Wednesday Watch

Evening Headlines
Bloomberg:

• Wall Street Fix Seen Ineffectual by Four of Five in U.S. Americans harbor doubts that a financial-regulation bill about to be passed by Congress will do what President Barack Obama says it will: help avoid another crisis and make their finances safer. Almost four out of five Americans surveyed in a Bloomberg National Poll this month say they have just a little or no confidence that the measure being championed by congressional Democrats will prevent or significantly soften a future crisis. More than three-quarters say they don’t have much or any confidence the proposal will make their savings and financial assets more secure. A plurality -- 47 percent -- says the bill will do more to protect the financial industry than consumers; 38 percent say consumers would benefit more. “Banks and the government are making out, not the ordinary person,” says Lenore Critzer, a 70-year-old retiree and poll participant who lives in Nelson, Ohio, about 40 miles from Cleveland. “We’re going to have another crisis and worse.” Skepticism about the financial bill, which may be approved this week, cuts across political party lines. Seven in 10 Democrats have little or no confidence the proposals will avert or significantly lessen the impact of another financial catastrophe; 68 percent doubt it will make their savings more secure. Almost half of those polled say banks will make few if any changes in the way they act in response to the overhaul; another 22 percent expect only minor changes. Democrats have greater optimism that consumers will benefit more than the financial industry from the proposals, with 51 percent saying that will be the result. Just 28 percent of Republicans and 35 percent of independents agree. Most Americans reject any new government rescues of financial institutions, such as arranged for New York-based Citigroup Inc. and insurer American International Group Inc., according to the poll. Almost 60 percent of respondents say the $700 billion plan that Congress passed in late 2008 to help the banks -- the Troubled Asset Relief Program -- was an unnecessary bailout. “The mood of the American public is highly skeptical toward government and its ability to do right by the average person,” says J. Ann Selzer, president of the polling firm.
• Bonds In Longest Rally Since March, Sales Soar, Swaps Dive: Credit Markets. Debt investors are signaling renewed confidence in the global economy, snapping up new securities from companies at the fastest pace since March and driving corporate bonds to their longest rally in four months. Relative yields on the more than 8,500 bonds in Bank of America Merrill Lynch’s Global Broad Market Corporate Index fell for the fourth straight day, the longest stretch since the six days ended March 11. “There is optimism over increased stability in Europe, uncertainty over financial regulation is ending and investors are now hoping for a repeat of 2009 with the European stress tests.” The extra yield investors demand to own company bonds instead of government debt fell 2 basis points to 189 basis points, the narrowest spread since May 24, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Worldwide corporate bond issuance rose to $73.3 billion this month from $57.5 billion in the same period of June, according to data compiled by Bloomberg. That’s the most since $148.8 billion of debt was sold in the corresponding period of March.
• U.S. Corporate Credit Risk Index Falls to the Lowest Since May. A benchmark indicator of corporate credit risk in the U.S. fell to a six-week low as corporate earnings beat expectations and stocks rallied. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 4.7 basis points to a mid-price of 107.2 basis points as of 5:12 p.m. in New York, according to Markit Group Ltd. Swaps on JPMorgan Chase & Co. and American Express Co. dropped, according to data service provider CMA. The Markit CDX index, which typically falls as investor confidence improves and rises as it deteriorates, has declined eight straight sessions to its lowest since a level of 106.8 basis points on May 31. Swaps on JPMorgan fell 5.3 basis points to 90.7, and American Express declined 4.1 basis points to 90.3, CMA data show. Contracts on American International Group Inc. eased 21.7 basis points to 328, and those on Citigroup Inc., which reports second-quarter earnings on July 16, decreased 6.1 basis points to 159.9, CMA data show. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 0.5 basis point to 116.1, and the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped 17.2 basis points to 516.3, Markit prices show. “If you look at the different indices across the board, there’s a much, much better tone,” said Anke Richter, a credit strategist with Conduit Capital Markets in London. “People are feeling a little bit more confident about the market. Overall sentiment has improved.”
