Today's Headlines

Bloomberg:

• Rajoy Battles ECB for Loans; Monti Appeals for EU Action. Spain and Italy appealed to European policy makers to step up their response to the financial crisis after a 100 billion-euro ($125 billion) lifeline for Spanish banks failed to calm markets. Spanish Prime Minister Mariano Rajoy said today he’ll “battle” central bankers refusing to buy debt from peripheral nations. Rajoy published a letter to European Union leaders calling for the European Central Bank to buy debt from the countries struggling to shore up their finances. “That is the battle we have to wage in Europe,” Rajoy told the Spanish parliament in Madrid today. “I am waging it.” His Italian counterpart, Mario Monti, told lawmakers in Rome Europe faces a “crucial” moment.
• European Stocks Fall As Borrowing Costs Rise At Debt Sale. European stocks declined as borrowing costs increased at debt auctions in Germany and Italy and as Sweden’s SKF (SKFB) AB reported weakening demand for its products in the second quarter. SKF, the world’s largest maker of ball bearings, dropped 7.3 percent. Renault SA (RNO) led a selloff by carmakers, sliding 4.2 percent. Etablissements Maurel & Prom SA surged the most since 2003 amid takeover speculation. The Stoxx Europe 600 Index (SXXP) dropped 0.4 percent to 242.56 in London.
• Greek Vote Won’t Alter Country’s Crisis, Schaeuble Tells Stern. Greece’s election results won’t change the reality of the country’s economic crisis and won’t prevent the nation from carrying out painful reforms, German Finance Minister Wolfgang Schaeuble told Stern magazine. Greeks on June 17 “can vote however they want,” Schaeuble told the German magazine in an interview today. “But whatever election result we have will change nothing about the actual situation in the country, which is in a painful crisis brought on by a decades-long flawed economy.” The German finance chief was quoted by Stern as saying he had “really great sympathy with the man on the street in Greece” suffering under the effects of austerity. “I can’t spare him that,” he added. “Crises are seldom fair.” “It’s not easy to cut the minimum wage in Greece if you think about all the yacht owners,” Schaeuble said. “But the Greek minimum wage is just dropping to the level of Spain. If the country wants to become competitive again, it has to sink.”
• Tsipras Sees Greece in Euro Even After Repealing Austerity. Alexis Tsipras said he expects the European Union will do all it can to keep Greece in the euro even if he wins elections and carries out his promise to repeal the austerity measures required to receive emergency loans. "We have no sense that European partners will follow this tactic of blackmail heard from some quarters and stop funding," Tsipras, whose Syriza party is vying for first place in pre- election polls, said in an interview in Athens today with Bloomberg Television. "Something like that would be catastrophic not only for Greece but for the entire euro area." Tsipras's promise to abrogate the terms of the bailout amounts to a bet the EU and International Monetary Fund will stop short of kicking Greece out of the 17-nation euro. "We want to simply convince our partners that it's in the interests of all to stop sending EU taxpayers' money into a bottomless pit," Tsipras said. "This money should be used properly in a program that is effective and not on a memorandum that has failed." Syriza was propelled to second place in the inconclusive May 6 vote. Most opinion polls show Syriza and New Democracy, which backs the bailout, running even for first place. According to the last opinion polls on June 1, neither has enough support at this point to rule alone.
• Deutsche Bank(DB) May Have $18 Billion Italy, Spain Gap. Deutsche Bank AG has a funding gap of as much as 14 billion euros ($17.5 billion) at its Italian and Spanish units which could reduce capital levels at the firm if those countries leave the euro, according to analysts at Espirito Santo Investment Bank. Deutsche Bank’s loans amount to 205 percent of deposits at the Italian unit and 314 percent in Spain, according to London- based analyst Andrew Lim, who cited company filings. If those countries exit the euro and the new currencies fall 30 percent, the Frankfurt-based lender could lose as much as 4.2 billion euros of equity as the value of assets at those divisions declines while some funding remains in euros, he said.
• Euro-Area Industrial Output Falls Second Month on Germany. Euro-area industrial production declined for a second month in April, led by a drop in Germany, adding to signs of a deepening economic slump. Output in the 17-nation euro area slipped 0.8 percent from March, when it decreased a revised 0.1 percent, the European Union’s statistics office in Luxembourg said today. Economists had projected a drop of 1.2 percent, the median of 28 estimates in a Bloomberg News survey showed. From a year earlier, production fell 2.3 percent.
• Dimon Says US Fiscal Cliff May Be Reached Before Year-End. JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon, testifying to a U.S. Senate panel, said the government is risking an earlier-than-expected fiscal crisis as policy makers stay deadlocked on taxes and the budget. “The one thing to keep in mind about the fiscal cliff is it may not wait until Dec. 31,” Dimon, 56, said today before the Senate Banking Committee, which called him to answer questions about a $2 billion trading loss. “Markets and businesses may start taking actions before that, that create a slowdown in the economy.”
• Dimon Fires Back at 'Complex' System in U.S. Senate Grilling. JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon spent much of his time at a hearing where U.S. senators aimed to put him on the defensive firing back at the federal regulatory system. During more than two hours before before the Senate Banking Committee, Dimon described a $2 billion loss in the bank’s chief investment office as a hedge that “morphed into something I can’t justify,” and largely blamed subordinates for a trading strategy gone wrong. The bank is looking at clawing back some of the compensation earned by those responsible, he said.
• Retail Sales in U.S. Declined for a Second Month in May. Retail sales in the U.S. fell in May for a second month, prompting economists to cut forecasts for economic growth as limited job and income gains hold back consumers. The 0.2 percent decrease matched April’s drop that was previously reported as a gain, Commerce Department figures showed today in Washington. Sales excluding car dealerships slumped by the most in two years. The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on the consumer spending that accounts for about 70 percent of the economy, leaving it more vulnerable to shocks from the European crisis. “The consumer is pulling back,” said Michael Brown, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who correctly forecast the drop in sales. “There isn’t a lot of job creation. We will continue to see softer numbers.”

