Thursday Watch

Evening Headlines
Bloomberg:

• European Bank Union ‘Premature’ Amid Resistance to Debt Sharing. A European banking union is no fix for the region’s lenders, trading at a fraction of the book value of their assets, without closer fiscal integration and a solution to the sovereign debt crisis, investors say. Policy makers will discuss ways to coordinate bank oversight, bring together national deposit guarantees and combine crisis management powers at a summit in Brussels today and tomorrow in an effort to bolster confidence in the region’s lenders. For a banking union to succeed, investors say, Europe must achieve for lenders what it’s failed to accomplish for governments: shared liabilities. “Talk about a banking union is too premature,” said Guy de Blonay, a London-based fund manager at Jupiter Fund Management Plc, which oversees about $37.5 billion. “Europe hasn’t taken steps to restoring an orderly sovereign debt market. You need economies to borrow at a decent rate.” Lenders in Europe, burdened by $1.2 trillion of holdings in Spanish, Portuguese, Italian and Irish government bonds, face rising bad loans as the single-currency region teeters on the brink of recession. Governments’ struggles to repay their debt as economies contract is adding to skepticism they can support ailing lenders. Germany’s opposition to sharing government and bank liabilities is raising concern a banking union will become another blunt tool in efforts to tame the crisis.
• Summit Stalemate Endangers Top Sovereign Ratings: Euro Credit. As European leaders debate how to save the 17-nation euro area at their summit today, investors are pricing in savage credit downgrades with four countries losing their Aaa status. Austria, Finland, France and the Netherlands may be cut by as many as nine levels from their top grades, according to a Moody's Analytics review of credit-default swaps prices. Demand for haven securities drove two-year note yields on Germany to a record low of minus .012 percent this month. Bondholders are accumulating debt insurance on concern sovereign borrowing costs will rise as ratings are undermined by the surging bill for bailing out weaker euro-area nations, recessions curb tax revenue and welfare payments increase. With Spain and Cyprus seeking aid this week, markets are skeptical the summit will find a pathway out of the crisis. "Investors are gradually discovering that a large proportion of stuff they thought was safe is turning out not to be," said Matt King, global head of credit strategy at Citigroup Inc. in London. "We are concerned that even as the magnitude of the risks is becoming bigger, policy makers seem as far apart as ever when it comes to agreeing on solutions."
• Germany’s Steinbrueck Tells Passauer Shared Debt Needs Oversight. European debt sharing isn’t possible without countries accepting external budget oversight, Peer Steinbrueck, Germany’s former Finance Minister, told Passauer Neue Presse. “First I want to see that Germany and the Mediterranean countries say, ‘Great, the rule will be: if we can’t keep our own budgets in order, our budget rights will move to a European institution,’” the newspaper cited Steinbrueck as saying in an e-mailed preview of an interview to be published today. “Otherwise it’s not acceptable for Germany to accept liability for others. That would be like giving out a credit card: others do the shopping, and Germany pays.” Steinbrueck ruled out a banking union with common deposit insurance as suggested by European Union President Herman Van Rompuy, the newspaper said. Strengthening national deposit insurance together with broader European oversight and a European bank liquidation law would be possible, the newspaper cited the Social Democrat lawmaker as saying.
• Will Angela Merkel Save Europe’s Banks? Europe’s leaders have raised hopes that, when they meet Thursday and Friday in Brussels, they will agree on a banking union aimed at severing the link between the health of the euro area’s financial institutions and the solvency of its governments. The plan’s success or failure, as with so much else in the currency union today, will depend on one person: German Chancellor Angela Merkel. Ultimately, the question of joint liability is a political one that goes far beyond banking. No currency union consisting of economies and cultures as different as, say, Germany and Spain can work unless its members agree to share the risks of financial and economic shocks. Refusing to do so is tantamount to rejecting the euro. So what will it be, Frau Merkel?
