Weekly Scoreboard*

Indices

• S&P 500 1,076.76 -3.65%
  
• DJIA 10,143.81 -2.94%
  
• NASDAQ 2,223.48 -3.74%
  
• Russell 2000 645.11 -3.27%
  
• Wilshire 5000 11,137.95 -3.61%
  
• Russell 1000 Growth 479.83 -3.70%
  
• Russell 1000 Value 554.69 -3.79%
  
• Morgan Stanley Consumer 654.21 -4.07%
  
• Morgan Stanley Cyclical 832.45 -3.52%
• Morgan Stanley Technology 542.49 -4.67%
  
• Transports 4,241.20 -4.34%
  
• Utilities 366.21 -4.47%
  
• MSCI Emerging Markets 39.26 -1.11%
  
• Lyxor L/S Equity Long Bias Index 967.24 -.50%
  
• Lyxor L/S Equity Variable Bias Index 855.51 -.06%
  
• Lyxor L/S Equity Short Bias Index 862.94 +.88%
  

Sentiment/Internals

• NYSE Cumulative A/D Line +84,323 -3.24%
  
• Bloomberg New Highs-Lows Index -212 -191
  
• Bloomberg Crude Oil % Bulls 34.0 -34.62%
  
• CFTC Oil Net Speculative Position +39,635 +20.36%
  
• CFTC Oil Total Open Interest 1,260,132 -5.72%
  
• Total Put/Call .88 +2.33%
  
• OEX Put/Call 1.37 +53.93%
  
• ISE Sentiment 134.0 +17.54%
  
• NYSE Arms 1.18 +19.19%
  
• Volatility(VIX) 28.53 +19.12%
  
• G7 Currency Volatility (VXY) 13.17 +2.73%
  
• Smart Money Flow Index 8,605.96 -3.95%
  
• Money Mkt Mutual Fund Assets $2.818 Trillion +.4%
  
• AAII % Bulls 34.46 -18.82%
  
• AAII % Bears 32.43 +5.77%
  

Futures Spot Prices

• CRB Index 265.61 +1.02%
  
• Crude Oil 78.86 +.51%
  
• Reformulated Gasoline 216.78 +.48%
  
• Natural Gas 4.86 -3.32%
  
• Heating Oil 211.22 -1.031%
  
• Gold 1,256.20 -.17%
  
• Bloomberg Base Metals 187.89 +3.36%
  
• Copper 311.10 +6.63%
  
• US No. 1 Heavy Melt Scrap Steel 336.67 USD/Ton -.39%
  
• China Hot Rolled Domestic Steel Sheet 4,183 Yuan/Ton -1.16%
• S&P GSCI Agriculture 300.13 -.87%
  

Economy

• ECRI Weekly Leading Economic Index 122.90 +.41%
  
• Citi US Economic Surprise Index -24.30 -8.5 points
  
• Fed Fund Futures imply 74.60% chance of no change, 25.40% chance of 25 basis point cut on 8/10
• US Dollar Index 85.31 -.45%
  
• Yield Curve 245.0 -6 basis points
  
• 10-Year US Treasury Yield 3.11% -11 basis points
  
• Federal Reserve's Balance Sheet $2.328 Trillion +.04%
  
• U.S. Sovereign Debt Credit Default Swap 40.42 +11.67%
• U.S. Municipal Credit Default Swap Index 250.0 +18.83%
  
• Western Europe Sovereign Debt Credit Default Swap Index 136.83 +9.32%
  
• 10-Year TIPS Spread 1.95% -7 basis points
  
• TED Spread 41.0 -3 basis points
  
• N. America Investment Grade Credit Default Swap Index 116.23 +5.57%
  
• Euro Financial Sector Credit Default Swap Index 146.99 +9.49%
  
• Emerging Markets Credit Default Swap Index 255.38 +1.37%
  
• CMBS Super Senior AAA 10-Year Treasury Spread 312.0 -8 basis points
  
• M1 Money Supply $1.693 Trillion -1.42%
• Business Loans 596.70 -.47%
  
• 4-Week Moving Average of Jobless Claims 462,800 -.3%
  
• Continuing Claims Unemployment Rate 3.5% -10 basis points
  
• Average 30-Year Mortgage Rate 4.69% -6 basis points
  
• Weekly Mortgage Applications 621.20 -5.86%
  
• ABC Consumer Confidence -43 +2 points
  
• Weekly Retail Sales +3.10% unch.
  
