Friday Watch

Evening Headlines

Bloomberg:

• Trichet Bond Firepower Faces Test as Rout Withstands ECB Buying. European Central Bank President Jean- Claude Trichet may be forced to step up his fight against the sovereign debt crisis after a resumption of bond purchases yesterday failed to halt a rout in Italy and Spain. Over opposition from Germany’s Bundesbank, Trichet yesterday sent the ECB back into bond markets as yields on Italian and Spanish yields soared, threatening the ability of the euro region’s third- and fourth-largest economies to borrow. As the sell-off continued, traders said the ECB purchased only Irish and Portuguese securities, suggesting the central bank is reluctant to put up the funds needed to tame a crisis it says governments are responsible for fixing. “The ECB is being dragged unwillingly back to the table, having tried originally to palm off responsibility for restructuring the euro zone to governments,” said Peter Dixon, an economist at Commerzbank AG in London. “If the ECB is serious about playing its part in holding the euro zone together, then it’s going to have to spend a considerable sum.” The ECB, which ceased buying bonds four months ago, was forced back into action after governments failed to convince investors that a package of new measures agreed to last month will prevent the crisis from spreading. The ECB may be hesitant to intervene in Italian and Spanish markets, which according to Bloomberg data have a combined 2.2 trillion euros ($3.1 trillion) worth of outstanding bonds, for fear of starting an engagement it can’t get out of. The ECB “would have to deploy more cash to have an impact on the Spanish or Italian yields than in the case of small periphery paper,” said Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht. “Secondly, markets would expect a certain commitment from the ECB to follow through.” Italian 10-year bond yields rose to 6.19 percent yesterday from as low as 5.92 percent earlier in the day, while the Spanish equivalent soared to 6.27 percent from 6 percent. Gilles Moec, co-chief European economist at Deutsche Bank AG in London, said that by shunning Italian and Spanish debt the ECB was putting pressure on those governments to “get their house in order.” “It’s showing it can buy, but only those whose governments have made an effort,” he said. While that may have been the case, the ECB succeeded in making the problem “even more intractable,” said David Owen, chief European economist at Jefferies International Ltd. in London. “The contagion is spreading. If spreads widen out significantly, I think the ECB would have to step in.” Bundesbank President Jens Weidmann voted against a resumption of the bond program, according to an official familiar with the discussions. Weidmann was not the only Governing Council member opposed to the move, the official said on condition of anonymity. Yesterday’s response may have been “the best the ECB could do because the Governing Council could not agree on a shock-and- awe response,” said Peter Westaway, chief European economist at Nomura International Plc in London. “If so, this is concerning.”
• Global Banks Tumble on Concerns About Growth, Sovereign Debt. European banks dropped to a two-year low and led a plunge in financial stocks around the world on growing fear about faltering growth and the creditworthiness of countries such as Ireland and Italy. The 46-member Bloomberg Europe 500 Banks Index dropped 4.2 percent to its lowest since April 2009. The KBW Bank Index of 24 U.S. financial stocks slid 5.3 percent in New York, the biggest percentage decline since July 2010. “The biggest issue that the European banks have is that they are undercapitalized,” said Daniel Alpert, managing partner at Westwood Capital LLC, a New York-based investment bank. “While U.S. banks don’t have a tremendous exposure to the sovereign debt in Europe, the bottom-line issue is these banks in Europe are important parts of the worldwide financial system.” “The ECB’s program is virtually useless, because it’s not big enough to stomach Italy or Spain,” said Ronny Rehn, a bank analyst at KBW Inc. in London. “Politicians need to get ahead of the curve and stop reacting to events when it is too late.” Spanish and Italian banks have been struggling to borrow money for more than 30 days’ duration over the past two months, according to analysts at Morgan Stanley in London. “The funding markets are drying up and short-term funding is getting shorter,” Rehn said. The Bloomberg European Banks index has slumped 11 percent in the last five trading days, with Intesa SanPaolo, Lloyds, and France’s Societe Generale SA all shedding more than one-fifth of their stock market value. European officials are trying to put a firewall around Italy and Spain on concern that they will have to follow Greece, Ireland and Portugal in seeking bailouts. The cost of insuring Italian debt surged to a record today, with credit-default swaps rising 18 basis points to 384, according to CMA in London. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers rose 6 basis points to 205, according to JPMorgan, nearing the 210 basis-point record of March 2009. Bank of New York Mellon Corp., the world’s largest custody bank, said today it will start charging institutional clients a fee for “extraordinarily high” cash deposits to stem a flight of capital into the safety of bank deposits. Other banks that have experienced dramatic increases in their cash deposits may follow, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, who said he’d never seen a bank charge for taking institutions’ deposits. In other signs of investors’ aversion to risk, the yield on the two-year U.S. Treasury dropped to a record low and rates on Treasury bills fell to zero. “Bank funding remains stressed for southern Europe and remains a key source of risk for bank earnings, ability to lend and a drag on economic recovery,” Morgan Stanley analyst Huw van Steenis said by telephone today. While the provision of six- month money is “at the margin helpful, it is not of sufficient term to really offer game-changing help to re-open term funding markets, which is the focal point of the stress.” Trichet said the ECB has also resumed bond purchases after it stopped buying the bonds of distressed euro-area governments 18 weeks ago. Citigroup analysts led by Giada Giani described the decision to re-open the program for Portuguese and Irish debt as “half-hearted” and liable to leave Italian and Spanish bonds “highly vulnerable to further market turbulence.” “Trichet could have done more to calm the markets,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “The lack of political leadership and an unwillingness to take things seriously is hurting the market.”
• Portugal's New Austerity Fails to Bring Down Yield: Euro Credit. Two months into the job, Portugal’s Prime Minister Pedro Passos Coelho is deepening the budgetary pain without feeling any gain. Swept to office June 5 on the back of a 78 billion-euro ($111 billion) rescue sought by his predecessor, Passos Coelho has announced a tax charge and spending cuts together worth more than 1 percent of gross domestic product to ensure he meets the targets set out in the aid package. All he’s got in return are higher borrowing costs as contagion spreads to Italy and Spain. “There was and there will be a contagion effect,” Andre Pinheiro, who helps oversee 100 million euros of assets at Orey Financial SA in Lisbon, said in a telephone interview. “Our recovery depends on their recovery, and our yields won’t decline if they don’t recover.”
• Stock Plunge Erasing $780 Billion 'Orderly' as Brokers Keep Bids. The rout that erased about $780 billion from U.S. share values yesterday reflected orderly selling by institutional investors, unlike the crash of May 2010, traders said. The Standard & Poor’s 500 Index fell 4.8 percent to an eight-month low, the biggest drop since February 2009.
• Decade of Stimulus Yields Nothing but Debt: Caroline Baum. When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion more freshly authorized by Congress. Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011. It doesn’t sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That’s one-half of one percent. And it qualifies as a “cut” only in the fanciful world of government accounting.
• Yuan Debt Worst in BRICs as PBOC Battles Inflation: China Credit. Yuan-denominated bonds are the only local-currency debt among the biggest emerging nations delivering a loss as investors bet quickening inflation will force China to keep raising interest rates. Yuan bonds are declining as three interest rate increases this year in the world’s fastest-growing economy fail to slow inflation that climbed to a three-year high in June, according to the latest available data. “Other BRIC nations, such as Brazil and India, have been raising rates aggressively,” Michael Roche, an emerging-markets strategist in New York at MF Global Inc., said by phone yesterday. “Higher degrees of policy action to combat inflation are being seen in” those countries compared with in China, he said. Investors have boosted bets on rising Chinese interest rates by the most among the BRIC countries in the past two months, with the cost to lock in borrowing costs for a year gaining 59 basis points, or 0.59 percentage point, since June 6, according to interest-rate swaps tracked by Bloomberg. Swaps for Brazil dropped 13 basis points in the same period, while Russia’s advanced four and Indian swaps rose 24, the data show. It’s too early to consider relaxing monetary policy, the People’s Bank of China said in a statement on Aug. 1. “Domestic inflation expectations remain strong and the foundation for stabilizing prices is not solid,” the central bank said. “Prices could rebound.” Chinese policy makers may raise benchmark rates again around Aug. 10, the state Xinhua News Agency said in a report published on Aug. 2, citing Li Pumin, deputy secretary general of the nation’s top planning agency. Five-year contracts protecting Chinese government debt against default rose four basis points to 96 basis points yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
  
