Stocks Higher into Final Hour on Euro Bounce, Global Central Bank Stimulus Hopes, Short-Covering, Bargain-Hunting

Broad Market Tone:

• Advance/Decline Line: Higher
  
• Sector Performance: Almost Every Sector Rising
  
• Volume: Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 22.79 -3.27%
  
• ISE Sentiment Index 91.0 +2.25%
  
• Total Put/Call 1.16 +23.40%
  
• NYSE Arms .67 -75.48%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 125.02 +.36%
  
• European Financial Sector CDS Index 292.73 +2.15%
  
• Western Europe Sovereign Debt CDS Index 323.62 +.56%
  
• Emerging Market CDS Index 304.47 -2.66%
  
• 2-Year Swap Spread 30.5 +.5 basis point
  
• TED Spread 37.75 -1.5 basis points
  
• 3-Month EUR/USD Cross-Currency Basis Swap -56.0 -3.75 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .09% +1 basis point
  
• Yield Curve 137.0 +6 basis points
  
• China Import Iron Ore Spot $133.10/Metric Tonne +.60%
  
• Citi US Economic Surprise Index -48.40 +1.0 point
  
• 10-Year TIPS Spread 2.14 +2 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating a +9 open in Japan
• DAX Futures: Indicating +3 open in Germany
  

Portfolio:

• Higher: On gains in my tech, retail, biotech and medical sector longs
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, covered some of my (EEM) short, added to my (TFM) long, then added some index hedges back
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is bullish as the S&P 500 trades near session highs despite rising Eurozone debt angst, rising energy prices and rising global growth fears. On the positive side, Alt Energy, Oil Tanker, Semi, Disk Drive and Road & Rail shares are especially strong, rising more than +1.25%. Small-cap and cyclical shares are outperforming. The UBS-Bloomberg Ag Spot Index is falling -.78%. The 10Y Yld is bouncing +7 bps to 1.66%. Major European indices were mostly higher, boosted by a +.8% gain in the UK. However, Italy fell another -.7% and is now down -14.0% ytd. The Bloomberg European Bank/Financial Services Index rose +.17%. The Brazil sovereign cds is falling -3.0%. On the negative side, Coal, Utility, Internet, Restaurant and Education shares are lower-to-flat on the day. Lumber is falling -.9%, Oil is rising +2.45% and Gold is gaining +.6%. Major Asian indices were mostly lower, led down by a -1.0% decline in Japan. The Germany sovereign cds is rising +1.2% to 109.67 bps(+6.2% in 5 days to the highest since early Jan.). The France sovereign cds is gaining +1.45% to 216.70 bps, the Spain sovereign cds is rising 2.3% to 608.50 bps, the Italy sovereign cds is gaining +2.2% to 564.65 bps and the Portugal sovereign cds is rising +1.8% to 1,074.15 bps. The Italian/German 10Y Yld Spread is rising +.4% to 474.69 bps. Moreover, the European Investment Grade CDS Index is gaining +2.2% to 183.27 bps. Weekly retail sales rose +2.5% this week versus a +3.1% gain the prior week, despite falling gas prices. US Rail Traffic continues to soften. The Philly Fed ADS Real-Time Business Conditions Index continues to trend lower from its late-December peak. Moreover, the Citi US Economic Surprise Index has fallen back to early-Sept. levels. Lumber is -5.0% since its Dec. 29th high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite expectations for a strong spring home selling season. The Baltic Dry Index has plunged around -60.0% from its Oct. 14th high and is now down around -50.0% ytd. China Iron Ore Spot has plunged -26.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +157.0% ytd. The CRB Commodities Index is now technically in a bear market, having declined -26.4% since May 2nd of last year. Overall, recent credit gauge deterioration remains a big worry as most key sovereign cds remain technically strong. The euro currency continues to trade poorly despite today's mild reversal higher. Oil is bouncing, but also trades poorly given global central bank stimulus hopes and recent stock gains. As well, the 10Y continues to trade too well despite mild weakness today. US stocks are likely rallying today on rising Fed stimulus hopes. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. While European officials' kick-the-can smoke-n-mirrors short-sighted "solutions" to the debt crisis may temporarily placate investors, economies in the region are likely accelerating their contractions right now. As well, the European debt crisis is really beginning to bite emerging market economies now, which will also further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. As well, the "US fiscal cliff "will become more and more of a focus for investors as the year progresses. I still believe there is too much uncertainty on the horizon to conclude a durable stock market low is in place. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices, a US "fiscal cliff" solution and higher-quality stock market leadership. I expect US stocks to trade mixed-to-higher into the close from current levels on a bounce in the euro, short-covering, global central bank stimulus hopes, tech/financial sector strength and bargain-hunting.

