declines since 2008. The euro climbed on bets that European will act to support the currency, which slipped 15 percent this year through yesterday. Before today, gold futures climbed 11 percent in 2010, reaching a record $1,249.70 an ounce on May 14. Palladium futures for June delivery plunged $47, or 9.3 percent, to $460 an ounce on the New York Mercantile Exchange. Before today, the metal gained 24 percent this year. “Some people are rushing to the exits because they think the deflation threat is going to be real in the short term,” Klopfenstein of Lind-Waldock said. “Palladium was overcooked on the upside, and now a lot of people are reevaluating their positions.”
ETFs Bearing Brunt of May 6 Drop Shows Hedging Worsened Losses. When $1 trillion briefly evaporated from the U.S. stock market on May 6, no group of securities got hurt more than exchange-traded funds, as attempts to protect against snowballing losses may have made the decline worse, a report by federal regulators shows. ETFs made up 70 percent of securities with trades that were later canceled because of excessive declines, the joint study by the Securities and Exchange Commission and Commodity Futures Trading Commission found. Traders selling the funds to offset falling stocks may have created “unusual liquidity demands,” causing buyers to pull out of the market, the report said. “No question there’s a direct correlation because ETFs are the new derivatives,” said Richard Weiss, who helps oversee $50 billion for City National Bank in Beverly Hills, California. “The ability to arbitrage to ensure prices are fair is theoretically a very good thing, but when you get perturbations or exogenous variables acting on prices, it can be bad.”
U.S. MBA Mortgage Applications Index Fell 1.5% Last Week. The number of mortgage applications in the U.S. dropped last week, depressed by the biggest plunge in purchases since 1997, as the expiration of a homebuyers’ tax credit drove away buyers. The Mortgage Bankers Association’s applications index fell 1.5 percent in the week ended May 14, the Washington-based group said today. The group’s purchase gauge slumped 27 percent, while the refinancing measure rose 15 percent. The drop in purchases follows a 9.5 percent decline the prior week, highlighting how the expiry of a tax credit worth as much as $8,000 may stifle housing demand in coming months.
Commercial Property Values Drop as Rebound Stalls. U.S. commercial real estate values fell in March, pushed lower by a quarterly drop in retail and office properties in the biggest metropolitan areas, Moody’s Investors Service said. The Moody’s/REAL Commercial Property Price Index fell 0.5 percent from February, the second straight monthly decline, Moody’s Investors Service Inc. said today in a report. Prices slid 25 percent from a year earlier and are down 42 percent from the October 2007 peak. “This is continued bad news for property owners,” Christopher Cornell, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said in a telephone interview. “The trend is basically flat prices.”
Fed in No Rush to Sell Mortgage Assets, Minutes Show. Federal Reserve policy makers last month said they were in no rush to sell $1.1 trillion of mortgage-backed securities, with a majority preferring to wait until after the central bank starts raising interest rates. “Most participants favored deferring asset sales for some time,” while others wanted to announce a schedule or start sales soon, the Fed said in minutes of its April 27-28 meeting in Washington, released today. Officials lowered their projections for inflation, excluding food and fuel, while keeping forecasts little changed for economic growth and unemployment in 2011 and 2012.
TIPS Tumble After Unexpected Decline in U.S. Consumer Prices. Treasury Inflation Protected Securities, or TIPS, plunged as a report showed U.S. consumer prices unexpectedly declined in April. Demand for the bonds, which are designed to protect investors against rising prices, weakened as the outlook turned from inflation to deflation. The break-even rate between yields on 10 year TIPS and nominal Treasuries, a gauge of trader expectations for consumer prices, contracted for a fifth straight day. Ten-year note yields were near the lowest level this year as global stocks dropped on concern that Europe will further regulate financial markets. “There is no inflation on the horizon,” said Keith Blackwell, an interest-rate strategist at Royal Bank of Canada in New York, one of the 18 primary dealers that trades with the Federal Reserve. “TIPS should continue to come under pressure.”
Wall Street Journal:
iPhone is Big in Japan. Apple Inc.'s(AAPL) iPhone has cracked the Japanese market, quickly becoming the best-selling smartphone here and challenging the long-held notion that this country's large cellphone market is hostile to foreign brands. The iPhone sold 1.7 million units in Japan, or 72% of all smartphones sold, in the fiscal year ended March 31, and its popularity has pushed the smartphone segment to double in size from a year earlier, according to Tokyo-based MM Research Institute Ltd. While the overall handset market in Japan is essentially flat, Apple, based in Cupertino, Calif., said iPhone sales in Japan nearly tripled in the latest quarter.
