Tuesday Watch

Evening Headlines
Bloomberg:

• High-Yield Debt's Best Rally Since March Entices Borrowers: Credit Markets. High-yield, high-risk bonds are rallying the most in four months on speculation defaults among the neediest borrowers will diminish as profits exceed forecasts. Returns of 2.99 percent this month are prompting a surge in U.S. speculative-grade offerings with Advanced Micro Devices Inc., the second-largest maker of microprocessors, and Vantage Drilling Co. leading $12.5 billion of July issuance, according to data compiled by Bloomberg. Junk bonds returned 1.3 percent last month after losing 3.52 percent in May, Bank of America Merrill Lynch index data show. The U.S. speculative-grade default rate will decline to 2.7 percent by the end of the year, from 6.3 percent at the end of the second quarter, according to Moody’s Investors Service. Credit-default swaps on 14 of the world’s biggest banks, including JPMorgan Chase & Co. and Deutsche Bank AG, fell to a 12-week low, according to an index of swaps compiled by Credit Derivatives Research LLC. Credit Derivatives Research’s Counterparty Risk Index of the largest banks fell 7 basis points to 126, the lowest since 124 on May 3. The benchmark has dropped 16.5 basis points the past week. The cost of protecting corporate bonds from default in the U.S. and Europe fell to the lowest in more than 10 weeks, with the Markit CDX North America Investment Grade Index of credit- default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, falling 3.42 basis points to 103 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings, dropped 5.61 to 106.69. Spreads on emerging-market bonds tightened 6 basis points to 279 basis points, according to JPMorgan index data, after ranging from as low as 229 on April 15 to as high as 359 on May 25.
• Nose Sniff Technology Enables Paralyzed to Navigate Wheelchairs, Write. A device operated by nose sniffs allows disabled people, quadriplegics and those “locked in” by complete paralysis to use computers or operate wheelchairs, an Israeli study showed. Quadriplegic patients were able to navigate wheelchairs as well as healthy people who used the device created by the researchers, according to the study published today in the Proceedings of the National Academy of Sciences. Two people in the study who were completely paralyzed with intact mental function used the technology to communicate by choosing letters on a computer screen to write. The device may be among the tools to help paralyzed people communicate and get around, said study author Noam Sobel. It may be cheaper than products on the market for the severely disabled such as eye-tracking devices that cost as much as $20,000, he said.
• Credit Ratings Don't Reflect China's Local Government Risks, Dagong Says. Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said. Local government-backed borrowers shopped around for the best rankings from Chinese ratings companies, Dagong Chairman Guan Jianzhong said yesterday during a Bloomberg Television interview in Beijing. “Whoever gives them a better rating gets the business,” he said. “Local governments are very powerful. The current system doesn’t reflect all the risks.” Local governments in China set up financing vehicles to fund projects such as highways and airports with bonds and loans, due to limits on their ability to directly borrow money. There are concerns Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local infrastructure projects, according to a person with knowledge of data collected by regulator the China Banking Regulatory Commission. “This is very dangerous,” Guan said. “If you look at the financial crisis, it was caused by an accumulation of credit risks. When it gets to a certain point, then a crisis breaks out.”
