Stocks Slightly Lower into Final Hour on Eurozone Debt Angst, Diminished Central Bank Stimulus Hopes, Profit-Taking, More Shorting

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 18.07 -1.69%
  
• ISE Sentiment Index 80.0 -17.53%
  
• Total Put/Call .91 -14.95%
  
• NYSE Arms 1.07 +9.18%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 114.99 -.37%
  
• European Financial Sector CDS Index 275.12 -1.12%
  
• Western Europe Sovereign Debt CDS Index 304.84 -2.07%
  
• Emerging Market CDS Index 284.47 -.05%
  
• 2-Year Swap Spread 24.0 -.75 basis point
  
• TED Spread 38.75 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -51.25 +.75 basis point
  

Economic Gauges:

• 3-Month T-Bill Yield .08% unch.
  
• Yield Curve 133.0 +1 basis point
  
• China Import Iron Ore Spot $136.80/Metric Tonne +.15%
  
• Citi US Economic Surprise Index -59.30 +.4 point
  
• 10-Year TIPS Spread 2.14 -1 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating a +13 open in Japan
• DAX Futures: Indicating -25 open in Germany
  

Portfolio:

• Slightly Higher: On gains in my tech sector longs and index hedges
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short, then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near session lows on rising Eurozone debt angst, diminished global central bank stimulus hopes and rising global growth fears. On the positive side, Alt Energy, Oil Tanker and Airline shares are especially strong, rising more than +.75%. Tech shares have traded well throughout the day. Gold is falling -.8% and Oil is down -3.9%. Major Asian indices were mostly higher, led by a +1.1% gain in Japan. However, China fell -.34% and is down -1.1% over the last 5 days, while the rest of Asia has rallied. Major European indices are higher, led by a +1.9% gain in Italy. The Bloomberg European Bank/Financial Services Index is rising +1.2%. The Spain sovereign cds is falling -4.8% to 573.46 bps, the Italy sovereign cds is down -3.2% to 511.49 bps and the Portugal sovereign cds is down -6.7% to 931.52 bps. Moreover, the Italian/German 10Y Yld Spread is down -5.3% to 415.25 bps and the European Investment Grade CDS Index is down -1.97% to 168.68 bps. On the negative side, Utility, Energy, Oil Service, Paper, Construction, Restaurant and Road&Rail shares are under pressure, falling more than -.75%. Copper is down -1.7%, Lumber is down -.75% and the UBS-Bloomberg Ag Spot Index is up +.4%. The Germany sovereign cds is up +1.0% to 99.83 bps, the China sovereign cds is up +3.4% to 117.89 bps, the Japan sovereign cds is up +2.6% to 93.87 bps, the Russia sovereign cds is up +2.4% to 220.51 bps and the UK sovereign cds is up +1.75% to 71.55 bps. Weekly retail sales have decelerated to a sluggish rate at +2.5%. 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 -8.0% 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 -23.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +148.0% ytd. The CRB Commodities Index is now technically in a bear market, having declined -26.0% since May 2nd of last year. Overall, credit gauge deterioration remains a big worry as most key sovereign cds remain technically strong despite some recent improvements. The euro currency, oil, lumber and copper all trade poorly given global central bank stimulus hopes and recent stock gains. As well, the 10Y continues to trade too well as the yield rose just +3 bps today to 1.65%. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is fairly high. The Citi Eurozone Economic Surprise Index is falling another -2.8 points to -68.3 points, which is the lowest since early Oct. of last year. 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 eurozone debt angst, diminished global central bank stimulus hopes, rising global growth fears, profit-taking and more shorting.

