Thursday Watch

Evening Headlines
Bloomberg:

• Fed's Maiden Lane Made Taxpayers Junk-Bond Buyers Without Congress Knowing. Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money. The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.
• Spain's Aaa Rating on Review for Downgrade at Moody's. Spain’s top credit ranking was placed on review for a possible downgrade by Moody’s Investors Service as the country prepares to sell as much 3.5 billion euros ($4.3 billion) of five-year notes today. “Deteriorating” growth prospects and challenges in meeting fiscal targets mean Spain’s Aaa classification may be lowered by as much as two grades, Moody’s analysts including Senior Vice President Kristin Lindow in New York said yesterday in a statement. The moves came before today’s auction provides a test of investor sentiment toward the euro region’s fourth-largest economy and puts pressure on the Socialist government to deepen spending cuts as it starts drafting next year’s budget. “It will add to the general nervousness before the Spanish auction,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. Prior to Moody’s decision, investors had expected strong demand at the five-year note auction on easing concerns about the region’s banks after lenders sought less cash than forecast at a European Central Bank tender. The extra yield demanded on Spanish debt rather than German equivalents fell to 198.4 basis points yesterday from 204.9 basis points. That compares with a euro-era high of 221 basis points on June 16. Spain, which faces 24.7 billion euros of maturing debt in July, is trying to convince investors it can cut the third- largest deficit in the euro region, while bolstering the country’s savings banks and lifting the economy out of a two- year slump. Moody’s said it will “review” next year’s budget “to assess whether the deficit target for 2011 can be achieved.” That increases pressure on the minority Socialist government, which cut civil servants’ wages last month and will increase the value-added tax rate today, as it starts drafting next year’s budget ahead of its presentation to Parliament by the end of September. The government expects to cut the budget deficit to 6 percent of gross domestic product next year from 11.2 percent in 2009, aiming to bring the shortfall in line with an EU limit of 3 percent in 2013. Moody’s expects the deficit to remain “just over” 5 percent that year, lead Spain analyst Kathrin Muehlbronner said in a telephone interview. That will push the debt ratio to close to 80 percent by 2014, she said. Last year Spain’s debt burden was 53 percent of GDP, less than Germany’s and below the euro region average.
  
• European Banks Not Out of the Woods Yet After ECB Tender, Investors Say. European banks are still dependent on life-support from the region’s central bank even after asking it for less money than analysts estimated. “We’re not out of the woods yet,” said Florian Esterer, who helps manage about $46 billion at Zurich-based Swisscanto Asset Management. “The cajas, the Greeks and maybe the Landesbanken have problems getting short-term refinancing. That is why the ECB is still providing funding.” “It’s an event that calms nerves but doesn’t change the picture at all,” said Juergen Lanzer who helps manage about $230 billion at Schroders Plc. “Some of the Spanish, Portuguese, Greek and Irish banks still have sizeable balance sheets that they would struggle to refinance without the ECB.”
• China Manufacturing Slows Again Amid Growth Concern. China’s manufacturing expanded at a slower pace for a second month in June, adding to signs that growth in the world’s third-largest economy is moderating. The Purchasing Managers’ Index fell to 52.1 from 53.9 in May, the Federation of Logistics and Purchasing said in an e- mailed statement today. That was less than the median 53.2 estimate in a Bloomberg News survey of 12 economists. An output index fell to 55.8 in June from 58.2 in May, today’s report showed. A measure of new orders slid to 52.1 from 54.8 and an export-order index dropped to 51.7 from 53.8. A measure of input prices decreased to 51.3 from 58.9, the biggest fall in the 11 sub-indexes.
• Europe Naphtha Exports to Asia to Slide on China Slowdown: Energy Markets. Naphtha exports from Europe to Asia may drop to zero this month as demand from Chinese chemical producers slows, making forward prices more expensive than those for prompt delivery for the first time in eight months. There may be no shipments of the oil product, used to make gasoline and petrochemicals, in July, compared with 300,000 metric tons in June and 500,000 tons in May, according to the median estimate in a Bloomberg survey of six Europe-based traders. “The chemical market is still weak and China isn’t buying,” said Jinsu Yim, a Singapore-based analyst at Chemical Market Associates Inc., which advises oil refiners, banks and manufacturers. The current lower demand for naphtha in Asia is shown by spot naphtha cargoes from the Middle East trading last week at a premium of about $9 a ton to benchmark Persian Gulf prices, according to two traders in Asia. This is less than half the premium Kuwait set in June for term supplies to Asian buyers for August to July next year, two traders with knowledge of the company’s negotiations said at the time.
• Fed Officials Avoid Talk of Further Stimulus to Stoke Growth. Federal Reserve policy makers expressed caution about the outlook for the U.S. recovery and bank lending without backing any new steps by the central bank to stimulate growth. Atlanta Fed President Dennis Lockhart said today that while the recovery isn’t sustainable enough yet to warrant raising interest rates, he doesn’t see a need for additional asset purchases to aid the economy. Fed Governor Elizabeth Duke said it may take years to return to pre-recession credit levels and that there’s “no single step” to unclog lending markets. Fed Governor Kevin Warsh, appointed in 2006 by then-President George W. Bush, a Republican, said any decision by the central bank to expand its $2.35 trillion balance sheet must be subject to “strict scrutiny.” Lockhart told reporters today after a speech in Baton Rouge, Louisiana, that he respects Warsh’s view. “Whenever you are purchasing government obligations in the current conditions of deficits and rising national debt, you have to think about the long-term credibility, which I think was Kevin’s point,” Lockhart said.
• India's Gold Imports May Fall 36% as Price Damps Demand, Association Says. Gold imports in India, the world’s biggest consumer, may fall as much as 36 percent this year as higher prices and volatility slows demand, the Indian Bullion Market Association said. Purchases may be about 350 tons to 400 metric tons in the year ending March 31, 2011, compared with about 550 tons a year earlier, the association’s President Anjani Sinha said yesterday in a phone interview in Mumbai. Imports are down by about half in the last three to four months, he said.
  
