Morning Note

Equity futures are trading below fair value in a continuation of yesterday's weakness following Chairman Bernanke's comments on the "frustratingly slow" and "uneven" economic recovery and in the absence of hints of a dovish policy response. Beige Book will be released at 14:00ET, and though the information on which that release is based won't be as current as yesterday's Bernanke commentary, perhaps a little more depth into the recent weak economic data will be revealed.

II Data: Bullish sentiment decreases to 40.9% from 45.2% in the latest US Investor's Intelligence poll. Bearish sentiment increases to 22.6% from 20.4%. Those expecting a market correction increases to 36.5% from 34.4%.

Libor fixings 

- Overnight Libor: Dollar: 0.127% vs prior 0.127% ; Sterling: 0.571% vs prior 0.568%; Euro: 1.079% vs prior 0.894%

- 1-month Libor: Dollar: 0.190% vs prior 0.190%; Sterling: 0.624% vs prior 0.625%; Euro: 1.194% vs prior 1.182%

- 3-month Libor: Dollar: 0.250% vs prior 0.252%; Sterling: 0.824% vs prior 0.825%; Euro: 1.401% vs. prior 1.390%

July WTI crude ($0.92) to $98.17

Natural gas ($0.061) to $4.770

Gold ($9.00) to $1533.00

10-year yield 2.9894%

30-year yield 4.2469%

Asian Markets

Asian markets fell this morning on worries about global economic growth, thanks to downbeat comments from Fed chair Ben Bernanke, though they recovered in the afternoon to end the day mixed. Bargain hunters bought property stocks to reverse morning losses in China and drive the market to a small gain. Japan was flat, encouraged by a weaker yen against the euro, but weighed on by Fed chief Ben Bernanke’s saying the US economy had slowed down. Banks led Australia down on worries about the economy and offshore debt. Shipyards and carmakers sent South Korea lower. Japan April trade balance (¥417.5B); trade balance for first 20 days of May (¥1.053T), +224$ y/y. April current account surplus ¥405.6B vs cons ¥217.1B. May M3 +2.1% y/y. Australia April home-loan approvals +4.8% m/m vs a revised (1.1%) seq.

The yen is trading at 79.88 to the US dollar.

European Markets

European equity markets trade lower following Fed Chairman Bernanke's bearish comments on the US economy. Banks and mining shares are amongst the leading fallers. Metal prices retreated and crude trades lower ahead of OPEC's meeting at which it is expected to raise output quotas. With little economic or corporate newsflow, major indices extended initial modest opening falls and currently trade around session lows. Portugal, Greece and Italy led the regions declines down over (1.4%). Germany April Industrial Output (0.6%) m/m vs consensus (0.0%) and prior revised to +1.2% from +0.7%. The pound and the euro are trading at $1.6366 and $1.4656 respectively

Today's Economic Releases (Eastern Time)

07:00 US MBA Mortgage Purchase Applications (03-Jun); consensus n/a

10:30 US DOE Crude Inventories (03-Jun); consensus n/a

19:50 Japan GDP y/y (Q1 (final)); consensus n/a 

Today's Key Events (Eastern Time)

02:30 TGS-NOPEC Geophysical Company Capital Markets Day

09:00 Convio Investor Day

10:45 Electronic Arts E3 2011 Analyst Event

12:20 Fed's Hoenig speaks

14:00 Beige Book release

15:00 Norfolk Southern Investor Day

—:— American Society of Neuroradiology ~ ASNR

—:— Apple Worldwide Developers Conference - WWDC

—:— Bank of AmericaTelecommunications, Media & Technology Conference

—:— Capstone Investments Dinner with NxStage Medical Management

—:— CapStone Investments Silicon Valley Bus Tour

—:— Credit Suisse Homebuilding and Building Products Conference

—:— Credit Suisse Pan European Small and Mid Cap Conference

—:— Design Automation Conference ~ DAC

—:— Deutsche Bank Global Financial Services Investor Conference

—:— E3 Expo

—:— FBR Capital Markets NAREIT REIT Week

—:— Goldman Sachs European Financials Conference

—:— Goldman Sachs Global Healthcare Conference

—:— International Technical Conference on Clean Coal & Fuel Systems

—:— Jefferies Global Healthcare Conference

—:— JP Morgan Diversified Industries Conference

—:— Keefe Bruyette & Woods Investment Management & Specialty Finance Conference

—:— Piper Jaffray Consumer Conference

—:— RBC Capital Markets Canadian REIT Investor Sessions

—:— UBS Global Basic Materials Conference 

Company Specific News

Earnings

CIEN (Ciena reports Q2 EPS ($0.24) ex-items; unclear if comparable to Reuters ($0.11). Reports Q2: Revenues $417.9M vs Reuters $428.1M)

LDK (LDK Solar reports Q1 revenues $766.3M vs Reuters $769.4M)

