Weekly Scoreboard*

Indices

• S&P 500 1,091.60 +2.51%
  
• DJIA 10,211.07 +2.81%
  
• NASDAQ 2,243.60 +1.10%
  
• Russell 2000 648.31 +2.19%
  
• Wilshire 5000 11,285.79 +2.52%
  
• Russell 1000 Growth 486.73 +1.95%
  
• Russell 1000 Value 564.10 +3.07%
  
• Morgan Stanley Consumer 670.78 +2.24%
  
• Morgan Stanley Cyclical 842.72 +4.01%
• Morgan Stanley Technology 551.98 +1.42%
  
• Transports 4,319.88 +3.91%
  
• Utilities 367.77 +3.81%
  
• MSCI Emerging Markets 38.43 +1.62%
  
• Lyxor L/S Equity Long Bias Index 947.01 -.57%
  
• Lyxor L/S Equity Variable Bias Index 849.97 -.51%
  
• Lyxor L/S Equity Short Bias Index 920.04 +.19%
  

Sentiment/Internals

• NYSE Cumulative A/D Line +83,193 -1.15%
  
• Bloomberg New Highs-Lows Index -166 +90
  
• Bloomberg Crude Oil % Bulls 42.0 -2.3%
  
• CFTC Oil Net Speculative Position +17,457 -29.82%
  
• CFTC Oil Total Open Interest 1,322,308 -3.27%
  
• Total Put/Call 1.06 +10.42%
  
• OEX Put/Call 1.17 +28.57%
  
• ISE Sentiment 94.0 +17.65%
  
• NYSE Arms 1.22 -91.05%
  
• Volatility(VIX) 28.79 -19.19%
  
• G7 Currency Volatility (VXY) 13.24 -10.36%
  
• Smart Money Flow Index 8,767.99 -2.22%
  
• Money Mkt Mutual Fund Assets $2.840 Trillion unch.
  
• AAII % Bulls 34.48 -7.04%
  
• AAII % Bears 43.10 +5.51%
  

Futures Spot Prices

• CRB Index 255.92 +2.80%
  
• Crude Oil 73.78 +4.70%
  
• Reformulated Gasoline 204.97 +3.37%
  
• Natural Gas 4.78 -.49%
  
• Heating Oil 200.53 +3.61%
  
• Gold 1,230.20 +.62%
  
• Bloomberg Base Metals 183.36 +1.20%
  
• Copper 290.40 +4.52%
  
• US No. 1 Heavy Melt Scrap Steel 338.0 USD/Ton -8.81%
  
• China Hot Rolled Domestic Steel Sheet 4,234 Yuan/Ton -1.03%
• S&P GSCI Agriculture 294.78 +3.99%
  

Economy

• ECRI Weekly Leading Economic Index 123.20 -.65%
  
• Citi US Economic Surprise Index -14.20 -22.0 points
  
• Fed Fund Futures imply 84.0% chance of no change, 16.0% chance of 25 basis point cut on 6/23
• US Dollar Index 87.51 -.95%
  
• Yield Curve 250.0 +3 basis points
  
• 10-Year US Treasury Yield 3.23% +3 basis points
  
• Federal Reserve's Balance Sheet $2.314 Trillion -.17%
  
• U.S. Sovereign Debt Credit Default Swap 37.14 -11.79%
  
• Western Europe Sovereign Debt Credit Default Swap Index 127.17 -15.60%
  
• 10-Year TIPS Spread 1.99% +1 basis point
  
• TED Spread 47.0 +5 basis points
  
• N. America Investment Grade Credit Default Swap Index 126.15 +2.97%
  
• Euro Financial Sector Credit Default Swap Index 154.65 -4.44%
  
• Emerging Markets Credit Default Swap Index 285.55 -2.43%
  
• CMBS Super Senior AAA 10-Year Treasury Spread 320.0 -14 basis points
  
• M1 Money Supply $1.727 Trillion +1.64%
• Business Loans 606.10 +.08%
  
• 4-Week Moving Average of Jobless Claims 463,000 +.5%
  
• Continuing Claims Unemployment Rate 3.5% -10 basis points
  
• Average 30-Year Mortgage Rate 4.72% -7 basis points
  
• Weekly Mortgage Applications 560.90 -12.22%
  
• ABC Consumer Confidence -43 +1 point
  
• Weekly Retail Sales +3.60% +90 basis points
  
• Nationwide Gas $2.70/gallon -.03/gallon
  
• U.S. Cooling Demand Next 7 Days 31.0% above normal
• Baltic Dry Index 3,423 -12.97%
  