• Afghan, Pakistan Leaders Warned by U.S. in Advance of Leaked War Documents. Afghan, Pakistani and Indian officials received advance notice from the U.S. that media in the U.S. and Europe were about to publish leaked American military documents about the war in Afghanistan, State Department Spokesman Philip J. Crowley said. Afghan President Hamid Karzai and Pakistani President Asif Ali Zardari were briefed by the U.S. ambassadors in their countries, and senior Pakistani officials met two nights ago with Admiral Michael Mullen, the top U.S. military commander, Crowley told reporters today in Washington. “We wanted to make sure they understood the context under which these documents would be released, that this was the result of a leak of classified documents, not sanctioned, authorized by the United States government,” Crowley said. “The briefing was, in fact, to help them understand that this represents a crime and that we are investigating it.”
• Basel Committee Softens Bank Capital Rules, Sets Leverage Cap. The Basel Committee on Banking Supervision softened some of its proposed capital and liquidity rules while introducing new restrictions on how much lenders can borrow in order to rein in their risk-taking. The panel agreed yesterday to allow certain assets, including minority stakes in other financial firms, to count as capital, according to a statement. The committee set a leverage ratio to apply to banks globally for the first time, which could become binding by 2018, pending further adjustments to the method of calculating banks’ assets. “Even after all the compromises, the banks aren’t off the hook from tighter capital and liquidity rules,” said Frederick Cannon, chief equity strategist at New York-based Keefe, Bruyette & Woods. France and Germany have led efforts to weaken rules proposed by the committee in December, concerned that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold, according to bankers, regulators and lobbyists involved in the talks. The U.S., Switzerland and the U.K. have resisted those efforts.
• California Mayor Regrets 'Indefensible' Salaries as Records Are Subpoenaed. The mayor of Bell, California, whose municipal pay records have been subpoenaed by Attorney General Jerry Brown, apologized for what he called the city’s “indefensible administrative salaries.” Oscar Hernandez, paid almost $100,000 as part-time mayor of the 38,000-population town about 10 miles (16 kilometers) south of Los Angeles, said he’ll serve the remainder of his term, ending in March, without pay, according to a statement today. Brown said he’s subpoenaed hundreds of employment, salary and contract records from the city of Bell, whose manager had an annual salary of almost $800,000 and resigned last week.
• Filmmaker Stone Apologizes for Remark on Holocaust, Jewish Media Influence. Filmmaker Oliver Stone apologized for remarks about the Holocaust and Jewish media influence that were criticized as being anti-Semitic. The apology followed comments Stone made to the Sunday Times of London. In an interview promoting a new documentary, Stone also discussed a project in the works, “Secret History of America.” He told the Times “Hitler was a Frankenstein, but there was also a Dr. Frankenstein. German Industrialists, the Americans and the British. He had a lot of support. Hitler did far more damage to the Russians than the Jewish people.” Stone also discussed in the article what he called “Jewish domination of the media,” and said Israel “f***** up United States foreign policy for years.”
• BP(BP) Asset Sales Win 58% Premium, Show Potential for More Deals. Robert Dudley, poised to be appointed as BP Plc chief executive officer today, may speed asset sales after the company got a 58 percent premium for the $7 billion disposal of oil fields to Apache Corp.
• Plosser Says Weaker Data Don't Yet Justify More Fed Stimulus. Federal Reserve Bank of Philadelphia President Charles Plosser said it’s too soon for the Fed to bolster record U.S. monetary stimulus in response to slower- than-forecast gains in economic growth and employment. “Talk of new efforts to stimulate the economy are premature right now,” Plosser said today in an interview with Bloomberg News in Washington. “I don’t think the data have been sufficiently compelling one way or another.”