• Default Rate Shows Junk Bonds Cheapest in a Year. High-yield bonds are the cheapest since March 2009 as surging profits drive down the corporate default rate to the lowest in more than two years. The average junk bond yields 697 basis points more than benchmark rates, according to Bank of America Merrill Lynch’s Global High-Yield Index. That’s 271 basis points more than the spread implied by the pace at which companies failed to meet their commitments in the second quarter, according to Martin Fridson, a global credit strategist at BNP Paribas Asset Management. The quarterly default rate of 0.47 percent is the lowest since the last three months of 2007, according to Fridson’s analysis of Moody’s Investors Service data. “On a risk-reward basis, high-yield bonds are priced very attractively,” New York-based Fridson said. “They’re a buy at this point.” The gap between the market-based spread and that implied by defaults climbed to 298 basis points at the end of June, according to Fridson. The gap was inverted as recently as January.
• U.S. Chamber Asking Obama to Cut Taxes, Sell Mineral Rights. The U.S. Chamber of Commerce, citing the threat of a double-dip recession, is asking President Barack Obama to curb new regulations and sell some government-owned resources to raise revenue. The Chamber, the biggest lobbying group for U.S. business, plans to release a letter to Obama tomorrow that will also urge him to “make clear” he will extend tax cuts that are set to expire and lower taxes on corporations, said Stan Anderson, a managing director at the Chamber’s Campaign for Free Enterprise. The letter will be discussed at a “jobs summit” the group will hold in Washington. “We are running a reasonable risk of going back into a recession,” Anderson said in an interview. “As you wear off the artificial spending of the stimulus, you are seeing weakening in job growth.” The Chamber, which spent more than $30 million lobbying this year, believes the “overhang” of pending health, financial, environmental and other regulations is stifling business spending and curtailing the economic recovery, Anderson said. Anderson said the Chamber will detail proposals to raise revenue without increasing individual taxes, such as reinstituting a tax holiday on corporations’ overseas income. The Chamber also will urge sales of minerals and timber on government land. The Chamber wants Obama to support continuing the tax cuts enacted under President George W. Bush in 2001 and 2003.
• Rio Tinto(RTP) Approves Spending to Increase Australian Iron Ore Output by 50%. Rio Tinto Group, the world’s second- largest iron ore producer, approved $200 million in spending to start expanding its Pilbara iron ore operations in Australia by 50 percent. The money will be used to start dredging work ahead of the development that will take annual capacity to 330 million metric tons by 2016, the London-based company said today in a statement. Rio now has capacity of 220 million tons a year.
• Obama AIDS Plan Adds $30 Million to Cut Infections, Expand Access to Drugs. The White House released the first comprehensive U.S. domestic strategy against AIDS today, aiming to reduce the number of cases by 25 percent in five years and expand early access to medicines. The National AIDS Strategy fulfills President Barack Obama’s campaign pledge to unify efforts among federal agencies and state partners. It will be implemented with $30 million from the Patient Protection and Affordable Care Act, said Kathleen Sebelius, secretary of the U.S. Department of Health and Human Services. The policy will increase prevention efforts among gay men and blacks -- groups with the highest rates of new HIV infections -- and get medicines to 85 percent of patients within three months of diagnosis, according to the plan.
• Oil Imports Dropping From Record as China Curbs Refining: Energy Markets. Chinese oil imports may decline from this month’s record high as waning energy demand reduces refining profits. Monthly imports may decline at least 19 percent to 18 million metric tons in the second half, from a record 22.3 million tons in June, according to Wang Aochao, a former Exxon Mobil Corp. marketing official who heads China energy research at UOB-Kay Hian Ltd. in Shanghai. Refining profits at state- owned China Petroleum & Chemical Corp., or Sinopec, sank almost 90 percent from May to June, a company official said. Shipments of oil to China, the world’s second-biggest energy consumer after the U.S., are poised to slow as Premier Wen Jiabao damps growth to curb inflation. “Slowing demand from China would put a lot of downward pressure on crude and reinforce concerns among traders,” said Victor Shum, a senior principal at energy consultants Purvin & Gertz Inc. in Singapore. “It’s going to raise alarm bells.” Sinopec may cut processing volumes by more than 100,000 tons to 17.5 million tons in July, or 4 million barrels a day, according to a company official, who declined to be identified because of internal rules. The Beijing-based company supplies about 60 percent of China’s fuels. “We see refineries’ utilization rate falling from May’s record as economic expansion drops faster than market expectations,” said UOB-Kay Hian’s Wang. “Right now we don’t see any turning point for the oil-processing rate to pick up.” “There is definitely an oversupply of fuel in the wholesale and retail markets,” said Jay Chi, chief analyst at Guangzhou Twinace Petroleum & Chemical Corp. “Inventories are high and so is the pressure to sell.”
• Arrogance Surplus Leads to Government Excesses: Amity Shlaes.
  

