Tuesday Watch

Evening Headlines
Bloomberg:

• Europe Muddle Thickens as Doubts Persist Leaders Can Stem Crisis. Today, Merkel faces mounting pressure to make even greater concessions, by putting Germany's financial muscle behind an integrated banking and borrowing system to keep the euro intact. The question is whether, after two years of muddling through, Europe's pre- eminent power can act quickly and decisively. "I think she will remain an incrementalist: we have not yet reached the point where it is obvious that we are hanging over the precipice," said Paul de Grauwe, a professor at the London School of Economics and two-time Belgian candidate for a European Central Bank post. "It looks again that what is going to come out is going to temporarily pacify markets until it is clear that it is not going to be sufficient."
• Saddling Spain With Bank Burden Repeats Irish Error: Euro Credit. Spain's surging borrowing costs suggest the nation is hurtling toward a full sovereign bailout as the same aid policies that doomed Ireland to pariah status on the capital markets are repeated in southern Europe. Germany is reluctant to sanction disbursements directly to the region's banks. Channeling payments via governments, however, increases their debt burdens, undermining their creditworthiness and stoking investor concern about ranking behind official creditors for repayment.
  
• Greek Coalition Talks Enter Second Day Amid Merkel Aid Warning. Greek election winner Antonis Samaras begins a second day of talks to form a coalition after holding “constructive” meetings with two party leaders, racing to forge a government that keeps bailout aid flowing. Samaras secured initial agreement yesterday from Socialist Pasok leader Evangelos Venizelos, the former finance minister who negotiated the second rescue, and said he’d hold further talks today with Fotis Kouvelis, the leader of the Democratic Left party. If those three team up, they will hold a majority of 179 seats in the 300-member Greek parliament. With German Chancellor Angela Merkel offering little flexibility on emergency loans needed to keep Greece in the euro and avert economic collapse, leaders in Athens are scrambling to forge a government that can negotiate changes to some of the austerity measures linked to the 240 billion euros ($303 billion) pledged by international lenders. “With Mr Venizelos we remain in agreement that we must have, at all cost, and within the deadline of my mandate, a government of national salvation,” Samaras said in Athens yesterday after receiving the three-day mandate to form a government. “We will, of course, have new meetings.”
• Gross Says Germany in Bond Bubble as Liabilities Increase. Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said Germany is in a bond market bubble as the country is saddled with rising liabilities from Europe’s debt crisis. “I would be leery of German bunds simply because there are only a few scenarios in which they can do well,” Gross said today in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Germany for me is a credit risk. It’s not an attractive market.” Germany is the largest contributor to Europe’s bailout packages for Greece and a collapse of that nation’s economy and its possible exit from the euro area may weigh heavily on Chancellor Angela Merkel’s administration. While German bonds have profited from Europe’s crisis, pushing yields on two-year notes below zero this month for the first time, Gross said the bonds have little room to rise further, except in a scenario such as Germany leaving the euro.
• Dimon Faces ‘Harsher and Crazier’ House Crowd in Second Round. Jamie Dimon won’t get off as easy at his second congressional hearing this month when he tries to explain how JPMorgan Chase & Co. (JPM) (JPM) lost at least $2 billion on trades that he has said “violated common sense.” The U.S. House Financial Services Committee will be a tougher audience for Dimon when he testifies today after members of the Senate Banking Committee spent much of their June 13 hearing complimenting the chief executive officer or asking his advice on financial law, banking analysts said.
• Rubber Glut Extends Bear Market Cutting Bridgestone Costs. Rubber shortages are about to turn into a flood as China, the biggest consumer, grows at the slowest pace in three years, driving prices paid by Bridgestone Corp. (5108) and other tiremakers to the lowest since 2009. The surplus will reach 402,000 metric tons in the second half, from a 134,000-ton shortage in the first six months, said Chris Pardey, a former commodities trader at Cargill Inc. and Noble Group Ltd. Futures, which entered a bear market last month, will drop a further 21 percent to 200 yen a kilogram ($2,529 a metric ton) in Tokyo by the end of the year, the lowest since October 2009, according to the median of 15 analyst and trader estimates compiled by Bloomberg. This quarter’s 22 percent decline is the worst since the global financial crisis in 2008 and exceeds a 16 percent retreat in commodities. The slump is reducing income for growers from Thailand to Ivory Coast to Indonesia and costs for Bridgestone, the world’s largest tiremaker.
• EPA Won’t Curb Greenhouse Gases From Ships, Off-Road Trucks. The Environmental Protection Agency turned down a demand from U.S. environmental groups that it curb greenhouse-gas emissions from aircraft, ships or off-highway vehicles such as trucks used in mining operations. The agency sent a court-ordered response today to the Center for Biological Diversity and other groups, saying that it wouldn’t issue regulations for those sources of carbon dioxide anytime soon.
• Foreign Ownership of JGBs Highest Since '79. Foreign ownership of Japanese government debt rose to a record in 2011, signaling increasing dependence on investors abroad to finance the world’s largest public debt. Overseas investors owned 8.3 percent of JGBs as of the end of the fiscal year in March, the Bank of Japan (8301) said in a report released in Tokyo today. This was the highest since 1979, the first year for which comparable data is available.
• Fiscal-Cliff Concerns Hurting Economy as Companies Hold Back. Companies are starting to delay hiring and spending out of concern that Congress won't reach a compromise in time to avoid automatic tax increases and budget cuts that would pull billions of dollars of purchasing power out of the economy. Faced with a so-called fiscal cliff of more than $600 billion in higher taxes and reductions in defense and other government programs in 2013, U.S. companies are pulling back, though the deadline for congressional action is more than six months away. The best strategy for companies to follow when confronted with such uncertainty ahead of Dec. 31 is to "stay lean and keep your inventories taut," Sandy Cutler, chief executive officer of industrial equipment-maker Eaton Corp.(ETN) in Cleveland, told a conference. Economists are predicting this trend will pick up through the year.
  

