Wednesday Watch

Evening Headlines

Bloomberg:

• Recession Panel Majority Sees Rising Odds of a Renewed U.S. Economic Slump. The odds of another U.S. downturn are rising amid cutbacks in spending by consumers and the government, according to five of the nine members of the U.S. panel that dates recessions. “This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.” A greater-than-expected slowdown in the first half of 2011 poses risks for the world’s largest economy, said economist Robert Hall of Stanford University, the panel’s chairman. Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29. “The slower the growth rate, the more likely it is that an adverse shock would cause a recession,” Hall said in an interview.
• Moody's Affirms U.S. Ratings, Warns of Downgrades. Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens. The outlook for the U.S. grade is now negative, Moody’s said in a statement yesterday after President Barack Obama signed into law a plan to lift the nation’s borrowing limit and cut spending following months of wrangling between Democratic leaders and Republican lawmakers. The compromise “is a positive step toward reducing the future path of the deficit and the debt levels,” Steven Hess, senior credit officer at Moody’s in New York, said in a telephone interview yesterday. “We do think more needs to be done to ensure a reduction in the debt to GDP ratio, for example, going forward.” JPMorgan Chase & Co. estimated that a downgrade would raise U.S. borrowing costs by $100 billion a year, while Obama said it could hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any AAA-ranked country, Fitch said in April.
  
