Stocks Reversing Sharply Lower into Final Hour on Rising Economic Fear, China Hard-Landing Worries, Tax Hike Concerns

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Almost Every Sector Declining
  
• Volume: Slightly Above Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 33.78 -1.03%
  
• ISE Sentiment Index 107.0 +27.38%
  
• Total Put/Call 1.02 -5.56%
  
• NYSE Arms 1.46 -74.50%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 119.47 bps -1.08%
  
• European Financial Sector CDS Index 149.84 bps -3.84%
  
• Western Europe Sovereign Debt CDS Index 163.50 bps +1.55%
  
• Emerging Market CDS Index 268.19 bps -.55%
  
• 2-Year Swap Spread 36.0 +1 bp
  
• TED Spread 36.0 -3 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .17% +3 bps
  
• Yield Curve 233.0 -2 bps
  
• China Import Iron Ore Spot $138.90/Metric Tonne -.36%
  
• Citi US Economic Surprise Index -35.90 +.5 point
  
• 10-Year TIPS Spread 1.85% -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -100 open in Japan
• DAX Futures: Indicating -60 open in Germany

Portfolio:

• Slightly Higher: On gains in my Medical/Retail long positions and ETF hedges
  
• Disclosed Trades: None
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 trades near session lows despite a bounce in the euro, end-of-the-quarter and the market's oversold state. On the positive side, Airline and Oil service stocks are relatively strong, rising .5%+. The S&P GSCI Ag Spot Index is jumping 3.6%, its best showing in many months. Spain sovereign cds is falling -8.4% to 251.63 bps, despite Moody's negative comments. The Greece sovereign cds is falling -8.8% to 910.88 bps and the Portugal sovereign cds is dropping -5.3% to 311.38 bps. The On the negative side, Gaming, Oil Tanker, Computer, Bank, HMO, Networking and Semi shares are under meaningful pressure, falling 1.5%+. Despite the decline in some country-specific sovereign cds, the Western Europe Sovereign CDS Index is moving very close to a new record high. Moreover, the US Municipal CDS Index is jumping another +5.0% to a record 266.3 bps, which is another large negative. The 10-year yield continues to fall too much and is rolling back over to session lows. The market is oversold short-term, but the overall technical action is very poor. Some leading stocks, that had been holding up relatively well, are breaking convincingly below their 50-day moving averages today. Economic data tomorrow will likely continue the recent trend of disappointments. I expect US stocks to trade mixed-to-lower into the close from current levels on rising sovereign debt angst, China hard-landing concerns, increasing economic fear, tax hike worries, regulatory fears and oil spill concerns.

Today's Headlines

Bloomberg:

• Bank Credit Risk Declines Most in Week After ECB Loans Tender. The cost to protect bank bonds from default fell the most in more than a week after the European Central Bank said lenders asked for 131.9 billion euros ($162 billion) for three months, less than economists had forecast. Credit-default swaps on the Markit iTraxx Financial Index of 25 banks and insurers declined 6.5 basis points to 165.5, according to JPMorgan Chase & Co. in London, the biggest one-day decline since June 18. Credit-default swaps tied to Greek bonds fell 72.75 basis points to 930.25, the fourth-straight drop, while contracts on Portugal declined 15.5 basis points to 315.25, according to CMA DataVision. Swaps on Spain tightened 6 to 265.5 basis points. The Markit iTraxx Crossover Index of swaps on 50 companies with mostly high-yield credit ratings fell 4 basis points to 582.5, according to Markit Group Ltd. The Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 3 basis point to 130.5, Markit prices show.
• ADP Estimates U.S. Companies Added 13,000 Workers. Companies in the U.S. added fewer workers in June than forecast, according to data from a private report based on payrolls. The 13,000 gain was the smallest since February and followed a revised 57,000 increase the prior month, figures from ADP Employer Services showed today. Economists surveyed by Bloomberg News had forecast a gain of 60,000, according to the median estimate. Companies may be slow to add workers until there’s evidence the gains in demand will be sustained. “We’re in a soft patch in the economy and employers are reluctant to hire,” said Richard DeKaser, chief economist at Washington-based Woodley Park Research, whose ADP forecast of 23,000 was closest among economists surveyed. “It suggests non- government payrolls will be quite soft, well below what’s necessary to ensure a stable economic recovery.” Today’s ADP report showed a decrease of 17,000 workers in goods-producing industries including manufacturers and construction companies. Employment in construction fell by 35,000.
• Cassano Says He Could Have Won Better AIG Deal for Taxpayer. Joseph J. Cassano, whose derivative bets on subprime loans forced American International Group Inc. into a U.S. bailout, said he could have negotiated discounts on collateral calls had he remained with the company. Cassano could have won “a much better deal for the taxpayer” by negotiating with banks demanding collateral from AIG, Cassano said today in testimony to the Financial Crisis Inquiry Commission.
• Chu Says China's 'Crude Securitization' of Loans a Worry: Video. Charlene Chu, a senior director in financial institutions for Fitch Ratings in Beijing, talks with Bloomberg's Rishaad Salamat about potential risks to China's banking system.
• The euro-region's debt crisis, which keeps weighing on market sentiment and threatens to hamper an economic recovery, risks restraining eastern Europe's growth outlook and ability to attract investment, BNP Paribas SA said in its monthly report. The Hugarian and Czech economies are in a "depressed" state, which calls for continued interest rate reductions, limiting potential gains in the forint and the koruna. Polish fiscal overhaul "remains non-existent," and weaker growth will "make that more apparent," according to BNP. Poland's fiscal outlook "suggests there is a higher risk of a disorderly unwinding of positions here than elsewhere in central and eastern Europe," BNP said.
• Commodity Slump Means Worst Quarter in Year on Growth Outlook. Commodities are heading for their worst quarter in more than a year on investors’ concern that slower growth from China to the U.S. will sap demand. The S&P GSCI Total Return Index of 24 raw materials plunged 11 percent since the end of March, led by declines in industrial metals, gasoline and crude oil. That’s the steepest decline since the fourth quarter of 2008 and the first time prices dropped in the first-half since 2001. Zinc’s 25 percent plunge was the worst quarter since the final three months of 2008. Nickel fell 22 percent, lead 19 percent, copper 17 percent and aluminum 15 percent. Barclays Capital is forecasting even lower prices by the fourth quarter. Copper will average $6,000 a metric ton in the period, 7.7 percent lower than now and aluminum $1,850, for a drop of 6.1 percent, according to a June 25 report. Oil retreated 9.7 percent since April, the first quarterly decline since the last three months of 2008. The U.S. is the world’s biggest energy consumer, ahead of China. U.S. crude stockpiles tracked by the Department of Energy rose almost 12 percent this year. The International Energy Agency, an adviser to consuming nations, forecasts that global oil demand will rebound 2 percent this year after a two-year collapse that was the steepest since the 1980s.
• Bankers Who Broke Big Dig With Swaps Gone Awry Get Paid for Fix. The same bankers who sold Massachusetts interest-rate swaps that blew up the debt financing for the so-called Big Dig road and tunnel project in Boston -- costing taxpayers $100 million -- are getting even more money to fix what they broke. UBS AG bankers showed up at the Massachusetts Turnpike Authority in 2001 with a solution to a growing deficit at the state agency overseeing the $15 billion project. The bank gave the authority $29.1 million for an interest-rate swap linked to $800 million of Big Dig bonds, an agreement meant to cut the cost of paying back the debt and cover part of the budget shortfall. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. made similar deals. The deal with UBS backfired as credit markets faltered two years ago, costing toll payers $36.3 million in extra interest and leading the Zurich-based bank to demand as much as $400 million to end the arrangement when the Big Dig bonds’ insurer lost its top credit ratings. “There was really no mention of any downside of these swaps,” said Christy Mihos, a turnpike board member from 1999 to 2004 who voted for the UBS agreement. “It was portrayed as a no-brainer that we could not lose.” The same Wall Street banks that triggered the worst financial collapse since the Great Depression also helped government borrowers from Greece to California paper over deficits with derivative deals promising savings on borrowings. Many of the agreements failed when credit markets seized up in 2008 and swap payments from banks no longer covered rising debt costs.
• Munis Underperform Treasuries as Default Speculation Mounts. Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months. Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data. Investors bought Treasuries, pushing two-year yields to a record low this week, on signs of slowing global economic growth and amid protests in Europe over austerity measures. The cost of contracts insuring against losses in municipal bonds almost doubled in the past two months, led by Illinois. Greece and Spain led a surge in the cost of protecting sovereign debt.
• Foreclosed Homes Sell at 27% Discount as Supply Grows. Homes in the foreclosure process sold at an average 27 percent discount in the first quarter as almost a third of all U.S. transactions involved properties in some stage of mortgage distress, according to RealtyTrac Inc.
• Merkel's President Candidate Fails to Win 2nd Round. Chancellor Angela Merkel’s candidate for the German presidency, Christian Wulff, failed to get enough votes to win the post in a second round, as delegates used the secret ballot to signal their frustration with her coalition. The vote marks “a serious shot across the bow for Merkel,” Richard Stoess, a political scientist at the Free University in Berlin, said in a phone interview. While the second-round result won’t bring down Merkel’s government, it’s “a disaster for her image and her standing, given the overwhelming majority the coalition has in the assembly.”

