Today's Headlines

Bloomberg:

• China Local-Government Debt Risk Needs 'Attention,' Bank of China Says. China’s central bank urged “paying attention” to the credit risks of local-government financing vehicles because their debts have long maturities and are difficult to oversee. Some companies set up by provincial and municipal governments to fund infrastructure projects are unsustainable, the People’s Bank of China said in a report on its website late yesterday. The loans are “generally large, with long maturities, and it is difficult to oversee their use,” the central bank said. China is increasing scrutiny of local-government borrowing to fund the construction of roads, airports and other infrastructure because of the risk of banks being saddled with bad loans. Local governments, barred from selling bonds or borrowing directly from banks, had set up more than 10,000 financing vehicles by the end of 2010 to raise money, mostly for infrastructure, the central bank said.
  
• U.S. Jobless Claims Fell Less Than Forecast. More Americans than forecast filed applications for unemployment benefits last week, signaling the job market is weakening as employers trim staff to cut costs. Jobless claims fell by 6,000 to 422,000 in the week ended May 28, exceeding the 417,000 median forecast of economists surveyed by Bloomberg News, according to Labor Department figures today in Washington.
• Sudden China Slowdown May Mean 50% to 75% Drop in Commodities, S&P Says. A “sudden” slowdown in China may lead commodity prices to fall as much as 75 percent from current levels, Standard & Poor’s said. Unexpected shifts in government policies or problems in the banking sector may trigger such a slowdown, S&P said in a report e-mailed today. The floor for aluminum is 65 cents to 70 cents a pound ($1,433 to $1,543 a metric ton), compared with about $1.20 a pound now and copper’s floor is $1.50 to $1.75 a pound, compared with $4.10 a pound currently, S&P said. “Given the extent to which China has bolstered commodity prices, that’s something that we have to be concerned about,” S&P analyst Scott Sprinzen said by telephone from New York. “The efforts by the government in China to slow growth are having an effect on commodity prices. It’s been a pretty modest correction so far.” In case of a sudden slowdown in the world’s biggest consumer of commodities, iron ore’s floor is $85 to $95 a metric ton compared with about $170 now, seaborne coking coal at the mine has a floor of $100 to $120 a ton, compared with about $180 now, and hot rolled coil steel’s floor is $475 to $525 a ton compared with about $750 now, according to the report. Commodities may “easily” drop 25 to 40 percent in the next 12 months, presenting an “enormous opportunity” for investors, David Stroud, chief executive officer of TS Capital, a hedge fund manager in New York, said in an e-mail today. Markets are “starting to look a lot like 2008,” he said. That year, the GSCI dropped 43 percent.
• Goldman(GS) Said to Get Subpoena From New York Prosecutor. Goldman Sachs Group Inc. (GS), the fifth- biggest U.S. bank by assets, received a subpoena from the Manhattan District Attorney’s office seeking information on the firm’s activities leading into the credit crisis, according to two people familiar with the matter.
• Company Bond Risk Rises to Six-Week High in Europe, Swaps Show. The cost of protecting European corporate bonds from default rose to the highest in six weeks, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 7 basis points to 379, the widest since April 18, according to JPMorgan Chase & Co. at 4 p.m. in London. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.25 basis points to 104.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers climbed 4.5 basis points to 159 basis points and the subordinated index was up 5 at 261.
• Oil Declines After U.S. Reports Unexpected Increase in Crude Inventories. Crude oil futures fell for a second day after a U.S. government report showed an unexpected increase in inventories to the highest level in two years. Crude dropped as much as 1.8 percent after the Energy Department said supplies climbed 2.88 million barrels to 373.8 million in the week ended May 27, the highest level since May 2009. Inventories were forecast to decline by 1.6 million barrels, according to the median of 13 analyst estimates in a Bloomberg News survey. Gasoline inventories also gained. “The fact that there is a quite large build in gasoline seems very bearish,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “Refiners are not making distillates because they intentionally want to bring inventories down to a more manageable, healthier level and because they don’t see demand,” said Evans. The rate at which refineries operated fell to 86 percent from the previous week’s 86.3 percent. “Overall, the numbers are quite bearish,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “I am looking for prices to fall to $95 by next week.”
• Sports-Gear Prices May Rise in Sign of Consumer Inflation. Retailers are poised to boost prices on athletic footwear, apparel and sports equipment as they join other industries in passing along rising costs for commodities, foreign labor and freight. More than 90 percent of sporting-goods manufacturers paid higher input costs in the first quarter, and 41 percent of these companies already increased wholesale prices, according to a quarterly survey of private, independent vendors and retailers conducted by Robert W. Baird & Co. “This clearly demonstrates the emerging cost and price pressure across the sporting-good space,” said Peter Benedict, a retail analyst in Stamford, Connecticut, at Baird. “We’re hearing a consistent message from vendors and retailers that cotton, fuel and wage costs are starting to go up, and they’re slowly going to come through on the retail side later this year and certainly in 2012.”
• Fed's QE2 Failed to Boost U.S. Spending, Pimco's El-Erian Says: Tom Keene. The Federal Reserve’s quantitative easing policy failed to meet the “ultimate objective” of boosting employment and economic growth, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co. While the bond-purchase program pushed investors into higher-yielding assets such as stocks, the “transmission mechanism” to lower unemployment by driving more money into the economy didn’t work, El-Erian of Pimco, the world’s biggest manager of bond funds, said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “If success is defined in terms of the ultimate objective, which is pushing up valuation in order for people to spend more on goods and services and therefore get the economy to grow and unemployment to come down rapidly, then the answer is no,” El- Erian said from Newport Beach, California.

