Friday Watch

Evening Headlines

Bloomberg:

• Junk Yields Top 10% as Growth Woes Shutter Market: Euro Credit. Junk-rated European company bond yields climbed above 10 percent for the first time in a year as investors demand more compensation for the region’s stalling economic growth. “These psychological levels are quite important, going from nine to 10 is different from going from eight to nine,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “You’re seeing outflows of funds but if we went to 11 percent that would certainly attract attention as a buying opportunity.” Yields on speculative-grade debt climbed to as high as 10.1 percent on Aug. 11, the most since June 2010 and 2 percentage points up on the start of this month, according to Bank of America Merrill Lynch’s Euro High-Yield Constrained Index. Borrowers unwilling to pay the higher premiums demanded by investors as the risk of recession looms means there have been no new junk bond sales in Europe since July 26, according to data compiled by Bloomberg. The extra yield buyers demand to own junk bonds instead of benchmark German bunds has almost doubled in the past four months as investors seek havens for their cash, Bank of America Merrill Lynch data show. The spread is at 800 basis points, or 8 percentage points, up from this year’s low of 476 basis points on April 11. Confidence in junk-rated debt is deteriorating as nations such as Italy and Spain tackle the debt crisis by implementing austerity measures that may hamper economic growth and hurt companies’ ability to pay debt. European-based mutual funds reduced holdings of high-yield bonds for the first month this year in June, pulling 1.1 billion euros out of junk-rated debt, according to Fitch Ratings. That compares with a net inflow of 5.1 billion euros in the first half.
• U.S. GDP Growth Estimates Cut at Citigroup(C). The U.S. economy may expand less than previously forecast in 2011 and 2012 because of potential “political paralysis” and fiscal tightening steps, Citigroup Inc. wrote in a report. The brokerage cut its 2011 gross domestic product growth forecast to 1.6 percent from 1.7 percent and lowered its 2012 GDP growth estimate to 2.1 percent from 2.7 percent, Steven Wieting and Shawn Snyder, analysts at Citigroup, wrote in a report dated yesterday. They also trimmed their estimates for the Standard & Poor’s 500 Index’s earnings-per-share this year to $97 from $98, and to $101 from $105 next year.
• Hidden Money From Hong Kong Banks Undermining Lending Curbs: China Credit. Chinese companies are borrowing record amounts from Hong Kong’s banks as the central government tries to bring the inflation rate down from a three-year high by reducing access to credit. Financial institutions’ claims on mainland companies rose four-fold to 1.6 trillion yuan ($250 billion) between mid-2009 and the end of May, Hong Kong Monetary Authority data show. “If you borrow in Hong Kong it’s a hell of a lot cheaper than in the mainland,” Jim Antos, a banking analyst at Mizuho Securities Asia, said in a telephone interview from Hong Kong on Aug. 10. “The money is easily repatriated or sent to China.” China’s preference for loan quotas and administrative controls is “becoming increasingly ineffective,” Charlene Chu, a senior director at Fitch in Beijing, said in a telephone interview on Aug. 17. “There are more and more ways around the rules and this is another example of a new channel that’s opened up.” Of Hong Kong banks’ liabilities on the mainland, a total of 74 percent are recorded as claims on mainland Chinese banks and included in Hong Kong banks’ interbank portfolio not their loan holdings, Fitch said. This is because most of these are loans to Chinese companies and the borrower often has a guarantee or letter of credit from a mainland bank, Fitch’s Chu said. Hong Kong banks’ claims on Chinese lenders accounted for 17 percent of their total interbank assets by the end of March, up from 5 percent in mid-2009, according to Fitch. Exposure to mainland China now amounts to about 20 percent of Hong Kong bank assets, Royal Bank of Scotland Group Plc said in a June 22 research note.
• Municipal Bonds May Face Downgrades Following Fina U.S. Budget, S&P Says. Standard & Poor’s, the credit rating company that cut the U.S. to AA+, said the federal budget deal may lead to downgrades on municipal credits. The company, which said earlier this month that states and local governments could remain AAA even after the U.S. cut, said in a report today downgrades could come after reductions in federal funding or changed policy. Ratings changes would come based on “differing levels of reliance on federal funding, and varying management capabilities,” and, after the Budget Control Act of 2011, will be felt “unevenly across the sector,” S&P said. “Experience tells me I would expect there to be some downgrades,” said S&P credit analyst Gabriel Petek in a telephone interview. “These cuts are coming in addition to the losses of revenue that already came during the recession.”
• U.S. gasoline demand is heading toward a nine-year low as a faltering economy and unemployment offset the effect of declines in pump prices. Refiners and blenders will supply the smallest amount of gasoline to the market this year since 2002, based on an Energy Dept. forecast. Demand at the pump has trailed year-earlier levels for the past 20 weeks, according to MasterCard Inc.
  