• China's Zhou to Monitor U.S. Debt as Xinhua Sees 'Bomb' Yet to Be Defused. Governor Zhou Xiaochuan said China’s central bank will closely monitor U.S. efforts to tackle its debt as the official Chinese news agency criticized what it called the “madcap” brinksmanship of American lawmakers. The People’s Bank of China welcomed legislation that raised the U.S. debt limit and prevented a default, Zhou said in a statement on the central bank’s website today. Xinhua News Agency said the move “failed to defuse Washington’s debt bomb for good,” in a commentary dated yesterday.
• LBO Loan Costs in Europe Exceed Lehman Crisis: Credit Markets. Private-equity firms face funding costs for European leveraged buyouts that exceed even the aftermath of Lehman Brothers Holdings Inc.'s collapse as a weakening global economy and Europe's debt crisis damp demand for high-yield, high-risk loans. Interest rates on loans to finance LBOs have risen to average 450 basis points more than benchmarks since June, from 413 basis points in the first five months, according to data compiled by Bloomberg. Margins peaked at about 437 basis points following Lehman's bankruptcy in late 2008.
• Commercial Mortgage Late Payments Hit Record in Signal of Market Distress. Late payments on commercial mortgages bundled and sold as bonds rose the most in more than 12 months, adding to concern that the market is deteriorating three years after the financial crisis choked off funding to borrowers. Delinquencies on the debt jumped 51 basis points in July to a record 9.88 percent, according to real estate data provider Trepp LLC. The increase follows two months of declines, the New York-based firm said today in a statement. The jump is partly because of how loan servicers report mortgages that are in foreclosure, Trepp said. “Much of the positive momentum that had been surrounding the CMBS market recently has now all but vanished in the past few weeks,” according to the statement from Trepp. Borrowers are falling behind on payments as a revival in new debt sales stumbles after investors pushed back on deal terms. Wall Street banks sold $3 billion in commercial mortgage- backed securities last month at the highest yields since issuance resumed in November 2009 and Standard & Poor’s exacerbated market turmoil by withdrawing rankings last week on new deals. S&P’s decision forced Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C), to scuttle a $1.5 billion deal after it was placed with investors. Wall Street lenders may incur ”hundreds of millions of dollars” in losses as prices on commercial-mortgage bonds tumble, Barry Sternlicht, the chief executive officer of Starwood Capital Group LLC, said on a conference call with investors today for Starwood Property Trust, a unit of the firm. The company used a “wild hedge” that prevented Starwood from losing “a lot of money,” he said. “Most of our peers in this business did not have hedges like this in place to our knowledge,” Sternlicht said.
• Corzine's Obama Covenant in MF Global Offering Stuns Wall Street. MF Global Holdings Ltd. (MF) took the cult of the Wall Street chief executive officer to a new level with a plan to sell bonds that pay a higher rate if Chairman and CEO Jon Corzine quits to take a job from the U.S. president. The futures broker is selling $300 million in five-year unsecured notes, said a person familiar with the offering who declined to be identified because the terms aren’t final. The notes will pay an extra percentage point of interest if Corzine is named to a federal post and confirmed by the Senate before July 2013, New York-based MF Global said in a regulatory filing. “That seems crazy,” said William Larkin, a fixed-income portfolio manager who oversees $500 million at Cabot Money Management Inc. in Salem, Massachusetts, and has 22 years of experience. “I’ve never heard of something like this.”
• Irish Disease Returns to Economy as Job Scarcity Spur Exodus From Country. Unemployment and emigration, the twin diseases that blighted Ireland in the 1980s before its economic boom, are returning to ail the country after the bust. The jobless rate will probably remain above 14 percent through the next year, according to economists at Allied Irish Banks Plc and Ulster Bank in Dublin. That’s double the level of three years ago. The unemployment rate was 14.2 percent in June and the statistics office will publish July data at 11 a.m. tomorrow. Meanwhile, more people are leaving the country than at any time since 1989. “Things are desperate,” Joe Cox, 51, who lost his job 11 months ago after running a hardware store before Ireland’s property bubble imploded, said outside a welfare office in Dublin. “Employers don’t even reply a lot of the time.”
• Oil Slides a Fourth Day as U.S. Spending Drops, Moody's Warns of Downgrade. Oil declined for a fourth day in New York, its longest losing streak since May, as investors bet that signs of a slowing U.S. economy indicate fuel demand will falter in the world’s biggest crude-consuming nation. “The economic numbers are reflecting that demand is weak in the U.S.,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who predicts oil will average $100 a barrel this year. “Prices could come back to the $90 level, if not more.” Crude for September delivery dropped as much as 69 cents to $93.10 a barrel in electronic trading on the New York Mercantile Exchange, and was at $93.32 at 11:55 a.m. Sydney time. Oil is extending losses in New York after dropping below the 200-day moving average yesterday, a long-term support level at about $95 a barrel, according to data compiled by Bloomberg. A breach of technical support usually means prices will continue to fall.
• Best U.S. Consumer Spending Forecaster DeKaser Sees Rebound in Second Half. Richard DeKaser, the best forecaster of U.S. consumer spending, projects expenditures will “rebound somewhat” in the second half of the year, reflecting the drop in fuel costs and a recovery in auto sales. The deputy chief economist at the Boston-based Parthenon Group calls for a 2.5 percent gain in spending in the second half of the year and 1.7 percent next year. Purchases rose at a 0.1 percent annual rate in the second quarter, the worst performance in two years, according to Commerce Department data.
• Wall Street Faces Disclosure to States, Cities. Wall Street banks hired to arrange bond sales for U.S. states and cities may be forced to tell public officials about potentially costly risks and conflicts of interest involved in the financings. The Municipal Securities Rulemaking Board, which draws up regulations for banks that work in the tax-exempt debt market, said today that it asked the U.S. Securities and Exchange Commission to approve the rules placing greater disclosure requirements on bond underwriters.
• Emerging Market Stocks Poised for 'Ominous' Drop: Technical Analysis. An "ominous" head-and-shoulders pattern has formed over the MSCI Emerging Markets Index(EEM), which may foreshadow declines that will take it to the lowest level in almost a year, according to Auerbach Grayson & Co. Investors should sell stocks of developing nations except for Russia, South Korea and Indonesia, Richard Ross, global technical strategist at Auerbach Grayson, said in a note to clients.
  
• Diggle's New Hedge Fund Bets on Volatility as Crisis Shifts to Public Debt. Stephen Diggle, the Singapore-based hedge fund manager who made $2.7 billion for investors as markets see-sawed in 2007 and 2008, is betting on price swings in government debt, currency and commodity markets amid concern that the debt crises in Europe and the U.S. may worsen. There has been an “unprecedented level of transfer of indebtedness from banks to governments” after the global financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc., said Diggle, who started Vulpes Investment Management after liquidating Artradis Fund Management Pte’s volatility funds this year. “The fault lines have moved away from the private sector to the public sector,” Diggle, 47, said. “These sorts of distortions are coming about principally because of government activity rather than excessive fear or greed amongst investors, which is what normally causes volatility.” “I’m not sure if the next crisis will be centered on the stock markets,” said Diggle. “It’s likely to be centered on government debt markets, currency markets and probably commodity markets.”