• Sovereign Default Enters Apparatchik Lexicon: Mark Gilbert. The notion that default might be the only sensible exit strategy for an indebted euro nation is finally gaining traction with the authorities. With global financial markets still in a state of disrepair, investors would be wise to tread softly amid the potential nightmares. A draft European Union document, dated June 25 and scheduled for discussion July 12-13, was obtained this week by Bloomberg reporter Meera Louis. The draft suggests the forthcoming stress tests planned for the region’s banks should assess the dangers posed by “exposures to sovereign risk.” That’s a euphemism for asking whether banks would blow up if a government couldn’t pay its debts. Including that scenario in the analysis is an admission that the prospect of restructuring has, in the minds of the euro’s apparatchiks, moved up the scale to “possible” from “out of the question.”
• Kan May Face Ghost of Hashimoto as Japan's Economy Weakens Before Tax Rise. Japan’s slowing recovery from its worst postwar recession is signaling the world’s second-biggest economy may be too weak to sustain the higher consumption taxes under consideration by Prime Minister Naoto Kan.
• Oil Falls a Fourth Day After Unexpected Increase in U.S. Gasoline Supplies. Crude oil fell for a fourth day in New York, its longest losing streak in seven weeks, amid concern the economic recovery in the U.S. and China will slow, curbing demand in the world’s two largest energy consumers.Gasoline inventories rose 537,000 barrels to 218.1 million in the week ended June 25, ending a seven-week gain, according to an Energy Department report yesterday. Supplies, 3.5 percent above the five-year average, were forecast to decrease by 400,000 barrels, based on a Bloomberg News survey of analysts. U.S. fuel consumption declined 2.6 percent to 19 million barrels a day, the lowest level since April, the report showed.
• Australia Mining Stocks to Drop on China Freight. Australian mining stocks are poised to keep tumbling, as two leading indicators from China, the world's largest metals buyer, have dropped to at least nine-month lows, according to Westpac Banking Corp. The decline in the freight index, which charts rates for cargoes from Dampier in Western Australia to Qingdao in China, “is as pure a read as you’ll get of what’s actually happening between the two economies.” said Huw McKay, a senior international economist at Westpac in Sydney. Further falls in China’s purchasing and shipping costs “would certainly put a lot of pressure on mining stocks,” McKay said.

