Stocks Higher into Final Hour on Falling Credit Market Angst, Lower Long-Term Rates, Less Economic Fear

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Medical longs, Biotech longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is above average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling 2.06% and is very high at 29.42. The ISE Sentiment Index is below average at 123.0 and the total put/call is about average at .83. Finally, the NYSE Arms has been running high most of the day, hitting 1.68 at its intraday peak, and is currently 1.36. The Euro Financial Sector Credit Default Swap Index is falling another 6.33% today to 104.67 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is dropping another 3.65% to 124.49 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is plunging 7.93% to 51 basis points. The TED spread is now down 412 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 10.42% to 43.0 basis points. The Libor-OIS spread is rising .06% to 45 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 4 basis points to 1.99%, which is down 65 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is up 4 basis points today. The Euro Financial Sector Credit Default Swap Index is now at the lowest level since early January, which is a large positive. Given the capital raising news, the (XLF) trades pretty well today and is near session highs. The (XLF) has been consolidating gains over the last three weeks. I suspect another surge up through its 200-day moving average will occur very soon. The NYSE Arms is high again today, despite gains in the major averages, which is also a positive. One of my longs, (ISRG), is breaking above its 200-day moving average on decent volume today for the first time since July 2008. I still see substantial upside in the shares over the intermediate/long-term. Nikkei futures indicate an +76 open in Japan and DAX futures indicate a +16 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, declining credit market angst, investment manager performance anxiety, technical buying, lower long-term rates and less economic fear.

Today's Headlines

Bloomberg:

- The number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, more than forecast and the fourth increase in five months, as lower prices attracted buyers. The gain in the index of signed purchase agreements, or pending home resales, was the biggest in more than seven years and followed a 3.2 percent increase in March, the National Association of Realtors said today in Washington. The April reading was up 3.2 percent from the same month a year earlier.

- The cost to protect U.S. corporate debt against default fell to the lowest in almost a year after Morgan Stanley, JPMorgan Chase & Co. and American Express Co. said they’ll raise at least $7.7 billion to repay rescue funds. Credit-default swaps on the CDX North America Investment- Grade Index linked to 125 companies in the U.S. and Canada fell 4 basis points to 124.5, the lowest since June 20, according to CMA DataVision prices at 10 a.m. in New York. Morgan Stanley also dropped to the lowest since June and American Express fell to a 10-month low, CMA prices show. Credit-default swaps on Morgan Stanley dropped 21 basis points to 191, CMA prices show. Contracts on American Express declined 14 to 188 and JPMorgan fell 2.5 to 87. The Markit iTraxx Financial index of 25 European banks and insurers declined 10 basis points to 102 and the subordinated index dropped 15 to 180.

- The rally in the Standard & Poor’s 500 Index above its 200-day moving average is sending a bullish signal after the measure traded below the level for the longest period since the 1930s. The benchmark gauge for American equities added 2.6 percent to 942.87 yesterday, exceeding its mean price of 926.89 over the past 200 days on a closing basis, data compiled by Bloomberg show. The climb halted a 523-day stretch where the S&P 500 trailed the average, the second longest in history. Harris Private Bank and Morgan Asset Management say the advance may indicate the bear market in U.S. equities that began in October 2007 is over, heralding more gains after a three- month, 39 percent increase.

- South Korea deployed a high-speed naval vessel equipped with anti-ship missiles to its sea border with North Korea amid reports the communist nation is preparing to test-launch several mid-range and one ballistic rocket. North Korea is readying as many as three medium-range missile in the Anbyon region, northeast of the capital of Pyongyang, Yonhap News reported today. There are signs the North may also be taking steps to test-fire its second longer-range, ballistic missile since April, U.S. Defense Secretary Robert Gates said yesterday.

- Herb Allison, nominated to run the Treasury’s office overseeing the U.S. financial rescue, owns $1 million to $5 million of stock in Bank of America Corp., one of the biggest federal aid recipients. Allison is also paid about $3,600 a month from a Merrill Lynch & Co. annuity, the firm where he worked for almost three decades, and was later bought by Bank of America.

- Emerging Markets Most Costly Since ’07 on Fund Flood.