Wall Street Journal:

• Spain Back in Cross Hairs. Greek Election Results Fade Quickly as Madrid's Borrowing Costs Set Record. The brief afterglow from Greece's vote Sunday to try to remain in the euro was quickly extinguished by a cascade of bad news out of Spain that again rattled faith in the currency bloc's ability to support its most troubled members. Fresh data from Spain's central bank showed the country's lenders were sitting on the highest level of bad loans in 18 years and that their deposits continued to leak away. The gloomy figures—and worries that consultants scouring the creaky banking system will find yet more problems—helped drive Spanish bond yields deep into territory that is widely viewed as unsustainable.
• Fed Wrestles With How Best to Bridge U.S. Credit Divide. The U.S. recovery is hobbled by an economic divide that separates Americans not by income or wealth but by their access to credit. The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom.
• Egypt Showdown Gains Momentum. Muslim Brotherhood, Claiming Victory in Presidential Election, Calls Protests and Moves to Reclaim Powers From Military. The Muslim Brotherhood appeared headed for a showdown with Egypt's ruling generals hours after claiming victory in Egypt's first freely contested presidential election, even as the military sought to assure the public it would hand over power. The Brotherhood, intent on reclaiming some of the powers that the military has claimed for itself in recent days, said it would convene Parliament on Tuesday in defiance of a court order dissolving the body, and called on Egyptians to take to the streets to challenge the military's recent moves to consolidate power.
• 'Whale' Swam in Choppy Waters. J.P. Morgan Chase & Co. trader Bruno Michel Iksil at times resisted sharing some details of his positions with superiors, while trading executive Achilles Macris had a history of clashing with co-workers, according to current and former colleagues. Mr. Iksil, a Frenchman known as "the London whale" for his outsize positions, and the Greek-born Mr. Macris are at the center of at least $2 billion of losses at the nation's biggest bank by assets. Each remains at the bank but is expected to leave, according to people at the bank.
• Banks Roll Out the Green Carpet to Attract High-Income Earners.
• Microsoft(MSFT) Unveils Surface Tablet to Rival iPad. Microsoft Corp. on Monday unveiled the first computer it has ever made, a tablet called the Surface that comes with a keyboard and other features designed to stand out in a market dominated by Apple Inc(AAPL).
• Russia Braces for Trouble in Its Export Markets. Government Doesn't Want State Firm to Buy BP's Stake in TNK-BP, Says Igor Shuvalov. Prices for oil, its main export, are sliding, and Russia is already gearing up for economic troubles, laying plans for spending cuts and a weaker ruble if the global situation worsens further, according to First Deputy Prime Minister Igor Shuvalov. "The dangers are clear—falling demand for our products and the prices on them—just what we saw in 2008. For the moment, it doesn't look that bad, but we need to be ready for the most dramatic possible shocks," he said in an interview.

MarketWatch:

• IMF: Emerging markets push new pledges to $456 bln. Several key emerging market countries Monday detailed their plans to boost the International Monetary Fund's coffers by more than $90 billion to push the total new commitments to around $456 billion, according to the IMF.

Business Insider:

• JCPenney(JCP) President Michael Francis Steps Down After Just 8 Months.
• Rising European Nationalism Is Destroying The Euro.
• SocGen: China's Housing Market Correction Is 'Sending Shock Waves Through Its Economy'.

Zero Hedge:

• On Egyptian Elections And Israeli Escalations.
• US Retirement Benefits Underfunding Rises To Record $1.4 Trillion.
• Biderman On Europe: "Germany Must Say No To Greece, Spain, & Italy".

CNBC:

• Oracle's(ORCL) Shares Surge on Better-Than-Expected Results. Oracle posted better-than-expected quarterly revenue and authorized an extra $10 billion in share buybacks after a 7 percent jump in sales of new software licenses, helping drive shares higher.

IBD:

• Dunkin' Brands(DNKN) Heating Up Westward Expansion.

NY Times:

• Electronics Retailers Scramble to Adapt to Changing Market.
• Lost in Recession, Toll on Underemployed and Underpaid. Throughout the Great Recession and the not-so-great recovery, the most commonly discussed measure of misery has been unemployment. But many middle-class and working-class people who are fortunate enough to have work are struggling as well.

Rasmussen Reports:

• Generic Congressional Ballot: Republicans 45%, Democrats 38%.

Telegraph:

• Debt crisis: Greek government will be forced to seek third bail-out. Greece is expected to ask for a third international bail-out agreement as soon as a government is formed, ramping up the pressure on Germany and Brussels to back the eurozone or break it.
• Spain pleads for ECB rescue as bond markets slam shut. Europe's leaders have vowed to mobilise all possible means to counter the region's escalating crisis after Spain's borrowing costs threatened to spiral out of control.

Les Echos:

• France Plans 3% Tax on Investor Dividends This Summer. The tax on dividends distributed to shareholders will be paid by companies, expected to bring in EU800m/yr, without citing anyone. Total, France Telecom, Sanofi may be among the most affected.

Sing Tao Daily:

• Hong Kong Trade Body Expects 2012 Exports to Fall 3%. The city's exporters remain "pessimistic" about business prospects, citing Edward Leung, chief economist at the Hong Kong Trade Development Council.

Evening Recommendations
Raymond James:

• Cut (BRY), (FST), (NOG), (ROSE) and (COP) to Underperform.

Night Trading

• Asian equity indices are -.50% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 180.0 -.5 basis point.
  
• Asia Pacific Sovereign CDS Index 141.50 -6.0 basis points.
  
• FTSE-100 futures +.19%.
  
• S&P 500 futures -.07%.
  
• NASDAQ 100 futures +.12%.