• Treasuries Poised for Biggest Weekly Advance Since Fed Rate Cut in 2008. Treasuries headed for their steepest weekly gain since the last time the Federal Reserve cut interest rates in 2008 as stocks tumbled around the world on concern economic growth is slowing. Bonds surged from Japan to Australia to Germany this week as investors sought the relative safety of government debt. The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 26.9 percentage points, the most in a year. “Hot money is flowing into U.S. Treasuries in a flight to quality,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $37.9 billion and is a unit of Japan’s second-largest bank. “There’s a flight from riskier assets into bonds. All bonds are benefitting.” U.S. 10-year yields were little changed today at 2.41 percent as of 10:56 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 traded at 106 5/32. The yield dropped 38 basis points this week, the most since the period ended Dec. 19, 2008, according to data compiled by Bloomberg.
• Cameron, Osborne May Cut Top Income Tax Rate to 45%, Mail Says. U.K. Prime Minister David Cameron and Chancellor of the Exchequer George Osborne are planning to cut the 50 percent top rate of income tax to 45 percent as early as March, the Daily Mail reported, without citing a source for the information. Cameron and Osborne are seeking to make the change because of Treasury statistics which show the current rate generates “marginal financial gains” for government, the newspaper reported. Allies of Osborne view a cut in the rate as necessary to help boost growth in the economy, the Mail said.
• Oil Heads for Biggest Weekly Drop Since May. Oil fell in New York, heading for the biggest weekly decline in three months and wiping out its gain for the year, on speculation fuel demand will falter as the U.S. economy weakens and the European debt crisis worsens. Futures dropped as much as 1.1 percent after slumping 5.8 percent yesterday. “The market is nervous, people are panicking,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who predicts oil in New York will average $100 a barrel this year. “Everyone is liquidating and moving into cash and that’s understandable because every other commodity market is under pressure.” Crude for September delivery dropped as much as 95 cents to $85.68 a barrel in electronic trading on the New York Mercantile Exchange at 11:38 a.m. Sydney time. The contract yesterday tumbled $5.30 to $86.63, the lowest settlement since Feb. 18. Prices are down 10 percent for the week and 6 percent in 2011.
• SAC Capital May Have Lost $196 Million on Paper in Dendreon(DNDN) Stock Plunge. SAC Capital Advisors LP, the $14 billion hedge fund run by billionaire Steven A. Cohen, may have a one-day paper loss of about $196 million from its stake in Dendreon Corp. (DNDN), the drugmaker that plunged the most ever after it withdrew its 2011 revenue estimate. SAC Capital owned 8.2 million shares of Seattle-based Dendreon as of March 31, making it the biggest shareholder, according to a regulatory filing. Dendreon fell 67 percent, or $23.87, to $11.97 at 3:15 p.m. New York time in Nasdaq Stock Market trading, the largest decline since its initial public offering in June 2000.
• U.S. Housing Market Slump Deals Double Blow to Small Businesses.
• British Companies Trading With Iran Hidden by U.K. to Avert U.S. Sanctions. The U.K. government is determined to keep secret British companies that applied to sell goods with potential military uses to Iran, saying international banks are under U.S. pressure to drop them as clients. The disclosure of the companies may result in them losing access to bank services, Britain’s Export Control Organization said in reply to a Freedom of Information lawsuit filed by Bloomberg News.
• South Korea Should Raise Rate, Allow Stronger Won, IMF Says. South Korea should raise its benchmark interest rate to at least 4 percent over time and allow its currency to appreciate further to better fight inflation, the International Monetary Fund’s staff said. “The policy rate hikes thus far, although gradual, are welcome, and should continue in a more decisive manner, given the strong underlying economic momentum and lags in monetary policy,” IMF economists wrote in an annual assessment of the country’s economy released today. “Further two-way exchange rate flexibility would also help in the policy response to inflation.” Higher energy and food costs pushed South Korea’s inflation to a four-month high of 4.7 percent in July, breaching the central bank’s target limit for a seventh straight month. The Bank of Korea’s board will meet on Aug. 11 to discuss whether to raise borrowing costs for the fourth time this year after reports last month showed that economic growth slowed in the second quarter.
• The cost in India to lock in five-year interest rates has fallen below that for one-year contracts by the most since 2008, signaling a bank-lending slowdown is deepening, according to Barclays Capital. The five-year interest-rate swap rate, a fixed payment made to receive adjustable amounts, has dropped 86 basis points below the one-year measure of 8.27 percent.
• Bank of America(BAC) Says Mortgage Buyback Claims May Exceed Prior Estimate. Bank of America Corp. (BAC), the lender that disclosed more than $30 billion in costs tied to faulty mortgages, said claims may rise as government-sponsored enterprises such as Fannie Mae step up demands for refunds. “We have been experiencing elevated levels of new claims,” the Charlotte, North Carolina-based company said today in a quarterly filing with regulators. Those claims have arrived “in numbers that were not expected based on historical experience. Additionally, the criteria by which the GSEs are ultimately willing to resolve claims have become more rigid over time.” The bank may report “more repurchase requests from Fannie Mae than the assumptions in our estimated liability contemplate,” according to the filing.
• China's Push to Boost Medical Care May Curb Sales Growth for Pfizer(PFE), Merck(MRK). China’s efforts to make medicines cheaper for 700 million rural people have dragged its biggest health-care stocks down 23 percent this year. Plans to expand the program to wealthy cities may also hurt Pfizer Inc. (PFE) and Merck & Co.
• Aussie Set for Biggest Weekly Drop Since May 2010 on Growth. The Australian dollar headed for its biggest weekly decline versus the U.S. currency since May 2010 as the Reserve Bank cut its forecast for 2011 economic growth.
• Indonesia Growth Spurs World's Priciest Stocks as BRICs Retreat. In a year when stocks around the world are getting cheaper, Indonesian shares are growing more expensive as surging profits lure Asia’s biggest investors. The Jakarta Composite Index’s 11 percent advance this year lifted its valuation to 15 times estimated profit, the highest level among 45 benchmark stock gauges tracked by Bloomberg and a record 36 percent premium to the MSCI All-Country World Index. Price-earnings ratios fell in every other market, declining by an average 15 percent, data compiled by Bloomberg show.
• Citigroup(C) Said to Be Subpoenaed by California Over Mortgages. The California Attorney General’s Office, which is investigating mortgage fraud, subpoenaed Citigroup Inc., a person familiar with the matter said. Attorney General Kamala Harris is seeking information about Citigroup’s mortgage-securitization practices, said the person, who wasn’t authorized to speak publicly about the matter and didn’t want to be identified. The subpoena comes after Harris’s May announcement that she had set up a mortgage-fraud task force to investigate “every step” of the mortgage process from lending to securitization.