• Crude Oil Heads for Fourth Weekly Drop on Growth Downgrades, U.S. Job Cuts. Oil declined in New York, heading for a fourth weekly drop, as investors bet fuel demand will falter amid signs of weaker growth in Europe, the U.S. and China, which account for about half of world crude consumption. Crude for September delivery dropped as much as $1.48 to $80.90 a barrel in electronic trading on the New York Mercantile Exchange and was at $81.04 at 10:03 a.m. Sydney time. The contract yesterday plunged 5.9 percent to $82.38. Prices are down 5.1 percent for the week.
• Treasury Yields Tumble to Record Lows on Global Growth Concern. Treasuries surged, pushing yields to record lows, as investors seek a refuge in the world's safest securities on concern global growth is slowing and speculation inflation will remain subdued. U.S. government debt was on pace for the best monthly returns since December 2008 a week after the Federal Reserve said it would keep borrowing costs unchanged until at least mid- 2013. Treasuries have returned 1.8 percent since Standard & Poor's lowered the U.S. credit rating for the first time on Aug. 5 and are up 2.9 percent this month. Bank of America Merrill Lynch's Global Government Bond Index, which excludes the U.S., has increased 1.7 percent in August. "The only place to hide is in the U.S.," said James Camp, managing director of fixed income in St. Petersburg, Florida, at Eagle Asset Management Inc., which manages $19.5 billion. "Rates are going to test the lows. It's the anemic or worse economic growth, a benign inflation environment and catastrophe in Europe." Yields on 10-year notes dropped 10 basis points, or 0.10 percentage point, to 2.07 percent at 1:56 p.m. in New York, according to Bloomberg Bond Trader prices.
• Chinese Protest $5 Billion Losses Tied to U.S. Reverse Mergers. Four wrinkled pieces of paper are all that remain of Xiong Renzhi’s Nasdaq-fueled dream of a comfortable retirement in the southern Chinese city of Nanchang. The certificates gripped in the former electrician’s sinewy hands represent 46,000 shares of Xi’an Xilan Natural Gas Co., which he bought in 2006 for 166,000 yuan ($25,990) by selling his apartment and moving in with his sick mother-in-law. Xiong, 62, said he expected returns many times his outlay when the natural-gas distributor listed on New York’s Nasdaq Stock Market, which it did on June 5, 2009. Like thousands of Chinese who bet their life savings on companies aiming for U.S. listings -- some of them among firms that later cost U.S. investors billions of dollars -- Xiong and his wife are still waiting for a payout. “We put all our eggs in this one basket,” said Xiong, who writes articles online to support protests in the financial capital of Shanghai by others who claim they’ve been cheated. “Is the company going to exploit us for nothing?” Xiong and as many as half a million Chinese who spent an estimated 35 billion yuan ($5.48 billion) on similar investments want authorities to ensure they get their money back. They bought into companies touted by local officials, investors said, only to have their share purchases later deemed illegal by the central government.
• Noda Pledges to Do 'Utmost' to Stop Strong Yen Hurting Growth. Japanese Finance Minister Yoshihiko Noda said currency-market intervention needs to surprise and he's ready to act to stem gains in the yen that could derail an export-led recovery. "I will keep monitoring markets carefully and I will take bold action when needed," Noda said yesterday in a speech in Chiba, near Tokyo. Intervention "is a measure of last resort -- it would be meaningless if it were not a surprise."
• Hedge Funds Most Bearish Since July 2009 After Global Equities Retreat 15%. Bets global stocks will fall have surged at hedge funds to the highest level since July 2009 as the economic slowdown and European debt crisis spur the biggest losses in almost three years. An index of hedge fund assets from International Strategy & Investment Group dropped to 45.8 on Aug. 16, showing the most short selling in two years, down from a 2011 high of 54.2 in February. The research company and broker-dealer surveys 35 firms with about $84 billion under management every week. The index from ISI, based in New York, tracks hedge-fund investments on a zero through 100 scale. Readings of zero show “maximum” short selling, the sale of equities with the hope of profiting by buying them at lower prices later, while 100 means “maximum” bullish bets. At 50, hedge funds are deploying a “normal” allocation to short and long investments. The ratio of bullish to bearish investments in U.S. equities has dropped to 11.7 from this year’s peak of 13.2 in May, according to New York-based Data Explorers, which provides research on short sales and stock lending. The measure sank to 6.5 in September 2008 after Lehman Brothers Holdings Inc.’s bankruptcy. History shows the S&P 500 may sink after closing at 1,140.65 yesterday, up 1.9 percent from the 11-month low of 1,119.46 reached on Aug. 8. The index plunged 16 percent between July 25 and Aug. 8. The eight declines of that size over similar amounts of time since 1928 led to additional losses averaging 17 percent, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York-based research company.
• Netanyahu Says Militants to Pay 'Heavy Price' for Southern Israel Attacks. Prime Minister Benjamin Netanyahu said Palestinian militants who attack Israelis will “pay a very heavy price,” after squads of gunmen killed eight people and wounded 30 in a series of assaults outside the resort town of Eilat. “Those who thought they could hurt us without any response will see there is a price to pay, a very heavy price,” Netanyahu said in broadcast comments late yesterday before meeting top ministers to discuss possible Israeli action.
• U.S. Fed's Low-Interest-Rate Pledge May Retard Recovery, Fisher Tells CNBC. Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s pledge to keep the benchmark U.S. interest rate near zero through at least mid- 2013 may lead to “unintended consequences” and hurt growth. “Now you know that you can wait to borrow because rates are going to be locked in at very low levels for a two-year period,” the regional bank chief said today in an interview with CNBC. “This might well further retard the recovery.” The Dallas Fed chief joined presidents Charles Plosser of Philadelphia and Narayana Kocherlakota from Minneapolis this month in posing the most opposition in almost 19 years to a Federal Open Market Committee decision. They dissented from the FOMC’s Aug. 9 decision to hold interest rates near zero at least until mid-2013, preferring instead to maintain a commitment to do so for an unspecified “extended period.” “There could be unintended consequences,” Fisher said.

