Thursday Watch

Evening Headlines

Bloomberg:

• Italy Braves Yield Surge With $7 Billion Bond Sale as Senate Votes on Cuts. Italy taps bond markets today as the Senate votes on budget cuts to tame a debt burden that is the second largest in Europe and has prompted investors to drive borrowing costs to a 14-year high. The treasury plans to sell as much as 5 billion euros ($7 billion) of four different bonds with maturities ranging from five to 15 years. It’s the first sale of longer-term debt since the country’s 10-year yield reached 6.02 percent on July 12, the highest since 1997. The yield fell from that peak after Italy successfully sold treasury bills the same day. “The auctions will go well, in the sense that they must go well,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. “There will be a galvanizing of opinion in the domestic sector certainly.” The failure of European Union policy makers to complete a second aid package for Greece and contain the region’s debt crisis fueled concern about the sustainability of Italy’s 1.8 trillion-euro debt, which is larger than that of Greece, Ireland, Spain and Portugal combined.
• Greece Gets World's Lowest Rating From Fitch in Catch-up Downgrade to CCC. Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any country in the world as the company followed rivals and said that a default is a “real possibility.” The move to CCC from B+ “reflects the absence of a new, fully funded and credible” program by the International Monetary Fund and the European Union, the ratings company said yesterday in a statement in London. It also reflects “heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece’s weakening macroeconomic outlook.” Fitch is the third ratings company to cut Greece to the bottom tier of its rankings, reflecting concerns that a new aid package being negotiated for the nation will inflict losses on investors.
• Default Inevitable as Every Greek $40,000 in Hock: Euro Credit. Greece has about a one in ten chance of sidestepping default, according to credit traders who are betting the country will be crippled by $490 billion of debt - more than $40,000 for every man, woman and child. Investors who bought 10-year Greek debt last year have lost almost half their money, with yields soaring to more than 16% as the budget deficit swelled by 28% since January. A $155 billion bailout hasn't stopped the nation's debt from becoming riskier than Venezuela, credit-default swap prices show, while Greek stocks lost 16% of their value this year and are down about 46% since the beginning of 2010.
• Commodities Rise to Four-Week High as Bernanke Signals More U.S. Stimulus. Commodities rose to a four-week high as Federal Reserve Chairman Ben S. Bernanke indicated he may provide more U.S. economic stimulus, driving down the dollar and boosting demand for raw materials as a hedge against inflation. Gold futures rose to a record $1,588.90 an ounce in New York, and silver closed up 7.1 percent, the most among GSCI components. Corn capped the biggest two-day gain in eight weeks, and soybeans posted the longest rally since August.
• Dial-a-Crowd Confronts Debt-Laden Spanish Banks by Thwarting Foreclosures. Rising unemployment in Spain may lead to 300,000 foreclosures this year and next, according to Adicae, a rights group representing bank customers. Spain has become a battleground between banks hurt by a five-fold increase in residential mortgage arrears since 2007 and debt-laden homeowners who are appealing to the government to reduce the burden on those facing foreclosure. The number of foreclosed homes advertised by Idealista.com, Spain’s largest real-estate website, has risen 10-fold to 30,000 in three years. The properties are valued at about 4.6 billion euros and owned by 40 banks. “If the banks had to assume all the losses resulting from the bad mortgages they granted during the property boom, the whole financial system would collapse,” Jesus Encinar, Idealista.com’s chief executive officer, said in an interview. Spanish banks have about 614 billion euros of outstanding residential mortgages, according to data from the Bank of Spain. At 21 percent, the jobless rate is the highest in Europe, making it harder for borrowers to keep up with their payments. Home prices may fall by an additional 20 percent in the next four years before bottoming out, R.R. de Acuna & Asociados, a Madrid-based real-estate consulting firm, said at a briefing last month. The company estimates there are about 1.5 million unsold homes, which won’t be absorbed for another six years. Jaime Alvarez, professor of finance at Madrid’s Complutense University, said there’s is no way of helping homeowners to reduce their debts without hurting lenders. “The committee is merely cosmetic and won’t recommend any changes that will hurt the banks because they’re Spain’s sacred cows,” said Alvarez, who was also a co-founder of Publica Subasta, Spain’s largest complier of data on public auctions.