Wall Street Journal:

• Gas Prices, Economy Leave Retailers With Mixed May Sales. Upscale merchants and retailers that sell gasoline turned in the best sales growth in May, continuing to see strength while the momentum of many other retailers waned. Uncertainty over the economy and high gasoline prices contributed to U.S. shoppers' reluctance to spend. The 24 retailers tracked by Thomson Reuters posted 4.9% growth in May same-store sales, missing expectations for a 5.4% gain. This is retailers' first miss since December. The results follow 2.6% growth a year earlier.
  

Business Insider:

• Transcript of David Einhorn's Speech at the Ira Sohn Conference.
• Dick Bove: The Losses Bank of America(BAC) Is About to Take Are "Historic In Proportion".
• There Is More Debt In China Than We Can Possibly Know.
  

Zero Hedge:

• Moody's Puts BofA(BAC), Wells Fargo(WFC) and Citi(C) on Downgrade Review: Cites Risk of No Government Support, Mortgage Exposure as Risks.
• Moody's Says It Expects to Place US Rating for Downgrade Review If No Progress on Increasing Statutory Debt Limit. Translation: unless America promises to increase its total debt to 120% of GDP in one year, the current debt which is just under 100% will be downgraded.
• John Paulson Could Lose Up to $650 Million On Latest Alleged Chinese Fraud.
  

Seeking Alpha:

• 4 Healthcare Stocks Hedge Funds Are Buying Like Crazy.

Politico:

• FCC Could Make VoIP Providers Pay to Connect Calls. More and more Americans are abandoning home telephone lines in favor of mobile phones, Skype, Google Voice and Vonage — and that leaves the Federal Communications Commission with a problem: figuring out what digital-age companies should pay to connect calls to the old Ma Bell network. One possible upshot: higher rates for low-cost or “free” Internet calls.
  

Reuters:

• EU Agrees in Principle on New Greek Bailout - Sources. Senior euro zone officials have agreed in principle on a new international bailout of Greece that will give it more time to try to resolve its debt crisis, a source close to the talks said on Thursday. The Economic and Financial Committee of deputy ministers and senior officials of the 17-nation currency zone approved the plan in principle in talks in Vienna that ended in the early hours of the morning, the source said. The second bailout of Greece, which will effectively replace a 110 billion euro ($160 billion) scheme launched in May last year, will run until mid-2014, giving Athens an additional year of financial support beyond the original plan, the source said.

Efe:

• Talks between Spanish unions and employers over changes to collective wage-bargaining rules have broken down, citing people in the unions.

Bear Radar

Style Underperformer:

• Mid-Cap Value (-.33%)

Sector Underperformers:

• 1) Retail -.90% 2) Hospitals -.78% 3) Medical Equipment -.77%

Stocks Falling on Unusual Volume:

• LO, UVV, JCP, KSS, NSANY, USNA, TTM, FTO, USMO, SNB, TIN, CYBX, VRA, TFM, ZUMZ, JOSB, CPRT, PCH, THRX, BANRD, SNDA, CBRL, DEST, ULTA, RSTR, GIFI, NNBR, IDXX, PANL, OMCL, CRDN, SEE, PIQ, BXS and VRA
  

Stocks With Unusual Put Option Activity:

• 1) JOE 2) DHI 3) ACI 4) XLP 5) LO
  

Stocks With Most Negative News Mentions:

• 1) CBRL 2) ASCA 3) CHKP 4) SJM 5) GIS
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Bull Radar

Style Outperformer:

• Mid-Cap Growth (+.18%)

Sector Outperformers:

• 1) Education +11.06% 2) Airlines +1.21% 3) HMOs +.58%

Stocks Rising on Unusual Volume:

• ESI, STRA, APOL, CECO, LOPE, LINC, EDMC, JOYG, ELS, DV, WPO, MOV, BPI, QNST, UNG, RLD and GNW
  

Stocks With Unusual Call Option Activity:

• 1) BRCD 2) COCO 3) APOL 4) CECO 5) ESI
  

Stocks With Most Positive News Mentions:

• 1) SKS 2) ALNY 3) BKE 4) OSIS 5) NRGY

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume
  

Thursday Watch

Evening Headlines

Bloomberg:

• Greece Default Risk Raised to 50% at Moody's as EU Readies Second Bailout. Greece’s risk of default was raised to 50 percent by Moody’s Investors Service as European officials rushed to put together the second bailout plan in two years to stave off renewed financial turmoil in the region. Moody’s downgraded Greece to Caa1 from B1, putting it on a par with Cuba, according to a report published late yesterday. The move came after policy makers considered asking investors to reinvest in new Greek debt when existing bonds mature. Twelve years after the currency was started, European leaders are trying to prevent the euro area’s first sovereign default. A 110 billion-euro ($158 billion) rescue in 2010 failed to prevent an investor exodus from Greece, and the country now faces a funding gap of 30 billion euros of bonds next year with yields on its 10 year bonds above 16 percent. “Taken together, these risks imply at least an even chance of default over the rating horizon,” Moody’s said in a statement.
• Yellen Says Fed Watching Rise in Leveraged Loan Demand for Imbalance Risk. Federal Reserve Vice Chairman Janet Yellen said an increasing demand for leveraged loans warrants monitoring as a possible emerging “imbalance” that the Fed would curb if necessary through regulation. The central bank will “continue to watch conditions in the leveraged loan market closely in the coming months, and we will speak out forcefully if we perceive pressures continuing to build,” Yellen said today in a speech in Tokyo. “Strong demand has been pushing prices higher in the syndicated loan market” and “inflows into this asset class have indeed been robust and prices have been rising quite rapidly.”
• China Lending-Binge Hangover Looms in 2013 as Wen Spurs Low-Income Housing. Premier Wen Jiabao aims to build 36 million low-cost homes by 2015, an initiative that will see 2 trillion yuan ($307 billion) added to local government borrowing by 2012, bringing it to a total 12 trillion yuan, Standard Chartered Plc estimates. The surge of loans to local authorities may spark a wave of bank bailouts that hobble economic growth. “We’re going to see more financial shenanigans, we’re going to see more money pushed off balance sheets” as banks seek to mask the extent of their lending to local governments, said Singapore-based Fraser Howie, who co-wrote “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” and has been an investment banker in Asia for almost two decades. “We’re going to see some major recapitalization coming at some point” in the banking system, he predicted.
  
• Wien Buying in S&P 500 Decline Where Birinyi Sees Chance of 10% Correction. The biggest retreat in the Standard & Poor’s 500 Index since August is creating a buying opportunity for investors willing to withstand declines that may reach 10 percent, according to Blackstone Group LP’s Byron Wien.
• Fukushima Radiated Water May Breach Storage Trenches in 5 Days. Radioactive water accumulating in Tokyo Electric Power Co.’s crippled Fukushima Dai-Ichi nuclear plant is set to start overflowing from storage trenches in five days, data provided by the company show. To prevent leakage into the ocean, the utility has poured concrete and gravel to seal off storage trenches closest to the sea containing water from the No. 3 and No. 4 reactors, according to Hikaru Kuroda, a nuclear facility maintenance official at the company. “Even as we have sealed these trenches, there is still the risk of radioactive water leaking into the sea,” he said to reporters after a media conference yesterday. The contaminated water is a “massive problem,” Tetsuo Iguchi, a specialist in isotope analysis and radiation detection at Nagoya University, said in a phone interview on May 27. Tepco has to ensure the contaminated water doesn’t get into the soil, Iguchi said. The rate of increase in water level quickened because of three days of rain from typhoon Songda that weakened as it swept pass Japan earlier this week. Namie, a town near the Fukushima Dai-Ichi station, had 112 millimeters of rain on May 30, according to the Japan Meteorological Agency. Japan is regularly buffeted by typhoons and tropical storms during the northwestern Pacific cyclone season, adding another risk to containing the radiated water at the Fukushima station.
  