Wall Street Journal:

• Financial Overhaul Bill Hits Farmers.
• Fed Sees Slower Growth. Officials Debate How to Respond if Recovery Falters; Softer 2nd Half Is Seen. Federal Reserve officials, who are likely to reveal Wednesday a cut in their assessment of the growth outlook, are divided on how aggressively the central bank should act if the economy slows further. Fed officials still expect the U.S. economy to keep growing. But an updated forecast to be released Wednesday afternoon with the minutes of the Fed's late-June policy meeting is likely to show that officials have trimmed their second-half forecasts—as have many private forecasters. One topic under debate is the possibility that today's already-low inflation may turn into a debilitating bout of deflation, a broad drop in prices across the economy.
• Employer Groups Criticize Mine-Saftty Bill. Employer groups criticized a mine-safety bill Tuesday that would strengthen civil and criminal penalties for companies, arguing that the bill would lead to higher costs, increased litigation and actually hinder safety improvements at the nation's mines.
• Talks for Motorola(MOT) Division Heat Up. Nokia Siemens Networks is in talks to buy the telecom-equipment arm of Motorola Inc., people familiar with the matter said, a deal that would hasten the dismantling of the U.S. technology company.
• FedEx(FDX) CEO Takes Stock of Alternative Energy, Obama and China. Frederick W. Smith, chairman and chief executive of FedEx Corp. sat down in late June with Wall Street Journal reporter Jennifer Levitz at the company's headquarters in Memphis, Tenn., to talk about the U.S. economy, his new fuel-efficient planes (please see accompanying article) and other subjects ranging from China to President Barack Obama to whether cargo jets will ever fly without pilots. The following is a condensed transcript of that interview:
• McAfee(MFE) to Launch Identity Protection Service for Consumers. Computer security vendor McAfee Inc. (MFE) on Wednesday plans to begin selling a new service that will monitor online records for evidence of consumer identity theft.
• Letting the Machines Decide. New Wave of Investment Firms Look to 'Artificial Intelligence' in Trade Decisions. Wall Street is notorious for not learning from its mistakes. Maybe machines can do better. That is the hope of an increasing number of investors who are turning to the science of artificial intelligence to make investment decisions.

Bloomberg Businessweek:

• Platinum Faces 'Major Reversal,' Jones Says: Technical Analysis. Platinum prices may face months of declines, possibly losing more than $200 an ounce with a “major reversal” under way, according to a technical analysis from Commerzbank AG that cited trading patterns. Platinum, used in auto catalysts, has fallen about 13 percent since touching a 21-month high of $1,756.25 an ounce on April 27. The metal traded today at $1,533 an ounce after rebounding 2 percent last week, the first weekly climb in three. “Once this minor corrective rebound has run its course, we look for downside pressure to resume,” Karen Jones, a London- based technical analyst, wrote in a report. A fall to $1,442 “would confirm that a major reversal lower has been taking place,” Jones wrote. The 200-week moving average at $1,383 is “then coming to the fore again,” Jones said.