• Nationwide Gas $2.76/gallon +.04/gallon
  
• U.S. Cooling Demand Next 7 Days 12.0% above normal
• Baltic Dry Index 2,501 -7.16%
  
• Oil Tanker Rate(Arabian Gulf to U.S. Gulf Coast) 57.50 -14.81%
  
• Rail Freight Carloads 227,985 +2.20%
  
• Iraqi 2028 Government Bonds 82.50 +.25%
  

Best Performing Style

• Small-Cap Growth -3.14%

Worst Performing Style

• Mid-Cap Growth -3.89%

Leading Sectors

• Steel +.84%
• Coal +.73%
• Insurance -.40%
• Gold -.48%
• Drugs -1.22%

Lagging Sectors

• Oil Service -5.44%
• Retail -5.56%
• Energy -5.65%
  
• Airlines -8.11%
• Education -8.21%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Slightly Higher into Close on Less Financial Sector Pessimism, Short-Covering, Commodity Strength, Bargain-Hunting

Broad Market Tone:

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

Equity Investor Angst:

• VIX 28.15 -5.35%
  
• ISE Sentiment Index 132.0 +71.43%
  
• Total Put/Call .89 -24.58%
  
• NYSE Arms 1.10 -67.08%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 116.23 bps -3.54%
  
• European Financial Sector CDS Index 152.0 bps +2.26%
  
• Western Europe Sovereign Debt CDS Index 136.83 bps +2.50%
  
• Emerging Market CDS Index 255.52 bps -2.81%
  
• 2-Year Swap Spread 37.0 -1 bp
  
• TED Spread 41.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .12% unch.
  
• Yield Curve 245.0 unch.
  
• China Import Iron Ore Spot $143.10/Metric Tonne -.91%
  
• Citi US Economic Surprise Index -24.3 -4.3 points
  
• 10-Year TIPS Spread 1.94% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +43 open in Japan
• DAX Futures: Indicating +22 open in Germany

Portfolio:

• Slightly Higher: On gains in my Medical, Biotech and Retail long positions
  
• Disclosed Trades: I 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 mildly bullish as the S&P 500 trades slightly higher on less financial and commodity sector pessimism. On the positive side, REIT, Bank, Gold, Coal, Oil Tanker and Oil Service stocks are especially strong, rising 2.0%+. Small-caps are strongly outperforming. The Greece sovereign cds is pulling back -2.8% to 1,008.35 bps today. On the negative side, Telecom, Wireless, Drug, HMO, Retail, Education and Airline shares are lower on the day. The China sovereign cds is rising another +2.47% to 89.58 bps and is up +9.1% over the last five days. Moreover, the Illinois Municipal CDS is jumping +5.2% to 335.0 bps, which is a new record high. As well, the California Municipal CDS is rising 4.11% to 319.0 bps, which is also a large negative. Oil is rising today on hurricane concerns, Iran worries, the rise in the euro and financial reform. As I said the other day, the recent bounce in the euro is likely related to short-covering, US economic weakness and rising US muni debt concerns, which shouldn't be construed as bullish for equities or commodities, in my opinion. The rally today is concentrated in the most technically beaten up and fundamentally weak stocks, which is a negative. Given the market's oversold state and end-of-quarter short-covering/bargain-hunting, stocks could rally short-term. However, I suspect weakness will return before next week's end. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, diminishing energy sector fear, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:

• Banks 'Dodged a Bullet' as Congress Dilutes Rules. Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said. A deal reached by members of a House and Senate conference early this morning diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private equity funds. Banks “dodged a bullet,” said Raj Date, executive director for Cambridge Winter Inc.’s center for financial institutions policy and a former Deutsche Bank AG executive. “This has to be a net positive.”
• U.S. commercial bank revenue from trading over-the-counter derivatives and securities surged more than 400% to $8.3 billion in the first quarter compared with fourth quarter 2009. The increase was led by trading credit products, including default swaps, which rose 100-fold to $2.7 billion from $27 million, the Office for the Comptroller of the Currency said today. JPMorgan(JPM) retained its top spot among U.S. commercial banks as of March 31, with $76 trillion of derivatives contracts as measured by notional amount, OCC said. Bank of America(BAC), Goldman Sachs(GS) and Wells Fargo(WFC) were the next four biggest users. The five firms accounted for 97% of the $216.5 trillion in derivatives held by U.S. banks as of March.
• Bank Ownership Cap on OTC Clearing, Execution Dropped. Banks may not have to limit their ownership of derivatives clearinghouses or execution services after a plan to restrict them to 20 percent stakes was excluded from U.S. legislation.
• European Yield Spreads Widen on Concern Debt Crisis Deepening. Belgian, Italian and French 10-year bonds declined, sending their yield differences with benchmark German bunds wider, on concern the region’s debt crisis is deepening as the economic recovery sputters. “This is a supply shock” as banks consider dumping their holdings to repay the ECB, said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “Banks are checking out the market. I anticipate this will intensify next week.”
  
