Today's Headlines

Bloomberg:

• Spain Bond Sale Hits Target as Moody's Threatens Cut. Spain sold 3.5 billion euros ($4.3 billion) of five-year bonds at an auction today, reaching the maximum sale target even as its borrowing costs rose after Moody’s Investors Service said it may cut the country’s top credit rating. Spain sold the notes at an average yield of 3.657 percent, compared with 3.532 percent at an auction of those bonds on May 6. Demand was 1.7 times the amount sold, below the bid-to-cover ratio of 2.35 at the May sale. “They did fill it at pretty much the maximum of their guidance, and when you consider the backdrop, you’d have to say that’s encouraging,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London.
• Dollar Drops to 7-Month Low Versus Yen on Outlook; Euro Climbs. The dollar tumbled to a seven-month low against the yen on speculation the world’s largest economy may be slow to recover, while the euro climbed amid signs that funding pressures are easing on Europe’s financial institutions. The euro surged as much as 2 percent to $1.2485, from $1.2238 yesterday, before trading at $1.2475. It was the biggest gain on an intraday basis since May 10, when European leaders announced an almost $1 trillion package to support debt-laden governments and shore up the shared currency.
• Gold Tumbles Most Since February as European-Bank Concerns Ease. Gold futures tumbled the most since February on signs that Europe’s financial industry may be in better shape than investors estimated, curbing demand for the metal as a haven. The euro jumped as much as 2 percent against the dollar after European banks borrowed less than the amount they are due to repay. “People are thinking maybe the European debt situation is not so bad,” said Matt Zeman, a trader at LaSalle Futures Group in Chicago. “Some of the safe-haven money is coming out of the market.” Gold futures for delivery in August fell $37.20, or 3 percent, to $1,208.70 an ounce at 1:07 p.m. on the Comex in New York. A close at that price would mark the biggest drop for a most-active contract since Feb. 4.
• Mortgage Rates on 30-Year U.S. Loans Fall to Record. Mortgage rates on 30-year U.S. loans slid to a record low for the second straight week, lowering borrowing costs for homebuyers as demand slumps. Rates for 30-year fixed loans sank to 4.58 percent in the week ended today from 4.69 percent last week, Freddie Mac said in a statement. The average 15-year rate fell to 4.04 percent, also a new low, the McLean, Virginia-based company said.
• Pending Sales of Existing U.S. Homes Fell 30% in May. The number of contracts to purchase previously owned houses plunged in May by more than twice as much as forecast after a homebuyer tax credit expired. The index of pending home resales dropped 30 percent from the prior month, figures from the National Association of Realtors showed today in Washington. The drop was the biggest in records dating to 2001 and compared with a 14 percent decrease forecast in a Bloomberg News survey of economists. All four regions saw decreases in May, today’s report showed, led by a 33 percent plunge in the South. Sales also fell 32 percent in both the Midwest and Northeast and 21 percent in the West. Compared with May 2009, nationwide pending sales were down 16 percent.
• Manufacturing in U.S. Expanded Less Than Forecast. Manufacturing in the U.S. expanded in June at a slowest pace this year as factories received fewer orders and demand from abroad cooled. The Institute for Supply Management’s manufacturing gauge fell to 56.2 last month from 59.7 in May. The ISM’s production index decreased to 61.4 from 66.6. The The new orders measure dropped to 58.5 from 65.7.employment gauge decreased to 57.8 from 59.8. The measure of export orders declined to 56 from 62. The measure of orders waiting to be filled dropped to 57 from 59.5. The index of prices paid decreased to 57, the lowest since November, from 77.5.
• Goldman Sachs(GS) Pressed By Born for Derivatives Data. Goldman Sachs Group Inc. has declined to provide the Financial Crisis Inquiry Commission with information on its revenue and profit from derivatives, unlike its rivals. “Some other firms have provided us with that data when we’ve asked for it and Goldman Sachs hasn’t,” Commissioner Brooksley Born said at a hearing today in Washington.
• Oil Has Longest Drop in Seven Weeks on China Data. Crude oil fell for a fourth day in New York, the longest losing streak in seven weeks, amid concern the economic recovery in the U.S. and China will slow and curb demand in the world’s two largest energy consumers. “The Chinese manufacturing index was disappointing and adds to the whole array of bearish macro data and sour market sentiment,” said Andrey Kryuchenkov, an analyst with VTB Capital in London. Oil for August delivery fell as much as $1.42, or 1.9 percent, to $74.21 a barrel in electronic trading on the New York Mercantile Exchange, its lowest since June 14.
• New York City Voters Oppose Mosque Near Ground Zero, Poll Says. New York City voters, by an almost 2- to-1 ratio, oppose a plan by a Muslim group to build a mosque and cultural center two blocks from the site of the Sept. 11 terrorist attacks, according to a Quinnipiac University poll. New Yorkers, by 52 percent to 31 percent, don’t want the Cordoba Initiative, a group that seeks to improve Muslim relations with Western societies, to build a community center near Ground Zero in Manhattan, the survey said. Opposition was strongest on Staten Island, where respondents were against the plan by 73 percent to 14 percent in favor. “Opponents suggest that the mosque would dishonor the memory of the attack’s victims,” Carroll said. The cultural center plans include a 500-seat auditorium, swimming pool, restaurants, bookstores and space for art exhibitions, according to the organization’s website. While a majority opposed the center, 55 percent of those questioned said “mainstream Islam” is a “peaceful religion.” To 22 percent of respondents, the religion “encourages violence against non-Muslims.”
• Biggest China Bears in Beijing, MIT's Johnson Says: Tom Keene. As Group of 20 nations look to China to underpin global growth, the Chinese anticipate their economy slowing, said Simon Johnson, a professor of finance at Massachusetts Institute of Technology’s Sloan School of Management. In China, bankers and economists expect their economy will slow after growth accelerated to the fastest pace in almost three years in the first quarter, Johnson said today in a radio interview with Tom Keene on Bloomberg Surveillance. “The biggest China bears I’ve met recently were in Beijing,” said Johnson, who said he was in China last weekend. Johnson said China can’t maintain growth at previous levels. Chinese who fear economic “overheating” worry their country’s heavy infrastructure investment, overburdened state sector and focus on objectives such as air quality instead of economic expansion will slow growth, Johnson said in a column today on the Economix blog on NYTimes.com. They do not agree with others who claim “China is going to be great,” he said. “They haven’t drunk the same Kool-Aid,” Johnson said during the radio interview. “G-20 and the industrialized countries are saying: ‘Assume China will grow fast, and that will help the world economy,’” Johnson said. “In China, they’re much less convinced they can continue to grow at these rates.” Johnson, who also co-authored with James Kwak the book “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown,” said the U.S. financial-regulatory bill, approved by the House of Representatives yesterday, didn’t go far enough to restrict bank size, making it “nothing more than mush.” “The big banks have won, and they’ve won hands down, and they’ve won with a terrific smokescreen,” Johnson said. “There’s a lot of pretense there’s actually some sort of reform going on.”
• FDIC Securitization Rule May Harm Markets, Industry Group Says. U.S. securitization and mortgage- industry groups said a Federal Deposit Insurance Corp. plan for overhauling part of the $4 trillion asset-backed securities market could restrict credit and undermine economic recovery. The FDIC proposal requiring sellers of securitized loans to keep 5 percent of credit risk in exchange for protection that makes the bonds more attractive to investors “could greatly inhibit its effectiveness and the restart of the markets,” Tom Deutsch, executive director of the American Securitization Forum, said in a comment letter filed with the agency today.