• China’s Housing Curbs Will Remain ‘Tight,’ Shui On’s Lee Says. The Chinese government’s curbs on the housing market will remain “tight” this year, preventing transactions and prices from rebounding significantly, according to Shui On Land Ltd. (272), the developer controlled by Hong Kong billionaire Vincent Lo. “The volume of transactions has increased and sentiment is improving, but any substantial turnaround is unlikely,” said Freddy Lee, chief executive officer of Shanghai-based Shui On, in an interview in Singapore yesterday. “I feel that prices will maintain where they are for a while.”
• China Local Government Finances Are Unsustainable, Auditor Says. The finances of China's county-level governments are unstable and unsustainable as the majority of their fiscal income comes from sources other than taxation, the nation's top auditor said. About 60% of revenue raised last year by 54 counties investigated by the National Audit Office wasn't derived from taxes, Liu Jiayi, the head of the agency, told a meeting of the legislature yesterday, according to a transcript of his speech on the audit office's website. Local governments have been forced to turn to non-tax income such as land sales and to increase debt because of the imbalance in tax revenue and spending obligations with the central government, Jia Kang, director of the finance ministry's Institute of Fiscal Science, was cited by the paper as saying.
• China’s Stocks Decline for Seventh Day on Earnings Concerns. China’s stocks fell, dragging down the benchmark index for a seventh day, on concern the nation’s economic slowdown is curbing earnings growth. Gansu Qilianshan Cement Group Co. declined 2 percent after it said first-half profit may have dropped more than 50 percent from a year earlier. Inner Mongolia Baotou Steel Rare Earth Hi- Tech led a gauge of material producers to the steepest loss among industry groups after the U.S., Europe and Japan asked the World Trade Organization to resolve disputes over China’s limits on exports of rare-earths materials. “The economy is still slowing and earnings growth forecasts have further room to be revised downward,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “Weak sentiment will dominate as investors have no idea how slow earnings growth will be.”
• Dealmaking Rebound Falters as Crisis Threatens Confidence. Dealmaking failed to make a comeback in the second quarter as the European debt crisis and volatile stock markets forced companies to delay big acquisitions. Takeovers fell about 2 percent from the first three months of the year to about $450 billion, the lowest level since 2009, according to data compiled by Bloomberg. Eaton Corp. (ETN)’s proposed purchase of Cooper Industries Plc (CBE) and Pfizer Inc. (PFE)’s sale of its infant-nutrition unit were the only deals to top $10 billion.
• Mortgage Seizures Create ‘Very Serious Concerns,’ Sifma Says. Wall Street’s largest lobbying group is objecting to the use of eminent domain by municipalities to seize mortgages packaged into bonds so the loans can be shrunk to aid homeowners who owe more than their properties’ values. Both the investment firm and bank members of the Securities Industry and Financial Markets Association have “very serious concerns” based on an agreement approved last week by San Bernardino officials granting the authority to study and create such a program, said Ken Bentsen, executive vice president for public policy and advocacy at the New York-based trade group. By using eminent-domain powers, municipalities can force the sale of private property at prices deemed to be fair if doing so serves a public purpose.
• Barclays(BCS) May Implicate Other Banks, Pitt Says. (video) Former U.S. Securities and Exchange Commission Chairman Harvey Pitt talks about record fines imposed by U.S. and U.K. regulators against Barclays Plc after the bank admitted it submitted false London and euro interbank offered rates.
  