Today's Headlines

Bloomberg:

• Spanish Bond Drop Sends Yields to Record on Rajoy Budget Concern. Spain’s bond yields rose to a record as Fitch Ratings’s prediction that Prime Minister Mariano Rajoy will miss budget-deficit targets stoked concern a 100 billion- euro ($124 billion) lifeline for banks won’t be enough to stabilize the economy. The yield on 10-year government debt rose for a third day, gaining 33 basis points to 6.83 percent. The spread over German bunds widened 23 basis points to 542 basis points as of 4:06 p.m. in Madrid. Rajoy has built his strategy for avoiding a full-blown sovereign bailout around meeting deficit goals that economists at Goldman Sachs Group Inc. (GS) and Societe Generale SA (GLE) said can’t be achieved. Investors’ concerns are straining Europe’s defenses before an election in Greece that may determine whether the country stays in the euro area. “An economy in recession like Spain can’t cut its deficit by 6 percentage points, it’s impossible,” said Jose Carlos Diez, chief economist at Madrid-based brokerage Intermoney SA. “Does Brussels want us to change the law of gravity as well?” Greeks will vote June 17 on whether to back Alexis Tsipras, who wants to scrap the austerity plan dictated by the EU and the International Monetary Fund, as a condition of its bailout. New Democracy leader Antonis Samaras, who supports the bailout conditions, said backing Tsipras will see Greece effectively thrown out of the euro. There is a 50.7 percent chance that a euro member leaves the single currency area by the end of next year, according to bets on Intrade.com. That compares with 55 percent a week ago.
• Europe's AAA Members at Risk as Crisis Worsens, Fitch Says. Sovereign credit ratings inside the euro area, including those of AAA nations, risk downgrades as policy makers fail to demonstrate they can end the region's debt crisis, according to Fitch Ratings. Ratings in the currency bloc are under "strong downward pressure," Fitch Managing Director Ed Parker said at an event in Oslo today. If there's "no light at the end of the tunnel soon," the risk of a breakup of the 17-member single currency bloc will rise, he said. Policy makers are likely to continue "muddling through" and the pattern of arriving at solutions at the "last minute" is raising the cost of managing the crisis, he said.
• Fitch Downgrades 18 Spanish Banks, Cites Concern About Bad Loans. Fitch Ratings, citing the potential of loans at some lenders to deteriorate, cut its credit ratings on 18 Spanish banks, including Bankia SA (BKIA), after its downgrade of Spain last week. Bankia’s long-term issuer default rating was cut to BBB from BBB+ with a negative outlook, the ratings company said in an e-mailed statement today. CaixaBank (CABK) SA was reduced to BBB from A-, Banco Sabadell SA to BBB from BBB+ and Banco Popular Espanol SA (POP) to BBB- from BBB, Fitch said. Spain on June 9 sought a European bailout of as much as 100 billion euros ($125 billion) to support ailing lenders, the fourth euro member to seek a rescue since the debt crisis started almost three years ago. Fitch, which estimates the capital needs of Spanish banks at as much as 60 billion euros under a “base case” scenario, said it had considered its sovereign downgrade for Spain on June 7 and also the potential for loans of certain banks to worsen in taking today’s actions on the lenders.
• German Greens Set Condition For Fiscal Pact, Die Welt Reports. Germany’s opposition Green Party won’t support a fiscal pact on euro-area budgetary discipline without a debt repayment fund, Die Welt reported, citing an interview with Lisa Paus, a member of parliament who has been involved in negotiations. The fiscal pact stipulates only that everyone should save and doesn’t determine how debt will be cut, the newspaper cited Paus as saying.
• Bundesbank's Dombret Says ECB Has Done Its Job To Solve Crisis. Bundesbank board member Andreas Dombret said the European Central Bank has done its job to buy time for governments to fix weaknesses in the euro’s foundations. “To those who ask what else the Eurosystem can do, I say that we have done our part, now it’s up to the political leaders to deliver on the fiscal and structural policy side and decide on governance issues,” Dombret said in an interview in London yesterday. “This is why it can’t be a short-term fix.”
• Greeks Continue to Withdraw Deposits in June, Kathimerini Says. Greece’s banking system has continued to hemorrhage deposits this month, amid uncertainty over the outcome of elections on June 17, Kathimerini reported, without saying how it got the information. Many people are putting money in shares of mutual funds denominated in dollars because of the bureaucratic difficulty of taking money out of Greece, or are keeping cash at home, the newspaper said. Deposits are leaving the banking system at a rate of 100 million to 500 million euros ($125 million to $625 million) a day, Kathimerini said, without specifying over how long a period that rate of outflow has continued.
• UK Manufacturing Output Declined More Than Forecast. U.K. manufacturing fell more than economists forecast in April, pointing to continued weakness in the economy at the start of the second quarter. Factory output dropped 0.7 percent from March, led by pharmaceuticals, aircraft maintenance and food and drink production, the Office for National Statistics said today in London. The median forecast of 30 economists in a Bloomberg News survey was for a decline of 0.1 percent.
• Gold Climbs for Third Straight Session on Stimulus Bets. Gold gained for the third straight session in New York on speculation that policy makers will announce additional stimulus measures to boost growth, increasing demand for bullion as a hedge against inflation. Gold futures for August delivery advanced 0.5 percent to $1,604.60 an ounce at 10 a.m. on the Comex in New York. Prices gained 0.6 percent in the previous two sessions.
• Blankfein Says U.S. Economy in ‘Tough Position’ Next Few Months. The U.S. economy will continue to struggle for the next few months as some business owners wait for the national election before making investments, Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said. “I think we’re in a tough position for the next three or four or five months,” Blankfein said today in an interview on MSNBC. “There’s a lot of uncertainty.” Business owners aren’t sure what the results of the U.S. election will be or how it will affect their taxes, he said. A common view is that “it’s going to be very consequential so I think I’ll wait -- I think there’s a lot of that going on,” Blankfein said.
• House of Dimon Marred by CEO Complacency Over Unit's Risk.
• Michael Kors(KORS) Fiscal 4Q Profit Triples, Shares Soar. Michael Kors Holdings Ltd. said Tuesday that its fiscal fourth-quarter net income more than tripled as the company opened new stores and demand grew for its luxury clothing and accessories. The results beat Wall Street expectations and the company also issued better-than-expected predictions for the current quarter and year, sending its shares up 14 percent in premarket trading.
• Postal Service to 'Look Like Greece' Without Aid, Donahoe Says. The U.S. Postal Service “will look like Greece” if Congress fails to help it cut costs, U.S. Postmaster General Patrick Donahoe said. Donahoe, speaking today at the PostalVision 2020 conference in Washington, said the service’s annual expenses will rise to $81 billion by 2016 without congressional action to allow cuts, including reducing a requirement to pay in advance for health benefits for future retirees. “If we don’t do something about the costs of this organization, we will look like Greece,” he said. The Postal Service, which lost $3.2 billion in the quarter ended March 31, is seeking congressional permission to run its own health benefits plans and labor agreements to relax work rules and use more part-time employees. About 78 percent of the service’s expenses are labor costs, including the 20 percent of the total that pays for future retiree health-care expenses and other health-care benefits, Donahoe said.