Barron's:

• Apple(AAPL): J.P. Morgan Boosts Price Target To Street High $390. J.P. Morgan analyst Mark Moskowitz this morning repeated his Overweight rating on Apple (AAPL), added the stock to the firm’s “Analyst Focus List,” and increased his target price on the stock to a Street-high $390, up from $316. “Apple stands to be the high-growth, technology leader, having no rival for some time,” he writes in a research note. “The iPhone and iPad rapid growth phenomena, coupled with untapped opportunities internationally for Mac, underpin our confidence in the stock’s major appreciation from current levels.” Moskowitz writes that Apple is “the growth story without rival,” and says he doubts the latest round of estimate revisions will be the last. He sees sales and profit growth “far exceeding 20%” over the next two years. He notes that at 14x his calendar 2011 EPS estimate, the stock trades below its 3-year average multiple of 23x.

NY Post:

• $500 Billion Cash Stash. High prices, weak growth deter PE deals. Private-equity firms sitting on $500 billion of uninvested cash and facing a deadline for spending it are nonetheless taking their sweet time making deals -- much to the chagrin of sellers eager to do a deal before capital-gains tax rates rise next year.
• Paterson Flees From Hedge Fund Tax. Gov. Paterson is running away from his $50 million tax on hedge fund managers, a day after his Connecticut counterpart lauded the levy as a boon to the Nutmeg State. The New York executive trashed the tax on out-of-state fund executives as a potential job-killer and blamed “special interests” for its inclusion in a legislative budget plan unveiled last weekend. “We were not favorable to this,” he insisted during an interview on WOR 710AM this morning. “We did it because we couldn’t get the Legislature to do the other revenue raisers that we thought were far more constructive.” The tax – endorsed by Paterson last week after negotiations with the Legislature – could soon be voted into law as part of a $1 billion “revenue” bill. Now, Paterson says he agrees with critics that the action could spur fund managers to simply relocate offices to low-tax locales, like Greenwich, Conn. Connecticut Gov. Jodi Rell, a Republican, sent a letter to the New York Hedge Fund Roundtable yesterday proclaiming “Connecticut welcomes you!” “What Gov. Rell said is right,” Paterson said. “She’s trying to take advantage of it. That is why that is worth revisiting.”

Business Insider:

• The Housing Industry Will Never Recover If Qualified People Can't Get A Home Loan.

The Daily Beast:

• A New Magazine for Terrorists. The man who inspired the Fort Hood shooter, the Christmas Day attacker, and the Times Square bomber is launching an online magazine in English aimed at aspiring jihadists. Lloyd Grove on why it has American officials worried. Al Qaeda in the Arabian Peninsula, known by the acronym AQAP at the CIA, is about to release its first English-language magazine. It’s a Web-based journal of propaganda aimed at inciting violent acts among would-be terrorists living in the United States, Great Britain, Australia, and other Western countries. American officials are deeply concerned.

Bespoke Investment Group:

• State Default Risk and a Comparison to Sovereign Debt. (graph/table)

Reuters:

• China will "gradually" cancel export rebates on steel, base metals and products over the next 5 1/2 years, citing Fan Jianping, director general of the State Information Center's Economic Forecasting Department. The government may impose export taxes on the metals and products during the same period, as it seeks to limit production capacity.
• Exclusive: U.S. small businesses cut borrowing in May: Paynet. Borrowing by small U.S. businesses in May dropped to its lowest level in seven months, data released by PayNet Inc on Thursday shows, a sign that the nascent recovery may already be faltering. The Thomson Reuters/Paynet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, sank about 5 percent from the prior month on a seasonally adjusted basis, hitting its lowest reading since October. It was the fourth-lowest level on record. William Phelan, PayNet's president and founder, said the numbers suggest the economic recovery has stalled. "We are in these irons," he said in an interview, using a sailor's term for a boat pointed so straight into the wind that its sails flap ineffectively. "Small business owners are cautious about expanding. They are retaining their capital and they are not interested in going out on a limb at this point because they are uncertain about the future." Impending regulatory overhauls in the U.S. healthcare and finance industries are making it difficult for small businesses to gauge what their costs will be in the future, and are holding them back from spending now, Phelan said. Investment in plants and equipment at small businesses has decreased for most of this year, the index shows. While that trend in itself does not signal the economy is headed for a so-called double dip recession, it does raise the chances, Phelan said. "Smaller companies may not have the resources to last in stalled economic times," Phelan said. "I'd be really cautious that a time like this couldn't force us into a double dip if this continues."

Financial Times:

• Immelt Hits Out at China and Obama. Jeffrey Immelt, General Electric’s chief executive, has launched a rare broadside against the Chinese government, which he accused of being increasingly hostile to foreign multinationals. He warned that the world’s largest manufacturing company was contemplating better prospects elsewhere in resource-rich countries and that those nations did not want to be “colonised” by Chinese investors. “I really worry about China,” Mr Immelt told an audience of dozens of top Italian executives, referring to the Chinese government which he accused of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful.” Mr Immelt also had harsh words for Barack Obama, US president, lamenting what he called a “terrible” national mood and expressing concern that over-regulation in response to the global financial crisis would damp a “tepid” US economic recovery. Business did not like the US president, and the president did not like business, he said, making a point of praising Angela Merkel, Germany’s chancellor, for her defence of German industry. “People are in a really bad mood [in the US],” the 54-year-old executive told an audience of somewhat surprised Europeans who had seen higher levels of US growth as a beacon of recovery. “We [the US] are a pathetic exporter… we have to become an industrial powerhouse again but you don’t do this when government and entrepreneurs are not in synch.” “China and India remain important for GE but I am thinking about what is next,” he said, mentioning what he called “most interesting resource-rich countries” in the Middle East, Africa, Latin America plus Indonesia. “They don’t all want to be colonised by the Chinese. They want to develop themselves,” he said. The comments from the GE chief echo a rising chorus of complaints from foreign business groups in China about the regulatory environment they face. However, it is extremely unusual for senior executives at companies with extensive operations in the country to voice such public criticisms, for fear of retaliation from Beijing.