New York Times:

• N.Y. Move Could Double-Tax Hedge Fund Managers. Finally, Gov. David A. Paterson and legislative leaders have found something they can agree on: that hedge fund managers from Connecticut and New Jersey should pay the state of New York millions more in taxes. As they grapple with a gaping budget shortfall, Mr. Paterson and the lawmakers plan to enact a tax change that will treat much of the compensation earned by the fund managers who work in New York but live outside the state as ordinary income. However, industry observers say the move could open up fund managers to double taxation and take some of the shine off New York as a hedge fund destination, The New York Times’s David M. Halbfinger reports.
• Hedge Funds Object to Lehman Chapter 11 plan. A group of Lehman Brothers Holdings‘ creditors, including the largest United States pension fund and a prominent hedge fund, said they object to the investment bank’s Chapter 11 bankruptcy plan, Reuters reported. In a filing in Manhattan bankruptcy court on Tuesday, the group of 12 hedge funds, pension funds and asset managers said the current plan would sow conflict among creditors, and could treat large bank creditors better than other creditors. This, it said, could result in years of needless lawsuits, delay the deserved recovery of tens of billions of dollars. The creditors said they are owed $15.5 billion. Among them are the California Public Employees’ Retirement System, a pension fund with $211 billion of assets, and Paulson & Company, a $35 billion hedge fund firm run by billionaire John Paulson. “The plan establishes a ‘pot’ of assets for distribution and pits creditors of the various estates against each other,” the filing said.

Business Insider:

• 17 Trades Hedge Funds Are Making Right Now.

Zerohedge:

• With $1 Trillion in Loans, The ECB is The Biggest Guarantor of European Banks.

Washington Post:

• Recession Cut Into Employment for Half of Working Adults, Study Says. The recession has directly hit more than half of the nation's working adults, pushing them into unemployment, pay cuts, reduced hours at work or part-time jobs, according to a new Pew Research Center survey. The economic shock has jolted many Americans into a new, more austere reality, which is likely to have lasting consequences for an economy fueled mostly by consumer spending. More than six in 10 Americans say they have cut down on borrowing and spending, the survey found. The reason: Nearly half of the survey's respondents say they are in worse financial shape as a result of the downturn, which destroyed 20 percent of Americans' wealth.