Today's Headlines

Bloomberg:

• Italy Banks Waning Loan Quality Hurts Efforts on Capital. Italian banks are struggling to increase capital levels as fallout from the European debt crisis and the country’s third recession in a decade force them to boost provisions against rising bad loan levels. Italian corporate and household bad debt totaled 109 billion euros ($138 billion) in April, an increase of 15 percent from a year earlier, according to Bank of Italy data. Impairments, excluding writedowns, rose to 58 billion euros from 50 billion euros. “Asset quality and high non-performing loans are growing problems for Italian banks, especially as capital levels and internal capital generation do not provide sufficient buffers,” Francesca Tondi, an analyst at Morgan Stanley, wrote in a June 15 report. “The economy is already frail and credit is clearly not flowing,” she said. Italy’s economy has lagged the euro region for the past decade and is expected to contract 1.4 percent this year, the European Commission estimates. The recession is reducing the ability of borrowers to repay loans, forcing lenders to increase provisions and hurting their profitability. The banks may need as much as 42 billion euros of additional capital to boost reserves for non-performing loans, according to Morgan Stanley’s analysis. Moody’s Investors Service downgraded 26 Italian banks last month, citing weakened earnings and the poor economic outlook.
• Merkel Pushes Back On Direct Bond Purchasing to Overcome Crisis. German Chancellor Angela Merkel declined to commit to direct sovereign debt purchases through the euro-area bailout fund, pushing back on calls by euro-region leaders who backed the measure as a way to ease the crisis. Such a move, while legally possible, “is not up for debate” at present, Merkel said today in Berlin. French President Francois Hollande yesterday championed the idea of using the European Stability Mechanism to purchase indebted countries’ bonds as a way to counter rising yields. Just back from the Group of 20 summit in Los Cabos, Mexico, Merkel said: “I haven’t heard about such things.” “There is no concrete planning that I know about, but there is the possibility of purchasing sovereign bonds on the secondary market,” Merkel told reporters today in Berlin after meeting with Dutch Prime Minister Mark Rutte. “But this is a purely theoretical statement about the legal situation.”
• French State Needs 10 Billion Euros for 2012 Budget, AFP Says. France’s government will need to find 10 billion euros ($12.7 billion) such as through new tax receipts to meet the 2012 budget, French Minister Alain Vidalies told Agence France-Presse. “The fact that we have 10 billion euros missing at the end of June isn’t the responsibility of this government that has started working May 16,” Vidalies, the Minister for Relations with the Parliament, said in an interview with AFP, Le Monde daily and La Chaine Parlementaire today. Vidalies said President Francois Hollande’s government, which is due to unveil a revised budget law next month, will seek to compensate the missing funds by scrapping tax breaks for tax payers, ending a tax holiday on labor charges and raising taxes for the wealthy people, AFP said.
• Greece’s Christodoulou Says Spain May Need Writedown Before Aid. Spain may need to impose losses on bondholders before it would be able to receive a “sizable” bailout from international peers, Petros Christodoulou, former head of Greece’s debt office, said in a BBC Radio 5 interview. “There will be some intervention to stabilize” Spain and Italy’s debt, Christodoulou told the radio station today. “If there is no sufficient stabilization” Europe is moving in the direction that “before sizable official money is poured into a country, there has to be some sort of private-sector involvement,” he said. Christodoulou also said buying of government debt by official institutions is “poisonous for the balance of the debt because this is subordinated to the official money.”
• Julian Robertson Says He's Betting Against the Euro: Tom Keene. Julian Robertson, founder of hedge fund Tiger Management LLC, said he's betting against the euro as the region struggles to resolve its sovereign debt crisis. "I continue to be short the euro against various currencies," Robertson, who once ran one of the biggest and best-performing hedge funds in the world, said today in an interview with Tom Keene on Bloomberg Surveillance. While a lot of investors are betting the euro will fall further, there's no reason to take a contrarian view until policy makers have taken steps to solve the crisis, he said.
• Fed Expands Operation Twist by $267 Billion Through 2012. The Federal Reserve will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of 2012 as policy makers lowered their outlook for growth and employment. The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in a statement at the conclusion of a two-day meeting in Washington.
• Job Growth May Fizzle in U.S. as Productivity Gains: Economy. The U.S. economy may be on the cusp of a pickup in productivity that will make it more difficult for Federal Reserve policy makers to reduce unemployment.
• Could Egypt’s Crisis Doom the Arab Spring? From the moment the Egyptian regime was toppled in February 2011, the nation’s military and its Islamic democrats were set on a collision course. Now we’re seeing the crash.

