Thursday, May 31, 2012

Stocks Reversing Higher into Final Hour on Financial Sector Strength, Euro Bounce, Short-Covering, Bargain-Hunting


Broad Market Tone:

  • Advance/Decline Line: Slightly Lower
  • Sector Performance: Mixed
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 23.78 -1.49%
  • ISE Sentiment Index 97.0 +11.49%
  • Total Put/Call 1.05 -15.32%
  • NYSE Arms .98 -49.08%
Credit Investor Angst:
  • North American Investment Grade CDS Index 122.53 +.21%
  • European Financial Sector CDS Index 297.38 -.49%
  • Western Europe Sovereign Debt CDS Index 326.26 +1.51%
  • Emerging Market CDS Index 333.19 +1.11%
  • 2-Year Swap Spread 35.75 +.75 basis point
  • TED Spread 40.50 +.5 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -50.25 +.5 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .07% unch.
  • Yield Curve 131.0 -4 basis points
  • China Import Iron Ore Spot $134.80/Metric Tonne unch.
  • Citi US Economic Surprise Index -35.90 -5.9 points
  • 10-Year TIPS Spread 2.09 +2 basis points
Overseas Futures:
  • Nikkei Futures: Indicating a -39 open in Japan
  • DAX Futures: Indicating +13 open in Germany
Portfolio:
  • Higher: On gains in my Retail and Tech sector longs
  • Disclosed Trades: Covered all of my (IWM), (QQQ) hedges, covered some of my (EEM) short, added (QCOM) long
  • Market Exposure: Moved to 100% Net Long

Today's Headlines


Bloomberg:
  • S&P 500 Pares Drop on Greek Poll. U.S. stocks reversed losses as a Greek opinion poll showed support for the largest pro-bailout party and a report indicated the International Monetary Fund has started discussing contingency plans for a rescue of Spain. The Standard & Poor’s 500 Index slipped 0.3 percent to 1,309.66 at 12:49 p.m. in New York, trimming an earlier drop of 1.1 percent. The index is down 6.3 percent in May, poised for its worst month since September. The Dow Jones Industrial Average erased a decline of as much as 103 points. A Greek opinion poll before June 17 elections showed New Democracy, the largest pro-bailout party, leading Syriza, which calls for the cancellation of the country’s bailout terms. Of 1,128 people surveyed by Marc SA for Athens-based Alpha TV, 26 percent said they’d vote for New Democracy, 24.3 percent for Syriza and 12.5 percent for the Pasok party, which also supports the bailout program.
  • Italian Leaders Press for German Action to Fight Crisis. Italy’s prime minister and central bank chief pressed Germany to back more aggressive efforts to snuff out the escalating debt crisis, setting up a south-north showdown over how to stabilize the 17-nation euro economy. Warning that six decades of European integration are at stake, Italian Prime Minister Mario Monti called on German Chancellor Angela Merkel to take steps to halt the financial rot before a backlash builds against budget cuts. Monti and Bank of Italy Governor Ignazio Visco pushed Germany to give up its opposition to direct euro-area aid for hard-hit banks. “Countries that are at the core of the system and which have had the huge merit of instilling the culture of stability to the European Union in the first place, most notably Germany, should really reflect deeply but quickly,” Monti said by video link to an European Union conference in Brussels today. “Europe should really accelerate the efforts, as the European Commission is doing, in order to limit the contagion.”
  • ECB's Paramo Says Spain Has Room On Bank Recapitalization. European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said Spain has room for maneuver in recapitalizing its banks through its Fund for Orderly Bank Restructuring. “The government has front-loaded the issuance program this year so there is some room in case of need for public funds through the FROB,” Gonzalez-Paramo, 53, said in an interview in Frankfurt today, his final day at the ECB. “There is now progress on the external evaluation of the banking-sector needs and these will be known in one month’s time.”
  • Euro Break-Up Firewalls Difficult to Build in East, Capital Says. Eastern European policy makers would struggle to build firewalls against contagion from a disorderly break-up of the euro because of short-term debt owed to western parent banks in foreign currencies, Capital Economics Ltd. said. In a worst-case scenario following a potential Greek exit from the euro, eastern European nations may need to resort to International Monetary Fund aid, Neil Shearing, chief emerging- markets economist at London-based Capital, wrote in an e-mailed note today. Strategies such as the Vienna Initiative and swaps with the European Central Bank have “significant barriers” as western lenders are “in the eye of the storm,” he wrote.
  • Announced U.S. Job Cuts Jump 67% From Year Ago, Challenger Says. Job cuts announced in the U.S. jumped in May by the most in eight months, led by computer companies. Planned firings surged 67 percent from May 2011 to 61,887, according to figures released today by Chicago-based Challenger, Gray & Christmas Inc. It marked the fourth year-over-year increase so far in 2012. Employers have announced 245,540 reductions since Jan. 1, 20 percent more than a year earlier, the report said.
  • U.S. Labor Market Cools As Jobless Claims Rise: Economy. The number of Americans applying for unemployment benefits rose to a one-month high and companies hired fewer workers than forecast, casting doubt on the vigor of the labor market. First-time claims for unemployment insurance payments increased by 10,000 to 383,000 in the week ended May 26, Labor Department data showed today. Private employment climbed by 133,000 in May, Roseland, New Jersey-based ADP Employer Services said. The median estimate of 39 economists surveyed by Bloomberg News called for an advance of 150,000.
  • Economy In U.S. Expanded Less Than Previously Estimated. Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed today in Washington. The report also showed corporate profits rose at the slowest pace in more than three years and smaller wage gains at the end of 2011.
  • Business Activity in U.S. Unexpectedly Grew at Slower Pace. Business activity in the U.S. expanded in May at the slowest pace in more than two years as orders and production cooled. The Institute for Supply Management-Chicago Inc. said today its barometer decreased to 52.7, the lowest since September 2009, from 56.2 in April. Readings greater than 50 signal growth. Economists projected the purchasing managers’ gauge would rise to 56.8, according to the median of 55 estimates in a Bloomberg News survey. While demand for automobiles continues to fuel factory output, the debt crisis in Europe and a slowdown in China may cause some businesses to cut back on spending and hiring.
  • Goldman's(GS) Blankfein To Testify as Gupta Trial, US Says. Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd Blankfein will testify at the insider- trading trial of the bank’s former director Rajat Gupta, a prosecutor said.
  • India Growth Slows to 9-Year Low as Rupee Drops to Record. India’s economic growth weakened to a nine-year low last quarter, hurt by an investment slowdown that has undermined the rupee and jeopardized Prime Minister Manmohan Singh’s development agenda. Bonds climbed and stocks fell. Gross domestic product rose 5.3 percent in the three months ended March from a year earlier, compared with 6.1 percent in the previous quarter, the Central Statistical Office said in a statement in New Delhi today. The median of 31 estimates in a Bloomberg News survey was for a 6.1 percent gain.
  • Romney Calls Solyndra A 'Symbol of Failure' for Obama. Presumptive Republican presidential nominee Mitt Romney visited the closed facilities of Solyndra LLC, the solar-panel manufacturer that went bankrupt after receiving a $535 million loan guarantee, and called the company a “symbol of failure” for the Obama administration. Romney, 65, spoke today outside the factory Solyndra constructed with government funds at its headquarters in Fremont, California, terming it “the Taj Mahal of corporate headquarters.” The campaign didn’t disclose the speech location until Romney arrived. “This building, this half-a-billion dollar taxpayer investment, represents a serious conflict of interest on the part of the president and his team,” Romney said. The former Massachusetts governor has repeatedly criticized the Obama administration’s decision to extend a $535 million loan guarantee to Solyndra, saying it was part of a pattern of rewarding companies and people that supported him with taxpayer dollars. The family foundation of Obama fundraiser George Kaiser was Solyndra’s biggest investor.
Wall Street Journal:
  • IMF Begins Talk On Spain Contingency Plans - Sources. The European department of the International Monetary Fund has started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bailout its third-largest bank by assets, Bankia SA, people involved in the handling of the Spanish crisis said Thursday. Both the EU and IMF want to avoid having to bailout Spain at all costs, the people said, but initial planning is under way given that the country is struggling to raise a EUR10 billion shortfall in funds to bail out Bankia.
CNBC.com:
  • Most Retailers Top Sales Estimates for May. Most retailers posted solid sales gains in May, with chains such as Target, TJX, and Limited topping analysts' estimates for the month. "Retailers rebounded from a soft April turning in solid May same-store sales results this morning fueled by decent weather conditions, robust Mother's Day selling and enticing Memorial Day weekend promotions," said Ken Perkins of Retail Metrics, in a research report.
  • Teamsters Invest Heavily in Private Equity. Hoffa made this blistering criticism of GOP presidential nominee Mitt Romney and his career in private equity at Bain Capital on May 7th: “He represents everything that is wrong with our financial system. He made his money as CEO of Bain Capital by destroying U.S. businesses, sending good-paying American jobs overseas and filling his pockets with millions while putting workers out on the street.” But it turns out that the Teamsters themselves make plenty of money from private equity through investments made by their regional pension funds, which are independently administered.
  • Worried Spaniards Sending Billions of Euros Abroad.
Business Insider:
Zero Hedge:

Le Monde:

  • The French government is preparing a bill that will restrict companies' ability to cut jobs for purely financial reasons, Arnaud Montebourg, the minister for Productive Recovery, said in an interview. "If certain companies accepted less spectacular profitability levels, these jobs could be saved," Montebourg said.

De Tijd:

  • The European Commission has "serious doubts" over the breakup plan of Dexia SA. One sticking point for the commission is the structure of the deal around Dexia's French unit, Dexma. A possible stalemate looms between France and Belgium over temporary guarantees.

Bear Radar


Style Underperformer:

  • Mid-Cap Growth -1.36%
Sector Underperformers:
  • 1) Coal -3.07% 2) Oil Service -2.22% 3) Gold & Silver -1.91%
Stocks Falling on Unusual Volume:
  • SWC, CLF, TSO, FSLR, LNKD, NE, CRZO, APL, KSS, SHLD, CLMT, HES, BMA, BMRN, FFIV, MELI, ATHN, SCSC, STX, IPGP, PWRD, VPRT, NFLX, OPEN, HFC, LUK, LVS, TDC, JWN, FFIV, BRS, BAH, JOY, PIR, SJT and BKE
Stocks With Unusual Put Option Activity:
  • 1) EWT 2) FB 3) RIO 4) BHP 5) DRYS
Stocks With Most Negative News Mentions:
  • 1) CLF 2) NFLX 3) JOY 4) FB 5) JCP
Charts:

Bull Radar


Style Outperformer:
  • Large-Cap Value -.76%
Sector Outperformers:
  • 1) Airlines +.39% 2) Utilities -.33% 3) Retail -.37%
Stocks Rising on Unusual Volume:
  • OVTI, CIEN, ZUMZ, FLO and GET
Stocks With Unusual Call Option Activity:
  • 1) TIVO 2) FB 3) AUXL 4) TLB 5) WU
Stocks With Most Positive News Mentions:
  • 1) SKS 2) FITB 3) TJX 4) MDR 5) GPS
Charts:

Thursday Watch


Evening Headlin
es
Bloomb
erg:
  • Greece Risks Trade Constraints as Insurers Cut Export Coverage. Euler Hermes SA (ELE), the world’s biggest credit insurer, said it will no longer cover new shipments of goods to Greece because of the risks of the nation leaving the euro currency and customers defaulting on payments. The insurer, a unit of Allianz SE (ALV), took the decision because exporting to Greece has become “significantly more risky,” Paris-based Euler Hermes said in an e-mailed statement yesterday. The insurer is still working under the assumption Greece will remain in the euro zone, it said. “We will still cover those shipments under way and internal commercial transactions,” spokeswoman Bettina Sattler said by telephone today. Future shipments to the country won’t be covered, she said. The lack of export insurance, which pays companies if a client defaults, raises the prospect that certain goods will no longer reach Greek companies and stores.
  • Moody’s Downgrades Danske Bank, Eight Other Danish Lenders. Moody’s Investors Service downgraded the ratings of nine Danish financial institutions, including the country’s biggest bank, Danske Bank A/S, saying loan books have deteriorated and debt refinancing has become harder. Danish banks suffer from “a weak operating environment, pressurized asset quality and poor profitability,” the rating company said late yesterday in a statement published out of London. Danske Bank’s deposit rating was cut two steps to Baa1 from A2, after Standard & Poor’s earlier yesterday cut the Copenhagen-based bank’s long-term rating to A- from A. The bank said in a separate statement that it “does not understand Moody’s very negative view” of the Danish banking industry. It had also questioned the reasoning for S&P’s downgrade. “We have had a close dialog with Moody’s in recent months,” Henrik Ramlau-Hansen, Danske’s chief financial officer, said. “We are certain that Moody’s has heard our arguments, but we do not think they are reflected in the rating the bank has received.”
  • Euro Approaches Two-Year Low on Spanish Banks Concern. The euro fell to the lowest level in almost two years against the dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region’s larger economies. The 17-nation currency slid for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. The yen and dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May. Asian currencies weakened, pushing the Bloomberg-JPMorgan Asia Dollar Index to the lowest level since September 2010.
  • JPMorgan(JPM) CIO Swaps Pricing Said to Differ From Bank. The JPMorgan Chase & Co. (JPM) unit responsible for at least $2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter.
  • Oil Enters Bear Market on Europe Debt Crisis, Slow U.S. Economy. Oil entered a bear market in New York as it headed for the biggest monthly drop in more than three years on speculation Europe’s worsening debt crisis and a slowing U.S. economy will reduce fuel demand. Futures today are 20 percent lower than their highest settlement this year, a definition of a bear market. New York futures slumped 3.2 percent yesterday. Prices slipped as economic confidence in the euro area fell more than forecast in May to the lowest since October 2009 and costs to protect Spanish government debt with default swaps climbed to a record. A report yesterday showed pending U.S. home sales in April slid the most in a year. Oil gained earlier in 2012 on concern that tension with Iran will disrupt global supplies. “We’re seeing demand destruction across the board,” said Jonathan Barratt, chief executive officer of Barratt’s Bulletin, a commodity-markets newsletter in Sydney. “I was looking for a Middle Eastern premium to be built in, but Spain’s concern seems to be overriding that and filtering through the whole commodity complex. People are scared to spend.”
  • India Policy Freeze Saps Funds as Greek Fallout Threatens Growth. Posco, the world’s third-largest steelmaker, took seven years to gain permission to build a mill in India, only to have the environmental approval suspended by a tribunal in March. Bahrain Telecommunications Co. (BATELCO) may sympathize after selling its share of mobile-phone operator STel Pvt. following the Indian Supreme Court’s revocation of 122 licenses in a corruption probe. Star India Pvt. Ltd., a unit of New York-based News Corp., waited even longer than Posco, finally exiting an eight-year television channel venture after the government failed to relax rules on news media ownership. The reversals reflect policy paralysis in Prime Minister Manmohan Singh’s administration that leaves India risking deeper damage from any global crisis now than it experienced during the 2008-09 turmoil.
  • Korean Washer Exporters to Pay U.S. Duties as High as 71%. The U.S. Commerce Department proposed duties of as much as 71 percent on large, residential washing machines made in South Korea, concluding that government subsidies for the goods undercut U.S. producers. The agency announced a preliminary finding yesterday after Whirlpool Corp. (WHR) of Benton Harbor, Michigan, said in a Dec. 30 complaint that LG Electronics Inc. (066570) and Daewoo Electronics Corp., both based in Seoul, and Samsung Electronics Co. (005930) of Suwon, South Korea, sell washers in the U.S. for less than production costs.
  • Fed’s Fisher Says Europe Drives U.S. Interest Rates Down. Federal Reserve Bank of Dallas President Richard Fisher said Europe’s debt crisis has done more to lower U.S. interest rates than the Fed’s maturity-extension program, known as Operation Twist.
Wall Street Journal:
  • Facebook(FB) IPO Review Finds No Listing Violations. Regulators probing Facebook Inc.'s listing on the Nasdaq Stock Market haven't found any evidence of industry rule violations and view the botched offering as a technical failure, according to a person familiar with the matter. Members of Congress, regulators and state officials are looking for foul play nearly two weeks after one of the largest initial public offerings fizzled during its first day on Nasdaq, leading to an estimated $100 million in initial trading losses. Yet so far, federal regulators have found no clear-cut signs that securities laws or industry rules were broken.
  • U.S. Firms Challenge Web-Oversight Proposals. Few issues unite AT&T Inc., Google Inc., Microsoft Corp. and Intel Corp., but the idea of new international regulation of the Internet has managed to do so. Those companies and many others are backing a U.S. effort to block a United Nations agency from extending its powers to the Internet. They say new regulation could increase costs for U.S. corporations offering online services abroad.
  • Exchanges Aim New Flash-Crash Fixes For February Launch. U.S. stock-exchange operators aim to roll out a new system designed to shield investors from massive price swings next February as part of an expanded plan that would give brokers a greater say in administering the plan.
  • Turmoil Frays Ties Across Continent. Amid Europe's intensifying debt crisis, a spat between banking authorities in Germany and Italy shows how Europe's carefully nourished financial ties are fraying. The row kicked up last fall when German banking regulators ordered Italian bank UniCredit SpA to stop borrowing billions of euros from its German subsidiary. They wanted to protect their banking system from being infected by the weaker one to the south. The move angered Italy's central bankers and sent relations between financial authorities into a nose dive.
  • Henninger: Church Is Still Not State. Catholics are being told to substitute state belief for their religious belief.
  • Citi's(C) Emerging Markets Risk Underestimated. Investors are underestimating the risks posed by Citigroup Inc.'s push into faster-growing emerging markets, according to a research report to be published Thursday. Gimme Credit, a fixed-income research company based in New York, said it expects debt issued by the third-biggest U.S. bank by assets to perform less well over the next six months than bonds issued by the company's peers. The report comes amid investor fears that once-thriving developing economies such as China and Brazil are facing a slowdown. About two-thirds of Citigroup's revenue comes from outside the U.S., primarily Latin America and Asia.
Business Insider:
Zero Hedge:
CNBC:
  • Brazil Cuts Rates to Record Low as Economy Stalls. Brazil's central bank cut interest rates on Wednesday for the seventh straight time to a record low 8.50 percent, moving into uncharted territory in a bid to shield a fragile recovery from a gloomy global outlook. President Dilma Rousseff has made lower interest rates one of the top priorities of her government which is struggling to steer the economy back to the 4 percent-plus growth rates that made Brazil one of the world's most attractive emerging markets in the last decade. The central bank's monetary policy committee, known as Copom, voted unanimously to lower the benchmark Selic rate 50 basis points from 9 percent, in line with market expectations.
  • Europe Fears Bailout of Spain Would Strain Its Resources. As Spain’s deepening financial problems make a European bailout a more distinct possibility, a looming question is where the money will come from. Spain is the euro zone’s fourth-largest economy, after Germany, France and Italy, and the cost of a rescue would strain the resources of Europe’s new 700 billion euros ($867 billion) bailout fund that is to become available this summer. That would leave little margin for any additional bailouts. Spanish and European officials hope a bailout will not be needed. But each day, financial turmoil mounts over the government takeover of the giant Spanish mortgage lender Bankia, the flight of money to safer borders and a worsening recession. Compounding Spain’s problems has been an outflow of foreign capital from the country, meaning the Spanish banks in recent months have been the only major buyers of its government bonds needed to finance the nation’s budget deficits. With those bonds now plummeting in value, the fate of Spain’s banks and government are intertwined in a financial tailspin.