Morning Preview Links

Earnings of Note
Company/Estimate

• n/a

Economic Releases
8:30 am EST

• Housing Starts for May are estimated to rise to 722K versus 717K in April.
• Building Permits for May are estimated top rise to 730K versus 715K in April.

Upcoming Splits

• (ABCO) 2-for-1
  

Other Potential Market Movers

• The Spanish Bill Auction, JOLTs Job Openings for April, Germany ZEW Survey, weekly retail sales reports, (ETH) investor conference, (MCK) investor day, (FSL) analyst meeting, Wells Fargo Healthcare Conference, Stifel Nicolaus Internet/Media/Publishing Conference, Raymond James Coal Conference and the Deutsche Bank Consumer Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly 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 mixed. The Portfolio is 50% net long heading into the day.

Stocks Slightly Higher into Final Hour on US Economic Optimism, Short-Covering, Bargain-Hunting, Tech Sector Strength

Broad Market Tone:

• Advance/Decline Line: Slightly Lower
  
• Sector Performance: Mixed
  
• Volume: Below Average
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 18.75 -11.18%
  
• ISE Sentiment Index 104.0 -11.86%
  
• Total Put/Call .95 -5.0%
  
• NYSE Arms 1.42 +141.37%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 119.75 +1.72%
  
• European Financial Sector CDS Index 288.30 +3.33%
  
• Western Europe Sovereign Debt CDS Index 319.40 +1.04%
  
• Emerging Market CDS Index 292.18 +2.14%
  
• 2-Year Swap Spread 25.25 -2.5 basis points
  
• TED Spread 38.75 +.5 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -52.75 -2.5 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .08% -1 basis point
  
• Yield Curve 129.0 -2 basis points
  
• China Import Iron Ore Spot $136.0/Metric Tonne +.74%
  
• Citi US Economic Surprise Index -59.60 +1.0 point
  
• 10-Year TIPS Spread 2.12 -1 basis point
  

Overseas Futures:

• Nikkei Futures: Indicating a -40 open in Japan
• DAX Futures: Indicating +7 open in Germany
  

Portfolio:

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

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 hugs the flatline, near session lows, on rising Eurozone debt angst, profit-taking, more shorting, financial sector weakness, technical selling and rising global growth fears. On the positive side, Alt Energy, Internet, Semi, Homebuilding, Road & Rail and Airline shares are especially strong, rising more than +1.0%. Transport and Technology shares have outperformed throughout the day. "Growth" shares are outperforming "value". Oil is falling -1.0%. Major Asian indices were around +1.25% higher overnight, led by a +1.9% gain in Australia. However, India fell -1.44% as the RBI didn’t cut rates as expected, their CPI came in at 10.4% y/y and Fitch cut its credit outlook on the country to negative. I still don’t believe inflation in China is subsiding as much as investors seem to perceive and that a major new easing is likely there anytime soon. The Portugal sovereign cds is falling -3.6% to 989.45 bps and the Japan sovereign cds is down -3.45%. On the negative side, Coal, Energy, Oil Service, Steel, I-Banking, Insurance and Education shares are especially weak, falling more than -1.0%. Lumber is falling -2.0% and the UBS-Bloomberg Ag Spot Index is gaining +1.8%. Major European indices are mostly lower, led down by a -3.0% decline in Spain. Spanish equities are now down -23.9% ytd, which remains a huge red flag. The Bloomberg European Bank/Financial Services Index is falling -1.94%. The Germany sovereign cds is up +.83% to 104.66 bps, the France sovereign cds is up +1.2% to 199.66 bps, the Spain sovereign cds is jumping +3.7% to 622.0 bps(all-time high), the Italy sovereign cds is gaining +1.8% to 553.83 bps and the UK sovereign cds is gaining +2.8% to 73.84 bps. The Spanish 10Y Yld is up 10.2% in 5 days to 7.16%. Moreover, the European Investment Grade CDS Index is gaining +2.4% to 179.08 bps and the Italian/German 10Y Yld spread is jumping +4.0% to 466.93 bps. Weekly retail sales have decelerated to a sluggish rate. 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 late-Aug. levels. Lumber is -9.0% 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 -24.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +188.0% ytd. The CRB Commodities Index is now technically in a bear market, having declined -26.0% 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. Oil, lumber and copper also trade poorly given global central bank stimulus hopes and recent stock gains. As well, the 10Y continues to trade too well as the yield remains at 1.58% today. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. The “solutions” for the European debt crisis I still hear being bandied about are only bigger kick-the-cans that will eventually lead to an even bigger catastrophe as Germany is engulfed, in my opinion. As well, some key economies in the region are likely accelerating their contractions right now. Moreover, 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. The "US fiscal cliff "will become more and more of a focus for investors as the year progresses. Finally, the upcoming earnings season could prove more challenging than usual for big multi-nationals given US dollar strength and the precipitous declines in some key parts of the global economy during the quarter. Global central bank stimulus hopes and hopes for a Eurozone fiscal unity "solution" have been propping up stocks, but 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 modestly lower into the close from current levels on rising eurozone debt angst, rising global growth fears, profit-taking, technical selling and more shorting.