MarketFolly:

• Latest Hedge Fund Exposure Levels: Trend Monitor Report. We've been tracking hedge fund exposure levels across asset classes for some time now. During this chronicle, we've seen hedge funds short the euro and then last week we saw them start to cover those shorts. One recent move that has been spot on has been global macro hedge funds going net short equities. So, given the recent market decline, how are hedge funds positioned now? In terms of the latest market exposure, long/short equity funds are now on average 30% net long. This has slowly started to creep up in recent weeks as they begin to increase market exposure. In terms of specifics, it appears as though l/s funds now very much favor large cap stocks. Additionally, they continue to sell emerging markets after having higher than average exposure in this arena as of late. This comes after these hedgies have had low net long exposure through 2010. Market neutral funds, on the other hand, continued to reduce market exposure. These two strategies have seemed to move conversely of each other over the past month or so with regard to equities. Turning to global macro hedge funds, Bank of America estimates that these funds have held their equity short position steady but have added to their net short in commodities and 10 year treasuries. Given the flattening that has occurred in regards to treasury yields as of late, it's interesting to see hedgies press toward a crowded short in 10 year treasuries yet again. This seems to be a trade they just refuse to let up on.
  

Chicago Tribune:

• Chicago-Area Banks Losing Money. Two years into the banking crisis, Chicago-area lenders have yet to find a bottom. As a whole, banks headquartered in the Chicago area are losing money, and the bad loans and foreclosed real estate continue to climb, according to a report by Loan Workout Advisers LLC and MDI Investments Inc. provided exclusively to the Tribune. For consumers, the fallout could mean jumping through more hoops to get loans as banks try to minimize their risks. "When a community bank faces capital problems, lending to consumers and small businesses suffers," said Justin Barr, managing principal for Loan Workout, a bank-turnaround consulting firm.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 28% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -15 (see trends).
• 28% Say U.S. Heading in Right Direction. Sixty-six percent (66%) of all voters believe the country is heading down the wrong track.

Politico:

• Republicans Seek to Resurrect Repeal of Health Care Reform. The top two House Republicans are renewing their calls to repeal the health care overhaul and will back efforts to force votes on the House floor amid polls that show the public continues to have decidedly mixed feelings about the legislation.
• White House Quiet on Obama-Blago Link. The White House was mum Tuesday after a union leader testified that Barack Obama personally asked him to approach then-Gov. Rod Blagojevich about appointing confidant Valerie Jarrett to his Illinois Senate seat – testimony Republicans say clearly contradicts the Obama team’s version of events.
  

Reuters:

• USDA Data Shows Explosive Potential for CBOT Corn. A shocking acreage and stocks report released by the U.S. Department of Agriculture draws attention to the explosive potential for CBOT corn futures prices, a CME Group (CME) panel of analysts said on Wednesday. "This is a shot across the bow and is astonishing given the fact farmers like to plant corn," said Greg Wagner, an independent analyst. In its June plantings report, USDA said American farmers had planted 87.9 million acres of corn this spring, below the lowest end of a range of analysts' estimates for 88.1 million to 90.2 million. USDA also said the supply of corn in the United States on June 1 totaled 4.310 billion bushels, below an average of analysts' estimates for 4.598 billion bushels.
• Cold War Support for Russian "spies" on networking site. Patriotic, anti-American messages adorn the pages of two alleged Russian spies on Russia's answer to Facebook, a reminder of historic suspicions and resentments that have survived the end of the Cold War.
• Moody's Puts Spain Ass Rating on Review for Downgrade. Moody's Investors Service said on Wednesday that it may cut Spain's Aaa local and foreign currency government bond ratings after a three-month review. Moody's said the possible downgrade reflects deteriorating short-term and long-term economic growth prospects, and the challenges the government faces in achieving its fiscal targets.The rating agency also cited concerns over the impact of rising funding costs over the medium term."If at the conclusion of the review, Spain's ratings are lowered, it would most likely be by one, or at most two, notches," Moody's said.

Bild Zeitung:

• Just over half of German voters, 51%, would prefer a return to the deutsche mark, while 30% favor sticking with the euro, citing a poll by market researcher Ipsos.

El Economista:

• Spanish lenders and savings banks may lose as much as $244 billion on bad loans, citing reports by RGE and Freemarket. RGE estimates that in a worst-case scenario bad loans could total 170 billion euros and the cost of bailing out lenders may be 80 billion euros to 100 billion euros. A separate study by Freemarket predicted that bad loans may reach 200 billion euros.

Le Parisien:

• France's gross debt will increase to 83.7% of the country's output by the end of this year and peak at 87.5% in 2012, citing a member of the government attending a parliamentary hearing. Debt in the euro zone's second largest economy stood at 80.3% of GDP after the first quarter, the National Statistics Institute said.

Xinhua:

• Over 5,800 Chinese Officials Penalized for Corruption in Construction Projects: CCDI. Over 5,800 Chinese officials have been penalized for disciplinary violations related to construction projects since August last year, a spokesman for the Communist Party of China (CPC) Central Commission for Discipline Inspection (CCDI) said Wednesday. The officials were implicated in more than 9,900 cases of corruption. Some 3,400 of the officials have been referred to judicial authorities, CCDI spokesman Wu Yuliang said at a press conference. The CPC Central Committee decided in July last year to launch a two-year campaign to tackle corruption in the construction sector. As of May, discipline authorities had probed more than 340,000 construction projects and uncovered disciplinary violations in 140,000 of the projects being probed. About 60,000 cases have been rectified, according to Wu.

The Australian:

• Resource Deal Near as 40% Rate Shifts. JULIA Gillard is hoping to settle the dispute with Australia's biggest mining companies today, after two days of intense negotiations in Canberra. For two days, the government has been considering calls from BHP Billiton, Rio Tinto and Xstrata to change the uniform 40 per cent tax rate proposed on profits from all minerals to a "globally competitive" rate on a "commodity by commodity" basis. Rio Tinto iron ore chief executive Sam Walsh said "serious negotiations" were continuing and the miners were "very hopeful of a quick resolution". Apart from earlier concessions on the tax that had been foreshadowed, such as removing the 40 per cent taxpayer guarantee for losses on mining projects, lifting the profits threshold when the tax cuts in from 6 per cent to 12 per cent and exempting the quarry industry entirely, the government is now looking at different tax rates for different minerals and which projects the tax would apply to.