Wall Street Journal:

• A Shaken Europe Looks for Bolder Fixes. A dramatic selloff in European financial markets on Thursday renewed fears that Europe's banks are too weak to withstand the Continent's debt crisis, increasing the chances that the region's leaders will be forced to pursue radical steps toward fiscal union in order to preserve their common currency.
  
• Australia Premier Warns on Debt. Australian Prime Minister Julia Gillard expressed concern Thursday about the outlook for global growth, warning that Europe's sovereign-debt crisis is far from being resolved and the U.S. is only beginning to deal with its fiscal problems. In a wide-ranging interview Thursday, Ms. Gillard said the inability of Europe's leaders up to now to calm markets worried over the economic health of the euro zone was the world economy's biggest challenge.
• Bank of America(BAC) Set to Slice 3,500 Jobs. Bank of America Corp. is cutting 3,500 jobs in the current quarter and working on a broader restructuring that could eliminate thousands of additional positions, people familiar with the situation said.
• Japanese Government Tests Show Radiation Exposure in Children. Nearly half the children surveyed in three towns near the stricken Fukushima Daiichi nuclear plant received low-grade internal exposure to radiation during the early days of the accident there, the government said Thursday, fueling concerns about long-term health effects on local residents.
• Deadlock in Ohio Over Union Rights. Labor unions have rejected an offer by Ohio Gov. John Kasich to seek a compromise on a new law that removes most collective-bargaining rights for the state's 350,000 public employees, as a fight over the legislation heads toward a statewide referendum in November. On Wednesday, Mr. Kasich, a Republican, and the party's leaders in the Ohio Senate and House made a pitch to public-employee union leaders to "avoid the bitter political warfare" over the law, known as Senate Bill 5. In a letter Thursday, however, unions said a "fresh start must begin with a full repeal of Senate Bill 5."
• Inflation Rise Puts Fed in Bind. U.S. inflation surged in July primarily because of climbing energy and food prices, but those costs are likely to retreat in coming months as prices for oil, grains, and other raw materials fall in a lagging economy. Underlying price pressures remain strong, however, which could constrain the Federal Reserve from taking more action soon to spur economic growth and hiring.