Handelsblatt:

• Twenty-one percent of European executives say the euro's existence is "no longer secure" after the sovereign debt crisis, a Handelsblatt poll showed. Some 42% of the 1,180 managers polled in five countries said they expect the currency to show "sustained weakness." Polling company Psephos GmbH conducted the survey in June, questioning managers in Germany, France, the UK, Switzerland and Italy. The companies they represent employ a minimum of 500 workers.
  

Kathimerini:

• Greece's Court of Audit deemed at least five provisions in the labor reform bill as unconstitutional. The court found that planned measures, including merging the public-sector workers' pension fund with IKA, are unlawful. The Court of Audit said that changes such as the scale of pension payments can only be altered by legislative reform and not by ministerial decree. The Athens Bar Association, civil servants union ADEDY and the Federation of Retired Civil Servants plan to submit objections to the measures.

Caixin Online:

• Bank of China Ltd. plans to raise up to $8.8 billion in additional share offering.

The Age:

• Gillard Bows to Mining Giants on Tax. JULIA Gillard has caved in to the mining industry, watering down the tax on so-called super profits as she clears the decks for a federal election. After a two-month-long dispute that ultimately cost Kevin Rudd his leadership, the new Gillard government has agreed to:

Bear Radar

Style Underperformer:

• Small-Cap Value (-.88%)

Sector Underperformers:

• Gold (-4.88%), Biotech (-2.41%) and HMOs (-2.07%)

Stocks Falling on Unusual Volume:

• STR, REGN, VRUS, DNDN, EGO, SA, ABG, AMED, GTIV, XRTX, LHCG, IPXL, AUXL, CRUS, RGLD and ALXN
  

Stocks With Unusual Put Option Activity:

• 1) CBS 2) GCI 3) EK 4) XRX 5) NVS
  

Stocks With Most Negative News Mentions:

• 1) TM 2) BP 3) GS 4) RAD 5) TSN
  

Bull Radar

Style Outperformer:

• Large-Cap Value (-1.54%)

Sector Outperformers:

• Oil Service (-.52%), Education (-.77%) and Software (-.86%)

Stocks Rising on Unusual Volume:

• STD, IOC and AIXG
  

Stocks With Unusual Call Option Activity:

• 1) CAM 2) JBLU 3) TQNT 4) JCI 5) JBL
  

Stocks With Most Positive News Mentions:

• 1) DAL 2) GOOG 3) C 4) YHOO 5) IBM

Thursday Watch

Evening Headlines
Bloomberg:

• Fed's Maiden Lane Made Taxpayers Junk-Bond Buyers Without Congress Knowing. Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money. The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.
• Spain's Aaa Rating on Review for Downgrade at Moody's. Spain’s top credit ranking was placed on review for a possible downgrade by Moody’s Investors Service as the country prepares to sell as much 3.5 billion euros ($4.3 billion) of five-year notes today. “Deteriorating” growth prospects and challenges in meeting fiscal targets mean Spain’s Aaa classification may be lowered by as much as two grades, Moody’s analysts including Senior Vice President Kristin Lindow in New York said yesterday in a statement. The moves came before today’s auction provides a test of investor sentiment toward the euro region’s fourth-largest economy and puts pressure on the Socialist government to deepen spending cuts as it starts drafting next year’s budget. “It will add to the general nervousness before the Spanish auction,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. Prior to Moody’s decision, investors had expected strong demand at the five-year note auction on easing concerns about the region’s banks after lenders sought less cash than forecast at a European Central Bank tender. The extra yield demanded on Spanish debt rather than German equivalents fell to 198.4 basis points yesterday from 204.9 basis points. That compares with a euro-era high of 221 basis points on June 16. Spain, which faces 24.7 billion euros of maturing debt in July, is trying to convince investors it can cut the third- largest deficit in the euro region, while bolstering the country’s savings banks and lifting the economy out of a two- year slump. Moody’s said it will “review” next year’s budget “to assess whether the deficit target for 2011 can be achieved.” That increases pressure on the minority Socialist government, which cut civil servants’ wages last month and will increase the value-added tax rate today, as it starts drafting next year’s budget ahead of its presentation to Parliament by the end of September. The government expects to cut the budget deficit to 6 percent of gross domestic product next year from 11.2 percent in 2009, aiming to bring the shortfall in line with an EU limit of 3 percent in 2013. Moody’s expects the deficit to remain “just over” 5 percent that year, lead Spain analyst Kathrin Muehlbronner said in a telephone interview. That will push the debt ratio to close to 80 percent by 2014, she said. Last year Spain’s debt burden was 53 percent of GDP, less than Germany’s and below the euro region average.
  
• European Banks Not Out of the Woods Yet After ECB Tender, Investors Say. European banks are still dependent on life-support from the region’s central bank even after asking it for less money than analysts estimated. “We’re not out of the woods yet,” said Florian Esterer, who helps manage about $46 billion at Zurich-based Swisscanto Asset Management. “The cajas, the Greeks and maybe the Landesbanken have problems getting short-term refinancing. That is why the ECB is still providing funding.” “It’s an event that calms nerves but doesn’t change the picture at all,” said Juergen Lanzer who helps manage about $230 billion at Schroders Plc. “Some of the Spanish, Portuguese, Greek and Irish banks still have sizeable balance sheets that they would struggle to refinance without the ECB.”
• China Manufacturing Slows Again Amid Growth Concern. China’s manufacturing expanded at a slower pace for a second month in June, adding to signs that growth in the world’s third-largest economy is moderating. The Purchasing Managers’ Index fell to 52.1 from 53.9 in May, the Federation of Logistics and Purchasing said in an e- mailed statement today. That was less than the median 53.2 estimate in a Bloomberg News survey of 12 economists. An output index fell to 55.8 in June from 58.2 in May, today’s report showed. A measure of new orders slid to 52.1 from 54.8 and an export-order index dropped to 51.7 from 53.8. A measure of input prices decreased to 51.3 from 58.9, the biggest fall in the 11 sub-indexes.
• Europe Naphtha Exports to Asia to Slide on China Slowdown: Energy Markets. Naphtha exports from Europe to Asia may drop to zero this month as demand from Chinese chemical producers slows, making forward prices more expensive than those for prompt delivery for the first time in eight months. There may be no shipments of the oil product, used to make gasoline and petrochemicals, in July, compared with 300,000 metric tons in June and 500,000 tons in May, according to the median estimate in a Bloomberg survey of six Europe-based traders. “The chemical market is still weak and China isn’t buying,” said Jinsu Yim, a Singapore-based analyst at Chemical Market Associates Inc., which advises oil refiners, banks and manufacturers. The current lower demand for naphtha in Asia is shown by spot naphtha cargoes from the Middle East trading last week at a premium of about $9 a ton to benchmark Persian Gulf prices, according to two traders in Asia. This is less than half the premium Kuwait set in June for term supplies to Asian buyers for August to July next year, two traders with knowledge of the company’s negotiations said at the time.
• Fed Officials Avoid Talk of Further Stimulus to Stoke Growth. Federal Reserve policy makers expressed caution about the outlook for the U.S. recovery and bank lending without backing any new steps by the central bank to stimulate growth. Atlanta Fed President Dennis Lockhart said today that while the recovery isn’t sustainable enough yet to warrant raising interest rates, he doesn’t see a need for additional asset purchases to aid the economy. Fed Governor Elizabeth Duke said it may take years to return to pre-recession credit levels and that there’s “no single step” to unclog lending markets. Fed Governor Kevin Warsh, appointed in 2006 by then-President George W. Bush, a Republican, said any decision by the central bank to expand its $2.35 trillion balance sheet must be subject to “strict scrutiny.” Lockhart told reporters today after a speech in Baton Rouge, Louisiana, that he respects Warsh’s view. “Whenever you are purchasing government obligations in the current conditions of deficits and rising national debt, you have to think about the long-term credibility, which I think was Kevin’s point,” Lockhart said.
• India's Gold Imports May Fall 36% as Price Damps Demand, Association Says. Gold imports in India, the world’s biggest consumer, may fall as much as 36 percent this year as higher prices and volatility slows demand, the Indian Bullion Market Association said. Purchases may be about 350 tons to 400 metric tons in the year ending March 31, 2011, compared with about 550 tons a year earlier, the association’s President Anjani Sinha said yesterday in a phone interview in Mumbai. Imports are down by about half in the last three to four months, he said.
  