Wall Street Journal:

• Italy's Inconvenient Truth. Somebody hasn’t been reading their Machiavelli. The Austrian finance minister, Maria Fekter, had the audacity to actually speak plainly and openly this morning, about the state of Italy. This has angered the Italian leadership. Because these are not times for politicians to speak openly.
• Risks Rise as Europe's Banking Ties Fray. The biggest threat to the survival of the euro may not be a Greek exit. It may be the Balkanization of Europe's banking system. Financial markets are braced for the growing likelihood that Greece will abandon the euro sooner or later. That raises the prospect that another euro member will leave, but it's ever easier to cast Greece—with its crippling government debt and political chaos—as sui generis. A bigger deal is the unraveling of the decadelong cross-border integration of European banks.
• Crédit Agricole Girds Greek Unit for Greece Euro Exit. Crédit Agricole SA is making contingency plans to abandon its Greek bank or merge it with a conglomerate of domestic banks in the event of Greece leaving the euro zone, according to a person with direct knowledge of the plans.
• Steep Rise in Health Costs Projected. Economists have been puzzling over whether a three-year slowdown in the growth of health-care spending, prompted by the economy, portends a permanent change. Federal projections indicate that isn't the case. A forecast released Tuesday said the growth rate for U.S. health spending of all types would stay historically low the next two years. But it would increase if most of the federal health-care overhaul takes effect in 2014.
• Goldman(GS) Looks to Forecast the Forecasts. Bank strategists often use analyst forecasts to peer into the future of the stock market, as changes can signal surprises in store. Now, Goldman Sachs Group Inc. is taking it a step further with a new indicator. Call it predicting the predictions.

MarketWatch:

• Crisis focus shifts to Italy ahead of key auction. Italy braces for medium- and long-term-debt auctions.

CNBC.com:

• US Business Inventories Grow in April, Hit Record High.
• Germany Warns Italy Over Euro Zone Crisis. Germany told Italians on Wednesday they must keep taking Prime Minister Mario Monti's tough economic medicine to avoid becoming the next victim of the euro zone debt crisis after a bailout for Spain's banks failed to calm markets.
• Central Bank Money-Printing: $6 Trillion... and Counting. Many more years of money printing from the world's big four central banks now looks destined to add to the $6 trillion already created since 2008 and may transform the relationship between the once fiercely-independent banks and governments.
• US shale boom to create half-million jobs.

