Thursday Watch

Evening Headlines

Bloomberg:

• ECB Daren't Blink First as It Stares Down Bond Market Yields: Euro Credit. The European Central Bank needs to back up last week’s record purchases of government debt with further buying to prevent speculators from driving borrowing costs for Spain and Italy back up again. “The ECB’s bond purchase program has been a very effective deterrent to panic selling, and as long as they don’t blink now, they can have this problem of speculative shorting licked in weeks rather than months,” said Luca Jellinek, the London-based head of European rate strategy at Credit Agricole Corporate & Investment Bank. The ECB snapped a five-month hiatus to buy 22 billion euros ($31.7 billion) of government bonds in the week through Aug. 12, and has bought more securities since. That helped push 10-year Spanish and Italian yields below 5 percent after they surged to euro-era records the previous week amid concern contagion from the debt crisis had infected both countries. The success mirrors the initial benefit of the ECB’s first program of buying Greek bonds in May 2010. Policy makers must avoid what came after that: a reluctance to extend the program with further purchases saw Greek 10-year yields reverse declines and soar by more than 10 percentage points.
• Bad Debt at China Banks Growing: Jain. Bad loans at Chinese banks will rise to “shockingly high” levels, eroding profits and slowing growth in the world’s second-biggest economy, said Vontobel Asset Management Inc.’s Rajiv Jain, who runs some of this year’s best-performing mutual funds. China’s local governments are struggling to repay their debt and “frothy” real-estate markets may leave banks exposed to falling prices, Jain said in an Aug. 16 phone interview. While valuations on Chinese banks have dropped to the lowest levels since October 2008, Jain said the shares aren’t cheap enough to buy because the lenders’ leverage is too high and earnings are likely to disappoint investors. “We have not owned a Chinese bank, and I don’t see owning one any time soon,” said Jain, who oversees about $15 billion, including three funds that beat 99 percent of peers this year, data compiled by Bloomberg show. “If you look at the accounting, I don’t see how anyone could put a penny there.” About a third of local government financing vehicles, used to get around laws prohibiting direct borrowing, don’t have cash flow to service their debt, according to China’s banking regulator. Non-performing loans may climb to as high as 18 percent in a “stress” case, Moody’s Investors Service said in a July 5 statement. “We feel that the non-performing loans are going to be shockingly high,” said Jain, who declined to give a specific estimate for the amount of bad debt. Jain’s $1.9 billion Virtus Emerging Markets Opportunities Fund has climbed 15 percent during the past 12 months and rose 0.2 percent this year through Aug. 16, the best performance among emerging-market stock funds with more than $500 million in assets, according to data compiled by Bloomberg. MSCI’s China Financials Index has dropped 16 percent this year. Shares haven’t fallen enough to compensate investors for the risks associated with high leverage, low lending margins and management incentives that may not maximize returns for shareholders, Jain said. Government-controlled ICBC had a financial leverage ratio, or total assets divided by common equity, of 16.5 at the end of March, according to data compiled by Bloomberg. That compares with an average ratio of 12.7 for banks in the MSCI Emerging Markets Index, the data show. ICBC’s net interest margin was 2.96 percent in the first quarter, compared with 6.1 percent for Itau Unibanco Holding SA (ITUB4), Brazil’s biggest bank by market value, according to data compiled by Bloomberg. For the Chinese banks, “there’s no margin of safety for us,” Jain said. The government may have limited room to use fiscal or monetary stimulus to support lending and property markets because of high inflation, according to Jain.
• China's benchmark money-mark rate rose the most in four weeks on speculation the central bank will add to this year's three interest rate increases as part of efforts to stem gain in living costs. Containing inflation remains the nation's top policy goal, Commerce Minister Chen Deming said yesterday in Hong Kong. "Not everyone agrees inflation is completely under control," said Matthew Huang, Singapore-based senior strategist with Macquarie Group Ltd. The seven-day repurchase rate, a gauge of funding availability in the financial system, rose 28 basis points to 3.53% as of 9:46 am in Shanghai. That's the biggest increase since July 20.
• China Forecasts Cut by Morgan Stanley(MS), Deutsche Bank(DB). Morgan Stanley (MS) and Deutsche Bank AG cut estimates for China’s economic growth as the debt burdens and elevated unemployment of developed nations threaten demand for exports.
• Japan Exports Fall More-Than-Expected 3.3%. Japan’s exports fell more than expected in July as a global slowdown and a strengthening currency weigh on the outlook for the nation’s sales overseas. Exports decreased 3.3 percent in July from a year earlier, the Finance Ministry said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a 2.6 percent decline, after a 1.6 percent decrease in June.
• Midwest Farmland Rose 17% in Second Quarter, Chicago Fed Says. Farmland values in one of the most productive regions in the U.S. Midwest rose 17 percent in the second quarter from a year earlier as higher grain prices made real estate more attractive, the Federal Reserve Bank of Chicago said in an e-mailed report. Rising demand for wheat, corn and soybeans boosted earnings, supporting higher land prices in the five-state Seventh Federal Reserve District, according to the report. The increase in farmland values was the biggest since the 1970s, the Fed said. Gains were reported in Illinois, Iowa, Indiana, Michigan and Wisconsin.
• Let Greece, Ireland, Portugal Default So Spain, Italy Won't, Kashkari Says. European politicians should let Greece, Ireland and Portugal default while taking steps to ensure Italy and Spain won’t, according to Pacific Investment Management Co.’s Neel Kashkari. “They are delaying and denying as long as possible because the medicine to actually put out this crisis tastes so bad,” Kashkari, head of new investment initiatives at Pimco, said in an interview on “InBusiness With Margaret Brennan” on Bloomberg Television. “They are always behind, always trying to play catch-up, and the crisis is always getting worse.” Germany, France, the International Monetary Fund and the ECB should unveil a “massive” bailout package and announce it’s available to the entire euro zone, except for Greece, Ireland and Portugal, effectively letting them default, according to Kashkari.