• Oil Drops a Second Day as Global Manufacturing Slows; U.S. Supplies Rise. Oil declined for a second day in New York after reports showed U.S. crude supplies rose, companies added fewer jobs than forecast and global manufacturing slowed, stoking speculation fuel demand may falter. Futures fell as much as 0.7 percent after the biggest drop in three weeks yesterday. Crude stockpiles climbed the most in more than a month, according to the American Petroleum Institute. Employment rose by 38,000 in May, the smallest gain since September, ADP Employer Services said. The industry-funded American Petroleum Institute said U.S. crude supplies rose 3.5 million barrels last week to 371.6 million. Gasoline inventories climbed 1.5 million barrels to 212.7 million, the American Petroleum Institute said. “The American Petroleum Institute crude inventory data looked negative, with a surprising rise in crude and gasoline stockpiles,” Pervan said. If Energy Department data “confirms today’s bearish numbers, prices could remain under pressure.” A purchasing managers’ index for China showed the slowest expansionary pace in nine months, while the equivalent measure for the euro area fell to a seven-month low. Russia’s index signaled “near stagnation,” and reports from Poland to Hungary also showed a loss of manufacturing momentum.
• Copper, Nickel Drop as Weaker Data Drive Speculation Recovery May Falter. Copper, nickel and aluminum declined in London for a second straight day on mounting concern that the global economic recovery may be faltering as manufacturing slows from China to the U.S. Three-month copper on the London Metal Exchange fell as much as 0.7 percent to $9,035 a metric ton, and was at $9,050 at 10:54 a.m. in Singapore. Nickel dropped as much as 1.3 percent to $22,950 per ton and aluminum lost as much as 1.4 percent to $2,630 per ton while tin, lead and zinc also retreated. “If you knock out employment gains, you really take back this idea that we’ve entered a sustainable recovery,” James Paulsen, chief investment strategist at Wells Capital Management, said in a Bloomberg Television interview. “If we’re no longer in a sustainable recovery, then investors get much more anxious.”
• Acer Tumbles After Audit Finds Abnormalities. Acer Inc. (2353), the world’s second-largest maker of laptops, tumbled by the 7 percent daily limit in Taipei trading after the company said an audit found abnormalities in its inventory and account receivables.
• Indian Equities to Trail Emerging Markets. Indian stocks will continue to lag behind emerging-market equities as rising borrowing costs and inflation squeeze profits, Morgan Stanley said. Overseas investors may continue to remain net sellers of Indian equities this year, Jonathan Garner, the investment bank’s chief Asian and emerging-market equity strategist, told reporters in Mumbai yesterday. The strategist reduced his recommendation on Indian equities to “underweight” from “equal weight” in March. The Bombay Stock Exchange Sensitive Index has fallen 10 percent this year as the Reserve Bank of India boosted interest rates to curb price increases.

Wall Street Journal:

• Delta(DAL) Probed on Union Drive. The National Mediation Board said Wednesday it will conduct a full-blown investigation into allegations by a flight attendants union that Delta Air Lines Inc. interfered in last year's fractious organizing drive at the world's second-largest airline by traffic. The investigation is expected to shine a spotlight on labor relations at the Atlanta-based carrier, which has denied interfering with the hotly contested union votes in which its workers rejected union representation.
• SEC Weighing Whether to Accept Hedgies' Invite. In January, a hedge-fund industry group asked SEC Enforcement Chief Robert Khuzami to address its members in a special forum on insider trading, a topic of renewed interest among financial regulators. Four months later, the SEC is still weighing whether Khuzami should accept the offer, a commission spokesman said today.
• Big Banks Cash In on Commodities. Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks' profits. A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter, according to Coalition, a firm that analyzes the performance of investment banks.
• Auto Bailout Cost $14 Billion. The White House said Wednesday that taxpayers could lose roughly $14 billion of the money spent on auto industry bailouts, despite the industry's recent recovery.
• The Economy is Flying Without Instruments Because of the White House's Policy Choices.
  

CNBC:

• China Land Price Fall Threatens Local Finances. If recent land auctions across China are anything to go by, then Beijing’s efforts to cool the country’s sizzling residential property market are finally beginning to work after a year of moral suasion and threats to local governments, banks and developers. For some, including China’s cash-strapped local authorities, they may be working too well. The average transaction price for land sales across the country fell 32 percent in April from a month earlier and has dropped 51 percent since the start of the year, according to government data published by Credit Suisse. In some cases, local government land auctions have failed as bids fell short of the minimum level required. For local governments with stretched finances that rely on land sales for the bulk of their revenues, the tumble in land prices could spell disaster. Furthermore, their vulnerability underscores the extent to which China relies on property as a source both of growth and of revenue to finance its sparkling infrastructure. From nothing 10 years ago, the contribution of land sales to local government revenues has soared, and last year total land transfer revenue nearly doubled from 2009 to about Rmb3,000 billion ($464 billion), according to CEIC, the data provider. That amounts to more than 70 percent of total local government revenues, according to data from HSBC. This year, by contrast, analysts at HSBC expect the figure to be less than Rmb2,000 billion. Following tax reforms in the 1990s, local governments receive only 46 percent of all tax receipts, with most going to Beijing. But at the same time, they account for 77 percent of public spending and their responsibilities are growing, according to research from the U.S.-based Lincoln Institute of Land Policy. Now that land sales are being discouraged as a source of finance, Beijing may have to rework all public finances and come up with another formula for paying for infrastructure and the social safety net that the country so desperately needs. “Local officials are all complaining about the restrictions. If land sales stop completely, debt service may become a problem,” says Helen Qiao, chief China economist for Goldman Sachs in Beijing. “There is a lot of debate about who will get into trouble first.”
• Fears of Slowdown Send 10-Year Yield Below 3%.
  