• China Cities Sell Land With Bonds Seen Toxic. Workers toil by night lights with hoes, carving out the signs for Olympic rings in front of an unfinished 30,000-seat stadium, bulb-shaped gymnasium and swimming complex in a little-known Chinese city. Loudi, home to 4 million people in Chairman Mao Zedong’s home province of Hunan, is paying for the project with 1.2 billion yuan ($185 million) in bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year. In Loudi, people take home $2,323 annually and there are no Olympics here on any calendar. “The debt isn’t a problem as Loudi is not a developed place,” Yang Haibo, an official at the city’s financing vehicle, says as he sits with colleagues in a smoke-filled meeting room under a No Smoking sign. “It’s an emerging city.”
• Debt ratings for Indian companies are being cut at the fastest pace since 2009 as a record increase in rupee interest rates and a slowing economy add to the risk of defaults. ICRA Ltd., the local unit of Moody's Investor Service, reduced rankings for 34 firms and raised ratings for 24 last quarter. There were only seven upgrades for every ten downgrades, the worst ratio since 2009. Yields on top-rated two-year notes jumped 225 basis points, or 2.25 percentage point, in the past year to 9.48 percent. A similar rate in the U.S. fell 44 basis points to .69%. "The rise in interest cost is hurting capital-intensive businesses the most and all those who can defer projects are deferring," said D.R. Dogra, CEO at Mumbai-based ratings provider Credit Analysis & Research Ltd.
• Wall Street Generated Losses on Proprietary Trading Since 2006, GAO Says. The six largest U.S. banks had a net loss of about $221 million from standalone proprietary trading from June 2006 through the end of 2010, according to the Government Accountability Office. The business of betting money for banks’ own accounts produced positive net revenue in 13 of the 18 quarters examined, totaling $15.6 billion, and generated losses of $15.8 billion in the other five quarters, the Washington-based GAO said today in a report.
• Singapore's Economy Shrank Last Quarter. Singapore’s economy shrank for the first time in three quarters as manufacturing slumped, adding to evidence the slowdowns in Europe and the U.S. are curbing growth in Asia. The island’s currency weakened from a record. Gross domestic product fell an annualized 7.8 percent in the second quarter from the previous three months.
• Beef Contaminated by Radiation Intensifies Food-Safety Concerns in Japan. Beef contaminated by radiation from Fukushima prefecture has been eaten by consumers in Japan, intensifying food-safety concerns and stoking criticism against a government testing program that checks only selected products. About 437 kilograms of beef from a farm in Minami-Soma city, 30 kilometers from the stricken Fukushima Dai-Ichi nuclear station, was consumed in eight prefectures, according to the Tokyo metropolitan government, which detected the first case of tainted beef from the farm earlier this month. Four months after a record earthquake and tsunami crippled the power plant in Fukushima, site of the worst nuclear disaster since Chernobyl, local government offices are struggling to check every farm product due to a shortage of testing equipment, staff and budget. Prolonged exposure to radiation in the air, ground and food can cause leukemia and other cancers, according to the London-based World Nuclear Association.
• China Bank Stocks Seen Extending Slump. Chinese banks, the cheapest among major emerging markets’ lenders, may drop lower as overseas banks and funds trim stakes to meet capital rules and curb risks amid concerns that the nation’s record credit boom will unravel. The three biggest Chinese banks posted their worst quarterly stock performance in 2 ½ years on concern that local governments may default on loans. The lenders’ credit outlook may sour in the absence of a government plan to deal with the issue, Moody’s Investors Service said this month, while regulators globally are demanding banks increase buffers. “You will certainly see share sales by some of these cornerstone investors,” said Sandy Mehta, chief executive officer for Hong Kong-based Value Investment Principals Ltd. “The U.S. and European financial companies obviously need capital for themselves. And there are more distressed opportunities in financial sectors” elsewhere, he said.
• Pickens Water-to-Riches Dream Unravels as 11 Texas Cities Scoop Up Rights.
  