CNBC:

• Intel(INTC) Reverses Loss, Delivers Rosy Sales Forecast. Intel shares jumped sharply as its earnings easily outpaced Wall Street's forecasts Tuesday, and the computer chip maker gave a sales forecast for the current quarter that also was higher than expected. The world's biggest maker of computer chips said it benefited from a strengthening computer market and more sophisticated factories. Intel earned 51 cents a share in the second quarter, against a loss of 7 cents a share this time last year. Revenue swelled to $10.8 billion, up from $8.024 billion last year. A group of equity analysts who follow Intel expected on average for the company to report a profit of 43 cents a share, according to Thomson Reuters. Intel's revenue forecast of $11.20 billion to $12 billion for the third quarter is higher than analysts' projections for $10.92 billion. Intel also raised its profit forecast. The company now expects gross profit margin—a key measure of a company's ability to control costs—of 64 percent to 68 percent of revenue. Its previous forecast was for 62 percent to 66 percent. "I'd expect that the enterprise market continues to be strong into the third quarter," Stacy Smith, Intel's chief financial officer, told Reuters. Intel shares leaped about 8 percent in extended trading Tuesday. "They beat on the top line, they beat on the bottom line, the gross margin is through the roof. It couldn't be better. I think Intel is very underpriced. And the key reason everybody missed on it is—as they've been talking about for eight months—cloud infrastructure is just started," said Trip Chowdhry, an analyst at Global Equities Research. "When we speak to our contacts who are IT purchasers and IT suppliers, we are not seeing any slowdown. Because Europe and Asia are investing in technology." Gleacher & Co analyst Doug Freedman said that new products in Intel's data center group, which makes chips for servers used by corporations, provided a big lift to Intel's top line. "Corporate spending for large server farms was much stronger than people expected," said Freedman.
  
• CNBC's Top States for Business 2010 - And the Winner is Texas. Texas reclaims the top spot from last year’s winner, Virginia, which slips to No. 2. Texas was last on top in 2008, and Virginia took the crown in the inaugural year of our study, 2007. That leaves Texas and Virginia dead even in the battle for bragging rights at two wins apiece. Rounding out the top five are No. 3 Colorado, No. 4 North Carolina, and No. 5 Massachusetts, which makes its first appearance among America’s Top States for Business.
  

IBD:

• Battle For Bandwidth Begins With The Ubiquitous Cell Phone Tower. That means demand for services from phone agnostics, like Boston-based American Tower (AMT), are growing.

Business Insider:

• Despite Being Broke, California Parks Dept. Wants to Buy Neverland Ranch for $100 Million.

Forbes:

• Intel(INTC) and the New Semiconductor Growth Cycle.

AppleInsider:

• Apple(AAPL) Retail Tells Employees Something Big Is On The Way. Apple is drumming up excitement amongst its retail employees, hinting this week that something revolutionary will soon be introduced within its international chain of brick-and-mortar shops. The news was shared with employees via an internal news bulletin, according to people familiar with the matter. However, details were scarce outside of text that teased the unknown product or service would be innovative enough to make a 'big' impact. According to those same people, the internal article text was supplemented by a collection of video clips that featured Apple Retail employees reciting phrases such as "It's coming!," and "It's going to be big!"

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 24% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-one percent (41%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).

Politico:

• Reid Warms to July Climate Vote. Senate Democratic leaders are set to roll the dice this month on a comprehensive energy and climate bill, including a cap on greenhouse gases from power plants, even though they don’t yet have the 60 votes needed to move the controversial plan. Senate Majority Leader Harry Reid (D-Nev.) confirmed Tuesday that he would gamble on the high-stakes legislation — much as he undertook health care and Wall Street reform — that for now remains in the rough-draft stage but that will soon be the subject of intense negotiations.
• Pelosi Rips Gibb's House Prediction. House Speaker Nancy Pelosi bashed White House Press Secretary Robert Gibbs Tuesday night, even as the president's top spokesman continued to backpedal from his assertion that Democrats could lose control of the House in the November election. The fusillade from Pelosi and other Democrats at a closed-door meeting escalated an already fiery clash between the White House and its own party in Congress. During the tense evening meeting, the speaker grilled the top White House aide in attendance, senior legislative affairs staffer Dan Turton, about the impact of Gibbs' comments.