Senator Gregg: Derivatives Proposal Like 'Madhatter's Tea Party'. So much for Senate Banking Committee Chairman Chris Dodd’s attempted compromise on derivatives regulation. Sen. Judd Gregg (R., N.H.) promptly went to the Senate floor and said it stinks. “It’s almost as if we’re at the Madhatter’s Tea Party the way this derivatives” language is “evolving,” he said. “It just gets worse and worse in an almost incomprehensible” way, he said. He called it a “convoluted exercise in chaos” and a “byzantine exercise in regulatory absurdity.” After all that, think he might support the financial overhaul bill? Um, no. He said it should be renamed from the “Wall Street Reform Act” to the “The-Expansion-Of-Government-For-Making-Us-More-Like-Europe Act.”
Fox News:
Lawmaker Seeks Investigation Into ShoreBank Bailout. Just when officials at the politically connected community lender ShoreBank thought they were rescued from near-certain failure by a consortium of Wall Street firms, a top Republican lawmaker is investigating why the firms were so generous with their money, FOX Business has learned. Spencer Bachus, the ranking Republican on the House Financial Services Committee, wrote President Obama this morning asking for "all records of communication - including emails, phone logs and meeting records- related to the ShoreBank negotiations that exist between the Administration and representatives of ShoreBank, and executives of the banks involved in the bailout."
Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19. Today’s rating is the lowest earned by the president since the passage of his health care proposal two months ago (see trends).
Reuters:
China Buying of Australia Wheat Seen Drawing to End. Australia wheat exports to China are expected to slow to a trickle in the coming months after surging in the first half of the 2009/10 marketing year, one of the country's largest grain exporters said. China's demand for Australian wheat this year was coming to an end with only a few more cargoes expected to be shipped to fill current orders, said CBH Group Ltd's chief of grain marketing, Tom Puddy. During the first half of the official marketing year ending in September, China's demand for Australian wheat was almost double the whole of the previous year, helping to offset weaker sales in other markets as bumper northern hemisphere harvests flooded markets. Puddy said about 570,000 tonnes of mainly Australian Standard White (ASW) wheat would have been shipped to China from November to the end of May, the highest volume in five years. "China has been replenishing its reserve stocks of ASW type wheat that they find hard to produce in China," Mr Puddy said. "They have been just topping up the cupboard to make sure they've got sufficient reserves," he said.
Telegraph:
Hedge Fund Selling Hits 18-Month High. In a sign of the speed with which market sentiment has deteriorated over the last month, hedge funds have made a dramatic switch from their biggest buying spree in more than two years to become big sellers once again, according to UBS. The latest data from UBS's prime brokerage business, which handles the Swiss bank's dealings with hedge funds, shows that as of the end of last week selling by funds was at its highest monthly level since January 2009. Based on the UBS data, hedge fund selling of bank shares has been relatively muted, with most of the net selling focused around the IT, consumer services and transport, telecoms, and metals and mining sectors. From heavy selling earlier in the year, hedge fund and long-only investors' buying of bank shares has picked up in the last two months, leading some to question why the German government decided to institute its ban now.
Irish Times:
The European Commission may ask the Irish government for additional spending cuts in order to push down the country's state debt, EU Economic and Monetary Affairs Commissioner Olli Rehn said.
Kathimerini:
Greece's black economy stands at around 40% of gross domestic product, or 95 billion euros, citing Finance Ministry Secretary General Dimitris Georgakopoulos. Tax evasion amounts to 40% of budget revenue, or 25 billion euros, he said.
El Universal:
Venezuela has taken over 31 brokerages for currency speculation, operations involving instruments known as mutuos and administrative problems.
Caijing:
China's raising of interest rates will trigger more capital inflows into the country, making it more difficult to control monetary policy, government adviser Ba Shusong wrote.
Euro Falls to 4-Year Low, Yen Jumps on German Speculation Ban. The euro sank to the weakest level in more than four years and the pound slumped to a 13-month low as Germany’s ban on some speculative sales triggered concern that Europe’s debt crisis will worsen. The yen gained against all 16 major counterparts amid heightened demand for safety after Germany prohibited naked short-selling and speculating on sovereign debt, and the Bank of Italy allowed lenders to exclude losses on government bonds. “If you don’t feel like you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. The German ban “creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.” “The regulatory step in Germany did little to soothe speculative selling on the euro and rather underscored the lack of solidarity in the euro zone,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “No one can dismiss entirely the worst-case scenario in which the single currency will fall apart.”
