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Some Speech By: WSS Research Desk

|Includes: BP p.l.c. (BP)
By: Brian Sozzi, Equity Research Analyst

President Obama stepped up to the plate last night attempting to hit one out of the park. The President, speaking from the historic Oval Office, addressed what his Administration was doing to contain the Gulf oil spill, which for a moment was reassuring. Then, in my opinion, the speech went downhill and as a result, our Commander in Chief hit a dribbler up the third base line only to be gunned down at first base.

The topic of some form of escrow fund set up by BP and managed by a third-party, as I understand it, creates another level of red tape to getting much needed funds to the people of the Gulf Coast. It also sends a few messages. First and foremost, there is a fundamental issue at play here; should, and can, the government force a private company into establishing such a fund. This is a very important consideration (maybe more so than bailing out banks) as capitalism, at least before Team Obama rode into office, is the fabric of our country. The system of a market based economy is copied by many countries across the world and is a reason why people flock to the U.S. (illegally as well through the Arizona border patrol), in the hope of living a better life. Where is the true opportunity to be a complete success if the government meddles in free markets? The opportunity becomes squashed; people refrain from striving for greatness and instead are content to collect food stamps and other government handouts while browsing the internet all day. Although BP must be pressed to stay on top of paying claims and cleaning up all coasts (Gulf, Florida, etc.), I think a $20 billion plus fund sets a bad precedent. Second, where was this speech by the President 57 days ago? If you want to cut the President some slack, where was the speech 50 days ago? Fan or not a fan of the President, the fact is his leadership has been called into question on a world stage and for that matter, the leadership among elected officials. The arising of such questions, unfortunately, makes us appear weaker in the eyes of others.

In the meantime, the bottom in BP shares is nowhere in sight. It would be nice to state that the stock being down 42% since the spill began creates a buying opportunity. However, we just do not have any visibility into how the situation will ultimately conclude. Perhaps more dangerous than the stock's direction is the other financial indicators surrounding BP:

* Credit investors are pricing in a 39% chance BP will default in five years. Investors are demanding 800 bps more in yield to own BP debt due next year than Treasuries. As background, 1,000 bps is usually a distressed level.
* BP's $750 million of 1.55% notes due in 2011 dropped to the lowest price on record yesterday.
* BP's short-term debt borrowing costs are rising.

Spotlight: Financials

The market has logged eight somewhat solid sessions dating back to June 8. Respectively, the DJIA and S&P 500 have advanced 4.7% and 2.8%. Absent to a certain extent in the short-term move have been the financials, which I find to be a potential contrarian indicator. Shares of Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), and JP Morgan (NYSE:JPM) on average have increased 3.0% since June 8. Is the market worried about international related debt write-downs? Lawsuits? Reduced corporate debt issuances? Trading? Whatever the root cause, the inability of the financials to lead the recent move in the market is worth keeping in mind.

Crude Musings

By: Conley Turner, Research Analyst

Crude oil futures are hovering around the around $76.00 a barrel level as investors sought to take a breather after the significant move in the commodity in the previous session. Much of the reason behind the pause has to do with lingering concerns by investors about the overall health of the European economy and the potential impact on oil demand. In the previous weeks, the commodity's price had rebounded as investors' fears began to give way to a more optimistic outlook. However, those fears have not altogether dissipated as concerns are emerging about Spain's fiscal situation.

This turn of events has caused the euro's recent advance to falter and the dollar to strengthen. The price of crude typically has an inverse relationship with the dollar and is therefore showing some initial weakness.

Morning Note

We received two economic data releases for May, the Producer Price Index and Housing Starts/Permits. More color on each will be presented in the afternoon report. Initially, it's obvious that the market has zeroed in on the Housing Starts/Permits report as the numbers were disappointing. The PPI report in many respect mirrors the import/export price data that was reported yesterday; inflation is benign.

Within the Housing Starts/Permits report, permits declined in all regions from April and starts only increased in two regions for the same measurement period. This is one of the first major reports on housing since the tax credit expired in late April, and the fact it was below consensus suggests the government was a greater contributor to the bounce in conditions than many expected. On the positive side, refinance activity was strong as indicated by data out this morning. This should alleviate stretched household budgets.


Disclosure: none