Wednesday, June 05, 2013

Wednesday Watch

Evening Headlines 
Bloomberg: 
  • Australia Economy Grows Less Than Forecast in First Quarter. Australia’s economy expanded less than economists forecast last quarter as machinery and equipment investment declined, sending the currency lower as traders increased bets on further interest rate cuts. First-quarter gross domestic product advanced 0.6 percent from the previous three months, when it expanded at the same pace, a Bureau of Statistics report released in Sydney today showed. The result compared with the median of 25 estimates in a Bloomberg News survey for a 0.7 percent gain.
  • Cash Outflows Turn World’s Best Stocks to Worst: Southeast Asia. Stock markets in Indonesia, the Philippines and Thailand have gone from being the world’s best to among the worst as the threat of reduced bond purchases by the U.S. Federal Reserve sends foreign investors to the exit. Equity indexes in the three markets have declined more than 3.5 percent since May 22, when Fed Chairman Ben S. Bernanke said policy makers could consider reducing stimulus if the U.S. labor market improves. International money managers pulled a combined $1.6 billion from the Southeast Asian countries in that period, the most since August 2011, data compiled by Bloomberg show.
  • Asian Stocks Fall, Led by Banks, on U.S. Stimulus Concern. Asian stocks fell, led by financial shares, on prospects the Federal Reserve will scale back stimulus efforts as the U.S. economy improves. Japanese shares swung between gains and losses before Prime Minister Shinzo Abe gives a speech on his economic-growth strategy. Westpac Banking Corp. (WBC), Australia’s No. 2 lender by market value, fell 1.9 percent, pacing declines among financial shares after the nation’s economy grew less than expected. Mitsui Fudosan Co. (8801), Japan’s largest property company by sales, added 0.6 percent after the Nikkei newspaper reported Abe will promote high-rise condominium developments in the growth plan. Hokkaido Electric Power Co. and Shikoku Electric Power Co. both dropped at least 3.9 percent to lead losses among Japanese utilities. The MSCI Asia Pacific Index slid 0.5 percent to 133.98 as of 11:25 a.m. in Tokyo. About two stocks dropped for each that rose as seven of the 10 industry groups on the gauge fell
  • Rubber Futures Fall in Tokyo on Concern Supply May Increase. Rubber futures declined in Tokyo trading on expectations that supply will increase from Thailand, the world’s largest exporter. The contract for delivery in November fell 0.4 percent to 260.3 yen ($2,600 a metric ton) on the Tokyo Commodity Exchange at 11:33 a.m. after moving between 258.5 yen and 262.3 yen. Futures have lost 14 percent this year.
  • Subprime Interrupted as Fed Concern Tapers Gain: Credit Markets. US mortgage bonds that returned as much as 59% over 18 months while recovering from the credit crisis they ignited are producing losses as speculation grows the Federal Reserve will cut unprecedented stimulus. Subprime-mortgage securities issued before the property bubble burst in 2007 lost .33% in May, the first decline since October 2011, Barclays Plc index data show. Prices on a Markit Group Ltd. index linked to commercial-mortgage bonds that have largely been cut to junk after being given top ratings during the boom have slumped to 71.7 cents on the dollar from 78.6 on May 8,  after soaring from as low as 54 a year ago.
  • Obama Failed to Tell Truth About IRS in Poll With 47% Skeptical. Almost half of Americans say President Barack Obama isn’t telling the truth when he says he didn’t know the Internal Revenue Service was giving extra scrutiny to the applications of small government groups seeking tax-exempt status. Forty-seven percent of Americans say they don’t believe Obama compared with 40 percent who say he is being truthful, according to a Bloomberg National Poll of 1,002 adults conducted May 31 through June 3. More than half of political independents -- 53 percent -- say Obama’s explanation that he learned it from media reports is untrue, while 34 percent say they believe him. “How could he not know?” said poll respondent June Wilshusen, 50, of Yuma, Colorado, a political independent and a stay-at-home wife married to a machinist. “I think any president has to know what’s going on with our government. I think they’re very aware of the IRS.”
  • Turkey’s Urban Protesters Blame Erdogan for Narrowing Freedoms. Asked why they’re joining the crowds that have gathered in Istanbul and Ankara every day since May 31, many cite what they say is a threat to their freedoms from an Islamist-rooted government increasingly unwilling to countenance dissent. Erdogan, who has blamed “extremists” for the spread of protests, has introduced curbs on alcohol, objected to popular television programs and said he hopes to preside over a “pious generation” of young people. 
  • France Says ‘No Doubt’ Syrian Regime Used Chemical Arms. French Foreign Minister Laurent Fabius said there is no question that Syrian President Bashar al-Assad’s forces used sarin gas against rebels in an escalating civil war that’s entered its third year. French tests detected the nerve agent in samples sent from Syria, and France is “certain that sarin gas has been used in Syria on several occasions and in a localized manner,” Fabius said yesterday in an e-mailed statement.
Wall Street Journal: 
  • One of Wall Street’s Riskiest Bets Returns. In a sign of how hard Wall Street is trying to satisfy investor demand for higher returns, J.P. Morgan Chase and Morgan Stanley bankers are moving to assemble synthetic collateralized debt obligations, or CDOs. Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO. In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, J.P. Morgan Chase & Co. and Morgan Stanley bankers in London are moving to assemble so-called synthetic collateralized debt obligations. CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds. Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice. While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments. During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world. Their catastrophic impact was denounced by many lawmakers and investors, and the market for all kinds of highly engineered financial instruments evaporated.