CNBC:

• High-Frequency Trading 'Negative' for Stocks: Marvin Schwartz. High frequency trading is a "major, major negative for the stock market" and the overall economy, legendary value investor Marvin Schwartz, managing director and senior portfolio manager at Neuberger Berman, told CNBC Thursday.
• Caution on Main Street: Retailers Fret Ahead of Holiday Season. Caution is the watchword for apparel executives heading into the all-important holiday season and their lack of confidence is scaring investors.
• Investors Back Hedge Funds Amid Turbulence. The GlobeOp Forward Redemption Indicator — a monthly snapshot of clients giving advance notice they want their money back as a percentage of GlobeOp's assets under administration — was 2.71 percent, the third lowest figure seen this year. Whilst up from July's 2.08 percent, it is still well below the 4.01 percent seen in June and well below the 19.27 percent recorded in November 2008 shortly after the collapse of Lehman Brothers.
• Apple(AAPL) Overtakes Lenovo in China Sales. Apple’s sales in greater China have for the first time overtaken those of Lenovo, the world’s third-biggest personal computer maker by shipment volume, results from the two companies confirm.

Business Insider:

• The Complete Guide To What's Killing Hedge Funds and What's Working For Them.
• The Market Has Spoken on HP's(HPQ) Grand New Plan.
• Drudge Report Skewers Obama Over Market Drop and Vineyard Vacation.
• Father Of The Euro: It's "On The Edge Of A Precipice". Jacques Delors -- one man responsible for ushering in the European Economic and Monetary Union -- told Swiss newspaper Le Temps that Europe and the euro risk falling from "the edge of a precipice."

Zero Hedge:

• Is The Next Domino To Fall .... Canada?
• Since It Is Now Cool To Downgrade The US, JPM Just Became Da Fonz: Feroli Cuts Q1 2012 GDP Forecast To 0.5% From 1.5%.
• Fed Resumes Liquidity Swap Lines, Lends $200 Million to Swiss National Bank, Most Since October 2010.
  

Forbes:

• Hedge Funds See Gold Going Higher, But Protective Measures Warranted.
• Warren Buffett's Public Disservice On Taxation. Warren Buffett is performing a gross public disservice in creating urban myths about the nature of the tax system in America. Those myths will mislead millions of Americans about the fundamentals of their own country.

IBD:

• Dollar Tree(DLTR), Ross Stores(ROST) Post Solid Earnings.

NY Times:

• Euro-Style Anxiety Spreads. European banks are continuing to show signs of strain, making investors increasingly skittish about American financial institutions. Regulators, bank executives and others continued to play down the risks on Thursday, emphasizing that this would not be a repeat of the 2008 financial crisis. In Europe, political leaders have vowed to prevent a Lehman-like collapse of a major bank, while American firms are better insulated from potential shocks than they were three years ago. But on Thursday, shares of some big Wall Street banks sank to levels nearly as low as that in the months after the downfall of Lehman Brothers.

LA Times:

• Criticism of S&P's Over U.S. Credit Rating Compounds Its Troubles in Washington. The backlash against Standard & Poor's for downgrading the U.S. credit rating adds to the company's problems in the nation's capital, where it faces investigations for its role in fueling the financial crisis with faulty assessments of mortgage-backed securities.
  

CME Group:

• Corn, Wheat, Rice Futures Margins Rise in Chicago.
• Cattle, Hog Futures Margins Increase in Chicago.
  

Reuters:

• BRIC Funds Bleed; Investors Skeptical About Theme's Future. Funds betting solely on stocks in fast-growing Brazil, Russia, India and China are suffering sustained investor withdrawals due to poor returns, throwing into doubt the future of one of the hottest asset classes of recent times. The 'BRIC' moniker was coined by Jim O'Neill of Goldman Sachs in 2001, and investing in the share markets of the four nations took off in the latter half of the last decade. Money managers such as Templeton, Schroders and Deutsche Bank's (DBKGn.DE) DWS launched successful products. Indeed, assets in BRIC funds surged 1,600-fold from a low base to about $38 billion between 2003 and 2007 as shares in the rapidly growing BRIC economies produced almost a 600 percent return. The tide, however, has turned.
• Barclays(BCS) Shares and Swaps Battered in US Market. Bank stocks around the world took a beating on Thursday, but investors and traders were scratching their heads over why shares of Barclays PLC (BARC.L) took one of the deepest dives while its credit default swaps widened dramatically.
• Stock, Bond Fund Outflows Slow in Aug 17 Week - Lipper.
• North American July Chip-Gear Bookings Fall 15.7% vs. June.
• LDK Solar(LDK) Cuts Outlook, Shares Slump. Chinese solar wafer maker LDK Solar Co Ltd on Thursday sharply lowered its revenue and gross margin forecasts for the second quarter and full year due to a dramatic drop in the price of its products. The company's shares fell nearly 11 percent in extended trade following the announcement.
• Salesforce(CRM) Bucks Tech Trend, Boosts Outlook. Web-based software maker Salesforce.com Inc raised its full-year revenue outlook, fueling hopes that cloud computing companies can avoid getting caught up in a possible slowdown in tech spending.