- Europe’s unemployment rate rose to the highest in almost 10 years in April as the worst global economic slump in more than six decades forced companies to cut jobs and spending. Unemployment in the 16-member euro region increased to 9.2 percent from 8.9 percent in March, the European Union statistics office in Luxembourg said today. That was the highest since September 1999 and exceeded the 9.1 percent rate expected by economists, according to the median of 29 forecasts in a Bloomberg News survey.

- Colorado State University today cut its hurricane forecast for the 2009 Atlantic season to five, from a prediction of six in April.

- Google Inc.’s(GOOG) free mobile-phone operating system will begin running computers next quarter, entering a market dominated by Microsoft Corp.’s(MSFT) Windows and deepening the rivalry between the two companies.

- FBI Director Robert Mueller said the U.S. government’s stimulus package, including TARP funds, has “the potential to be the next wave” of cases the agency investigates. “These funds are inherently vulnerable to bribery, fraud, conflicts of interest and collusion,” Mueller said in a speech today at the Economic Club of New York.

- US stocks may extend their rally if the S&P 500 breaches the 945 level, according to a technical analyst at UniCredit SpA. “A crossing of 945 will attract more mid-term orientated investors into the market,” Volker Bien said. UniCredit’s first medium-term target level for the S&P 500 is 980 should the measure close above 945.

- Citadel Investment Group LLC, the $11 billion hedge-fund firm founded by Ken Griffin, gained 21 percent this year through May in its main funds as convertible bonds and stocks rose, a person familiar with the results said. The Wellington and Kensington funds tumbled 55 percent in 2008. They will have to climb another 84 percent before Chicago- based Citadel can charge clients performance fees once again.

Wall Street Journal:

- The technology sector is bottoming out as companies are seeing a better performance in the second quarter compared with the first quarter, Seshu Madhavapeddy, general manager of Texas Instruments Inc.'s (TXN) mobile Internet devices business unit, said Tuesday.

- Microsoft Corp. (MSFT) on Tuesday announced the date the latest version of the Windows operating system, Windows 7, will be in general commercial availability: Oct. 22. The milestone comes amid intense pressure on the world's largest software maker to reverse its perceived missteps with Windows 7's predecessor, Vista, and as evidence mounts that computer makers are increasingly considering alternatives to its ubiquitous operating system.

CNBC:

- After taking a beating for the past two years, real estate investment trusts are regaining popularity with investors looking for bargains and a way to capitalize on an industry rebound. More commonly known by their acronym, REITs are funds that provide investors with a broad range of investment opportunities while delivering substantial tax breaks to the corporations that set up the vehicles.

NY Times:

- The end result is that G.M. will not become more like successful car companies. It will become less like them. The federal merger will not accelerate the company’s viability. It will impede it. We’ve seen this before, albeit in different context: An overconfident government throws itself into a dysfunctional culture it doesn’t really understand. The result is quagmire. The costs escalate. There is no exit strategy.

- Critics have long complained about the exorbitant fees hedge funds charge their clients. Now, it seems those complaints are finally being heard. A new study from Barclays Capital, expected to be released Tuesday, shows that investors are becoming increasingly vocal about the fees they pay hedge fund managers and they want more than just a reduction in the typical 2 percent management fee and 20 percent performance fee. One idea gaining ground involves the use of a “hurdle rate” – or a specific benchmark a hedge fund manager needs to overcome to get paid an incentive fee at the end of the year. The hurdle would vary for each fund depending on its strategy, but for a simple long-short equity fund, for example, returns would have to exceed the S&P 500 by at least 2 percentage points. Investors are also demanding that less-liquid funds, which lock up their money for three years or more, delay the collection of performance fees until after the lock-up period is over.

- With two carmakers operating in bankruptcy protection, the auto industry is hoping to see some evidence Tuesday that new-vehicle sales could start to pull out of their slump. The Ford Motor Company said it sold more vehicles in the United States in May than in any month since last July and that its market share climbed to the highest level in three years. It sales were down 24 percent from a year ago, one of the smallest declines that any major automaker has reported in months. But Ford said its sales rose 20 percent in May from April — helped by record sales of some of its small cars. Ford said it would increase production in the second and third quarters by 52,000 vehicles, or 6 percent. That is in contrast to significant cutbacks at Chrysler, which has idled all of its United States plants for the last month, and G.M., which is shutting 13 assembly plants for part of the summer to clear out inventories.