  • The Wonk With the Ear of Chinese President Xi Jinping. Even in China, few people would recognize Wang Huning, head of the Communist Party's secretive Central Policy Research Office. And small wonder: The former university professor almost never talks in public, barely speaks to old acquaintances and makes a point of not associating with foreigners. Yet party insiders and experts on Chinese politics consider him one of the most influential figures in China today, a key architect of its domestic and foreign policy over the past decade, and now of Mr. Xi's signature "China Dream" campaign that evokes a militarily and economically strong nation reclaiming its place of prominence in the world.
  • SAC Flap Is Liable to Hit Wall Street. The fate of SAC Capital Advisors LP is a $1 billion question on Wall Street. That figure is an estimate of how much the hedge-fund giant generates annually in trading commissions, financing fees and an array of other payouts to banks and other financial firms, according to more than a dozen representatives of Wall Street banks, brokerage firms and others that do business with SAC or are familiar with details of its operations. The firm is by far the biggest hedge-fund customer on Wall Street, said people at multiple firms.
Fox News:
  • EPA accused of singling out conservative groups, amid IRS scandal. It's not just the IRS. A second federal agency is facing a probe and accusations of political bias over its alleged targeting of conservative groups. The allegations concern the Environmental Protection Agency, which is being accused of trying to charge conservative groups fees while largely exempting liberal groups. The fees applied to Freedom of Information Act requests -- allegedly, the EPA waived them for liberal groups far more often than it did for conservative ones. The allegations are under investigation by the House Energy and Commerce Committee and the House Oversight and Government Reform Committee, which is also holding hearings on the Internal Revenue Service targeting of conservative groups. 
CNBC: 
  • Amazon(AMZN) Plans Major Move Into Grocery Business. Amazon.com is planning a major roll-out of an online grocery business that it has been developing for years, targeting one of the largest retail sectors yet to be upended by e-commerce, according to two people familiar with the situation.
  • Consumers Still to Buy Into Abe's Economic Experiment. Skepticism is setting in among consumers in the world's third largest economy over Abe's radical policies and whether he will be able to successfully deliver on his promise to end two decades of economic stagnation and ignite inflation.
  • The Aussie Dollar Just Can’t Catch a Break. Just as the Australian dollar attempted to make a concerted rebound against the U.S. dollar this week, the prospect of further monetary easing in Australia has provided traders with another reason to dump the currency.
Zero Hedge: 
Business Insider: 
Washington Post:
New York Times:
  • Trade Nominee Holds $500,000 in Cayman Islands. Michael Froman, a longtime White House economic aide nominated to be President Obama’s trade representative, holds close to $500,000 in the Cayman Islands and received millions of dollars to divest himself from Wall Street accounts that rely on a tax loophole the administration has sought to close. 
Reuters: 
  • Fed poised to evaluate bond buys, 'fine tune' tactics -Fisher. The U.S. Federal Reserve is poised to evaluate and potentially make changes to its massive monetary stimulus, a top Fed official who is critical of the Fed's bond-buying program said on Tuesday. Financial markets have been increasingly on edge on expectations that the Fed is ready to start scrolling back on its stimulus. "The plot now thickens," Richard Fisher, president of the Dallas Federal Reserve Bank, said. He likened developments in the Fed's monetary policy to a Shakespearean play starring a "daring captain," Fed Chairman Ben Bernanke, steering the ship of the U.S. economy. "Act IV, just beginning, will involve the drama of introspection, with the FOMC evaluating the utility of its navigational tactics, and, perhaps, fine-tuning them, if not altering the course," Fisher said, referring to the Fed's policy-setting Federal Open Market Committee, in remarks prepared for delivery to the C.D. Howe Institute Directors' Dinner in Toronto. Fisher is not a voting member of the committee this year. "Only time will reveal the efficacy of current policy and whether the risks that I and more experienced observers like Paul Volcker fret over are as substantial as we surmise, or whether we have made much ado about nothing," he added. He told the Toronto audience there was a "practical limit" to the size of the Fed's balance sheet and investors should not expect "QE infinity." He later told journalists he had advocated for the Fed to begin slowing the rate of purchases of mortgage-backed securities, but not stop them. Asked if he was concerned about the impact of rising bond yields on the economy, he said it should be monitored but that policymakers could not let markets dictate policy. "We cannot live in fear that gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine," he said. While chances are "extremely low" that monetary policies will help push inflation above the Fed's 2 percent target this year, the bond-buying program is, "at best, pushing on a string and, at worst, building up kindling for speculation and, eventually, a massive shipboard fire of inflation," he said. 
  • Brazil reduces foreign capital controls as currency tanks. Brazil will scrap a tax on foreign investments in local debt, a surprise move that could help stop a sharp depreciation of the country's currency that threatens to stoke already high inflation in Latin America's largest economy.
  • Japan's Abe to target income gains in growth strategy. Prime Minister Shinzo Abe will pledge to boost incomes by 3 percent annually and allow tax cuts and reduce red tape in special economic zones when he unveils the government's latest polices aimed at revitalizing the world's third-biggest economy, Japanese media said. 
Telegraph: 
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -1.0% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 121.0 +1.0 basis point.
  • Asia Pacific Sovereign CDS Index 99.50 -4.5 basis points.
  • FTSE-100 futures -.31%.
  • S&P 500 futures -.07%.
  • NASDAQ 100 futures -.04%.
Morning Preview Links