Wall Street Journal:

• World Bank Warns of Years of Volatility. The global economy will face years of volatility as Europe's debt turmoil weighs on investor sentiment and growth prospects, the World Bank warned Tuesday in its latest economic update.
  
• FDIC's Hoenig, Norton Concerned About Bank Capital Rules. Two new members of the Federal Deposit Insurance Corp.’s board said Tuesday they have some concerns about whether new bank-capital rules will do enough to limit risk in the financial system.
• Thousands of Russians Rally Against Putin. Tens of thousands of Russians marched in Moscow Tuesday to demand that President Vladimir Putin step down, defying a crackdown on opposition leaders a day earlier and heavy new fines for violations at protests.
• French Economy a Problem for Hollande. The French government is in the process of revising its economic growth forecasts for next year after a weak start to 2012, underscoring the challenges for President François Hollande as he seeks to control debt and deficit levels while delivering on a promise to foster growth domestically and in Europe.

Fox News:

• Starbucks(SBUX): Economic Issues in Europe Hurt Sales, Turnaround Efforts. Starbucks Corp. (SBUX) said its business in Europe is struggling "more than expected" in the current quarter, as broader economic challenges in Europe are hurting the coffee giant while it is attempting to orchestrate a turnaround in the region. "We continue to struggle from macro challenges in Europe. This was true in the first quarter, it was profoundly true in the second quarter, and it's even more than expected in the third quarter," Chief Financial Officer Troy Alstead said at an investor presentation Tuesday. "The third quarter isn't over yet, but it's clear we will have increased pressure on our earnings from [the Europe, Middle East and Asia, or EMEA division] in the third quarter."

CNBC.com:

• India Output Growth Flat, Adds to BRIC Straggler's Gloom. India's industrial output growth flatlined in April, piling pressure on policymakers to cut rates and revive the economic fortunes of the BRIC nation that Standard & Poor's warned could be downgraded to junk status because of political inaction. Tuesday's data showed industrial production rose just 0.1 percent in April from a year earlier, lower than a forecast in a Reuters poll of a 1.7 percent increase. That followed a 3.2 percent fall in March, revised figures showed. "The data clearly points to industrial growth being extremely weak, and it is in clear need of monetary as well as fiscal support," said Abheek Barua, chief economist at HDFC Bank in New Delhi. Capital goods, which includes such items as factory machinery, fell 16 percent in April from a year earlier. This key investment indicator has risen only once in the last eight months. Output in the mining sector, another key economic driver, fell 3.1 percent year on year in April, the second consecutive monthly decline.
• Small Business Owners in 'Holding Pattern': Survey. If there is one thing for certain among small business owners, it’s that the amount of uncertainty they are facing has made it difficult for them to make decisions on spending and jobs. That’s evident in the results of the National Federation of Independent Business’ latest Small Business Optimism Index, released Tuesday. While the Index fell by 0.1 points, leaving it basically unchanged from April, the various components tell a tale of business owners unsure of many economic factors which would prompt them to invest in inventory and hiring.
• Euro Zone Capital Flight: Currency Strategists. The euro zone crisis has entered its third phase, that of a flight of capital, and this will push the euro much lower, foreign exchange strategists from Nomura wrote in a market note.
• Mad Dash for Cash Hits Highest Level Since Crisis.