Business Insider:

• Barack Obama's Lead In National Polls Has Collapsed.
• Chart of the Day: Spain's Gigantic Debt Problem.
  

Zero Hedge:

• The Cost Of The Best Senate Banking Committee JP Morgan Can Buy: $877,798 In Bribes.
• Italian Bonds Back In The Crosshairs.
• European Banks Preparing To Boycott Big Three Rating Agencies.
• SocGen's Albert Edwards on Spain: "A Bailout Will Solve Nothing".
  

YouTube:

• The Genius of Mutual Indebtedness - Nigel Farage. (video)

@EdConwaySky:

• House prices in Beijing are over 3x more expensive (in relation to income) than in London or New York. (graph)
  

NY Post:

• Romney Leading Obama in Wisconsin, New Poll Finds. Mitt Romney is leading President Barack Obama in Wisconsin, according to a new poll released Wednesday. The new Rasmussen Reports survey showed the Republican nominee leading Obama 47 percent to 44 percent in the Badger State, within the poll's margin of error. The telephone survey of 500 Likely Voters also showed four percent undecided. The poll also found 47 percent of voters approved of Obama's job performance while 52 percent disapproved. Romney, on the other hand, was viewed favorably by 49 percent of respondents and unfavorably by 45 percent.

Bespoke:

• Bank and Broker Default Risk. (graphs)

Reuters:

• Algeria Says OPEC Faces Risk From Oil Price Slide. The Organization of the Petroleum Exporting Countries (OPEC) will face a real risk because of a slide in crude oil prices caused by the group exceeding its production ceiling, Algerian Energy and Mines Minister Youcef Yousfi was quoted as saying on Wednesday. "I hope there will be an awareness of the negative effect (of increased oil production) on prices, particularly in recent weeks, and thus OPEC faces a real risk," Algeria's official APS news agency quoted him as saying in Vienna ahead of an OPEC meeting.
• Exclusive - LME copper players turn up heat on warehouse queues. Global copper market heavyweights are drafting proposals to stop metal from getting stuck in queues leaving storage facilities, as such delays would threaten the credibility of the London Metal Exchange's (LME) flagship product, industry sources said.
• Copper slips on U.S. data, euro debt fears. Copper dipped on Wednesday, reversing earlier gains, after a U.S. retail sales report reinforced views the world's top economy is slowing and added to fears of worsening euro zone debt and upcoming elections in Greece.

Telegraph:

• Debt crisis: Greeks pulling €800m a day from banks. Greeks are withdrawing up to €800m a day from their banks and stocking up on basic food supplies ahead of the election on Sunday that many fear will result in the country being forced out of the euro.
• Debt crisis: Bailed-out Spain pleads for aid from European Central Bank. Spain's prime minister said he is “battling” to get the eurozone’s central bankers to bring down the country’s record borrowing costs, amid predictions the state will need a second bail-out to save itself.

Times:

• UK Chancellor of the Exchequer George Osborne said that if Germany is to save the euro, a Greek withdrawal from the common currency might be the price necessary to secure the German public's acquiescence.
  

Irish Times:

• The European Commission and the IMF can't totally rule out the need for more capital for Irish banks, citing documents supplied to German lawmakers. Risks include continued weakness in the housing market and an increase in non-performing loans.
  

FT Deutschland:

• Every new Greek govt., independent of the June 17 election outcome, will seek amendments to the bailout. The Eurozone won't deny this if it wants to keep Greece in. The Troika expects Greece won't have met the conditions of austerity program.

Tageblatt:

• Europe's banking system cannot be rescued by plowing money into a "common European pot," Luxembourg Finance Minister Luc Frieden said. "I grasp the idea of a banking union in principle, but you cannot mutualize all risks in Europe," Frieden said in a preview of an interview to be published in Tageblatt tomorrow. "Yes to more Europe, but only when it includes an effective and serious banking world that doesn't force some to pay for others' blunders," he said.
  

Bild:

• German Insolvencies Rose in March to the Highest in 2 Years. 2,809 companies went bankrupt during the month.
  

China Daily:

• China's GDP growth in the second quarter may be below 7% if economic data in June doesn't improve, citing Zheng Xinli, vice president of the state-backed China Center for International Economic Exchanges.