Wall Street Journal:

• Fed Eyes European Banks. Regulators Scrutinize Ability of Institutions' U.S. Units to Fund Themselves. Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter. The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say. Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks. Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.
  
• Chinese Audit Regulators to Visit U.S. A delegation of Chinese regulators will visit Washington in October as the U.S. and China continue talks on allowing American inspectors to scrutinize Chinese audit firms, the U.S.'s top auditing regulator said Wednesday.
• Threat to Letterman on Muslim Forum. A frequent contributor to a jihadist website has threatened David Letterman, urging Muslim followers to "cut the tongue" of the late-night host because of a joke the comic made on his CBS show. The Site Monitoring Service, a private intelligence organization that watches online activity, said Wednesday that the threat was posted a day earlier on the Shumuka al-Islam forum, a popular Internet destination for radical Muslims.
• Exxon(XOM), U.S. Government Duel Over Huge Oil Find. Exxon Mobil Corp. is fighting with the U.S. government to keep control of one of its biggest oil discoveries ever, in a showdown where billions of dollars hang in the balance for both sides. The massive Gulf of Mexico discovery contains an estimated one billion barrels of recoverable oil, the company says. The Interior Department, which regulates offshore drilling, says Exxon's leases have expired and the company hasn't met the requirements for an extension. Exxon has sued to retain the leases. The court battle is playing out at a time in which the Obama administration has made an issue of unused leases, which deprive the Treasury of valuable taxes. The stakes are high: Under federal law, the leases—and all the oil underneath—could revert to the government if Exxon doesn't win in court.
• Analysts Say Greece's Recession Will Continue in 2012. Analysts warned that Greece is at risk for a fourth year of recession in 2012, defying official forecasts of a recovery and dealing a further setback to the government's deficit-cutting plans. Amid plunging consumer demand, weakening global growth prospects and the possibility of fresh austerity measures, analysts said Greece's economy could shrink 2% or more next year, following a 4.5% contraction in 2010 and an expected 3.9% downturn this year.
• Behold, A Hard-Money Texas Politician. The media trope of the week is that Mr. Perry is George W. Bush only more so, but he clearly isn't the same on monetary policy. Mr. Bush, who first appointed Mr. Bernanke, was an easy-money, weak-dollar President. He and his former economic advisers still don't understand how Alan Greenspan's policies at the Fed contributed to the credit and housing manias that led to the financial meltdown that caused the GOP's political undoing in 2008. Mr. Perry seems to appreciate that the Federal Reserve can't conjure prosperity from the monetary printing presses. His articulation needs some work, but we hope the Texan doesn't let media and other criticism deter him from pursuing the argument. The issue is crucial to understanding—and explaining to the American public—how the meltdown happened and why Americans are so unhappy with the current recovery. The Texas Governor has a better insight into middle-class economic anxiety than do most Washington-Wall Street elites. Americans intuitively understand that their after-inflation incomes haven't risen for a decade. Even when incomes rose during the growth years from 2003-2007, the gains were undermined by the rising cost of housing, as well as by rising food and energy prices. Then huge chunks of middle-class net worth were wiped out in the panic. And now, even as the recovery is supposedly underway, their meager salary increases are being washed away with another burst of commodity inflation caused by near-zero interest rates and quantitative easing. This is what happens when politicians and central bankers try to use monetary policy to compensate for the slow growth caused by bad fiscal and regulatory policies. The Texas Governor, or one of his advisers, may also have noticed that various economic sages are offering inflation as the solution to America's debt problem. Harvard economist Kenneth Rogoff has suggested that an annual 4% to 6% rise in the price level over several years would do the trick. Assorted columnists are picking up the theme, and our guess is that the Obama Administration is privately on board. By all means, we need a debate in 2012 over Fed policy.

