Friday Watch

Evening Headlines
Bloomberg:

• Balkan Democracies Fray as Anti-Austerity Boosts Orban Followers. Austerity is starting to tug at the seams of Europe’s youngest democracies. Romanian Prime Minister Victor Ponta’s drive to oust the president, whose budget cuts drew praise from German Chancellor Angela Merkel, will come to a head in a July 29 referendum. Incoming Serbian Premier Ivica Dacic threatened to sack the central bank chief and declared foreign banks an “enemy.” The leu and the dinar fell to record lows against the euro as debt costs soared. Politicians in the region are riding anti-austerity sentiment that has also bolstered radicals in more established European democracies such as Greece, France and the Netherlands. The post-communist leaders are following Hungarian Prime Minister Viktor Orban, who has battled the EU for two years as he sought to consolidate his power, said Lars Christensen, chief analyst at Danske Bank A/S. (DANSKE) “The politics and the rhetoric of the Hungarian government and what we now see in southeastern Europe -- it’s the same sentiment,” Christensen said. Many Balkan countries “are moving in the wrong direction at the same moment as Hungary. They have all kinds of attempts to rig the process. Democratic institutions are not really respected.”
• Draghi Boxes Himself Into a Corner With Bond Signal: Euro Credit. ECB President Mario Draghi may have boxed himself into a corner. Spanish and Italian bond markets rallied yesterday as investors cheered Draghi's signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts aid. This risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. "Draghi is damned if he does and damned if he doesn't," said Carsten Brzeski, senior economist at ING Group in Brussels. "He maneuvered himself into an extremely difficult situation. Expectations are very high."
• Libor Criminal Probe in U.K. Starts as U.S. Readies Indictments. The U.S. Justice Department is preparing to file charges this fall against traders from several banks in the global probe of interest rate-rigging. Meanwhile, U.K. prosecutors haven’t even decided whether they have a case. The U.K. Serious Fraud Office opened a criminal investigation this month after Barclays Plc (BARC) was fined a record 290 million pounds ($450 million) by U.K. and U.S. authorities. Politicians including U.K. Chancellor of the Exchequer George Osborne and Ed Miliband, leader of the opposition Labour Party, called for a criminal probe, and the agency was told it would be given a budget to take on the case.
• China Industrial Companies’ Profits Drop for Third Month. Chinese industrial companies’ profits fell for a third month in June, a government report showed today, as decelerating growth in the world’s second- biggest economy hurt corporate earnings. Income fell 1.7 percent from a year earlier to 467.2 billion yuan ($73 billion), the National Bureau of Statistics said on its website today. That compares with a 5.3 percent decline in May and 2.2 percent drop in April. “The current slowdown has undoubtedly inflicted a lot of pain on the corporate sector,” Yao Wei, a China economist at Societe Generale SA in Hong Kong, said before the release. Taxes and wages are squeezing companies “from both ends,” and the limited room private businesses have to grow is helping push China “into a state of profitless growth,” Yao said. Industrial profits in the first six months of the year declined 2.2 percent from a year earlier to 2.31 trillion yuan, the statistics bureau said. That compares with a 2.4 percent drop in the first five months and 28.7 percent gain in the same period in 2011.
• Corn output in Iowa, the biggest U.S. producing state, will fall 33% from a year ago after the hottest July since 1956 damaged yields, Doane Advisory Services Co. said. Soybean output may drop to the lowest in nine years.
• China Job Market for Graduates Shows Stress on Slowdown. China’s job market for university graduates is showing signs of stress as the nation’s deepest economic slowdown since the global financial crisis coincides with a record 6.8 million students completing their studies. “The job market for graduates is the worst since 2009,” said Jennifer Feng, chief human resources expert at 51job Inc. (JOBS), a Shanghai-based online recruiter. In Beijing, Tang Wen, a spokesman at ChinaHR.com, a Chinese subsidiary of Monster Worldwide Inc. (MWW), said conditions “may be slightly worse compared with 2011, but not too much.”
• Japan Expansion Shows Signs of Cooling as Data Misses Estimates. Japan’s consumer prices unexpectedly fell and retail sales missed analysts’ forecasts, adding to evidence that the economy’s expansion is faltering as gains in the yen and austerity measures in Europe hit exports. Consumer prices excluding fresh food fell 0.2 percent in June from a year earlier, the statistics bureau said in Tokyo today after the median estimate in a Bloomberg News survey for no change. Retail sales rose 0.2 percent, a separate report showed, the smallest gain since November and less than a median forecast for a 1.1 percent increase.
• Syria Pounds Rebel-Held Areas as U.S. Warns of ‘Massacre’. Syrian troops loyal to President Bashar al-Assad used helicopter gunships and artillery to pound rebel-held areas in Aleppo as the U.S. warned of an impending “massacre.” About 80 tanks are stationed outside the southern entrance to Aleppo in a sign that Assad’s forces may be preparing to storm Syria’s biggest city, Ahmed Zaidan, a member of the main opposition group, the Syrian National Council, said yesterday in a phone interview from Bab al-Hawa, a rebel-held border post.
• Facebook(FB) Falls as Report Fails to Quell Concerns Over Growth. Facebook Inc. fell in late trading after its first earnings report as a public company showed a slower sales gain and narrower profit margins, failing to allay the concerns over growth that have sliced shares 29 percent. Facebook executives led by Chief Executive Officer Mark Zuckerberg, addressing analysts for the first time since the company’s May 17 initial public offering, issued no growth forecasts and said little else to reassure investors who fret that the company is overvalued. The largest social network is adding users faster than it can generate ad sales, the company said, reiterating remarks it made on the cusp of the IPO. “It has become a show-me story,” said Nabil Elsheshai, a senior equity research analyst at Thrivent Financial. “The problem is deceleration, and there wasn’t anything from an outlook perspective that would indicate that is going to stop.” Facebook shares slumped 12 percent to as low as $23.75 after the results were released. It had dropped 8.5 percent to $26.85 by the close in New York, and it’s down from $38 at the IPO.
• Amazon(AMZN) Profit Tumbles as Bezos Splurges on Warehouses. Amazon.com Inc. (AMZN), the largest Internet retailer, reported the biggest drop in net income since it reached profitability a decade ago after ramping up spending to capture more business during the holidays. The shares increased less than 1 percent to $221.88 in extended trading after earlier gaining 1.4 percent at the close in New York.

