Thursday Watch

Evening Headlines

Bloomberg:

• Trichet Says Risk Signals 'Red' as Debt Crisis Threatens Banks. European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks. “On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. BNP Paribas (BNP) SA, France’s biggest bank, and rivals Societe Generale (GLE) SA and Credit Agricole SA (ACA), may have their credit ratings cut by Moody’s Investors Service because of their investments in Greece, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch Ratings said last month. “The most serious threat to financial stability in the EU stems from the interplay between the vulnerabilities of public finances in certain EU member states and the banking system,” Trichet said. There are “potential contagion effects across the union and beyond.”
• Germany's Weder di Mauro Favors Greek Debt Cut, Reuters Says. Beatrice Weder di Mauro, a member of the German government’s council of economic advisers, called a “tough” cut of Greek debt unavoidable in the long run, Reuters reported, citing a speech by the economics professor in Brussels. Because European banks couldn’t bear it, such a step isn’t feasible for now, and the current debt restructuring plans will help only to win time, the newswire cited her as saying. Di Mauro also criticized the fact that European banking regulators don’t include a Greek default scenario in their bank stress tests, Reuters said.
• China Housing Boom Spreads to Smaller Cities. China’s property boom is shifting from Beijing and Shanghai as government measures to curb the market haven’t kept prices from rising in secondary cities. New home prices rose in 67 of 70 cities in May led by smaller centers as developers hold off price cuts, even as existing home prices cool following higher interest rates and down-payment requirements. Standard & Poor’s on June 15 cut its outlook on Chinese developers, echoing concerns of a property bubble aired by bears such as hedge fund manager Jim Chanos. Efforts to rein in property prices have been focused on the nation’s largest urban areas, leaving less affluent cities such as Urumqi in the northwest and northeastern Dandong with surging home values as developers increased building there. That raises challenges for a government that last week escalated its fight against inflation by raising bank reserve requirements for the ninth time since October. “Purchase restrictions in the major cities drove speculators to second- and third-tier cities,” said Liu Li-Gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “China should raise interest rates and basically use monetary policies to curb demand, otherwise negative interest rates and few appealing options will send more speculation into the property market.”
• Japan's slowing machinery exports to China point to weakening Asian demand that may threaten the world's third-largest economy as it recovers from the March 11 earthquake, Citigroup Global Markets Japan Inc. said. Exports of general machinery to China fell to $3 billion in May, a four-month low, according to Ministry of Finance data. Shipments of items from motors to construction machines make up 26% of exports to China, the biggest overseas buyer of Japan's goods. "We need to be alert about sluggish exports to Asia resulting from the region's economic slowdown, especially China," said Kiici Murashima, chief economist at Citigroup in Tokyo. Weaker demand may cap the gains from manufacturers restoring production after the nation's strong quake on record, according to Murashima. Overseas shipments to China fell 8.1% in May from a year ago, the biggest drop since October 2009. Exports to Asia, where countries from South Korea to India have raised borrowing costs this year to quell inflation, slid 8.7%.
• Sarkozy Tells G-20 Ministers Food Price Surge Is 'Plague' Needing Action. World food prices that rose 37 percent in a year, driving 44 million more people into poverty, are a “plague” that need action from world leaders now, French President Nicolas Sarkozy said. France, which holds the G-20 presidency, wants a central database on crops, limits on export bans, international market regulation, emergency stockpiles and a plan to raise global output. A lack of transparency in agricultural markets is exacerbating price swings, threatening economic recovery and food production, Sarkozy said. “We have to act, and act together,” the president said. “The world is watching you.”
• Silver Surge Makes 'Headwind' for Solar inn Fossil Fuel Rivalry. Soaring silver prices are hampering the solar industry’s ability to compete with fossil fuels. Panel makers consume about 11 percent of the world’s supply of silver, the metal in solar cells that conducts electricity. The metal has appreciated 74 percent to $35.30 a troy ounce on average so far this year from $20.24 for last year. Prices for solar cells have dropped about 27 percent this year and would be even lower if each panel didn’t require about 20 grams of silver, according to Bloomberg New Energy Finance. That’s pushing back the date when companies such as Solarworld AG (SWV) and LDK Solar Co. can deliver solar power at prices that are competitive with traditional energy.
• Crude Declines After Federal Reserve Lowers U.S. Economic Forecast. Oil declined for the first day in four in New York after the Federal Reserve lowered its economic growth outlook for the U.S., signaling that fuel demand in the world’s biggest crude-consuming nation may weaken. Futures slipped as much as 1.5 percent after Fed officials yesterday lowered their forecasts for growth and employment this year and next. An Energy Department report showed U.S. oil stockpiles fell less than forecast and inventories at Cushing, Oklahoma, the delivery point for the New York-traded West Texas Intermediate grade, increased for the first time in four weeks. Oil for August delivery declined as much as $1.41 to $94 a barrel in electronic trading on the New York Mercantile Exchange and was at $94.27 at 11:01 a.m. Sydney time.
• China Money Rate Reaches Three-Year High Even After Bill Sale Suspended. China’s money-market rate soared to the highest level in more than three years on concern cash supply won’t rebound before the end of this month. The seven-day repurchase rate, which measures interbank funding availability, gained for a seventh day even after the People’s Bank of China suspended a bill sale. The rate has more than doubled since the central bank ordered banks on June 14 to set aside more cash as reserves for a sixth time this year. “Smaller banks are really short of money after the reserve ratio hike,” said Peng Hao, a bond analyst at Fudian Bank Co. in Kunming, capital of the southern Yunnan province. “Also, banks won’t lend to each other before the end of every quarter because they have to meet capital requirements.” The seven-day repo rate climbed 30 basis points to 9.11 percent as of 9:28 a.m. in Shanghai, the highest level since October 2007, according to a weighted average rate compiled by the National Interbank Funding Center.
• Buy Emerging-Market Put Options on Short-Term Retreat, UBS Says. Investors should use a bearish options strategy on emerging-market stocks to protect against a decline because chart patterns show the shares are at risk of a “near-term” drop of 17 percent, UBS AG strategists said.
• 'Inevitable' Greek Default Contagious, Feldstein Writes in FT. A Greek default is “inevitable,” and “the only question is when it will occur,” given the country’s debt-to-gross-domestic-product ratio of more than 150 percent, Harvard University Professor Martin Feldstein writes in the Financial Times. “The current negotiations are really about postponing the inevitable default,” Feldstein writes, adding that a default now could trigger defaults by Portugal, Ireland and Spain. The European Central Bank is “determined to avoid a default at this time” in order to give negotiators time to find a way to delay the contagion defaults “long enough for creditors to withstand the writedowns of bond values if Greece, Portugal and Ireland default simultaneously,” Feldstein writes.
• Red Hat(RHT) Sales to Triple to $3 Billion in Five Years, CEO Whitehurst Says.
  