Bear Radar

Style Underperformer:

• Mid-Cap Growth -.40%

Sector Underperformers:

• 1) Retail -.52% 2) Education -.50% 3) Alt Energy -.43%

Stocks Falling on Unusual Volume:

• SMG, TSCO, RWT, ABB, SHW, TFM, CASY, CTCT, REGN, VPRT, FSLR, BJRI, MYGN, WPPGY, SNHY, SHLM, FNSR, NICE, POWI, PHMD, QCOR, RRGB, CMTL, WTI, BPOP, TKR, M and MPO
  

Stocks With Unusual Put Option Activity:

• 1) KEY 2) WFM 3) TSCO 4) ITW 5) WFT
  

Stocks With Most Negative News Mentions:

• 1) EXPE 2) SMG 3) CMG 4) SHW 5) CECO
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value +.08%

Sector Outperformers:

• 1) Airlines +1.48% 2) Disk Drives +1.47% 3) Tobacco +1.09%

Stocks Rising on Unusual Volume:

• WIFI, DELL, LNCR, LCC and DAL
  

Stocks With Unusual Call Option Activity:

• 1) SUN 2) RAX 3) DNDN 4) VRSN 5) NAV
  

Stocks With Most Positive News Mentions:

• 1) PM 2) JNJ 3) CELG 4) RTN 5) BA
  

Charts:

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

Wednesday Watch

Evening Headlines
Bloomberg:

• Spain's Record Yields Show Italy Bailout Risk. Spain’s benchmark borrowing costs climbed to a record yesterday, raising the specter of sovereign bailouts for the government in Madrid and then Italy that would stretch European Union finances to their limit. The yield on Spanish 10-year government debt rose for a third day, touching 6.83 percent, the highest since 1997, after Fitch Ratings predicted that Prime Minister Mariano Rajoy will miss budget-deficit targets he’s made the foundation of his economic policy. Italian 10-year yields rose to the highest in almost six months. The bond rout wiped out the effects of 1.1 trillion euros ($1.4 trillion) in official funding for euro-region banks that has held yields in check since December. Spain’s 10-year yield is close to the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts. Italy, the second-biggest sovereign borrower in the euro area, may need to seek a rescue within months, said James Nixon, chief European economist at Societe Generale SA (GLE) in London. “The crisis will inevitably roll on to the next domino, and that’s Italy,” Nixon said in a telephone interview. “The southern European economies are effectively in free-fall and market appetite for southern European debt is rapidly drying up. I can’t see anything to turn that dynamic around.” European policy makers face a series of hurdles in the coming days as bond investors spurn the 100 billion-euro rescue package for Spanish banks that the European Central Bank said yesterday would bolster financial stability. Italy is due to sell as much as 9.5 billion euros of bills and bonds at auctions today and tomorrow while auditors are due to report on the extent of Spanish banking losses from next week.
• Seeds of Next Crisis Sown as Repressive Loans Bite: Euro Credit. European banks have stuffed their balance sheets with domestic government bonds, compelled by rules on capital and tempted by cheap central bank loans, sowing the seeds for the next stage in the sovereign debt crisis. "We're seeing the increasing balkanization of finance," said Toby Nangle, who helps manage the equivalent of about $49 billion as head of multi asset allocation at Threadneedle Asset Management in London. "It represents the single-currency project in reverse gear."
• Italy Tax Increases Backfire As Monti Tightens Belts. Italian Prime Minister Mario Monti is facing signs that tax increases are beginning to backfire as his new levy on real estate goes into effect. Value-added tax receipts have declined since Monti’s predecessor, Silvio Berlusconi, raised the rate by 1 percentage point in September as the economy was slipping into recession, government data released June 5 showed. The amount collected fell in the 12 months ended April 30 to the lowest since 2006. Finding the right deficit-reduction mix as Monti fights to meet budget targets is critical for Italy to avoid becoming the biggest victim yet of Europe’s financial crisis. A slump that is driving up welfare spending is adding urgency to Monti’s effort to make the economy more competitive amid a growing backlash across Europe against austerity. “This government has raised taxes too much,” said Alberto Alesina, a professor of political economy at Harvard University. “It would be much, much better to lower spending.”
• Greek Bank Deposit Outflows Said to Have Risen Before Elections. Greek deposit outflows have accelerated before this weekend’s elections, two bankers familiar with the situation said, on concern the nation may move closer to abandoning the euro. Daily withdrawals have increased to the upper end of a 100 million-euro ($125 million) to 500 million-euro range this month, one banker said, asking not to be identified because the figures aren’t public. A second banker said the drawdown may have exceeded 700 million euros yesterday. An official for the Bank of Greece (TELL), the Athens-based central bank, declined to comment.
• Worst of China Slowdown Seen in Wenzhou as Stimulus Limited. Jiang Xiangsong has 18 days to pay a 2 million yuan ($314,000) bank debt or his suitcase company in eastern China will go bankrupt. He's close to tears as he realizes his last hope, a government-backed office, won't help. "This is totally useless: If I had any collateral, why the hell would I come here?" he yells at an official in Wenzhou's state-run loan service, set up to help small businesses after rising bankruptcies and suicides prompted Premier Wen Jiabao to visit in October and pledge support. Wenzhou's more than 400,000 businesses make everything from shoes in dusty side streets to synthetic leather in dilapidated factories, much of it financed by unregulated lenders that spread during China's record 2009-10 credit boom. The decline of so-called shadow banking in the city, triggered by Wen's move to rein in a national property bubble, has left Wenzhou bearing the brunt of the country's economic slowdown.
• Gorman Says Three-Level Cut Would Be ‘Somewhat Stunning’. Morgan Stanley (MS) Chief Executive Officer James Gorman said a three-level credit-rating downgrade by Moody’s Investors Service would be “somewhat stunning” given the firm’s increased capital. Moody’s has said it may reduce the rating on New York-based Morgan Stanley by as much as three levels when it announces the results of an industrywide review this month. Morgan Stanley can manage through any potential cut, Gorman said today at an investor conference in New York.
• JPMorgan(JPM) Traders Didn't Understand Risks, CEO Dimon Says. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said traders in a London unit responsible for a $2 billion loss didn't understand the risks they were taking and weren't properly monitored. "This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks," Dimon said in prepared remarks ahead of his appearance tomorrow before the Senate Banking Committee. "We have let a lot of people down, and we are sorry for it."