Wall Street Journal:

• J.P. Morgan(JPM) Cuts Derivatives Exposure. J.P. Morgan Chase & Co. this week slashed the size of a position at the center of more than $2 billion in trading losses, according to traders. The New York company so far this month has reduced by $50 billion its exposure to a credit derivatives index known as the CDX.NA.IG.9, according to people familiar with the trading. Much of the reduction came this week, according to traders.
• Food Stamp Fiasco. The next time someone moans about Washington "austerity," tell them about the Senate's food stamp votes on Tuesday. Democrats and a few Republicans united to block even modest reform in a welfare program that has exploded in the last decade and is set to spend $770 billion in the next 10 years. Yes, $770 billion on a single program. And you wonder why the U.S. had its credit-rating downgraded?
  

MarketWatch:

• Let's Be Frank, The Euro's Days Are Numbered. Don’t be fooled by a rallying stock market, where blind hope that a dollar-deluging Federal Reserve will come to its rescue has trumped fundamental analysis these past two days. The world must come to terms with a brutal fact: the euro’s endgame has begun.

CNBC.com:

• 'We Should Be Doing Better,' Welch Says of US Economy. The U.S. economy is missing its full potential because of political stubbornness in Washington and regulations that discourage production, businessman and author Jack Welch told CNBC.
• Housing Isn't a Buyer's Market for Many First-Timers.
  

Business Insider:

• Here's What You Need To Know About The Gun Running Scandal That Could Destroy Obama's Attorney General.
• Jamie Dimon Has Exposed A Huge Financial Loophole.
• 12 Juicy New Details About The Young Barack Obama.
• The 'Skyscraper Index' is Sending a Warning Signal.
  

Zero Hedge:

• Obama Exerts Executive Privilege Over Fast and Furious Fiasco.
• Europe's New, New Math.
• LCH Hikes Italian Bond Margins.
  

Reuters:

• Contagion may drag Italy back to heart of crisis. Italy risks being pulled back to the heart of the euro zone debt crisis as the fallout from a Spanish bank bailout makes market access more expensive even though Italian economic fundamentals are seen as stronger than Spain's. The correlation between moves in Italian and Spanish bonds has risen sharply since March, showing the increased risk attached to holding Spanish debt is feeding through to Italy. Many in markets believe rising borrowing costs will push Spain into a sovereign bailout, damaging investor confidence in lower-rated euro zone debt such as Italy's and depleting the regional funds available if Rome needed assistance.
• Alberta Expects Big Rise In Oil Sands Production.
• Copper extends losses after Fed "Twists" again.

Telegraph:

• Debt crisis: markets bet Germany will be dragged down with everyone else. Nobody ever got rich shorting Japanese government bonds, it is often said. Are those now aggressively shorting German bunds about to fall into the same trap?
• Credit Conditions for Firms Still Deteriorating. Banks are increasingly looking to call in outstanding debts from businesses while new loans are becoming harder and more expensive to secure, the Bank of England has warned.

MNI News:

• France PM Ayrault: To Take Years For Euro Bonds To Be Possible. French Prime Minister Jean-Marc Ayrault on Wednesday said it will take years before the Eurozone reaches the level of political integration necessary for debt mutualization. "A mutualization of debt requires stronger political integration, and this will certainly take some years," Ayrault said in an interview with German weekly Die Zeit.

Frankfurter Allgemeine Zeitung:

• Germany's BVR Banking Assoc. opposes a European banking union as it would provide wrong incentives, citing Gerhard Hofmann, a board member of the organization. A grouping of risks, losses and debt among euro-area banks would go too far and a common European deposit guarantee would be at the detriment of German savers, he said in an interview.
  

Boersen-Zeitung:

• Spanish Prime Minister Mariano Rajoy has failed to win support for this request to allow direct recapitalization of the country's banks through the euro region's financial backstops, citing Brussels-based European Union officials it didn't name.
  

Bild:

• German federal lawmakers may be forced to return to parliamentary session in Berlin over the 10-week summer recess if Spain's debt woes worsen, citing politicians. The summer recess begins on June 29.
  

Die Zeit:

• The German govt is skeptical about giving the European Stability Mechanism a banking license because it's concerned this would give states direct access to the printing press, citing German finance officials.
  