Wall Street Journal:

• The Dodd-Frank Financial Fiasco by John B. Taylor. The bill all but guarantees bailouts as far as the eye can see, while failing to address real problems like Fan and Fred and our outdated bankruptcy code. The sheer complexity of the 2,319-page Dodd-Frank financial reform bill is certainly a threat to future economic growth. But if you sift through the many sections and subsections, you find much more than complexity to worry about. The main problem with the bill is that it is based on a misdiagnosis of the causes of the financial crisis, which is not surprising since the bill was rolled out before the congressionally mandated Financial Crisis Inquiry Commission finished its diagnosis.
• From Russia With Gripes. Suburban Spy Suspect Didn't Feel Appreciated by Mother Country Handlers.
• China Agency Nears Times Square. China's state news agency could soon be the newest Times Square neighbor of media giants Thomson Reuters and Conde Nast. Xinhua, one of the Chinese government's main news outlets and propaganda arms, is finalizing a deal to move to the top floor of the 44-story skyscraper at 1540 Broadway, Xinhua's North America bureau chief, Zeng Hu, confirmed in an interview.
• Obama and the Fiscal 'Road to Hell'.
  

Bloomberg Businessweek:

• Chinese Provinces Raise Minimum Wages to Curb Labor Disputes. At least nine Chinese provinces and cities will raise minimum wages from today by as much as a third after Premier Wen Jiabao called for measures to head off growing worker unrest in the world’s third-largest economy.

CNBC:

• California Economy Is a Sign of What's Coming: Fiorina. All of the United States will end up like California if Washington does not focus on private sector job creation and reduce spending, Carly Fiorina, a Republican nominee for Senate, told CNBC Wednesday. "California is kind of a test case of what happens when government gets too big, spending gets too high, regulation gets too thick, entitlements get too rich. We start destroying jobs and that's what we are doing in California," said Fiorina. "And the reason I'm running for the U.S. Senate is because I think California is a harbinger of things to come if we don't have people in Washington focusing on job creation."

MarketWatch:

• Hurricane Alex Sending Oil to Gulf Coast Beaches. Hurricane Alex, which strengthened overnight from a tropical storm, is heading for the coastline near the Texas-Mexico border and is starting to churn oil from the massive BP spill on to beaches along the Gulf of Mexico, officials said Wednesday.

IBD:

• With Regulation, Electronic Markets Hope to Conquer New Business. That suits Intercontinental Exchange (ICE) just fine.

NY Times:

• Energy Savers, Loan Losers. The Obama administration is devoting $150 million in stimulus money for programs that help homeowners install solar panels and other energy improvements, which they pay for over time on their property tax bills. At the same time, the two government-chartered agencies that buy and resell most home mortgages are threatening to derail the effort by warning that they might not accept loans for homes that take advantage of the special financing. The mixed messages have alarmed state officials and prompted many local governments to freeze their programs, which have been hailed as an innovative way to help homeowners afford the retrofitting of a house with solar panels, which can cost $30,000 or more before incentives.
• Documents Show Goldman(GS) Pressure on AIG(AIG). Goldman’s aggressive and repeated demands for billions in cash from A.I.G. drove the insurer to the brink of failure in September 2008. The documents also revealed for the first time the dollar amounts behind Goldman’s negative bet on A.I.G., which Goldman put in place to hedge its risk that A.I.G. might fail and not pay its obligations. Under the terms of the $182 billion rescue, which was overseen by the Federal Reserve Bank of New York and the Treasury, the banks that had insured mortgage securities with A.I.G. were made whole on those contracts when they agreed to unwind them. Some $46 billion of the A.I.G. bailout money went to those banks.

Business Insider:

• Flashback: Steve Ballmer's First Take On The iPhone, January 2007. (video)

Zero Hedge:

• The Credit Default Swap Wolfpack Is Now Coming After France... China. (table)
• CALPERS and Risk: Together Forever? Before clocking a $100 billion loss in early 2009, the California Public Employees' Retirement System, known as Calpers, had the swagger of a hedge fund and the certainty of a saint. Other pension funds followed its lead, loading up on leverage, investing in unrated CDOs, shoving money into high-priced private equity deals and barreling into commodities and real estate. The question now is whether a loss of nearly 40% of its market value -- the worst loss in the system's 77-year history -- has brought Calpers sufficiently back down to earth to avoid another such debacle, and whether other chastened pension systems have followed suit.