Wall Street Journal:

• Threat Spreads Across Europe. Borrowing Costs Rise Across Continent as World Bank Sees Global Impact From Crisis. Borrowing costs for Italy and Spain continued to surge on Tuesday, escalating calls for bigger steps from euro-zone leaders amid a new warning that the crisis is dragging down even the world's resilient emerging economies.
• Berlin's Ballooning Bailout Bill. A billion here, a billion there, and soon you are talking real money. A true fiscal union may still be a distant prospect. But each round of the European sovereign-debt crisis has seen Germany make financial commitments that have raised the cost it would bear if the euro failed. This week's Spanish bailout will raise its exposure to financially stressed countries by as much as €25 billion ($31.2 billion) or so. Is Germany now in too deep to risk the single currency collapsing?
• Pressure Mounts for Italy's Monti. Skittish Investors Fear Economic Overhaul Risks Stalling. Prime Minister Mario Monti's honeymoon is over. Italy's return to the cross hairs of the euro-zone debt crisis has ratcheted up pressure on Mr. Monti to accelerate his turnaround of the country's moribund economy. But the effort is running up against a rising tide of discontent at home. Mr. Monti has passed austerity measures including tax increases and an overhaul of Italy's pension system since taking office in November, garnering widespread praise from investors and world leaders.
• This Moody's Man Is Giving Banks the Blues. Gregory Winans Bauer and his team could cost Morgan Stanley's shareholders more than $9 billion. Not many people outside major banks and credit-rating firms have heard of Mr. Bauer. But the low-key 57-year-old debt analyst is leading a spate of credit downgrades by Moody's Corp.'s Moody's Investors Service that is forcing some of the biggest European and U.S. banks to put up additional capital and causing controversy on Wall Street.
• Tin Pan Valley: The Coming Shakeout for App Makers. Like the Early Music Industry, Today's Apps Are 'Made' By Marketing, Sales.
• U.S. Probes Cable for Limits on Net Video. The Justice Department is conducting a wide-ranging antitrust investigation into whether cable companies are acting improperly to quash nascent competition from online video, according to people familiar with the matter. Justice Department officials have spoken to several online video providers, including Netflix Inc. and Hulu LLC, those people said. Investigators have also questioned Comcast Corp., Time Warner Cable Inc. and other cable companies about issues such as setting data caps, limits to the amount of data a subscriber can download each month, these people said.
• China Firms Under Fire. Lawmakers investigating spying threats from China are pressing two Chinese telecommunications firms active in U.S. markets for details about their relationship with the Chinese government and with U.S. companies.