Bear Radar

Style Underperformer:

• Large-Cap Growth (+.15%)

Sector Underperformers:

• Oil Tankers (-1.55%), Education (-1.23%) and Computer Hardware (-.64%)

Stocks Falling on Unusual Volume:

• GIS, K, BBL, DLLR, VRUS, CELG, FNGN, SPMD, NWPX and CRMT
  

Stocks With Unusual Put Option Activity:

• 1) AZN 2) OC 3) CELG 4) SBUX 5) CHL
  

Stocks With Most Negative News Mentions:

• 1) AIG 2) MT 3) XOM 4) RIG 5) GS
  

Bull Radar

Style Outperformer:

• Mid-Cap Growth (+.58%)

Sector Outperformers:

• Airlines (+2.77%), Oil Service (+2.28%) and Coal (+1.67%)

Stocks Rising on Unusual Volume:

• DB, BP, PANL, CHA, STST, ABII, APSG, ECOL, RBCN, MNRO, CTRP, SMSC, CTRN, DMND, AMZN, MRCY, RDWR, ILMN and DBRN
  

Stocks With Unusual Call Option Activity:

• 1) ALKS 2) XL 3) HSY 4) OC 5) ATHR
  

Stocks With Most Positive News Mentions:

• 1) AAPL 2) CELG 3) BA 4) BP 5) GOOG

Wednesday Watch

Evening Headlines
Bloomberg:

• Health of Europe's Banks May Be Illuminated by ECB Three-Month Loan Demand. The health of Europe’s banks may be exposed today when the European Central Bank offers them three- month loans before a landmark 12-month facility has to be paid back. Banks tomorrow need to repay 442 billion euros ($540 billion), the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. Demand for three-month cash today will highlight how much banks still rely on the ECB for funding, investors and economists said. The ECB will announce how much money banks have asked for at about 11:15 a.m. in Frankfurt. “The amount that will be rolled over will have powerful information content regarding the health of European banks,” said Luca Cazzulani, senior fixed-income strategist at UniCredit SpA in Milan, Italy’s biggest bank. “As market rates are much lower” than the 1 percent charged by the ECB, “only banks with very limited access to liquidity will bid,” he said. Banks can currently borrow three-month money from each other in the market at about 0.76 percent.
• Stress Tests May Expose German Landesbanken's 'Black Hole'. German officials seeking to bolster confidence in the financial system by releasing the results of banking stress tests may heed calls to shine a light into the accounts of Germany’s state-owned lenders. The Bundesbank and financial regulator BaFin plan to meet today with officials from Germany’s largest lenders, said two people with knowledge of the matter. Among the topics: whether the state-owned banks, or Landesbanken, will agree to publish the results of the evaluations, said the people, who declined to be identified because the talks are confidential. “Stress tests can’t be credible without the Landesbanken,” said Simon Maughan, a London-based banking analyst at MF Global Securities Ltd. “We need clarity on the listed and unlisted sector to see where the real problems are.” Landesbanken are under scrutiny after booking more than $34 billion in credit losses and writedowns during the global financial crisis, according to data compiled by Bloomberg, forcing state bailouts for Bayerische Landesbank, Landesbank Baden-Wuerttemberg, HSH Nordbank AG and WestLB AG. State-owned lenders accounted for 17.5 percent of loans to companies and self-employed people in Germany at the end of last year, compared with 11.9 percent for the country’s largest commercial banks, according to the DSGV association of savings banks. The government will rely on market pressure to compel lenders to publish their stress-test results, the German finance ministry said on June 18. The Association of German Public Sector Banks, which represents 62 lenders including the Landesbanken, opposes publishing results for individual lenders, and is open only to the release of aggregate results. Landesbanken are owned by regional governments and groups of savings banks. “German Landesbanken may harbor a black hole,” said Michael Helsby and Derek De Vries, analysts at Bank of America Merrill Lynch, in a note to clients on June 18. “These are arguably unlikely to pass an unstressed test let alone a stressed one.”
• Bond Sales Plunge as Cash Hoards Allow Debt to Beat Equity: Credit Markets. Companies from the U.S. to Europe and Asia are selling the fewest bonds since 2004, as rising cash levels allow borrowers to weather a slowing economy. Debt offerings fell to $1.17 trillion in the first half of the year, 39 percent less than the same period in 2009, according to data compiled by Bloomberg. The decline was led by financial companies, which issued 35 percent less debt. Issuance is declining as borrowers with 15 percent more cash than a year earlier avoid tapping credit markets amid concern that Europe’s sovereign-debt crisis may slow the global economic recovery. “Companies are sitting on lots of cash,” said Michael Collins, senior investment officer at Prudential Investment Management Inc. in Newark, New Jersey, with about $240 billion of fixed-income assets. “They don’t have a lot of confidence in the growth trajectory of the economy or their businesses, so they’re definitely reticent to expand capacity” and raise debt, he said. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, rose 6 basis points to a mid-price of 122.5 basis points, the highest since June 14, according to Markit Group Ltd. The index has climbed from 88.1 basis points on March 31. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 8.59 to 133.12, the highest since June 9. That index was at 78.5 at the end of the first quarter. In the U.S., investment-grade companies have sold $130.1 billion of corporate bonds this quarter, a 48 percent decline from the first three months of 2010, bringing issuance for the year to $381.8 billion, Bloomberg data show. High-yield, high-risk issuance fell to $47.5 billion in the quarter from $70.7 billion in the first three months of the year, Bloomberg data show. Credit markets began to unravel in April as European leaders failed to convince investors they could keep the region’s debt crisis from escalating. Global sales totaled $768 billion in the first quarter before tumbling to $398.5 billion in the current period, Bloomberg data show. Financial companies sold $251.6 billion in the quarter, bringing issuance to $792.3 billion for the first half of the year, the worst start since 2003, Bloomberg data show. European bank balance sheets are coming under heightened scrutiny this week as a lending facility from the region’s central bank expires. Banks need to repay 442 billion euros on July 1 and demand for three-month cash will expose how much banks still rely on the ECB for funding, investors and economists said.
• Obama Pressed to End Foreign-Ship Ban in Debate Over BP(BP) Oil Spill Cleanup.
  