Business Insider:

• Russia is Sending Attack Helicopters to Syria; Will 'Escalate The Conflict Dramatically'.
• Obama Is Doing Stunningly Bad Among African Americans In North Carolina.

Zero Hedge:

• What Does European Credit Know That Stocks Don't? (graph)
• "Due To The Current Market Environment In Europe", Saxo Bank Quadruples CHF Margins From 1% to 4%.
• The US "Budget Surplus" Miracle Is Over: $125 Billion Deficit In May. (graph)
• China Tells U.S. What It Can Do With Its Iran Oil Import Sanctions.
  

24/7 Wall St:

• Hedge Funds Get Large Outflows, Fund Managers Growing More Bearish.

Rasmussen Reports:

• New High: 42% Worried They'll Lose Their Money Due To Bank Failure.
  

Reuters:

• DirecTV(DTV) Could Also Deploy Ad Skip Technology. DirecTV Group, the largest U.S. satellite TV operator, could deploy technology that would enable its millions of subscribers to automatically skip television advertising, its top executive said on Monday.
• NetApp(NTAP) Sticks to Pessimistic View of Economy. Data storage company NetApp Inc said the economic view in Europe was increasingly uncertain, justifying the pessimistic outlook it gave at the time of its last quarterly results. Chief Executive Tom Georgens said Europe, a major market for the U.S. company, was stronger than expected for most of the year but worries about the debt situation in the south of the continent were starting to spread to Germany, Britain and France. "Clearly we are concerned about the trajectory of where we are heading," he said at the Reuters Media and Tech summit. "Not only the trajectory is a concern but there is a wide range of potential outcomes."
• Managed Money Traders Set to Switch View on Corn: Maguire. Managed money traders have whittled their net exposure to the corn market back to its lowest level in close to two years lately as a near-record-large corn planted area total weighed on market sentiment as the 2012 growing season got under way. Souring economic confidence stemming from economic and political disarray in Europe also sparked a broad shedding of risk by large speculators in recent weeks.
• China Ready to Impound EU Planes in CO2 Dispute. China will take swift counter-measures that could include impounding European aircraft if the EU punishes Chinese airlines for not complying with its scheme to curb carbon emissions, the China Air Transport Association said on Tuesday.
• Greek Radical Leftist Rejects Call for Unity Govt. The leader of Greece's leftist SYRIZA party on Tuesday ruled out forming a government with pro-bailout parties after June 17 elections that could decide the nation's future in the euro zone. Instead, SYRIZA chief Alexis Tsipras said that, if elected, he would lead a government of the left against the painful austerity measures demanded by the European Union and the International Monetary Fund.
• US Gasoline Demand Dips on Weak Economy - Mastercard. Demand dropped 3.5 percent in the week to June 8, compared with year-earlier levels, and was 0.5 percent lower than the previous week, MasterCard said. "This past week was the third in a row of increasing year-over-year declines, even while prices at the pump continued to fall," said John Gamel, gasoline analyst for MasterCard Advisors SpendingPulse.
• Brazil's Tombini Sees Years of Slow Global Growth.
  

Financial Times:

• Banks Seek to Offload Risk on Insurers. Now when and where did that last happen… In Tuesday’s FT, Brooke Masters reported on a rather novel approach that some banks are trying to take in order to reduce their capital requirements. The trick is to reduce the predicted loss that would be experienced if a borrower were to default. This is effectively done by getting an insurer to guarantee the future value of the collateral held as security for the loan.

Telegraph:

• Debt Crisis: Live. Spanish 10-year bond yields jump past 6.8pc, a 13-year high, as German Chancellor Angela Merkel warns that any funds for the country will be tied to reforms of its banking sector.
• EC Preparing Secret Plans for Greek Euro Exit. Legal advice on capital controls, including limits on withdrawals from Greek bank accounts, and emergency border restrictions, has been provided by the European Commission to eurozone governments drawing up plans for Greece to leave the euro.

el Mundo:

• The European Commission is pressuring Spain to delay meeting its deficit target of 3% of gdp for 2013 by one year.
  

Bear Radar

Style Underperformer:

• Large-Cap Growth +.28%

Sector Underperformers:

• 1) Education -2.70% 2) Homebuilders -.43% 3) Restaurants -.05%

Stocks Falling on Unusual Volume:

• FDS, P, GRPN, APOL, RYAAY, LFL, FN, VSAT, AWAY, TFM, VTUS, PRSC, LSTR, PHMD, Z, MAKO, CNC, STJ, HAR, PAY and NAV
  

Stocks With Unusual Put Option Activity:

• 1) SVNT 2) NAV 3) JRCC 4) GNW 5) NSC
  

Stocks With Most Negative News Mentions:

• 1) YPF 2) LSTR 3) NAV 4) PNC 5) BAC
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth +.97%

Sector Outperformers:

• 1) Disk Drives +2.14% 2) Alt Energy +1.98% 3) Oil Tankers +1.95%

Stocks Rising on Unusual Volume:

• SLT, IVN, FSLR, ASNA, URI, SNDK, APL, FNSR, VLO and FIO
  

Stocks With Unusual Call Option Activity:

• 1) ALXA 2) KORS 3) NUAN 4) FNSR 5) AKS
  

Stocks With Most Positive News Mentions:

• 1) BA 2) BX 3) TXN 4) LMT 5) KORS
  

Charts:

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

Tuesday Watch

Evening Headlines
Bloomberg:

• Spain Loan Prompts Bond Selling as Bailout Binds State to Banks. Spanish bond yields surged the most in four months in the first trading after the government in Madrid sought a bailout for its banks. Investors speculated the 100 billion euros ($125 billion) may not be enough. The lifeline from the euro area, aimed at loosening the connection between banks and the state, risks doing the opposite as foreign investors continue to shun the nation’s bonds and Prime Minister Mariano Rajoy’s government grows increasingly dependent on domestic lenders. “This 100 billion will be added to the public finances of Spain so it just reinforces the link between banks and the sovereign,” Olly Burrows, credit analyst at Rabobank International, said in a phone interview from London. “Spain is receiving funds to bail out its banks, which have been buying Spanish debt while everyone else has been getting out.” Spain agreed to take the aid in loans to be added to the public debt burden that rose to 69 percent of gross domestic product last year. The loans, which Economy Minister Luis de Guindos said will carry an interest that’s more favorable than market rates, will be channeled through the country’s bank- rescue fund.
• Pulling Plug on Greece Sells in German Town Opposing Merkel Plan. In the German town of Hassloch, sandwiched between vineyards and farms growing lettuce and asparagus, people have had enough of the debt crisis. “We can’t go on funding the Greeks, they’re beyond help,” Angelika Hoerner, 50, said as she served customers from behind a glass counter of her family’s butcher shop in the town of 21,000 in western Rhineland-Palatinate state. “It’s better to have an end with horror than horror without an end.” While nationwide polls show Germans are swinging against helping their poorer southern euro partner, opinions in Hassloch underscore a warning for Chancellor Angela Merkel as Greeks prepare for a second shot at electing a government on June 17. The town has been used since 1985 by market-research company GfK SE as a miniature Germany to test products ranging from Unilever NV (UNA)’s Dove soap to Ferrero Spa Rondnoir chocolates before they are rolled out across the country.
• Spanish Bailout Shows Europe Still Doesn’t Get It. The challenge of bailing out Spain’s banks is compelling Europe’s leaders to confront a question they had hoped never to contemplate: How to prevent financial and economic malaise from overwhelming the euro area’s fourth- largest economy. So far, their actions suggest they’re sticking with the strategy they pursued in Greece and expecting different results. They’d better think again.
• Goirigolzarri's Aid Demand Helped Push Spain To Bailout. Jose Ignacio Goirigolzarri, the man charged with cleaning up Bankia group, helped set Spain on its course to a banking bailout by asking for 19 billion euros ($23.8 billion) in state aid two weeks after becoming chairman. The demand for aid, made in consultation with the government and the Bank of Spain, revealed the deepening hole in the balance sheet of Bankia, the country’s third-biggest lender, and by extension other parts of the nation’s financial system. “He was the one who has thrown back the curtain in Spain itself and said ‘yes it really is this bad,’” said Simon Maughan, a financial industry strategist at Olivetree Securities Ltd. in London. “It wasn’t his intention to trigger a bailout but it may have been an unintended consequence.”
• Brazil Losing China Lifeline as Exports Slow: Chart of the Day. Brazilian exports to China are on course to have their worst performance in a decade, jeopardizing growth in Latin America's biggest economy, which has become increasingly commodities-dependent. Brazilian shipments to China rose 7.6% in the first four months of 2012 compared with the same period a year ago to $11.9 billion, leaving them on pace to fall short of a 43% increase in 2011. Since 2001, exports to China have grown an average 40% a year. The worst may be yet to come. Exports this year will contract from $44 billion in 2011 as China likely grows at its slowest pace in a decade, sapping demand for South America's raw materials, said Jose Augusto de Castro, vp of Brazil's Foreign Trade Assoc. "If the crisis takes down China, it'll be complete chaos for Brazil," said Castro, adding that he expects iron ore prices to drop further this year.
• S&P Says India May Lose Investment Rating. (video) Slowing economic growth and political roadblocks to policy making are just some of the risk factors to India’s BBB- long-term sovereign credit rating, S&P said in a statement.
• Fed's Lockhart Says Lower Yields Bolster Case for No New Action. Federal Reserve Bank of Atlanta President Dennis Lockhart said falling Treasury yields take pressure off the central bank for further action as policy makers prepare for a meeting next week. Lockhart, in a speech in Chicago, said recent U.S. economic data indicate the recovery may be losing steam, and that policy makers will need to take more steps to stimulate the economy if it becomes clear growth is slowing. "I don't think any of the options should be taken off the table under the current circumstances," Lockhart told reporters after the speech. "But I am not convinced at this moment that the circumstances quite yet call for additional action."
• GM(GM) Directors Undaunted by 33% Stock Slump Praise CEO Akerson. General Motors Co. directors praised Dan Akerson's performance as chief executive officer while saying he must now fix the automaker's European operations and begin grooming a successor.
• Beck Said to Renew Clear Channel Radio Deal for $100 Million. Radio talk-show host Glenn Beck renewed his contract with Clear Channel Communications Inc. in a deal that doubles his pay to $100 million over five years, according to a person with knowledge of the situation.
• Facebook(FB) Audience, Engagement Growth Slowing, ComScore Says. Facebook Inc.'s audience growth in the U.S., along with time spent on the site, is slowing as the world's biggest social network saturates its home market, according to ComScore Inc. The number of visitors rose 5 percent in April from a year earlier, down from a 24 percent surge in the same month of 2011, market researcher ComScore Inc. said in an e-mailed statement today. The average time spent on the site by each vistor climbed 16 percent, less than the 23 percent increase a year earlier.
• U.S. Exempts India, Korea From Iran Oil Sanctions, Not China. The U.S. added seven economies to the list of nations qualifying for an exemption from financial sanctions on Iranian oil imports, penalties intended to pressure Iran's leaders to abandon any nuclear weapons ambitions. India, South Korea, Turkey, South Africa, Malaysia, Sri Lanka and Taiwan will not be penalized by the U.S. for continuing to import oil from Iran over the next six months because they have proven they "have all significantly reduced" the volume of the oil they buy from Iran, Secretary of State Hillary Clinton said in a statement yesterday.
• Citadel, CQS Hire Asia Managers as Small Hedge Funds Buckle. Citadel LLC and CQS (U.K.) LLP are among global hedge funds providing refuge to managers in Asia as smaller firms struggle to raise money.