Dow Jones:

• Low Interest Rates Create New Layer of Risk for CMBS Deals. The extended period of unusually low interest rates is creating fresh headwinds for the commercial mortgage-backed securities market as Wall Street dealers prepare to sell at least $2 billion of bonds in coming weeks. As CMBS yields follow benchmark Treasurys lower, banks are grappling with interest-rate risk--the degree that bond prices fall as rates rise--as much as the credit risk that has dominated the conversation for years. The unexpected turn of events may require dealers to offer floating-rate debt or mark down prices on new fixed-rate CMBS in order to attract investors. Lower prices translate into higher yields on fixed-income securities. "It's very difficult to sell 10-year CMBS right now," Harris Trifon, head of CMBS strategy at Deutsche Bank, said while attending the Commercial Real Estate Finance Council's annual conference in Washington. "It's not that people aren't happy with the asset class. It's more about the yield."

Barron's:

• Scotts Miracle-Gro(SMG) Plunges on Profit Warning. Scotts Miracle-Gro (SMG) fell 14% after-hours as the lawn care company announced that it won’t meet its previous earnings guidance because of reduced demand for its products.

MarketWatch:

• Japan markets unfazed by gridlock of tax politics. Stocks, bonds cool to prospect of another government’s fall over tax.

Business Insider:

• Bill Ackman Has Added A New Short Position To Pershing Square's Portfolio.
• A Surprise Party Could Bail Out Cyprus Within Days.
• The Federal Budget Deficit Is Set To Top $1 Trillion For The Fourth Straight Year.
• This Chart Shows The Bilderberg Group's Connection To Everything In The World.
• The Federal Reserve's Policies Ruined Any Chance We Had Of Cleansing The Economy.

Zero Hedge:

• Biderman On Central Banks: "In The End, They Will Get What They Deserve".
• Ahead Of Tomorrow's Dimon Hearing, Presenting JP Morgan's(JPM) 93.5% Historical Winning Trade Perfection.
• Did Fitch Just End Europe's Hope For LTRO3?

CNBC:

• Full-Scale Bailouts for Italy, Spain in 6 Months: Egan-Jones. Spain and Italy need a full-scale bailout from the European Union because of their high levels of government debt and the credit quality of their banks, and will likely seek help within the next 6 months, according to Sean Egan, Founding Partner and President of Egan-Jones, an independent ratings agency. Poor credit quality of banks usually goes hand-in-hand with poor government finances as the two institutions are “joined at the hip”, Egan told CNBC Asia’s “Squawk Box” on Wednesday. That’s the case for most countries such as the U.S., the U.K., Switzerland and Ireland; Spain and Italy are no exceptions, he said. “It makes little sense to separate the banks’ credit quality from the governments’ credit quality because quite often, they support each other and that’s certainly the case in Italy and Spain,” he said. “We think that Spain will be back at the table, asking for more than the 100 billion euros ($125 billion) that they just asked for, and we think that Italy will also come to the table within the next 6 months.” The worries about Spain’s and Italy’s finances could spread to the rest of Europe, Egan said. Even Germany, seen as the nation with the soundest economy, may not be immune to the crisis. Italy has Europe’s second-highest debt-to-GDP ratio. “When you step back, you see that the combined economies for the EU have a fairly high debt-to-GDP,” Egan said. “There’s the assumption that Germany will be able to pull. That assumption may want to be re-examined.”
• PIMCO Total Return Fund Raises US Treasury Exposure. Bill Gross's PIMCO Total Return Fund, the world's largest bond fund, increased its exposure to U.S. Treasury-related securities to 35 percent in May, up from 31 percent in April, the company said on its website on Tuesday.
• Spain to Charge at Least 8.5% for Loans to Banks. Spanish banks which receive public loans in the form of convertible shares as part of an up to 100 billion euros financial package will be charged an interest rate of at least 8.5 percent, a European Commission spokesman said on Tuesday.
• China Backsliding on Trade Openness, US Tells WTO. China is backsliding on the path of trade openness and economic reform that marked its entry to the World Trade Organization in 2001, the United States said on Tuesday during a biennial review of China's trade policies.