MarketWatch:
- Bankrupt automaker General Motors said Tuesday it reached a tentative deal to sell Hummer, its military-styled vehicle, reportedly to a machine maker based in western China.

- In a move likely to push exchange-traded funds even further into the investing mainstream, Pacific Investment Management Co. on Tuesday launched its first ETF and said it plans to follow up with a half-dozen more.

WebWire:

- J.P. Morgan(JPM) was recently named "Best Overall Hedge Fund Administrator" by HFMWeek magazine in its 2009 Service Provider Awards. The awards recognize hedge fund service providers that outperformed their peer group in 2008/2009, and that demonstrated financial progress, growth and genuine innovation.

Market News International:

- The European Central Bank doesn’t exclude cutting its benchmark interest rate by a further quarter points and may use additional non-standard policy measures, citing “well-informed” sources. Another official said expanding the bank’s use of non-standard policy tools is also a possibility. The ECB has a “genuine willingness to consider all options” and “could easily go further” in response to changing market conditions, the official said.

Atlanta Business Chronicle:

- Georgia officials offered NCR Corp.(NCR) more than $60 million to lure the company to the state, which is double what Ohio offered the company at the last minute Monday night. Atlanta Business Chronicle broke the news Monday evening that NCR (NYSE: NCR) would move its headquarters and roughly 1,300 workers from Dayton to Duluth, Ga. The move is sending reverberations across the Dayton area.

Reuters:
- Access to the popular social networking service Twitter and email service Hotmail was blocked across mainland China late on Tuesday afternoon, two days before the twentieth anniversary of a bloody crackdown on Tiananmen Square. Indignant users filled chatrooms with protest, after access to Twitter was denied shortly after 5:00 pm (0900 GMT) on Tuesday. "The whole Twitter community in China has been exploding with it," said Beijing-based technology commentator Kaiser Kuo. "It's just part of life here. If anything surprises me, it's that it took them so long."

- To find a U.S. region where auto manufacturing is well placed to weather the storm in the American car industry, look south.

Financial Times:
- Many managers hope the end of the hedge fund bubble will help create better times ahead.

- Some time over the next few weeks, the US House of Representatives is likely to vote on what Barack Obama and others have described as an historic bill that would sharply reduce American carbon emissions. The headline looks good. The reality is not so flattering.

JLM Pacific Epoch:

- According to Taiwanese media, the 3G Apple (Nasdaq:APPL) iPhone is expected to reach the mainland market in July, reports Sina quoting cens.com. It's not yet clear which 3G standard the iPhone will support, said the report. China Unicom's (NYSE:CHU, 762.HK, 600050.SH) Shanghai subsidiary confirmed on March 25 that its parent company had reached an agreement with Apple to release the 3G iPhone in China.

Xinhua News Agency:

- China’s crude-oil stockpiles for both emergency and commercial use rose by 1 million metric tons to 38.6 million tons in April from March.

Bernama:
- General Motors Corp.(GMGMQ), the bankrupt US carmaker, is considering opening a plant in Malaysia, citing the head of the manufacturer’s Southeast Asian division.

Bear Radar

Style Underperformer:
Mid-cap Value (+.28%)

Sector Underperformers:
Semis (-3.06%), Coal (-2.05%) and Gaming (-1.99%)

Stocks Falling on Unusual Volume:
BCS, MRVL, WNR, ATHR, HES, SNP, CLDX, ALTR, NTAP, JNPR, KLAC, MTZ, CAH, GNI and CAM

Stocks With Unusual Put Option Activity:
1) CMCSK 2) CX 3) DDUP 4) EP 5) NSC

Bull Radar

Style Outperformer:
Small-cap Growth (+.86%)

Sector Outperformers:
Airlines (+5.63%), Education (+3.04%) and HMOs (+1.70%)