NY Times:

AppleInsider:
ABC News:
  • Fisker May Never Build Electric Cars in U.S. The luxury carmaker Fisker Automotive continues to signal it could ditch plans to build its next generation hybrid electric vehicle in the United States, despite the nearly $200 million in Obama administration loan money it has already received. Fisker received federal funds in part to help purchase a shuttered General Motors plant in Delaware, where it predicted it would one day employ 2,000 auto workers to assemble the clean-burning gas-electric family car, known as the Atlantic.
Reuters:
  • States Crack Down on Prescription-Drug "doctor shopping".
  • Euro Collapse Could Halve Luxury London Home Prices. Prices of the best central London homes could halve if the euro zone breaks up, as the safe-haven appeal of sterling disappears and weaker European currencies give rise to bargains elsewhere, research showed. An ensuing collapse in global equity prices would also force buyers to seek cheaper alternatives, the report from British developer Development Securities said. Luxury London house prices have rocketed in recent years as economic turmoil in Europe and political uprisings across north Africa and the Middle East prompted investors to shield their wealth by buying property in the UK capital.
  • US Q1 pre-foreclosure sales at 3-year high -report. Sales of U.S. homes in default jumped in the first quarter to the highest level in three years as steeper price discounts were offered, a report from RealtyTrac said on Thursday. Known as pre-foreclosure or short sales, the first three months of the year saw such sales jump 16 percent to 109,521 homes compared to the fourth quarter of 2011. That was an increase of 25 percent compared to the year before and the highest level since the first quarter of 2009.
  • Japan industrial output gains slow, stirring recovery doubts.
  • Stock funds see big outflows in latest week -ICI.
Telegraph:
  • Spain faces 'total emergency' as fear grips markets. Spain is facing the gravest danger since the end of the Franco dictatorship as the country is frozen out of global capital markets and slides towards an epic showdown with Europe. “We’re in a situation of total emergency, the worst crisis we have ever lived through” said ex-premier Felipe Gonzalez, the country’s elder statesman. The warning came as the yields on Spanish 10-year bonds spiked to 6.7pc, pushing the “risk premium” over German Bunds to a post-euro high of 540 basis points. The IBEX index of stocks in Madrid fell 2.6pc, the lowest since the dotcom bust in 2003.

Hong Kong Economic Times:
  • China Overseas Says Worst Not Over for China Home Market. Funding for developers may continue to be "tight" in the second half of this year, citing Chairman Kong Qingping. The government's policy fine-tuning for the property market isn't enough to stimulate the industry, Kong said.
China Daily:
  • Foreign direct investment in China will be "unpredictable" in the months ahead, citing Liu Yajun, director of the Ministry of Commerce's foreign investment administration. China FDI fell for a sixth consecutive month in April. The drop in FDI has been mainly because of a "sluggish" global economy, Liu said.
  • A survey of 4,000 people in eight Chinese cities finds that more than 73% believe the nation's food is unsafe. Of those respondents who said they believed food was unsafe, about 27.8% said they believed food was "extremely unsafe."
Economic Information Daily:
  • China's Hunan Says It Didn't Study Relaxing Property Curbs. The Development and Reform Commission of Hunan province has never studied measures to rescue the property market, citing Tian Yongjun, deputy director at the information center of the provincial agency.
Shanghai Securities News:
  • China Big 3 Banks Lend 86B Yuan in First 28 Days of May. The Bank of China extended least net loans among 3 biggest lenders excluding AgriBank, citing a person familiar with the matter. The Central government didn't order banks to increase lending, citing Bank of China President Li Lihui.
Evening Recommendations
Morgan Stanley:
  • Upgraded (ALTR) to Overweight, target $40.
  • Rated (SNDK) Overweight, target $45.
Night Trading
  • Asian equity indices are -1.50% to -.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 203.0 +10.0 basis points.
  • Asia Pacific Sovereign CDS Index 160.50 -.25 basis point.
  • FTSE-100 futures -.31%.
  • S&P 500 futures -.03%.
  • NASDAQ 100 futures -.10%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (CIEN)/-.04
  • (JOY)/1.96
  • (ESL)/1.29
  • (OVTI)/.22
  • (SAI)/.33
  • (JCG)/.68
Economic Releases
8:15 am EST
  • ADP Employment Change for May is estimated at 150K versus 119K in April.