Hedge Funds Bet Europe's $1 Trillion Bailout Won't Solve Crisis. Kyle Bass, who made $500 million in 2007 on the U.S. subprime collapse, is betting Europe’s debt crisis won’t be solved by the $1 trillion loan package the International Monetary Fund and European Union agreed on last week. “The EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world,” wrote Bass, head of Dallas-based Hayman Advisors LP, in a letter to clients sent after the bailout was announced.
Swaps Soar on Germany's 'Act of Desperation': Credit Markets. Credit-default swaps soared on German Chancellor Angela Merkel’s plan to ban speculation on European government bonds, with the contracts sparking concern among investors about increasing government regulation. The Markit CDX North America Investment Grade Index Series 14 climbed 12.17 basis points to a mid-price of 120.67 basis points in New York, according to Markit Group Ltd. The increase in the index, which typically rises as investor confidence deteriorates, was the second-largest since March 2009. “The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,” said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. The Markit iTraxx Australia index jumped 17 basis points to 125 basis points as of 10:35 a.m. in Sydney, on course for its biggest one-day gain since May 7, according to Nomura Holdings Inc. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 15 basis points to 136.5 as of 8:42 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show. The Markit iTraxx Japan index climbed 14.5 basis points to 138.5 as of 9:10 a.m. in Tokyo, according to Morgan Stanley.
CLSA 'Massively Underweight' Australia on China. Australian equities will be the biggest losers in the Asia-Pacific region this year as a slowing Chinese economy cuts demand for commodities, according to CLSA Asia Pacific Markets. “We are massively underweight Australia,” Christopher Wood, the second-ranked Asia strategist in Institutional Investor magazine’s annual poll, said in an interview yesterday in Shanghai. “Australia is perceived as an economy that is geared to China on the commodity side.” “The impact of tightening is starting to affect other markets such as commodities,” said Hong Kong-based Wood, who is CLSA’s chief equity strategist.
Goldman Sachs(GS) Advice Hands Clients Losses in 7 of 9 Top Trades. Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who followed the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who followed the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar. The trades are distributed by Goldman Sachs’s global markets economic research group. It tracks the performance of the trades in a daily research note sent to clients. The time period of the recommendations is 12 months.
Goldman(GS) to Face SEC Deputy Director in Subprime Suit. Lawyers for Goldman Sachs Group Inc. will face Lorin Reisner, the deputy director of enforcement for the Securities and Exchange Commission, in the agency’s lawsuit over the bank’s use of subprime mortgage-backed securities. Reisner today filed a one-sentence “notice of appearance” in federal court in Manhattan, indicating he will participate in the case. Reisner, who worked at the law firm Debevoise & Plimpton LLP before joining the SEC last year, was an assistant U.S. attorney in New York from 1990 to 1994. “It sends a strong message that the enforcement division is both stepping up to the plate and standing behind its case,” said Jacob Frenkel, a former SEC enforcement division attorney, who isn’t involved in the Goldman lawsuit. “It’s unusual, but it’s a logical and brilliant move when you have skilled trial lawyers who are part of senior management who step forward.”
Brazil's Bovespa Tumbles on Europe Concern, Credit-Card Rules. Brazil’s Bovespa stock index fell to the lowest level since October on concern the debt crisis in Europe will curb global growth and a government plan to overhaul credit-card regulations will hurt payment processors. Payment firms Cielo SA and Redecard SA fell more than 10 percent after a Justice Ministry official said the nation will ask companies to reduce fees. Itau Unibanco Holding SA led a drop for financial companies, following a bank sell-off around the world, after Germany’s ban of certain bearish investments fueled concern Europe’s debt crisis will worsen. The Bovespa slid 3.2 percent to 60,841.08, the biggest drop since May 4. The decline extended the drop from its April 8 high to 15 percent.
BHP(BHP) Won't Rule Out Dividend Cut on Resources Tax, Review Reports. BHP Billiton Ltd. Chief Executive Officer Marius Kloppers won’t rule out a cut in the company’s dividend because of the Australian government’s plan to impose a resource profits tax, the Australian Financial Review reported, citing an interview.