• National Iranian Tanker Co. released eight of 25 supertankers being used to store crude oil, Arctic Securities ASA said. The vessels will offload their cargoes and increase the number of tankers available for hire, Arctic said today.
• Gulf Begins Storm Watch as Weather System Lingers Off Honduras. Residents and business owners along the Gulf of Mexico face a weekend of watching and planning as a weather system that may become the year’s first tropical storm, or hurricane, lingers on their doorstep.
• U.K. Banks 'Vulnerable' to Asset Writedowns, BOE Says. U.K. banks remain “vulnerable” to further writedowns on their assets because of a potential decline in investor appetite for risk, the Bank of England said. Derivatives and other financial instruments accounted for 40 percent of U.K. banks’ total assets at the end of 2009, the central bank said in its semiannual financial stability report published in London today. Globally, mark-to-market losses on assets rose to $7.8 trillion in June from $4.5 trillion in March, it said. “If sovereign risk concerns rise or risk appetite continues to diminish, asset prices could fall further,” the BOE said. “This would have a significant impact on the solvency positions of holders of these assets, including both U.K. and global banks.”
• KB Home(KBH) Falls After Posting Wider Loss Than Estimated. KB Home, the U.S. homebuilder that targets first-time buyers, tumbled to the lowest price in almost a year in New York trading after reporting a wider-than- estimated loss and a drop in new orders.
• Bove Says 'Buy' Banks as Regulatory Overhaul Won't Hurt Them. Investors should buy bank stocks, as they will be able to pass on to consumers the cost of the most sweeping overhaul of U.S. financial regulation since the Great Depression, according to Dick Bove of Rochdale Securities LLC. “They can increase prices,” Bove, who is based in Lutz, Florida, said in a telephone interview. “You’ll see prices on just about every bank product soar. Everybody else will be negatively impacted by this bill, but not the banks. The industry has been pummeled because everybody believed that banks caused the financial crisis. That pummeling is over.”

CNBC:

• Why Wall Street Will Love The 3% Solution in Reform Bill. The new limits on proprietary trading and hedge fund investments may actually benefit big banks more than harm them—especially in the hedge funds they market to clients.

NY Times:

• A New Plan for Valuing Pensions. The board that writes accounting rules for states and cities has proposed a new approach for pension disclosures that falls far short of what some financial experts hoped, but which would still force many governments to highlight pension shortfalls they have played down. The current standard has come under heavy fire from mainstream economists, who say it makes virtually all government pension benefits look less costly than they really are. Government officials have granted pensions to teachers, police, judges and other public workers for years, without reflecting the true cost, analysts say. Now the bills are coming due, and in many cases there is not enough money set aside, adding to the fiscal distress across the country.

NY Post:

• Debit Cards' $20B Issue Merchants, Banks' Bitter DC Battle Over Swipe-Fee Cuts. The move on Capitol Hill to cut the $20 billion a year in debit-card "swipe fees" charged by banks could come back to bite consumers. Under a proposal in the new financial reform package being hammered out last night in Washington, the 3 percent fee that banks charge retailers may be halved -- but banks might look to make up for the loss by ending free checking for bank customers plus hiking other fees, experts say. "This is going to squeeze a good revenue stream for banks and financial institutions," said Greg McBride, senior financial analyst at BankRate.com. "Banks will make up for it by pricing for their services."

Zero Hedge:

• ECRI Leading Economic Index Plunges at -6.9% Rate, Back to December 2007 Levels When Recession Officially Started.

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-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -15 (see trends).

Politico:

• Obama Losing Hill Liberals on War.
  

USA Today:

• Whooping Cough Epidemic Hits California. Whooping cough is now an epidemic in California, and is on pace to break a 50-year record for infections for the year. As of June 15, California had 910 recorded cases of the highly contagious disease, and five babies — all under 3 months of age — have died from the disease this year. "Children should be vaccinated against the disease and parents, family members and caregivers of infants need a booster shot," California Department of Public Health director Dr. Mark Horton said Wednesday.

Shulte Roth & Zabel:

• Financial Crisis Inquiry Commission Sends Out Hedge Fund Industry Market Risk Survey.

CBCNews:

• Ottawa Aware of Foreign Influence: Sources. Sources tell CBC News the highest levels of the Canadian government have known for years that foreign countries have been trying to win influence over Canadian politicians and public servants. That information comes a day after CSIS director Richard Fadden said he had never warned officials close to Prime Minister Stephen Harper that some provincial cabinet ministers may be under the sway of countries like China — even though he told the CBC earlier this week the agency was discussing the issue with the Privy Council Office. In an exclusive interview with CBC News earlier this week, Fadden said Canada's spy agency suspects that some municipal politicians and cabinet ministers in two provinces are being swayed by their connections to foreign governments. China was one of the countries Fadden mentioned. Senior intelligence sources say the highest levels of the Canadian government were "absolutely" aware of the issue. "These problems are very well-known," one source said. "This information did not blindside the government." A source suggested the prime minister was personally aware of the issue of foreign agents trying to win influence over politicans and bureaucrats — even if he didn't know the details. "The prime minister is strongly of a view that this is a problem," a source said.
  