Ansa News:

• The possibility of Italy leaving the euro area if the ECB doesn't start printing euros is not "blasphemy," former Prime Minister Silvio Berlusconi said in Rome today. "The alternative is that member states return to their own currencies," Berlusconi said. This is not "desirable" but it would allow Italy "to increase exports with a competitive depreciation without repercussions on the domestic market."
  

Bear Radar

Style Underperformer:

• Large-Cap Growth -.42%

Sector Underperformers:

• 1) Construction -1.26% 2) Road & Rail -1.12% 3) Utilities -1.01%

Stocks Falling on Unusual Volume:

• WAG, SO, PG, LPSN, APKT, LQDT, ADBE, ALGN, ATHN, MLNX, EXXI, ROSE, EXPE, DLTR, ASPS, CERN, HSNI, HSIC, VQ, UCO, ATU, ETH and LZB
  

Stocks With Unusual Put Option Activity:

• 1) GNW 2) BG 3) ADBE 4) CIGX 5) APKT
  

Stocks With Most Negative News Mentions:

• 1) WAG 2) ROK 3) ADBE 4) PG 5) ADM
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Value +.03%

Sector Outperformers:

• 1) Alt Energy +1.18% 2) Tobacco +.77% 3) Education +.52%

Stocks Rising on Unusual Volume:

• CHKP, TSLA, SODA, MCP, IDIX, OSIR, JBL, AIR, SFD, BG and PCYC
  

Stocks With Unusual Call Option Activity:

• 1) ADBE 2) FTR 3) HMA 4) PG 5) BSX
  

Stocks With Most Positive News Mentions:

• 1) AMAT 2) FDX 3) CSCO 4) MITL 5) LMT
  

Charts:

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

Wednesday Watch

Evening Headlines
Bloomberg:

• Pressure Builds on Spain as G-2o Leaders Chide Europe on Crisis. Group of 20 leaders prodded Spain to spell out details of its bank bailout as the deepening debt crisis in Europe exposed tensions among the world's biggest economies. With Greece on a financial lifeline and Spain asking for as much as 100 billion euros ($127 billion) in aid for its blighted banks, emerging economies pledged more money to stem the turmoil while chastising the euro area's guardians for damaging market confidence. G-20 chiefs "talked about how we need clarity on Spain's application as soon as possible," German Chancellor Angela Merkel said today in the Mexican resort of Los Cabos, where leaders began their final day of deliberations. "We all know that banks that aren't properly capitalized are a real source of turmoil and risk for the economy." Hanging over the meeting were record borrowing costs for Spain, the 17-nation euro region's fourth-largest economy, that is now threatening to spill over into Italy, where bond yields have also been rising. With the global recovery slowing, officials from China to India and Brazil signaled exasperation with Europe's slow response to the debt crisis, which is now in its third year.
  