Wall Street Journal:

• Course of Economy Hinges on Fight Over Stimulus. Eighteen months after President Barack Obama administered a massive dose of spending increases and tax cuts to a weak economy, a brawl has broken out among economists and politicians about whether fiscal-stimulus medicine is curing the illness or making it worse.
  
• Afghan War Leak Sets Off Effort to Control Damage.
• Reports Bolster Suspicion of Iranian Ties to Extremists. Cooperation among Iran, al Qaeda and other Sunni extremist groups is more extensive than previously known to the public, according to details buried in the tens of thousands of military intelligence documents released by an independent group Sunday.
• Rent a Leaf: Enterprise Buys a Fleet. Purchase of 500 of Nissan's Electric Cars Will Make Them Available in Eight Cities.
• China Fuels Trade Tension With Policies, Report Says. China's drive to support domestic technologies—which has already resulted in high-profile complaints by foreign businesses over government purchasing policies—is likely to continue to cause trade disputes and political tensions with the U.S., says a new report from the U.S. Chamber of Commerce.
• Supply of Homes Set to Grow. Sales of new homes are near 47-year lows, yet the supply of new and existing homes is expected to grow in the months ahead as construction ramps up and a wave of foreclosed homes hits the market.

Bloomberg Businessweek:

• Banks Charge States Millions in Debt Binge to Fix Subprime Bust. “You're basically rewarding those who got you into the mess,” Arizona's Treasurer Dean Martin said in an interview.
• Dow Erasing '10 Loss as S&P 500 Tops Moving Average Fuels Bulls. The rally that erased the Dow Jones Industrial Average’s 2010 loss yesterday and carried the Standard & Poor’s 500 Index above its 200-day average spurred optimism among chart analysts and investors who track earnings. The Dow advanced 1 percent to wipe out an annual slump that reached 7.1 percent on July 2 after U.S. companies beat analysts’ profit estimates at twice the rate they trailed them in the second quarter. The S&P 500 rose above its mean price in the past 200 days for the first time in more than a month, after surging 8.2 percent since June 30. Bullish signals are increasing in equities after the S&P 500 lost 13 percent in May and June, its biggest retreat since the bull market began in March 2009. Projections for the fastest S&P 500 income growth since 1988 are helping investors overcome concern that the economy will sink into its second recession in three years.

CNBC:

• What Financial Reform Means for Municipal Bonds.
• US Senate Democrats Battling for Viable Energy Bill. Senate Majority Leader Harry Reid hopes to unveil his pared-back U.S. energy bill on Tuesday that focuses on reforming offshore oil drilling but Republicans were quick to dismiss its chances of passing.

Business Insider:

• Suddenly, The Obama Administration Loves Elizabeth Warren For The Consumer Financial Protection Agency.
• Dennis Gartman Has Quit Being A Gold Bull.
• Brazil Might Be Overheating.
  

CNNMoney:

• Senator Evan Bayh(D-IN): How Financial Reform Could Impede Growth. There's still a lot of unfinished business, he says. And the law's mark in history will largely depend on how financial regulators apply the new rules. Fortune caught up with Bayh to get his thoughts on the new law as the government's focus shifts to the monumental task of implementing it. Here's an edited transcript.

Forbes:

• Talk On High-Speed Trading Hacks Pulled From Security Conference. Just as important as what's revealed each summer at the Black Hat hacker confab in Las Vegas may be what isn't. Among the talks conspicuously absent from this year's schedule: a presentation exposing security vulnerabilities in banks' high-speed trading systems.

cnet:

• Is Yahoo Japan Poised to Switch to Google(GOOG) Search? In what would be a stunning blow to the massive search alliance between Microsoft and Yahoo, Google is apparently zeroing in on a deal to grab the algorithmic search business for Yahoo Japan, said several sources.

Boortz:

• Decentralizing Healthcare ... In the UK? The passage of ObamaCare fulfilled - or came close to fulfilling - two liberal dreams: It was a big step toward the liberal dream of a government-run healthcare system and it expanded the role of government in hopes of creating a "centrally-planned economy." While we're heading hell bent for leather toward a health care system run by our wonderful federal government, Great Britain is headed in entirely the opposite direction. There is a reason for this - government-run healthcare leads to increased cost, less quality care and ... ta da! ... RATIONING! Coupled with a budget/deficit crisis, the infrastructure of its national health system had become so cumbersome and abysmal that the UK is now ready to dismantle it.

Rasmussen Reports:

• Generic Congressional Ballot: Republicans 46%, Democrats 36%. Republican candidates now hold a 10-point lead over Democrats on the Generic Congressional Ballot for the week ending Sunday, July 25, the widest gap between the two parties in several weeks. A new Rasmussen Reports national telephone survey finds that 46% of Likely Voters would vote for their district's Republican congressional candidate, while 36% would opt for his or her Democratic opponent. Eighty-six percent (86%) of Republicans back their party's candidate, while 74% of Democrats support the candidate of their party. Voters not affiliated with either party prefer the Republican candidate by a 44% to 23% margin.