China to Drive a 'Hard Bargain' on Yuan, State Researcher Writes. China, as the largest holder of U.S. debt, should drive a “hard bargain” with the U.S., especially as it relates to an appreciation of the yuan, Zhang Monan, an economics researcher with the State Information Center, wrote in a commentary in the China Daily today. The nation should transform its financial clout into policies that are in its advantage and also use that clout to improve China’s ability to fend off pressure from the outside world, Zhang wrote. China should push to make the yuan an international currency, which includes increasing the proportion of global trade settled in yuan, developing the yuan into a leading investment currency and making the yuan a leading reserve currency, Zhang wrote. Steps should also be taken to adjust China’s foreign assets structure so that its “capital advantages” become “institutional, resources and investment advantages,” Zhang wrote.
Kroll to Begin Rating Mortgage Bonds Next Quarter. Jules Kroll, the risk consulting executive whose former company’s work included probing the hidden assets of Iraq dictator Saddam Hussein’s regime in the 1990s, plans to start his credit-ratings business with grades on U.S. home-loan debt “early” next quarter. Kroll Bond Ratings Inc. will initially offer unpaid opinions on outstanding securities, “some of which we feel have ratings that are still substantially too high and others that we feel have been marked down overly aggressively” as existing competitors respond to criticism, Kroll, 69, said today in a telephone interview.
Copper Drops, Snapping Rebound, on Renewed Europe Debt Concern. Copper dropped, snapping a rebound from a three-month low, on concern Europe’s debt crisis may worsen and reduce demand for raw materials. Aluminum, lead, zinc and nickel also fell. Three-month delivery copper on the London Metal Exchange slumped as much as 3.4 percent to $6,470 a metric ton and traded at $6,540 at 9:30 a.m. in Shanghai. “There may be short-lived rebounds now and then for some metals but the big downtrend is not over yet against the macro backdrop,” Zhu Mingyuan, an analyst at Xiangyu Futures Co., said from Shanghai. Aluminum in London dropped 1.9 percent to $2,014 a ton. Lead slumped 3.8 percent to $1,765 a ton and tin fell 1.3 percent to $17,270 a ton.
Calpers Demands $600 Million More From California Amid Deficit. The California Public Employees’ Retirement System, the largest U.S. public pension, wants an extra $600.7 million from the state, which is confronting a $19 billion budget deficit. The pension fund’s 13-member governing board is set to vote tomorrow to increase the amount the state must pay as its share of retirement costs to $3.9 billion in the fiscal year that starts July 1. The state put in $3.3 billion this year. The increase is needed, Calpers managers have said, after a 24 percent drop in the fund’s value in the past fiscal year. “This is further evidence of an unsustainable pension system that must be reformed,” Schwarzenegger, 62, a two-term Republican, said today in a statement. “Every additional dollar we spend on state employee pensions is a dollar we take from education, health, and public safety.”
Harvard's Rogoff Says EU's Bazooka Won't Prevent Defaults. Kenneth Rogoff says Europe’s unprecedented aid package, worth roughly $1 trillion, won’t be enough to prevent sovereign debt defaults. What’s needed, the Harvard University economist says, is a mechanism to allow countries such as Greece to walk away from the euro.
'Tainted' Credits Pull Down UN Carbon Price: Energy Markets. Emission traders’ most-profitable credits, linked to greenhouse gases considered more harmful than carbon dioxide, are dragging the United Nations carbon market to its biggest discount in a year. The UN faces a devaluation of the tradable credits it gives investors that pay for projects to reduce hydrofluorocarbons, or HFCs, because the European Union may favor alternatives such as windfarms to combat global warming. UN offsets for 2012 traded yesterday at 4.11 euros ($5.04) a metric ton less than comparable EU permits, twice the spread at the end of last year. Goldman Sachs Group Inc. and Royal Dutch Shell Plc are among investors that may get lower returns amid a clampdown on HFCs.