Today's Headlines

Bloomberg:

• Spanish Yield Jumps Past 7% as Spotlight Shifts Back From Greece. Spanish bonds slid, propelling 10- year yields to more than 7 percent, after yesterday's Greek election failed to convince investors that politicians will be able to tame Europe's financial woes. Italian debt also fell and German bunds rose, reversing earlier declines. Spain's yields climbed to euro-era records as a report today showed the nation's bad loans increased in April. The securities tumbled last week after the bloc's fourth-largest economy requested as much as 100 billion euros ($126 billion) of aid on June 9 to support its banks. Greek bonds rose after pro- bailout parties won enough seats to control parliament. "The spotlight is now back on Spain," said Christian Reicherter, a Frankfurt-based analyst at DZ Bank AG. "The market is worried about the bad loans at the Spanish lenders, which is pressuring the bonds. This goes to show that the European debt crisis isn't solved and we expect bunds to remain well supported." Spain's 10-year yield climbed 35 basis points to 7.22 percent at 1:38 p.m. London time, the most since the euro was introduced in 1999.
• Spanish Bad Loans Jump, Adding to Concerns. More Spanish loans went unpaid in April, suggesting the country’s recession is forcing more companies and consumers into default as the government struggles to restore investor confidence. Bad loans as a proportion of total lending jumped to 8.72 percent in April, the highest since 1994, from 8.37 percent in March and 6.36 percent a year ago as 4.8 billion euros ($6.1 billion) of credit soured in the month, according to data published today by the Bank of Spain in Madrid. Spain’s 10-year government bond yields today reached a euro-era record as concern the region’s debt crisis may deepen outweighed optimism about the results of Greece’s election. Euro finance chiefs called for a new government to emerge “swiftly” from yesterday’s contest, which showed the pro-bailout New Democracy party in a position to form a coalition. “Major steps are necessary at the euro-zone level to protect Spain and Italy from fresh bouts of contagion in the future,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “Judging by past form, European politicians tend to take their foot off the gas when the pressure has gone. It is to be hoped that this time will prove different, but there is a significant risk that progress will be slower than hoped.” The bad-loans ratio on consumer loans rose to 7.43 percent in March from 6.86 percent in December and to 3.01 percent for mortgages from 2.74 percent, the Spanish regulator said.
• Euro Crisis Shifts to Spain as Merkel Faces G-20 Pressure. Europe’s financial crisis deepened and enveloped Spain, raising pressure on German Chancellor Angela Merkel at a meeting of world leaders to shift her stance on measures to shield the global economy. President Barack Obama, who has blamed the crisis for a slowdown in U.S. employment growth, is due to hold talks with Merkel in the Mexican resort of Los Cabos at 1:30 p.m. today local time, a White House official said. Merkel and her fellow euro-area leaders will then hold more talks with Obama this evening at the president’s request. Group of 20 chiefs began a two-day meeting in Mexico today as Spanish borrowing costs soared to a euro-era record. With elections in Greece failing to damp the threat of contagion, policy makers are discussing ways to stimulate the world economy if necessary, a Canadian official said. Merkel, who last week criticized U.S. debt levels, said June 15 she’ll press the G-20 to hold to prudent government spending. “It’s not a complete beating up session, but Germany is the recipient of fairly caustic criticism from other members of the G-20,” Rob Carnell, chief international economist at ING Bank NV in London, said by telephone. “The pressure will be on Germany to give more ground and behind closed doors Merkel may well be more accommodative. There is ground for the euro zone to move, but just what it does depends on how much Germany digs its heels in.”
• EU Commission Has Scant Flexibility On Greece, Handelsblatt Says. The European Commission has only narrow scope to offer Greece more flexibility regarding its fulfillment of bailout conditions, the EU Budget Commissioner Janusz Lewandowski told the Handelsblatt newspaper. The commission has already shown flexibility toward Greece and the country must adhere to its savings targets to receive more aid, Lewandowski is cited as saying in an interview.
• Greek Election Leaves Pyrrhic Victory Risk As Aid Talks Near. Greece survived to fail another day, say economists at Royal Bank of Scotland Group Plc and Citigroup Inc. An election result yesterday that defused expectations of an imminent euro exit by Greece left the threat hanging over the global economy and put European leaders under pressure to speed efforts to protect the rest of the region. Spanish 10-year bond yields soared above 7 percent for the first time in the euro era, showing investor concern of the relentless financial turmoil.
• Bond-Swap Divide Deepens Amid Europe Distortion: Credit Markets. Investors seeking shelter from the debt crisis that started in Greece and forced Spain to seek a bailout are distorting credit markets by fueling record disparities between bonds and derivatives. The cost of credit-default swaps insuring investment-grade European companies from steelmaker ArcelorMittal to cement maker Holcim Ltd. (HOLN) exceeded a measure of bond yields by as much as 61 basis points in May and 44 last week, according to Morgan Stanley. That compares with an all-time low of minus 135 in 2008. There was almost no difference in January. Traders are accumulating bond insurance on concern Greece’s exit from the euro would traumatize Europe’s economy and as this weekend’s elections leave the nation’s future in the balance. A shortage of corporate bonds is at the same time driving down yields as banks and investors take advantage of the liquidity from the European Central Bank’s lending program to snap up the notes as an alternative to government debt. “The CDS view is much more realistic because it’s correlated with sovereigns,” said Jochen Felsenheimer, a managing director in Munich at Assenagon Credit Management, which oversees 1.85 billion euros ($2.3 billion). “The distortion provided by the ECB is fully reflected in cash bond spreads, so cash is wrong.”
• Crude Falls for First Time in Three Days on European Debt. Oil dropped for the first time in three days on concern that the worsening European debt crisis will slow global economic growth and reduce demand for crude. Prices declined as much as 2.4 percent as Spanish borrowing costs rose to a euro-era high. More Spanish loans went unpaid in April, Bank of Spain data showed, suggesting the country’s recession is forcing more companies and consumers into default. The weekend elections in Greece eased concern that the country will exit the euro. “Although the Greek news was positive, people are more concerned now about Spain,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “There is a bearish economic contagion in Europe and it’s essentially bringing prices down.” Oil for July delivery fell 86 cents, or 1 percent, to $83.17 a barrel at 11:55 a.m. on the New York Mercantile Exchange. Prices are down 19 percent in the second quarter and 16 percent this year. Brent oil for August settlement dropped $1.56, or 1.6 percent, to $96.05 a barrel on the London-based ICE Futures Europe exchange.
• Dollar Shortage Seen in $2 Trillion Gap Says Morgan Stanley. Central banks rebuilding foreign- exchange reserves at the fastest pace since 2004 are crowding out private investors seeking U.S. dollars, boosting demand even as the Federal Reserve considers printing more currency. After falling to an all-time low of 60.5 percent in the second quarter of last year, the dollar’s share of global reserves rose 1.6 percentage points to 62.1 percent in December, the latest International Monetary Fund figures show. The buying has left the private sector with $2 trillion less than it needs, according to investment-flow data by Morgan Stanley, which sees the dollar gaining 8.2 percent in 2012, the most in seven years.
• Biggest Stocks Beat S&P 500 Most In 13 Years As P/Es Fall.
  