Business Insider:

• Hugh Hendry Letter! Why He's Super-Bearish on Europe, And A Specific Commodity Company. In his April letter to investors, Hendry, who manages the hedge fund Eclectica and is hugely bearish on the European economy, goes into detail about latest short and why he's not worried about inflation.
• Why China's 2-3 Trillion Yuan Local Government Bailout May Only Be The Beginning.
• What The US Can Learn From The Eurozone Mess.
  

Zero Hedge:

• Consumer Confidence Is Now Lower Than During All Recent Financial Crises and Tragedies.(graph)

NY Times:

• SAC Capital Said to Face Insider Trading Inquiry. The Securities and Exchange Commission is investigating whether trades in health care stocks by the hedge fund SAC Capital Advisors as recently as last year were made using inside information, a person briefed on the matter said Wednesday.

San Jose Mercury News:

• Google(GOOG) Gmail Accounts Hacked From China. Google (GOOG) disclosed Wednesday that hundreds of Gmail accounts, including those of senior U.S. officials and Chinese political activists, were targeted in a concerted hacking campaign originating from Jinan, China. Unlike a series of cyber attacks from China last year, Google said the goal this time was not its own central systems, but the individual accounts of users of its e-mail service. The attacks, which Google said also targeted government officials in South Korea and other Asian nations, military personnel and journalists, were likely the result of "phishing" attempts, in which the attacker dupes users into sharing passwords. There were no indications Wednesday that the latest round of attacks would prompt any change in Google's operations in China. Nor was there evidence of Chinese government involvement, although some analysts speculated Chinese officials could be indirectly involved.

Real Clear Politics:

• Boneheaded Stimulus Never Works by Larry Kudlow. We're learning that the Fed's QE2 has actually done more harm than good. All that money-printing stimulus worked to depreciate the dollar and jack-up commodity prices, especially oil and gasoline, but also food. So both companies and consumers have been punished. Some demand-side boneheads on Wall Street want the Fed to move to QE3, allegedly to fight a stalling economy. But if the central bank prints another $600 billion or so, all that will do is sink the greenback another 10 percent and drive oil and gasoline prices higher and higher. And that, in turn, will slow business and consumers even more.

Politico:

• Rep. Anthony Weiner 'can't say with certitude' photo isn't him.

Reuters:

• Outflows From U.S. Equity Funds Accelerate - ICI.

Xinhua:

• The number of Chinese local government financing vehicles increased more than 25% last year from 2008 to more than 10,000 units, citing a central bank report. Borrowing by the financing vehicles accounted for as much as 30% of banks' outstanding yuan-denominated loans.
• China's Xinjiang region has raised the minimum wage by 20% on rising living costs and labor shortage concerns, citing the region's human resources and social security bureau.
  

Shanghai Securities News:

• Chinese regulators have suspended property businesses at 10 domestic trust companies, citing a person familiar with the situation. The trust companies involved have large property trust businesses. Other trust firms were told to limit the size of their property businesses. Property companies have been borrowing funds from trust companies as banks tighten lending.
  

Securities Times:

• China's property market curbs including home purchase limits and a property tax trials are long-term policies, citing Qin Hong, deputy director of the Ministry of Housing and Urban-Rural Development's policy research center.

21st Century Business Herald:

• China's passenger car sales excluding minivans, dropped 1% in May from a year earlier to 850,000 units, citing the country's Passenger Car Association. Sales fell 11% last month from April, citing the association.

China Daily:

• Iran, Pakistan and India will start talks to become full members of the Shanghai Cooperation Organization following the expected passing of a memorandum at the group's summit in June, citing Muratbek Sansyzbayevich Imanaliev, the organization's secretary-general.
• Expectations for yuan gains by non-resident holders of the Chinese currency may result in more problems for China and reverse the success of the yuan's internationalization, Yu Yongding, a former Chinese central bank adviser, wrote in a commentary.
  