Goldman, Credit Suisse Cut China Property Forecasts. Goldman Sachs Group Inc. and Credit Suisse Group Inc. cut profit and share-price estimates for Chinese property companies, citing a government clampdown on speculation to avoid asset bubbles. Goldman Sachs lowered its 2010 net income estimates by an average 13 percent and reduced earnings forecasts for the next two years by 25 percent, analysts led by Yi Wang wrote in a report today. Credit Suisse pared earnings-per-share estimates by as much as 15 percent for 2010 and 20 percent for 2011. The brokerages slashed share-price targets by as much as 57 percent. The MSCI China Real Estate Index’s 16 companies have slumped an average 24 percent this year as the central bank raised bank reserve requirements three times, while the government increased down-payment requirements for second homes and banned loans for third-home purchases. “In view of the revised tightening measures since mid- April, we turn more cautious on the property sector, particularly on transaction volumes for the remainder of the year,” Credit Suisse analysts led by Jinsong Du wrote in a report yesterday. Property transaction volumes will tumble by about 15 percent on average this year from 2009, the brokerage estimated, keeping an earlier forecast that prices will slump 30 percent from current levels.Goldman Sachs predicted volumes will fall 40 percent between May and December from a year earlier, while home prices will fall as much as 30 percent from current levels, according to a note today. “A number of developers with funding gaps may face refinancing issues if banks tighten credit to developers further,” the Goldman Sachs analysts wrote. “We suggest investors avoid such secondary real estate brokers due to their high leverage to transaction volumes.” Sales of new homes in Shanghai fell to a five-year low last week as tightening measures took effect, property consultant Shanghai UWin Real Estate Information Services Co. said yesterday in an e-mailed statement. Sales from May 10 to May 16 fell 16 percent to 60,000 square meters from the week before, the lowest level for the same period since 2005.
Australia Consumer Confidence Falls Most in 19 Months. Australian consumer confidence tumbled by the most in 19 months after the central bank boosted borrowing costs for the sixth time since October and concern about European debt triggered turmoil on financial markets. The sentiment index fell 7 percent to 108 points this month, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers conducted between May 10 and May 16 and released today in Sydney.
Wall Street Journal:
Primary Voters Rebuke Parties. In Arkansas, Sen. Blanche Lincoln was pushed into a June run-off by a union-supported candidate who portrayed her as a friend of Wall Street banks. In all three, voters showed they were ready to sever ties with candidates too closely identified with Washington and its political leaders.
Officials Fear Slick Will Flow Up Coast. An ocean current could carry oil leaking into the Gulf of Mexico around Florida and up the East Coast, federal officials said Tuesday. Officials also announced they were closing one-fifth of federal waters in the Gulf to fishing—a major blow to the seafood industry—due to the threat of oil still leaking from a well opened by the Deepwater Horizon drilling rig, which burned and sank late last month. A thread of oil from the spill already may have entered a movement of water in the Gulf known as the Loop Current, said Jane Lubchenco, administrator of the National Oceanic and Atmospheric Administration. Oil in the Loop Current could reach Florida within 10 days and then start heading up the East Coast, she said.
US Airways(LCC) CEO: Some In Washington 'Hell-Bent' On Interfering In Industry. US Airways Group Inc. (LLC) Chief Executive Doug Parker criticized the Obama administration and congressional Democrats Tuesday for their approach to aviation policy, saying "the biggest threat to our viability is government intervention." Parker, using harsh language during a speech at an aviation luncheon here, said some members of the administration and Congress are "hell-bent" on instituting policies that he said would hamper the industry's recovery. He cited legislation passed by the House that he said could lead to billions of dollars in additional fees annually for airlines, would curb global airline alliances and shift costs of air traffic-control system upgrades to the industry. He also criticized a ruling by U.S. regulators this month requiring Delta Air Lines Inc. (DAL) and US Airways to divest some takeoff landing slots in New York and Washington as a pre-condition for a larger slot swap in the two cities. He called the decision "stunning," and reiterated plans to appeal it in federal court. "It's a disturbing state of affairs," Parker said, adding that the ruling on the slot swap in particular "doesn't bode well" for the industry's future dealings with the Obama administration. Parker, who also is chairman of US Airways, said the policies out of Washington could threaten the industry's recovery.
Bloomberg Businessweek:
China Stocks Will Extend Bear Market Plunge: Technical Analysis. The bear market in Chinese stocks will deepen after the nation’s Shanghai Composite Index dropped beneath its low reached in August, according to Bespoke Investment Group LLC. The measure tumbled 1.9 percent on May 11, stretching its loss from a November high to 21 percent. A bear market is commonly defined as a decline of at least 20 percent from a high. The plunge dragged the Shanghai index beneath a three- month closing low reached Aug. 31, and while the gauge climbed back above that level on May 13, it fell below it again this week, a sign that more losses are likely, according to Bespoke. China stocks have suffered 25 bear markets since 1990, with drops averaging 35 percent, according to Bespoke.