• Oil Tanker Rate(Arabian Gulf to U.S. Gulf Coast) 65.0 +18.18%
  
• Rail Freight Carloads 191,758 -14.82%
  
• Iraqi 2028 Government Bonds 82.45 -1.03%
  

Best Performing Style

• Mid-Cap Value +3.74%

Worst Performing Style

• Large-Cap Growth +1.95%

Leading Sectors

• Coal +8.23%
• REITs +7.46%
• Oil Tankers +6.95%
• Steel +6.48%
• Paper +6.14%

Lagging Sectors

• Internet +.36%
• I-Banks +.14%
• Education -.26%
  
• HMOs -.68%
• Disk Drives -.70%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Rising to Session Highs into Final Hour on Tech Sector Optimism, Falling Sovereign Debt Angst, Diminishing Energy Sector Fear

Broad Market Tone:

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

Equity Investor Angst:

• VIX 29.71 -2.78%
  
• ISE Sentiment Index 113.0 +34.52%
  
• Total Put/Call 1.01 +1.0%
  
• NYSE Arms 1.16 +681.42%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 126.15 bps -.76%
  
• European Financial Sector CDS Index 157.64 bps -3.86%
  
• Western Europe Sovereign Debt CDS Index 127.17 bps -2.80%
  
• Emerging Market CDS Index 287.33 bps +.44%
  
• 2-Year Swap Spread 39.0 +2 bps
  
• TED Spread 47.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .07% -1 bp
  
• Yield Curve 249.0 -5 bps
  
• China Import Iron Ore Spot $143.10/Metric Tonne -.07%
  
• Citi US Economic Surprise Index -14.20 -17.4 points
  
• 10-Year TIPS Spread 1.97% -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +105 open in Japan
• DAX Futures: Indicating +4 open in Germany

Portfolio:

• Slightly Higher: On gains in my Technology, Medical and Biotech long positions
  
• Disclosed Trades: Covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short
  
• Market Exposure: Moved to 100% Net Long

BOTTOM LINE: Today's overall market action is bullish as the S&P 500 pushes to session highs despite recent gains, a euro decline and disappointing economic data. On the positive side, Education, Airline, Semi, Software, Paper and Oil Tanker stocks are especially strong, rising 1.0%+. Cyclical and small-cap shares are outperforming. Copper is bouncing another +1.2% today. The BP(BP) cds is falling -13.4% to 401.47 bps. On the negative side, Retail, Homebuilding, Bank and Utility shares are under pressure, falling 1.0%+. The TED spread continues to grind to new 52-week highs, which remains a big negative. As well, the yield on 3-Month Treasuries is now down to February levels and the 10-year yield is falling too much today. The Citi US Economic Surprise Index is rolling over, which usually indicates economists will soon ratchet down their forecasts. This also corresponds with the recent deterioration in the ECRI weekly leading index. I suspect upcoming inflation readings will come in meaningfully below current estimates. The tone of trading today is better than the major averages would suggest. Action in tech sector shares is much improved. Leader (AAPL) is at session highs and is trying to break back above its 50-day moving average. The recent bounce in the major averages looks to continue short-term. I expect US stocks to trade modestly higher into the close from current levels on short-covering, tech sector optimism, less energy sector fear, declining sovereign debt angst and lower energy prices.