8:30 am EST

  • 1Q GDP is estimated at +1.9% versus a prior estimate of a +2.2% increase.
  • 1Q Personal Consumption is estimated at +2.9% versus a prior estimate of a +2.9% gain.
  • 1Q GDP Price Index is estimated to rise +1.5% versus a prior estimate of a +1.5% gain.
  • 1Q Core PCE is estimated to rise +2.1% versus a prior estimate of a +2.1% gain.
  • Initial Jobless Claims are estimated at 370K versus 370K the prior week.
  • Continuing Claims are estimated to fall to 3250K versus 3260K prior.

9:45 am EST

  • Chicago Purchasing Manager for May is estimated at 56.8 versus 56.2 in April.
11:00 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,000,000 barrels versus an +883,000 barrel gain the prior week. Distillate supplies are estimated unch. versus a -309,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,000,000 barrels versus a -3,299,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.35% versus a -.2% decline the prior week.

Upcoming Splits

  • None of note

Other Potential Market Movers

  • The Fed's Pianalto speaking, Ireland Fiscal Treaty referendum, China PMI, ICSC Chain Store Sales for May, Challenger Job Cuts report for May, weekly Bloomberg Consumer Comfort Index, NAPM-Milwaukee for May, RBC Consumer Outlook Index for June, All Things Digital Conference, (FLEX) analyst day, (PRXL) investor day and the (CLX) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and financial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Wednesday, May 30, 2012

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Less US Economic Optimism, Financial/Homebuilder Sector Weakness, More Shorting


Broad Market Tone:

  • Advance/Decline Line: Substantially Lower
  • Sector Performance: Every Sector Declining
  • Volume: Below Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • VIX 23.32 +10.89%
  • ISE Sentiment Index 83.0 -8.79%
  • Total Put/Call 1.34 +38.14%
  • NYSE Arms 1.91 +314.51%
Credit Investor Angst:
  • North American Investment Grade CDS Index 122.33 +4.84%
  • European Financial Sector CDS Index 298.90 +3.07%
  • Western Europe Sovereign Debt CDS Index 321.34 +2.33%
  • Emerging Market CDS Index 328.13 +3.07%
  • 2-Year Swap Spread 35.0 +.75 basis point
  • TED Spread 40.0 +1.0 basis point
  • 3-Month EUR/USD Cross-Currency Basis Swap -50.75 -3.5 basis points
Economic Gauges:
  • 3-Month T-Bill Yield .07% -1 basis point
  • Yield Curve 135.0 -10 basis points
  • China Import Iron Ore Spot $134.80/Metric Tonne +1.74%
  • Citi US Economic Surprise Index -30.0 +.2 point
  • 10-Year TIPS Spread 2.07 -5 basis points
Overseas Futures:
  • Nikkei Futures: Indicating a -140 open in Japan
  • DAX Futures: Indicating -3 open in Germany
Portfolio:
  • Slightly Lower: On losses in my Biotech and Tech sector longs
  • Disclosed Trades: Added to my (IWM)/(QQQ) hedges, added to my (EEM) short, then covered some of them
  • Market Exposure: 50% Net Long
BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 gives back much of its recent gain on rising Eurozone debt angst, financial/homebuilder sector weakness, less US economic optimism, the ongoing decline in (FB) shares and rising global growth fears. On the positive side, Defense shares are holding up relatively well, falling less than -.5%. Oil is falling -3.6%. On the negative side, Coal, Alt Energy, Oil Tanker, Energy, Oil Service, Steel, Internet, Disk Drive, Networking, Bank, I-Banking, Hospital, Construction, Homebuilding, REIT, Retail, Education and Road&Rail shares are under significant pressure, falling more than -2.0%. Cyclical and Small-cap shares have traded poorly throughout the day. The financial/homebuilding sectors have also underperformed. Lumber is falling -2.6%, Copper is dropping another -2.4% and Gold is gaining +.6%. Major Asian indices fell around -.75% overnight, led lower by a -1.92% decline in Hong Kong. Major European indices fell around -2.0%, led lower by a -2.6% decline in Spain. Spain is now down -5.4% in 5 days and down -28.9% ytd, which remains a huge red flag. The Bloomberg European Bank/Financial Services Index is down -1.6%. This index is down -3.3% in 5 days and down -25.1% since March 19th. The France sovereign cds is jumping +6.3% to 214.33 bps, the Spain sovereign cds is jumping +5.1% to 588.83 bps, the Italy sovereign cds is gaining +5.3% to 549.51 bps, the Germany sovereign cds is gaining +3.0% to 102.16 bps, the UK sovereign cds is gaining +3.0% to 74.82 bps and the Brazil sovereign cds is gaining +3.6% to 165.65 bps. The Italian/German 10Y Yld Spread is rising +5.9% to 466.52 bps(+8.4% in 5 days). Moreover, the European Investment Grade CDS Index is gaining +4.2% to 177.36 bps. US Rail Traffic continues to soften. The Philly Fed ADS Real-Time Business Conditions Index continues to trend lower from its late-December peak. Moreover, the Citi US Economic Surprise Index has fallen back to late-Sept. levels. Lumber is -3.0% since its Dec. 29th high despite improving sentiment towards homebuilders and the broad equity rally ytd. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite expectations for a strong spring home selling season. The Baltic Dry Index has plunged around -55.0% from its Oct. 14th high and is now down around -40.0% ytd. China Iron Ore Spot has plunged -25.0% since Sept. 7th of last year. Shanghai Copper Inventories have risen +238.0% ytd. The CRB Commodities Index is now technically in a bear market, having declined -25.3% since May 2nd of last year. Overall, recent credit gauge deterioration remains a big worry as most key sovereign cds remain technically strong. I still believe the level of complacency among US investors regarding the rapidly deteriorating situation in Europe is still fairly high. The Italian/Spanish economies appear to be in freefall, which will further intensify sovereign pressures. The 10Y T-Note continues to soar, copper trades very poorly and the euro can’t even sustain a bounce. I still believe there is still too much uncertainty on the horizon to conclude a durable stock market low is in place after the recent pullback. Spain is rapidly approaching full-blown crisis. I still don’t hear any viable “solutions” to the European debt crisis and it is really beginning to bite emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades. As well, the "US fiscal cliff "will become more and more of a focus for investors as the year progresses. For this year's equity advance to regain traction, I would expect to see a resumption in European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices, a US "fiscal cliff" solution and higher-quality stock market leadership. One of my longs, (TFM), made a new record high today on an excellent earnings report. I still see substantial outperformance for the shares over the intermediate-term. I expect US stocks to trade mixed-to-lower into the close from current levels on rising Eurozone debt angst, rising global growth fears, less US economic optimism, financial sector weakness and more shorting.