Wall Street Journal:

• Raters Put U.S. on Notice. Moody's, S&P Sound Alarms on Debt; President Obama Walks Out of Talks. Credit rating agencies moved closer to an unprecedented downgrade of the U.S. government's debt amid deteriorating talks in Washington, with President Barack Obama abruptly walking out of a key meeting Wednesday with Republicans seeking a deal to raise the federal borrowing limit. Moody's Investors Service said it was reviewing the government's top Aaa bond rating for a possible downgrade, citing the "rising possibility" that the government's $14.29 trillion borrowing limit won't be raised soon enough to prevent the U.S. from running out of money to pay its bills.
• Triple Blasts Hit Mumbai, Killing 21. Attacks, Worst Since City's 2008 Siege, Cast Doubt on India Security Gains and Pakistan Détente; 'Coordinated' Terrorist Bid. The city was placed on high alert after the blasts, which officials believed were "a coordinated attack by terrorists," Home Minister P. Chidambaram said at a news conference. He didn't say whether he believed the perpetrators were homegrown or foreign-based. The attacks underscored India's significant domestic security vulnerabilities, despite efforts in recent years to bolster intelligence-gathering and coordination between local and national-security officials. The attacks could also complicate nascent efforts at establishing peace between India and neighboring rival Pakistan.
• Financial Oversight Panel to Delay Guidance. Federal regulators will not complete guidance detailing how the U.S. will determine which large firms could pose a risk to the financial system in time for a Monday meeting, according to people familiar with the matter. The Financial Stability Oversight Council, a new federal body created by the Dodd-Frank financial-overhaul law, had planned to issue the guidance Monday but it likely will be several weeks before it is complete, these people said.
• In Shift, Municipalities Turn to Banks for Loans. Time was running out for the Orange County School Board. A $105 million debt deal was about to expire, triggering painful penalties for the approximately 175,000-student district in the Orlando, Fla.-region. Along came Wells Fargo & Co. with a deal that avoided the penalties: Wells bought the $105 million debt from investors and negotiated new terms with the district.
• Bank Liabilities Facing Scrutiny. As big banks prepare to report their second-quarter results, federal regulators are scrutinizing what these institutions are telling shareholders about possible payouts to clean up mortgage-related messes, according to people familiar with the matter. Officials at the Securities and Exchange Commission are looking closely at banks' estimates of possible liability in the wake of a surprise June 29 announcement that Bank of America Corp. would take mortgage-related charges of $20.6 billion during the second quarter, the people added. The total cost was greater than some investors and analysts had expected.

Fox Business:

• Morgan Stanley(MS) Could Be Next Wall Street Giant to Cut Staff. Morgan Stanley & Co. could be the next Wall Street firm to announce a major round of layoffs, joining its arch rival Goldman Sachs in slashing possibly thousands of jobs, the FOX Business Network has learned. The firm is “running layoff scenarios into several thousand folks,” said one person with direct knowledge of the matter. This possible new round of job cuts would go well beyond the pruning of low-producing brokers (also known as financial advisers) the firm has already announced.
  

CNBC:

• Pigs at Front Line in China Inflation Battle. In the past year, pork prices in China have rocketed 57 percent, and are again helping to drive Chinese inflation, which hit a three-year high in June. For economists bringing the price of China’s pork under control represents one of the keys to bringing Chinese inflation under control.
• Yum(YUM) Posts Profit Beat, Raises 2011 Estimate.
  