MarketWatch:

• Bundesbank Rejects Bond-Redemption-Fund Plan. Germany's conservative central bank said Monday it opposes a proposed bond redemption fund, first put forward by the country's Council of Economic Advisers, that would allow euro-zone states to share liability for debts above 60% of GDP. Whether the idea could be implemented under existing European treaties and be compatible with German constitutional law "appears very questionable," the bank said in its June bulletin. The bank said that the euro zone's bailout funds, the EFSF and the ESM, are better tools for addressing fiscally weak states in the 17-nation currency bloc as these are linked with strict conditions and penalty interest rates on loans. It also cautioned a mutualization of debts would lower the pressure on states with higher financing costs to engage in sound fiscal policies and could ultimately damage Germany's credit rating. Comprehensive shared liability would "throw liability and monitoring considerably out of balance," wrote the bank, adding that reform proposals failed to beef up European authorities' right to intervene in the budgetary policies of individual member states. Leading policy makers in Germany have taken a skeptical stance toward any sharing of debt in the euro zone that is not accompanied by strict and enforceable rules regulating the fiscal deficits the region's countries can run.

CNBC.com:

• Google(GOOG): Government Censorship Requests 'Alarming'. Google has received more than 1,000 requests from authorities to take down content from its search results or YouTube video in the last six months of 2011, the company said Monday, denouncing what it said was an alarming trend.
• Weak Jobs Market Hits Homebuilder Confidence. A stall in job growth hit home builder confidence in June. A monthly confidence index from the National Association of Home Builders saw just a one point gain after posting a 4 point spike in May. The survey now sits at 29, with 50 the line between positive and negative sentiment. “While the June HMI is in keeping with our forecast for gradually improving single-family home sales this year, recent economic reports have shown some weakening in the pace of recovery likely factored into the marginal gain,” said NAHB chief economist David Crowe in a written release. “In addition, builders across the country continue to report that overly tight lending conditions and inaccurate appraisals are major obstacles to completing sales at this time.”

Business Insider:

• GREEK SHIPPER: I Am Taking My Family Out Of Athens To Avoid The Coming Unrest.
• A Chinese Company Plans To Build The World's Tallest Building In Just 90 Days.
• Facebook(FB) Buys Facial Recognition Startup Face.com.
• 17 Facts You Need To Know About The Controversial Islamist Group That Just Took The Egyptian Presidency.
• WILLEM BUITER: Spain And Italy Will Both Need Sovereign Bailouts.
• Russia Is Reportedly Filling Two Of These Assault Ships With Marines And Rushing Them To Syria.

Zero Hedge:

• As Italy Hints Of Subordination, Did Rome Just Request A "Semi" Bailout?
• Spain May Not Be Uganda, But Germany Is Chile. (graph)
• Merkel Just Says "Nein".
• Complete European Sovereign Event And PIIGS Bond Issuance Calendar - June And July.

Reuters:

• Fitch Cuts India Rating Outlook to Negative. Fitch Ratings cut its credit outlook for India to negative from stable, nearly two months after rival Standard & Poor's made a similar call, citing risks that India's growth outlook could deteriorate if policymaking and governance don't improve. "A significant loosening of fiscal policy, which leads to an increase in the gross general government debt/GDP ratio, would result in a downgrade of India's sovereign ratings," Fitch said in a statement on Monday. The agency estimated general government debt for India of 66 percent of GDP at the end of the most recent fiscal year, compared with a median of 39 percent for BBB-rated countries. India's economy grew just 5.3 percent in the March quarter, the weakest in nine years, but earlier on Monday the central bank unexpectedly left interest rates on hold, sending bonds, stocks and the rupee lower. The rupee weakened further to 55.94 per dollar from around 55.82 before the Fitch statement. Bond yields were range-bound, while stocks were already shut for the day.
• Intel(INTC) to Buy InterDigital(IDCC) Patents for $375 Million. InterDigital Inc said on Monday it had agreed to sell to Intel Corp about 1,700 wireless technology patents for $375 million, sending InterDigital shares up 27 percent.

Telegraph:

• Greek agony drags on as Asphyxiation Bloc wins. Europe’s establishment is delighted by the victory of New Democracy and pro-asphyxiation bloc. This relief is unlikely to last much beyond today, if that. Greece’s new leaders have a mandate from Hell. Almost 52pc of the popular vote went to parties that opposed the bail-out Memorandum in one way or another. There is no national acceptance of the Troika’s austerity policies whatsoever. The hard-Left Syriza party of Alexis Tsipras is arguably more dangerous in opposition, now fortified with big bloc of seats in Parliament. He can lacerate the government without responsibility as the state sheds 150,000 public sector workers, a fifth of the total.
• G20: don't expect any solutions from the international junketing in Mexico. It's Monday, so it must be time for another international summit. Gathered in the Mexican seaside resort of Los Cabos, G20 leaders will already be wondering why they've made the trip.

China Finance:

• The slowing of China's economy growth will end in the second half of this year, but won't rebound noticeably, Zhang Liqun, a researcher at the Development Research Center of the State Council, wrote.