• Sovereign Default Enters Apparatchik Lexicon: Mark Gilbert. The notion that default might be the only sensible exit strategy for an indebted euro nation is finally gaining traction with the authorities. With global financial markets still in a state of disrepair, investors would be wise to tread softly amid the potential nightmares. A draft European Union document, dated June 25 and scheduled for discussion July 12-13, was obtained this week by Bloomberg reporter Meera Louis. The draft suggests the forthcoming stress tests planned for the region’s banks should assess the dangers posed by “exposures to sovereign risk.” That’s a euphemism for asking whether banks would blow up if a government couldn’t pay its debts. Including that scenario in the analysis is an admission that the prospect of restructuring has, in the minds of the euro’s apparatchiks, moved up the scale to “possible” from “out of the question.”
• Kan May Face Ghost of Hashimoto as Japan's Economy Weakens Before Tax Rise. Japan’s slowing recovery from its worst postwar recession is signaling the world’s second-biggest economy may be too weak to sustain the higher consumption taxes under consideration by Prime Minister Naoto Kan.
• Oil Falls a Fourth Day After Unexpected Increase in U.S. Gasoline Supplies. Crude oil fell for a fourth day in New York, its longest losing streak in seven weeks, amid concern the economic recovery in the U.S. and China will slow, curbing demand in the world’s two largest energy consumers.Gasoline inventories rose 537,000 barrels to 218.1 million in the week ended June 25, ending a seven-week gain, according to an Energy Department report yesterday. Supplies, 3.5 percent above the five-year average, were forecast to decrease by 400,000 barrels, based on a Bloomberg News survey of analysts. U.S. fuel consumption declined 2.6 percent to 19 million barrels a day, the lowest level since April, the report showed.
• Australia Mining Stocks to Drop on China Freight. Australian mining stocks are poised to keep tumbling, as two leading indicators from China, the world's largest metals buyer, have dropped to at least nine-month lows, according to Westpac Banking Corp. The decline in the freight index, which charts rates for cargoes from Dampier in Western Australia to Qingdao in China, “is as pure a read as you’ll get of what’s actually happening between the two economies.” said Huw McKay, a senior international economist at Westpac in Sydney. Further falls in China’s purchasing and shipping costs “would certainly put a lot of pressure on mining stocks,” McKay said.

Wall Street Journal:

• The Dodd-Frank Financial Fiasco by John B. Taylor. The bill all but guarantees bailouts as far as the eye can see, while failing to address real problems like Fan and Fred and our outdated bankruptcy code. The sheer complexity of the 2,319-page Dodd-Frank financial reform bill is certainly a threat to future economic growth. But if you sift through the many sections and subsections, you find much more than complexity to worry about. The main problem with the bill is that it is based on a misdiagnosis of the causes of the financial crisis, which is not surprising since the bill was rolled out before the congressionally mandated Financial Crisis Inquiry Commission finished its diagnosis.
• From Russia With Gripes. Suburban Spy Suspect Didn't Feel Appreciated by Mother Country Handlers.
• China Agency Nears Times Square. China's state news agency could soon be the newest Times Square neighbor of media giants Thomson Reuters and Conde Nast. Xinhua, one of the Chinese government's main news outlets and propaganda arms, is finalizing a deal to move to the top floor of the 44-story skyscraper at 1540 Broadway, Xinhua's North America bureau chief, Zeng Hu, confirmed in an interview.
• Obama and the Fiscal 'Road to Hell'.
  

Bloomberg Businessweek:

• Chinese Provinces Raise Minimum Wages to Curb Labor Disputes. At least nine Chinese provinces and cities will raise minimum wages from today by as much as a third after Premier Wen Jiabao called for measures to head off growing worker unrest in the world’s third-largest economy.

CNBC:

• California Economy Is a Sign of What's Coming: Fiorina. All of the United States will end up like California if Washington does not focus on private sector job creation and reduce spending, Carly Fiorina, a Republican nominee for Senate, told CNBC Wednesday. "California is kind of a test case of what happens when government gets too big, spending gets too high, regulation gets too thick, entitlements get too rich. We start destroying jobs and that's what we are doing in California," said Fiorina. "And the reason I'm running for the U.S. Senate is because I think California is a harbinger of things to come if we don't have people in Washington focusing on job creation."

MarketWatch:

• Hurricane Alex Sending Oil to Gulf Coast Beaches. Hurricane Alex, which strengthened overnight from a tropical storm, is heading for the coastline near the Texas-Mexico border and is starting to churn oil from the massive BP spill on to beaches along the Gulf of Mexico, officials said Wednesday.

IBD:

• With Regulation, Electronic Markets Hope to Conquer New Business. That suits Intercontinental Exchange (ICE) just fine.

NY Times:

• Energy Savers, Loan Losers. The Obama administration is devoting $150 million in stimulus money for programs that help homeowners install solar panels and other energy improvements, which they pay for over time on their property tax bills. At the same time, the two government-chartered agencies that buy and resell most home mortgages are threatening to derail the effort by warning that they might not accept loans for homes that take advantage of the special financing. The mixed messages have alarmed state officials and prompted many local governments to freeze their programs, which have been hailed as an innovative way to help homeowners afford the retrofitting of a house with solar panels, which can cost $30,000 or more before incentives.
• Documents Show Goldman(GS) Pressure on AIG(AIG). Goldman’s aggressive and repeated demands for billions in cash from A.I.G. drove the insurer to the brink of failure in September 2008. The documents also revealed for the first time the dollar amounts behind Goldman’s negative bet on A.I.G., which Goldman put in place to hedge its risk that A.I.G. might fail and not pay its obligations. Under the terms of the $182 billion rescue, which was overseen by the Federal Reserve Bank of New York and the Treasury, the banks that had insured mortgage securities with A.I.G. were made whole on those contracts when they agreed to unwind them. Some $46 billion of the A.I.G. bailout money went to those banks.