• Greek Leaders Poised to Agree on Three-Way Governing Coalition. Haggling among Greek political leaders is set to continue for a third day as they bid to form a coalition that will seek relief from austerity measures tied to emergency loans. Socialist Pasok leader Evangelos Venizelos said a new government could be ready today. Antonis Samaras’ New Democracy party, which won June 17 elections, is hammering out a three-way government committed to staying in the euro. He would partner with Venizelos’s Socialist Pasok, which finished third, and Democratic Left. They would hold 179 seats in the 300-member parliament. Talks resume at 1 p.m. in Athens. “The most critical matter isn’t the form the government takes but the national negotiating team which will seek the best possible revision of the loan accord,” Venizelos told reporters at the party headquarters as they wrapped up a second day of talks. “We must do what we can to fight the recession and unemployment and bring growth and jobs. This is what determines the framework in which the government and the country will move.” European officials have held out the prospect of flexibility after the election that amounted to a referendum on remaining in the 17-nation currency union. Venizelos, the former finance minister who negotiated a second 130 billion-euro ($165 billion) rescue package earlier this year, spoke as representatives of the three parties met on a joint policy program. All three party leaders have committed to forming a government that will keep Greece in the euro area and fight to change some austerity measures that have led the country into a fifth straight year of recession. The government in Athens may seek to push back against required cuts in pensions and the minimum wage and the pace of budget-deficit reductions.
• Banks Face $15 Billion Demand on Spain Downgrade: Credit Markets. Spanish lenders face the prospect of needing as much as 12 billion euros of extra collateral for their central bank loans, raising pressure on the banks as they negotiate a 100 billion euro bailout. The additional security will be required on about 245 billion euros of sovereign and government-guaranteed debt pledged by Spanish banks should DBRS Inc. become the fourth ratings company to downgrade the nation to the cusp of junk, according to JPMorgan Chase(JPM). Bonds of Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA are the worst performers in the Bank of America Merrill Lynch EMU Financial Corporate Index this month. The ECB will demand deeper discounts on Spanish debt should DBRS cut its A High rating to match grades from Moody's Investors Service, Standard & Poor's and Fitch Ratings, according to JPMorgan. "People are already asking if the 100 billion-euro bailout will be enough for their needs, and having to raise another 12 billion won't help," said Olly Burrows, a London-based credit analyst at Rabobank Intl. "It's too much pressure on Spanish banks that are already squeezed."
• LCH Raises Margin Costs for Trading Spanish Bonds Amid Crisis. LCH Clearnet Ltd., Europe’s biggest clearing house, raised the extra deposit it takes from clients to trade most Spanish government bonds as concern mounts that euro-area leaders are failing to tame the debt crisis. The margin needed for Spanish securities due in 10 years to 15 years will be increased to 14.7 percent from 13.6 percent, according to a statement on LCH Clearnet’s website yesterday, which was confirmed by Rachael Harper, a spokeswoman for the company. The rate was also boosted on all Spanish debt due from zero months through seven years.
• RBS’s Hester Says Europe Crisis Resolution to Take Years. Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester said it may take years before Europe finds a solution to the debt crisis as economies in the region struggle to implement reforms. “At issue is the ability for some countries in Europe, particularly in southern Europe, to make themselves more competitive,” Hester, 51, said today in an interview with Bloomberg Television in Hong Kong. “In the meantime, we’re talking about pieces of sticking plaster to buy time for economic reform to bite.”
• Cyprus Said to Face Europe Pressure for $13 Billion Aid. European authorities are pushing Cyprus to take a full bailout package worth as much as 10 billion euros ($12.7 billion), resisting the country’s attempt to limit any aid to its banking system, two officials said. Bargaining with Cyprus, which is also pursuing a loan from Russia, will continue on June 21 when euro-area finance ministers grapple with salvaging Spain’s banking system and a possible relaxation of Greek aid terms. If the Russian loan comes through, the country could use that agreement to improve its bargaining position with its euro-bloc partners.
• Subbarao: India's Inflation Rate Is Disturbing. (video) Indian inflation exceeds acceptable levels and restraining it may require sacrificing economic growth, central bank Governor Duvvuri Subbarao said.
• Indians Grow Weary of Socialism in the Skies. Two decades into their country's post-liberalization new economy, many Indians, especially the sizeable middle-class, have substantially revised ideas about government spending that were accepted without question in the old days of socialism.
• IPad Boom Strains Lithium Supplies After Prices Triple. Investors from JPMorgan Chase & Co. to BlackRock Inc. are trying to make money from the exploding popularity of iPads and increasing sales of hybrid cars by investing in producers of lithium for batteries. Prices for the conductive metal, the lightest in the periodic table, have tripled since 2000 in a market now worth $1 billion a year as uses expand in vehicles, ceramics, electronics and lubricants. Apple Inc. (AAPL) and Toyota Motor Corp. (7203), maker of the Prius electric-gasoline car, have few alternatives as they pursue higher performance and mobility, leading Dahlman Rose & Co. analysts to forecast lithium demand will double by 2020.
• South Korean Taxi Drivers Go on First Nationwide Strike. South Korean taxi drivers began their first nationwide strike today, demanding a fare increase and the right to burn diesel amid rising fuel costs.
• Europe Debt Crisis Restrains Rebound in Japan’s Exports: Economy. Japan reported its first trade deficit with the European Union since the Finance Ministry began tracking data in 1979 as the debt crisis roiling Spain and Greece limits a rebound in Japanese exports.
• Obama Plan Means Higher Taxes on Business. President Barack Obama’s plan to raise tax rates for the top 2 percent of U.S. households would mean higher taxes on the people who report 53 percent of business income reported on individual returns, according to the Joint Committee on Taxation. The nonpartisan analysts prepared the data at the request of Republicans on the Senate Finance Committee. Orrin Hatch of Utah, the panel’s top Republican, said the document was “irrefutable proof” that tax rates shouldn’t go up. “With our economy as weak as it is, it makes absolutely no sense to hit more and more small businesses with a tax hike,” he said in a statement.