Wall Street Journal:

• JPMorgan(JPM) Knew of Risks. Some top J.P. Morgan Chase & Co. executives and directors were alerted to risky practices by a team of London-based traders two years before that group's botched bets cost the bank more than $2 billion, according to people familiar with the situation.
  
• Loophole at MF Global Is Headache for Regulators. Most of the senior executives at MF Global Holdings Ltd. weren't registered with commodities regulators, meaning the executives can't be charged with supervision failures related to the firm's collapse. The situation is a headache for regulators as they press ahead with their 7½-month investigation of MF Global. "Failure to supervise" sanctions generally are much easier to prove than allegations of deliberate wrongdoing, according to legal experts uninvolved in the case. In addition, the probe hasn't yet produced smoking guns that show anyone at MF Global knowingly raided the customer funds that went missing in the firm's final days.
• Ethanol's Long Boom Stalls. Fuel-Additive Plants Close as Gasoline Demand Falls, Federal Mandates Are Met.
• Hedges' Assets: $5 Trillion. Funds May Triple Over Five Years, Survey Says; New Offerings to Stoke Growth. The hedge-fund industry may more than double in size during the next five years, to more than $5 trillion in assets, as private fund firms broaden their offerings to compete with traditional money managers, according to a recent Citigroup Inc. survey. The poll of investors, consultants and money managers predicted that hedge funds could lure $2 trillion in new money to investment vehicles long associated with mutual-fund companies and other institutional managers, including "long-only" funds that buy and hold stocks.
• Emails Reveal How the White House Bought Big Pharma. The following emails are among those released by the House Energy and Commerce Committee as part of its investigation into the health-care deal-making between the White House and industry groups. Some of the names were redacted by the committee for privacy reasons. A related editorial is nearby.

MarketWatch:

• SEC probes hit a wall in uncooperative China. Regulators refusing to help U.S. counterparts probe fraud charges. It appears to be dawning on officials at the U.S. Securities and Exchange Commission (SEC) that cooperative, cross-border financial investigations are completely foreign to China.

Business Insider:

• Watch: Apple's(AAPL) Huge WWDC Keynote In 60 Seconds.

Zero Hedge:

• Credit Suisse Explains "The Real Issue", And Why There Is Two Months Tops Until France Is In The Bulls Eye.
• Charting The Simple Reason Why Every 'Bailout' In Europe Will Be Faded.
• At The End Of May NYSE Short Interest Soared To November 2011 Levels, Leading To Epic Short Squeeze. (graph)
  

CNBC:

• US Headed for Europe-Style Fiscal Crisis: Max Baucus. The United States is on a "dangerous path" that could lead to a European-style fiscal crisis, the Senate's top tax legislator warned on Monday, while calling for more tax revenue and ending corporate incentives to shift profits and jobs overseas.
• Why Markets No Longer Rally on European Bailouts.
• El-Erian: Time Running Out for European Credibility. Monday’s disappointing market reception to the bailout package for Spanish banks is a reminder to European policymakers of something that is more than familiar to veteran sovereign crisis managers in emerging countries: The greater the erosion of policymaking credibility, the harder it is to get the private sector to buy into your plans.