USA Today:

• Starting Salaries of New College Graduates Drop 1.3%.
• Bailout Watchdog to Audit Obama Housing Program. The special inspector general for the financial bailout will examine how 10 states were selected for an Obama administration plan to provide $2.1 billion in assistance to areas hit by the housing bust.
  

Reuters:

• Expeditors(EXPD) Sees Strong Q2 Earnings; Shares Rise. Logistics company Expeditors International of Washington Inc (EXPD) said it expects to post better-than-expected second-quarter earnings on volume increase in its airfreight and ocean freight businesses, sending shares up 9 percent. For the second quarter, the company expects earnings of 38 cents to 40 cents a share. Analysts on average were expecting earnings of 30 cents a share, according to Thomson Reuters I/B/E/S.
• Wilmington Exec Sees Small Adviser 'Wipe Out'. New regulations, as well as competition from big banks, are putting the squeeze on small money managers. Peter "Tony" Guernsey, chief client officer at Wilmington Trust(WL) and a 39-year veteran in wealth management, told Reuters that smaller financial advisory firms face expensive technology upgrades to keep pace with compliance mandates. "This could wipe them out," said Guernsey, who joined Wilmington 12 years ago and until recently had served as head of national wealth management. Even well-known names such as Brown Brothers Harriman & Co, Rockefeller Financial and Bessemer Trust may forced to seek mergers with larger, more deep-pocketed partners, Guernsey said. Equally daunting: Guernsey said thousands of small firms that serve as outside investment advisers for big banks may see a decline in funds. Instead the big firms are offering more in-house funds that offer some fee advantages and greater control for customers. "There is a move toward proprietary funds," he said. In response to these trends, Guernsey said, more small outside shops may seek acquisitions by larger banks.
• Fed's Hoenig: Recovery on Track Despite Stumbles. A top Federal Reserve official said on Tuesday that the U.S. economic recovery is on track despite some setbacks and the central bank should take no additional actions to encourage economic growth. "I have not seen any recoveries that are perfectly straight lined," Kansas City Federal Reserve Bank President Thomas Hoenig told Reuters. "When you look at the long -run trend lines, I think the most likely outcome is for continued growth, and that's what we should act on." Hoenig, one of the Fed's most vigilant anti-inflation hawks, acknowledged that the U.S. economy was proving weaker than he had anticipated earlier this year. He said he has adjusted his forecast for 2010 growth down to the 2.5 percent to 3 percent range from above 3 percent.
• New Cap Test to Stem Gulf Oil Flow Delayed. BP Plc(BP) on Tuesday delayed a critical test that will determine if it can close a cap atop its ruptured Macondo well that has leaked oil into the Gulf of Mexico for the last 12 weeks.
• Japan Seeks 10% Cut in Spending to Curb Debt - Nikkei. Japan's government is looking to cut policy-related spending by 10 percent in next fiscal year's budget so that it can meet its spending targets, the Nikkei business daily reported. The government has set a cap of around 71 trillion yen ($800 billion) on policy-related spending and payouts to local governments but excluding debt servicing costs, in each of the three years from April 2011.
  
• Yum(YUM) Shares Fall on 2010 View, China Worries. Yum Brands Inc (YUM), parent of the KFC, Taco Bell and Pizza Hut chains, issued a disappointing full-year earnings outlook and said it expects labor costs to rise in its key China market, sending its shares down 3.2 percent. In the second half of 2010, Yum expects labor and commodity inflation in its China division, which contributes 35 percent of company profit. KFC China workers won a pay raise in June amid mounting unrest that is pushing up labor costs in the world's third-largest economy. Closely watched sales at established restaurants in China rose 4 percent during the quarter, in line with analysts' expectations.