CNNMoney:

• Congressional Budget Office Chief: Budget Outlook 'Daunting'. Douglas Elmendorf, chief budget cruncher for Congress, got to play the role of bad-news bear before the president's bipartisan fiscal commission on Wednesday. His job: Present the Congressional Budget Office's latest assessment of the long-term federal budget. The gist of his testimony went something like this: The outlook is bad under current law and daunting if many current policies are extended as expected. And even that may understate the fiscal problem the country faces, because it doesn't factor in potential effects of debt on economic growth. Under the rosiest scenario painted by Elmendorf, the debt held by the public is on track to rise to 80% in 2035 from 62% at the end of this year. At that point, interest payments on that debt would jump to 4% of GDP, up from roughly 1% today. That's the equivalent of a third of all federal revenue. Spending on health care remains the federal budget's biggest problem, even after accounting for the estimated impact of the health reform law enacted in March. Specifically, Elmendorf noted that spending on major mandatory health care programs such as Medicare is on track to double by 2035, up to 10% of GDP from 5% today. That increase is the equivalent of $700 billion this year in additional spending, Elmendorf said. Add in the less dramatic increase in Social Security spending, and the cost to federal coffers of mandatory entitlement programs will reach 16% of GDP by 2035. That's not very far below what the government has spent on all federal programs and activities on average over the past 40 years.

Huffington Post:

• The Failure of Financial Reform, Itemized. It is really quite incredible that of all the things that went wrong to cause the latest economic crisis, the new financial reform bill does almost nothing with regards to the following key issues. Here are the original problems and the actions being taken.

HedgeFund.net:

• New York State Pension Commits $200M to Emerging Hedge Fund Managers. Rock Creek was given the directive to focus on hedge fund firms that are women- and minority-owned, and that have less than $500 million in assets. The CRF also wants its money to be invested with “newer” hedge fund firms.

Rasmussen Reports:

• 60% Support Offshore Drilling, Still Critical of Obama and Oil Companies.

Politico:

• Stark: 'Our borders are quite secure'. (video) Rep. Pete Stark (D-Calif.) got into a heated exchange over immigration with some border security activists Saturday, asking a member of the Minutemen, “Who are you going to kill today?”

USA Today:

• 2010 Had Worst Start for Stocks in Nearly a Decade. The second half can't start fast enough for investors who have suffered through the worst start to a year for the stock market since 2002. Coming off the brutal second quarter that ended Wednesday, the big concern is whether the current 15% pullback in stocks is just a routine decline or the start of something more ominous.

AP:

• US Officials: Al-Qaida Operative Tied to NY Plot. U.S. counterterrorism officials have linked one of the nation's most wanted terrorists to last year's thwarted plot to bomb the New York City subway system, authorities said Wednesday. Current and former counterterrorism officials said top al-Qaida operative Adnan Shukrijumah met with one of the would-be suicide bombers in a plot that Attorney General Eric Holder called one of the most dangerous since the 9/11 terror attacks. Federal prosecutors in Brooklyn have named Shukrijumah in a draft terrorism indictment but on Wednesday the Justice Department was still discussing whether to cite his role. Some officials feared that the extra attention might hinder efforts to capture him. Shukrijumah's involvement shows how important the subway bombing plot was to al-Qaida's senior leadership. Intelligence officials believe Shukrijumah is one of the top candidates to become al-Qaida's next head of external operations, the man in charge of planning attacks worldwide. Current and former counterterrorism officials discussed the case on condition of anonymity because they were not authorized to speak about it.

Reuters:

• Medicare Looking at Dendreon(DNDN) Cancer Vaccine. The U.S. Medicare program said on Wednesday it was evaluating data on Dendreon Corp's (DNDN) prostate cancer therapy to decide whether to cover the product for seniors nationwide. Shares of the company fell 23 percent to $25 on the news after closing at $32.33 on Nasdaq. The Centers for Medicare & Medicaid Services (CMS) said it had opened a national coverage analysis after receiving inquiries following the approval of Dendreon's Provenge therapy in April. Nationwide Medicare coverage could help make the product successful, while a denial could sharply hit sales.
• AIG(AIG) CEO Threatened to Quit if Chairman Stays - Report. American International Group Inc Chief Executive Robert Benmosche said last week he would quit unless Chairman Harvey Golub leaves the company, Bloomberg reported on Wednesday.
• Environmental Groups Seek Halt to BP(BP) Oil Burnings to Save Turtles.
  