NY Times:

• Regulator Releases 'Road Map' on Swaps Overhaul. The Securities and Exchange Commission detailed a plan on Monday to phase in dozens of new rules governing over-the-counter swaps.
• Worry for Italy Quickly Replaces Relief for Spain. Concerns grew on Monday that Italy could be the next victim of Europe’s financial infection, leading nervous investors to sell Italian stocks and bonds and damping euphoria over a weekend deal to bail out Spain’s banks.

LA Times:

• Commerce Secretary John Bryson taking medical leave after crashes. U.S. Commerce Secretary John Bryson will take a medical leave after being involved in two San Gabriel Valley hit-and-run crashes, the White House announced Monday night. “Secretary Bryson informed the White House tonight that he will be taking a medical leave of absence from his position as Commerce secretary as he undergoes tests and evaluations.

Washington Times:

• Obama Donors Get Deal; Depositors Get 'stiffed again'. A billionaire Chicago family that has donated and raised hundreds of thousands of dollars for President Obama got a deal from the federal government to avoid paying all of a $460 million settlement it agreed to in the 2001 failure of a Chicago-area bank it owned, while 1,400 former depositors are still owed more than $10 million in lost savings. And now, 11 years later, the prospect that any of the depositors will get their money back is bleak.

CNN:

• Long-term unemployment crisis rolls on. The national unemployment rate has fallen from its recession highs, but Americans who have been out of work for six months or more are still having trouble finding work. The numbers are staggering. The ranks of the long-term unemployed swelled last month from 5.1 million to 5.4 million, and those individuals now account for 42.8% of the unemployed.

Reuters:

• U.S. money funds still vulnerable-NY Fed blog. U.S. money market mutual funds are still vulnerable to heavy redemptions in times of financial turmoil, which could destabilize the broader banking system, Federal Reserve staff members said in blog post on Monday.
• Texas Instruments(TXN) narrows Q2 financial forecast. Texas Instruments Inc (TXN.O) on Monday narrowed its forecasts for second-quarter earnings and revenue, but kept the midpoints of its target ranges intact as demand for its chips held up, despite global economic uncertainties. The maker of chips for a wide variety of products, including cellphones and industrial equipment, forecast revenue in a range of $3.28 billion to $3.42 billion. It previously estimated revenue of $3.22 billion to $3.48 billion. It now expects earnings per share in a range of 32 cents to 36 cents. Its previous target was 30 cents to 38 cents.

Financial Times:

• Banks eye intangible assets as collateral. Several US banks want to tap the value of the intellectual property holdings of their borrowers as a way of trimming their capital requirements, which are to be made tougher under Basel III rules.

Telegraph:

• This latest euro fix will come apart in less than a month. Another day, another sticking plaster solution from beleaguered eurozone policymakers.
• Spain deal poses more questions than answers. After the fiesta, comes the hangover. Still, the inevitable headaches and handwringing over Spain surprised with the speed of their arrival.
• European airlines could go out of business, warns economist Brian Pearce. European airlines could go out of business because of the continent's economic weakness, the aviation industry's leading economist has warned.

FAZ:

• Financial aid must be restricted to existing mechanisms, has to be precisely limited and must only be granted based on credible obligations by recipient countries, former ECB Chief Economist Otmar Issing wrote. Asking for aid based on "solidarity" ridicules democratic principles and economic reason and would mean some countries could make others pay for permanently living above their means. There is no room in the euro area for countries that demand ever more aid and won't stick to agreed obligations. Germany is right to adhere to EU treaties and should demand the same from others, he said.

ORF TV THEK:

• Austrian Finance Minister Maria Fekter said Italy may require European Union assistance because of the high interest payments on its debt. "Italy has to get itself out of the dilemma of very high deficits and debt, but it could be that because of the high interest that Italy already has to pay in the market for refinancing that it also could come to help payments," Fekter said in an interview. "The size that Italy would need as a state is in a dimension which probably couldn't be managed by the rescue umbrella alone," Fekter said.

couriermail:

• Fitch Ratings gives 'strong indications' it plans to revise Queensland's AA+ rating down to AA within weeks. QUEENSLAND'S battered credit rating looks set to take another hit with ratings agency Fitch preparing to downgrade the state's outlook yet again. The Courier-Mail can reveal Fitch Ratings last week met with Queensland Treasury and gave "strong indications" it planned to revise its AA+ rating down to AA within weeks.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.75% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 196.0 +9.0 basis points.
  
• Asia Pacific Sovereign CDS Index 153.50 -7.25 basis points.
  
• FTSE-100 futures +.10%.
  
• S&P 500 futures +.45%.
  
• NASDAQ 100 futures +.45%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FDS)/1.16
• (CASY)/.67

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for May is estimated to fall to 94.0 versus 94.5 in April.

8:30 am EST

• The Import Price Index for May is estimated to fall -1.0% versus a -.5% decline in April.