Wall Street Journal:

• Obama Sets Afghan Rollback. President Barack Obama ordered the withdrawal of 10,000 troops from Afghanistan this year, leaving the bulk of U.S. forces in place into the summer of 2012, when fighting is fiercest, but also signaling the beginning of the end of America's role in the 10-year war. The announcement pleased neither Democrats in Congress who wanted a faster end to the costly and increasingly unpopular conflict, nor the Republicans and defense officials who had pushed hard to keep more troops in the fight for longer.
• Outlook Grows Bleak on Main Street. In the eyes of the average small business, the U.S. economy is still in a recession and likely to stay that way through 2012. While revenues are in line with or higher than they were last year for many on Main Street, the outlook for hiring and business in general is bleak, according to a broad-reaching survey to be released Thursday. Small-business owners say a continued lack of financing, coupled with rising commodity prices and weak overall sales, is to blame. The new survey, commissioned by U.S. Bancorp, is one of several reports to come out in recent weeks painting a more dismal picture for American small businesses than previously perceived.
• Shutting Up McKinsey. The White House vilifies a company for reporting health-care reality. The White House routinely tries to intimidate its health-care critics, but the campaign against McKinsey & Co. is something else. The management consultants attempted to find out how U.S. business will respond to the government restructuring of 17.3% of the economy, Democrats don't like the results, and so McKinsey must pay with its reputation.
• Salon CEO Gingras to Head Up News at Google(GOOG). Richard Gingras, the chief executive of Salon Media Group, said on Wednesday he is leaving the online publisher to become global head of news products for Google Inc.
• GM(GM) Stock Sag Weighs on U.S. Exit. Two years after General Motors Co. and the Obama administration worked together to save the auto maker, the two are now at odds over how to get the government out of the company. The Detroit auto maker wants a share sale as soon as possible, people familiar with the matter said, while the administration has a goal of selling its remaining 27% stake in August or September, after GM's next quarterly results are released.
• Hedge Funds Aren't Minting Fees Like They Used To. Hedge funds are estimated to have generated $10 billion in revenue for investment banks and broker-dealers, at least a third below historical norms, according to an annual survey of hedge funds, as managers remain conservative toward borrowing coming out of the financial crisis. “Assets under management have risen substantially in the last year, yet both investment returns and the appetite for risk–as measured by leverage and appetite to borrow stock to cover short sales–remain suppressed by comparison with the years prior to the financial crisis of 2007-09,” Global Custodian, a magazine, said. The magazine’s annual survey, based on more than 3,100 hedge funds, assumed that hedge funds in total manage $2 trillion in assets globally. The survey also made the assumption that financial conditions led to a narrowing of the fees on prime brokers’ sources of income, such as margin finance and stock loans, to 40 basis points from 50.
• Colorado Out of Joint Over Pot Shops. Cities Crack Down on Proliferation, Say Medical Marijuana Not So Medical.
• Lagarde on Track to Win IMF Nod. The race to lead the International Monetary Fund is all but over as its executive board interviews the candidates this week and French Finance Minister Christine Lagarde appears on track to win final approval within days.
• The Food-Stamp Crime Wave. The number of food-stamp recipients has soared to 44 million from 26 million in 2007. Not surprisingly, fraud and abuse are rampant.