IBD:

• ATV Maker Polaris(PII) Keeps The Pedal To The Metal.

NY Times:

• Bailout in Spain Leaves Taxpayers Liable for the Cost. Many details of the banking bailout remain to be resolved — including which of Europe’s rescue funds will supply the money. The one thing that is clear is that even though the money will be funneled to the banks, the government in Madrid will ultimately be responsible for guaranteeing that $125 billion, adding to the Spanish government’s already rising debt load. That fact, more than any other, probably explains why there was heavy selling of Spanish government bonds on Monday and Tuesday.

Seeking Alpha:

• Bank Of America's(BAC) $67 Trillion In Derivative Positions Explained.
  

Forbes:

• Is Perestroika Coming In California?

CNN:

• Fears rise over EU handling of debt crisis. "The crisis is deteriorating at an ever-increasing pace," said Mark Schofield, a senior strategist at Citigroup. "Investors are increasingly pricing in either of the two tail risks -- full eurozone break-up or fiscal union."

Telegraph:

• Debt crisis: Bundesbank scuppers all talk of EU banking union. Germany's central bank has shot down EU proposals for a European banking union, warning categorically that eurozone liabilities cannot be shared without a fundamental shift towards fiscal and political union.

Bild-Zeitung:

• Germany may cut solar-power subsidies by 20% to 25% annually, citing Michael Fuchs, a lawmaker of the governing Christian Democratic bloc.

Beijing Transportation Research Center:

• Traffic jams in Beijing have eased to an average 55 minutes during weekdays in the first quarter, from 75 minutes a year earlier.

China Securities Journal:

• China's interest rate liberalization is better than rate cuts for promoting the healthy development of the nation's economy and financial reform, China Securities Journal said in a front-page editorial today. Raising the cap on the deposit rate will narrow lenders' net interest margin and push them to offer higher-rate loans to smaller companies, the editorial said. This will increase borrowing costs for state-owned companies and local governments, forcing them to invest limited funds into profitable projects, according to the editorial. Rate liberalization will also drive companies to finance from capital markets, the editorial said.

Evening Recommendations
Jefferies:

• Rated (PIR) Buy, target $20.

Oppenheimer:

• Rated (LOGM) Outperform, target $40.

Night Trading

• Asian equity indices are -.50% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 190.0 -6.0 basis points.
  
• Asia Pacific Sovereign CDS Index 156.0 +2.5 basis points.
  
• FTSE-100 futures +.23%.
  
• S&P 500 futures -.23%.
  
• NASDAQ 100 futures -.14%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KFY)/.27

Economic Releases
8:30 am EST

• The Producer Price Index for May is estimated to fall -.6% versus a -.2% decline in April.
• The PPI Ex Food & Energy for May is estimated to rise +.2% versus a +.2% gain in April.
• Advance Retail Sales for May are estimated to fall -.2% versus a +.1% gain in April.
• Retail Sales Less Autos for May are estimated unch. versus a +.1% gain in April.
• Retail Sales Ex Auto & Gas for May are estimated to rise +.4% versus a +.1% gain in April.
  

10:00 am EST

• Business Inventories for April are estimated to rise +.3% versus a +.3% gain in March.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,500,000 barrels versus a -111,000 barrel decline the prior week. Distillate inventories are estimated to rise by +1,175,000 barrels versus a +2,253,000 barrel gain the prior week. Gasoline supplies are expected to rise by +1,400,000 barrels versus a +3,346,000 barrel rise the prior week. Finally, Refinery Utilization is estimated unch. versus a +1.9% gain the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Germany/Italy Bond Auctions, weekly MBA mortgage applications report, Jamie Dimon testimony to Senate Banking Committee, 10Y T-Note Auction, Deutsche Bank Industrials/Basic Materials Conference, (DELL) analyst meeting and the (AGU) investor day could also impact trading today.
  

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

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.