Today's Headlines


Bloomberg:
  • Italy, Spain Bonds Slump as Crisis Puntures Demand; Bunds Jump. Italy’s bond yields surged to a four- month high as the nation missed its maximum target for sales of five- and 10-year securities, stoking concern that Europe’s financial woes are denting investor appetite for the debt. Germany’s two-year yield reached zero for the first time. Five-, 10- and 30-year German bond yields fell to records as economic confidence in the euro area declined more than analysts forecast in May to the lowest in 2 1/2 years. Spanish bonds slumped, driving five-year yields to more than 6 percent for the first time since November, after Bank of Spain Governor Miguel Angel Fernandez Ordonez quit before his term expired amid criticism over the nationalization of Bankia group.
  • Greek Exit From Euro Seen Exposing Deposit-Guaranty Flaws. The threat of Greece exiting the euro is exposing flaws in how banks and governments protect European depositors’ cash in the event of a run. National deposit-insurance programs, strengthened by the European Union in 2009 to guarantee at least 100,000 euros ($125,000), leave savers at risk of losses if a country leaves the euro and its currency is redenominated. The funds in some nations also have been depleted after they were used to help bail out struggling lenders, leading policy makers to consider implementing an EU-wide protection plan. “These schemes were not designed to deal with a complete meltdown of a banking system,” said Andrew Campbell, professor of international banking and finance law at the University of Leeds in the U.K. and an adviser to the International Association of Deposit Insurers. “If there’s a systemic failure, there needs to be some form of intervention.” With European officials openly discussing a Greek exit from the euro for the first time, savers in Spain, Italy and Portugal may start to withdraw cash on concern that those countries will follow Greece and their funds will be devalued with a switch to a successor currency. None of those nations has the firepower to handle simultaneous runs on multiple banks.
  • Spain Credit-Default Swaps Surge to Record on Bank Bailout Woes. The cost of insuring against default on Spanish sovereign bonds rose to a record as the nation's debt crisis deepened amid concern over bank bailouts. Credit-default swaps linked to the nation's debt climbed 23 basis points to 583 at 11:44 a.m. in London, according to data compiled by Bloomberg. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose seven basis points to 320.5. "The pressure remains on Spain," Elisabeth Afseth, an analyst at Investec Bank Plc in London, wrote in a note. "The focus remains on how the government is going to deal with the banking crisis." The cost of insuring bank debt also increased with the Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rising eight basis points to 299 and the subordinated index jumping 12.5 to 497.5. Swaps on Banco Santander SA, the biggest Spanish lender, jumped 15.5 basis points to 421 while contracts on Banco Bilbao Vizcaya Argentaria SA added 15 to 461. Italy's bond yields surged to a four-month high as the nation missed its maximum target for sales of five- and 10-year securities, stoking concern that Europe's financial woes are crimping investor appetite for the debt. Swaps on the nation's debt jumped 20 basis points to 542, the highest since Dec. 16. The Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increased 16 basis points to 716. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings advanced five basis points to 175.5 basis points.
  • EU Weighs Direct Aid to Banks as Antidote to Crisis. The European Commission challenged Germany’s remedies for the financial crisis, calling for direct euro-area aid for troubled banks and insisting on a “roadmap” for common bond issuance. The commission, the European Union’s central regulator, sided with Spain in proposing that the planned permanent rescue fund, the European Stability Mechanism, inject cash to banks instead of channeling the money via national governments.
  • Euro-Area Economic Confidence Falls to 2 1/2 Year Low: Economy. Economic confidence in the euro area declined more than economists forecast in May to the lowest in 2 1/2 years after inconclusive Greek elections raised the specter of a euro breakup and Spain struggled to shore up its banks. An index of executive and consumer sentiment in the 17- nation euro area fell to 90.6 from a revised 92.9 in April, the European Commission in Brussels said today. That’s the lowest since October 2009 and below the 91.9 forecast by economists, according to the median of 28 estimates in a Bloomberg survey.
  • European Stocks Drop on Concern Debt Crisis is Deepening. European stocks dropped the most in a week as Italy failed to meet its maximum target at a debt sale, Spain struggled to bolster its banking system and a Greek poll showed increased support for parties opposed to spending cuts. The Stoxx Europe 600 Index declined 1.5 percent to 240.56 at the close in London. The benchmark measure has tumbled 12 percent from this year’s high on March 16 amid growing concern that Greece will be forced to leave the euro currency union.
  • National Systemic Banks to Face Core Capital Rules in Basel Plan. Global regulators will seek a deal this year to strengthen capital requirements and supervision at banks whose failure would harm national economies. The Basel Committee on Banking Supervision is preparing to identify so-called domestically systemic lenders and discussing “possible policy tools” that regulators should use to handle their collapse, Teo Swee Lian, deputy managing director of the Monetary Authority of Singapore, said in an e-mail. Rules on the amount of core capital that the lenders should hold are expected to be “an important part of the policy framework,” said Teo, a member of the Basel group.
  • Pending Home Sales Fall By Most In A Year. The number of Americans signing contracts to buy previously owned homes fell in April by the most in a year, indicating the U.S. housing recovery remains uneven. The index of pending home resales dropped 5.5 percent following a revised 3.8 percent gain the prior month, figures from the National Association of Realtors showed today in Washington. The median forecast of 42 economists surveyed by Bloomberg News called for no change in the measure. Mortgage rates at record lows failed to sustain the pace of demand as some buyers may have waited for home prices to decline further. Limited access to credit and persistent foreclosures still weigh on housing, adding to concern it will remain a source of weakness for the world’s largest economy. “The pattern of demand is sluggish and volatile,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who projected a decline. “Until the supply issue is resolved, we could see further declines in prices and the housing market will continue to hover around the bottom. It’ll be a gradual improvement, we don’t expect anything stronger than that.”
  • Treasury Yields Tumble to Records as Europe Spurs Bids. Treasury 10-year note yields fell to a record low as investors sought refuge from the deteriorating credit conditions of European sovereign borrowers. The benchmark yield reached 1.6254 percent, less than its previous all-time low of 1.6714 percent on Sept. 23, as Spain struggled to recapitalize its banks and Italian bonds fell as the country sold less than its target at a debt auction. The Federal Reserve announced Sept. 21 that it would buy $400 billion of longer-term Treasuries, funding the purchases with sales of shorter-term notes, in an effort to bolster the U.S. economy and spur jobs growth. “We could go a lot lower,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of 21 firms that trade Treasuries with the Fed. “It’s fear about the solvency of the banking system in Europe and more money is pouring into dollars and into U.S. Treasuries. Yields don’t matter and prices don’t, it’s just being in the safe haven.”
  • Copper Drops to 20-Week Low on Europe: Commodities at Close. The Standard & Poor’s GSCI gauge of 24 commodities fell 2.3 percent to 603.73 at 5 p.m. in London. The UBS Bloomberg CMCI index of 26 raw materials was down 1.8 percent at 1,445.638. Copper fell to a 20-week low in New York as a reduction of Spain’s credit rating fueled concern that Europe’s debt crisis will slow the economy and reduce demand for raw materials. Copper futures for July delivery declined 2.2 percent to $3.387 a pound on the Comex in New York, after touching $3.383, the lowest since Jan. 9. Before today, prices fell 9.6 percent in May.
  • Verizon(VZ) Doubles FiOS Broadband Speeds In Race With Cable. Verizon Communications Inc. (VZ), the second-largest U.S. phone company, doubled the speed of its most expensive FiOS broadband Internet service, seeking an edge against cable providers. Verizon will begin offering five speeds of service next month, topping out at 300 megabits per second, according to a statement today. Pricing will be announced in June, the New York-based company said. The new top speed, up from a previous high of 150 megabits, is designed to let consumers handle multiple Internet devices and more bandwidth-hogging applications.
  • Facebook(FB) Seen Dropping 20% to Gain Parity With Nasdaq Rivals. Facebook Inc. (FB)’s stock, which has already lost $25 billion in value since its public debut, would have to drop another 20 percent for its valuation to match other companies that do business over the Internet. Facebook, with a market capitalization of $79.1 billion, is trading at 29.5 times the company’s projected 2014 profit of $2.69 billion, data compiled by Bloomberg show. The stock would have to dive to $23.07 to match the average price-to-earnings ratio for the Nasdaq Internet Index based on estimated earnings in the next 12 months, according to the data.
  • BofA(BAC) Chief Sees Europe's Crisis's Indirect Impact As Bigger Threat. Bank of America Corp. Chief Executive Officer Brian T. Moynihan said the main risk of Europe’s financial crisis will be the indirect effects on the rest of the global economy. Concern that European nations may not be able to pay their debts has already slowed the world’s economy, Moynihan said today at a Manhattan investor conference. His Charlotte, North Carolina-based company is ranked second by assets among lenders in the U.S., where Moynihan said consumer spending is being aided by lower gasoline prices and corporations keep finding ways to adjust their models to bolster profits.
  • Monsanto(MON) Profit Forecast Tops Estimates as Seed Sales Climb. Profit will be $1.57 to $1.62 a share in the three months through May, excluding costs from a legacy tax matter, St. Louis-based Monsanto said today in a statement. The forecast topped the $1.29 average of 16 estimates compiled by Bloomberg. Monsanto said earnings in the year through August will be $3.65 to $3.70 a share, excluding the tax issue, settlement of pollution claims and discontinued operations. The company in April forecast $3.49 to $3.54, while the average of 17 estimates was $3.56. Earnings were $2.96 a share in fiscal 2011.
  • Greenlight Added Investors After 6.8% First-Quarter Gain. Greenlight Capital Inc., the $7.8 billion hedge fund run by David Einhorn, opened to investors last quarter for the first time since 2008 after posting a 6.8 percent gain, according to a letter to investors. Greenlight increased assets by 6 percent last quarter and a “high percentage” of the capital raised was invested in the dollar-denominated class of the Greenlight Capital Gold funds, the firm said in the May 29 letter, which was obtained by Bloomberg News.
  • U.S. Proposes Duties As High as 26% On China Wind-Tower Imports. The U.S. Commerce Department proposed duties of as much as 26 percent on wind-tower imports from China, siding with American manufacturers including Broadwind Energy Inc. (BWEN). The agency today released preliminary results of its investigation into a complaint from the Wind Tower Trade Coalition, which claims its members are being harmed by subsidies from the Asian nation. In addition to Broadwind of Naperville, Illinois, the group includes Otter Tail Corp. (OTTR)’s DMI Industries, Katana Summit LLC and a unit of Trinity Industries Inc. (TRN).
  • Fed's Dudley Sees Economy Continuing to Grow at Moderate Pace. Federal Reserve Bank of New York President William C. Dudley said the U.S. expansion will probably continue at a “moderate” pace and that additional stimulus likely won’t be needed unless the economy falters. “As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs,” Dudley said today in the prepared text for a speech in New York.
Wall Street Journal:
  • Delinquency Rate Hits All-Time High For CMBS. A surge in maturities for troubled loans has pushed the delinquency rate for commercial mortgage-backed securities to an all-time high of 10.04% for May, according to a loan-research service. That’s the first time the rate passed the 10% mark, fed largely by five-year loans that were made in 2007 — when standards were at their weakest — and are now coming due, according to Trepp LLC. Landlords have had difficulty paying these off given that standards and values are far more stringent now, with more properties falling into default. (Loans are delinquent when at least 30 days past due.) Tens of billions of commercial-property loans that were securitized have run into trouble in recent years, as a drop in rents and values during the downturn pushed many landlords into trouble, unable to pay off their debts. Even as the commercial-property market across the U.S. slowly recovers, more loans are falling into trouble because leases made during times when rents were higher are coming due, and because mortgages are reaching their maturity dates, with property owners unable to find new loans to replace them. The rate of delinquent loans, up from 9.8% in April and 9.68% in March, has remained relatively steady above 9% for well over a year, increasing recently due to the 2007-vintage maturities. Currently $59 billion in CMBS loans is past-due, according to Trepp.
  • Networks Built on Milliseconds. Microwaves—Not Fiber Optics—Are Latest Thing for High-Frequency Traders.
  • Morgan Stanley(MS) Chief Defends Facebook(FB) Handling. Morgan Stanley Chairman and Chief Executive James Gorman defended the securities firm's role in Facebook Inc.'s tumultuous initial public offering, telling employees internally that the firm worked "100% within the rules" and calling the steep decline in the social network's stock "disappointing."
MarketWatch:
  • 6 Reasons Spain Will Leave the Euro First. The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries. They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into. There are few good reasons for the country to stay in the euro — and little sign it has the will to endure the sacrifices the currency will demand of them.
CNBC.com:
  • Auto Jobs: Sign of the Times. At the Hyundai plant in Montgomery, Alabama more than 20,000 people have applied for one of the 877 job openings. The surge of people applying may seem unusual, but it's not.
  • India's Economy Slows, With Global Implications. While short-term growth has slowed but not ground to a halt, India’s problems have dampened hopes that it, along with China and other non-Western economies, might help revive the global economy, as happened after the 2008 financial crisis. Instead, India is now facing a political reckoning, as the country’s elected leaders must address difficult, politically unpopular decisions — or risk even deeper problems.
Business Insider:
Zero Hedge:
Heartland.org:
  • FHA Subprime Defaults Hit 9% in California; Climbing Elsewhere. The American taxpayer is about to be saddled with another multi-billions bailout of subprime mortgage loan losses from the stealth Federal Housing Authority lending program that has been offering ultra-low 3.5 percent down payments since 2009. Delinquency rates are already at 9 percent in California and expanding rapidly across the United States.