Financial Times:

• EU Agrees To Tough New Bonus Guidelines. European Union lawmakers and member states backed the toughest restrictions on bankers bonuses seen so far on Wednesday, sowing confusion across an already jittery financial services sector. Under legislation expected to pass the European parliament next week, between 40 and 60 per cent of bonuses would have to be deferred for three to five years and half the upfront bonus would have to be paid in shares or in other securities linked to the bank’s performance. As a result, the cash portion would be limited to between 20 per cent and 30 per cent, far tighter the limits currently used by most members of the 27-nation bloc. The agreement caught bankers and regulators by surprise and left them scrambling to figure out how the rules would work. The UK Financial Services Authority, which already has a remuneration code in place, said it was studying how the proposed directive would affect its practices.

Telegraph:

• Miners Wary of Super Tax as Talks With Australian Government Continue. Talks between the Australian government and the world's largest mining companies will continue into the next few days after both sides failed to reach an agreement on a proposed 40pc tax on miners' profits.
• Angela Merkel's Political Woe Punctures Market Euphoria. Fears over the political survival of German Chancellor Angela Merkel sent tremors through European markets late on Wednesday, puncturing the near euphoric mood after a crucial funding operation by the European Central Bank eased doubts over bank stress.

Financial Times Deutschland:

• Bundesbank President Axel Weber supports the German banking industry's opposition to the "full and uncontrolled" disclosure of the results of stress tests.

Yonhap News:

• U.S. Repeats Calls on China to Condemn N. Korea for Ship Sinking: State Dept. The United States Wednesday repeated calls on China to join forces in condemning North Korea at the U.N. Security Council for the torpedoeing of a South Korean warship in March. "The president framed this, we think, appropriately so," State Department spokesman Philip Crowley said. "We continue our discussions with China and other countries in New York, but we think at this point there's little ambiguity and, we believe the international community needs to send a direct and clear message to North Korea." Crowley was responding to the Chinese Foreign Ministry, which has said China's position on the sinking of the Cheonan is "fair and justified" and denounced President Obama for his remarks on China's "willful blindness" to North Korea on the Cheonan issue in Toronto Saturday while meeting with South Korean President Lee Myung-bak on the margins of the G-20 economic summit.

China Business News:

• The basic direction of China's monetary and fiscal policy won't change this year, Citing Fan Jianping, head of the economic forecast department of the State Information Center.

Evening Recommendations
Citigroup:

• Reiterated Buy on (WRI), target $24.

Piper Jaffray:

• Rated (JBHT) Overweight, target $42.
• Rated (WERN) Overweight, target $28.
  

Night Trading

• Asian equity indices are -1.75% to -.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 142.50 -4.5 basis points.
• Asia Pacific Sovereign CDS Index 138.25 -1.75 basis points.
  
• S&P 500 futures -.68%.
  
• NASDAQ 100 futures -.66%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (STZ)/.35

Economic Releases
8:30 am EST

• Initial Jobless Claims for last week are estimated to fall to 455K versus 457K the prior week.
• Continuing Claims are estimated to rise to 4550K versus 4548K prior.
  

10:00 am EST

• ISM Manufacturing for June is estimated to fall to 59.0 versus a reading of 59.7 in May.
• ISM Prices Paid for June is estimated to fall to 70.0 versus a reading of 77.5 in May.
• Construction Spending for May is estimated to fall -.8% versus a +2.7% gain in April.
• Pending Home Sales for May is estimated to fall -14.2% versus a +6.0% gain in April.
  

Afternoon

• Total Vehicle Sales for June are estimated to fall to 11.4M versus 11.64M in May.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Treasury's Geithner speaking, Challenger Job Cuts report, weekly EIA natural gas inventory report and the (GIS) Investor Day could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by commodity and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.