Today's Headlines

Bloomberg:

• Spanish Lenders Lead Decline in Bank Bond Risk, Debt Swaps Show. Spanish banks led a decline in the cost of insuring against default on financial company bonds as Caja Madrid and Bancaja began a merger process and Banco Santander SA eased profit concerns. Credit-default swaps on Caja Madrid dropped 29 basis points to 437 and Bancaja decreased 29 to 501, while contracts on Santander, Spain’s biggest lender, declined 31.5 basis points to 182.5, according to CMA DataVision. Banco Bilbao Vizcaya Argentaria SA fell 39 basis points to 221. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers dropped 9 basis points to 169 and the subordinated index declined 9 basis points to 257, JPMorgan Chase & Co. prices show. Swaps on corporate bonds also fell with contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high- yield credit ratings down 6.5 basis points at 599 and the Markit iTraxx Europe Index of 125 companies with investment-grade ratings 2.5 lower at 130, according to JPMorgan.
• U.S., China Object to 'Strange Meal' Draft UN Climate Pact. The U.S., China and Brazil joined dozens of nations criticizing a draft climate treaty issued in Bonn, where two weeks of United Nations talks conclude today. The negotiating text pares back alternatives from a document published in May, eliminating some potential targets to limit global warming and greenhouse gas emissions. In the closing forum of the talks, delegates criticized the document, and urged the chair who produced it, Zimbabwe’s Margaret Mukahanana-Sangarwe, to revise it. “I think there is something wrong with your kitchen,” said Mohammad Al Sabban, Saudi Arabia’s lead negotiator. “The recipe we have discussed over the last two weeks has been taken by you, and you gave us a very strange meal.”
• Loan Market Slump Forces Companies to Hold Off Debt Refinancing. Leveraged loans erased 77 percent of this year’s gains in a monthlong drop, causing companies to sideline proposed refinancing transactions that would rely on institutional investors.
• U.S. Economy: Retail Sales Fall for First Time Since September. Sales at U.S. retailers unexpectedly dropped in May for the first time in eight months, indicating the rebound in consumer spending is cooling as Americans boost savings. Purchases fell 1.2 percent, led by a record plunge in demand at building-material stores that may reflect the end of a government rebate on sales of energy-saving appliances, according to figures from the Commerce Department issued today in Washington.
• Dropping Swaps Plan for Volcker Rule May Not Reduce Bank Risk. A Congressional plan to ban proprietary trading by banks may still allow them to take risks with private derivatives in transactions initiated by customers. The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, won’t stop Wall Street firms from betting on the direction of a market as long as the trade originated with a customer, said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC. If Congress passes the Volcker rule, a firm seeking to wager that a market will rise or fall may just avoid hedging the opposite side of a client order.

Wall Street Journal:

• Morgan Stanley(MS), J.P. Morgan(JPM) to Lead GM IPO. Morgan Stanley and J.P. Morgan Chase & Co. are expected to win the lead underwriting roles for General Motors' initial public offering, people familiar with the matter said Friday.
• Hedge Funds Try New Way to Avoid Big Redemptions. Many hedge funds are adopting a new way to avoid a repeat of the massive redemptions that crushed managers during the 2008 financial crisis. Some investors like the changes, while others don't. So-called investor-level gates are popping up all over the $2 trillion industry, replacing more traditional fund-level gates, according to investors.

CNBC:

• Obama Renews Call for $30 Billion Plan to Boost Hiring.

Business Insider:

• New Google(GOOG) News Spotted. Google (GOOG) is testing a new Google News homepage, SEL's Matt McGee reports. The changes, according to Matt:
• Check Out Just How Damaged German Banks Would Get If The PIIGS Default.
• The Inventory Adjustment That Boosted GDP is Now Over. (graph)
  

Zero Hedge:

• ECRI Leading Economic Index Drops to 44 Week Low. (graphs) David Rosenberg's favorite leading indicator, the Economic Cycle Research Institute (ECRI) Leading Index, fell to 123.2 in the week ended June 4, down from 124 the week before, a -3.5% annualized contraction: the first time this has gone negative in over a year. This is the lowest level since July 31, 2009, when it was at 122.4.
• SEC Associate Director King to Join High-Frequency Trader GETCO. Now that is has achieved complete regulatory capture, and the SEC has been purchased for 30 pieces of silver, Sky-Net is on the verge of sentience. Going forward nobody except the HFT computers will be trading with each other. The computerized market has now made a complete mockery of regulation, and it cost it about 1 day worth of frontrunning based profits. We fully expect the SEC to find "absolutely nothing wrong" with market structure when it concludes its probe into HFT manipulation. In all seriousness, just what is Getco so worried about if it needs to conduct such a blatant example of "regulatory capture"?
• Japan's New PM Warns Country at "Risk of Collapse" Under Massive Debt Load.
• S&P Warns it Could Cut Largest Spanish Deposit Bank Counterparty Credit Ratings.
  

