Today's Headlines

Bloomberg:

• Ukraine ‘Close to Civil War as You Can Get,’ Russia Says. Ukraine “is as close to civil war as you can get” and a solution must be found that satisfies all regions, Russian Foreign Minister Sergei Lavrov said. Russia has “no intention” of sending its troops anywhere, Lavrov said in an interview today with Bloomberg Television at the Foreign Ministry building in central Moscow. While holding Russia accountable for Ukraine’s presidential election on May 25 is “ridiculous,” the vote can’t be legitimate if it’s impeded by fighting, he said. There’s already a “real war” between government forces and separatist fighters in the country’s east and south, Lavrov said. Any attempt to grant NATO membership to Ukraine would be “an issue for Russia” and its inclusion in the alliance would hurt European security, he said.
• Mizuho Leads Japan’s Big Banks in Forecasting Annual Profit Drop. Mizuho Financial Group Inc. (8411) led Japan’s three biggest banks in forecasting a drop in earnings for this year as loan growth loses momentum and returns from stock investments wane.
• China Insurers’ Investment Risks Accumulating, Regulator Writes. Chinese insurers face increasing risks from their investments in property and local government debt as the nation’s economic growth slows, according to a senior regulatory official. The China Insurance Regulatory Commission will focus more on risk prevention, and seek to avert any systemic or regional crisis, Chen Wenhui, a vice chairman of the watchdog, wrote in an article published in the Shanghai Securities News today. The regulator’s warnings add to signs of growing concerns among policy makers about risks from an economic slowdown.
• China Plays Cat and Mouse With Vietnam Coast Guard on Rig. From his Vietnamese Coast Guard boat at night, Lieutenant Phan Chi Cuong can see the yellow lights of an oil rig 10 nautical miles away. Owned by a Chinese company, it sits in waters near islands claimed by both nations in the South China Sea.
• Sony Unexpectedly Forecasts Loss on PC Exit, Restructuring Costs. Sony Corp. (6758) unexpectedly forecast an annual loss, the sixth in seven years, casting further doubt on Chief Executive Officer Kazuo Hirai’s ability to revive the company amid restructuring efforts. The net loss will probably be 50 billion yen ($490 million) in the 12 months ending March 31, the Tokyo-based company said in a statement yesterday. That compares with the 57.1 billion-yen profit average of 19 estimates compiled by Bloomberg and a 128.4 billion-yen net loss the year earlier.
• Deere(DE) Cuts Sales Forecast After Decline in Equipment Volumes. Deere & Co. (DE), the largest agricultural-equipment maker, posted lower-than-expected sales and reduced its full-year revenue outlook after shipping less machinery while the dollar weakened against other currencies. Equipment sales in the fiscal second quarter through April dropped to $9.25 billion from $10.3 billion a year earlier, the Moline, Illinois-based company said today in a statement. That trailed the $9.65 billion average of 12 analysts’ estimates compiled by Bloomberg.

ZeroHedge: 

• Santelli Introduces Subprime 2.0. (video)
• What Can Possibly Go Wrong: In China Homes Are Offered "Zero Money Down".
• White House On Biden's Son Joining Ukraine Gas Giant - No Ethical Issues Here.
• 10Y Treasury Yield Breaks Key Support. (graph)
• What Food Inflation? (graph)

Financial Times:

• European banks’ bad loans hit €1tn. A majority of Europe’s banks have suffered a jump in bad loans even as investors lined up to lend them money, according to a study by Fitch, the rating agency. Impaired loan volumes rose 8.1 per cent in 2013 to slightly more than €1tn compared with the year before, said the Fitch analysis, which used banks’ financial results for the years ending 2012 and 2013.