Stocks Rising on Unusual Volume:
UNFI, CVLT, ULTI, SA, BG, PEP, AA, CCE, BMA, PHH, OVTI, DDUP, CISG, HOGS, FUQI, CBEY, QSFT, CMED, GOLD, BLUD, KNXA, APWR, OSIP, SHLD, ISRG, HWCC, NUVA, TBSI, KNDL, NTG, STI, CHU, ROS and AXR

Stocks With Unusual Call Option Activity:
1) DDUP 2) CHKP 3) QLGC 4) BCS 5) BKC

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- The euro’s rally against the U.S. dollar may be entering its “last stage,” and investors would likely benefit from selling the 16-nation currency against the greenback, UBS AG said in a note to clients yesterday. The euro is likely to drop toward $1.30, UBS analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist, wrote in a research note.

- Investors should take off bets that Treasury prices will fall further because elevated yields will attract buyers, Deutsche Bank AG says. Deutsche shifted to a ‘neutral duration’ from a ‘duration underweight’ recommendation on U.S. debt on the expectation that the pressures that drove investors to sell Treasuries have nearly abated, New York-based analysts Mustafa Chowdhury and Marcus Huie wrote in a note to clients. Investors with cash will likely resume buying government debt if borrowing costs rise much further, while the Federal Reserve could shift from its “negligible” response to the borrowing cost increase by boosting the amount of money allocated for Treasury purchases, the analysts wrote.

- The cost of protecting Asia-Pacific corporate and government bonds from default fell, according to traders of credit-default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 10 basis points to 165 as of 8:46 am in Singapore, according to Royal Bank of Scotland Group Plc prices. The Markit iTraxx Japan fell 15 basis points to 155 at 9:20 am in Tokyo, Credit Suisse Group AG prices show. The Markit iTraxx Australia index was quoted 11 basis points lower at 173.5 as of 10:46 am in Sydney, according to Citigroup Inc. data.

- Microsoft Corp.(MSFT) will enable gamers to control Xbox 360 machines with body motions instead of hand-held controllers, a bid to gain an edge on Nintendo Co.’s market leading Wii. Xbox 360 consoles, including those already sold, will be able to track gestures and recognize voice commands and facial movements, Shane Kim, an Xbox vice president, said today in an interview. The features rely on a box with motion and voice sensors.

- EMC Corp.(EMC) made an unsolicited offer to acquire Data Domain Inc. for $1.8 billion in cash, topping a bid by NetApp Inc.(NTAP), which agreed to buy the company for $1.5 billion two weeks ago. DataDomain(DDUP) rose 16 percent in late trading after EMC offered $30 a share in cash. NetApp’s offer is valued at $25.56 a share, based on today’s closing price, making EMC’s bid 17 percent higher

- Israeli Prime Minister Benjamin Netanyahu rejected U.S. President Barack Obama’s demand for a halt to all construction in West Bank settlements. Netanyahu, who spoke at a meeting of the parliament’s Foreign Affairs and Defense Committee, said a call by the U.S. to stop all so-called natural growth in existing settlements was unreasonable, according to someone who was present at the meeting and spoke on condition of anonymity because the session was held behind closed doors. Netanyahu’s remarks come just three days before Obama is to make a speech to the Muslim world in Cairo, and two weeks after the president told the Israeli leader in Washington that all settlement building must stop. Most of the parties in Netanyahu’s ruling coalition, including his Likud party, oppose halting settlement expansion. The statement by Netanyahu may elevate tensions with the U.S. administration, said Yossi Alpher, who advised former Prime Minister Ehud Barak, now the defense minister, and today co- edit’s the bitterlemons.org Web site. “It’s a conscious decision by the Netanyahu government to defy a request by the Obama administration,” Alpher said. “The ball is now in Obama’s court.”

- JPMorgan Chase & Co.(JPM) and American Express Co.(AXP) will sell at least $5.5 billion of stock to satisfy a new Federal Reserve rule forcing firms that took bank rescue funds to tap equity markets before they can repay the money. JPMorgan, the second-largest U.S. bank by deposits, will sell $5 billion of stock, and American Express, the biggest U.S. credit-card company by purchases, plans to raise $500 million, the companies said today in separate statements. The Fed issued its rule today.