• Petraeus: U.S. May Ease Rules of Engagement in Afghanistan. General David Petraeus today said he’s concerned the U.S. military’s rules of engagement in Afghanistan are too restrictive and putting American forces at risk. General Stanley McChrystal, in an effort to curb civilian casualties, issued directives that sharply curtailed the use of lethal force. Civilian casualties are down, yet some troops have charged that the restrictions make them more vulnerable. U.S. and allied soldiers in Afghanistan are dying at the fastest pace in the war, now nine years old and the longest in U.S. history. “I am keenly aware of concerns by some of our troopers,” Petraeus told the Senate Armed Services Committee. He said he discussed the issue with President Hamid Karzai and other top Afghan officials “and they are in full agreement with me.”
• California Schools Facing 'Financial Disaster' Rises 38% to Record. A record number of California schools are in financial distress and may not meet their commitments over the next two years due to the recession and state budget cuts, according to the California Department of Education. The number of school districts on a semi-annual “fiscal early warning” list issued by the department has jumped 38 percent to 174 districts since January, or 16 percent of the state’s 1,077 local education agencies.
• Fuel Oil Glut in Singapore Widens Price Gap to Dubai Crude: Energy Markets. Fuel-oil prices in Singapore, Asia’s biggest energy trading hub, may weaken relative to Dubai crude as imports from Russia, Mexico and the Caribbean drive up record stockpiles. Deliveries to Singapore will rise as much as 20 percent next month from June to 4.2 million metric tons, according to a Bloomberg survey of seven traders from Singapore to Tokyo, who declined to be identified as they aren’t authorized to speak on transactions. The discount to crude may widen to $9 a barrel, the most in a year, from $5.55 yesterday, the survey showed. “Fuel-oil imports into Singapore will remain steady in July, and probably in August,” said Yasuhito Imaizumi, a Singapore-based trading manager at Petro Summit Pte, a unit of Sumitomo Corp., Japan’s third-largest trading company. Refiners are creating a glut of the heavy residue from processing crude as they boost output of gasoline and diesel. Singapore’s onshore stockpiles climbed to a record 25.7 million barrels on April 21, according to the Ministry of Trade and Industry. Inventories swelled as production has outpaced a recovery in the shipping industry, the main user of 380-centistoke grade of fuel oil.
• Volcker Said to Be Disappointed With Final Version of His Rule.
• Greek Default-Swap Costs Only Beaten by Venezuela. The cost of insuring Greek government debt is now second only to that of Venezuela, where President Hugo Chavez has declared “economic war” against the “bourgeoisie.”
• 'Deep Cover' Spies Had Day Jobs as Consultant, Columnist. Day jobs held by three of the accused “deep-cover” Russian spies may have put them in contact with opinion makers, corporate executives or aspiring technology industry workers.

Wall Street Journal:

• The Bailout Tax. A new tax on financial companies seemed like a good idea to Chris Dodd and Barney Frank at 3 a.m. last Friday, but now their $19 billion levy is threatening to blow up their 2,319-page financial bill. So they're scrambling to replace that cash, but the bigger news here is that Barney and Chris need to impose a bailout tax for what they claim is a bill that will end bailouts.
  
• Lennar(LEN) Cuts Its Prices as Sales Hit a Wall. Builder Lennar Corp. recently cut some prices more than 15% here, but that isn't enough to encourage buyers like Linda Primm. "As far as being in a rush now, no," she says, as she tours a model home in the Rancho D'oro community. "What are you going to get? Nothing." Since the tax-credit for home buyers expired at the end of April, sales of new homes have fallen sharply. In response, builders are cutting prices and offering concessions. But those moves aren't working as well as the tax credit, which credits as much as $8,000. Builder KB Home said last week its second-quarter orders plunged 23%. While price cutting and freebies have long been a part of the business, further price reductions and profit-eroding incentives reduce revenue. That will deal the fragile sector yet another blow, possibly delaying recovery until 2011. "The rest of the summer and the fall are going to be tough for the builders," says Demir Gjokaj, a Majestic Research analyst. "Demand has remained far weaker for far longer than builders expected. Price incentives can't rebuild the spent demographics that cratered demand. That will take time."
  