Business Insider:

• Flashback: Steve Ballmer's First Take On The iPhone, January 2007. (video)

Zero Hedge:

• The Credit Default Swap Wolfpack Is Now Coming After France... China. (table)
• CALPERS and Risk: Together Forever? Before clocking a $100 billion loss in early 2009, the California Public Employees' Retirement System, known as Calpers, had the swagger of a hedge fund and the certainty of a saint. Other pension funds followed its lead, loading up on leverage, investing in unrated CDOs, shoving money into high-priced private equity deals and barreling into commodities and real estate. The question now is whether a loss of nearly 40% of its market value -- the worst loss in the system's 77-year history -- has brought Calpers sufficiently back down to earth to avoid another such debacle, and whether other chastened pension systems have followed suit.

CNNMoney:

• Congressional Budget Office Chief: Budget Outlook 'Daunting'. Douglas Elmendorf, chief budget cruncher for Congress, got to play the role of bad-news bear before the president's bipartisan fiscal commission on Wednesday. His job: Present the Congressional Budget Office's latest assessment of the long-term federal budget. The gist of his testimony went something like this: The outlook is bad under current law and daunting if many current policies are extended as expected. And even that may understate the fiscal problem the country faces, because it doesn't factor in potential effects of debt on economic growth. Under the rosiest scenario painted by Elmendorf, the debt held by the public is on track to rise to 80% in 2035 from 62% at the end of this year. At that point, interest payments on that debt would jump to 4% of GDP, up from roughly 1% today. That's the equivalent of a third of all federal revenue. Spending on health care remains the federal budget's biggest problem, even after accounting for the estimated impact of the health reform law enacted in March. Specifically, Elmendorf noted that spending on major mandatory health care programs such as Medicare is on track to double by 2035, up to 10% of GDP from 5% today. That increase is the equivalent of $700 billion this year in additional spending, Elmendorf said. Add in the less dramatic increase in Social Security spending, and the cost to federal coffers of mandatory entitlement programs will reach 16% of GDP by 2035. That's not very far below what the government has spent on all federal programs and activities on average over the past 40 years.

Huffington Post:

• The Failure of Financial Reform, Itemized. It is really quite incredible that of all the things that went wrong to cause the latest economic crisis, the new financial reform bill does almost nothing with regards to the following key issues. Here are the original problems and the actions being taken.

HedgeFund.net:

• New York State Pension Commits $200M to Emerging Hedge Fund Managers. Rock Creek was given the directive to focus on hedge fund firms that are women- and minority-owned, and that have less than $500 million in assets. The CRF also wants its money to be invested with “newer” hedge fund firms.

Rasmussen Reports:

• 60% Support Offshore Drilling, Still Critical of Obama and Oil Companies.

Politico:

• Stark: 'Our borders are quite secure'. (video) Rep. Pete Stark (D-Calif.) got into a heated exchange over immigration with some border security activists Saturday, asking a member of the Minutemen, “Who are you going to kill today?”

USA Today:

• 2010 Had Worst Start for Stocks in Nearly a Decade. The second half can't start fast enough for investors who have suffered through the worst start to a year for the stock market since 2002. Coming off the brutal second quarter that ended Wednesday, the big concern is whether the current 15% pullback in stocks is just a routine decline or the start of something more ominous.

AP:

• US Officials: Al-Qaida Operative Tied to NY Plot. U.S. counterterrorism officials have linked one of the nation's most wanted terrorists to last year's thwarted plot to bomb the New York City subway system, authorities said Wednesday. Current and former counterterrorism officials said top al-Qaida operative Adnan Shukrijumah met with one of the would-be suicide bombers in a plot that Attorney General Eric Holder called one of the most dangerous since the 9/11 terror attacks. Federal prosecutors in Brooklyn have named Shukrijumah in a draft terrorism indictment but on Wednesday the Justice Department was still discussing whether to cite his role. Some officials feared that the extra attention might hinder efforts to capture him. Shukrijumah's involvement shows how important the subway bombing plot was to al-Qaida's senior leadership. Intelligence officials believe Shukrijumah is one of the top candidates to become al-Qaida's next head of external operations, the man in charge of planning attacks worldwide. Current and former counterterrorism officials discussed the case on condition of anonymity because they were not authorized to speak about it.

Reuters:

• Medicare Looking at Dendreon(DNDN) Cancer Vaccine. The U.S. Medicare program said on Wednesday it was evaluating data on Dendreon Corp's (DNDN) prostate cancer therapy to decide whether to cover the product for seniors nationwide. Shares of the company fell 23 percent to $25 on the news after closing at $32.33 on Nasdaq. The Centers for Medicare & Medicaid Services (CMS) said it had opened a national coverage analysis after receiving inquiries following the approval of Dendreon's Provenge therapy in April. Nationwide Medicare coverage could help make the product successful, while a denial could sharply hit sales.
• AIG(AIG) CEO Threatened to Quit if Chairman Stays - Report. American International Group Inc Chief Executive Robert Benmosche said last week he would quit unless Chairman Harvey Golub leaves the company, Bloomberg reported on Wednesday.
• Environmental Groups Seek Halt to BP(BP) Oil Burnings to Save Turtles.
  

Financial Times:

• EU Agrees To Tough New Bonus Guidelines. European Union lawmakers and member states backed the toughest restrictions on bankers bonuses seen so far on Wednesday, sowing confusion across an already jittery financial services sector. Under legislation expected to pass the European parliament next week, between 40 and 60 per cent of bonuses would have to be deferred for three to five years and half the upfront bonus would have to be paid in shares or in other securities linked to the bank’s performance. As a result, the cash portion would be limited to between 20 per cent and 30 per cent, far tighter the limits currently used by most members of the 27-nation bloc. The agreement caught bankers and regulators by surprise and left them scrambling to figure out how the rules would work. The UK Financial Services Authority, which already has a remuneration code in place, said it was studying how the proposed directive would affect its practices.

Telegraph:

• Miners Wary of Super Tax as Talks With Australian Government Continue. Talks between the Australian government and the world's largest mining companies will continue into the next few days after both sides failed to reach an agreement on a proposed 40pc tax on miners' profits.
• Angela Merkel's Political Woe Punctures Market Euphoria. Fears over the political survival of German Chancellor Angela Merkel sent tremors through European markets late on Wednesday, puncturing the near euphoric mood after a crucial funding operation by the European Central Bank eased doubts over bank stress.