2:00 pm EST

• The Monthly Budget Deficit for May is estimated to widen to -$125.0B versus -$57.6B in April.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Tarullo speaking, 3Y T-Note auction, Greek Bill Auction, weekly retail sales reports, IBD/TIPP Economic Optimism for June, William Blair Growth Stock Conference, Morgan Stanley Financials Conference, (BIIB) analyst day and the (JNPR) analyst meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by technology and financial 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 Reversing Lower into Final Hour on Rising Eurozone Debt Angst, Global Growth Fears, Financial/Tech Sector Weakness, Technical Selling

Broad Market Tone:

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

Equity Investor Angst:

• VIX 22.14 +4.29%
  
• ISE Sentiment Index 74.0 -44.36%
  
• Total Put/Call .83 -12.63%
  
• NYSE Arms 1.50 +59.43%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 123.96 +2.79%
  
• European Financial Sector CDS Index 286.99 +2.57%
  
• Western Europe Sovereign Debt CDS Index 321.40 -.03%
  
• Emerging Market CDS Index 310.42 +2.03%
  
• 2-Year Swap Spread 30.0 -1.25 basis points
  
• TED Spread 39.25 +.5 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -52.25 -.5 basis point
  

Economic Gauges:

• 3-Month T-Bill Yield .08% unch.
  
• Yield Curve 131.0 -4 basis points
  
• China Import Iron Ore Spot $132.30/Metric Tonne +.68%
  
• Citi US Economic Surprise Index -49.40 +.7 point
  
• 10-Year TIPS Spread 2.12 -2 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating a -120 open in Japan
• DAX Futures: Indicating -7 open in Germany
  

Portfolio:

• Slightly Higher: On gains in my index hedges
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges
  
• Market Exposure: Moved to 25% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 reverses a morning gap higher on rising Eurozone debt angst, large stock reversals lower in Spain/Italy, financial/tech sector weakness, less US economic optimism and rising global growth fears. On the positive side, Road & Rail, Utility, Telecom, Drug and Tobacco shares are flat-to-higher on the day. Copper is gaining +1.3% and Oil is falling -2.2%. Major Asian indices rose around +1.5% overnight, led by a +2.4% gain in Hong Kong. India was a notable underperformer, falling -.3%. On the negative side, Coal, Oil Tanker, Steel, Computer, Disk Drive, Networking, HMO, Homebuilding and Airline shares are under significant pressure, falling more than -2.0%. Cyclical and Small-cap shares have traded poorly throughout the day. The financial/tech sectors have also underperformed. Lumber is falling -.6% and Gold is gaining +.3%. Major European indices are falling around -.5%, led lower by a -2.8% decline in Italy. Spanish and Italian equities gapped substantially higher this morning and fell throughout the day, finishing lower and at session lows. The Bloomberg European Bank Financial Services Index is also falling -.6% after an initial gap higher. The Germany sovereign cds is rising +.6% to 108.42 bps(+6.02% in 5 days to the highest since early Jan.). The France sovereign cds is gaining +.75% to 213.76 bps, the Spain sovereign cds is rising 1.3% to 594.67 bps, the Italy sovereign cds is gaining +1.8% to 553.0 bps and the Brazil sovereign cds is gaining +1.0% to 164.06 bps. The Italian/German 10Y Yld Spread is rising +6.4% to 472.67 bps. Moreover, the European Investment Grade CDS Index is gaining +1.7% to 179.30 bps. US Rail Traffic continues to soften. The Philly Fed ADS Real-Time Business Conditions Index continues to trend lower from its late-December peak. Moreover, the Citi US Economic Surprise Index has fallen back to early-Sept. levels. Lumber is -4.0% since its Dec. 29th high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite expectations for a strong spring home selling season. The Baltic Dry Index has plunged around -60.0% from its Oct. 14th high and is now down around -50.0% ytd. China Iron Ore Spot has plunged -27.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +157.0% ytd. The CRB Commodities Index is now technically in a bear market, having declined -26.5% since May 2nd of last year. Overall, recent credit gauge deterioration remains a big worry as most key sovereign cds remain technically strong. The euro currency is reversing morning gains and continues to trade poorly. Oil is oversold, but trades very heavy despite China stimulus hopes and recent stock gains. As well, the 10Y continues to trade very well with the yield falling -4 bps to 1.59% despite the Eurozone news. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. Europe’s kick-the-can smoke-n-mirrors “solutions” are resulting in less and less positive impact and it appears to me that investors are just beginning to sense that these solutions will eventually lead to an even greater escalation in the debt crisis. The facts remain that a country can't solve a debt crisis with more debt and Europe is not making the necessary reforms to become more competitive and grow(France actually moving backwards), in my opinion. As well, the European debt crisis is really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. As well, the "US fiscal cliff "will become more and more of a focus for investors as the year progresses. There is too much uncertainty on the horizon to conclude a durable stock market low is in place. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices, a US "fiscal cliff" solution and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on rising Eurozone debt angst, rising global growth fears, less US economic optimism, large reversals lower in Spanish/Italian equities, financial/tech sector weakness, technical selling and more shorting.