CNBC:

• Lofty Valuations at Risk as Asia IPO Withdrawals Hit Record. A record $58 billion in withdrawn IPOs in Asia and muted market debuts are expected to force listing hopefuls to cut valuations to win over investors in the world's top region for offerings.

Business Insider:

• There's a Report of a Brand New Hole in the Greek Austerity Plan.
• Chinese Energy Demands Are Starting to Anger Its Neighbors.
• 10 Fracking Things That Everyone Should Know.
  

Zero Hedge:

• Investors Pull The Most Money From Domestic Mutual Funds Since September as Margin Debt Deleveraging Begins. (graph)
• Pocket-Change SEC Fines: Barely a Bark and No Bite. There's a reason yesterday's announcement that JPM Chase(JPM) would 'settle' for a fine of $156.3 million, while neither admitting nor denying any wrong-doing, thereby forking over the whopping equivalent of a normal person's weekly grocery budget, pisses people off. Because it's a marginal fleabite on the teflon hand of the nation's second largest bank in terms of punitive pain, and absolutely meaningless in altering the grand scheme of toxic securities creation or complex financial institution business as usual.
  

IBD:

• Netgear(NTGR) Leads In Home Networking Devices.

NY Times:

• Derivatives Cloud the Possible Fallout From a Greek Default. The possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate.
• Some Greeks Fear Government is Selling Nation. They are the crown jewels of Greece’s socialist state, and they are now likely to go to the highest bidder: the ports of Piraeus and Thessaloniki; prime Mediterranean real estate; the national lottery; Greek Telecom; the postal bank and the national railway system.

LA Times:

• Best Buy(BBY) to Downsize Brick-And-Mortar Footprint. Amid weak sales and growing online competition, Best Buy plans to sublease space at its stores to smaller retailers, joining the ranks of big-box giants that are shrinking store sizes.

Washington Post:

• SEC Tightens Reins on Hedge Funds. Hedge funds are about to become a bit less mysterious. Many will have to make limited disclosures to the Securities and Exchange Commission and answer to its regulators under rules the agency adopted Wednesday. The funds won’t have to bare their innermost secrets. But they will have to publicly disclose general information about their size and ownership, and who is auditing their books, among other matters. To spotlight practices that might harm investors, the SEC said, the funds will have to reveal potential conflicts of interest, such as whether they pay anyone to send them clients.

Politico:

• GOP Challenges Obama's War Powers. House Republican leaders have launched the most serious challenge to the war-making power of the presidency in more than a decade, proposing to cut off funding for U.S. direct military engagement in Libya. The funding cutoff — a stronger rebuke from Republicans than originally planned — reflects a desire among rank-and-file Republicans to take a harder line against a mission they don’t like and a president who they believe has exceeded his authority by flouting the War Powers Act.

Rasmussen Reports:

• 26% Say U.S. Heading in Right Direction. Sixty-five percent (65%) of voters say the country is heading down the wrong track.