Wall Street Journal:

• Stocks Nose-Dive Amid Global Fears. Weak Outlook, Government Debt Worries Drive Dow's Biggest Point Drop Since '08.
• New Focus of Fears on Italy Sends Officials Scrambling. A few months ago, European policymakers were jostling to erect barricades protecting Spain from the marauding sovereign-debt crisis. But suddenly, it is Italy in the cross hairs—deeply transforming Europe's problem and putting policymakers in full retreat. What was a battle to avoid a costly bailout has now become a push to avoid a doomsday scenario. "The line has shifted from before Spain to after Spain," said Carsten Brzeski, senior economist at ING in Brussels.
• Sarkozy to Discuss Crisis with Merkel, Zapatero. French President Nicolas Sarkozy has been talking with the President of the European Central Bank over the last two days and will on Friday hold separate telephone talks with Spanish Prime Minister José Luis Rodriguez Zapatero and German Chancellor Angela Merkel, the French Presidency said late Thursday. The talks come as markets the world over have been plunged into turmoil, as investors fret over the global economy and policy makers' ability to resolve the euro zone's debt crisis.
• Inquiry is Ordered on New IMF Chief. A French criminal court Thursday ordered a probe into whether International Monetary Fund chief Christine Lagarde was complicit in any misuse of public funds in 2008, when she was France's finance minister.
• Tax Reform's Moment? by Stephen Moore. Where else is the growth going to come from?
• The Global Rout. The Keynesians have fired all their ammo and here we are.
  

MarketWatch:

• A Big Red Flag On Emerging Markets. Commentary: Yield curves flashing ominous signals. A critical indicator is flashing red in a couple of key emerging markets, and that could be bad news for the global economy and U.S. investors who have retained a touching but puzzling faith in these recent overachievers.
• Apple(AAPL) Now No. 1 Smartphone Vendor: IDC.
  

CNBC:

• First Solar(FSLR) Misses Target, Cuts 2011 Forecast. First Solar missed earnings expectations and cut its 2011 forecast as slack demand in Europe hit prices for its thin-film panels.

Business Insider:

• Is The Other Shoe Dropping In Europe?
• Democrats Preparing For Another Stalemate Over The New "Super Committee".
  

Zero Hedge:

• Presenting Record Low Mutual Fund Cash Levels. (graph)
• Summarizing Italy's Predicament in 15 Simple Bullet Points.
  

CNNMoney:

• Food Stamp Use Rises to Record 45.8 Million. (graph)

Forbes:

• Brazil Stocks Index Plummets: The Worst Performance Among The World's 20 Largest Equity Markets.