China Securities Journal:

• China's economic growth may slow to about 9% this year from 10.3% last year, China Securities Journal wrote in an editorial today. Rising pork, egg and seafood prices have stoked inflation in May and June and may prompt the central bank to raise interest rates, according to the newspaper.

International Oil Daily:

• OPEC may boost oil supply by as much as 1.5 million barrels a day to offset the loss of Libyan production. OPEC will discuss an increase of 500,000 to 1.5 million barrels a day to add to the estimated 29 million its 12 member currently produce. The group is scheduled to meet June 8 in Vienna.

Evening Recommendations
Citigroup:

• Reiterated Buy on (BAC), target $17.

Night Trading

• Asian equity indices are -2.0% to -.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 109.50 +2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 113.25 -.25 basis point.
  
• S&P 500 futures -.05%.
  
• NASDAQ 100 futures -.14%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JOYG)/1.35
• (UNFI)/.48
• (COO)/.93
• (DMND)/.48
• (PAY)/.43
• (ZQK)/.07

Economic Releases
8:30 am EST

• Final 1Q Non-farm Productivity is estimated to rise +1.7% versus a prior estimate of a +1.6% gain.
• Final 1Q Unit Labor Costs are estimated to rise +.8% versus a prior estimate of a +1.0% gain.
• Initial Jobless Claims for last week are estimated to fall to 417K versus 424K the prior week.
• Continuing Claims are estimated to fall to 3675K versus 3690K prior.
  

10:00 am EST

• Factory Orders for April are estimated to fall -1.0% versus a +3.0% gain in March.
  

11:00 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,600,000 barrels versus a +616,000 barrel increase the prior week. Distillate supplies are estimated to fall by -250,000 barrels versus a -2,040,000 decline the prior week. Gasoline inventories are expected to rise by +900,000 barrels versus a +3,794,000 barrel gain the prior week. Natural gas supplies are expected to rise by 93 bcf versus a 105 bcf injection the prior week. Finally, Refinery Utilization is expected to rise by +.5% versus a +3.1% gain the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The ICSC Chain Store Sales for May, RBC Consumer Outlook Index for June, weekly Bloomberg Consumer Comfort Index, CSFB Engineering/Construction Conference, (PRXL) investor day and the (FEIC) investor meeting 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 higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Dropping During Final Hour on Global Growth Worries, Emerging Markets Inflation Fears, Technical Selling, Eurozone Debt Concerns

Broad Market Tone:

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

Equity Investor Angst:

• VIX 17.54 +13.72%
  
• ISE Sentiment Index 83.0 +3.75%
  
• Total Put/Call 1.14 +46.15%
  
• NYSE Arms 3.07 +297.03%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 90.65 +86%
  
• European Financial Sector CDS Index 109.92 -3.02%
  
• Western Europe Sovereign Debt CDS Index 196.92 +1.05%
  
• Emerging Market CDS Index 216.89 +2.34%
  
• 2-Year Swap Spread 19.0 unch.
  
• TED Spread 21.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .04% -1 bp
  
• Yield Curve 252.0 -6 bps
  
• China Import Iron Ore Spot $168.80/Metric Tonne -.59%
  
• Citi US Economic Surprise Index -91.30 -19.9 points
  
• 10-Year TIPS Spread 2.21% -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -150 open in Japan
• DAX Futures: Indicating -51 open in Germany

Portfolio:

• Lower: On losses in my Tech, Medical, Retail and Biotech sector longs
  
• Disclosed Trades: Added (IWM)/(QQQ) hedges and added to my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 trades back below its 50-day moving average to session lows on global growth concerns and emerging market inflation fears. On the positive side, Education and Gaming shares are relatively strong. Small-cap shares are outperforming again. Oil is falling -2.3% and the UBS-Bloomberg Ag Spot Index is falling -.62%. Weekly retail sales rose +3.9% last week versus a +4.0% gain the prior week and are down from a +5.1% gain the first week of May. On the negative side, Airlines, Road & Rail, REIT, Homebuilding, Construction, I-Banking, Banking, Networking, Paper, Steel, Oil Service, Energy, Alt Energy and Coal shares are under significant pressure, falling more than -2.75%. Small-cap and cyclical shares are underperforming. (XLF)/(IYR) have been very heavy throughout the day. Copper is falling -1.7%. The US price for a gallon of gas is unch. today at $3.78/gallon. It is up .64/gallon in less than 4 months. The 10-year yield is still falling too much too quickly, declining another -11 bps to 2.94%. The Greece sovereign cds is rising +2.16% to 1,451.09 bps, the Portugal sovereign cds is rising +1.6% to 690.36 bps and the Emerging Markets Sovereign CDS Index is soaring +10.04% to 175.37 bps. QE2 was overall a disaster, in my opinion and has directly contributed to the recent global economic slowdown. While any QE3 may temporarily boost stocks and commodities, it would likely lead to another serious global recession. The global economy is too fragile to sustain food/energy prices much above current levels. I cautioned a couple of months ago that global growth would likely slow much more than economists expected. Many are now calling for a snapback in growth over the coming months. While growth will likely improve modestly from current levels, a "snapback" is unlikely. While global growth has decelerated meaningfully, equity earnings estimates have continued to rise, which could lead to a surge in negative pre-announcements during the upcoming earnings season. A number of market-leading growth stocks are holding up well today. High-quality S&P 500 stocks are now the cheapest versus low-quality S&P stocks since 1997. Investors should begin to pay a higher premium for growth as the global economy decelerates. I expect US stocks to trade mixed-to-lower into the close from current levels on global growth worries, eurozone debt concerns, emerging markets inflation fears, profit-taking, technical selling and more shorting.