Yonhap News:

• N.Korea Vows to Bolster Nuclear Arms on War Anniversary: Report. Marking the 60th anniversary Friday of the outbreak of the Korean War, North Korea vowed to bolster its nuclear weapon capability to cope with U.S. hostilities, the country's main radio station said.

Bear Radar

Style Underperformer:

• Large-Cap Value (+.53%)

Sector Underperformers:

• Education (-3.35%), Airlines (-1.65%) and Wireless (-1.52%)

Stocks Falling on Unusual Volume:

• RIMM, BP, AVAV, ARTC, STST, CHSI, COCO, SAFM, FNGN, APOL, EDMC, RBCN, CIX and KBH
  

Stocks With Unusual Put Option Activity:

• 1) KWK 2) WFR 3) RIMM 4) NKE 5) NTAP
  

Stocks With Most Negative News Mentions:

• 1) BP 2) KBH 3) WHR 4) XOM 5) MS
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (+.37%)

Sector Outperformers:

• Gold (+1.70%), Banks (+1.19%) and REITs (+1.15%)

Stocks Rising on Unusual Volume:

• ACN, TIBX, ORCL, SNX and HRB
  

Stocks With Unusual Call Option Activity:

• 1) NE 2) RIMM 3) BRCM 4) CTXS 5) OC
  

Stocks With Most Positive News Mentions:

• 1) BA 2) AAPL 3) ORCL 4) GILD 5) RIMM

Friday Watch

Evening Headlines
Bloomberg:

• Private Lenders to Keep at Least 5% of Risk Under New U.S. Financial Rules. Private lenders will be required to keep at least a 5 percent stake in loans they package and sell under an agreement reached by House and Senate lawmakers who are negotiating the financial-regulatory bill. Lawmakers said the goal of the risk retention rule, also known as the skin-in-the-game provision, is to raise the quality of loans by keeping companies tied to the loans they make. The measure would affect credit-card debt, auto loans, mortgages and other securitized debt. Issuers of asset-backed debt and the originators who supply them with pools of loans would be forced to retain at least 5 percent of the credit risk. Lawmakers exempted many mortgages from the rules after lobbying by brokers and community banks, who said forcing lenders to keep loans on their books would tie up capital and lead to higher interest rates. Originators of long-term, fixed-interest-rate mortgages would be among those that would not be required to retain risk. The exemption would not apply to mortgages with risky features such as negative amortization, interest-only payments and balloon payments. In addition, loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture and U.S. Department of Veterans Affairs would not be required to retain risk. The goal is to allow government agencies to promote lending in the absence of private capital, FHA Commissioner David Stevens said. The rule will curtail lending to consumers, said Tom Deutsch, executive director of the American Securitization Forum, a New York trade group that represents issuers, investors and other participants in the market. “Some credit will become more expensive because of these rules,” Deutsch said in an interview.
• Senators Retain Volcker Rule With Hedge Fund Leeway. Senate negotiators offered changes to the regulatory-overhaul bill that would strengthen part of the language banning proprietary trading at U.S. banks while giving them leeway to invest in private-equity and hedge funds. The proposal Dodd outlined would limit a bank’s investment in private-equity or hedge funds to 3 percent of a fund’s capital. Total investment in private-equity and hedge funds wouldn’t be able to exceed 3 percent of a company’s tangible common equity. The change softens language in the bill the Senate approved last month, which would have barring banks, their affiliates and holding companies from sponsoring or investing in private-equity or hedge funds.
• Bank Credit Risk Rises as Financial-Overhaul Legislation Nears Completion. Swaps on Morgan Stanley gained 16 basis points to 270 basis points, and those on Goldman Sachs increased 8 basis points to 201 basis points, according to CMA DataVision prices. Contracts tied to Bank of America Corp. advanced 6 basis points to 168.
• Bond Sales Diminish as Renault Trims Offering, Swaps Climb: Credit Markets. Bond sales fell and the cost of protecting against default on Greek government debt rose to a record as concern the global economy may slow brought new signs of stress to credit markets. Company debt offerings globally declined 8 percent this week to $36.9 billion, according to data compiled by Bloomberg. Renault SA, France’s second-biggest carmaker, reduced a bond sale by 20 percent, citing “more difficult” market conditions. Credit-default swaps on Greece rose 197 basis points to an all-time high of 1,125 basis points, meaning it costs $1.125 million a year to protect $10 million of the nation’s bonds from non-payment, according to CMA DataVision. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 4.19 basis points to a mid-price of 119.69 basis points as of 6:44 p.m. in New York, the highest since June 14, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 3.89 basis points to 128.69 basis points, Markit prices show. Sales of corporate bonds in the U.S. fell 18 percent this week to $16.5 billion, from $20.3 billion in the period ended June 18, Bloomberg data show. Issuance was below the 2010 average of $19.8 billion for the eighth time in nine weeks, Bloomberg data show. Spreads on speculative-grade bonds widened 21 basis points since June 21 to 689 basis points, according to Bank of America Merrill Lynch’s U.S. High Yield Master II index.
• Morgan Stanley(MS) to Pay $102 Million in Subprime Accord With Massachusetts. Morgan Stanley, the sixth-largest U.S. bank by assets, agreed to pay $102 million to settle claims by Massachusetts that the firm financed and securitized unfair residential loans, state Attorney General Martha Coakley said. Of the $102 million, $58 million will be earmarked for more than 1,000 Massachusetts homeowners, with other funds set aside for the Massachusetts Pension Fund for investment losses and the commonwealth’s general fund, Coakley said today at a press conference in Boston. “This has become an all-too-familiar pattern in which the deceptive practices of Wall Street devastated homeowners and investors, and ultimately contributed to the collapse of our economy,” Coakley said. “Our extensive investigation revealed that Morgan Stanley not only backed loans for homeowners that they should have known were destined to fail, they also caused additional damage in the subprime marketplace.”
• ArcelorMittal(MT) Needing Production Cuts as Costs Spiral, Squeezing Returns. ArcelorMittal and competitors in Europe will probably curb steel production to support prices as they struggle to pass on higher raw-material costs, just as a regional debt crisis and rollbacks in state spending cut demand. “You’ll see some blast-furnace stoppages,” said Gordon Moffat, director general of Eurofer, representing steelmakers in Europe including ArcelorMittal, the world’s biggest. “It looks like they’re responding to a weakening of the market.” Slowing demand is damaging efforts to sustain output gains during the past year after the industry hauled itself out of its worst crisis in 60 years. “Prices have come under pressure worldwide,” said Imran Akram, a London-based analyst at Collins Stewart Plc. “It is looking increasingly as if the industry will need to idle more capacity than has been announced.” “There is now a risk that steel production has increased more quickly than the recovery in real demand, which could lead to pricing pressure” in the second half, Matthias Hellstern, an analyst at Moody’s Investors Service, wrote in a note. ArcelorMittal said in April it would expand worldwide output to 80 percent of capacity in the second quarter from 72 percent in the prior three months. In February it said production would reach 85 percent by the end of the year. European producers face falling demand as governments end incentives to buy new cars introduced as part of economic stimulus measures and the debt crisis centered on Greece stifles the chances of a housing-market recovery across the region. Fiat SpA Chief Executive Officer Sergio Marchionne forecast in March that demand for cars in Europe this year will drop about 15 percent to the lowest level since 1994. French new car registrations fell 12 percent in May after a year of monthly gains. Automotive and construction companies made up 43 percent of European steel consumption in 2008, according to Moody’s. “We are looking at weak demand from autos in the second half and at this point construction is likely to remain weak,” said Christian Georges, an analyst at Olivetree Securities Ltd. in London. Steel “price deflation in the second half will be extremely difficult to prevent.”
• China's Stock Markets Are Most Immature in Asia, Goldman(GS) Says. China’s stock markets are “immature” compared with regional rivals, posing a challenge to Shanghai’s ambition of becoming a global financial center within a decade, according to Goldman Sachs Group Inc. Shanghai’s share market has a so-called free float of 30 percent, the lowest among the benchmark equities exchanges in a dozen Asian-Pacific nations, according to data compiled by Goldman. Australia had the highest free-float level at 91 percent, followed by Japan’s 76 percent, the data show. “Despite the high level of liquidity and capitalization, Shanghai’s equity market is still small,” Goldman analysts Christopher Eoyang, Jason Lui and Sunil Koul said in a report. “The structure of Shanghai’s equity market is still relatively undeveloped by regional standards as Chinese regulators have taken a gradualist approach to market development.”
• JPMorgan(JPM) Reorganizes Carbon Unit for More Takeovers. JPMorgan Chase & Co. is reorganizing EcoSecurities, the carbon-emissions company it bought for $206 million, to pursue further takeovers even as the market for greenhouse gases shrinks. “It is possible that EcoSecurities will be in a position to make additional acquisitions in this area over the next few years,” said Mark Nicholls, an independent director for the Dublin-based investor in carbon credits. Nicholls served as its chairman from 2005 until the takeover by JPMorgan last December. “This was not a trading play, not a one- to three-year plan, but a long-term plan by JPMorgan to get into this space, and we are delivering on that plan,” he said in a written response to questions. Boosting its wager may help JPMorgan strengthen its role in a market that the U.S. Commodities Futures Trading Commission says has the potential to be worth $2 trillion. Before that, EcoSecurities Chief Executive Officer Paul Kelly must ride out a slump in emissions trading after the U.S., the European Union and Australia reined in plans to build carbon markets. EcoSecurities has taken stakes in 341 emissions-cutting projects in developing nations, more than any other company under a United Nations-supervised climate change program, data compiled by Bloomberg show. In return, the company earns tradable credits that may be sold to other investors or to industries that use them as pollution permits. Other UN credit investors include Italian utility Enel SpA and Goldman Sachs Group Inc. The value of UN-sponsored credits produced last year dropped 59 percent to $2.7 billion as the bureaucrats running the system struggled to process applications, the World Bank said last month. Kelly, the JPMorgan executive who led the acquisition team and now steers EcoSecurities through the slump, has cut back investment in new projects until the regulatory outlook clears, just as competitors are doing, Nicholls said.
• Osborne Takes 'Chainsaw' to British Government Spending. George Osborne’s spending cuts to narrow the record U.K. deficit will be the longest and deepest since World War II, the Institute for Fiscal Studies says. The squeeze means departments face an unprecedented six years of spending cuts, with transport, higher education and housing at risk of having their budgets reduced by a third, the independent IFS calculates. Spending has never fallen for more than two consecutive years in any other postwar period. “The chancellor unleashed a vast swathe of tax and spending decisions that belied his six weeks in office,” said David Page, an economist at Investec Securities in London. “His first budget took not so much an ax, but a chainsaw, through a variety of expenditure commitments, including welfare payments.”
• Australia's New Leader Gillard Likely to Tax Miners, Morgan Stanley Says. Australia’s new Prime Minister Julia Gillard is still likely to introduce a tax on resources profits following negotiations with mining companies over the levy that helped the premier oust her predecessor, Morgan Stanley said. Gillard was closely connected to former prime minister Kevin Rudd’s policy decisions, which allows little prospect for a big change, Morgan Stanley strategist Gerard Minack said in a telephone interview from Sydney. BHP Billiton Ltd. and Rio Tinto Group slid in Sydney trading on speculation Gillard will pursue the tax. The stocks rose yesterday after she pledged to consult companies on the plan. “We will still get a super profits tax on the mining sector,” said Minack. “You can’t assume that a change in prime minister means that the tax gets dropped.”