Financial Times Deutschland:

• Bundesbank President Axel Weber supports the German banking industry's opposition to the "full and uncontrolled" disclosure of the results of stress tests.

Yonhap News:

• U.S. Repeats Calls on China to Condemn N. Korea for Ship Sinking: State Dept. The United States Wednesday repeated calls on China to join forces in condemning North Korea at the U.N. Security Council for the torpedoeing of a South Korean warship in March. "The president framed this, we think, appropriately so," State Department spokesman Philip Crowley said. "We continue our discussions with China and other countries in New York, but we think at this point there's little ambiguity and, we believe the international community needs to send a direct and clear message to North Korea." Crowley was responding to the Chinese Foreign Ministry, which has said China's position on the sinking of the Cheonan is "fair and justified" and denounced President Obama for his remarks on China's "willful blindness" to North Korea on the Cheonan issue in Toronto Saturday while meeting with South Korean President Lee Myung-bak on the margins of the G-20 economic summit.

China Business News:

• The basic direction of China's monetary and fiscal policy won't change this year, Citing Fan Jianping, head of the economic forecast department of the State Information Center.

Evening Recommendations
Citigroup:

• Reiterated Buy on (WRI), target $24.

Piper Jaffray:

• Rated (JBHT) Overweight, target $42.
• Rated (WERN) Overweight, target $28.
  

Night Trading

• Asian equity indices are -1.75% to -.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 142.50 -4.5 basis points.
• Asia Pacific Sovereign CDS Index 138.25 -1.75 basis points.
  
• S&P 500 futures -.68%.
  
• NASDAQ 100 futures -.66%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (STZ)/.35

Economic Releases
8:30 am EST

• Initial Jobless Claims for last week are estimated to fall to 455K versus 457K the prior week.
• Continuing Claims are estimated to rise to 4550K versus 4548K prior.
  

10:00 am EST

• ISM Manufacturing for June is estimated to fall to 59.0 versus a reading of 59.7 in May.
• ISM Prices Paid for June is estimated to fall to 70.0 versus a reading of 77.5 in May.
• Construction Spending for May is estimated to fall -.8% versus a +2.7% gain in April.
• Pending Home Sales for May is estimated to fall -14.2% versus a +6.0% gain in April.
  

Afternoon

• Total Vehicle Sales for June are estimated to fall to 11.4M versus 11.64M in May.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Treasury's Geithner speaking, Challenger Job Cuts report, weekly EIA natural gas inventory report and the (GIS) Investor Day could also impact trading today.
  

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

Stocks Reversing Sharply Lower into Final Hour on Rising Economic Fear, China Hard-Landing Worries, Tax Hike Concerns

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Almost Every Sector Declining
  
• Volume: Slightly Above Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 33.78 -1.03%
  
• ISE Sentiment Index 107.0 +27.38%
  
• Total Put/Call 1.02 -5.56%
  
• NYSE Arms 1.46 -74.50%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 119.47 bps -1.08%
  
• European Financial Sector CDS Index 149.84 bps -3.84%
  
• Western Europe Sovereign Debt CDS Index 163.50 bps +1.55%
  
• Emerging Market CDS Index 268.19 bps -.55%
  
• 2-Year Swap Spread 36.0 +1 bp
  
• TED Spread 36.0 -3 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .17% +3 bps
  
• Yield Curve 233.0 -2 bps
  
• China Import Iron Ore Spot $138.90/Metric Tonne -.36%
  
• Citi US Economic Surprise Index -35.90 +.5 point
  
• 10-Year TIPS Spread 1.85% -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -100 open in Japan
• DAX Futures: Indicating -60 open in Germany

Portfolio:

• Slightly Higher: On gains in my Medical/Retail long positions and ETF hedges
  
• Disclosed Trades: None
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 trades near session lows despite a bounce in the euro, end-of-the-quarter and the market's oversold state. On the positive side, Airline and Oil service stocks are relatively strong, rising .5%+. The S&P GSCI Ag Spot Index is jumping 3.6%, its best showing in many months. Spain sovereign cds is falling -8.4% to 251.63 bps, despite Moody's negative comments. The Greece sovereign cds is falling -8.8% to 910.88 bps and the Portugal sovereign cds is dropping -5.3% to 311.38 bps. The On the negative side, Gaming, Oil Tanker, Computer, Bank, HMO, Networking and Semi shares are under meaningful pressure, falling 1.5%+. Despite the decline in some country-specific sovereign cds, the Western Europe Sovereign CDS Index is moving very close to a new record high. Moreover, the US Municipal CDS Index is jumping another +5.0% to a record 266.3 bps, which is another large negative. The 10-year yield continues to fall too much and is rolling back over to session lows. The market is oversold short-term, but the overall technical action is very poor. Some leading stocks, that had been holding up relatively well, are breaking convincingly below their 50-day moving averages today. Economic data tomorrow will likely continue the recent trend of disappointments. I expect US stocks to trade mixed-to-lower into the close from current levels on rising sovereign debt angst, China hard-landing concerns, increasing economic fear, tax hike worries, regulatory fears and oil spill concerns.

Today's Headlines

Bloomberg:

• Bank Credit Risk Declines Most in Week After ECB Loans Tender. The cost to protect bank bonds from default fell the most in more than a week after the European Central Bank said lenders asked for 131.9 billion euros ($162 billion) for three months, less than economists had forecast. Credit-default swaps on the Markit iTraxx Financial Index of 25 banks and insurers declined 6.5 basis points to 165.5, according to JPMorgan Chase & Co. in London, the biggest one-day decline since June 18. Credit-default swaps tied to Greek bonds fell 72.75 basis points to 930.25, the fourth-straight drop, while contracts on Portugal declined 15.5 basis points to 315.25, according to CMA DataVision. Swaps on Spain tightened 6 to 265.5 basis points. The Markit iTraxx Crossover Index of swaps on 50 companies with mostly high-yield credit ratings fell 4 basis points to 582.5, according to Markit Group Ltd. The Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 3 basis point to 130.5, Markit prices show.
• ADP Estimates U.S. Companies Added 13,000 Workers. Companies in the U.S. added fewer workers in June than forecast, according to data from a private report based on payrolls. The 13,000 gain was the smallest since February and followed a revised 57,000 increase the prior month, figures from ADP Employer Services showed today. Economists surveyed by Bloomberg News had forecast a gain of 60,000, according to the median estimate. Companies may be slow to add workers until there’s evidence the gains in demand will be sustained. “We’re in a soft patch in the economy and employers are reluctant to hire,” said Richard DeKaser, chief economist at Washington-based Woodley Park Research, whose ADP forecast of 23,000 was closest among economists surveyed. “It suggests non- government payrolls will be quite soft, well below what’s necessary to ensure a stable economic recovery.” Today’s ADP report showed a decrease of 17,000 workers in goods-producing industries including manufacturers and construction companies. Employment in construction fell by 35,000.
• Cassano Says He Could Have Won Better AIG Deal for Taxpayer. Joseph J. Cassano, whose derivative bets on subprime loans forced American International Group Inc. into a U.S. bailout, said he could have negotiated discounts on collateral calls had he remained with the company. Cassano could have won “a much better deal for the taxpayer” by negotiating with banks demanding collateral from AIG, Cassano said today in testimony to the Financial Crisis Inquiry Commission.
• Chu Says China's 'Crude Securitization' of Loans a Worry: Video. Charlene Chu, a senior director in financial institutions for Fitch Ratings in Beijing, talks with Bloomberg's Rishaad Salamat about potential risks to China's banking system.
• The euro-region's debt crisis, which keeps weighing on market sentiment and threatens to hamper an economic recovery, risks restraining eastern Europe's growth outlook and ability to attract investment, BNP Paribas SA said in its monthly report. The Hugarian and Czech economies are in a "depressed" state, which calls for continued interest rate reductions, limiting potential gains in the forint and the koruna. Polish fiscal overhaul "remains non-existent," and weaker growth will "make that more apparent," according to BNP. Poland's fiscal outlook "suggests there is a higher risk of a disorderly unwinding of positions here than elsewhere in central and eastern Europe," BNP said.
• Commodity Slump Means Worst Quarter in Year on Growth Outlook. Commodities are heading for their worst quarter in more than a year on investors’ concern that slower growth from China to the U.S. will sap demand. The S&P GSCI Total Return Index of 24 raw materials plunged 11 percent since the end of March, led by declines in industrial metals, gasoline and crude oil. That’s the steepest decline since the fourth quarter of 2008 and the first time prices dropped in the first-half since 2001. Zinc’s 25 percent plunge was the worst quarter since the final three months of 2008. Nickel fell 22 percent, lead 19 percent, copper 17 percent and aluminum 15 percent. Barclays Capital is forecasting even lower prices by the fourth quarter. Copper will average $6,000 a metric ton in the period, 7.7 percent lower than now and aluminum $1,850, for a drop of 6.1 percent, according to a June 25 report. Oil retreated 9.7 percent since April, the first quarterly decline since the last three months of 2008. The U.S. is the world’s biggest energy consumer, ahead of China. U.S. crude stockpiles tracked by the Department of Energy rose almost 12 percent this year. The International Energy Agency, an adviser to consuming nations, forecasts that global oil demand will rebound 2 percent this year after a two-year collapse that was the steepest since the 1980s.
• Bankers Who Broke Big Dig With Swaps Gone Awry Get Paid for Fix. The same bankers who sold Massachusetts interest-rate swaps that blew up the debt financing for the so-called Big Dig road and tunnel project in Boston -- costing taxpayers $100 million -- are getting even more money to fix what they broke. UBS AG bankers showed up at the Massachusetts Turnpike Authority in 2001 with a solution to a growing deficit at the state agency overseeing the $15 billion project. The bank gave the authority $29.1 million for an interest-rate swap linked to $800 million of Big Dig bonds, an agreement meant to cut the cost of paying back the debt and cover part of the budget shortfall. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. made similar deals. The deal with UBS backfired as credit markets faltered two years ago, costing toll payers $36.3 million in extra interest and leading the Zurich-based bank to demand as much as $400 million to end the arrangement when the Big Dig bonds’ insurer lost its top credit ratings. “There was really no mention of any downside of these swaps,” said Christy Mihos, a turnpike board member from 1999 to 2004 who voted for the UBS agreement. “It was portrayed as a no-brainer that we could not lose.” The same Wall Street banks that triggered the worst financial collapse since the Great Depression also helped government borrowers from Greece to California paper over deficits with derivative deals promising savings on borrowings. Many of the agreements failed when credit markets seized up in 2008 and swap payments from banks no longer covered rising debt costs.
• Munis Underperform Treasuries as Default Speculation Mounts. Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months. Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data. Investors bought Treasuries, pushing two-year yields to a record low this week, on signs of slowing global economic growth and amid protests in Europe over austerity measures. The cost of contracts insuring against losses in municipal bonds almost doubled in the past two months, led by Illinois. Greece and Spain led a surge in the cost of protecting sovereign debt.
• Foreclosed Homes Sell at 27% Discount as Supply Grows. Homes in the foreclosure process sold at an average 27 percent discount in the first quarter as almost a third of all U.S. transactions involved properties in some stage of mortgage distress, according to RealtyTrac Inc.
• Merkel's President Candidate Fails to Win 2nd Round. Chancellor Angela Merkel’s candidate for the German presidency, Christian Wulff, failed to get enough votes to win the post in a second round, as delegates used the secret ballot to signal their frustration with her coalition. The vote marks “a serious shot across the bow for Merkel,” Richard Stoess, a political scientist at the Free University in Berlin, said in a phone interview. While the second-round result won’t bring down Merkel’s government, it’s “a disaster for her image and her standing, given the overwhelming majority the coalition has in the assembly.”

New York Times:

• N.Y. Move Could Double-Tax Hedge Fund Managers. Finally, Gov. David A. Paterson and legislative leaders have found something they can agree on: that hedge fund managers from Connecticut and New Jersey should pay the state of New York millions more in taxes. As they grapple with a gaping budget shortfall, Mr. Paterson and the lawmakers plan to enact a tax change that will treat much of the compensation earned by the fund managers who work in New York but live outside the state as ordinary income. However, industry observers say the move could open up fund managers to double taxation and take some of the shine off New York as a hedge fund destination, The New York Times’s David M. Halbfinger reports.
• Hedge Funds Object to Lehman Chapter 11 plan. A group of Lehman Brothers Holdings‘ creditors, including the largest United States pension fund and a prominent hedge fund, said they object to the investment bank’s Chapter 11 bankruptcy plan, Reuters reported. In a filing in Manhattan bankruptcy court on Tuesday, the group of 12 hedge funds, pension funds and asset managers said the current plan would sow conflict among creditors, and could treat large bank creditors better than other creditors. This, it said, could result in years of needless lawsuits, delay the deserved recovery of tens of billions of dollars. The creditors said they are owed $15.5 billion. Among them are the California Public Employees’ Retirement System, a pension fund with $211 billion of assets, and Paulson & Company, a $35 billion hedge fund firm run by billionaire John Paulson. “The plan establishes a ‘pot’ of assets for distribution and pits creditors of the various estates against each other,” the filing said.

Business Insider:

• 17 Trades Hedge Funds Are Making Right Now.

Zerohedge:

• With $1 Trillion in Loans, The ECB is The Biggest Guarantor of European Banks.