Bear Radar

Style Underperformer:

• Large-Cap Value -.50%

Sector Underperformers:

• 1) I-Banking -1.52% 2) Oil Service -1.51% 3) Coal -1.50%

Stocks Falling on Unusual Volume:

• LRE, DB, ORCL, E, USNA, LFL, INFI, HCSG, SHOO, ONXX, CHKP, CWEI, LNCR, ASIA, USPH, SDT, BKI and DSW
  

Stocks With Unusual Put Option Activity:

• 1) GRA 2) ADBE 3) EWA 4) ADM 5) NKE
  

Stocks With Most Negative News Mentions:

• 1) NE 2) APA 3) HUN 4) AGCO 5) BODY
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth +.16%

Sector Outperformers:

• 1) Homebuilders +1.68% 2) Biotech +.80% 3) Internet +.71%

Stocks Rising on Unusual Volume:

• TEO, FIO, VMED, IOC, ZNGA, OSIR, BVSN, MLNX, CERN, YNDX, ALGN, GRPN, FSLR, QCOR, EBAY, SFD and TFM
  

Stocks With Unusual Call Option Activity:

• 1) EWG 2) AUXL 3) CCJ 4) ONXX 5) RDN
  

Stocks With Most Positive News Mentions:

• 1) PETM 2) GRPN 3) GD 4) CMG 5) ELT
  

Charts:

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

Monday Watch

Weekend Headlines
Bloomberg:

• Greece Races as Cash Dwindles With Europe Seeking Return to Cuts. Greece’s two traditional political rivals are in a race to forge an unprecedented coalition as the state’s cash dwindles, bank deposits flee and Europe demands renewed austerity pledges before releasing more emergency aid. Greece will run out of money in mid-July, the Syriza party, which placed second in yesterday’s election, said on June 13 after being briefed by Acting Finance Minister Giorgios Zanias. Caretaker Labor and Social Security Minister Antonis Roupakiotis refused to offer assurances pensions will be paid in August, Athens News Agency reported the same day. “There’s no time to lose or leeway for small party games,” Antonis Samaras, leader of New Democracy, said in Athens yesterday after placing first in a rerun vote that will force him to rule with the third-place socialist Pasok party. “The country must be governed.”
• Greece Still Has No Crisis Plan After Vote, Germany’s Bild Says. Greece’s parliamentary election doesn’t ease the euro area’s crisis because voters failed to give clear support to the shared currency, Bild, Germany’s most- read newspaper, said in an editorial. “Far too many Greeks voted for the leftist party that is taking them for a ride,” Bild said, referring to Syriza, which rejects the terms of Greece’s bailout. “In truth, Greece is a developing country. It has no economic basis, no administration worthy of the name and still no plan for changing that.” “Nobody can draw any clear conclusions from a slim majority, neither in Athens nor in the rest of Europe,” Bild said in an e-mailed editorial for tomorrow’s edition. Greece’s election “split and paralyzed the country and doesn’t help the euro out of the crisis.”
• Hollande Bolstered as Socialists Win French Parliament Control. French President Francois Hollande’s Socialist Party and its allies won an absolute majority in the National Assembly, exit polls showed, paving the way for them to pass legislation without the aid of other members of parliament. The Socialist bloc won 314 out of the 577 seats, pollster CSA said, with 289 needed for a majority. Former President Nicolas Sarkozy’s Union for a Popular Movement party and its allies have 228 seats, CSA said, and the anti-euro National Front won two seats. Turnout in the second and decisive round of legislative elections yesterday was 56 percent. The victory gives the Socialists control of practically every political institution in France -- the presidency, the upper and lower houses of parliament, all but two of the regions and most of the country’s big cities, communes and departments - - a first in the Fifth Republic. Control of the lower house of parliament will allow Hollande to push through the tough decisions needed amid Europe’s debt crisis. With growth stalling at home, Hollande now faces the task of telling the French people that the state’s depleted coffers may mean cuts in spending and higher taxes as he makes good on his deficit-cutting promises. “The result means that President Hollande and his government have free reins to continue to govern,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “With domestic politics now out of the way, investors’ focus will probably turn to the domestic economy, which has shown recently worrying signs of deterioration, and to the Franco- German relationship, which has yet to reach cruise speed.”
• Spanish Yields Suggest Bond Investors Slamming Door: Euro Credit. Investors who oversee more than $3.2 trillion expect Spain to become the fourth euro member to need external funding as borrowing costs surge to levels too punitive for the nation to finance its needs on the capital markets. Spanish debt slumped last week, pushing the 10-year yields to 7%, as investors at Fidelity Investments, Frankfurt Trust and Principal Investment Management said the nation may lose market access. "Yields are at levels at which Spain can't really afford to finance itself for more than a few months," said Craig Veysey, head of fixed income at Principal Investment Management in London, part of Sanlam Group, which manages $72 billion.
  