Reuters:

  • BoE's Fisher Says Can't Rule Out Euro Break Up: Paper. A break up of the euro zone cannot be ruled out, Bank of England policymaker Paul Fisher was quoted as saying on Wednesday, amid growing jitters about the stability of the single currency bloc. In an interview with the Leicester Mercury, Fisher, who sits on the BoE's Monetary Policy Committee and Financial Policy Committee for regulation of the wider financial system, was quoted as saying that the impact of a euro break up would depend on how it was handled by European authorities."No one is trying to anticipate a euro break-up, but you just can't rule it out," he said. His comments come after Prime Minister David Cameron and finance minister George Osborne met with BoE Governor Mervyn King and bank regulator Adair Turner to discuss contingency plans for a possible break-up of the euro zone.
  • Anti-Bailout SYRIZA Party in the Lead: Greek Poll. The outcome of an election in Greece next month that may determine whether Athens can stay in the euro was thrown into doubt on Wednesday when a poll suggested the anti-bailout SYRIZA party would win, contradicting six previous forecasts. The poll, by VPRC for Epikaira magazine, showed SYRIZA, a radical leftist party which says it wants the debt-laden country to remain in the euro but to ditch austerity, would win 30 percent of the vote if elections were held now.The same poll put the pro-bailout conservative New Democracy party in second place with 26.5 percent of the vote. That was consistent with a previous VPRC forecast last week that also showed SYRIZA in the lead, with 28.5 percent, and New Democracy second with 26 percent. If Wednesday's result were repeated in a parliamentary election on June 17, it would be almost impossible to form a government without the participation of SYRIZA. SYRIZA's stated aim of jettisoning the international bailout deal and the tough austerity measures that went with it is a scenario that the country's international lenders have made clear is unacceptable, raising fears that Greece might be forced out of the single currency in chaotic fashion.
  • Image Shows Buildings Gone at Iran Site: Diplomats. U.N. nuclear inspectors displayed new satellite imagery on Wednesday indicating that some small buildings had been dismantled and other possible clean-up work undertaken at an Iranian military site they want to visit. One image from May 25 showed signs that "ground-scraping activities" had taken place at the Parchin facility, as well as the presence of a bulldozer, according to diplomats who attended a closed-door briefing by U.N. nuclear agency officials. This will likely further strengthen Western suspicions that Iran is "sanitizing" the site of any incriminating evidence before allowing the International Atomic Energy Agency (IAEA) into the complex. "It is very clear," one Western envoy said.