Business Insider:

• Hezbollah Hooks Up With Mexican Drug Cartels.
• The Truth Behind Fannie and Freddie: Why The Government Didn't Make a Profit From The Bailout.
• A Guide to the Political Impasse That Could Tear Belgium Apart.
• Turkey Thwarts Potentially Devastating Al-Qaeda Attack on U.S. Embassy. Turkish authorities in three different cities arrested 15 individuals today who it accused of planning attacks in multiple locations, including one on the U.S. embassy in Ankara.

Zero Hedge:

• Quantitative Easing Rounds 1 and 2 Hurt the Economy ... Bernanke Proposes Round 3.
• Chart of the Day: Evolution of U.S. Federal Public Debt Held by the Public(in % of GDP).
  

CNNMoney:

• PC Sales Continue Slump Amid iPad Takeover. Shipments of personal computers in the United States tumbled in the second quarter as manufacturers, retailers and consumers shift their focus to tablets. U.S. PC shipments fell 5.6%, compared to the same three-month period a year ago, according Gartner. Worldwide PC shipments grew just 2.3%, well below the tech consultancy's modest 6.7% growth forecast. "Given the hype around media tablets such as the iPad, retailers were very conservative in placing orders for PCs," said Mikako Kitagawa, principal analyst at Gartner. "Instead, they wanted to secure space for media tablets."

NY Times:

• Utility Shelves Ambitious Plan to Limit Carbon. A major American utility is shelving the nation’s most prominent effort to capture carbon dioxide from an existing coal-burning power plant, dealing a severe blow to efforts to rein in emissions responsible for global warming.
• Borders Faces Liquidation After Takeover Bid's Rejection.
  

Salon.com:

• US More Unpopular in the Arab World Than Under Bush. I've written numerous times over the last year about rapidly worsening perceptions of the U.S. in the Muslim world, including a Pew poll from April finding that Egyptians view the U.S. more unfavorably now than they did during the Bush presidency. A new poll released today of six Arab nations -- Egypt, Lebanon, Jordan, Saudi Arabia, the United Arab Emirates and Morocco -- contains even worse news on this front:

Lloyd's List:

• Hedge Funds Jump On The Ship Finance Bandwagon.

Rasmussen Reports:

• 25% Say U.S. Heading In Right Direction. Sixty-eight percent (68%) of voters say the country is heading down the wrong track, showing no change from last week.

USA Today:

• Some Netflix(NFLX) Customers Threaten to Quit Over Price Increases.
• Who Exactly Has The Tax Target on Them? Individuals earning $200,000, couples earning $250,000 and, to a lesser extent, all taxpayers could lose money in the deal as their tax rates rise or they move into higher tax brackets. How much would be raised and from whom?

Reuters:

• UAW Sees Its Future: Organize Southern US Plants. The time for the United Auto Workers to win the hearts and minds of nonunion workers in southeastern U.S. plants is now in one top union executive's opinion. "If not now, when? We are going to fix it or we continue to do what we're doing. You keep kicking the can down the road or we're going to fix it," said Gary Casteel, director of the UAW region that includes Tennessee, South Carolina, Alabama and Georgia where most of the nonunion auto plants are located. Casteel echoes the belief of his boss, UAW President Bob King, who has staked his reputation and the union's future growth on winning votes to represent workers at those plants. A failure would likely result in a marginalized organization.
• No Link Seen Between Cell Phones, Brain Tumor. People who have used a cell phone for more than a decade do not appear to be at increased risk of a type of non-cancerous brain tumor, a large study suggests. Looking at data on more than 2.8 million Danish adults, researchers found that those who'd used a cell phone for 11 to 15 years were no more likely than newer users or non-users to develop an acoustic neuroma.
• US Board Changes Swaps Accounting for Local Govts. The board that sets accounting standards for state and local governments on Wednesday changed some financial reporting requirements for swaps and other hedging instruments the governments use. The Governmental Accounting Standards Board said that "deferred outflows" and "deferred inflows" of resources should be reported separately from assets and liabilities on financial statements. A deferred outflow would, for example, be an interest rate swap agreement with a negative value, GASB said. A deferred inflow could be a payment from a public-private partnership. The board then used the separation to tackle how states and local governments would account for the replacement for a swap counterparty or a counterparty's credit support. They can continue to list the value changes of the derivative as a deferred outflow or inflow, rather than as changes in investment income, if they are likely to still collect payments from the swaps, the replacement counterparty meets certain GASB-defined criteria, or when the termination of the swap is the fault of the counterparty. GASB said the changes were "intended to improve financial reporting by providing citizens and other users of state and local government financial reports with information about how past transactions will continue to impact a government's financial statements in the future."
• Marriott(MAR) Earnings Match Estimates, Stock Declines. Marriott International Inc reported higher quarterly earnings that matched analyst estimates and gave a tepid forecast for the year. Shares of the hotel operator dropped more than 4 percent after-hours.