VRNT (Verint Systems reports Q1 EPS $0.56 ex-items vs Reuters $0.53. Reports Q1: Non-GAAP revenues $176.6M vs Reuters $179.2M)

Offerings

CLF (Cliffs Natural Resources 9M share secondary offering priced at $85.63/sh through JPMorgan, BofA Merrill Lynch and Citigroup)

MCP (Molycorp announces proposed offering of $200M of convertible senior notes due 2016)

OMEX (Odyssey Marine Exploration to offer 4M shares through Craig-Hallum Capital)

M&A

C (AXA Private Equity acquires $1.7B private equity portfolio from Citigroup)

EVR (Evercore Partners to acquire Lexicon Partners for approx £86M in cash and share)

VLCM (PPR (PP.FP) extends cash tender offer for Volcom)

Newspaper Articles / Headlines

Barron's

- Barron's Weekday Trader is positive on Convergys. Barron's Weekday Trader is positive on Convergys citing recent asset divestitures in turn allowing the company to simplify its business model and focus more on its core competencies. In addition, Barron's believes the management team is strong, notes the possibility of a share buyback in the near future and says the company trades at a discount when compared to peers; around 11x 2011 earnings.

Bloomberg

- Covidien working with JPMorgan on sale of drug unit, which could fetch $3-4B.

- Manulife (MFC) has joined the Maple Group bid for TMX Group. According to a source close to the negotations, MFC approached the Maple Group Acquisition Corp in order to be a part of its C$3.58B hostile bid for X.CN and has joined the group. Citing sources, Bloomberg reports that Covidien had been in talks to sell its drug unit to another healthcare company, but the talks recently broke down.

Other potential buyers are reportedly still considering the unit

Guardian

- Glencore International not to pay back taxes to Zambia without "conclusive proof" of tax avoidance. Sources close to Glencore tell the Guardian that in the absence of the proof that subsidiary Mopani Copper Mines underpaid, Glencore will not hand over any money. Zambia's Finance Minister did not say how much Mopani is thought to owe, but the Guardian reports that charities estimate the annual figure rose sequentially from 2006 to a high of up to £76M in 2008.

Financial Times

- FT discusses additional stimulus measures being considered by President Obama. The article really does not break much new ground, as the FT notes that after cutting payroll taxes and extending tax breaks for business in a deal with Republicans last December, President Obama said at a recent press conference in Washington that the administration would now look at “how do we continue some of these policies” beyond this year. The article goes on to discuss the limited options the White House has when it comes to boost the economy, particularly given that there is no chance that Congress will agree to another stimulus plan. The paper adds that the administration also has little ability to influence high oil prices, which seems to be the main factor behind the recovery soft patch and dampened consumer confidence.

- Swiss Parliament to discuss how to prevent Swiss banks becoming too big to fail. The FT reports that they will debate recommendations from a parliamentary committee including higher capital requirements than required by international regulations the measures could be passed by the end of the session and take effect in 2012.

- UK Government changing stance on Lloyds bank branch selloff. The FT reports that the Chancellor, George Osborne has turned from initially supporting the idea that Lloyds should sell more than 600 branches but now, according to an aide, thought the idea was unworkable. The article notes the Independent Commission on Banking recommended the sale of more than 600 branches in April and the company has been lobbying the government since that time.

- Government asking commercial TV stations to contribute money to support local TV stations in the UK. The FT, citing people familiar with the situation, reports that ITV and Channel 4 have been asked for tens of million of pounds p.a.

- Eli Lilly to settle with Indian generic drug makers. The FT reports that The dispute began when the Dutch authorities blocked shipments of low-cost generic drugs in 2008-9, claiming they violated patents.

The drugs were actually bound for developing countries where the patents didn't apply

The article cites the CEO of Cipla (CIPLA.IN) as saying the global drug companies are now settling with Indian companies. Eli Lilly said it was bound by confidentiality and so couldn't comment.

- Evercore Partners to buy Lexicon Partners for about £86M in cash and stock. People familiar with the matter tell the FT the deal could be announced 8-Jun. The payment will be roughly 40% paid at closing, with the remaining 60% mostly in Evercore stock over several years.

- British Airways settles US class-action lawsuit for $90M over air cargo price fixing. The FT notes that the lawsuit results from a US Department of Justice investigation of price-fixing and that BA pleaded guilty 4 years ago and was fined $300M as well as €104M by the European commission.

Los Angeles Times

- CW (CBS-TWX) sells more than 75% of its inventory for $400-420M in upfront. A person with knowledge of the negotiations tells the LA Times that the network charged 11% more than it did a year ago. A source says ABC (DIS) is getting 10-11% price hikes, NBC's (CMCSA) prices are up 9%, and CBS "had hoped for 18% increases."

New York Post

- Banks may cut thousands of Wall Street jobs within weeks. Sources tell the NY Post that Barclays Capital (BARC.LN), Goldman Sachs (GS), Bank of America (BAC), JPMorgan Chase (JPM), and Morgan Stanley (MS) are considering cutting jobs or salaries for equities trading and investment banking. The word is that executives will look at Q2 results and weigh them against the increased costs imposed by Dodd-Frank before making any decisions. Barclays Capital may end up with "significant" headcount reductions by the end of the year.