• SocGen Chief Warns on Bank Tax Impact. The bank taxes proposed by several European governments could hurt their economies at a time when growth is still fragile, said Fréderic Oudéa, the chief executive of Société Générale SA. France, Germany and the United Kingdom have in recent weeks said they would impose various taxes on banks. But Mr. Oudéa said this would be particularly harmful in Europe, where banks deliver about 75% of overall financing needs, compared to some 25% in the U.S. "In Europe, financing the economy is a critical element of growth," he said. "We should pay attention so that the total burden on banks shouldn't be heavy."
• For Farallon, a $1.5 Billion Workout. Hedge-fund giant Farallon Capital Management LLC is restructuring more than $1.5 billion in debt stemming from a big bet on trailer parks, one of the largest attempted workouts involving commercial-property loans sliced and sold to investors in the boom years. The $1.5 billion securitized loan backing Farallon's 2007 purchase of a business operating about 270 mobile-home communities on Friday was placed with a debt-servicing company that deals with troubled loans, according to a spokeswoman for the trailer-park operator.
• Fast Traders Face Off With Big Investors Over 'Gaming'. A high-tech, high-speed poker game is playing out in the stock market, and billions of dollars are at stake. The adversaries are high-frequency traders and big investors such as mutual funds. High-speed firms are using computers to detect large "buy" and "sell" orders to adjust their trades, and traditional investors are scrambling to trade undetected. The showdown has led to an escalating arms race, with players on both sides plowing money into ever-more-powerful technology to trade effectively. It also has led to growing tension between these camps as conventional investors call for greater regulation of their high-frequency counterparts. The clash came to the fore after the May 6 "flash crash," which underscored the rising use of computers and algorithms to trade stocks. Jeff Engelberg, a trader at Southeastern Asset Management Inc., a Memphis, Tenn., value-investing firm with about $35 billion under management, said high-speed traders are jumping ahead of his firm's trades. "Short-term traders are able to get an instantaneous glimpse into the future" through direct feeds to exchange data, he said, turning the market into "something nearer to a casino." High-frequency trading accounts for about two-thirds of U.S. stock-market volume, according to industry estimates. Some say they find certain trades have become more expensive to carry out, thanks to a practice critics call "gaming." With gaming, if a high-speed firm's computers detect a large buy order for a stock, for instance, the firm will instantly start snapping up the stock, expecting to quickly sell it back at a higher price as the investor keeps buying. Phillip Krauss, head of stock trading at Chicago's Harris Investment Management, says his firm's orders are getting picked off by high-speed trading firms that use computer programs to detect orders. "They front-run us," said Mr. Krauss, whose firm manages $15 billion in assets. To protect themselves, traditional investors like Mr. Krauss are stepping up investments in "antigaming" computer power and expertise. Big firms such as Bank of America Corp., acting on behalf of thousands of individual investors who trade through its vast brokerage network, have been rolling out high-tech platforms to help their traders avoid getting gamed. Algorithms are expected to account for about 60% of stock trading this year, up from 28% in 2005, according to Aite Group, a Boston firm that tracks electronic trading. A sharp fall in trading size shows the impact of algorithmic trading, which is typically done in 100- or 200-share chunks. The average size of a trade of a stock listed on the New York Stock Exchange was 268 shares through most of 2009, down from 724 in 2005, according to the SEC. That has made it much more difficult for traders to buy or sell large chunks of stocks. Now, traders must parcel out orders in tiny bits—and some high-speed firms are monitoring the activity for signs of a big trade. Henri Waelbroeck, research director at New York electronic brokerage Pipeline Financial Group Inc., has designed a trading system that alternates algorithms to keep gamers off the scent of big trades. "You need to understand what the games are and how to defend yourself," Mr. Waelbroeck said.
• Arizona, Texas Call for More Border Troops. Officials in Arizona and Texas are clamoring for more National Guard troops along the U.S.-Mexico border, saying that their share of a planned new deployment won't be enough to make a dent in illegal immigration.
• Mexicans Struggle to Regroup After Killing. Leaders of Mexico's former ruling party gathered Tuesday to mourn the assassination of a top gubernatorial candidate, pick a replacement for this weekend's elections, and debate whether the party wants to get behind President Felipe Calderón's assault on drug gangs or continue to criticize the war from the sidelines.
• Why Obamanomics Has Failed. Uncertainty about future taxes and regulations is enemy No. 1 of economic growth.
  

CNBC:

• US Crisis Panel to Examine Goldman(GS), AIG(AIG) Ties. The congressionally appointed panel begins two days of hearings Wednesday, headlined by former AIG Financial Products head Joseph Cassano and Goldman President Gary Cohn. A key focus will be "how the interaction of these two financial giants may or may not have contributed to the causes of the financial crisis,'' Phil Angelides, chairman of the commission, said in a call with reporters on Tuesday. Goldman has long been criticized for benefiting from the U.S. taxpayers' bailout of AIG. Taxpayers pledged up to $182 billion to address problems at AIG's financial products division.

MarketWatch:

• No Upside to China Stocks as Credit Tightens, Strategist Says. Chinese stocks will continue to trend lower in the second half of the year, pressured by tighter lending policies and a gloomy global outlook, according to a leading Hong Kong-based strategist. Andrew Ferris, senior investment strategist for Asia at BNP Paribas, says the sharp sell-off in Shanghai on Tuesday, which saw China stocks skid to a 14-month low, is in line with the overall weakening trend that's been in place since the start of the year. He believes asset prices are likely to remain under pressure until Chinese authorities ease up on their current tightening campaign -- something that won't happen for some time. "They are not going to let go quickly or easily," Ferris said referring to the determination of Chinese authorities to push ahead with recent administrative measures to cool credit growth. "China will continue to have tight monetary policy until the end of year," he added.

Fox News:

• BP(BP) Going Back to Banks for More Funding. BP Plc has approached four major banks in an effort to raise money either through a private placement of debt and lines of credit, looking to raise as much as $10 billion sometime this week to help pay tens of billions of dollars in liabilities stemming from its massive oil spill in the Gulf of Mexico, FOX Business Network has learned.

NY Times:

• In U.S. Bailout of A.I.G., Forgiveness for Big Banks. Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the and the Federal Reserve Bank of New YorkTreasury Department orchestrated one of the biggest corporate bailouts in history. The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks.

Business Insider:

• Quarterly Ratings: Keith Olbermann Is Slipping In The Key 25-54 Demographic.

McClatchy:

• Goldman(GS) Admits it Had Bigger Role in AIG(AIG) Deals. Reversing its oft-repeated position that it was acting only on behalf of its clients in its exotic dealings with the American International Group, Goldman Sachs now says that it also used its own money to make secret wagers against the U.S. housing market. A senior Goldman executive disclosed the "bilateral" wagers on subprime mortgages in an interview with McClatchy, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an "intermediary" responding to its clients' demands. The official, who Goldman made available to McClatchy on the condition he remain anonymous, declined to reveal how much money Goldman reaped from its trades with AIG. However, the wagers were part of a package of deals that had a face value of $3 billion, and in a recent settlement, AIG agreed to pay Goldman between $1.5 billion and $2 billion. AIG's losses on those deals, for which Goldman is thought to have paid less than $10 million, were ultimately borne by taxpayers as part of the government's bailout of the insurer. Goldman's proprietary trades with AIG in 2005 and 2006 are among those that many members of Congress sought unsuccessfully to ban during recent negotiations for tougher federal regulation of the financial industry. A McClatchy examination, including a review of public records and interviews with present and former Wall Street executives, casts doubt on several of Goldman's claims about its dealings with AIG, which at the time was the world's largest insurer. For example:

Forbes:

• Financial Reform? Sure. But The Systemic Six Are Here to Stay. The Financial Reform Bill, which I've nicknamed The Let's Not Allow Our Largest Donors To Embarrass Us Again Act of 2010, is not a total failure, but it fails miserably to address perhaps the worst part of the crisis - Too Big To Fail. The bill doesn't really address the Hexopoly of Too Big To Fail Banks. I'm also calling these The Systemic Six. The big six banks (Goldie, Morgan, JP, B of A, Wells and Citi) will be limited in their hedge fund investments and trading activity, but not very limited. The interconnectedness, however, is unchanged, and this is the very crux of the matter. Oh well. Maybe we'll get it right after the next economic evisceration. For now, The Hexopoly or The Systemic Six are here to stay.