• Spain Needs Liquidity Injection From ECB, Minister Tells ABC. Spanish Deputy Minister for European Affairs Inigo Mendez de Vigo said countries including Spain need a liquidity injection from the European Central Bank, according to an interview in ABC. The government’s last overhaul of the banking industry, which increased provisions for losses, may not have been sufficient as some banks weren’t able to make those provisions, Mendez de Vigo told the newspaper.
• Europe Gets Emerging Market Crisis Ultimatum as G-20 Meet. European leaders are facing pressure at the Group of 20 summit in Mexico to halt market uncertainty and stamp out the debt crisis as global partners hint at help to keep the world economy afloat. As elections in Greece reduced the immediate risk of the euro area’s breakup, China and Indonesia signaled growing exasperation with more than two years of European crisis- fighting that has failed to stem the threat of global contagion. World Bank President Robert Zoellick said that policy makers bungled their attempt to rescue Spain’s banks. “I hope that one way or another our European colleagues will reach an agreement on rigorous methods to manage the crisis,” Indonesian President Susilo Bambang Yudhoyono, who heads Southeast Asia’s biggest economy, said in a speech in the Mexican resort of Los Cabos yesterday. “The absence of such methods will have unsettling consequences to all of us.” The two-day G-20 summit starting today kicks off a week of crisis meetings taking place after Spain this month became the fourth euro-region nation to seek a bailout amid the weakest global economy since the 2009 recession.
• Ireland May Need to Write Down Debt for Recovery, Reinhart Says. Ireland and other “advanced economies” may have to write down billions of euros in personal and corporate debt before economic growth can return, Carmen Reinhart said in an interview with the Sunday Business Post. “To restore solvency and the confidence that you can grow again, you need to deal with the debt overhang,” Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington, told the Dublin-based newspaper.
• China Abandons Role of Global Engine as Wen Tempers Stimulus. Premier Wen Jiabao has an unspoken message to his Group of 20 counterparts in Mexico today: This time, don’t count on a growth bailout from China. In the depths of the 2008 credit crunch, Wen’s 4 trillion yuan ($586 billion) fiscal injection over two years and 17.6 trillion yuan credit surge helped prop up the global economy. In China, it fueled a property bubble, stoked inflation and amassed bad debts that Fitch Ratings says weakened the banking system. “The government is trying to strike a better balance between stabilizing growth in the short term and adjusting structure in the long term,” said Peng Wensheng, chief economist in Beijing at China International Capital Corp., who worked at the International Monetary Fund and Hong Kong’s central bank. Total stimulus this year may be less than one- third the size of the 5.4 trillion yuan fiscal and monetary firepower of 2009, Peng said. Investment is more strategically focused than the efforts that year that helped cushion everyone from Australian iron-ore exporters to General Motors Co., which saw its Chinese sales soar 67 percent as it coped with bankruptcy at home. Of some 818 billion yuan in projects recently approved, 55 percent were for clean energy or subsidies for fuel-efficient cars, according to Australia and New Zealand Banking Group Ltd.
• China Home Prices Fall in More Than Half Cities Tracked. China’s home prices fell in a record 54 of 70 cities tracked by the government in May as developers cut prices to boost sales amid housing curbs. The eastern city of Wenzhou led declines with a 14 percent slump in values from a year earlier, while Beijing and Shanghai recorded losses of as much as 1.6 percent, according to data released by the statistics bureau today. China has pledged to maintain its curbs on the housing market even as economic growth is slowing, prompting the central bank to cut borrowing costs for the first time since 2008 on June 7. The Housing Ministry said this month that China will steadfastly continue with its property curbs that have so far included higher down payments and restrictions on the number of homes being bought.
• Fed Seen Twisting to Risk Management to Spur U.S. Growth. Federal Reserve officials must choose this week between their best estimates and their worst fears of what will happen to the U.S. economy. Policy makers will bring new forecasts to their June 19-20 meeting and probably will mark down their April central-tendency estimate for growth of 2.4 percent to 2.9 percent this year. Lurking in the background is the risk of increasing financial stress in Europe and stubbornly high U.S. unemployment that has remained above 8 percent for 40 consecutive months. All this could prompt them to move away from their outlook for moderate growth and tilt toward a “risk-management” strategy pioneered by former Fed Chairman Alan Greenspan, which puts more emphasis on tracking and containing high-cost threats. Both Janet Yellen, the Fed’s vice chairman, and William C. Dudley, head of the Federal Reserve Bank of New York, used the phrase in the past month.
• Third Fed Stimulus Won’t Be Better Than QE2, Romney Says. Presidential candidate Mitt Romney said the Federal Reserve’s attempts at stimulating the U.S. economy “did not have the desired effect” and a new round of quantitative easing by the central bank wouldn’t fare better. The second round of quantitative easing, a series of bond purchases referred to as QE2, “was not extraordinarily harmful, but it does put in question the future value of the dollar and it will obviously encourage some inflation,” Romney said in an interview that aired today on CBS’s “Face the Nation” program. “A QE3 would do the same thing.”

Dow Jones:

• Indonesia's exports could slow further unless the crisis in Europe is resolved quickly, the country's Trade Minister Gita Wirjawan said.

Wall Street Journal:

• Saudis Bury Crown Prince in Mecca. Attention Turns to Succession Plans; Prince Salman Is Expected to Be Named New Crown Prince. The surviving sons of King Abdulaziz gathered in the holy city of Mecca to bury the second heir to the throne within eight months, moving the succession process closer to a new generation in a family determined to maintain stability as the Middle East is gripped by political change.
• Homeowner Aid Boosts Big Banks. A government program that helps struggling homeowners take advantage of low interest rates to cut monthly mortgage payments is providing an unexpected revenue boost to large banks such as Wells Fargo(WFC) and J.P. Morgan Chase(JPM).
• Bombings Target Churches in Nigeria. Three suicide bomb attacks on churches rocked a northern Nigerian state Sunday, killing at least 21 people and wounding about 100, officials said, prompting protests in a state that has previously been strained by religious tensions.
• A Greek Reprieve. The Germans might have preferred a victory by the left in Athens. The tragedy of Greece, and much of the rest of Europe, is that it overborrowed during the euro's first decade to finance a higher standard of living than it could afford. Now the debtors have to adjust. The best way to do so is with supply-side reforms in taxes, pensions and labor markets that will lure investment and make Europe's economies more competitive. They need austerity for government but growth for the private economy. Without that, the Greek reprieve will be merely another opportunity lost.

Fox News:

• Iran: About 20 arrested for nuclear scientist hits. Iran says about 20 suspects have been arrested for alleged links to assassinations of Iranian nuclear experts that Tehran claims is part of covert operations led by Israel. Sunday's remark by Intelligence Minister Heidar Moslehi is the first official number on the detentions. Last week, Iran announced it had made arrests linked to the slayings.