Wall Street Journal:

• Will Obamacare Raise the Price of a Big Mac? In exchange for lower health premiums under Obamacare, experts say shoppers could pay higher prices on everything from printer paper to French fries. Complying with the Affordable Care Act will cost as much as $420 million annually, McDonald’s CFO Peter Bensen said during a conference call Monday, according to CFO Journal. And when the new law goes fully into effect in 2014, it’s possible menu prices will be raised to cover the health costs.
• Geithner's 'Best Rate Available'. If Libor was a fraud, why did regulators use it themselves?

Business Insider:

• Number of Months It Takes to Sell a New House Still High. (graph)

Zero Hedge:

• On Europe's Broken Transmission Channels.
• Biderman Batters 'Believe-Me'-Draghi.
• Multiple Expansion Boosting Stocks. (graphs)
  

CNBC:

• Why Asia’s Retail Investors Are Ditching the Market.
• Starbucks(SBUX) Earnings Fall Short of Street's Expectations. Starbucks reported quarterly earnings that missed Wall Street's expectations on Thursday, sending its shares lower in after-hours trading. “We missed our estimate, but we are dealing with significant economic and global headwinds in Europe. And in June, we felt the beginning of a slowdown in the U.S. business,” Howard Schultz, Starbucks CEO, told CNBC after results on Thursday.

IBD:

• Foot Locker(FL) Sprints Ahead Thanks To Strong Shoe Sales.

NY Times:

• For Big Drug Companies, a Headache Looms.

Washington Post:

• Iran bolsters retaliation capability in gulf, experts say. Iran is rapidly gaining new capabilities to strike at U.S. warships in the Persian Gulf, amassing an arsenal of sophisticated anti-ship missiles while expanding its fleet of fast-attack boats and submarines, U.S. and Middle Eastern analysts say. The new systems, many of them developed with foreign assistance, are giving Iran’s commanders new confidence that they could quickly damage or destroy U.S. ships if hostilities erupt, the officials say.
• Europe is Addicted to Spending & Debt.
  

Forbes:

• Texas Entrepreneurs Tell President Obama: 'I Built This'.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows Mitt Romney attracting 48% of the vote, while President Obama earns support from 44%. Four percent (4%) prefer some other candidate, and five percent (5%) are undecided.