Wall Street Journal:

• Snags Slow Financial Overhaul. Congressional Democrats scrambled Thursday to resolve a number of flashpoints in the financial-rules overhaul bill while a fractious block of House Democrats threatened to upend the package. Rep. Barney Frank (D., Mass.) and Sen. Christopher Dodd (D., Conn.) said they believed a final deal on the new package regulating the financial sector would be completed soon, but talks hit snags Thursday. Aides said they believed a deal would still get done but added that the process was slower than expected. The most divisive issue was a provision backed by Sen. Blanche Lincoln (D., Ark.) that could force banks to spin off their derivatives businesses. Many New York Democrats and several dozen business-friendly Democrats have said the provision, known as "716," needs to be removed.
  
• Why It's Safer to Drill in the 'Backyard'. Texas has had 102 oil and gas well blowouts since the start of 2006, without catastrophic consequences. As oil continues to gush from BP's Macondo well and politicians posture, it is time for us to ask why we are drilling in such risky places when there is oil available elsewhere. The answer lies in the mantra NIMBY—"not in my back yard." BP was drilling for oil in 5,000 feet of water in the Mississippi Trench, more than 40 miles off the Louisiana coast. The site was leased in March 2008 from the Interior Department's Minerals Management Service. The area is one of an increasingly limited number of places available for oil and gas development in the United States.
• Iowa Avoids Build America Bonds, Citing Program Uncertainties. The next time Iowa needs to borrow money, it will use traditional tax-exempt bonds instead of Build America Bonds, a state official said, because the savings offered by the subsidized federal program don't outweigh the potential pitfalls--at least for now. "We just decided that the benefit really wasn't worth it and thought we could do really well in the tax-exempt space," Iowa Deputy Treasurer Stefanie Devin said in an interview Thursday with Dow Jones Newswires.
• Commodities Star Trader Andrew Hall Absorbs Loss. Wall Street's $100 million man has stumbled, a potential warning sign for traders poised to bolt banks for hedge funds. Andrew Hall, the legendary energy trader who left Citigroup Inc. last year after his lofty compensation ignited controversy about pay practices at banks receiving government support, has hit a rough patch running his own hedge fund. His commodities fund posted a decline of more than 10% last month, its weakest month in the last two years, to put it down nearly 10% this year through May, which is behind similar hedge funds.

Bloomberg Businessweek:

• More Car Jobs Shift to Mexico. U.S. production may decline over the next decade, despite the bailout.
• For-Profit Colleges Need More Oversight, Democratic Senator Says.
  

CNBC:

• China's Export Economy Begins Turning Inward.