Wall Street Journal:

• European Banks Are Facing More Pain In Spain. Spanish-owned banks aren't the only ones under pressure to fortify themselves against Spain's crumbling economy. Foreign banks with big Spanish operations also find themselves in a tough position—and with few options. Three European banks—Barclays PLC, Deutsche Bank AG and ING Bank NV—have large Spanish units. They already have pumped in billions of euros of capital to shore up those businesses, but as the Spanish government conducts a wide-ranging review of the sector's health and the economy continues to struggle, they could demand even more, according to bankers and analysts.
• Optimism on Europe Doesn't Add Up. In Europe there is hope, and then there is math. And the two are on a collision course. Optimists are counting on the latest make-or-break European summit that starts Thursday to deliver convincing steps toward the fiscal and banking unions deemed necessary to keep the euro alive. Unfortunately, even best-case scenarios for the two-day summit won't change some bleak arithmetic. This suggests the debt crisis will rage in Spain and Italy for years.
• IRS Probes Political Group Tied to Rove. The Internal Revenue Service is taking initial steps to examine whether Crossroads GPS, a pro-Republican group affiliated with Karl Rove, and similar political entities are violating their tax-exempt status by spending too much on partisan activities.
• Regulators Ramp Up Queries Into CDS Trades at Data Warehouse. Regulators are increasing the number of queries they make into global credit-default swaps trades reported to the Depository Trust & Clearing Corp., according to figures the data warehouse provider released Wednesday. DTCC said regulators submitted 360 searches in May, the most recent month for which data is available, compared with 37 searches in the same month last year. In April, the number of searches rose to 579 from 77 a year earlier.
• News Corp.(NWSA) Board Approves Split in Principle. News Corp.'s board unanimously approved a plan to split the media conglomerate in two pieces, separating its lucrative entertainment operations from its publishing business, said a person familiar with the situation.
• Google's(GOOG) New Role as Gadget Maker. Web Giant to Brandish Tablet, Home Media Player in Hardware Turf War With Apple, Amazon.
• Madoff's Brother to Plead Guilty to Criminal Charges. Bernard Madoff's younger brother, Peter, is expected to plead guilty to criminal charges and has agreed to go to prison for 10 years, in the first admission of wrongdoing by a family member in a multibillion-dollar investment business that turned out to be "just one big lie."

Dow Jones:

• SEC to Miss Deadline on Hedge Fund Ad Rules. The Securities and Exchange Commission will miss next week's deadline to adopt rules allowing hedge funds to engage in mass marketing but will likely move on the matter soon, SEC Chairman Mary Schapiro will say in prepared testimony for a hearing Thursday.

Business Insider:

• Large Defense Company Is Already Threatening Massive Layoffs On January 1 Next Year If The Fiscal Cliff Hits.
• Here's What To Expect From The Supreme Court's Big Obamacare Ruling.
• The Really Big Show In Europe Is Italy.
• These 31 Democrats Could Join Republicans And Hold Attorney General Eric Holder In Contempt Tomorrow.
• FITCH: The Eurozone Is Entering The 'Danger Zone'.

Zero Hedge:

• How Much To Save The Euro?

CNBC:

• Stockton, Calif., Prepares for Bankruptcy. Are Other US Cities at Risk?

IBD:

• Wright Express(WXS) Fuel Cards Help Truckers Fill Tanks.

NY Times:

• Attack Raises Fears of a New Gang War in Macau. A senior figure in Macau’s gambling industry was severely beaten by six men in a restaurant at his own casino, the highest-profile case of violence in the city’s booming gambling business since Portugal handed control of the former colony back to China in 1999.

LA Times:

• Tiny Telescopes Implanted Into Eyes Help Elderly Patient See Better. UC Irvine ophthalmologists implanted tiny telescopes in two patients suffering from age-related, end-stage macular degeneration, the university announced this week. Doctors from the university's Gavin Herbert Eye Institute in December inserted one of the 4-millimeter telescopes into an 85-year-old Irvine resident's eye and another in a 94-year-old Anaheim resident's eye, according to a UCI statement. The devices restore limited vision by projecting an image onto the undamaged section of the retina, enabling patients to recognize faces, read and perform daily activities. After the implant, the Irvine resident was able to see her son's face for the first time in more than a decade.
• Facebook's(FB) Advertising Growth Slowed Down A Lot In The Last Year. Facebook's U.S. advertising growth has slowed down to a third of what it was in 2011, according to a report issued Wednesday. After growing at impressive rates in the 60% range during the first three quarters of 2011, Facebook's advertising growth fell by more than half to 30% in the fourth quarter, and during the first part of 2012, the growth rate went down to 21.2%, according to a report by the IDC. The slowing growth has resulted in Facebook losing market share. After holding on to almost 14% of display advertising at the end of 2011, Facebook's share is now down to 12%.