Business Insider:

• ...And John Paulson's Disastrous Year Gets Even Worse. Things just keep getting worse for hedge fund giant Paulson & Co. Previously it was reported that he was down 31% for the year. Now? 34% for the year through last Friday, according to CNBC's Kate Kelly. Meanwhile, his leveraged merger-arb fund is down 7%.
• Poll Disaster for Obama: Job Approval On The Economy Plunges; Independents Adbandon Ship. President Barack Obama's approval rating on the economy dropped to a new low today — with the latest Gallup poll showing just 26 percent of Americans are happy with his handling on the economy. It was a drop of 11 percentage points since May, and down from 59 percent at the start of his presidency. A majority of voters have not approved of Obama's leadership on the issue since the middle of 2009. Most troubling for the his reelection chances, a majority of independent voters disapprove of Obama's handling of a broad swath of issues ranging from foreign affairs to job creation.
• Department of Justice Investigating S&P Over Ratings. The Department of Justice is investigating Standard & Poors over its ratings of mortgage securities, The New York Times reports.The department is reportedly interested in instances where raters wanted to give lower ratings to bonds, but were overruled by executives in the years before the financial crisis. The investigation appears to predate the downgrade of debt issued by the United States, though that has likely added urgency to the investigation.
• The UN Just Released a Report That Could Make Lebanon Explode. Al Jazeera reports that the United Nation's Special Tribunal for Lebanon (STL) has finally lifted confidentiality restrictions on its report on the 2005 assasination of former Lebanese Sunni Prime Minister Rafiq al-Hariri. The tribunal found enough circumstantial evidence to recommend that four members of Hezbollah stand trial for Hariri's death.
• Meet The Analyst Who Says Facebook Management "Is In A Virtual Panic" As "Growth Hits A Wall".
• Watch The Media's Portrayal Of Female Celebrities Become Increasingly Pornographic Over The Years.
• Maxine Waters Says Congressional Black Caucus "Getting Tired" of Covering For Obama.
  