Politico:

• Rangel Stands His Ground. Facing an ethics trial that may end his 40-year congressional career, Rep. Charles Rangel grew emotional Monday, saying the investigation has “been a very traumatic experience for me and for my family and my constituents.” But it may only get worse for Rangel in the coming days. The House ethics committee will release the detailed results of its Rangel probe Thursday, and a special investigative subcommittee has already concluded there is “substantial reason to believe” that he broke House ethics rules.

Reuters:

• NYSE Short Bets Eased in Mid-July as Market Rose. Bearish bets against stocks on the New York Stock Exchange decreased in mid-July, the exchange said on Monday, suggesting short investors took money off the table as the stock market rallied. Short interest fell 1.2 percent to about 13.76 billion shares as of July 15, compared to a revised 13.93 billion shares as of June 30. The June figure was initially reported as 14.08 billion shares. The short interest on NYSE is equal to 3.6 percent of the total shares outstanding, the exchange said. On the Nasdaq, short interest edged up, suggesting investors remain slightly bearish on companies on the tech-heavy index. Short bets rose 0.4 percent to about 7.42 billion shares, compared to 7.39 billion shares at the end of June. This is 2.99 days' average daily volume, compared with an average of 3.70 days for the previous reporting period, the exchange said.
• Veeco(VECO) Q2 Profit Outpaces Street; Sees Strong Q3. Chip equipment maker Veeco Instruments Inc (VECO) posted a second-quarter profit that surpassed Wall Street expectations, helped by strong light emitting diode (LED) and solar orders, and forecast a strong third quarter. The company, which makes equipment used to produce LEDs, solar cells and data storage, expects third-quarter earnings of $1.23 to $1.43 per share, excluding items, on revenue of $290 million to $315 million. Analysts were looking for third-quarter earnings of $1.05 a share, excluding items, on revenue of $282.6 million, according to Thomson Reuters I/B/E/S.
• Advent Software(ADVS) Q2 Beats Consensus; Ups 2010 Revenue View. Advent Software Inc (ADVS) posted a better-than-expected quarterly profit on strong bookings and revenue from its license, maintenance and other recurring revenue, and raised its full-year revenue outlook. The company, which makes software to automate data and work flows, now expects full-year revenue of $277 million to $281 million, compared with its previous forecast of $272 million to $280 million.

Financial Times:

• Deutsche Bank Yields Over Sovereign Holdings. Deutsche Bank AG will today disclose details of its sovereign debt holdings after European regulators criticized it and other German banks for failing to reveal the information for European stress tests.

Telegraph:

• BP's(BP) Russian Partners Back Bob Dudley to Replace Tony Hayward as Chief. BP's billionaire partners in Russia indicated they are willing to back their old adversary Bob Dudley as its new chief executive, as the oil giant's board met on Monday night to finalise a radical shake-up. The endorsement will be a boost to BP, as it attempts to draw a line under its Gulf of Mexico oil spill by on Tuesday announcing the departure of chief executive Tony Hayward and revealing hefty impairment charges of up to $25bn (£16bn). The board is expected to say that Mr Hayward will leave on October 1 to be replaced by the American managing director now in charge of BP's spill response unit.
• Spain Shines on Stress Test, Germany Flunks. Europe's stress tests for banks have greatly reduced pressure on Spanish lenders but have so far done little to ease broader strains in the interbank credit markets. Three-month Euribor rates have crept up to a one-year high of 0.889pc. The "Libor-OIS spread", watched as a key gauge of stress in the system, also nudged up to 26 basis points. The refusal of some Landesbanken and German lenders to reveal exposure to EMU sovereign debt has raised suspicions that they have something to hide. Credit default swaps measuring bond risk jumped from 140 to 150 points for HSH Nordbank, with smaller rises for LB Berlin (154), West LB (127), Norddeutssche LB (125) and Deutsche Postbank (121). If the original purpose of the tests was to unlock interbank lending and head off an incipient credit crunch, the jury is still out. A report last week by the International Monetary Fund said eurozone lending had "nosedived" during the global crisis and "has yet to recover". The IMF said this was asphyxiating small business, which generates most job growth. As analysts sift through the wealth of new detail from the tests, they are baffled by the chaotic criteria. "We have a ludicrous worst-case scenario that Greek house prices fall by 2pc in 2011: when you first read it you think their must be a typo," said David Owen from Jefferies Fixed Income. Austria's worst-case is a 2.7pc rise in house prices, or zero for Poland, and -2pc for Italy. Mr Owen said these assumptions would be demolished by a serious recession. Yet the tests assume that all eurozone states would contract at the same rate in a downturn. In reality, Club Med states and Ireland would almost certainly fare worse since they are already coping with the triple effects of debt-deleveraging, lost competitiveness, and fiscal tightening. Spain was rewarded by the markets for the high quality of its tests, which cover 95 of its banks and include a 28pc fall from peak-to-trough for finished houses, and 61pc for development land. Yields on 10-year Spanish bonds dropped 11 basis points to 4.24pc on Monday, outperforming the eurozone. The cost of bond insurance fell for Spanish Cajas. Alastair Whitfield from RBC said a large number of lenders would have failed if the Tier 1 capital ratio had been raised from 6 to a more credible 7, including Deutsche Post Bank, Monte dei Paschi, Espirito Santo, Piraeus, and Allied Irish. Credit Suisse said the entire Greek banking system and a string other lenders would have failed if "core" Tier 1 had been used, disallowing hybrid capital. At least the results provide analysts with a wealth of data on Europe's banks, which is a key step to restoring trust. "We can all conduct our own stress tests now," said Mr Owen.

Yonhap News:

• LG Display Co. plans to invest $844 million by 2012 to increase liquid-crystal-display production in South Korea, citing the company.

Economic Information Daily:

• China's 77 largest steelmakers' profit fell 38% in June on a month earlier because of lower prices, citing an unidentified China Iron & Steel Association official.

Evening Recommendations
Citigroup:

• Reiterated Buy on (FTI), target raised to $72.
• Reiterated Buy on (ACL), target raised to $181.
  

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 113.0 -5.0 basis points.
• Asia Pacific Sovereign CDS Index 113.75 -1.25 basis points.
  
• S&P 500 futures -.21%.
  
• NASDAQ 100 futures -.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PCAR)/.21
• (BEAV)/.37
• (ODP)/-.17
• (VLO)/.70
• (LMT)/1.78
• (ABC)/.49
• (LXK)/.93
• (CMI)/.89
• (X)/.66
• (LLL)/1.93
• (DD)/.94
• (UA)/.03
• (CEPH)/1.78
• (JEC)/1.62
• (IGT)/.21
• (PNRA)/.84
• (BRCM)/.62
• (ILMN)/.22
• (BXP/.99
• (CBG)/.09
• (NSC)/.99
• (JLL)/.57
• (AFL)/1.33
• (AET)/.73
• (BWLD)/.42
• (OXY)/1.35
• (DPZ)/.28

Economic Releases
9:00 am EST

• The S&P/CaseShiller 20 City Home Price Index for May is estimated to rise +.2% versus a +.44% gain in April.

10:00 am EST

• Consumer Confidence for July is estimated to fall to 51.0 versus a reading of 52.9 in June.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Richmond Fed Manufacturing Index, $38 Billion 2-Year T-Note Auction, weekly retail sales reports, ABC consumer confidence reading, Keefe Bruyette Woods Community Bank Investor Conference, (BEC) Analyst Event and the (IVZ) Investor Day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by shipping and financial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.