Rasmussen Reports:

• 27% Say U.S. Heading in Right Direction.

Reuters:

• Glencore fights to save $26 billion Xstrata bid. Commodities trader Glencore fought to save its $26 billion bid for miner Xstrata on Wednesday after shareholder Qatar stunned the pair with a late demand for better terms, forcing them to push back the timing of the deal.
• Moody's downgrades 11 Brazilian banks. Moody's Investors Service said it had downgraded the ratings of 11 Brazilian financial institutions in line with its review of global banks.
• Fed officials differ on whether more easing needed. Top Federal Reserve officials differed on whether the U.S. central bank needs to be more aggressive in spurring economic growth, indicating another round of easing is far from certain. Chicago Federal Reserve Bank President Charles Evans, one of the U.S. central bank's strongest advocates for further monetary policy easing, said Wednesday he is flummoxed by the Fed's timidity in the face of high unemployment and low inflation. However, his colleague, Atlanta Fed leader Dennis Lockhart, said the Fed would only need to act further if the economy took a turn for the worse or if Europe's simmering debt crisis boils over.
• Italy debt cost likely to rise after Merkel rebuff. Investors are likely to drive Italy's borrowing costs further above 6 percent at a bond auction on Thursday after German Chancellor Angela Merkel brushed aside Spanish and Italian pleas for emergency action to steady debt markets. Battling with rising interest payments on its 1.95 trillion euro ($2.4 trillion) debt, Italy is offering up to 5.5 billion euros in five- and 10-year bonds just hours before the start of an EU summit where Prime Minister Mario Monti will keep pushing for joint moves to contain government funding costs.

Telegraph:

• Banks face billions of dollars of claims after Barclays settles. Damages claims running to billions of dollars against the world’s biggest banks have been given fresh “credibility” by Barclays £290m Libor settlement, lawyers said.
• Angela Merkel dismisses Spain and Italy's pleas for aid. Pleas from Spain and Italy for urgent financial aid from the eurozone to bring down borrowing costs were dismissed by Angela Merkel as divisions hardened on the eve of a critical summit.

expressindia.com:

• Ansari Arrest Confirms Pakistan Role: PC. INDIA today claimed that the interrogation of Zabiuddin Ansari alias Abu Jundal — a key suspect in the Mumbai terrorist attack who has been arrested recently — had confirmed its suspicion that “state actors” in Pakistan had a role to play in the November 2008 attacks that left close to 200 people dead.

Evening Recommendations
Wells Fargo:

• Rated (AAPL) Outperform, target $640-$660.
• Rated (EMC) Outperform, target $29-$30.
  

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 183.50 -2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 150.0 -1.25 basis points.
  
• FTSE-100 futures +.33%.
  
• S&P 500 futures +.11%.
  
• NASDAQ 100 futures +.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FDO)/1.07
• (NKE)/1.37
• (TIBX)/.23
• (AM)/.69
• (SCHN)/.25
• (WOR)/.52
  

Economic Releases
8:30 am EST

• 1Q GDP is estimated to rise +1.9% versus a prior estimate of a +1.9% gain.
• 1Q Personal Consumption is estimated to rise +2.7% versus a prior estimate of a +2.7% gain.
• 1Q GDP Price Index is estimated to rise+1.7% versus a prior estimate of a +1.7% gain.
• 1Q Core PCE is estimated to rise +2.1% versus a prior estimate of a +2.1% gain.
• Initial Jobless Claims are estimated to fall to 385K versus 387K the prior week.
• Continuing Claims are estimated to fall to 3280K versus 3299K prior.
  

11:00 am EST

• Kansas City Fed Manufacturing Activity for June is estimated to fall to 4.0 versus 9.0 in May.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Supreme Court's ObamaCare decision, EU Leader's Summit, Fed's Fisher speaking, Fed's Pianalto speaking, 7Y T-Note Auction, German Unemployment data, Annual Crop Acreage Report, weekly EIA natural gas inventory data and the weekly Bloomberg Consumer Comfort Index could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and automaker shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.