Bear Radar

Style Underperformer:

• Small-Cap Value -1.03%

Sector Underperformers:

• 1) Gaming -2.52% 2) Homebuilding -2.31% 3) Banks -1.51%

Stocks Falling on Unusual Volume:

• JGW, ENZY, AR, HYGS, FOSL, LFL, TTWO, BANC, URS, INSY, WAT, DOOR, MMLP, RDY, LLL, SNE, NVO, NXPI, ICON, CUB, RDEN, TRAK, SQM, WHR, DXYN and RAX

Stocks With Unusual Put Option Activity:

• 1) FOSL 2) M 3) CSCO 4) DE 5) WY
  

Stocks With Most Negative News Mentions:

• 1) C 2) DE 3) WMT 4) ZLC 5) PCLN
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -.31%

Sector Outperformers:

• 1) Steel +1.24% 2) Biotech +.89% 3) Gold & Silver +.71%
  

Stocks Rising on Unusual Volume:

• ZU, STKL, OSIR, IRM, CLDX, CRTO, ISIS, KATE, IMPV, RUBI, BLUE, XON, XONE and VMI

Stocks With Unusual Call Option Activity:

• 1) HUN 2) RAI 3) NEE 4) WIN 5) IRM

Stocks With Most Positive News Mentions:

• 1) M 2) RNF 3) ISIS 4) SHLD 5) YHOO
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Evening Headlines 
Bloomberg:  

• Goldman(GS) to Citigroup(C) Miss World’s Worst Selloff in China. The China reform trade is backfiring in the stock market. After soaring the most in two years on Nov. 18 as the Communist Party unveiled its biggest policy changes since the 1990s, the Hang Seng China Enterprises Index has since posted the world’s worst drop. An index of stocks JPMorgan Chase & Co. says benefit most from reform sank 10 percent this year through yesterday.
• Ex-BOJ Policy Maker Sees Scary Japan Inflation Dilemma. The Bank of Japan faces a “terrifying dilemma” of inflation forcing it to tighten monetary policy just as the central bank most needs to support the bond market, according to a former board member. There’s about a 50-50 percent chance the BOJ will achieve its 2 percent goal for consumer-price increases, which could push the 10-year yield above 3 percent, said Kazuo Ueda, who served as a BOJ policy maker from 1998 to 2005, and was also senior adviser to the Government Pension Investment Fund. Bond market expectations for inflation have risen to 1.36 percent from 0.94 percent in October, data compiled by Bloomberg show.
• Asian Stocks Index Extends Biggest Rally in Seven Weeks. Asian stocks rose, with the regional benchmark index extending its biggest rally in seven weeks yesterday, as U.S. equity gauges held at record highs and investors weighed earnings. Kadokawa Corp., a Japanese book publisher, surged 10 percent on a report it will merge with Dwango Co. Hotel Properties Ltd., which manages hotels, surged 7.3 percent in Singapore after reporting higher quarterly profit. Dentsu Inc., an advertising company, slid 4.9 percent in Tokyo after forecasting net income that missed estimates. The MSCI Asia Pacific Index rose 0.3 percent to 139.72 as of 10:56 a.m. in Tokyo with all but one of its 10 industry groups climbing.
• Split-Second Lurches Affect Stocks From AOL(AOL) to Caterpillar(CAT). A trading firm’s mistake caused wild price swings in U.S. stocks including Caterpillar Inc., AOL Inc. and Nabors Industries Ltd. about 10 minutes before markets closed today, according to people familiar with the matter. Caterpillar, which had been trading around $107.12, jumped to an intraday high of $108.21 within a second at 3:49 p.m. New York time before almost immediately sinking back to where it had been. More than $11 million worth of shares changed hands at the elevated levels, according to data compiled by Bloomberg. The shares were moved by orders tied to the close of trading that were incorrectly entered, said the people, who asked to not be named because the details aren’t public.

Wall Street Journal: 