CNBC:
Hewlett-Packard Earnings Beat Wall Street Forecasts. Hewlett-Packardbeat expectations on solid demand for personal computers and servers and a resurgence in its printing business, and the company raised its full-year outlook.
Fox News:
CFTC, SEC Summary On 'Flash Crash' Focuses On 6 Hypotheses. Market regulators are exploring six hypotheses surrounding the May 6 "flash crash"--including the use of stop-loss orders and stub quotes--but they haven't pinpointed a single cause, according to joint report issued Tuesday. While they haven't isolated a single cause, they are looking closely at trading in the E-mini S&P 500 futures contract, where the patterns are closely linked to the volatile market behavior during the tumult. Other things that may have contributed to the market plunge in the report include:
Suddenly, Everyone's In the CRASH Camp, Not Just The Bear Camp. Here a Swan, there a Swan, everywhere a Black Swan...Newsletter writers, hedge fund managers, journalists, bloggers, technicians, fundamental analysts, economists and strategists are joining the crash camp left and right. Not the bear camp...the crash camp. So what is the herd hearing/ seeing?
Hedge Fund Regulation Protects Banks, Big Hedge Funds. One reason Big Business often supports bigger government is the tendency of regulation to disproportionately burden smaller businesses. Wal-Mart can afford an employer mandate in health insurance, but Mom n Pop can’t. Toy inspection requirements weigh down more heavily on a craftsman than on Mattel. Today, we’re seeing the same thing with hedge funds, where past regulation proposals seemed aimed at protecting banks from hedge funds, and current ones seem aimed at protecting big hedge funds from smaller ones. At CNBC.com, John Carney (my brother) quotes University of Illinois law professor Larry Ribstein on the previous effort by the SEC to regulate hedge funds: Indeed, the rule seemed mainly aimed at protecting banks and big funds from the competitive threat represented by smaller hedge funds rather than targeting a need for investor protection. The whole history of hedge-fund regulation — and the increasing closeness of hedge funds and government (especially Chuck Schumer) — is worth studying. You can start with this New York Times piece from the first weeks of a Democratic Congress. Then see what happened to Democratic fundraising from hedge funds over that summer. And cap it off with Kim Strassel’s expert take on the picture.
Politico:
Chris Dodd Tries to Gut Derivatives Bill. With Sen. Blanche Lincoln in Arkansas fighting for her political life, Senate Banking Committee Chairman Chris Dodd (D-Conn.) quietly introduced an amendment Tuesday gutting her plan to crack down on derivatives trading. The Wall Street reform bill includes Lincoln’s plan to ban banks from trading most derivatives, the complex financial instruments that contributed to the 2008 economic crisis. But some Senate Democrats, as well as administration officials and Wall Street banks, have lined up against the restriction, saying it would put the trades out of the reach of regulators. Dodd’s proposal, which aimed at resolving those differences, would delay implementation of the ban by two years while a federal council of regulators studied it — a move that would likely prevent the prohibition from ever going into effect. He was required to submit the amendment by noon Tuesday for it to be considered ahead of final passage. Lincoln said in a statement that she would oppose attempts to water down the derivatives trading ban.
The Admiral Sinks Specter. Rep. Joe Sestak knocked out five-term Sen. Arlen Specter (D-Pa.) in a closely watched Democratic primary Tuesday night, tapping into a wave of anti-incumbency to bring a dramatic halt to Specter’s 30-year Senate career.
Rand Paul Tapped Into 'Anger'. Rand Paul, the first-time candidate for elective office who has emerged as a symbol of the national tea party's clout in Republican politics, appears to have clinched the GOP's nomination for this state's open Senate seat — in a victory certain to jolt the political order in Kentucky and across the country.
Reuters:
Chanos Sees More Short Sale Restrictions in Europe.Prominent short seller James Chanos, whose U.S.-based hedge fund makes money when stock prices fall, said he expects to see additional short-sale restrictions in Europe as other nations follow Germany's ban. "This is certain to be followed by Holland, France and everyone else," Chanos said hours after Germany's financial watchdog announced a temporary ban on "naked" short selling.
