Check me out tonight on the Glenn Beck Show on Fox News at 5:00

The grilling of Ken Lewis isn't living up to my expectations but there have been moments including the observation that maybe the Bank of America (BAC) Chairman is suffering from the Stockholm syndrome. He does look weird almost like he had some kind of lobotomy (and can someone get the man a glass of water, he is licking his lips like he is walking through the Sahara). I'm thinking Jack Nicholson in "One Flew over the Cuckoo's Nest" when at the end nurse Ratchet finally put him down for good. (I guess if taxpayers were smart, we'd make like the big Indian and jump out a window and head for the hills.) Ken Lewis is refusing to call a threat a threat even though he has been adamant that he was forced to swallow Merrill when he finally figured out they were overpaying by a factor of a zillion. Coming into the morning, I thought Lewis would take a victory lap.

As it turns out he is still doing the one thing he's done through all of this...protecting his own skin. He threw shareholders under a bus to save his jobs and now he is throwing the truth under a bus to save his job. He's got a lot of money, so, is it only ego that is making him go up there and look like a fool? Heck, in the past, it seemed he was protesting too much and looked a little foolish and rabid to boot. This was his chance to tell the world about the heavy-handed tactics of the Fed. This was his chance to tell the world that maybe the government shouldn't have too much more power. This was his chance to say: "Hey, who's regulating the regulators?' Instead he can't say an obvious threat is an obvious threat. This is a sham and a sham.

This is why people need to be worried. The government through its control of large businesses has a conduit to distribute money, buy favors, and redistribute wealth. The drama continues and it will be interesting to see if the ducking helps him keep his job, but for once Lewis could have gone out on his shield.

Treasury Yields

Starting yesterday, when the government had to increase the yield on its $19 billion 10-year auction to 4.0%, treasury yields have been trending higher. Additionally, mortgage rates continue to inch higher and higher as hopes of the "green shoots" sparking a full blown recovery stick around (oil prices are also moving higher on the same belief). However, we continue to question if the economy is on that strong of footing. Data this morning showed that firings have slowed, but hirings haven't begun to pick up yet. Higher mortgage rates will only slow the rebound in the housing market, and higher oil prices will sap any disposable income out of the pockets of many Americans. Throw in higher taxes and many Americans may looks for ways to rebuild the shells they have been hunkering down in over the past few months.

Foreclosures

As we noted in this morning's report, foreclosure filings fell by 6% in May from April but there were a few more points worth taking a look at. For one, there was a boost in bank repossessions in Michigan and New York as a large number of homeowners funneled through the foreclosure process on the back of foreclosure delay programs; supply is likely to be building in these areas, causing additional pricing pressure. It appears as though high amounts of layoffs in Michigan and New York related to the auto and finance industries, respectively, are really starting to set in, and could turn these into problem regions along with the lines of Florida and California. In fact, total foreclosure filings increased by 28% month to month in Michigan. It is also worth noting that in the months ahead, foreclosure trends may be difficult to read clearly, particularly as it relates to the Obama Administration's $50 billion housing plan. Banks are now getting incentives to allow homeowners to sell their homes for less than the mortgage is worth, allowing homeowners to walk away, making efforts to refinance and delay the foreclosure process. Feedback so far has been that these processes take a very long time to complete and therefore the fact that foreclosures dropped could simply mean we are hitting another bottleneck as we did at the end of 2008 when similar government efforts took effect.



Thoughts From the WSS Research Desk

Carlos Guillen

* As we progress towards the final stages of the second quarter, we continue to expect a short term recovery in earnings from the semiconductor industry. We believe this recovery will be led by continuing channel demand as distributors seek to re-stock significantly depleted inventories. At the same time, we see that the consumers have been holding on strongly as evidenced by slight improvements in retail sales. In addition, we believe semiconductor companies will also begin to benefit from improvements in margins, mainly driven by sharp rises in utilization rates. In general, after reaching a low point during the March quarter, we expect utilization rates to significantly improve during the next couple of quarter as semiconductor companies have considerably cut down on manufacturing capacity. In addition, driven by both supply chain replenishment and some consumer demand, utilization rates should also benefit from a higher level of revenues, that is in comparison to the depressed levels that were reached in the first quarter of this year. Longer term visibility is still foggy, and prolonged, higher levels of unemployment threaten to suppress growth in consumer spending. For now, though, we are confident there will be a nice short term recovery in earnings for semiconductor companies.

David Silver

* Ford (F) announced that sales through the first 10 days of June are progressing slightly better than in May. We are not jumping out of our seats with excitement just yet, but we do feel that Ford is the best positioned of the North American automakers. Green shoots or not, more people are looking to buy Fords.