Wall Street Journal:

• Deficit Battle Shifts to Panel. The Senate approved—and President Barack Obama immediately signed—the long-awaited deal to raise the nation's debt limit Tuesday, as the battle shifted to how a special committee created by the measure will cut the deficit by $1.5 trillion.
• Worries Mount Over Italy and Spain. Government bonds and financial markets in Italy and Spain continued their relentless downward march Tuesday, heightening concern about the potential spread of the euro zone's debt crisis into two of the region's most vulnerable countries. In Italy, the government shifted into emergency mode on Tuesday, as government-bond yields climbed and the share prices of the Italian banks that hold many of them slid precipitously.
• Europe's Banks Retreat. Barclays Latest to Turn Defensive as Chief Executive Cites "Loss of Confidence". Banks across Europe are retrenching in efforts to shield themselves from the continent's financial crisis and an increasingly bleak international economic outlook. Some banks are scrambling to dump government bonds and cut credit lines in southern Europe's economic laggards, while others are stockpiling cash. They are also firing thousands of workers and warning about a growing number of red flags they see among customers. With the crisis starting to infect Spain and Italy, where borrowing costs recently have skyrocketed, some banks appear to be accelerating their cleanup and fortification efforts. Barclays, which has suffered more than £1 billion in losses on corporate and commercial real-estate loans in Spain, said it was holding about £6.6 billion, or €7.6 billion ($10.8 billion), of such assets as of June 30. That is down sharply from the roughly €11.1 billion figure it reported as of Dec. 31 in the stress tests. "The size of the balance sheet in Spain is absolutely shrinking," said John Winter, the head of the corporate-banking arm at Barclays. He said the bank is focusing, in particular, on reducing its portfolio of Spanish construction and property loans. A similar move is under way at HSBC Holdings PLC. Iain Mackay, the bank's chief financial officer, said Monday that HSBC has been limiting credit lines for customers in Spain and Italy.
• BofA(BAC) Proposes Loan-Forgiveness Deal. Bank of America Corp. is having preliminary conversations about a home-foreclosure settlement that would reduce the amounts owed by some of its troubled borrowers in exchange for a broad release from legal claims against the lender, said people familiar with the talks.
• Census Shows New York Exodus. New Yorkers are flocking to other states at the fastest rate in the nation. And most of them are leaving from New York City, according to a new analysis of U.S. Census data. Over the past decade, about 1.6 million New Yorkers, or 8% of the state's population, decamped to another part of the country, a bigger percentage drop than any other state, said the analysis released Tuesday by the Empire Center for New York State Policy.
• Amazon(AMZN) Battles States Over Sales Tax.
• Where's Your Budget, Mr. President? by Paul Ryan. Ever since they fudged the numbers to pass ObamaCare, Democrats have abandoned credible spending plans.

MarketWatch:

• Bin Laden Group to Build World's Tallest Tower. An affiliate of Saudi Arabia's Kingdom Holding Co., Jeddah Economic Co., has signed a deal worth roughly $1.23 billion with the Bin Laden Group to build the world's tallest tower in Jeddah, Saudi Arabia, the Wall Street Journal reported Tuesday.

CNBC:

• US Rating 'Will Remain Under Pressure': Fitch. Fitch's triple-A rating on U.S. debt is safe, for now, but that could change if "fundamental weakness" in the economy isn't addressed, Fitch Managing Director David Riley told CNBC Tuesday.

Business Insider:

• The Updated Guide To Europe's Impending Debt Disaster. Way back in March we gave you a guide to the debt situation in Europe. Since then, Portugal needed a bailout, Greece needed a second bailout, Cyprus now probably needs a bailout, and Belgium still has no government. In light of the changes, here's our updated guide to the economic conditions of the PIIGS and other countries in Europe that the markets worry about.
• A War of Words Erupted After Deutsche Bank Dropped $11 Billion in Italian Government Bonds.
• Israel Will Bomb Iranian Nuclear Sites Next Month, Ex-CIA Agent Predicts.
• More Than Half of Mexico's Top Prosecutors Have Resigned En Masse.
  