Wall Street Journal:

• G-20 Leaders Divide Over Euro-Zone Crisis. World leaders papered over their differences after clashing over the euro-zone debt turmoil, deferring concrete decisions to other meetings amid worries about another global crisis. The Group of 20 advanced and developing economies, after a two-day summit, pushed European nations to integrate their banking systems quickly to calm the financial turbulence hitting Spain and threatening to ricochet around the world.
• CFTC Moves to Brake High-Speed Traders. U.S. regulators are about to take a big step toward reining in high-frequency trading: defining what it is. On Wednesday, a Commodity Futures Trading Commission subcommittee is expected to propose a roughly 60-word definition of high-frequency trading that would define it broadly, a bad sign for traders who had hoped for narrower language. The announcement follows three months of sometimes contentious meetings by an industry group that was formed by the CFTC to help the agency wrestle with the impact of rapid-fire trading on financial markets.
• Dimon: 'We Don't Gamble'. J.P. Morgan(JPM) CEO Gets Tougher Treatment From House Than He Got in Senate.
• Steelmakers Gird for a Downturn. The steel industry faces its worst prospects in four years, with prices and demand falling, prompting a call by industry executives to cut costs and shut unprofitable mills. The gloomy outlook mostly reflects the European crisis and slowing construction in China. It represents a sharp contrast from earlier this year when, buoyed by the automotive and energy-extraction industries, steelmakers were able to push through price increases and step up production.
• Egyptian Opposition Finds Unity Against Military. Egypt's Islamist and liberal forces, wary about the results of the weekend's presidential election, cast aside their ideological differences to protest the ruling military's moves to extend its grip on power.
• Farm Bill Holds Windfall for Foreign Insurers. Several foreign insurers stand to collect millions of dollars in new U.S. taxpayer-funded subsidies as part of a proposed shift in farm policy. A Senate bill would expand the federal crop-insurance program while eliminating direct subsidy payments to farmers. Such an expansion would benefit numerous U.S. insurance companies—as well as several based in Australia, Bermuda and Switzerland that in recent years acquired five of the nine largest U.S. crop-insurance companies.
• US, EU May Consider Trade Pact to Spur Growth. The U.S. and European Union said Tuesday they would consider a comprehensive trade pact and other measures to spur job and economic growth on both sides of the Atlantic.

Business Insider:

• Tomorrow Is The Day Of Reckoning For Obama's Attorney General.
• Even The Airports In Europe Are Bizarrely Empty.
• Here's Why Microsoft's(MSFT) Surface Tablet Is Guaranteed To Have Small Sales.

Zero Hedge:

• Your EBT Card Has Been Denied... At The Spearmint Rhino.
• Forget EURIBOR And Basis-Swaps; EUREPO Curve Inversion Signals Major European Funding Stress. (graphs)
• Guest Post: Who Destroyed The Middle Class? (Part 1).
• The Consequences Of The Rise Of European Nationalism.

CNBC:

• Hedge Funds Bet on Big German Bunds Sell-Off. Leading hedge fund managers are betting on a significant sell-off in German government bonds in the coming months after a sharp fall in yields on the debt paper driven by a flight to safety in the eurozone. More than 50 percent of managers polled at an industry conference in Monaco on Tuesday said they expect Bund yields to double within a year. Gavyn Davies, the founder of hedge fund Fulcrum Asset Management, told the Gaim conference that every hedge fund’s analytical model was signaling that the German bond market was too expensive. He said Bund yields were being depressed by a big “capital flight” from other eurozone countries that was “one heck of a powerful force”. However, the former Goldman Sachs chief economist said this pressure would not continue to push down yields indefinitely. Among those hedge fund managers already shorting German bonds is John Paulson, the U.S. hedge fund manager who rose to prominence in 2007 thanks to correctly betting that the U.S. housing market would collapse. Bill Gross, the chief investment officer of the world’s largest bond fund, Pimco, is also bearish on the prospects for German debt. “Bunds are attractive to short because they are at historical lows in spite of the fact that the German fiscal position can only deteriorate,” said one hedge fund manager of a large top-tier global macro firm. “It is an obvious trade if you can wait.” Managers believe the cause of such a sell-off will be Spain’s difficulties which they expect to worsen and lead to a costly bailout. Jamil Baz, the chief investment strategist at GLG Partners said policy makers’ tools were becoming weaker and weaker. “The crisis has not even started,” he said, predicting that deleveraging in the eurozone could take 20 years to accomplish.
• No Need for Easing, Fed’s Work Is Done: Former Fed Governor. The Federal Reserve’s monetary easing has reached its limit and it is now time for the government to put fiscal policy to work, according to Robert Heller, former governor of the U.S. central bank. “Monetary policy, the foot is on the gas pedal, has been there for a long time, three years now,” Heller, who served on the Fed’s board from 1986 to 1989, told CNBC Asia’s “Squawk Box” on Wednesday. “And I think the Fed has done what it can do. It’s now the time for fiscal policy to do its part.”
• Adobe(ADBE) Earnings Beat, but Shares Fall on Guidance. Adobe Systems, maker of Photoshop and Acrobat software, reported a quarterly profit that beat expectations but fell slightly, as costs rose 8 percent.
• Further Chinese Interest Rate Cuts Seen As Last Resort. China's central bank could rely on cutting the amount of cash the banks must hold as reserves to bolster growth but reserve further interest rate cuts as the last-resort policy option, economists familiar with Beijing's policy-making process said.

IBD:

• NetSuite(N) Benefits From Trend Toward Cloud Products.
  

Reuters:

• Valero(VLO) Idles Nebraska Ethanol Plant Due To Margins. Valero Energy Corp temporarily shut down its ethanol plant in Albion, Nebraska, on Tuesday due to poor profit margins at the facility, a company spokesman said.
  

Financial Times:

• Hedge Funds Battered By Euro Crisis. “The crisis has not even started,” said Jamil Baz, chief investment strategist at GLG Partners, part of the world’s second-largest hedge fund, the Man Group, on Tuesday. “It will take 20 years for us to reach escape velocity,” he told a room of about 300 hedge fund traders and investors at a hotel in the Larvotto – attendees at one of the hedge fund industry’s biggest annual conferences: Gaim. “It will be devastating,” Mr Baz’s pessimism was outdone by Niall Ferguson, the Harvard historian in vogue in financial circles. “Over-optimistic,” he said.

Telegraph:

• G20 summit: perils of a half-baked rescue for Spain and Italy. Germany and France are doubling up on a high-risk gamble. The tentative deal at the G20 summit to mobilise the EU's rescue machinery to douse the raging fire in Spain and Italy comes in the nick of time, but is fraught with fresh dangers.

Rheinische Post:

• Finland's Finance Minister Jutta Urpilainen said she opposes any easing of the austerity and reform measures agreed to by the European Union and Greece in exchange for its bailout. What has been agreed upon must be complied with, citing Urpilainen as saying in an interview.

Oriental Morning Post:

• Chinese retailers are facing the most difficult year they've had in a decade in 2012 as sales decline, citing Shanghai Friendship Group Inc. General Manager Li Guoding. About 26 Shanghai-based department stores will sell about 70% of their goods at a 50% discount on June 22-July 1, citing Li.

Evening Recommendations
Cantor Fitzgerald:

• Rated (WFM) Buy, target $104.
• Rated (HUM) Buy, target $95.
• Rated (UNH) Buy, target $70.

Wells Fargo:

• Rated (CECO), (NAUH), (DV), (LRN), (LOPE), (APOL) and (AMBO) Outperform.

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 179.0 -1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 144.25 +2.75 basis points.
  
• FTSE-100 futures -.25%.
  