Austria Aims for European Ban of Naked Shorts - FT. Austria's finance ministry is pushing for a European-wide ban of naked short-selling of some financial stocks and debt securities after Germany's crack down, the Financial Times reported on Wednesday. "It's our intention to get this on the agenda of the finance ministers' task force meeting on Friday, aiming towards a European ban on naked short selling," the FT quoted an unidentified spokesman for Austria's finance ministry as saying. The newspaper also reported that the European Union's internal market commissioner Michel Barnier said the Commission would present an proposal on how to deal with short-selling this autumn, including measures for sovereign credit default swaps.
Volcker: Europe's Debt Crisis Shows Risks for U.S. Europe's debt crisis shows the risks for the United States if it does not get its budget deficits under control, former Federal Reserve Chairman Paul Volcker said on Tuesday.
US Senate Defeats Measure to Ban Naked CDS. By a vote of 57 to 38, the Senate defeated the proposed ban offered by Democratic Senator Byron Dorgan, who argued that their risky nature was not outweighed by their societal benefits. Democratic Senator Christopher Dodd said a sweeping rewrite of financial regulations he is shepherding toward passage would adequately tame the derivatives by requiring them to be traded through a clearinghouse.
Financial Times:
Funds Hit Out at Brussels 'Power Grab'. Lawmakers in Brussels are attempting a “power grab” through controversial new rules to regulate hedge fund managers and private equity firms, industry figures have warned. Rewordings of the EU’s new draft directive on alternative fund managers – notably the version by European Union parliamentarians – may shift the power to regulate London’s financial markets to the European Union, according to fund managers. “This is a political exercise in a large degree. This is not an abstract debate over how to best regulate the shadow banking industry,” said Barney Reynolds, a lawyer for Shearman & Sterling. “Parliament’s latest draft gives ESMA [European Securities and Markets Authority, a proposed pan-EU agency] and the Commission an enhanced role in collecting information and setting policy, rather than just co-ordinating among national regulators. It is part of a broader power grab that also appears in other areas [such as regulation of derivatives and credit rating agencies],” said Mr Reynolds. According to the head of one large Mayfair-based buy-out group, “What really worries us is the plan to create a powerful pan-European financial regulator. That is the real battle we should be fighting.” Serious concerns also remain about some of the restrictions imposed by the directive. These include constraints on remuneration, leverage and so-called third country rules, which will determine how non-EU funds and managers are allowed to market themselves within the bloc. “Certain new elements of the texts are legally impossible to implement, other elements we just don’t understand,” said one of London’s leading hedge funds. The effects of the directive – even in its draft forms – are already being felt in some quarters. Europe’s largest hedge fund manager, Brevan Howard, has relocated 50 staff to Geneva because it believes the directive will curtail its ability to deal with non-EU investors if it is based in the EU. Other large fund managers, such as London-based Marshall Wace, have begun to redomicile Cayman Island-based funds to Dublin, in order not to get caught by some of the EU’s proposed restrictions on offshore-based products. Meanwhile, private equity bosses say their big concerns are the extra disclosure requirements for their portfolio companies and the “third country” rules. “Our particular worry is the disclosure regime and the threshold applying to any company with more than 50 employees, which is especially mad,” said Simon Walker, chief executive of the British Private Equity and Venture Capital Association. “That will capture many of the small venture capital-backed start-ups that don’t even have revenues yet.”
Shanghai Securities News:
The growth of China's exports to Europe may slow by six to seven percentage points in May, June, and in the third quarter of the year as Europe's debt crisis deals a "severe" blow to foreign trade, citing Huo Jianguo, a researcher at the Asian country's Ministry of Commerce. China's exports to Europe rose by 25% in April.
South China Morning Post:
China Mainland Curbs Reduce Appetite for Hong Kong Flats. Mainland investor sentiment has taken a hammering from recent measures to clamp down on credit and curb property price growth in the country, analysts say - and the spillover effects are already evident in Hong Kong's property market.
Yonhap News:
South Korea Asks China to Ban Mount Kumgang Tours. Seoul has requested that Beijing exclude North Korea's Mount Kumgang resort from its list of group tour destinations allowed for its people while it seeks understanding on a dispute over the North's recent illegal freeze of South Korean assets there, the Ministry of Culture and Tourism here said Tuesday. The tours, once a cash cow for the poverty-ridden communist country, were suspended in 2008, when a South Korean tourist was shot dead by a North Korean soldier guarding a restricted area. Seoul has demanded a full investigation into the case and safety guarantees for South Korean tourists. The demands have yet to be met.