Zero Hedge:

• Food Stamp Use Surges By Most In Years as Alabama Food Stamp Recipients Double In May. (graph)

Forbes:

• Higher Taxes and An Epic Tax Fight Are On The Horizon.

Politico:

• Debt Ceiling Bill's Super Committee Has Lobbyists Preparing. K Street wasted little time putting clients on notice about the next phase of the debt ceiling debate with a simple message: Nobody is safe from the super committee.

Rasmussen Reports:

• Election 2012: Generic Republican 47%, Obama 42%.

Reuters:

• Google(GOOG)+ Attracts 25 Million Visitors - comScore. Google Inc's new social network has attracted 25 million users, making it the fastest website to reach that audience size, according to data released on Tuesday by comScore. Google+, launched in late June, had 25 million unique visitors as of July 24 and is growing at a rate of roughly one million visitors a day, comScore noted in a presentation. In contrast, it took Facebook about three years to attract 25 million visitors, while Twitter took just over 30 months, according to comScore.
• Moody's Puts State-Linked U.S. Institutions on Negative Watch. Credit rating agency Moody's Investors Service reaffirmed the Aaa ratings of several major state-linked U.S. financial institutions on Wednesday but, in line with its outlook for sovereign debt, gave notice of a possible downgrade. Moody's statement applies to mortgage firms Fannie Mae and Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks. "In conjunction with the revision of the U.S. government outlook to negative, the rating outlook for these directly linked issuers has also been revised to negative," it said.
  
• Corrosiveness of Oil Sands Crude An Unproven Science. There is little hard evidence that the Canadian oil is more corrosive than conventional crude, scientists and regulators say. Environmental groups, led by the New York-based Natural Resources Defense Council (NRDC), contend that the oil from the Alberta tar sands, when blended with light hydrocarbons to allow it to flow, eats away at the insides of long-haul pipelines because of its high acidity and mineral content.
• S&P Says Markets Have Discounted Possible U.S. Downgrade. A senior official at rating agency Standard & Poor's said on Wednesday that global markets have already discounted a possible U.S. ratings downgrade, and that Asian nations' ratings were generally on an uptrend despite global economic woes. "Market is to some extent already discounted to the potential risk of a U.S. downgrade," Takahira Ogawa, director of sovereign ratings at S&P, told Reuters. He said Indonesia, the Philippines and South Korea have a relatively larger proportion of debt held by foreign funds and could be more vulnerable to any risk aversion, but said most Asian sovereign ratings were on the uptrend. However, he said Japan's finances remained a worry. "We see Japan sovereign risk still increasing but not to the extent for us to have another action," Ogawa said.

Global Finance:

• US Hasn't Given Japan Support For Possible Currency Intervention - Source. The U.S. hasn't given its backing to Japan for possible intervention in currency markets, a person familiar with the matter told Dow Jones Newswires on Tuesday. Japan's government has received no support from the U.S. for intervention, the person said, declining to elaborate. Japanese Finance Minister Yoshihiko Noda and other officials have stepped up their threats of intervening to curtail the strength of the yen, as the dollar has approached the post-World War II lows reached before Japan and its Group of Seven counterparts joined in March to sell the yen in the first coordinated intervention in a decade.
  

Financial Times:

• Eurozone Bail-Out Triggers Loom Large. Spanish and Italian debt is edging closer to a number of triggers that could take the eurozone crisis to a new peak. Spreads on the eurozone’s third- and fourth-largest economies – the premium they pay to borrow over Germany – hit 404 basis points for Spain and 384bp for Italy on Tuesday. That edges both countries closer to higher margin calls for Europe’s biggest clearing house, LCH.Clearnet, a move that has previously deepened market problems for other peripheral eurozone countries. LCH imposes an additional margin requirement of 15 per cent when the yield spread rises above 450bp. “These spreads are not sustainable … Something has to give,” said one senior European capital markets banker.

Telegraph:

• Europe's Money Markets Freeze as Crisis Escalates in Italy and Spain. The European money markets have begun to seize up as pressure mounts on the Italian and Spanish banking systems, tracking the pattern seen during the build-up towards the financial crisis in 2008. The three-month euribor/OIS spread, the fear gauge of credit markets, reached the highest level in two years today, jumping 7 basis points to 40 in wild trading. "Europe's money markets are undoubtedly starting to freeze up," said Marc Ostwald from Monument Securites. "It's not as dramatic as pre-Lehamn but it is alarming and shows the pervasive degree of fear in the markets. People are again refusing to lend except on a secured basis."