Reuters:

• Coinstar(CSTR) sees revenue largely below Street; shares fall. Redbox kiosks owner Coinstar Inc forecast full-year revenue largely below estimates on rollout delays in Canada, sending its shares down 13 percent after market.
• KLA-Tencor(KLAC) sees lower revenue as economy weighs. KLA-Tencor Corp forecast weaker-than-expected revenue for the current quarter as memory chipmakers and foundries concerned about the global economy hold off on new investments in semiconductor manufacturing gear. Chip gear-makers, including KLA-Tencor and ASML Holding NV have benefited from booming smartphone and tablet sales, but worries about future demand have weighed on some of their customers, with PC sales barely growing. "The industry demand outlook for the rest of calendar year 2012 has backed off recently due to a combination of weaker memory forecasts and some softening in near-term foundry demand," Chief Executive Rick Wallace told analysts on a conference call.

Financial Times:

• Since 1975 the countries now in the euro zone have given birth to just one company currently among the world’s 500 biggest (ironically it is from Spain: Inditex); by contrast California alone has created 26.

Telegraph:

• Sceptics abound as Mario Draghi's ECB bond 'bluff' electrifies global markets. The European Central Bank has opened the door to emergency support for the Spanish and Italian bond markets, setting off a blistering rally on bourses across the world. The euphoria is unlikely to last long unless the ECB comes through with concrete action after its pre-holiday meeting next week. Angel Gurria, head of the OECD, honed in on Mr Draghi's caveat, saying the legal constraints are the nub of problem. The ECB must "explore the flexibility of its mandate", he said. Others were blunter. Marc Ostwald from Monument Securities said Mr Draghi's words were "cheerleading bluster", while Gary Jenkins from Swordfish called them "a bluff to get through the summer". "Spain is very close to the precipice, and its pretty much game over already, " said Mr Jenkins. "Today's action was a short-covering rally. The real trick is get bond investors to come in alongside the ECB, and that is much harder."

The Economist:

• The Flight From Spain. Spain can be shored up for a while; but its woes contain an alarming lesson for the entire euro zone.

Passauer Neue Presse:

• Europe's car market faces five very tough years, Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the Univ. of Duisburg-Essen. Carmakers with a strong focus on the European market will have no choice but to cut jobs and close factories, he said.

South China Morning Post:

• China's Guangdong province has closed down at least seven non-governmental groups that advocated for the rights of migrant workers, citing activists.

Xinhua:

• Chinese finance minister Xie Xuren said the ministry will strictly implement a "differentiated" housing tax policy in the second half of the year to curb speculation in the real estate market, citing his comments.

Shanghai Securities News:

• Chinese banks may have until 2018 to meet new capital-adequacy rules that take effect next year, citing a person familiar with the matter.

China Business News:

• More Than Half of Industrial Companies' Output Falls in Wehzhou. Output fell in 2,276 industrial companies in the eastern Chinese city of Wenzhou from a year earlier, citing a survey by Zhejiang Province Economic and Information Commission. One hundred and forty industrial companies halted production this year. There are 3,998 industrial firms involved in the survey.

Evening Recommendations
BMO Capital:

• Rated (AGCO) Outperform, target $53.
• Rated (ITW) Outperform, target $62.
• Rated (NAV) Underperform, target $20.
  

Night Trading

• Asian equity indices are unch. to +1.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 170.0 -4.0 basis points.
  
• Asia Pacific Sovereign CDS Index 140.75 -3.0 basis points.
  
• FTSE-100 futures +.32%.
  
• S&P 500 futures +.24%.
  
• NASDAQ 100 futures +.36%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (B)/.47
• (CVX)/3.27
• (DHI)/.21
• (MRK)/1.02
• (NWL)/.45

Economic Releases
8:30 am EST

• Advance 2Q GDP is estimated to rise +1.4% versus a +1.9% gain in 1Q.
• Advance 2Q Personal Consumption is estimated to rise +1.3% versus a +2.5% gain in 1Q.
• Advance 2Q GDP Price Index is estimated to rise +1.5% versus a +2.0% gain in 1Q.
• Advance 2Q Core PCE is estimated to rise +1.8% versus a +2.3% gain in 1Q.
  

9;55 am EST

• Final Univ. of Mich. Consumer Confidence for July is estimated at 72.0 versus 72.0 in June.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

BOTTOM LINE: Asian indices are higher, boosted by technology and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.