- GE Capital to start selling what amount to subprime corporate loans. Sources tell the NY Post that GE Capital thinks the idea -- which wil involve interest rates of at least 10% on loans for which the company will take a fee but none of their returns -- will get it new customers.

- Leonard Green, CVC Capital Partners to make joint bid for BJ's Wholesale. The NY Post reports that the offer will be for at least $2.8B, vs BJ's current $2.6B market cap. A source close to the situation says Morgan Stanley would like to avoid a situation where there is only one offer for the company, but large possible buyers have dropped out for fear they will not be able to match Leonard Green.

Wall Street Journal

- RSA Security system at Lockheed Martin (LMT) breached. Reminding readers that RSA underwent an attack in March (see linked comment), the WSJ reports that RSA acknowledged the 21-May breach two days ago. A reseller for RSA says customers are concerned about the problems, but the article notes that changing security devices is a high hurdle for large corporations.

- Sale of controlling stake in Hynix to restart this month. A person familiar with the matter tells the WSJ that the nine creditors holdnig the shares want to get letters of intent early next month. The 15% stake is currently worth KRW2.58T ($2.38B). Another source says Hyundai Heavy (009540.KS) may take part in the auction, but the article says no one else has expressed interest.

- WSJ wonders whether Target is losing its cachet. The Journal notes that the company has been struggling to gain back its pre-recession sales strength, while the stock is trading near a 52-week low, having fallen 22% from a year ago. The article points out that Target shoppers are focusing on toilet paper and foodstuffs, while the stores are having a hard time getting customers to spend money on higher-margin clothing and home goods, which make up more than 40% of sales. The paper adds that while Target puts a lot of the blame on consumer headwinds such as housing market weakness and sluggish wage growth, some analysts and retail experts think that the company has shifted its focus too far away from the higher-end shopper. The article also discusses the pressures from a changing competitive landscape, as companies such as Kohl's (KSS) and JC Penney(JCP) have added low-price designer clothes from the likes of Vera Wang, Ralph Lauren and others.

- WSJ is positive on Ford. A "Heard on the Street" column says that with its lineup revisions and focus on streamlining its platforms, Ford is indicating it can adapt as market conditions change.

- Citi to sell $1.7B portfolio of private-equity assets to AXA Private Equity. People familiar with the deal tell the WSJ that it involves 207 limited-partnership interests in buyout funds and stakes in about 20 companies, and it will probably be announced today.

- General Motors ponders ways to spend cash. The WSJ, citing CEO Daniel Akerson at the company's AGM, reports that: The company has net cash of around $25B and the company is working on plans for what to with the money. These include: paying down the company's pension shortfall, reducing debt pumping money into its finance arm, spending on new products and facilities buyback shares in the market.

- Blue Shield to limit its net income to 2% of revenues amid pressure to control health costs. The WSJ, citing CEO Bruce Bodaken, reports that the company will distribute $180M of 2010 earnings to customers in the form of credits against their premiums. The article notes this will put pressure on other health companies to do the same, especially non-profits and mentions that Wellpoint (WLP) is the notable exception in being a for-profit owner of 14 Blue Shield plans.

- Morgan Stanley to focus on cost cutting. The WSJ, citing the CFO presentation at an investor conference, reports that he whole presentation focused on cost-cutting rather than revenue generation. The article notes that this is in contrast to recent presentations where revenue was the dominant theme the expense saving target is about $500M in 2012 and $1B in the next three years the number of financial advisers in the JV with Citigroup (C) may shrink to below the previous target of 17,500 -18,500 staff.

- WSJ is cautious on fashion retailers. A "Heard on the Street" column makes the unsurprising observation that the companies see their margins suffer when customers don't buy their products and prices are cut as a result. And it says that discounting is unlikely to be the "bloodbath" that it was in 2008, but it warns that any move to reduce prices will be problematic given the higher costs the retailers are trying to pass on.

- Private-equity firm Najafi in discussions to buy Borders Group. The WSJ reports, citing people familiar with the matter, that Najafi is competing with Gores Group to buy the Borders out of bankruptcy

Research

Bank of America Merrill Lynch: downgraded QNST

Barclays Capital: downgraded VSEA, GPS

BMO Capital: upgraded CHSI

Canaccord Genuity: upgraded COG

Dahlman Rose: upgraded ESV, NE

Goldman Sachs: upgraded KCG, RJF; downgraded CBOE, SF

Jefferies: downgraded SPWRA

Keefe Bruyette: downgraded DB

KeyBanc: upgraded GIII

Morgan Stanley: downgraded CLX

Oppenheimer: upgraded VZ

Susquehanna: downgraded FST

Ticonderoga: upgraded BEN; downgraded COGO

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.