Forbes:

• European Bank Shares Send Greek Default Signal. European bank stocks are sending an ominous signal: They are trading as if a default by Greece is not a question of "if" but one of "when"? While Greece has been touting its efforts to cut its massive deficit in recent days, the issue for Greece is that the moves it is taking are unlikely to help the country this year, says Stephen Pope, chief global equity strategist at Cantor Fitzgerald in London. Pope expects that Greece's deficit as a percentage of gross domestic product is likely to surge this year to 150% from 120% currently. The deficit-cutting measures "cannot be implemented this year," says Pope. "It is just kicking the tin can further" into the future. Pope says if all the PIIGS countries –an acronym which refers to Portugal, Ireland, Italy, Greece and Spain—had to restructure their debts, it would result in about 900 million to 1 billion euros in writedowns. "The banks can't handle that," says Pope.

CNNMoney.com:

• iPhones for BlackBerries at UBS. Up to one third of the the bank's 18,000 BlackBerries could migrate to Apple's smartphone.
• Questioning Keynes. In the 1930s, British economist John Maynard Keynes spearheaded a revolution in economic thinking: The free market is imperfect. And because of these imperfections, it's the government's job to intervene and somehow make things right. The global financial crisis ignited a resurgence in Keynesian thought -- specifically, the idea that government should spend big to pull out of a recession. But given Europe's sovereign debt crisis, is it time to ask where Keynes may have gone wrong? Or did European leaders misinterpret his teachings? And, given the growing complexity of the global financial system, are Keynes' ideas perhaps outdated?

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -16 (see trends).

The Hill:

• Panel Commissioned by Barney Frank Recommends Nearly $1 Trillion in Defense Cuts. A panel commissioned by Rep. Barney Frank (D-Mass.) is recommending nearly $1 trillion in cuts to the Pentagon’s budget during the next 10 years. The Sustainable Defense Task Force, a commission of scholars from a broad ideological spectrum appointed by Frank, the House Financial Services Committee chairman, laid out actions the government could take that could save as much as $960 billion between 2011 and 2020.

Reuters:

• OECD Indicators Point to Slower Expansion, Brazil Peak. The pace of economic growth in the world's developed economies showed signs of slowing in April, with a potential peak emerging in Brazil and stronger evidence of expansion halting in China, France and Italy, according to an OECD survey on Friday.

TimesOnline:

• BP(BP) Plans to Defer Dividend After Pressure From Obama. BP is preparing to defer payment of its next dividend to shareholders by placing the money in an escrow account until the full scale of the company’s liabilities from the Gulf of Mexico disaster can be determined, The Times has learnt.

Xinhua:

• The average price of second-hand housing in Beijing in May fell 17% from April to 12,661 yuan per square meter, the city's statistics bureau said on its website today. The number of transactions of second-hand homes slumped by 70.7% from April and 64.8% from May last year to 3,028, according to the statement.

Bear Radar

Style Underperformer:

• Large-Cap Value (-.37%)

Sector Underperformers:

• Banks (-1.31%), Retail (-1.0%) and Homebuilders (-.84%)

Stocks Falling on Unusual Volume:

• SI, WPPGY, EDMC, CHBT, BIIB, SBR, RMBS, FARO, UFPI, THO, BPL and HBHC
  

Stocks With Unusual Put Option Activity:

• 1) SPWRB 2) PHM 3) HAL 4) PM 5) MAR
  

Stocks With Most Negative News Mentions:

• 1) BP 2) DELL 3) XOM 4) EOG 5) APH
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (+.29%)

Sector Outperformers:

• Education (+.77%), Biotech (+.66%) and Airlines (+.63%)

Stocks Rising on Unusual Volume:

• CSIQ, NSM, ADVS, PFE, BMY, BA, TIN, BP, AIXG, ULTA, ARST, LFUS, MEAS, DCTH, IPCM, DECK, CECO, AGAM, ADVS, SVVS, FINL, CAVM, ALTR, BGH, PWO and TBL
  

Stocks With Unusual Call Option Activity:

• 1) LXK 2) DFS 3) GME 4) LULU 5) CAL
  

Stocks With Most Positive News Mentions:

• 1) QCOM 2) WEN 3) LFUS 4) AAPL 5) BSFT

Friday Watch

Evening Headlines
Bloomberg:

• Euro Company Spreads Rise to Record Versus U.S.: Credit Markets. The risk of owning Europe’s corporate bonds is the highest on record relative to U.S. company debt as investors lose confidence that lawmakers and central bankers can tame the region’s worsening fiscal crisis. Yields on investment-grade bonds in euros rose to a 10- month high of 239 basis points, or 2.39 percentage points, more than government debt, according to Barclays Capital index data. That’s 43 basis points more than the spread for U.S. company fixed-income securities, near the record 44 basis points reached May 27. European bond spreads were below those on dollar debt as recently as February, the indexes show. Yields suggest debt investors are concerned that Europe’s sovereign debt crisis will stifle growth and curb profits.
  
• Goldman's(GS) Cohn Sees No Sign of Resolution to SEC Case. Goldman Sachs Group Inc. President Gary Cohn said he sees no signs of a resolution to the Securities and Exchange Commission’s fraud claims against the firm. “There’s no indications of anything at this point,” Cohn told reporters at a conference in Montreal today.
• Senate Vote on EPA Carbon Rules Splits Democrats. A failed Republican move to block a U.S. agency from regulating greenhouse gases under existing law may have drawn enough votes to damage Democratic hopes of a passing a bigger pollution-reduction plan this year. Six Senate Democrats joined the Republican effort to challenge the Environmental Protection Agency’s planned regulations for carbon dioxide and other gases linked to climate-change. The motion to disapprove the EPA’s carbon regulations from Lisa Murkowski, an Alaska Republican, was defeated 47-53 in a procedural vote. EPA carbon rules are the Obama administration’s backup plan for limiting greenhouse gases if its preferred approach, cap- and-trade legislation that charges polluters a price for the carbon dioxide they released into the atmosphere, doesn’t pass Congress this year. Senate Majority Leader Harry Reid told reporters after the vote he’ll wait for a meeting with Democrats next week before deciding what should be in next month’s energy legislation, although it won’t be branded as “cap-and-trade.” “We don’t use the word cap-and-trade; that’s something that’s been deleted from my dictionary,” Reid said. “Carbon pricing is something we’re talking about.” and Today, all 41 Republicans voted against the EPA’s proposed carbon regulations. The six Democrats to side with them today were Evan Bayh of Indiana, Ben Nelson of Nebraska, Jay Rockefeller of West Virginia, Mary Landrieu of Louisiana and Mark PryorBlanche Lincoln of Arkansas. They joined Republicans in arguing that the EPA regulations, which would take effect next year, are impractical and damaging to the economy. The regulations are a “back-door national energy tax” that would deal “a devastating blow to an economy that’s already in rough shape,” said Senate Republican Leader Mitch McConnell of Kentucky.
• Wind Companies to Buy More U.S. Parts in Agreement With Unions. Wind-energy companies agreed to buy more parts from U.S. suppliers, and a labor union promised to join in lobbying Congress for a requirement to use more renewable energy. The accord announced today by the American Wind Energy Association and the United Steelworkers union grew out of objections by lawmakers that federal money was being spent to purchase clean-energy components made abroad.
• Hong Kong's Hang Seng Index may fall 6.3%, extending its slump from its November Peak, as technical analysis signals further weakness, according to MF Global Holdings Ltd.
• Korea Bank Debt Faces Biggest European Funding Risk, RBS Says. Bonds of South Korean lenders such as Woori Bank are most at risk among Asian financial companies should Europe’s debt crisis escalate, according to Royal Bank of Scotland Group Plc.“If there is a global liquidity crunch, Korean banks are likely the most vulnerable,” analysts led by Kristine Li wrote in a report e-mailed yesterday. “Korea is the most dependent on external bank financing besides Hong Kong and Singapore, and Korean banks have the highest loan-to-deposit ratio.”
• Papandreou Unwinds Greek Socialist Past to Confront Corruption. Socialist Prime Minister George Papandreou promised to undo decades of welfare policy to win an international bailout for Greece. Keeping the lifeline will force him to reverse another legacy left by past leaders, including his father: corruption and a bloated bureaucracy. Papandreou has promised “clean hands” to win public support for austerity measures that will cost all 11 million Greeks -- from newborns to retirees -- as he introduces in coming weeks a plan to overhaul the pension system, the fattest target in his deficit-cutting campaign. The nation’s financial crisis, which has sparked dozens of anti-government demonstrations including one in which three bank employees were killed, presents an opportunity for a political and economic overhaul that Papandreou must grasp, analysts and investors say. Failure by the 57-year-old, U.S.-born leader threatens default and a cataclysm that may undermine the euro.
• China Reaches Lewis Turning Point as Inflation Overtakes Labor. Shenzhen Jufeng Handicraft Co. was so eager to ensure employees returned to work after February’s Lunar New Year holiday that it threw them a party, handed out gifts and bused workers to homes 1,000 kilometers away. “We needed to do more to make them stay,” said Sunny Jia, sales manager of the Shenzhen-based company, which makes linen, leather bags and cabinets for such customers as Oscar Collections Ltd. in the U.K. “All our customers wanted orders shipped within a month.” China, once an abundant provider of low-cost workers, is heading for the so-called Lewis turning point, when surplus labor evaporates, pushing up wages, consumption and inflation, said Huang Yiping, former chief Asia economist at Citigroup Inc. The result may prompt manufacturers to switch to cheaper countries such as India and Vietnam. “If the first decade of the 21st century saw China rapidly rising as a global manufacturing center, the post-Lewis turning point could see the opposite,” said Huang, an economics professor at Peking University in Beijing. “Global manufacturing activities concentrated in China today may find their way elsewhere.”