Business Insider:

• The Head Of Greece's Neo-Nazi Party Is The Only One Really Happy About Tonight's Outcome.
• 4 Reasons Why China Is Headed For Meltdown.
• Check Out These Awesome Photos Of What Apple's Next iPhone Could Look Like.
• Europe Will Splinter No Matter What Happens In Greece; 'France Has At Most Three Months' Says German Official.

Zero Hedge:

• SocGen's Take On The Greek Elections And What Happens Next.
• And Now... Let's Play Chicken.
• Pasok Throws A Monkey Wrench Into Coalition Discussions.

CNBC:

• Muslim Brotherhood Declares Victory in Egypt Election. Egypt's Muslim Brotherhood declared on Monday that its candidate Mohamed Morsy won the country's first free presidential race, beating Hosni Mubarak's last prime minister and ending six decades of rule by presidents plucked from the military. But shortly before the final result the generals who have run the country since the overthrow of Mubarak issued new rules that made clear real power remains with the army. "Mohamed Morsy is the first popularly elected civilian president of Egypt," the official website of Brotherhood's Freedom and Justice Party announced in a brief message.
• Are Speculators 'Attacking' Spain and Italy? It may be hard to tell, but a subtle shift is going on behind the scenes in Europe. Both German Chancellor Angela Merkel and French President Francois Hollande have denounced “speculators” who are “unjustly attacking” Italy and Spain.

Wall Street All-Stars:

• Indicator Update: Can the Fed Meet Market Expectations?
  

IBD:

• 55,000 Containers Give J.B. Hunt Transport An Edge.

LA Times:

• Some Southern California 'nonprofit' Pot Shots Make Big Money. Documents show a cash-infused retail world bearing little resemblance to the one pitched to voters for the 1996 Compassionate Use Act for 'seriously ill Californians.'

NY Times:

• Russia Sending Missile Systems to Shield Syria. Russia’s chief arms exporter said Friday that his company was shipping advanced defensive missile systems to Syria that could be used to shoot down airplanes or sink ships if the United States or other nations try to intervene to halt the country’s spiral of violence. “I would like to say these mechanisms are really a good means of defense, a reliable defense against attacks from the air or sea,” Anatoly P. Isaykin, the general director of the company, Rosoboronexport, said Friday in an interview. “This is not a threat, but whoever is planning an attack should think about this.”

NY Post:

• Morgan’s big secret. The coming muni-bond crisis. While the Senate Banking Committee last week spun its wheels trying to get JP Morgan chief Jamie Dimon to admit to something nefarious during testimony about his “London Whale” trading loss, executives at the big bank were concealing a far bigger scandal. OK, it’s no secret that nation’s public pension funds are in big trouble, holding large “unfunded” liabilities owed to public workers once they retire. But most politicians (New Jersey Gov. Chris Christie is an exception) will tell you the problem is fairly containable, that there are simple fixes — such as raising taxes on the rich or pruning benefits. Not so, warns a “strictly confidential” report JP Morgan issued last year. It describes in straightforward, frightening detail how underfunded pensions are huge ticking timebombs for many of the nation’s big cities and states. The scandal isn’t simply that most public officials are misleading the public about the enormity of the problem and what steps must be taken to address the matter. As the Morgan report notes, many of the real liabilities are located “off balance sheet,” hidden from the public’s eye, and lax accounting standards let cities and states minimize their enormity. It’s also that JP Morgan itself kept the report’s findings a secret except for a few big clients, mostly hedge funds and large institutional investors, who got the inside tip on which states and cities are most likely to default on their debt as their pension liabilities fester. Yes: Default is a very real possibility, because the solutions are far from easy.

Reuters:

• India likely to cut rates despite high inflation. India's central bank is expected to cut interest rates on Monday in a bid to breathe fresh life into a sputtering economy even as inflation remains uncomfortably high.

The Telegraph:

• Business is starting to get tired of Europe. It was an article of faith not often tested that businesses liked the European Union.
• Greece will have to leave EMU whoever is elected. The exact circumstances and timing of Greece’s ejection from monetary union no longer have any systemic importance for global finance. The damage has already been done. The precedent of EMU break-up is by now priced into the credit markets. Formalising it changes little.
• Greek election: Live. German Chancellor Angela Merkel holds a conference call with Antonis Samaras following his Greek election victory and says that she is confident the country would now abide by its bailout pledges.

Efe:

• Spanish Prime Minister Mariano Rajoy has ruled out for now increased value-added tax and cutting wages of public workers as suggested by the IMF, citing comments he made to reporters following a People's Party meeting in the northern city of San Sebastian.
  

China Securities Jounral:

• China should introduce new measures to curb real-estate speculation "appropriately and prudently," according to a commentary on the front page of the China Securities Journal today. Some cities are loosening government restrictions on home purchases, according to the commentary, written by a reporter at the newspaper named Zhang Min. Real-estate speculation will hurt "reasonable" home demand and push up housing prices again, according to the commentary.

Weekend Recommendations
Barron's:

• Made positive comments on (SMG), (XOM), (COP), (CVX) and (NBR).
• Made negative comments on (NAV).
  

Night Trading

• Asian indices are +.75% to +1.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 180.5 -2.5 basis points.
• Asia Pacific Sovereign CDS Index 147.50 -3.0 basis points.
• FTSE-100 futures +.71%.
  
• S&P 500 futures +.37%.
• NASDAQ 100 futures +.45%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (IHS)/.94

Economic Releases
10:00 am EST

• The NAHB Housing Market Index for June is estimated to fall to 28 versus 29 in May.

Upcoming Splits

• (DORM) 2-for-1
• (BTH) 2-for-1
• (ABCO) 2-for-1
  

Other Potential Market Movers

• The Greek election outcome, G-20 Leaders Summit, India rate decision, Jefferies Consumer Conference, Goldman Sachs Chemicals Conference, (MSFT) announcement, (DHR) Analyst Meeting and the (TGP) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are higher, boosted by commodity and technology shares in the region. I expect US stocks to open higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the week.