Telegraph:

  • Europe's Money Contracts Again. (graph) Very quickly, today's ECB data shows that Euroland's money supply is contracting again. M3 fell by €51bn in April. M1 fell by €55bn. Private credit fell €55bn. I don't yet have the country breakdown. My guess is that the Club Med implosion is grim.
  • Dublin forecasts 60pc of voters will back EU fiskalpakt. Ireland’s government is confident of victory in Thursday's eurozone fiscal pact referendum as secret official polling forecasts that over 60pc of Irish voters will tick the Yes box.

Die Welt:

  • Goldman Sachs Group Inc.(GS) chief economist Jan Hatzius warned against Greece exiting the euro as depositors in other countries might pull funds from banks on concern their nation could leave the common currency. Austerity measures in some European countries have stifled economic growth and Germany needs to accept a period of inflation to support other states, citing Hatzius in an interview.

El Economista:

  • Spain's stock market regulator CNMV doesn't rule out another ban on short-selling of financial stocks, citing comments made by Julio Segura, head of the CNMV. The decision would only be taken along with the European Securities and Markets Authority, Segura said.

MoneyNews:

  • Canada Seen Headed for US-Style Housing Collapse. Canadian home prices have been soaring thanks to loose credit and a solid economy, though excessive demand in the sector may send home prices eventually collapsing similar to the U.S. bust a few years ago, experts say. With mortgage loans under 3 percent, rising home prices suggest many Canadians are spending beyond their means, which serves as the building blocks for a collapse. "What we are seeing is the irrational exuberance that was present in the U.S.," says David Madani, a former Bank of Canada analyst now with the consultancy Capital Economics, the Christian Science Monitor reports.

Bear Radar


Style Underperformer:

  • Mid-Cap Growth -2.02%
Sector Underperformers:
  • 1) Oil Tankers -5.42% 2) Homebuliders -4.75% 3) Oil Service -4.35%
Stocks Falling on Unusual Volume:
  • MBT, RIO, BAC, EGO, JOSB, BPOP, TSCO, RIMM, EBAY, PSSI, MFRM, LOGI, PRGS, SHLD, ROSG, CALL, CRZO, LOPE, ENDP, FINL, VRA, CRUS, MCRS, WWWW, IYE, UDR, KMX, TOL, SJT and TEA
Stocks With Unusual Put Option Activity:
  • 1) CSC 2) FB 3) TOL 4) HBAN 5) BK
Stocks With Most Negative News Mentions:
  • 1) OMC 2) PWRD 3) PCX 4) MHO 5) RIMM
Charts:

Bull Radar


Style Outperformer:
  • Large-Cap Value -1.21%
Sector Outperformers:
  • 1) Utilities -.11% 2) Drugs -.65% 3) Gold & Silver -.72%
Stocks Rising on Unusual Volume:
  • TFM, VRTX, BAH, ENS and VHC
Stocks With Unusual Call Option Activity:
  • 1) FB 2) AUXL 3) ONXX 4) DRI 5) M
Stocks With Most Positive News Mentions:
  • 1) M 2) SAFM 3) AKAM 4) BA 5) WYNN
Charts:

Wednesday Watch


Evening Headlin
es
Bloomb
erg:
  • Euro Slides Toward 2-Year Low Amid Spain Bank Concerns. The euro fell to an almost two-year low after Spain’s borrowing costs climbed as the nation struggles to rescue its troubled banks, fueling concern Europe’s debt crisis is spreading. The European currency was poised for the biggest monthly decline since September after Bank of Spain Governor Miguel Angel Fernandez Ordonez resigned a month early amid criticism over the May 9 nationalization of Bankia group, Spain’s third- biggest lender. The dollar gained versus peers before data this week forecast to show consumer confidence remained weak and the jobless rate rose across the 17 nations that share the euro. Australia’s dollar fell after retail sales decreased. “Spanish yields have risen to the extent that the nation can’t raise funds easily, and a further gain in the yields will increase the possibility” that the country will require a bailout, said Kengo Suzuki, a foreign-exchange strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “Even from the perspective of its economic fundamentals, the euro is susceptible to selling.”
  • Greek Opinion Poll Shows Majority Want to Revise Bailout Terms. Most Greeks want to see terms for an international financial rescue revised, according to an opinion poll conducted weeks before a second general election on June 17. Nearly eight in 10, or 77 percent, of the 1,600 Greeks surveyed by GPO for Athens-based Mega TV, said the terms of the bailout should be revised. The poll results were broadcast on Mega TV. Most Greeks, or 81 percent, said they wanted to remain in the single currency, the poll showed. More than half, or 52.4 percent, said they should stay in the euro if they were forced to accept the current austerity measures accompanying the bailout while 44.5 percent said they shouldn't. The poll showed Greeks divided on whether they would leave the euro area, with 48 percent saying there was a low possibility compared with 45 percent saying the possibility was high.
  • EU Won't Treat Irish as Greeks If They Vote 'No". The eyes of the world are on elections in Greece next month that could determine whether it defaults and triggers contagion throughout the euro area. By contrast, Ireland’s referendum tomorrow on whether to ratify Europe’s new fiscal treaty is passing almost unnoticed. That’s odd, because although Ireland can’t veto the pact -- its full name is the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union -- the government is warning voters that the very same thing could happen here as in Greece.
  • Greece Exit From Euro Seen Exposing Flaws of Deposit Guarantees. The threat of Greece exiting the euro is exposing flaws in how banks and governments protect European depositors' cash in the event of a run. National deposit-insurance programs, strengthened by the EU in 2009 to guarantee at least 100,000 euros, leave savers at risk of losses if a country leave the euro and its currency is redenominated. The funds in some nations also have been depleted after they were used to help bail out struggling lenders, leading policy makers to consider implementing an EU-wide protection plan. "These schemes were not designed to deal with a complete meltdown of a banking system," said Andrew Campbell, professor of international banking and finance law at the Univ. of Leeds in the U.K. and an adviser to the International Assoc. of Deposit Insurers. "If there's a systemic failure, there needs to be some form of intervention."
  • Spain Ejects Clean-Power Industry With Europe Precedent: Energy. Spanish renewable-energy companies that once got Europe’s biggest subsidies are deserting the nation after the government shut off aid, pushing project developers and equipment-makers to work abroad or perish.
  • Mercedes Laying Off 1,500 Workers in Brazil as Sales Fall. Daimler AG (DAI)’s Mercedes-Benz, Brazil’s second biggest truck and bus manufacturer by market share, said it’s laying off 1,500 workers in Brazil for five months to adjust output to a drop in sales. All affected employees work at Mercedes’ plant in Sao Bernardo do Campo, Brazil, the company said today in an e-mailed statement. The company employs about 14,000 workers in Brazil, where it has 25.5 percent of the truck and bus market, according to data from the country’s dealerships association, known as Fenabrave. The Sao Bernardo do Campo unit is Daimler’s biggest manufacturing facility outside Germany, according to the company’s website. Declines in truck and bus sales “created the need to reduce production” and a larger-than-needed workforce caused the layoffs, Mercedes said in the statement. Truck and bus sales fell 28 percent in the first two weeks of May from a year earlier, according to Fenabrave.
  • RIM(RIMM) Shares Plunge After Company Reports Surprise Operating Loss. Research In Motion Ltd., reeling from sluggish BlackBerry sales, forecast a surprise operating loss for the first quarter and hired banks to advise on strategic options. The shares tumbled 15 percent in late trading. JPMorgan Chase & Co. and RBC Capital Markets have been hired to help RIM evaluate options, including forging partnerships, licensing its software and looking at "strategic business model alternatives," the Waterloo, Ontario-based company said today in a statement. RIM also is attempting to streamline operations by reducing spending and headcount.
  • Syrian Diplomats Expelled as Houla Massacre Spurs Annan Mission. The U.S. joined its Western allies in expelling top Syrian diplomats, blaming the regime-backed Shabiha militia for the "vile, despicable" massacre of women and children in the town of Houla.
  • Wells Fargo(WFC) Promises More Than $435 Million to End Memphis Suit. Wells Fargo & Co. (WFC), the largest U.S. home lender, pledged more than $435 million in mortgage credit and investments to end a discrimination lawsuit brought by Memphis, Tennessee.
  • How Political Clout Made Banks Too Big to Fail. The U.S. has historically kept the financial sector in check through a combination of sound principles and serendipitous decisions. But as the financial system gained strength in recent years, it also gained political influence. In the last decade, it has become too concentrated and too powerful, which has damaged not only the economy but the financial sector itself. How did it happen?
  • Japan’s Currency Chief Sees Threat From Very Rapid Gains in Yen. “Very rapid” gains in the yen are “counter-productive” and Japanese officials are closely monitoring the foreign-exchange market, the nation’s top currency official said. “The disorderly and speculative movement of any currency is not constructive” for economic growth, Vice Finance Minister Takehiko Nakao said in an interview yesterday in Hong Kong, where he’s attending a meeting of the Financial Stability Board. This is especially so for Japan as the nation recovers from last year’s earthquake and tsunami, he said.
  • Rubber Inventory Rising in China as Slowdown Cuts Demand. Rubber stockpiles in China’s Qingdao port, the main shipment hub for the commodity used in tires, are starting to expand as demand slows in the world’s largest consumer, said the Qingdao International Rubber Exchange Market. “Demand from downstream tire makers seems to be weak at the current stage, so destocking has slowed down,” said exchange chairman Li Xiangou, who correctly forecast in March that high inventories may pressure prices. Futures have plunged 50 percent from a record in February 2011, cutting costs for tire makers such as Bridgestone Corp. (5108), Goodyear Tire & Rubber Co. (GT) and Michelin & Cie. Prices slumped as China, the biggest car market, expanded last quarter at its slowest pace in almost three years and Europe struggled to contain its debt crisis. Chinese vehicle sales dropped 1.3 percent in the first four months, the worst performance since 1998, says the China Association of Automobile Manufacturers. The market “has yet to come to terms with a scenario where Chinese demand is diminishing faster than anticipated,” said Wang Chen, head of research at commodity hedge-fund Hangzhou Dunhe Investment Co. “Weak auto sales in China, especially falling sales of trucks, coincide with a lackluster market in the U.S. and Europe, and may lead to a glut of the commodity that hasn’t yet been reflected in prices.”
Wall Street Journal:
  • Confusion Surrounds Giant IPO. A $6 billion listing of a giant Chinese state-owned insurer is taking on new twists and turns as bankers gear up for an increasingly taxing deal. In addition to previous demands that already have raised eyebrows among bankers, People's Insurance Co. (Group) of China Ltd. is now asking banks that want to be on the deal to seek so-called cornerstone investors, according to people familiar with the matter.
  • Romney Says Win Secures GOP Nod. Mitt Romney Tuesday night claimed his win in the Texas primary gives him the requisite number of delegates to clinch the Republican presidential nomination. "I am honored that Americans across the country have given their support to my candidacy and I am humbled to have won enough delegates" to be the GOP nominee, Mr. Romney said in a statement.
Business Insider:
Zero Hedge:
CNBC:
  • Asia’s Message to Europe: Bite the Bullet and Implement Reforms. Europe should be “realistic,” devalue its currency and bear the pain of reforms so that it can emerge from the debt crisis stronger like Asia did in 1997, said Bank of Thailand’s Governor Prasarn Trairatvorakul.
  • Sun to Set on Commodities Super-Cycle: Morgan Stanley(MS). The massive commodities boom of the past decade is at its tail end given the slowdown in one of the largest consumers, China, says Ruchir Sharma, Head of Emerging Markets at Morgan Stanley Investment Management. “China's growth is downshifting to a lower plain, its very commodity-intensive phase of growth is coming to an end. This to me marks a big decade of increase in commodity prices coming to an end,” Sharma told CNBC Asia’s “Squawk Box” on Wednesday. “I suspect that we're headed now for two decades down as far as commodity prices are concerned. This is the sunset of the big commodities super-cycle,” he said.