Zero Hedge:

• The Out-of-Control Explosion of Equity Quote Rates or Why Any and All HFT "Research" Is Already Obsolete.
• Monorail.... Monorail... Monorail...Is Coming to a Broke State Near You. Unfortunately, we are not kidding: not even a day after Obama came pleading for more fiscal stimulus, and already California governor Jerry Brown is saying that the most insolvent state in America should proceed... with a high-speed rail project. Forget that China is in the process of shutting down 54 of its own: you see, this is precisely what California needs to give the optics it is the next Chinese miracle.
• The Benz Burners Arrive: Protests Come to Germany as Arsonists Burn Down "Fat Cat" Cars.
  

Forbes:

• SEC Destroys Evidence Against Banks and Hedge Funds, Whistleblower Alleges. In a heavy dose of irony for the Securities and Exchange Commission, which launched a new whistleblower program this week, one of its own lawyers is calling foul on the agency for allegedly destroying thousands of documents related to investigations that involved suspicious activity at major banks and hedge funds. Today Sen. Chuck Grassley of Iowa asked the SEC to account for the allegations. “From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” Grassley said. “It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law.”

IBD:

• Accenture(ACN) Benefits From Surge of IT Spending.

NY Times:

• Court Ruling Offers Path to Challenge Dodd-Frank.

The Washington Examiner:

• Obama Concedes Health Care Law Won't Control Costs. With a little noted remark at an appearance in Cannon Falls, Minn., on Monday, President Obama tacitly acknowledged that his signature legislative achievement won't meet its stated goal. During a rant against Republican intransigence, Obama said that he could tackle the deficit tomorrow if his opponents would agree to raise taxes and "were willing to take on some of the long-term costs that we have on health care." Sound familiar? Back in February 2009, days after signing an economic stimulus package then valued at $787 billion, Obama convened a Fiscal Responsibility Summit at the White House. At the time, the event was advertised as Obama's "pivot" to tackling the nation's debt burden, but it was really the opening pitch for imposing national health care on America. "Health care reform is entitlement reform," said Peter Orszag, then Obama's budget director. "The path to fiscal responsibility must run directly through health care." Obama amplified this message in his own remarks, calling rising health care costs "the single, most pressing fiscal challenge we face, by far." He added that in the 2008 election, Americans had rejected the "casual dishonesty of hiding irresponsible spending with clever accounting tricks." It's undeniable that health care inflation -- which helps drive the ballooning cost of Medicare and Medicaid -- is the most significant fiscal challenge we face. The problem is, the health care plan that Obama rammed through Congress ended up making our problems worse, as it relied on the very type of accounting tricks he decried. To make the legislation appear cheaper over the standard 10-year budget window, Obama and his Democratic allies delayed the major spending provisions until 2014. To be able to claim modest deficit reduction, they turned to other gimmicks.

Reuters:

• China's Exporters Feel The Pain of Shoppers in Europe, U.S. Chinese exporters are bracing for bad news as shoppers in their two biggest markets -- Europe and the U.S. -- increasingly stay at home. A week after surprisingly strong export data for July, interviews with 16 Chinese manufacturers showed that most expect a slump in exports in the coming months, particularly for textiles and electronics. "Right now with Europe's debt crisis, people are making less, and they will have to buy less too. That will have a big impact on our business," said Roger Wen, manager of the Shenzhen Design Center Co, which exports small home appliances such as microwaves and coffee makers. "Christmas orders have already come in and they aren't bad, about the same as last year. But I'm not sure all the orders will go through in the end," he said. "When we get to September and October, who knows if they'll still want the shipments. They might cancel."
• Brazil Gov't in Crisis as Fourth Minister Quits. Brazilian President Dilma Rousseff's seven-month-old government sunk further into crisis on Wednesday as a fourth minister quit and another top aide publicly questioned whether the leader would seek reelection or step aside in 2014 for her much more popular predecessor.
• JDS Uniphase(JDSU) Forecasts Weak Q1, Sees Bookings Improving. JDS Uniphase Corp forecast weak first-quarter revenue on macro-economic challenges and inventory corrections but said booking trends were encouraging. Shares of the company, which provides broadband and optical communication components, fell much as 16 percent to $9.80 in after-market trading on Wednesday, before recouping the losses.
• Limited Brands(LTD) Raises Profit, August Sales Outlook. Limited Brands Inc reported a higher-than-expected profit as it sold more lingerie at full price and the company raised its August same-store sales and full-year profit forecasts, sending its shares up more than 3 percent.
• NetApp(NTAP) Misses as Sales Slow Sharply in July. Data storage equipment maker NetApp Inc posted quarterly revenue below Wall Street projections, saying business fell dramatically in July -- the latest sign that global technology spending is slowing. "The environment remains unsettled and macro economic forecasting remains beyond our scope," Chief Executive Tom Georgens told investors in a conference call on Wednesday, after watching shares in his company tumble 12 percent