Earnings of Note

Company/Estimate
  • (HOV)/-.05
  • (JOSB)/.34
  • (BF/B)/.46
  • (PAY)/.47
  • (RUE)/.47
  • (CWTR)/-.77
  • (TECD)/1.06
Economic Releases
8:15 am EST
  • The ADP Employment Change for May is estimated to rise to 165K versus 119K in April.
8:30 am EST
  • Final 1Q Non-farm Productivity is estimated to rise +.6% versus a prior estimate of a +.7% gain.
  • Final 1Q Unit Labor Costs are estimated to rise +.5% versus a prior estimate of a +.5% gain.
10:00 am EST
  • Factory Orders for April are estimated to rise +1.5% versus a -4.0% decline in March. 
  • ISM Non-Manufacturing for May is estimated to rise to 53.5 versus 53.1 in April.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -800,000 barrels versus a +3,000,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +1,000,000 barrels versus a -1,514,000 barrel decline the prior week. Distillate supplies are estimated to rise by +1,400,000 barrels versus a +1,851,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.6% versus a -.9% decline the prior week.
2:00 pm EST
  • The Fed's Beige Book
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Japan 30Y bond auction, Eurozone Services PMI, weekly MBA mortgage applications report, (UA) investor day, (SWK) investor day and the (STZ) investor meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and financial shares in the region. I expect US stocks to open mixed and weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Tuesday, June 04, 2013

Stocks Lower into Final Hour on Fed Taper Worries, Rising Global Growth Fears, Technical Selling, Homebuilding/Biotech Sector Weakness

Today's Market Take:

Broad Market Tone:
  • Advance/Decline Line: Lower
  • Sector Performance: Most Sectors Declining
  • Volume: Below Average
  • Market Leading Stocks: Underperforming
Equity Investor Angst:
  • VIX 16.25 -.25%
  • ISE Sentiment Index 84.0 +16.67%
  • Total Put/Call 1.13 +24.18%
  • NYSE Arms 1.09 +90.1%
Credit Investor Angst:
  • North American Investment Grade CDS Index 81.91 +4.22%
  • European Financial Sector CDS Index 149.10 -4.2%
  • Western Europe Sovereign Debt CDS Index 81.09 -2.78%
  • Emerging Market CDS Index 199.75 +1.53%
  • 2-Year Swap Spread 16.5 -.25 bp
  • TED Spread 23.75 -.5 bp
  • 3-Month EUR/USD Cross-Currency Basis Swap -13.5 +.25 bp
Economic Gauges:
  • 3-Month T-Bill Yield .03% unch.
  • Yield Curve 184.0 +3 bps
  • China Import Iron Ore Spot $116.60/Metric Tonne +4.2%
  • Citi US Economic Surprise Index -21.80 +.8 point
  • 10-Year TIPS Spread 2.19 unch.
Overseas Futures:
  • Nikkei Futures: Indicating +49 open in Japan
  • DAX Futures: Indicating -26 open in Germany
Portfolio: 
  • Slightly Lower: On losses in my biotech/tech/medical sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges
  • Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:
  • Merkel CDU Says Euro Future Hinges on Low Debt. Staying the course on debt reduction and measures to boost competitiveness are the prescriptions for ending the euro region crisis, German Chancellor Angela Merkel’s party says in a draft paper for her re-election campaign. The 10-page platform for the Christian Democratic Union suggests that Merkel, who is running for a third four-year term in Sept. 22 elections, will stick to positions staked out during the debt crisis that have made her popular in Germany and resented in southern Europe. “The answer to the sovereign-debt crisis must be greater competitiveness in Europe” and lower budget deficits, the CDU document obtained by Bloomberg News says. “This is the only path that leads to growth and new jobs and strengthens Europe.” Pooling euro-area debt, including with so-called euro bonds, is rejected because it “would weaken Europe.”
  • ESM Bank Aid Delayed by German Push to Slow Banking Union. Germany has secured French support to delay rules on direct bank aid from the euro area’s firewall fund, calling into question when the tool will be available, according to two European officials. Euro-area finance ministers had aimed to reach political agreement this month on when and how the European Stability Mechanism could help banks so that the new program is ready next year when common supervision starts within the currency bloc. 
  • EU Seeks Role in Bank Shutdowns That Goes Against German Plan. The European Commission is seeking to give itself the power to shut down failing euro-area banks as part of a draft crisis blueprint that defies German calls for a more decentralized approach. The Brussels-based authority is set to propose that decisions to force losses on crisis-hit lenders’ creditors, as well as other steps to prevent a disorderly collapse, should be taken largely out of national hands, according to a document obtained by Bloomberg News. While the system would include a “newly-created central resolution body,” final decisions would be taken by the commission itself. 
  • European Stocks Climb as Fed’s Lockhart Backs Stimulus. European stocks rose, rebounding from a one-month low, as Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank is committed to its stimulus program.
  • Gross Says Reduce Risk Assets Since QE Not Boosting Growth. Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund (PTTRX), said the Federal Reserve’s zero-bound interest rate policy and quantitative easing programs are becoming more of a problem for an economy that needs structural reforms. The Fed’s polices are “desperately attempting to cure an economy that requires structural as opposed to monetary solutions,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. “Central banks -- including today’s superquant Kuroda, leading the Bank of Japan -- seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect.”    
  • IRS Paid Speaker $17,000 to Paint Michael Jordan at Event. The Internal Revenue Service spent $17,000 to hire a speaker who painted pictures of Michael Jordan and U2 singer Bono to motivate employees at a 2010 conference in California, the agency’s inspector general said. The tax agency spent about $49 million on 225 conferences from fiscal 2010 to 2012, including $4 million on the Anaheim, California meeting, said the inspector general report released today. In Anaheim, some IRS employees stayed in rooms typically costing as much as $3,500 a night, and the agency paid $135,350 to speakers, including $17,000 for a lecture by Erik Wahl on “The Art of Vision,” the report said.
  • Shipping Faces $500 Billion Environment Costs as Rates Slump. Shipping faces $500 billion in extra costs to meet environmental legislation at a time when a rout in rates has become so severe that some owners are struggling to maintain vessel safety. The industry will need $50 billion a year between 2015 and 2025 to meet sulfur-emission rules and other regulations, Masamichi Morooka, chairman of the International Chamber of Shipping, representing most of the world’s ship operators, said at a conference in Oslo today. Some shipping companies already aren’t earning enough to maintain their fleets, said Andreas Sohmen-Pao, chief executive officer of BW Group Ltd., a Singapore-based owner.
MarketWatch:
CNBC: 
Zero Hedge: 
Business Insider: 
Telegraph: 
Xinhua:
  • China's economic situation is "very complicated" and the country is facing increasing risks and challenges, citing Vice Premier Zhang Gaoli.
China National Radio:
  • Land Sales in 10 Chinese Cities Surge 390% Y/Y in May. Land Sales in 10 Chinese cities including China totaled about 67b yuan in May, a record high since 2008, citing data from E-house China R&D Institute. Beijing Jan.-May land sales are more than 60b yuan, almost equal to the total of 2012.