Today's Headlines

Bloomberg:

• ADP: U.S. Added Fewer Workers in May. Companies in the U.S. added fewer workers than forecast in May, a sign that job growth is struggling to gain momentum, data from a private report based on payrolls showed today. Employment increased by 38,000 last month, the smallest increase since September, from a revised 177,000 in April, according to figures from ADP Employer Services. The median estimate in the Bloomberg News survey called for a 175,000 advance for May. Such gains in employment are insufficient to help the world’s largest economy accelerate after a surge in food and fuel costs earlier this year.
  
• Factory Growth Slows in Europe, US. Manufacturing growth from China to the euro region and the U.S. slowed in May, adding to signs that momentum is weakening in a global economy facing headwinds from rising commodity costs and regional shocks. A purchasing managers’ index for China showed the slowest pace of expansion in nine months, while the equivalent measure for the euro area fell to a seven-month low. The U.S. gauge of factory growth was at its weakest in a year, Russia’s index signaled “near stagnation,” and reports from Poland to Hungary also showed a loss of manufacturing momentum. The synchronized drop in global factory indicators is adding to evidence that the world’s economy is struggling to withstand the combination of rising oil prices, the aftermath of Japan’s earthquake and Europe’s sovereign-debt crisis.
• Job Cuts Announced in U.S. in May Fell 4.3% From Year Ago, Challenger Says. Employers in the U.S. announced fewer job cuts in May than a year earlier, signaling the labor market is improving. Planned firings dropped 4.3 percent to 37,135 last month from May 2010, according to figures released today by Chicago- based Challenger, Gray & Christmas Inc. Government and nonprofit agencies had the most cutbacks. Announced job reductions in the first five months of 2011 were down 21 percent from the year-earlier period, consistent with other data that indicate the economic expansion is prompting companies to retain staff.
• EU May Sweeten Greek Debt Extension. European officials preparing Greece’s second bailout in two years may offer bondholders incentives to roll over maturing debt without triggering a credit-rating downgrade that would roil Europe’s banking system, two people with knowledge of the talks said. Investors may be given preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, said the people, who declined to be identified because the talks are in progress.
• QE3 Would Be 'Excessively Bearish': Belski. Stocks would suffer after an initial jump should the Federal Reserve decide to extend economic stimulus beyond the June expiration of its current quantitative easing program, Oppenheimer & Co.’s Brian Belski said. “We become excessively bearish if the Fed goes to QE3,” Belski said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “We do not want to see QE3,” the New York-based chief investment strategist said.
• Analyst: Goldman(GS) 'Too Big' to Face Prosecution. Goldman Sachs Group Inc. (GS) won’t face criminal prosecution related to sales of mortgage-linked securities because such a move could threaten the U.S. financial system, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co. The U.S. Department of Justice, which is reviewing a Senate subcommittee report that alleged Goldman Sachs misled clients before the financial crisis, will avoid jeopardizing the fifth- largest U.S. bank by assets because it’s viewed as “too big to fail,” Hintz wrote in note to clients today. “If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department,” Hintz wrote. “In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred-prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge.”
• Twitter Use Climbs to 13% of U.S. Adults Online. Twitter Inc., the social-networking site that lets people share 140-character messages, is now used by 13 percent of U.S. adults online, up from 8 percent in November, as more older Americans embrace the service. Among Twitter users who own cell phones, 54 percent have used the mobile devices to access the social-media service, according to a report today by the Pew Research Center. Additionally, Twitter use has more than doubled since late 2010 among people ages 25 to 34, to 19 percent from 9 percent, and increased among adults ages 35 to 44, to 14 percent from 8 percent. Usage for those ages 55 to 64 doubled to 8 percent.
• GM(GM), Ford(F) Sales Fall as Higher Gas Prices Hit Buyers. General Motors Co. (GM) and Ford Motor Co. (F) reported U.S. sales in May that fell from a year earlier and trailed analysts’ estimates as higher gasoline prices and smaller discount offers deterred purchases. GM deliveries dropped 1.2 percent to 221,192 vehicles, the Detroit-based automaker said today in a statement. The average estimate of three analysts was for a 1.5 percent increase. Ford light-vehicle deliveries fell 2.6 percent to 191,529, compared with five analysts’ average estimate for a 0.5 percent decline. Nissan Motor Co.’s U.S. sales also trailed analysts’ estimates. Gasoline that has exceeded $3.50 a gallon since early March led some buyers to defer purchases, and the industry reduced sales incentives in May, said Don Johnson, GM’s vice president of U.S. sales.