Wall Street Journal:

• U.S. Firms Build Up Record Cash Piles. U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery. The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963. While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the cash on hiring or expansion amid doubts about the strength of the recovery. They are also anxious to keep cash on hand in case Europe's debt troubles lead to a new market freeze.
• U.S. Shifts Toward Support for Iran's Dissidents. The U.S. has accelerated its effort to provide dissidents in Iran with computer hardware and software to evade government censors. But it's a shift that many activists say is insufficient to bring political change in Tehran.
• Federal Budget Deficit in May Totals $135.93 Billion. The U.S. federal budget deficit rose again in May as the government neared the $1 trillion mark a second straight year. The government spent $135.93 billion more than it collected, the U.S. Treasury said in its monthly budget statement released Thursday. Government spending on defense came short of the expectations of research firm Macroeconomic Advisers, causing the research firm to lower its tracking forecast for second-quarter economic growth to 3.6% from 3.7%. The budget report came out a day after Federal Reserve Chairman Ben Bernanke issued a new warning on the U.S. fiscal condition. Mr. Bernanke, who testified to Congress Wednesday, said there is a risk to the overall economy if financial markets begin worrying about the government's commitment to reducing the deficit. The U.S. ran a record $1.42 trillion deficit in fiscal 2009. Fiscal years begin Oct. 1. Mr. Bernanke even said the U.S. could face problems that debt-stricken Greece has suffered if it doesn't come up with a plan soon to cut the deficit.
• Deflation Fears Stir in Developed Economies. Worries about consumer price deflation are resurfacing in the world's developed economies after weeks of financial-market turmoil driven by Europe's fiscal crisis. The fears are most pronounced in Europe, where policy makers are under pressure to reduce large budget deficits now, before durable recoveries emerge. A combination of spending cuts and tax increases could weigh on economic growth and feed into deflation, which is a broad decline in consumer prices. Deflation makes it harder for consumers, businesses and governments to pay off debts. Principal repayments on debt are fixed but deflation is marked by falling incomes, so as deflation sets in the burden of paying off old debts gets greater. Officials fret about deflation because it is hard to stop. Interest rates are already near zero in the U.S. and elsewhere, so policy makers can't use the traditional tool of rate cuts to spur growth and stop deflation. That's an acute worry today.
• 'We Are Totally Unprepared'. Nine years after 9/11, a chilling complacency about WMD attacks. The most important overlooked story of the past few weeks was overlooked because it was not surprising. Also because no one really wants to notice it. The weight of 9/11 and all its implications is so much on our minds that it's never on our mind. I speak of the report from the Inspector General of the Justice Department, issued in late May, saying the department is not prepared to ensure public safety in the days or weeks after a terrorist attack in which nuclear, biological or chemical weapons are used.