Bear Radar

Style Underperformer:
  • Small-Cap Value -.76%
Sector Underperformers:
  • 1) Homebuilders -1.92% 2) Gold & Silver -1.92% 3) Construction -1.25%
Stocks Falling on Unusual Volume:
  • ACTG, SPAR, CP, CATY, CFNL, CLVS, TSRO, MAIN, DG, RHP, CG, CRM, UBNT, HITK, HPTX, HCI, AL, AIMC, BIG, FRGI, SCTY, ASML, FEN, EQIX, LMCA, LGND, HE, CONE, TTS, ACC, TROX, KCAP, DDS and MKTO
Stocks With Unusual Put Option Activity:
  • 1) OCN 2) TGT 3) MON 4) IYR 5) INTC
Stocks With Most Negative News Mentions:
  • 1) ULTA 2) BMY 3) WFC 4) C 5) PVH
Charts:

Bull Radar

Style Outperformer:
  • Large-Cap Value -.06%
Sector Outperformers:
  • Semis +1.09% 2) Airlines +.96% 3) Oil Tankers +.77%
Stocks Rising on Unusual Volume:
  • INVN, LMOS, EVC, MNST, ET, GIII, INFI, MKTG, UNXL, HMA and MNST
Stocks With Unusual Call Option Activity:
  • 1) ANV 2) BBBY 3) DG 4) HCA 5) INFI
Stocks With Most Positive News Mentions:
  • 1) TOL 2) TIF 3) AN 4) ALTR 5) BA
Charts:

Tuesday Watch

Evening Headlines 
Bloomberg: 
  • Slovenia Shows Why the EU Shouldn’t Discard Austerity. The Slovenian government has been masterful at delaying difficult reform, particularly in the banking sector. If there is no real pressure to finally clean up the banking sector and push through the sale of state assets, the flow dynamics may keep worsening public debt, government deficits and bad bank loans. Now that the EU has loosened fiscal targets, it’s hard to see where the pressure will come from.
  • Copper Ruse Busted Curbs Yuan, Cuts Cash Supplies: China Credit. China’s crackdown on financial deals disguised as copper trades is helping curb yuan appreciation and worsening the tightest money market in more than a year. Metal trades designed to facilitate borrowing of dollars to finance higher-yielding yuan investments swelled inventories in Shanghai’s bonded zone to a record 1 million tons earlier this year, about 5 percent of global annual production. Goldman Sachs Group Inc. said in a May 22 report that regulators may end the arbitrage. The benchmark seven-day repurchase rate averaged 3.57 percent in May, the highest in 13 months, while the yuan fell the most since February last week. “Commodity finance has been a fast-growing type of credit,” said Fu Peng, commodity strategist at Galaxy Futures Co., a brokerage controlled by the country’s sovereign wealth fund. “Now, strict rules limiting the trade will rein in this source of funding, which will have a material impact on money markets and currency exchange rates.” 
  • Beijing Caps Home Prices to Control Demand: Mortgages. Beijing, which already has China’s strictest real estate curbs, is being forced to take additional steps to contain surging home prices as demands for record-high down payments fail to deter buyers. The city has enforced citywide price caps since March by withholding presale permits for any new project asking selling prices authorities deem too high, according to developer Sunac China Holdings Ltd. (1918) and realtor Centaline Group. Local officials will need further tightening as they struggle to meet this year’s target of keeping prices unchanged from last year, said Bacic & 5i5j Group, the city’s second-biggest property broker.
  • Canary in Coal Mine Gasps as Australia Resource Jobs Fall. “Companies won’t hire,” McGrath said by phone from the central coast, separated from his family who are packing up the Liverpool home. “They’ve a lot of contractors working in the pits up here,” he said, who are being let go first. A drop in hiring of support staff by resources companies is one of the first indicators of a broader downturn because each mining position creates four to five contract jobs in related services, said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “Mining service companies are the canary in the coal mine,” said Whetton. “We’re likely to see higher unemployment over the course of the year.”  
  • Gillard Slips Again in Poll as Australians Abandon Labor. Australian Prime Minister Julia Gillard’s Labor party slumped again behind Tony Abbott’s Liberal-National coalition in an opinion poll that indicates a change of government in the Sept. 14 election. Labor fell 2 percentage points to 42 percent on a two-party preferred basis, while the opposition gained 2 points to 58 percent, according to a Newspoll published in the Australian newspaper today. Gillard’s satisfaction rating dropped 3 points to 28 percent
  • Philippine Stock Swings Surge as Index Tumbles 10% From High. Philippine stock volatility is surging at the fastest pace in emerging markets as foreign investors sell the world’s most expensive equities on speculation the U.S. will reduce monetary stimulus. The Philippine Stock Exchange Index’s 10-day historical volatility increased to 33 yesterday from 12 two weeks ago, the highest level since October 2011 and the biggest jump among 21 developing-nation gauges tracked by Bloomberg.
  • Won Gains as Fed Concern Eases; Most Asian Stocks, Oil Decline. South Korea’s won led gains among emerging-market currencies as concerns eased the Federal Reserve will reduce its monetary stimulus. Most Asian stocks fell and oil declined. The won advanced 0.6 percent to 1,121.26 per dollar as of 12:23 p.m. in Tokyo, the biggest gain since April 19. China’s Shanghai Composite Index dropped 1.2 percent as the MSCI Asia Pacific Index added 0.3 percent.
  • China’s Stocks Fall for 4th Day, Led by Appliance Shares. China’s stocks fell for the fourth day, the longest losing streak in two months. Small-company shares and consumer-discretionary companies declined, while price-swings on the benchmark index dropped to a nine-month low. Gree Electric Appliance Inc. and TCL Corp. led a gauge of consumer companies to the second-biggest slump among industry groups as the government ended subsidies for purchases of energy-saving home appliances at the start of the month. Qingdao TGOOD Electric Co. and Tianjin Chase Sun Pharmaceutical Co. dropped more than 2 percent, pacing losses for small-company shares. Yanzhou Coal Mining Co. lost 1.4 percent after the Hong Kong-listed shares were cut at Bank of China Ltd. 
  • Rebar Declines on Concern Supply Will Outstrip Demand in China. Steel reinforcement-bar futures in Shanghai fell on concern that supply will continue to outstrip demand. Rebar for delivery in October on the Shanghai Futures Exchange fell as much as 0.5 percent to 3,467 yuan ($566) a metric ton and was at 3,474 at 10:13 a.m. local time. Futures gained 2 percent yesterday after falling for a fourth month in May. The steel industry’s purchasing manager’s index in May rose to 46.8 from 45.1 in April, the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing said yesterday. The steel industry’s output index also expanded to 49 in May from 44.9 a month ago, it said. “There’s no sign the steel mills are cutting production, while previous expectations for stronger demand to help absorb this supply hasn’t really materialized,” Li Jinlu, an analyst at Yongan Futures Co., said by phone from Hangzhou today.