The Chosun Ilbo:
Lee, Obama Agree to Act Against North Korea Over Shipwreck. President Lee Myung-bak and his U.S. counterpart Barack Obama agreed to put diplomatic and military pressure on North Korea in the belief that the North was behind the sinking of the Navy corvette Cheonan in the West Sea on March 26. In a telephone conversation with Obama on Tuesday morning, Lee said the findings of an international investigation team "clearly point to North Korean involvement," a Cheong Wa dae official said. The two countries are mulling joint military maneuvers, especially anti-submarine exercises off the west coast, a government official said. They are also discussing seeking further UN Security Council sanctions against the North; blocking passage of North Korean merchant ships through the Jeju Strait; resuming psychological warfare along the military demarcation line; and suspending all inter-Korean business except for the joint Korean Kaesong Industrial Complex. Lee is expected to deliver a nationwide address early next week following the announcement of the findings on Thursday.
Evening Recommendations Citigroup:
Reiterated Buy on (DKS), target $34.
Reiterated Buy on (HPQ), raised target to $64.
Night Trading
Asian indices are -1.50% to -.50% on average.
Asia Ex-Japan Investment Grade CDS Index 136.5 +14.0 basis points.
The Consumer Price Index for April is estimated to rise +.1% versus a +.1% gain in March.
The CPI Ex Food & Energy for April is estimated to rise +.1% versus unch. in March.
10:30 am EST
Bloomberg consensus estimates call for a weekly crude oil inventory build of +500,000 barrels versus a +1,949,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -900,000 barrels versus a -2,814,000 barrel decline the prior week. Distillate inventories are expected to rise by +1,000,000 barrels versus a +1,396,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise by +.3% versus a -1.17% decline the prior week.
2:00 pm EST
FOMC Minutes
Upcoming Splits
None of note
Other Potential Market Movers
The 1Q Mortgage Delinquencies report, 1Q MBA Mortgage Foreclosures report, weekly MBA mortgage applications report, Barclay's Capital Financial Services Conference, (OXY) analyst day, (SYK) analyst meeting, (POT) analyst meeting, (AMCC) analyst day, JPMorgan Tech/Media/Telecom Conference, BMO Capital Ag/Protein/Fertilizer Conference, (INTC) shareholders meeting, Robert Baird Growth Stock Conference, could also impact trading today.
BOTTOM LINE: Asian indices are 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 50% net long heading into the day.
North American Investment Grade CDS Index 118.55 bps +8.9%
European Financial Sector CDS Index 1335.63 bps -4.48%
Western Europe Sovereign Debt CDS Index 114.33 bps -.72%
Emerging Market CDS Index 272.79 bps +9.38%
2-Year Swap Spread 38.0 +3 bps
TED Spread 31.0 unch.
Economic Gauges:
3-Month T-Bill Yield .16% +1 bp
Yield Curve 263.0 -6 bps
China Import Iron Ore Spot $162.90/Metric Tonne -.24%
Citi US Economic Surprise Index +22.80 +1.2 points
10-Year TIPS Spread 2.18% -1 bp
Overseas Futures:
Nikkei Futures: Indicating -87 open in Japan
DAX Futures: Indicating -52 open in Germany
Portfolio:
Slightly Lower: On losses in my 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 very bearish as equities trade near session lows despite gains in European shares, lower sovereign debt angst and a bounce in Shanghai overnight. On the positive side, HMO, Computer Service, Medical and Oil Tanker stocks are flat. Oil is lower again on rising supply, another euro plunge and worries over Chinese demand. The Spain sovereign cds is falling another -10.44% to 170.02 bps. On the negative side, Bank, Education, I-Bank, Steel, Disk Drive, Alt Energy, REIT and Semi shares are under meaningful pressure, falling 2.5%+. Cyclicals are underperforming, falling -2.3%. The sharp increase in the emerging market and North Amer. Inv. Grade cds is a large negative. As well, the 2-year swap spread is surging to the highest since the peak of the Greece fears 8 days ago. The decline in the euro is disorderly again and the 10-year yield is starting to fall too fast. US stocks have traded poorly all day. Even after a bounce in Shanghai overnight, lower sovereign debt angst, gains in European stocks and a jump in (WMT) shares, US stocks were met with meaningful selling since the open. Losses have accelerated on new regulatory fears and the disorderly decline in the euro. The horrid action in shares of (V)/(MA) is a red flag for the broad market. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, technical selling, regulatory rumors, rising economic fears, increasing financial sector pessimism and tax hike concerns.