Real Clear Markets:

• A Doctor's Take On Health Care. As a practicing doctor in California it troubles me that those with the ability to influence health care legislation have either been politically motivated to remain silent, or strikingly inarticulate when it comes to voicing the major issues patients and taxpayers will face with the new health care bill. My own, long-held view has been that any reform should be of the free market variety. In that sense, I'm increasingly scared as I learn more about what's inside the health legislation passed by Congress not long ago. Despite the rising level of unhappiness with what has transpired, it dismays me that the general public, like me, is not fully aware of the financial tsunami that is on the way for patients, insurers and hospitals thanks to this legislation, not to mention the irregular way in which it was passed.

ISDA:

• US Companies May Face US $1 Trillion in Additional Capital and Liquidity Requirements As a Result of Financial Regulatory Reform, According to ISDA Research.

VisionCritical:

• Noticeable Drop for President Obama's Rating in United Stated. The approval rating for U.S. President Barack Obama has dropped markedly this month, and less than one-in-five Americans have a favorable view of the U.S. Congress, a new Angus Reid Public Opinion poll has found. In the online survey of a representative national sample of 1,001 American adults, 44 per cent of respondents (-4 since May) approve of Obama’s performance, while 50 per cent (+5) disapprove. The level of strong approval for the U.S. President (14%) continues to trail the level of strong disapproval by double digits (31%). This month, Independents appear to have turned their back on the U.S. President. This group is now clearly more likely to disapprove of Obama’s performance (60%, +7) than to approve of it (35%, -7). The approval rating for the U.S. Congress stands at 18 per cent this month (-7), while 72 per cent of respondents disapprove of its actions (+9). The level of strong approval is two per cent (-2), while two-in-five Americans (40%, +4) are strongly dissatisfied. Only seven per cent of Republicans and 11 per cent of Independents approve of Congress. This month, just over a third of Democrats (36%, -9) provide a positive assessment of the legislative branch.

Politico:

• Clinton Friend Was Spy's Target. A leading Democratic fundraiser and close political ally of Secretary of State Hillary Clinton was been a target of the alleged ring of Russian spies arrested yesterday by federal authorities. The president of the high-end tax accounting and financial advising firm Morea Financial Services confirmed earlier today that the alleged spy "Cynthia Murphy" was a longtime employee and a vice president at the company, which is located on lower Broadway in Manhattan. Federal and state campaign finance filings suggest that the little-known company manages the finances of one of New York's top Democratic financiers: Alan Patricof, a venture capital figure and the finance chairman of Clinton's Senate campaign, as well as a top presidential campaign fundraiser. According to the federal complaint, Murphy had "several work-related personal meetings" with a person it describes as "a prominent New York-based financier," and says she and her husband and alleged co-conspirator accurately reported back to Moscow that the financier was "prominent in politics" and "an active fundraiser for" a major political party, as well as "a personal friend" of a current Cabinet secretary, and in a position to provide information about foreign policy.
• Democrats, Obama Willing to Scale Back Energy and Climate Change Bill. Key Senate Democrats offered, during a White House meeting with President Barack Obama and skeptical Republicans on Tuesday, to scale back their ambitious plans to cap greenhouse gases across multiple sectors of the economy. Sens. John Kerry and Joe Lieberman told reporters after the 90-minute West Wing meeting that Obama held firm in his calls for a price on greenhouse gases. But they said the president acknowledged that he could agree to a more limited climate and energy bill than any the senators had previously drafted. “We believe we have compromised significantly, and we’re prepared to compromise further,” Kerry said. "The president was very clear about putting a price on carbon" and curbing greenhouse gases, he added.

OECD:

• Growing health spending puts pressure on government budgets, according to OECD Health Data 2010. In all OECD countries total spending on healthcare is rising faster than economic growth, pushing the average ratio of health spending to GDP from 7.8% in 2000 to 9.0% in 2008. Factors pushing health spending up - technological change, population expectations and population ageing - will continue to drive cost higher in the future. In some countries the recent economic downturn, with GDP falling and healthcare costs rising, led to a sharp increase in the ratio of health spending to GDP. In Ireland, the percentage of GDP devoted to health increased from 7.5% in 2007 to 8.7% in 2008. In Spain, it rose from 8.4% to 9.0%.

Reuters:

• General Mills(GIS) Outlook Disappoints; Shares Fall. General Mills Inc (GIS) forecast fiscal 2011 earnings below Wall Street expectations, sending the food maker's shares down more than 4 percent.
• Fiscal 2011 Could Be Hardest Yet for U.S. States - CBPP. U.S. states in fiscal 2011 could be facing the worst budget situation since the recession began in 2007, according to a think-tank report released on Tuesday. States' cumulative budget shortfall "will likely reach $140 billion in the coming year, the largest shortfall yet in a string of huge annual gaps that date back to the beginning of the recession," said the Center on Budget and Policy Priorities.