Financial Times:

• Chicago Traders Launch New Derivatives Exchange. Five Chicago-based trading firms have joined forces with CME Group, the US futures exchange, to launch a new exchange that will offer trading in interest rate swap derivatives closely modelled on current over-the-counter (OTC) rate swaps, people familiar with the matter said. The new venture, called Eris Exchange, is designed to take advantage of the rapidly shifting competitive landscape in trading and clearing of derivatives amid sweeping financial regulatory reform of such markets. It is an attempt by Chicago, which pioneered exchange-traded financial derivatives in the 1970s, to seize the initiative from Wall Street dealers which are set to lose control of OTC derivatives trading under legislation that is being finalised in the US Congress. The legislation forces trading of swathes of OTC derivatives onto exchanges and “swap execution facilities” to boost transparency, and required that as many as possible be processed through clearing houses to reduce counterparty risk. The five firms are Getco, DRW Trading, Infinium Capital Management, Chicago Trading Company and Nico Trading. All are engaged in market-making in either equities and options and bonds. Some are the biggest names in so-called “high-frequency” trading, a form of rapid, computerised trading that has made inroads into derivatives as well as equities.
• Bank Teams Rush to Set Up New Funds. The hedge fund industry is seeing a rush of start-ups amid a series of high-profile spin-outs from the in-house trading teams at investment banks. In spite of one of the worst second-quarter performances for the industry on record, the new funds also are attracting strong backing from investors. The launches come as many of Wall Street and the City of London’s star traders look to take their leave before a tough new regulatory environment forces them out in the coming months. For the industry as a whole, the first quarter saw 254 funds launch, the largest quarterly number since the financial crisis began, according to Hedge Fund Research. While most have raised less than $50m, top prop-desk talent is attracting much more interest.

Telegraph:

• Spain 'relying on short-term funding' as councils go bust. A third of Spain's city councils are in dire straits and may be forced to suspend payments by the end of the year, replicating the woes in the US, where many states are bearing the brunt of fiscal tightening. More than 400 of the 8,000 councils across the country have stopped paying electricity, water and telephone bills, according to Spanish newspaper El Economista.

Nikkei:

• The Bank of Japan's policy board may increase its forecast for real gross domestic product growth in fiscal 2010 to the mid-2% level from 1.8%.

Evening Recommendations
Citigroup:

• Reiterated Buy on (AAPL), target $330.
• Reiterated Buy on (INTC), boosted estimates, raised target to $32.
• Reiterated Buy on (LM), target $42.
  

Oppenheimer:

• Rated (MDT) Outperform, target $48.
• Rated (LIFE) Outperform, target $60.
  

Night Trading

• Asian equity indices are +.75% to +1.5% on average.
• Asia Ex-Japan Investment Grade CDS Index 122.5 -5.5 basis points.
• Asia Pacific Sovereign CDS Index 121.0 -4.5 basis points.
  
• S&P 500 futures +.74%.
  
• NASDAQ 100 futures +1.19%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JTX)/1.03
• (LSTR)/.48
• (MAR)/.29
• (ADTN)/.34
• (HTLD)/.16
• (AMR)/-.03
• (ASML)/.57
• (PGR)/.36
  

Economic Releases
8:30 am EST

• The Import Price Index for June is estimated to fall -.4% versus a -.6% decline in May.
• Advance Retail Sales for June are estimated to fall -.3% versus a -1.2% decline in May.
• Retail Sales Less Autos for June are estimated to fall -.1% versus a -1.1% decline in May.
• Retail Sales Ex Auto & Gas for June are estimated unch. versus a -.8% decline in May.

10:00 am EST

• Business Inventories for May are estimated to rise +.2% versus a +.4% gain in April.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,500,000 barrels versus a -4,961,000 barrel decline the prior week. Gasoline supplies are expected unch. versus a +1,320,000 barrel gain the prior week. Distillate inventories are estimated to rise by +1,000,000 barrels versus a +321,000 barrel increase the prior week. Finally, Refinery Utilization is estimated unch. versus a +1.4% increase the prior week.

2:00 pm EST

• FOMC Minutes
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The $13 Billion 30-Year Treasury Bond Auction, weekly MBA mortgage applications report, SEMICON West, Piper Jaffray Cancer Summit, (VRGY) analyst meeting, (ARO) analyst day, could also impact trading.
  

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the day.