Financial Times:

• High-Frequency Traders Slowed by Headwinds.

Guardian:

• BSkyB 'Bloodbath' Hits Hedge Funds. Hedge funds have suffered one of their worst setbacks in years, losing tens of millions of pounds by betting that Rupert Murdoch's News Corporation was on the verge of taking full control of BSkyB. Short-term speculators expected to make a killing by investing in a company viewed as a prime bid target, but instead have seen shares in the satellite television company plunge. One trader said: "It's a bloodbath out there. The hedgies have dumped their holdings and some of them will be nursing big losses."

The Standard:

• Hong Kong Home Prices to Plateau as Buyers Hit Pocket Limit. Cheung Kong (0001) executive director Justin Chiu Kwok-hung said: "Price levels are now challenging buyers' affordability, so there is very limited room for large hikes," adding that home prices have already climbed 10-15 percent in the first half of the year. Any substantial hikes in home prices are unlikely in the second half, as they have reached the affordability limit of local buyers, a top developer forecast.

South China Morning Post:

• Broker Sees 20% Fall in Hong Kong Home Prices. Real estate risks include a stock market shock and lagging interest by mainland buyers, analyst warns. Property bulls beware: the city's real estate sector could be vulnerable to a slowdown or even a significant fall, according to broker CLSA Asia- Pacific Markets.

21st Century Business Herald:

• The slowing trend for Chinese exports may continue in the second half as overseas demand is unlikely to improve, citing Huo Jianguo, head of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

Economic Information Daily:

• China's monetary policy should remain prudent in the second half of this year to maintain stable economic growth and keep prices stable, citing central bank adviser Xia Bin.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 122.00 +.5 basis point.
  
• Asia Pacific Sovereign CDS Index 122.50 -2.5 basis points.
  
• S&P 500 futures -.42%.
  
• NASDAQ 100 futures -.36%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FCS)/.40
• (JPM)/1.21
• (VMI)/1.45
• (JBHT)/.53
• (PGR)/.39
• (CBST)/.41
• (GOOG)/7.85
• (CBSH)/.72
  

Economic Releases
8:30 am EST

• The Producer Price Index for June is estimated to fall -.2% versus a +.2% gain in May.
• The PPI Ex Food & Energy for June is estimated to rise +.2% versus a +.2% gain in May.
• Advance Retail Sales for June are estimated to fall -.1% versus a -.2% decline in May.
• Retail Sales Less Autos for June are estimated unch. versus a +.3% gain in May.
• Retail Sales Ex Autos & Gas for June are estimated to rise +.4% versus a +.3% gain in May.
• Initial Jobless Claims for last week are estimated to fall to 415K versus 418K the prior week.
• Continuing Claims are estimated to fall to 3680K versus 3681K prior.
  

10:00 am EST

• Business Inventories for May are estimated to rise +.8% versus a +.8% gain in April.

Upcoming Splits

• (TGI) 2-for-1
• (SNHY) 3-for-2
  

Other Potential Market Movers

• The Fed's Bernanke speaking, 30-yr Treasury Bond Auction, weekly EIA natural gas inventory, Fed's weekly balance sheet report and the (FUL) analyst/investor day report could also impact trading today.
  

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