NY Times:

• Local Debt in China Worries Its Auditor. China won praise last year for reviving domestic growth with aggressive bank lending and a $586 billion economic stimulus package. But now the nation’s top auditor is warning that the mounting debt of local governments could undermine the recovery in some parts of the country. Li Jiayi, head of the National Audit Office, said in a report to the legislature this week that borrowing by local governments had created public debt burdens totaling hundreds of billions of dollars. The report questions whether those governments have the resources to pay down the loans. The warning is the latest indication that a portion of the government-backed loans and stimulus money could eventually be categorized as bad loans. It is unclear how serious a threat local government debt is to China’s booming economy. On Thursday Fitch Ratings, the credit rating agency, warned that record loan growth and aggressive efforts by state-run banks to repackage and sell debt to investors had raised credit risks in the country and could “lead to another financial crisis,” according to a report published by Bloomberg News. In a release issued Wednesday by Fitch, Charlene Chu, the firm’s senior director for financial institutions in China, said that the financial positions of Chinese banks were more strained than they appeared to be and that “future asset quality deterioration is a near certainty.”

Zero Hedge:

• Second Straight Hungarian Bond Auction Failure As Citi's Willem Buiter Calls For €2 Trillion European Rescue Facility, Ridicules Stress Tests.

CNNMoney:

• The Future of Oil is the Future of the Gulf.

LA Times:

• California Energy Commission Approves $114.3 Million for Electric and Ethanol Vehicle Infrastructure. Owners of eco-friendly vehicles in California are now $114.3 million closer to having workable options for charging and fueling up.

Chicago Sun-Times:

• Harris: Obama Knew of Blagojevich Plot. A top aide to former Gov. Rod Blagojevich said he believed Barack Obama knew of Blagojevich's plot to win himself a presidential Cabinet post in exchange for appointing Valerie Jarrett to the U.S. Senate. John Harris, Blagojevich's former chief of staff, testified Wednesday in the former governor's corruption trial that three days after the Nov. 4, 2008, presidential election, the ex-governor told Harris he felt confident Obama knew he wanted to swap perks. "The president understands that the governor would be willing to make the appointment of Valerie Jarrett as long as he gets what he's asked for. . . . The governor gets the Cabinet appointment he's asked for," Harris said, explaining a recorded call. Harris said Blagojevich came away believing Obama knew what he wanted after having a conversation with a local union representative, who in turn spoke with labor leader Tom Balanoff, with whom Blagojevich met to discuss a Jarrett appointment. Jarrett, now a White House adviser, was seeking the appointment to Obama's Senate seat. Defense lawyers say Harris' testimony contradicts the government's previous public statements that Obama knew nothing about deal-making involving the Senate seat appointment. The defense on Wednesday moved to force the prosecution to turn over FBI reports of Obama's interview with federal agents in December of 2008. Obama is not accused of wrongdoing. "Testimony elicited by the government from John Harris and wiretaps played in court raise the issue of President Obama's direct knowledge and communication with emissaries and others regarding the appointment to his Senate seat," lawyers wrote in the filing.

Nasdaq:

• Carlyle is First Test for New Chinese Tax Law. The Chinese government is beginning to enforce new tax rules to prevent potential tax revenue from slipping out of the country, with potentially "scary" consequences for private-equity investors, lawyers said. In December 2009, China drafted a new regulation called Circular 698, which requires international shareholders to disclose the sale of positions in Chinese companies through the transfer of shares held by an overseas holding company. The regulation is aimed at preventing investors from using shell companies to shield themselves from local Chinese taxes, lawyers said. In what appears to be the first enforcement of this regulation, a local tax bureau is requiring the Carlyle Group to pay out an estimated $25 million for capital gains on an investment in Yangzhou Chengde Steel Tube Co. (Chengde), which the firm recently exited, LBO Wire has learned. The fact that China's regulatory agencies are enforcing the new rules marks a turning point, lawyers said. "It's big...especially for private equity funds," said Ni Yongjun, a partner in the Shanghai offices of the law firm White & Case LLP. "In the past, you had rules but many times the enforcement was quite weak."

Politico:

• Obama: No Hasty Afghan Exit. A day after replacing the top American general in Afghanistan, President Barack Obama said Thursday that U.S. troops could remain in significant numbers in the country well after his withdrawal timeline begins next summer.
  
• Harry Reid's High-Stakes Climate Bill Gamble. Senate Majority Leader Harry Reid (D-Nev.) is planning a high-risk, high-stakes strategy for bringing climate and energy legislation to the floor ahead of the August recess. The gamble: yoking a bipartisan, fast-track measure to overhaul offshore drilling rules with a broad, contentious bill capping greenhouse gas emissions that otherwise would have almost no chance of passage on its own. Reid’s own Democrats are mixed on the strategy for notching 60 votes. Some argue that public perception of fossil fuels in the wake of the BP oil spill will sway enough of the party’s swing votes and open Republicans to attack if they oppose the measure as their reelection campaigns head into the homestretch.