• U.S. Steel Imports Spark Wave of Trade Complaints. Global Production Capacity Has Doubled. 
• U.S. Backs Off Tight Mortgage Rules. In Reversal, Administration and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery. The Obama administration and federal regulators are reversing course on some of the biggest postcrisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery. On Tuesday, Mel Watt, the newly installed overseer of Fannie Mae and Freddie Mac, said the mortgage giants should direct their focus toward making more credit available to... 
• Google(GOOG) Faces Challenges in Europe After Privacy Ruling. Surprise Decision Could Prove Highly Disruptive to Search-Engine Operators. Europe's top court ruled that Google Inc. can be forced to erase links to content about individuals on the Web, a surprise decision that could disrupt search-engine operators and shift the balance between online privacy and free speech across Europe. Under Tuesday's ruling—which doesn't trigger any specific new enforcement, but sets a strong legal precedent across the European Union—individuals can request that search engines remove links to news articles, court judgments and other documents in search results for their... 
• Nigerian Militant Makes a Name for Himself Through Terror. Boko Haram Leader Steps Up Attacks to Emerge From Shadows of Other Radical Groups. When he appeared in a video on Monday boasting of having abducted more than 200 schoolgirls, the leader of terror group Boko Haram took the occasion to egg on the U.S. Army and get in a dig at ancient Egypt. "We don't fear any American troops," shouted Abubakar Shekau, whose Islamist insurgency has terrorized northern Nigeria and recently drawn search-and-rescue advisers from the U.S. and other countries....
• U.S. Military Pressed on Climate Change. Retired Officers' Report to Call for Updated War Plans and Building More Ships to Operate in Arctic. The military must do more to prepare for the impacts of a changing climate, including updating war plans and building more ships to operate in the Arctic, a report by a group of retired military officers will say Wednesday.
• Stopping Keystone Ensures More Railroad Tank-Car Spills. Pipelines in the U.S. carry 25 times more oil than tank cars do, yet derailments are by far the biggest threat. The Keystone XL Pipeline got another nail in its coffin Monday, in the form of a Senate energy vote that excluded the pipeline issue. But Keystone was already near death thanks to the Obama's administration's recent decision to ignore the evidence of a definitive government study—and instead keep listening to environmentalists' dubious claims. The upshot will be more political fires in Washington caused by train derailments in the absence of a pipeline to transport oil more safely.

MarketWatch.com:

• Corporate bond rally is next to bust, some fear. It’s ‘better to leave early than to stay too late,’ say UBS strategists.

Zero Hedge: 

• Russia Holds "De-Dollarization Meeting": China, Iran Willing To Drop USD From Bilateral Trade.
• If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Devastating For The US. (graph)
• German Finance Minister Admits To "New Bubbles" & "Excessive Confidence".
• Harvard Group Cancels "Satanic Black Mass".
• Rupert Murdoch's Drop Boxes: Where Central Bankers Post Front-Runners On When To "Buy".
• China Deploys Submarine Near Vietnam Oil Rig, 86 Vessels Now Present.

Business Insider:

• As If Lebanon Weren't Unstable Enough, Al Qaeda Is Now Moving In.

Reuters: 

• U.S. Fed warns of more bank scrutiny over leveraged loans. A senior Federal Reserve official warned banks on Tuesday the central bank may have to take further action to ensure compliance with U.S. guidance on leveraged lending, in the clearest sign yet it is seeking to dispel a perception that it is lenient.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 117.5 -2.25 basis points.

• Asia Pacific Sovereign CDS Index 83.0 -1.75 basis points.

• FTSE-100 futures +.17%.

• S&P 500 futures +.08%.

• NASDAQ 100 futures  +.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DE)/2.49
• (M)/.60
• (A)/.73
• (CSCO)/.48
• (JACK)/.52
• (XONE)/-.12
• (RMAX)/.27

Economic Releases
8:30 am EST

• The PPI Final Demand MoM for April is estimated to rise +.2% versus a +.5% gain in March.
• PPI Ex Food & Energy for April is estimated to rise +.2% versus a +.5% gain in March. 

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +36,360 barrels versus a -1,781,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +90,910 barrels versus a +1,608,000 barrel gain the prior week. Distillate inventories are estimated to rise by +381,820 barrels versus a -447,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.46% versus a -.8% decline the prior week.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Japan GDP report, Eurozone CPI, UK Unemployment report, BoE minutes, weekly MBA mortgage applications report, JPMorgan Homebuilding/Building Products Conference, (WMB) analyst day and the (MWW) briefing day could impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and consumer 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 Central Bank Hopes, Yen Weakness, Short-Covering, Transport/Homebuilding Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Slightly Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 12.24 +.08%

• Euro/Yen Carry Return Index 146.22 -.25%

• Emerging Markets Currency Volatility(VXY) 7.19 -.96%

• S&P 500 Implied Correlation 55.58 +1.35%

• ISE Sentiment Index 110.0 -17.91%

• Total Put/Call .85 +32.81%

• NYSE Arms .74 +12.11% 

Credit Investor Angst:

• North American Investment Grade CDS Index 62.49 +.27%

• European Financial Sector CDS Index 71.38 -1.91%

• Western Europe Sovereign Debt CDS Index 31.72 -2.19%
• Asia Pacific Sovereign Debt CDS Index 83.54 -1.55%

• Emerging Market CDS Index 266.34 +.09%

• China Blended Corporate Spread Index 356.82 -1.01%
• 2-Year Swap Spread 13.5 -.25 basis point

• TED Spread 20.25 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -6.25 -2.0 basis points

Economic Gauges:

• 3-Month T-Bill Yield .02% unch.

• Yield Curve 223.0 -3.0 basis points

• China Import Iron Ore Spot $103.0/Metric Tonne n/a

• Citi US Economic Surprise Index -12.70 -6.1 points

• Citi Emerging Markets Economic Surprise Index -26.70 -2.3 points

• 10-Year TIPS Spread 2.15 -2.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating +43 open in Japan

• DAX Futures: Indicating +9 open in Germany

Portfolio: 

• Slightly Lower: On losses in my biotech sector longs and emerging markets shorts 

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg: 

• Ukraine in ‘Undeclared War’ With Russia as Rebels Unite. Insurgents killed six Ukrainian soldiers and wounded eight others in an ambush near an eastern rebel-held stronghold as the defense minister said the country was fighting an “undeclared war” with Russia. More than 30 attackers struck a convoy near the Donetsk region city of Kramatorsk at about 1 p.m., according to a statement on the Defense Ministry’s website. As fighting flared, Europe tried to rev up diplomatic efforts, with Germany’s Foreign Minister Frank-Walter Steinmeier visiting Kiev and Odessa in a bid to broker talks between the central government and separatists. “Russia is already engaged” in Ukraine “in supporting Russian-led protesters and terrorists,” Ukrainian Prime Minister Arseniy Yatsenyuk told reporters in Brussels today after talks with European Commission President Jose Barroso. “We urge Russia to condemn them, to urge all these so-called protesters -- or really, terrorists -- to leave and vacate the buildings, and to do everything they can to stabilize the situation in Ukraine. Russia will fail to make Ukraine a failed state.” 
• Russia Bans Rocket Engine Sales to U.S. Military. Russia said it will no longer export rocket engines to the U.S. to launch military satellites, adding to a dispute in Washington that already pits the two biggest U.S. defense contractors against billionaire Elon Musk. Russian Deputy Prime Minister Dmitry Rogozin told reporters in Moscow today that Russian engines can be used only to launch civilian payloads, amid tensions over Russia’s support for separatists in Ukraine and the U.S. and European economic sanctions that have followed.
• China Slowdown Deepens. China’s economic slowdown deepened with unexpected decelerations in industrial-output and investment growth and a decline in home sales, testing policy makers’ reluctance to step up monetary stimulus. Factory production rose 8.7 percent in April from a year earlier, the National Bureau of Statistics said in Beijing, compared with the 8.9 percent median estimate of analysts surveyed by Bloomberg News. Fixed-asset investment increased 17.3 percent in the first four months of the year, the slowest for the period since 2001, and home sales fell 9.9 percent.
• Asian Junk Left Behind as Defaults Expose Cracks: Credit. Asia’s junk bond returns are lagging behind investment-grade debt like never before as China’s weakest projected growth since 1990 and escalating leverage expose cracks across the region’s economies. Speculative-grade notes denominated in dollars have gained 2.76 percent this year through May 9, 1.95 percentage points less than high-grade bonds, according to index data compiled by JPMorgan Chase & Co. The underperformance is the worst over the same period since at least 2005. Globally, returns were about even at 4.1 percent, Bloomberg indexes show.
• German Investor Confidence Drops for Fifth Straight Month. German investor confidence fell for a fifth month in May in a sign of growing concern that threats from low inflation (ECCPEST) to a strong euro may undermine the recovery. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, slid to 33.1 from 43.2 in April. The gauge is at the lowest level since January 2013. Economists forecast a decline to 40, according to the median of 33 estimates in a Bloomberg News survey. The index has dropped every month since reaching a seven-year high of 62 in December.
• Bundesbank Support for ECB Stimulus Not to Be Automatic. The Bundesbank’s support for any more stimulus for the euro area won’t be automatic even if the European Central Bank cuts its inflation forecast for 2016, two people with knowledge of the matter said. While the German central bank will focus on the outlook for price stability at the end of the ECB’s forecast horizon and is open to a package of measures from a negative deposit rate to halting the sterilization of crisis-era bond purchases, nothing is decided yet, said the people, who asked not to be identified because the matter is private.
• Europe Stocks Rise to Six-Year High; ThyssenKrupp Climbs. European stocks climbed to a six-year high amid better-than-estimated earnings from ThyssenKrupp AG to Airbus Group NV. (AIR) ThyssenKrupp rose 4.1 percent after Germany’s biggest steelmaker also raised its full-year earnings forecast. Airbus advanced 6.2 percent. Pandora A/S jumped 8.1 percent after increasing its sales projection. Telecom Italia SpA (TIT) declined 5.2 percent as quarterly revenue missed estimates. The Stoxx Europe 600 Index gained 0.3 percent to 341.89 at the close of trading in London.
• Why Chart Watchers Are Skeptical of S&P 500’s New Record. There are soldiers and there are generals in the stock market, according to Oppenheimer & Co.’s Ari Wald, and they need to march together for this army to keep winning.
• Grandma Gets to Play Hedge Fund With New Credit Swap ETFs. If your grandmother wants to bet her savings on a bundle of credit derivatives, it’ll be easy for her to do so through a new swath of exchange-traded funds. The ETFs may not have been created with her in mind, but she’ll be able to buy their shares. Regulators this month signed off on a plan to allow trading in eight new ProShares ETFs backed by wagers on the creditworthiness of the riskiest to the safest corporate borrowers. Those funds, which package credit-default swaps, join more than 250 others that are based on derivatives, an arena traditionally dominated by hedge funds.
• Wells Fargo(WFC) Needs to Answer for Bad Home Loans, U.S. Says. Wells Fargo & Co. (WFC:US)’s $5 billion payment two years ago in a national mortgage settlement was for loan servicing abuses, and the bank still needs to answer for making bad government-insured loans, a U.S. Justice Department lawyer told a federal appeals court.