  • Rising Junk-Debt Loads Erode Credit Quality, Morgan Stanley Says. The record pace of U.S. junk-bond sales is weakening the credit quality of speculative-grade companies as debt loads expand and cash piles erode, according to Morgan Stanley. U.S. junk companies increased borrowings by 10 percent in the first quarter from a year earlier while the ratio of cash to debt fell to 9.6 from almost 15 percent in 2010 and is approaching the long-term average of 8.7 percent, strategists led by Adam Richmond in New York wrote in a note to clients dated today. Even as earnings growth slows the economic expansion sputters, companies are “no longer feeling the need to hoard cash,” they wrote. “Low rates have served as both a positive and a negative driver of corporate fundamentals,” the analysts wrote. While “low rates have allowed companies to lower coupon payments, in some cases quite dramatically, and push out upcoming maturities in the process,” they wrote, “today’s record low cost of debt has given companies the incentive to issue debt and increase leverage.”
  • Credit Traders Said to Win SEC Relief in Portfolio Margin Rules. Hedge funds and asset managers will win partial relief from Dodd-Frank Act collateral requirements for credit-default swaps under a policy shift to be announced this week, according to two people briefed on the matter. The U.S. Securities and Exchange Commission is revising a policy released in March that required some clients to put up double the collateral dealers post at Atlanta-based IntercontinentalExchange Inc. (ICE), according to the people, who requested anonymity because the decision isn’t public. The relief applies to portfolio accounts that hold credit swaps tied to single securities as well as indexes
  • AIG(AIG), Prudential(PRU) Named Systemically Important by Panel. American International Group Inc. (AIG), Prudential Financial Inc. (PRU) and a unit of General Electric Co. were identified by U.S. regulators as potential risks to the financial system in a step toward putting the firms under tighter government scrutiny. AIG and Prudential, in statements after a meeting today of the Financial Stability Oversight Council, said they were notified of the proposed designations. Russell Wilkerson, a spokesman for GE Capital, said in an e-mail that his company also received a notice.
  • Senators Near Plan to Abolish Fannie Mae, Shrink U.S. Role. A bipartisan group of U.S. senators is putting the final touches on a plan to liquidate Fannie Mae and Freddie Mac (FMCC) and replace them with a government reinsurer of mortgage securities behind private capital. The proposed legislation, which could be introduced this month, would require private financiers to take a first-loss position adequate to cover price declines as steep as those seen during recessions over the past century, according to a draft obtained by Bloomberg News.
Wall Street Journal: 
  • Japan's Market Has Bulls Reeling. At a hedge-fund conference in Las Vegas last month, Michael Novogratz, a principal at New York's Fortress Investment Group, called Japan "the most exciting place to invest in the world." Now, following four stock-market routs in the span of less than two weeks, Japan has become one of the world's scariest places to invest, and foreign investors are caught in the middle. Hedge funds and other overseas buyers pumped more than $25 billion into Tokyo's stock market in the seven months before the Las Vegas conference, according to EPFR Global, which tracks such flows. They were lured by a new government's plans for radical action to boost Japan's economy after two decades of stagnant growth and falling prices known as deflation. 
  • Weak Signs For U.S. Output. Factories Suffer Worst Slump Since End of Recession. U.S. factories in May posted their worst month since the end of the recession, as weakness overseas overwhelmed a still-shaky manufacturing recovery at home.
  • Supreme Court: Police Can Take DNA Samples in Arrests. A divided Supreme Court held Monday that police can take DNA samples from people under arrest in the hope of tying them to unrelated crimes, in a ruling that touched both on fast-changing technology and age-old issues of citizens' rights against state searches.
Fox News: 
  • 'Something to hide?' Republicans reject DOJ explanation of Holder testimony. Republican leaders of the House Judiciary Committee on Monday accused Attorney General Eric Holder of having "something to hide," after the Justice Department issued a formal defense of his questionable testimony on reporter surveillance -- a defense Republicans rejected as inadequate. "This response is insulting and further proof that Attorney General Holder refuses to hold himself accountable," Rep. Jim Sensenbrenner, R-Wis., said. Holder was facing a Wednesday deadline, set by the committee, to explain his May 15 testimony.
CNBC: 
  • BRIC Powerhouses Risk 'Middle-Income Growth Trap'. Growth in the powerhouses of Brazil, Russia, India and China (BRIC) is slowing precipitously. Last week, India reported its slowest growth in a decade, while Brazil reported growth of just 1.9 percent for its first quarter, compared to a year-ago. "There is a growing risk that BRIC markets, along with other emerging economic, fall into the middle income trap. Cheap cash breeds complacency and record low interest rates and soaring capital inflows have pumped up growth in the emerging market world,while structural reforms have lagged behind," Frederic Neumann, co-head of Asian economic and global research at HSBC told CNBC. The "middle-income trap" is commonly reached when developing economies grow quickly but struggle to maintain that growth because of a lack of structural reforms, labor market development and industrial growth