The Economist:

• Many Unhappy Returns. A difficult year for many hedge funds may prove a fatal one for some. August is on track to be one of hedge funds’ worst months ever. The effects will be felt most by some of the weakest funds, many of which need a quarter or two of good performance to restore the morale of their investors and traders. Should they continue to underwhelm in the coming months, investors are likely to withdraw their money. That could force some smaller funds to be wound down. Others will close before investors have the chance to desert them. Some funds have been hanging on since 2008, trying to claw their way back to their peaks, or “high-water marks”, at which point they can once again earn lucrative performance fees. But as many as 89% of hedge funds may have still been under their 2006 and 2007 high-water marks in June, according to PerTrac, a data aggregator. Given their high costs, most have been barely surviving on management fees from investors, which are usually around 2% of assets. Bigger funds, which have economies of scale, might be able to survive for another few years on these paltry pickings. Smaller ones will not.

Guardian:

• European Central Bank is Fighting Fires On All Fronts. The ECB needs the eurozone to stop quarrelling over the Greek bailout with US manufacturing weak and recession looming.

Digitimes:

• Handset Vendors Reportedly Cutting Back Chipset Orders for 4Q11. Some handset solution suppliers have indicated that a number of handset vendors, including Apple and HTC, have scaled down their chipset orders for the fourth quarter as compared with the third on concerns of the global economy, according to sources at Taiwan-based chipset makers. While most smartphone vendors are likely to reach their shipment targets for the third quarter, they have begun to reduce orders for parts and components for the fourth quarter in preparation for a possible impact from changing economic conditions, the sources noted.

China Securities Journal:

• The rising yields of bills sold by China's central bank this week may indicate the monetary authority will maintain a tight policy stance, but will watch future inflation trends before raising interest rates again, citing analysts. One-year bill yields had remained higher than the one-year deposit rate for three months before the People's Bank of China raised interest rates in July.

China Information News:

• The global financial turmoil triggered by the European and U.S. debt crises is the biggest uncertainty facing China's economy in the second half of the year, the China Information News said in a front page commentary today. China's export and economic growth may be negatively affected by cuts in fiscal spending in major economies, according to the commentary. The nation's exports may also face challenges from rising protectionism, accelerating yuan appreciation and higher costs, the commentary said.

Economic Daily News:

• Delta Electronics Inc. plans to eliminate 10% of its workforce in China, or 6,000 workers, as a cost-cutting measure, citing Yancey Hai, chief executive officer of the company.

Economic Observer:

• Chinese banks may not cope as well with a 50% decline in home prices as CBRC Chairman Liu Mingkang thinks, Fitch Ratings senior director Charlene Chu is being quoted as saying. - NPL ratio at Chinese banks may be as high as 30% in extreme scenario; NPL ratio of 13% very likely, citing Chu. - Stress tests on property loans that Chinese banks conduct are static and isolated. - Related sectors may be affected if home prices fall 50%. - Banks low valuations show investor concern about their local govt. financing, vehicle loans, property loans, wealth- management products and frequent fundraisings. - China's govt. may bail out banks if they pose a risk to the banking system, which could affect China's sovereign rating.

National Business Daily:

• China should prevent hot money inflows and inflationary pressure that would be triggered by a new round of U.S. quantitative easing, citing central bank adviser Li Daokui. The Asian country should use the U.S. debt turmoil as an opportunity to make China's economic policies more proactive, citing Li. China's Sate Council and the People's Bank of China must realize that the country is facing the danger of a recession, Yuan Gangming, a researcher with Tsinghua University, was cited as saying in the report. The key for China to deal with the global downturn is to firmly stabilize the exchange rate, push forward the yuan's internationalization and promote diversification of global reserve currencies, Xiang Songzuo, a deputy director of the International Monetary Institute at Renmin University said, according to the report.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -4.0% to -1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 153.50 +12.5 basis points.
  
• Asia Pacific Sovereign CDS Index 151.25 +13.25 basis points.
• FTSE-100 futures -.58%.
  
• S&P 500 futures -.85%.
  
• NASDAQ 100 futures -.60%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ANN)/.45
• (HIBB)/.19

Economic Releases

• None of note

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Dudley speaking and the Fed's Pianalto speaking could also impact trading today.
  

BOTTOM LINE: Asian indices are sharply lower, weighed down by technology and industrial 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.