- General Motors Corp., the world’s largest carmaker until its 77-year reign ended last year, will be removed from the Standard & Poor’s 500 Index after filing for bankruptcy protection, S&P said. GM will be replaced by DeVry Inc.(DV), the second-largest publicly traded U.S. school owner by market value, after the close of trading tomorrow, S&P said in a statement.

- The four-week flood of money into developing-nation stock funds that drove the MSCI Emerging Markets Index to an eight-month high is sending the strongest sell signal since equities peaked in October 2007. Inflows totaled $12 billion, or 3.5% of developing-nation fund assets, the most since the 22-country benchmark hit its record high 19 months ago, said EPFR Global, which tracks $410 trillion in investments worldwide. The only other time since 2001 that funds attracted as much cash, in February 2006, the MSCI gauge lost 8.4% in four months. A slower-than-estimated economic recovery in China, the largest emerging market, may spark a retreat, said RBC Capital Markets. “Fund flows at their extremes are contrary indicators,” Leo Grohowski, who helps oversee about $132 billion as the New York-based CIO at BNY Mellon Wealth Management, said.

- Goldman Sachs Group Inc., which wants to return $10 billion this month to the U.S. government, is raising as much as HK$14.86 billion ($1.92 billion) by selling shares of Industrial & Commercial Bank of China Ltd. after the stock jumped 29 percent in two months. Goldman Sachs, based in New York, is offering 3.03 billion Hong Kong-traded shares, or a 0.9 percent stake in the Chinese bank, at HK$4.80 to HK$4.90 each, according to a sale document e-mailed to fund managers today. That’s as much as 6 percent below the stock’s HK$5.11 closing price yesterday.

- North Korean leader Kim Jong Il has named third son Kim Jong Un as his successor to lead the Stalinist state, the Dong-A Ilbo newspaper said, citing unidentified people familiar with the situation. North Korea notified its international diplomatic offices of the choice and is teaching its people a song in praise of the anointed leader, the South Korean daily said.

- Treasuries rose, snapping yesterday’s decline, as Federal Reserve purchases scheduled for the next two days and yields near a six-month high attracted investors.

- Treasury Secretary Timothy Geithner said Chinese officials are confident in the U.S. economy and the Obama administration’s actions to fight the recession and restore financial stability. “I’ve actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy,” Geithner said in an interview in Beijing for CCTV, Chinese state-run television.

Wall Street Journal:

- Citigroup Inc. and Bank of America Merrill Lynch are expanding their teams that provide services to hedge funds, looking to become bigger players in that sector even as it has shrunk dramatically.

- In a rare case of a jetliner disappearing midflight, an Air France Airbus A330 plane with 228 people onboard was feared lost over the Atlantic Ocean on Monday after suffering an apparent electrical failure while flying through storms and turbulence en route from Rio de Janeiro to Paris.

- While we were poking fun at Silicon Valley’s incessant need to stick a hyped-up catchphrase on each and every development, the use of such jargon was actually important, because we think that the digital sector is now moving full bore into an entirely new cycle of profound change. ”So what’s the seminal development that’s ushering in the era of Web 3.0? It’s the real arrival, after years of false predictions, of the thin client, running clean, simple software, against cloud-based data and services.” The Apple iPhone and iPod Touch are the tip of this spear. It’s more than just those two products, of course, but it’s what they represent: the complete integration of computing into every part of our lives in a way that is seamless, ubiquitous and, ideally, dead simple.

- Target(TGT) has its bull's-eye on a new venture: online media. On Tuesday, the retailer plans to formally announce a partnership with DailyCandy.com, the email newsletter and Web site owned by cable operator Comcast that covers fashion and culture for a mostly female audience. The venture, called Red Hot Shop, will be a special section of Target.com that will feature products from up-and-coming designers selected by DailyCandy editors, along with articles and artwork by the DailyCandy team.