  • Market Strife Puts Japan Policies in a Flux. Japan's radical plans to get the world's third largest economy back on track, which have created investor euphoria in recent months, seem to be losing momentum just as quickly as markets succumb to a triple whammy impact of plunging stocks, a strengthening yen and a volatile bond market.
Zero Hedge:
  • Why the Fed Can't Stop Fueling The Shadow Bank Kiting Machine. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers. 
Business Insider: 
New York Times:
  • Behind the Rise in House Prices, Wall Street Buyers. Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing.
The Blaze:
Reuters: 
  • Fitch cuts Illinois rating over failure to fix pensions. Illinois' lowest-among-states credit rating took a new hit on Monday as Fitch Ratings downgraded the state just days after Illinois lawmakers left the state capitol last week without addressing a huge public pension funding crisis. "Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable," the rating agency said in a statement. It said the failure to achieve reform measures despite the substantial focus on the topic exacerbates concerns about management's willingness and ability to address the state's "numerous fiscal challenges."
Financial Times:
  • US packaged car loan deals slump. The securitisation of car loans to prime US borrowers has slumped by almost a quarter so far this year, in one of the few pockets of the credit markets where issuance is not booming. The data suggest that lenders, including big US banks and car manufacturers, are finding alternative sources of cheap funding, such as customer deposits or unsecured borrowing.
  • French minister accuses Amazon(AMZN) of dumping. France’s culture minister has attacked Amazon, the online retailer, for deliberately undercutting traditional rivals to create a “quasi-monopoly”, in the latest assault by the socialist government on internet companies. “Today, everyone has had enough of Amazon which, through dumping practices, smashes prices to penetrate markets to then raise prices again once they are in a situation of quasi-monopoly,” said Aurélie Filippetti, the culture minister.
Telegraph: 
  • Global shock as manufacturing contracts in US and China. Manufacturing has begun to contract in the US and China for the first time since the Lehman crisis, raising fears of a synchronized downturn in the world’s two largest economies. The closely-watched ISM index of US factories tumbled through the “boom-bust line” of 50 to 49, far below expectations. It is the lowest since the depths of the crisis in mid-2009 and a clear sign that US budget cuts are starting to squeeze the economy. New orders plunged 3.5 to 48.8 on weak foreign demand and reduced federal contracts.
    The news came hours after HSBC said its index for China also fell below 50, a major inflexion point for the world’s industrial workshop.
Yonhap News:
  • U.S. Institute Says North Korea Set to Restart Reactor. New commercial satellite imagery shows North Korea is making "important progress" in activating the 5mw reactor, citing U.S.-Korea Institute at the Johns Hopkins Schools of Advanced International Studies.
Asahi:
  • U.S., Japan will hold a military drill in California on June 10 as scheduled, citing government officials. China asked for the drill to be canceled in light of Chinese President Xi Jinping's meetings with U.S. President Barack Obama in California starting June 7.
21st Century Business Herald:
  • China to Try New Investment Statistics Methods. China may change methods for compiling statistics on investment in a trial program in the cities of Jincheng, Xi'an and Wuxi and Guizhou province, citing a meeting arranged by Ma Jiantang, head of the National Bureau of Statistics. Guizhou, Gansu and Qinghai reported investments more than their gdp last year, prompting suspicions that the statistics were inflated, the report said.
China Information News:
  • China Local Govts Should Stop Competing on Growth. China's local governments should stop competing over economic growth rates and focus on raising the "quality and efficiency" of their development, China's statistic bureau website posted a commentary by a reporter.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -1.0% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 120.0 +3.75 basis points.
  • Asia Pacific Sovereign CDS Index 104.0 +3.75 basis points.
  • FTSE-100 futures +.38%.
  • S&P 500 futures -.14%.
  • NASDAQ 100 futures -.06%.
Morning Preview Links

Earnings of Note

Company/Estimate
  • (DG)/.71
  • (BOBE)/.64
  • (MFRM)/.35
Economic Releases
8:30 am EST
  • The Trade Deficit for April is estimated to widen to -$41.1B versus -$38.8B in March.
9:45 am EST
  • ISM New York for May is estimated to fall to 55.0 versus 58.3 in April.
10:00 am EST
  • The IBD/TIPP Economic Optimism Index for June is estimated to rise to 50.0 versus 45.1 in May. 
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Fisher speaking, Fed's George speaking, Fed's Sarah Bloom Raskin speaking, Spain Unemployment report, Austrian GDP report, RBA rate decision, weekly retail sales reports, JPMorgan Industries Conference, CSFB Energy Conference, BoA Merrill Telecom/Media Conference and the BoA Merrill Tech Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and real estate shares in the region. I expect US stocks to open modestly higher and weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.