The Hill:

• Bayh, Card Plan Road Show for Chamber on Regulations. Former Sen. Evan Bayh (D-Ind.) and ex-Bush White House Chief of Staff Andy Card are embarking on a summer road trip to preach regulatory reform for the U.S Chamber of Commerce. On Wednesday, the Chamber held a press conference to announce that the two Washington heavyweights were heading out to several states, including Wisconsin, West Virginia, Illinois and Georgia, to talk about the need for regulatory balance. "We are not looking to say that all regulation is bad," Card said. Instead, the two will be looking for "common sense" to return to the rule-making process. The Obama administration has proposed several regulations since coming into the office that have been heavily lobbied against by business groups. Many of those new rules come from the healthcare reform and financial services reform laws. "Big chunks of both laws were left open to interpretation for the bureaucracy," Bayh told reporters. Both Bayh and Card argued that when the need for job creation is paramount, the added weight of new regulations will not help the economy. "This is just a very difficult time to put additional burdens on the job creators in this country," Bayh said.
  

USA Today:

• Sad Summer Ahead for Teen Employment. Seasonal job prospects are so tight that 75% of teens won't have a job this summer, according to the Bureau of Labor Statistics.

Reuters:

• Bed Bath(BBBY) Profit Beats, Ups Full-Year View. Bed Bath & Beyond Inc posted a quarterly profit that handily topped Wall Street expectations as U.S. shoppers spent more to spruce up their homes and the company boosted its full-year earnings forecast. Shares in the retailer, which sells everything from toasters to shower curtains, rose 1.7 percent.
• Bristol(BMY)/Pfizer(PFE) Stroke Prevention Data Wow Market. A blood thinner developed by Bristol-Myers Squibb Co and Pfizer Inc proved superior to and safer than warfarin in preventing strokes in patients with dangerously irregular heart rhythms in a key clinical trial, greatly boosting its sales potential. Shares of both companies rose on the highly anticipated data from the late-stage study of apixaban, a pill the drugmakers hope to sell under the brand name Eliquis.

Financial Times:

• Athens Accused of Big to Amend Austerity Deal. Greece’s new finance minister has attempted to renegotiate parts of the austerity deal struck with international lenders last month, drawing anger from his European counterparts as they battle to find a solution to Athens’ debt crisis. According to officials briefed on the gambit, Evangelos Venizelos proposed changing the €50bn privatisation programme agreed to by Greek authorities and tried to delay next week’s vote in parliament, insisting it could not be done quickly on procedural grounds.

Economic Times:

• Diesel, Kerosene & LPG Price Hike Coming in July. NEW DELHI: The Indian government will raise diesel, cooking gas and kerosene prices next month after a gap of one year as cash-strapped state firms say their borrowings have risen alarmingly and they will be forced to cut fuel supplies, starting with cooking gas. State-run refiners are facing acute liquidity crunch as their market borrowings have soared to Rs 1,20,000 crore from Rs 97,000 crore in March. They will now be forced to cut imports leading to shortage of fuel, two government officials with direct knowledge of the matter said.

China Securities Journal:

• China's central bank should raise interest rates to counter inflation, China Securities Journal said in an unsigned editorial today on its front page. The move would push real interest rates toward positive territory and drive funds back to banks. Quantitative tools such as the reserve requirement ratio can't tighten funds outside the baking system.

South China Morning Post:

• Living In Anxious Times as Fears of China Crash Grow. Paulson's misstep over Sino-Forest reflects unease about how the second-biggest economy does business. Suddenly finance god John Paulson isn't looking so omniscient.
  

Evening Recommendations
Citigroup:

• Reiterated Buy on (BBBY), raised target to $67.

Piper Jaffray:

• Rated (IPCM) Overweight, target $54.
• Rated (MD) Overweight, target $82.

BMO Capital:

• Rated (CME) Outperform, target $340.
  

Night Trading

• Asian equity indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 119.0 +6.0 basis points.
  
• Asia Pacific Sovereign CDS Index 125.0 +8.75 basis points.
  
• S&P 500 futures -.35%.
  
• NASDAQ 100 futures -.30%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LEN)/.04
• (DFS)/.75
• (CAG)/.48
• (TIBX)/.18
• (FINL)/.30
• (HRB)/2.15
• (ORCL)/.71
• (MU)/.16

Economic Releases
8:30 am EST

• The Chicago Fed National Activity Index for May is estimated to rise to -.05 versus -.45 in April.
• Initial Jobless Claims for last week are estimated to rise to 415K versus 414K the prior week.
• Continuing Claims are estimated to fall to 3670K versus 3675K prior.
  

10:00 am EST

• New Home Sales for May are estimated to fall to 310K versus 323K in April.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Evans speaking, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report and the (UTIW) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and commodity shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the day.