Wall Street Journal: 

• U.S. Economy Contracted In First Quarter, Latest Figures Show.
• Bundesbank Open to Significant ECB Stimulus in June if 2016 Inflation Forecasts Lowered. Measures Include Negative Rate On Bank Deposits, Person Familiar With Matter Said.

CNBC: 

• Pimco sees an end to bull markets in 3-5 year outlook.

ZeroHedge:

• 6 Ukraine Soldiers Killed, 8 Injured Ahead Of Tomorrow's "Leave Or Face War" Deadline.
• The Farce Is Complete: Joe Biden's Son Joins Board Of Largest Ukraine Gas Producer.
• The Fed's Consumer Credit Spreadsheet Is #REF!-ing Out: Here's Why.
• Student Loans Soar To Record $1.111 Trillion, Up 12% In Past Year. (graph)
• "Robust Evidence" Confirms Fed Leaks Data Ahead Of Rate Announcements.
• Why The Bond Bubble In Peripheral Europe Is A Problem.
• The "Quite Gloomy" Chinese Housing Market Completes "Head And Shoulders" Formation. (graph)
• SEC Official Claims Over 50% Of Private Equity Audits Reveal Criminal Behavior.

ValueWalk:

• Rothschild: EM Sovereign Debt Could Be Approaching “Bubble Territory".

Business Insider:

• Marijuana Is More Addictive These Days — Here's Why.
• Healthcare Workers Exposed To Florida MERS Patient Show Symptoms Of Infection.
• 10 Charts That New College Graduates Are Going To Hate.
• CHART OF THE DAY: This Is What $11.65 Trillion Worth Of Household Debt Looks Like.
• The Expected Winner Of India's Election Is No Fan Of The US.

Telegraph: 

• Our recovery is at risk from British arrogance and delusion. We tend to blow it whenever things start to go right, and my great worry is that this time will be no different.