Financial Times:

• Markets Give Eurozone Plan Cool Reception. Financial markets and fellow European leaders reacted coolly on Wednesday to proposals by the French and German leaders for more economic co-ordination between eurozone capitals, with several countries reiterating long-held reservations towards ceding control of tax and economic policies.

Telegraph:

• Bank of England More Worried About Recession Than In Downturn. The Bank of England is more pessimistic now about the prospects for the UK economy than it was when the country was in recession.

Globe and Mail:

• Soros: Crisis Is Not Over. The current crisis in Europe is a continuation of the 2008 U.S. crisis rather than a separate event and it is far from over, according to billionaire investor George Soros. Soros further argued China will defend the Euro, because it wants a viable alternative currency to the U.S. dollar. As a result, he says, he won’t short the Euro. In fact, he says, that is why the Euro has been so strong relative to the dollar during the European crisis “There is a mysterious buyer that keeps propping up the euro,” he said.

Financial News:

• China should place priority on using interest rates as one of its policy tolls and eliminate arbitrage opportunities in the interest rate structure, citing market participants. The Asian nation will likely further tighten lending for property development in the second half.
  

People Daily:

• Europe must defend the euro against an uncertain future, the People's Daily said in a commentary attributed to Ding Gang. Europe must rely on itself to solve its debt turmoil and obtain credit for the eurozone, the commentary said.

Evening Recommendations
Citigroup:

• Rated (RHT) Buy, target $45.
• Reiterated Buy on (JDSU), target $14.50.

Night Trading

• Asian equity indices are -2.25% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 141.0 -4.5 basis points.
  
• Asia Pacific Sovereign CDS Index 138.0 -2.75 basis points.
• FTSE-100 futures -1.31%.
  
• S&P 500 futures -.87%.
  
• NASDAQ 100 futures -.94%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PERY)/.04
• (SSI)/.29
• (SHLD)/-.46
• (TECD)/.95
• (PLCE)/-.39
• (BKE)/.50
• (SJM)/1.08
• (DLTR)/.75
• (ROST)/1.28
• (TTC)/1.13
• (GME)/.21
• (GPS)/.33
• (INTU)/.00
• (ADSK)/.41
• (ARO)/-.03
• (CRM)/.29
• (HPQ)/1.09
• (FL)/.12
• (CRMT)/.75

Economic Releases
8:30 am EST

• The Consumer Prices Index for July is estimated to rise +.2% versus a -.2% decline in June.
• The CPI Ex Food & Energy for July is estimated to rise +.2% versus a +.3% gain in June.
• Initial Jobless Claims are estimated to rise to 400,000 versus 395,000 the prior week.
• Continuing Claims are estimated to rise to 3700K versus 3688K prior.
  

10:00 am EST

• Leading Indicators for July are estimated to rise +.2% versus a +.3% gain in June.
• Philly Fed for August is estimated to fall to 2.0 versus 3.2 in July.
• Existing Home Sales for July are estimated to rise to 4.9M versus 4.77M in June.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Dudley speaking, 5-year TIPS auction, Bloomberg Economic Expectations Index for August, Fed's weekly balance sheet/M1, M2 reports, Bloomberg's weekly Consumer Comfort Index and the weekly EIA natural gas inventory report could also impact trading today.
  

BOTTOM LINE: Asian indices are 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.