Bloomberg Businessweek:

• China's Inflation Rises to 19-Month High of 3.1%. China’s inflation accelerated in May to the quickest pace in 19 months, highlighting overheating risks in the fastest-growing major economy. “China’s economy is still in a cycle towards overheating and the government should step up measures to curb inflation expectations,” Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd., said before today’s release. “This weekend or this period of time in general before the G-20 summit would be an excellent time” for China to widen the yuan’s trading band, Liu said. Producer-price inflation quickened to 7.1 percent from 6.8 percent.

CNBC:

• Trouble Rumbling in China for US Companies. In a global economy unsettled by the patchiness of the U.S. recovery and European financial turmoil, China would appear to be the one place in the world no one needs to worry about. Appearances may be deceiving. While China's efforts to rein in real-estate speculation have alleviated fears it might be overheating, experts say other issues—from wage inflation to continued currency controls to a new "Buy China" push—are turning the world's third-largest economy into another source of potential trouble for the foreign companies that do business there. That could be especially bad news for U.S. manufacturers, which have not only moved a lot of production to China but come to rely on it in recent years to offset the weakness in many other markets, including the United States.
• Reform Panel Members Got Millions From Wall Street. The 43 U.S. lawmakers charged with shepherding a massive government overhaul of the financial industry over its final hurdles in Congress have collected at least $67 million combined in campaign contributions from financial sources. The conference committee's Senate members have received more than $40 million from political action committees and individuals connected with Wall Street securities and investment firms, commercial banks, insurance companies, mortgage bankers, and finance and credit companies. House members, including panel chairman Barney Frank, have collected at least $27 million for their election campaigns over the same period. Democrats, who make up nearly two-thirds of the panel, are the financial industry's greatest beneficiaries, drawing an average of $1.7 million per lawmaker, versus $1.4 million for each Republican. In fact, about one-third of industry contributions, or $21.7 million, went to only two Senate Democrats—Banking Committee Chairman Christopher Dodd of Connecticut and Charles Schumer of New York. Following is a list of conference committee members and the campaign contributions they have received from securities, investment, banking, insurance, mortgage banking and finance companies since 1989 and during the 2010 election cycle, which began January 1, 2009.

MarketWatch:

• Frank: Tough Version of 'Volcker Rule' Will Be in Bank Bill. Lawmakers begin efforts to reconcile House and Senate financial reform.

NY Times:

• The Full Soros Speech on 'Act II' of the Crisis.

Business Insider:

• WHOOPS: Merrill Sold CDOs To Little Guys. Well, you had to see this one coming...Turns out Merrill Lynch didn't just sell CDOs to "sophisticated" institutional investors. It also sold them to individual investors who thought they were sophisticated.
• New York Governor Warns Of Anarchy If Budget Isn't Passed Right Away. Maybe New York will see its own Greece-like street chaos as a result of the state budget. At least that's what David Paterson seems to be hinting at.
• Check Out North Korea's Racy New Anti-Capitalist Propaganda Video.
  

Finance & Commerce:

• House Passes Bill to Boost FHA Reserves $300 Million a Month. The U.S. House voted to allow the Federal Housing Administration to raise the fees it charges to borrowers, a move that would add $300 million a month to help the agency rebuild its dwindling reserves. The House approved the measure in a 406-4 vote Thursday, sending the bill to the Senate for consideration. The bill allows the FHA, which protects lenders against mortgage defaults, to increase the insurance premium for homebuyers and change the way that fee is collected. It also gives the agency more authority to reject mortgage lenders with excessive defaults.