The Australian:

• IMF Warns Interest Rates Will Have to Rise. THE International Monetary Fund warns that interest rates will need to rise further to deal with the mining boom, tax reform needs to be more urgent to ease two-speed economy pressures and the budget needs to build bigger surpluses to prepare for a possible slump in Chinese export demand. The head of the IMF's annual staff mission to Australia estimates house prices here are 10-15 per cent overvalued and says they are likely to remain flat for several years.

Xinhua:

• China's Dagong Global Credit Rating Co. cut the credit rating for the U.S. to A from A+ with a negative outlook after the U.S. government announced its debt limit would be increased again, citing a statement from Dagong.

China Digital Times:

• China Extends Surveillance Into Supermarkets, Cinemas and Classrooms.

Securities Times:

• Beijing's land sales for residential developments reached 16 billion yuan for the first seven months of this year, 15% of last year's total, citing Beijing Land Consolidation and Reserve Center. Home purchases limits and tighter credit have affected real estate developers' funds, according to the report.

Financial News:

• China must maintain continuity and stability of policy while implementing prudent monetary policy in the second half of this year, the Financial News said in a front-page commentary today. Controlling consumer price increases to within 5% this year won't be easy and needs great effort, the commentary said. China should use tools, including open market operations and reserve requirement ratios, to maintain liquidity at an appropriate level, according to the commentary by a writer at the central bank publication. The nation needs to increase flexibility of the exchange rate, the commentary said.

People's Daily:

• China should curb inflation in the next few years as it affects social and economic stability, Lin Zhaomu, a researcher with the National Development and Reform Commission's academy of macroeconomic research, wrote in a commentary today. Imported inflation, rising domestic costs, investment demand and excess liquidity are the main drivers of rising consumer prices these days, Lin wrote.

Beijing Times:

• China failed to sell 353 parcels of land at auction in the first seven months of this year, 242% more than the same period a year earlier, because of government curbs on the property market, citing Beijing Homelink Real Estate Co.

Evening Recommendations
Citigroup:

• Reiterated Buy on (MDRX), target $25.

CSFB:

• Reiterated Outperform on H, lowered target to $50.
  

Night Trading

• Asian equity indices are -2.0% to -1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 123.0 +6.5 basis points.
  
• Asia Pacific Sovereign CDS Index 122.25 +4.75 basis point.
  
• S&P 500 futures +.15%.
  
• NASDAQ 100 futures +.09%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KKR)/.40
• (MA)/4.23
• (OC)/.58
• (EE)/.63
• (DVN)/1.53
• (TWX)/.56
• (MMC)/.48
• (PWR)/.17
• (ICE)/1.67
• (SPW)/.89
• (WCG)/.95
• (TRW)/1.71
• (KCP)/.03
• (CECO)/.66
• (MDR)/.31
• (ATW)/1.03
• (ATVI)/.05
• (WMB)/.39
• (PRU)/1.54
• (CQB)/1.13
• (TSO)/1.32
• (GGC)/.35
• (IPI)/.36
• (SKYW)/.01
• (BID)/1.56
• (CEG)/.84
• (DNDN)/-.71
• (CMCSA)/.40
• (CLX)/1.19
• (ANDE)/1.72

Economic Releases
8:15 am EST

• The ADP Employment Change for July is estimated at +100K versus +157K in June.

10:00 am EST

• ISM Non-Manufacturing for July is estimated to rise to 53.5 versus 53.3 in June.
• Factory Orders for June are estimated to fall -.8% versus a +.8% gain in May.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,500,000 barrels versus a +2,296,000 barrel increase the prior week. Distillate inventories are expected to rise by +1,500,000 barrels versus a +3,385,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +250,000 barrels versus a 1,022,000 barrel gain the prior week. Finally, Refinery Utilization is estimated unch. versus a -2.0% decline the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Challenger Job Cuts report for July, weekly MBA mortgage applications report, (MDAS) Investor Day and the Leerink Swann Life Science Tools/Diagnostics Roundtable Conference 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 rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.