CNBC.com:
- Traders are eagerly watching a relatively obscure technical indicator. Every time it turns higher, it almost always signals the start of a bull market! We’re talking about something known as the Coppock guide. According to Bloomberg the technical indicator has successfully signaled the start of a bull market all but once since World War II. Although it’s a rather complicated thing – essentially the Coppock guide signals a buy when it moves from a negative number to zero. And it's making that move right now!

NY Times:

- For decades, the United Automobile Workers had a simple strategy for getting what it wanted from the carmakers — it would go on strike. The tactic proved so successful that the mere threat of a walkout often won better wages, benefits and job security. Now, with General Motors and Chrysler in bankruptcy and the union a major shareholder in both through its retiree health fund, life has become a lot more complicated for the U.A.W.

CNNMoney:

- Whether a new iPhone will be unveiled at Apple’s (AAPL) World Wide Developers Conference — which begins a week from today — is still an open question, but all the signs of an impending announcement are now in place. Two weeks ago, we got specs and spot shortages (see here). Last week the leaked photos started showing up. The provenance of none of them is certain, but neither has any been shown to be a forgery. And at least one veteran Apple watcher says the latest batch “look very real” to him.

Politico:

- RNC Chairman Michael Steele takes a sharp line against the the White House auto industry plan; this is one whose politics will depend very much on how it works out.

LA Times:

- The State Lands Commission lashed out today at Gov. Arnold Schwarzenegger's attempt to reverse its rejection of the first new oil drilling in California waters since 1969. Lt. Gov. John Garamendi, the three-member panel's chair, called the governor's proposal "a naked power-grab." At a contentious hearing in Santa Monica, the commission passed a resolution urging legislators not to go along with Schwarzenegger's plan, which would revive a drilling project off the Santa Barbara County coast that the commission killed in January.

Pensions&Investments:

- CME Group Inc. and Citadel Investment Group have signed five prominent money managers to their fledgling credit-swap default joint venture. But the launch of the business — targeting a $29-trillion market — is being thwarted by an “oligopoly” of banks that want to keep business at a rival clearinghouse in which they have an economic interest, according to a letter from one of the founding hedge funds, New York-based BlueMountain Capital Management LLC. CME’s joint venture, CMDX, has been in the works for more than a year, but its ambitions to be a clearing destination for the insurance-like derivatives known as credit-default swaps have so far gone unfulfilled. CMDX’s main rival, IntercontinentalExchange Inc.’s ICE Trust clearinghouse, opened for business in March and has so far guaranteed $710 billion in credit-default swaps. ICE Trust is backed by a dozen or so Wall Street firms, including Morgan Stanley and Goldman Sachs Group Inc.

The other funds that have signed on to Chicago-based CMDX include bond-fund manager Pacific Investment Management Co. and hedge funds BlackRock Inc., D. E. Shaw & Co. and AllianceBernstein Holding LP.

USA Today.com:

- Americans are overwhelmingly opposed to closing the detention center for suspected terrorists at Guantanamo Bay and moving some of the detainees to prisons on U.S. soil, a USA TODAY/Gallup Poll finds. By more than 2-1, those surveyed say Guantanamo shouldn't be closed. By more than 3-1, they oppose moving some of the accused terrorists housed there to prisons in their own states. The findings underscore the difficult task President Obama faces in convincing those at home that he should follow through on his campaign promise to close the prison in Cuba, especially in the absence of a plan of where the prisoners would go.

- Prefab homes sprout green designs, improve affordability.

Reuters:

- SunTrust Banks Inc (STI), a U.S. Southeast regional bank ordered by federal regulators to raise $2.2 billion of equity capital, on Monday speeded up a previously announced capital-raising plan, hoping to benefit from recent investor demand for banks' securities. The Atlanta-based bank said it plans to sell $1.4 billion of common stock, raise $300 million of common equity from selling securities, and raise $250 million of common equity from buying back up to $1 billion of preferred and hybrid securities for cash. After the markets closed, the bank priced the offering of 108 million stocks at $13.00 per share, below Monday's closing price of $13.80. SunTrust said the underwriters will have up to 30 days to buy an additional 16.2 million shares.