Huffington Post:

• Top Fiscal Hawk on Fed Supports Restricting Banks' Derivatives Bets, Goes FURTHER Than Obama. The top fiscal hawk and longest-serving policy maker in the Federal Reserve supports limiting banks' derivatives activities, a potential blow to Wall Street megabanks that use their taxpayer-supported banks to trade the kind of risky financial products that nearly brought down the global financial system. In a letter of support, Federal Reserve Bank of Kansas City President Thomas M. Hoenig endorsed a Senate provision Thursday that would force banks to strip their swaps desks out from their depository institutions, calling it "of utmost importance to our nation's long-term financial and economic stability." The firms would have to move those units, which deal and trade in a type of financial derivative product, into a separately-capitalized institution within the bank holding company, raising as much as a few hundred billion dollars to protect them in case their bets go bad. Or, they could disband the activity altogether. Of the nearly 8,000 banks in the U.S., less than 25 would be seriously affected.

Politico:

• Cantor Aims to Focus GOP on Spending. House Minority Whip Eric Cantor will kick off a personal drive Friday to rebrand the GOP “as a party that gets it” and would focus on spending — not ideology — if Republicans win a House majority in November. “People are receptive to a message of responsible leadership,” he said in an interview in his Capitol suite.
  

USA Today:

• Auto Dealers Could See New Financial Regulations.

Reuters:

• Australian PM, BHP(BHP) Knock Down Quick Mine Tax Deal.
• AU Optronics(AUO), CEO Indicted in U.S. for Price-Fixing. AU Optronics Corp, a Taiwanese maker of liquid crystal display panels, and its CEO Lai-Juh Chen, were among those indicted for conspiring to fix prices, the U.S. Justice Department said on Thursday.
• Investors Ditch Global Equities for U.S., Emerging Bonds - EPFR. Investors slashed their equity holdings and poured money into U.S. and emerging market bonds and commodities last week on lingering fears that global growth will be hit by Europe's debt problems, EPFR Global said on Friday.
• Fed's Bullard-Senate Bill Would Politicizes Fed. A senior Federal Reserve official warned on Thursday that a Senate proposal to make the New York Federal Reserve Bank president a White House appointee risks injecting a dangerous dose of politics into the deliberations of the U.S. central bank. "This is pretty much blatant politicization of the Fed," St. Louis Federal Reserve Bank President James Bullard told Reuters in an interview. "I also think it's setting up conflicts with the Board of Governors in the future."

Oriental Daily News:

• Foxconn Technology Group will relocate some of its production lines from China to Taiwan after a spate of suicides at a plant in southern China, citing Terry Gou, chairman of the Hon Hai Group, which includes Foxconn.

Business Standard:

• Oversupply in Mumbai Luxury Housing Looms Large. Property developers are dreaming of making Lower Parel, a former textile hub in central Mumbai, into a super-luxury residential address for the country’s ultra-rich. However, analysts and property consultants see oversupply of premium houses looming large on the island city’s skyline. In all, Lower Parel is expected to see over 10 million sq ft of residential supply in the next three to four years, according to Religare Capital Markets.

Evening Recommendations
Citigroup:

• Rated (FO) Sell, target $41.
• Upgraded (BMY) to Buy, target $30.

Night Trading

• Asian indices are +.50% to +1.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 142.0 -9.0 basis points.
• S&P 500 futures -.14%.
  
• NASDAQ 100 futures -.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• Advance Retail Sales for May are estimated to rise +.2% versus a +.4% gain in April.
• Retail Sales Less Autos for May are estimated to rise +.1% versus a +.4% gain in April.
• Retail Sales Ex Auto & Gas for May are estimated to rise +.2% versus a +.4% gain in April.

9:55 am EST

• Preliminary Univ. of Mich. Consumer Confidence for June is estimated to rise to 74.5 versus a reading of 73.6 in May.

10:00 am EST

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

Upcoming Splits

• (LNCR) 3-for-2
  

Other Potential Market Movers

• The Fed's Plosser speaking, Fed's Kocherlakota speaking and the Jefferies Life Sciences Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are higher, boosted by automaker and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.