USA Today:

• Oil Spill Takes Toll on Tourism on Gulf Coast.

Reuters:

• Japan May CPI Falls 1.2% Y/Y, Down 15th Month.
• NYSE Short Interest at Year High as Negativity Grows. Short is up sharply since the beginning of the year. On NYSE it has risen 7.3% since late December and is now at its highest level since the first half of July 2009. On Nasdaq, it is up 15.3% in the last 6 months.
• Oracle(ORCL) Earnings Beat Street View, Shares Rise.
• RIM(RIMM) Shares Drop as BlackBerry Shipments Disappoint.
  

Financial Times:

• Banks Win Battle for Limits to Basel III. Plans by global regulators to compel banks to set aside billions of dollars in extra capital to cope with future crises are to be pared back after intense lobbying by the industry. After wrangling over the details of a regulatory overhaul published six months ago, a consensus on the Basel committee is suggesting that its proposals be thinned down. The most significant change to the proposed reforms concerns the committee’s recommendations on the volume of liquid funds that banks should hold to protect them against another financial crisis. Proposed short-term emergency funding measures will go ahead. But the committee is likely to shelve the idea that banks should be forced to maintain a longer term “net stable funding ratio” that aligns the maturity of their assets and liabilities. That contentious proposal, fiercely opposed by the banks, could be replaced by an alternative system of oversight, said officials close to the drafting process.

TimesOnline:

• UK Retirement Age May Be Raised Every Five Years. The age for retirement will rise every five years under radical moves by the coalition to curb the £55 billion-a-year state pension bill. New laws are expected to be introduced in this Parliament that will link pension payments to life expectancy for the first time, senior government sources told The Times. It would mean that in just 25 years time the pension age will have risen to 70, affecting all workers now aged 40. It is estimated that, by automatically pushing back pension entitlement as the population ages, up to £13 billion a year would be recouped. A similar system of linking retirement to life expectancy is being explored in Denmark, where the pension age will rise from 65 to 67 between 2024 and 2027.

Telegraph:

• Ben Bernanke Needs Fresh Monetary Blitz as US Recovery Falters. Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral. Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners.

Guardian:

• Greece Puts Its Islands Up for Sale to Save Economy. Desperate attempt to repay debts also driven by inability to find funds to develop infrastructure on islands. Greece is making it easier for the rich and famous to fulfill their dreams by preparing to sell, or offering long-term leases on, some of its 6,000 sun-kissed islands in a desperate attempt to repay its mountainous debts. The Guardian has learned that an area in Mykonos, one of Greece's top tourist destinations, is one of the sites for sale. The area is one-third owned by the government, which is looking for a buyer willing to inject capital and develop a luxury tourism complex, according to a source close to the negotiations.

Yonhap News:

• North Korea declared a nine-day sailing ban in an area off its western coast, prompting South Korea to be on watch for the possible test-launching of short-range missiles by the communist nation.

Radio Television Hong Kong:

• A People's Bank of China survey of Beijing residents showed 40.9% expect housing prices in the city to drop in the third quarter of the year, citing the Chinese central bank.

China Daily:

• Chinese local government debt may depress banking industry profitability by 7.9% between this year and 2012, citing a report from the Chinese Academy of Social Sciences. Banks may have to set aside 283.1 billion yuan($42 Billion) in provisions for bad loans over the next two years as the ratio of doubtful debt to local financing arms rises to 3.36% and watchlist loans reach 13.46%, according to CASS's 2010 Blue Book for China Finance.
  

South China Morning Post:

• Honda Motor, Japan's No. 2 carmaker, said its China production fell 37% last month from April after the first in a series of labor strikes. The company's China sales dropped 10% from a year earlier in May, quoting figures from consultancy JP Power and Assoc.

Evening Recommendations
Citigroup:

• Reiterated Sell on (RIMM), target $50.

Night Trading

• Asian equity indices are -1.75% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 135.0 +5.0 basis points.
• Asia Pacific Sovereign CDS Index 131.0 +3.25 basis points.
  
• S&P 500 futures +.08%.
  
• NASDAQ 100 futures -.24%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AZZ)/.57
• (KBH)/-.30
  

Economic Releases
8:30 am EST

• Final 1Q GDP is estimated to rise +3.0% versus a prior estimate of a +3.0% gain.
• Final 1Q Personal Consumption is estimated to rise +3.5% versus a prior estimate of a +3.5% gain.
• Final 1Q GDP Price Index is estimated to rise +1.0% versus a +1.0% prior estimate.
• Final 1Q Core PCE is estimated to rise +.6% versus a prior estimate of a +.6% gain.

9:55 am EST

• Final Univ. of Mich Consumer Confidence for June is estimated at 75.5 versus a prior estimate of 75.5.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

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