Financial Times:

- After months of financial gloom, summer has brought some relief. However, there is now a danger that policymakers and market participants are lulled into a false sense of security, which would be likely to lead to another negative feedback loop. To prevent such an outcome, quick and resolute action is needed. In particular, Europe must complete the job of putting the financial system on firmer ground. If one looks at earlier episodes of large-scale macro-financial distress, a number of key lessons emerge. Japan’s experience in the past two decades, in particular, make clear that a banking system populated by zombie banks is a major threat to recovery; banking systems remain dysfunctional until losses are fully recognized and disclosed; and procrastination increases the ultimate cost to the taxpayer. Sweden’s experience shows the benefits of expediting the clean-up. A dysfunctional banking system would represent a particular challenge for Europe, whose economies are much more dependent on banks than is that of the US. Big worries about the state of Europe’s banks remain, as current information is unsatisfactory and published accounts are not trusted. Recent International Monetary Fund estimates of potential future writedowns and recapitalization needs have added to these concerns, as they suggest that the European Union trails the US in the recapitalization process. Europe’s approach to stress testing has been half-hearted at best. We cannot wait another four months to discover that we do not yet know the true state of Europe’s banking system. Instead, a systematic European approach is needed.

- A leading Chinese financial official on Monday rejected suggestions the US dollar could be replaced quickly as the global reserve currency, as US Treasury secretary Tim Geithner arrived in China on his first official visit. “In the short term I don’t think we can find another currency to replace the US dollar,” said Guo Shuqing, chairman of China Construction Bank and former head of the country’s foreign exchange administrator. “The US dollar is the main currency because their economy is number one in terms of competitiveness, in terms of innovation.” Speaking in an interview with the Financial Times, Mr Guo also raised doubts about a proposal from China’s central bank governor, Zhou Xiaochuan, to replace the dollar with a “super-sovereign reserve currency” based on special drawing rights issued by the International Monetary Fund. “We’ve had SDRs for many years but everybody knows they don’t work so well,” said Mr Guo. “People worry about US dollars very much because of the imbalances in the current account but that has been the case for many years – they have had a deficit in the current account since the very beginning of the 1970s.” The bulk of China’s total international investment position is held in US dollar assets and only 6 per cent is in the form of direct investment.

China Daily:

- China's largest Internet search engine, Baidu.com Inc(BIDU), stands accused of abusing its dominant market position in the Internet industry's first test of the nation's Anti-Monopoly Law. Tangshan Renren Information Service Company (TRISC), claimed that the Web giant had monopolized China's search engine market and blacklisted its subsidiary website after TRISC cut back spending on advertising on Baidu.

Chosun Ilbo:

- North Korea built as many as four intercontinental ballistic missiles or rockets last year. The assessment by South Korean and the US intelligence agencies of the communist state’s capability is based on component purchases abroad, citing a South Korean official.

Yonhap:

- South Korea won approval from the US to buy laser-guided bombs capable of destroying North Korea’s underground military facilities, citing a South Korean military source.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (BDN), raised target to $9.

- Reiterated Buy on (ALTR), target $21.

CSFB:

- Reiterated Buy on (BRCM), boosted estimates, raised target to $29.

Morgan Keegan:

- Rated (GD) and (LMT) Outperform.

Night Trading
Asian Indices are +.50% to +1.75% on average.
S&P 500 futures -.06%.
NASDAQ 100 futures -.10%.

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Earnings of Note
Company/EPS Estimate
- (UNFI)/.34

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- (BOBE)/.39

- (PAY)/.16

- (HOV)/-1.51

Economic Releases

10:00 am EST

- Pending Home Sales for April are estimated to rise .5% versus a 3.2% gain in March.

Afternoon

- Total Vehicle Sales for March are estimated to rise to 9.4M versus 9.3M in April.

Upcoming Splits
- None of note

Other Potential Market Movers
- Treasury Secretary Geithner Visiting China, the Fed’s Fisher speaking, weekly retail sales reports, KeyBanc Capital Markets Industrial/Automotive/Transportation Conference, Goldman Lodging/Gaming/Restaurant/Leisure Conference, (CAH) investor day, RBC Capital Markets Energy/Power Conference, (THC) investor day, (MDT) analyst meeting and the Cowen Display Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by automaker and commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.