Washington Post:

• Recession Cut Into Employment for Half of Working Adults, Study Says. The recession has directly hit more than half of the nation's working adults, pushing them into unemployment, pay cuts, reduced hours at work or part-time jobs, according to a new Pew Research Center survey. The economic shock has jolted many Americans into a new, more austere reality, which is likely to have lasting consequences for an economy fueled mostly by consumer spending. More than six in 10 Americans say they have cut down on borrowing and spending, the survey found. The reason: Nearly half of the survey's respondents say they are in worse financial shape as a result of the downturn, which destroyed 20 percent of Americans' wealth.

MarketFolly:

• Latest Hedge Fund Exposure Levels: Trend Monitor Report. We've been tracking hedge fund exposure levels across asset classes for some time now. During this chronicle, we've seen hedge funds short the euro and then last week we saw them start to cover those shorts. One recent move that has been spot on has been global macro hedge funds going net short equities. So, given the recent market decline, how are hedge funds positioned now? In terms of the latest market exposure, long/short equity funds are now on average 30% net long. This has slowly started to creep up in recent weeks as they begin to increase market exposure. In terms of specifics, it appears as though l/s funds now very much favor large cap stocks. Additionally, they continue to sell emerging markets after having higher than average exposure in this arena as of late. This comes after these hedgies have had low net long exposure through 2010. Market neutral funds, on the other hand, continued to reduce market exposure. These two strategies have seemed to move conversely of each other over the past month or so with regard to equities. Turning to global macro hedge funds, Bank of America estimates that these funds have held their equity short position steady but have added to their net short in commodities and 10 year treasuries. Given the flattening that has occurred in regards to treasury yields as of late, it's interesting to see hedgies press toward a crowded short in 10 year treasuries yet again. This seems to be a trade they just refuse to let up on.
  

Chicago Tribune:

• Chicago-Area Banks Losing Money. Two years into the banking crisis, Chicago-area lenders have yet to find a bottom. As a whole, banks headquartered in the Chicago area are losing money, and the bad loans and foreclosed real estate continue to climb, according to a report by Loan Workout Advisers LLC and MDI Investments Inc. provided exclusively to the Tribune. For consumers, the fallout could mean jumping through more hoops to get loans as banks try to minimize their risks. "When a community bank faces capital problems, lending to consumers and small businesses suffers," said Justin Barr, managing principal for Loan Workout, a bank-turnaround consulting firm.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 28% 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 -15 (see trends).
• 28% Say U.S. Heading in Right Direction. Sixty-six percent (66%) of all voters believe the country is heading down the wrong track.

Politico:

• Republicans Seek to Resurrect Repeal of Health Care Reform. The top two House Republicans are renewing their calls to repeal the health care overhaul and will back efforts to force votes on the House floor amid polls that show the public continues to have decidedly mixed feelings about the legislation.
• White House Quiet on Obama-Blago Link. The White House was mum Tuesday after a union leader testified that Barack Obama personally asked him to approach then-Gov. Rod Blagojevich about appointing confidant Valerie Jarrett to his Illinois Senate seat – testimony Republicans say clearly contradicts the Obama team’s version of events.
  

Reuters:

• USDA Data Shows Explosive Potential for CBOT Corn. A shocking acreage and stocks report released by the U.S. Department of Agriculture draws attention to the explosive potential for CBOT corn futures prices, a CME Group (CME) panel of analysts said on Wednesday. "This is a shot across the bow and is astonishing given the fact farmers like to plant corn," said Greg Wagner, an independent analyst. In its June plantings report, USDA said American farmers had planted 87.9 million acres of corn this spring, below the lowest end of a range of analysts' estimates for 88.1 million to 90.2 million. USDA also said the supply of corn in the United States on June 1 totaled 4.310 billion bushels, below an average of analysts' estimates for 4.598 billion bushels.
• Cold War Support for Russian "spies" on networking site. Patriotic, anti-American messages adorn the pages of two alleged Russian spies on Russia's answer to Facebook, a reminder of historic suspicions and resentments that have survived the end of the Cold War.
• Moody's Puts Spain Ass Rating on Review for Downgrade. Moody's Investors Service said on Wednesday that it may cut Spain's Aaa local and foreign currency government bond ratings after a three-month review. Moody's said the possible downgrade reflects deteriorating short-term and long-term economic growth prospects, and the challenges the government faces in achieving its fiscal targets.The rating agency also cited concerns over the impact of rising funding costs over the medium term."If at the conclusion of the review, Spain's ratings are lowered, it would most likely be by one, or at most two, notches," Moody's said.

Bild Zeitung:

• Just over half of German voters, 51%, would prefer a return to the deutsche mark, while 30% favor sticking with the euro, citing a poll by market researcher Ipsos.

El Economista:

• Spanish lenders and savings banks may lose as much as $244 billion on bad loans, citing reports by RGE and Freemarket. RGE estimates that in a worst-case scenario bad loans could total 170 billion euros and the cost of bailing out lenders may be 80 billion euros to 100 billion euros. A separate study by Freemarket predicted that bad loans may reach 200 billion euros.

Le Parisien:

• France's gross debt will increase to 83.7% of the country's output by the end of this year and peak at 87.5% in 2012, citing a member of the government attending a parliamentary hearing. Debt in the euro zone's second largest economy stood at 80.3% of GDP after the first quarter, the National Statistics Institute said.

Xinhua:

• Over 5,800 Chinese Officials Penalized for Corruption in Construction Projects: CCDI. Over 5,800 Chinese officials have been penalized for disciplinary violations related to construction projects since August last year, a spokesman for the Communist Party of China (CPC) Central Commission for Discipline Inspection (CCDI) said Wednesday. The officials were implicated in more than 9,900 cases of corruption. Some 3,400 of the officials have been referred to judicial authorities, CCDI spokesman Wu Yuliang said at a press conference. The CPC Central Committee decided in July last year to launch a two-year campaign to tackle corruption in the construction sector. As of May, discipline authorities had probed more than 340,000 construction projects and uncovered disciplinary violations in 140,000 of the projects being probed. About 60,000 cases have been rectified, according to Wu.

The Australian:

• Resource Deal Near as 40% Rate Shifts. JULIA Gillard is hoping to settle the dispute with Australia's biggest mining companies today, after two days of intense negotiations in Canberra. For two days, the government has been considering calls from BHP Billiton, Rio Tinto and Xstrata to change the uniform 40 per cent tax rate proposed on profits from all minerals to a "globally competitive" rate on a "commodity by commodity" basis. Rio Tinto iron ore chief executive Sam Walsh said "serious negotiations" were continuing and the miners were "very hopeful of a quick resolution". Apart from earlier concessions on the tax that had been foreshadowed, such as removing the 40 per cent taxpayer guarantee for losses on mining projects, lifting the profits threshold when the tax cuts in from 6 per cent to 12 per cent and exempting the quarry industry entirely, the government is now looking at different tax rates for different minerals and which projects the tax would apply to.