NY Times:

  • Challenges Mount for Chinese Maker of Electric Cars. Four years ago, the BYD Company promoted the electric battery technology it was developing as a way to help China transform the automobile. No less an investor than Warren E. Buffett, one of the world’s richest men, boasted about the company’s prospects and bought a 10 percent stake.
Forbes
Reuters:
  • Facebook(FB) faces extended U.S. review of Instagram deal. Facebook has received notice that U.S. antitrust regulators will give its proposed purchase of the popular photo-sharing app maker Instagram a lengthy investigation, an industry source told Reuters on Tuesday. Facebook has received a "second request" from the Federal Trade Commission, essentially a request for relatively large amounts of data that the regulators will sift through to ensure that the deal complies with antitrust law. A prolonged review adds another headache to the No. 1 social network, whose shares on Tuesday slid below $29 to a new low as nervous investors continued to show their concerns about Facebook's long-term business prospects and rich initial public offering price of $38.
  • Apple(AAPL) CEO wants to make more products in U.S. Apple Inc Chief Executive Tim Cook said he would like to see more of the company's products assembled at home than in China and contain more U.S. components such as semiconductors.
  • 'Corzine rule' proposed for futures brokers. Futures brokers would need to get approval from a top executive before making big withdrawals from customer accounts under a rule now pending and referred to in the industry as the "Corzine rule", after MF Global's former CEO Jon Corzine.
Financial Times:
  • ECB Rejects Madrid Plan to Boost Bankia. A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said. News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early.
Telegraph:

Capital.gr:
  • EU May Extend To 2014 Deadline For Spain To Reach 3%-Of-GDP Deficit -Report. The European Commission will ask European Union finance ministers to grant an additional year to Spain to reach a deficit target of 3% of its gross domestic product, extending the deadline to 2014 from 2013, El Pais reported in its Wednesday Internet edition, citing an EU draft document. The broader flexibility to meet budgetary-deficit objectives, however, is conditioned on speeding up the increase in Spain's retirement age, increasing the taxable base of the value-added tax and ensuring regional governments comply with the country's stability program, among other things, the paper reported. Brussels will also demand that Spain create an independent fiscal institution--already in place in countries such as Sweden and the U.K.--to carry out analyses, give advice and control Spain's fiscal policy, the report said.
South China Morning Post:
  • The European Union Chamber of Commerce interviewed 557 cos. and almost a quarter said they may move their operations from China to other developing countries because of rising labor costs and a change in regulations, citing Davide Cucino, the chamber's president. More than 40% of respondents said China's policies related to foreign-invested cos. were less fair than they were two years ago. Almost 60% expected the country's labor costs to rise in the next two years, it said.
Hunan Daily:
  • Chinese Premier Wen Jiabao said the country faces increasing downward economic pressure, citing a speech by Wen.
Evening Recommendations
Citigroup Global Markets:
  • Upgraded (LNKD) to Buy, target $125.
Night Trading
  • Asian equity indices are -1.0% to -.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 193.0 -1.75 basis points.
  • Asia Pacific Sovereign CDS Index 160.75 unch.
  • FTSE-100 futures -.61%.
  • S&P 500 futures -.46%.
  • NASDAQ 100 futures -.43%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (TFM)/.36
  • (BAH)/.40
  • (LGF)/.21
Economic Releases
10:00 am EST
  • Pending Home Sales for April are estimated unch. versus a +4.1% gain in March.

Upcoming Splits

  • None of note

Other Potential Market Movers

  • The Fed's Rosengren speaking, Fed's Dudley speaking, Fed's Fisher speaking, Italy 10Y Bond auction, ECB's Draghi speaking, weekly MBA Mortgage Applications report, Sanford C. Bernstein Strategic Decisions Conference, Lazard Alt Energy Conference, Cowen Tech/Media/Telecom Conference and the (RDC) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and financial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.