• S&P 500 futures -.21%.
  
• NASDAQ 100 futures -.06%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ATU)/.59
• (RHT)/.27
• (BBBY)/.84
• (CLC)/.70
• (MU)/-.21
• (SCS)/.12
• (JDAS)/.57

Economic Releases
10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,300,000 barrels versus a -191,000 barrel decline the prior week. Distillate inventories are expected to rise by +1,000,000 barrels versus a -63,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +1,000,000 barrels versus a -1,724,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.3% versus a +1.0% gain the prior week.
  

12:30 am EST

• The FOMC is expected to leave the benchmark fed funds rate at .25%.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke speaking, FOMC's economic forecast, EU Finance Minister's Meeting, HSBC China PMI (Flash), weekly MBA mortgage applications report, Citi Water/Renewables Conference and the RBC Metals/Mining Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial 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 Rising into Final Hour on Less Eurozone Debt Angst, Global Central Bank Stimulus Hopes, Short-Covering, Financial Sector Strength

Broad Market Tone:

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

Equity Investor Angst:

• VIX 18.22 -.55%
  
• ISE Sentiment Index 107.0 +16.30%
  
• Total Put/Call 1.07 +8.08%
  
• NYSE Arms .92 -36.63%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 116.18 -2.58%
  
• European Financial Sector CDS Index 277.25 -3.84%
  
• Western Europe Sovereign Debt CDS Index 311.39 -2.50%
  
• Emerging Market CDS Index 284.78 -2.50%
  
• 2-Year Swap Spread 24.75 -.5 basis point
  
• TED Spread 38.75 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -52.0 +.75 basis point
  

Economic Gauges:

• 3-Month T-Bill Yield .08% unch.
  
• Yield Curve 132.0 +3 basis points
  
• China Import Iron Ore Spot $136.60/Metric Tonne +.44%
  
• Citi US Economic Surprise Index -59.70 -.1 point
  
• 10-Year TIPS Spread 2.15 +3 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating a +55 open in Japan
• DAX Futures: Indicating -3 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 bullish as the S&P 500 trades near session highs despite Eurozone debt angst, rising energy prices and rising global growth fears. On the positive side, Coal, Oil Tanker, Oil Service, Ag, Steel, Software, Bank, Construction, Education and Airline shares are especially strong, rising more than +1.75%. Small-cap and Cyclical shares have traded well throughout the day. Financial shares are also outperforming. Gold is falling -.4%, Lumber is up +2.2% and Copper is gaining +1.0%. Major Asian indices were mixed overnight as a +.92% gain in India was offset by a -.75% decline in Japan. Major European indices rose around +2.0% today, led by a +3.3% gain in Italy. The Bloomberg European Bank/Financial Services Index rose +2.6% today. The Germany sovereign cds is down -4.9% to 99.0 bps, the France sovereign cds is down -2.5% to 194.66 bps, the Spain sovereign cds is down -3.3% to 602.78%, the Italy sovereign cds is down -4.4% to 528.83 bps and the UK sovereign cds is down -4.9% to 70.25 bps. Moreover, the Italian/German 10Y Yld Spread is falling -6.1% to 438.53 bps and the European Investment Grade CDS Index is falling -3.9% to 172.08 bps. On the negative side, Utility, Computer, Computer Service, REIT, Restaurant and Road&Rail shares are underperforming, rising less than +.5%. Oil is gaining +1.3% and the UBS-Bloomberg Ag Spot Index is jumping 3.8%. The Portugal sovereign cds is rising +.92% to 998.55 bps and the Japan sovereign cds is up +3.89% to 91.75 bps. Weekly retail sales have decelerated to a sluggish rate at +2.5%. 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 -7.0% 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 -23.0% 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 -25.0% since May 2nd of last year. Overall, credit gauge deterioration remains a big worry as most key sovereign cds remain technically strong despite some recent improvements. The euro currency, oil, lumber and copper all trade poorly given global central bank stimulus hopes and recent stock gains. As well, the 10Y continues to trade too well as the yield is rising just +4 bps to 1.62% 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 more 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, 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 eurozone debt angst, rising global growth fears, rising energy prices, profit-taking and more shorting.