AppleInsider:

• Apple(AAPL) Takes Aim at Copycat Fake Retail Stores With New Lawsuit. After a number of fake Apple retail stores in China gained publicity online, Apple appears to have taken legal action, undoubtedly looking to shut down the counterfeit locations designed to look like its own operations. Apple has gone on the offensive against a number of defendants, including 50 John Does and unnamed businesses, in a new trademark infringement suit. The lawsuit filed in U.S. District Court in the Eastern District of New York remains under a court seal, so the specifics of the complaint are not known.

Gallup:

• Gallup Daily: Obama Job Approval, 51% Disapprove, 41% Approve.

Reuters:

• Italy Prosecutors Seize Moody's, S&P Documents. Italian prosecutors have seized documents at the offices of rating agencies Moody's and Standard & Poor's in a probe over suspected "anomalous" fluctuations in Italian share prices, a prosecutor said on Thursday. The measure is aimed at "verifying whether these agencies respect regulations as they carry out their work," Carlo Maria Capistro, who heads the prosecutors' office in the southern town of Trani which is leading the probe, told Reuters. The documents were seized at the Milan offices of the two agencies on Wednesday, he said, adding that prosecutors had also asked Italian market regulator Consob to provide documents relating to their registration in Italy. S&P in Italy said in a statement it believed the probe was "groundless." "We strongly defend our work, our reputation and that of our analysts," it said. Moody's said it "takes its responsibilities surrounding the dissemination of market sensitive information very seriously and is cooperating with the authorities." The Trani prosecutors have opened two probes -- one for each rating agency -- after a complaint by two consumer groups over the impact of their reports about Italy on Milan stock prices.
• Paulson's Hedge Funds Endure Another Rough Month. Hedge fund titan John Paulson's flagship funds performed poorly in July and sank further into the red for the year. The Paulson Advantage Plus fund is down 21.6 percent for the year after the fund fell 4.63 percent in July, according to people familiar with the firm who declined to be identified. The Paulson Advantage fund is down about 15 percent for the year. The Paulson Advantage funds, which peaked with $19.1 billion in assets under management in March, are losing altitude. The two funds now control about $15.7 billion in investor assets, sources say.
• China's SAIC July Auto Sales Fall 2.97% Y-o-Y. Top Chinese automaker SAIC Motor Corp saw July vehicle sales fall 2.97 percent from a year ago, amid a slowdown in the world's largest auto market. SAIC, the China partner of General Motors and Volkswagen (VOWG_p.DE), sold 270,439 vehicles in July, down from 278,730 units a year earlier and 317,682 in June, it said in a stock exchange filing on Friday.
  
• Massive Net Outflow From Money Market Funds - Lipper.

Financial Times:

• Resource Stocks Take Market's Full Impact.

Telegraph:

• Rio Tinto(RIO) Warning on Commodity Market Spooks Investors. The miner expressed concerns about the impact of the sovereign debt crisis in Europe and the US on global growth, as well as monetary tightening in emerging economies. "Given this range of risks, it seems likely that news or rumours affecting expectations about monetary, credit and fiscal settings as well as the broader health of the financial sector will induce ongoing volatility in commodity markets, albeit around an elevated price trend," Vivek Tulpule, Rio's chief economist said.

Nikkei:

• The Japanese government probably spent $50 billion yesterday to buy dollars.

Financial News:

• China should maintain the strength of monetary policy to consolidate and enhance achievements from previous measures, the Financial News said in a commentary on its second page today. It will be difficult to control consumer price increases to within 5% this year, the commentary said. Factors that push prices higher are not eliminated, the commentary said. Autumn grain output and hog supply in the country still face lots of uncertainties, according to the commentary by a writer at the central bank publication.

Evening Recommendations
Citigroup:

• Reiterated Buy on (PCLN), boosted estimates, raised target to $700.

Night Trading

• Asian equity indices are -5.0% to -2.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 135.50 +14.0 basis points.
  
• Asia Pacific Sovereign CDS Index 129.0 +6.0 basis points.
  
• S&P 500 futures -.08%.
  
• NASDAQ 100 futures -.12%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ABVT)/.58
• (MGA)/1.37
• (WTW)/1.12
• (WCRX)/.89
• (VIA/B)/.85
• (SUP)/.39
• (PG)/.82
• (PPL)/.45

Economic Releases
8:30 am EST

• The Change in Non-farm Payrolls for July is estimated at +85K versus +18K in June.
• The Change in Private Payrolls for July is estimated at +113K versus +57K in June.
• The Unemployment Rate for July is estimated at 9.2% versus 9.2% in June.
• Average Hourly Earnings for July are estimated to rise +.2%% versus unch. in June.

3:00 am EST

• Consumer Credit for June is estimated to fall to $5.0B versus $5.08B in May.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

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