Wall Street Journal:

• Schwab's(SCHW) Bold Bet on ETFs. Jim McCool, Charles Schwab Corp.'s executive vice president of institutional business, made waves at an asset-management conference in March when he announced that the brokerage firm soon would offer 401(k) retirement plans stuffed solely with exchange-traded mutual funds—and let investors trade them without charge. "You could tell the rest of the room was nervous about it," says Mike Alfred, co-founder and chief executive of BrightScope Inc., an independent rater of 401(k) plans, who heard the comments. "The idea is disruptive."
• Europe's Stress Tests to Be Delayed. The results of Europe's latest round of bank "stress tests" will be delayed until July thanks to haggling between European regulators, the banks and their national supervisors over whether the banks submitted overly optimistic data, according to people familiar with the matter. The European Banking Authority had planned to release the test results later this month.
• UnitedHealth CEO: Assessing Options On Medco Relationship. UnitedHealth Group Inc. (UNH), one of the largest U.S. health insurers, is weighing the future of its relationship with Medco Health Solutions Inc. (MHS) and whether to bring in-house some of the drug-benefit business that Medco handles for its health-plan members.
• GOP: Obama Rebuffs Call for Deficit Plan. Republican leaders said they told President Barack Obama at a White House meeting Wednesday that he needs to offer up a detailed plan to reduce the federal budget deficit, a call they said Obama rejected.
  

CNBC.com:

• LightSquared Near $2 Billion a Year Sprint Deal. Sprint Nextel Corp is close to completing a $2 billion-a-year network sharing agreement with hedge fund billionaire Phil Falcone's LightSquared telecommunications venture, sources familiar with the matter said on Wednesday.
• El-Erian: Why Fed Is Unlikely to Have Third Round of Easing.
  

Business Insider:

• NYT Publishes Huge Goldman(GS) Story, And Everyone is Obsessed With Mystery Laptop That Broke It Wide Open.
• Nobel Prize Winner Explains How America's Economy Is Becoming... EUROPEAN! Nobel Prize winning economist Robert Lucas believes the U.S. is struggling to grow with any strength because we've chosen a path of European style reforms (via the FT). Lucas believes that leaders at the Fed made the correct decision when confronting the recession head on, providing liquidity to the market and preventing the sequel to the Great Depression. But he believes that since then, we've strayed, and are now looking at slower than pre-recession growth rates. The reason: fiscal policy that threatens higher taxes on the rich, and promises higher spending on programs like healthcare. Essentially, Lucas says we're turning into Europe, and should expect similar weak growth rates as a result.
• The ENTIRE Global Economy In One Gigantic Chart.
  
• 5 Warning Signs That A Chinese Stock May Be A Fraud.
  

Zero Hedge:

• John Taylor Says Fed Funds Rate Should Be 1.0%, Sees No Rationale for Further QE.

Rasmussen Reports:

• 26% Say U.S. Heading in Right Direction. That's down three points from 29%, the finding for the previous three weeks.

Reuters:

• EIB Halts Glencore Lending on Governance Concerns. The European Investment Bank has frozen all new loans to commodities trader Glencore and its subsidiaries, it said in a statement on Wednesday, citing "serious concerns" over the group's corporate governance.

Sina.com:

• China will investigate local-government debt in the June-to-September quarter, and isn't yet ready to start restructuring action, citing Wu Xiaoling, vice director of the National People's Congress finance and economy committee. The government can't complete the program in three months time Wu said. She was responding to a Reuters report yesterday that China will shift as much as $463 billion of debt off local governments by September.

International Oil Daily:

• Saudi Arabia is preparing to raise oil output by 500,000 barrels a day this month, citing industry sources. The country's production would reach about 9.5 million barrels a day in June.