Financial Times:

• Anadarko(APC) Approved Key BP(BP) Well Designs. Anadarko, the US partner to BP in its ill-fated Macondo well in the Gulf of Mexico, approved several key aspects of the UK company's designs for the project that have been sharply criticised by Washington lawmakers. Anadarko, which owns 25 per cent of Macondo, also knew of significant operational decisions made by BP that some lawmakers believe could have been a factor in causing the explosion at the well, according to senior executives at both companies. Anadarko attempted this month to distance itself from BP by saying the oil spill at the well had been preventable and was likely because of the UK company's "reckless decisions and actions". However, both Anadarko and BP have confirmed to the Financial Times that the US company was aware of design choices that lawmakers, who have accused the UK company of cutting corners to cut costs, have criticised.

Telegraph:

• European Firms 'Wave a Warning Flag' Over Chinese Protectionism. European businesses in China could be forced to “vote with their feet” if China doesn’t do more to create a level-playing field for foreign businesses, the president of the European Chamber of Commerce in China has warned. His remarks followed a survey showing almost 40pc of European firms expect the business environment in China to deteriorate over the next two years, confirming growing fears that China is using backdoor protectionism to shut foreign businesses out of the market. “If things turn sour, China is not necessarily ‘a must’ for our members,” said Jacques de Boisseson, “Nobody should take for granted that European companies will continue investing whatever the business environment.”
• Warning Signals of a Double-Dip Recession Flash Brightly Across the World. Global bond markets are flashing warning signals of a sharp slowdown in growth across the world and a possible slide toward a double-dip recession and outright deflation.

Evening Recommendations
Citigroup:

• Reiterated Buy on (GIS), target $43.

Susquehanna:

• Rated (SYK) Positive, target $64.
• Rated (ZMH) Positive, target $67.
  

Night Trading

• Asian equity indices are -1.75% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 147.0 +12.0 basis points.
• Asia Pacific Sovereign CDS Index 140.0 +8.75 basis points.
  
• S&P 500 futures +.39%.
  
• NASDAQ 100 futures +.38%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AYI)/.56
• (AM)/.78
• (MON)/.79
• (CBK)/.11
• (APOL)/1.54
• (SCHN)/.87

Economic Releases
8:15 am EST

• The ADP Employment Change for June is estimated at +60K versus +55K in May.
  

9:45 am EST

• The Chicago Purchasing Manager report for June is estimated to fall to 59.0 versus a reading of 59.7 in May.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory drawdown of -1,000,000 barrels versus a +2,017,000 barrel build the prior week. Gasoline supplies are estimated to fall by -400,000 barrels versus a -762,000 barrel decline the prior week. Distillate supplies are expected to rise by +950,000 barrels versus a +297,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.15% versus a +1.5% gain the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Evans speaking, Fed's Duke speaking, Fed's Lockhart speaking, weekly MBA mortgage applications report, NAPM-Milwaukee, Bloomberg Financial Conditions Index for June, Oppenheimer Consumer/Gaming/Lodging/Leisure Conference and the (TDG) Analyst Meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology 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 Substantially Lower into Final Hour on Rising Sovereign Debt Worries, Increasing Economic Fear, China Hard-Landing Concerns, Tax Hike Worries

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Every Sector Declining
  
• Volume: Slightly Above Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 34.15 +17.93%
  
• ISE Sentiment Index 79.0 -28.83%
  
• Total Put/Call 1.06 +37.66%
  
• NYSE Arms 4.43 +258.25%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 120.78 bps +5.60%
  
• European Financial Sector CDS Index 159.67 bps +9.18%
  
• Western Europe Sovereign Debt CDS Index 161.0 bps +2.88%
  
• Emerging Market CDS Index 267.67 bps +5.83%
  
• 2-Year Swap Spread 35.0 unch.
  
• TED Spread 39.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .14% +1 bp
  
• Yield Curve 235.0 -5 bps
  
• China Import Iron Ore Spot $139.40/Metric Tonne -.21%
  
• Citi US Economic Surprise Index -36.40 -11.6 points
  
• 10-Year TIPS Spread 1.88% -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -185 open in Japan
• DAX Futures: Indicating +11 open in Germany

Portfolio:

• Lower: On losses in my Medical, Retail, Biotech and Technology long positions
  
• Disclosed Trades: Added to my (IWM)/(QQQQ) hedges and added to my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 trades substantially lower, to the lowest level since November of last year, as it breaks key technical support. On the positive side, Drug and Telecom stocks are relatively strong, falling less than 2.0%. Weekly retail sales rose +3.0% this week versus a +3.1% gain the prior week and down from a +3.9% increase the first week of April. On the negative side, Gaming, Airline, Construction, Wireless, Internet, Steel, Paper, Oil Tanker, Alt Energy and Coal shares are under significant pressure, falling 5.0%+. The large rise in the European Financial Sector CDS Index is a big concern. The China sovereign cds is jumping +5.5% to 91.81 bps. Moreover, the Russia sovereign cds is jumping another +5.7% to 201.14 bps and the Hungary sovereign cds is surging +6.1% to 352.63 bps. As well, the European Investment Grade CDS Index is rising +7.5% to 128.37 bps, which is also a large negative. The 10-year yield continues to fall too much and is breaking to session lows to below the key 3% level. The fact that in today's very poor Consumer Confidence reading the percentage of people who said they intend to buy a car dropped to the lowest since records began in 1967 is stunning, considering the state of the automobile industry/financing/consumer psyche during the last meltdown. The overall reading was led down by a -32.68% plunge in consumer confidence in the Southeast Central region, which was likely affected by the oil spill. Economic data tomorrow may also surprise on the downside. The Citi US Economic surprise index has completely broken down, which usually means economists will be revising their expectations down soon. The market is very worried by the policies in the US and Europe. Raising taxes and cutting government spending during a bad economic environment will lead to further economic decline and less tax revenues, further raising the risks of default. Raising taxes and increasing spending will eventually lead to the same result, but it just takes longer. The market wants to see government spending cuts and tax cuts, in my opinion. The global economy is perilously close to entering another vicious downwards cycle. I expect US stocks to trade mixed-to-lower into the close from current levels on rising sovereign debt angst, China hard-landing concerns, increasing economic fear, tax hike worries, regulatory fears and oil spill concerns.