Friday Watch

Evening Headlines
Bloomberg:

• Gloves Off in Draghi-Weidmann Clash Over Bond Purchases. When Mario Draghi took the helm of the European Central Bank nine months ago, he took care not to alienate Bundesbank President Jens Weidmann. Now the gloves are coming off. Draghi yesterday announced the ECB is working on a plan to re-enter bond markets and took the unusual step of naming Weidmann as the only policy maker to object to the proposal. While the move would ratchet up the ECB’s response to Europe’s debt crisis, it risks isolating the German central bank, potentially undermining the effectiveness of the new measures. “That’s why investors are disappointed,” said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf. “The ECB can’t just take random measures against the Bundesbank’s will. The country with the largest economy needs to be part of any package.” The euro dropped yesterday, with the standoff between Draghi and Weidmann adding to uncertainty around the latest effort to tame a debt crisis that’s threatening the survival of the single currency. Weidmann must now decide whether to acquiesce to a new bond program or dig his heels in. Two German policy makers have already quit the ECB’s Governing Council over bond buying.
• Luxury Watch Sales Show China Failing to Secure Economic Rebound. China's economy is yet to rebound according to one gauge: sales of the luxury watches that business people give to clients and officials to build commercial relationships. Eleven of 13 shops and chains surveyed in Hong Kong by Bloomberg News reported no pick-up in July in purchases by mainland Chinese customers. Watch, clock and jewelry sales in the city gained 3.1% in June from a year earlier, down from a 59% increase in the same month in 2011, according to government data released yesterday.
• Migrants Exit Guangdong as China Powerhouse Turns Growth Laggard. The region that drove China’s rise after market barriers started coming down in 1978 is among the nation’s slowest- growing as faltering demand cuts exports and workers exit for the central and western areas powering the nation’s expansion.
• Pimco’s El-Erian Says World in Serious Slowdown. Pacific Investment Management Co.’s Mohamed El-Erian called recent declines in purchasing manager indexes in Europe and Asia “frightening” and said the world economy is suffering its severest slowdown since the global recession ended in 2009. El-Erian, who is chief executive officer of the Newport Beach, California-based Pimco, predicted global growth of 2.25 percent over the next 12 months. That’s down from the 3.9 percent in 2011 and 5.3 percent in 2010 recorded by the International Monetary Fund. The world economy contracted 0.6 percent in 2009. “This is a serious, synchronized slowdown,” El-Erian said in an interview today. The global slowdown is weighing on the U.S. at a time when its economy is already struggling, El-Erian said. He sees U.S. growth of 1.5 percent over the next 12 months, dangerously close to what may be considered “stall speed,” and puts the odds of an American recession at roughly 25 to 33 percent. “While a recession is not my baseline forecast, it certainly is a serious risk,” said El-Erian, whose firm manages the world’s largest bond fund.
• Knight(KCG) Said to Open Books to Suitors as Pressure From Loss Grows. Knight Capital Group Inc. (KCG) opened its books to potential buyers, including private-equity firms and at least one securities-industry rival, as it seeks an investment or takeover to survive after a $440 million trading loss, said two people with knowledge of the matter.
• Knight(KCG) Errors Prompt Calls for Stronger SEC Trading Oversight. The trading losses at Knight Capital Group Inc. renewed pressure on Washington regulators to prove they are equipped to protect investors in markets that are increasingly computerized and fragmented. The software problem, which disrupted yesterday’s market opening, has cost Knight $440 million and left the company scrambling for a financial infusion. It comes on the heels of other high-profile technological lapses that botched the initial public offerings of Facebook Inc. and Bats Global Markets Inc.
• BofA(BAC) Says Libor Probe Draws U.S. Subpoenas on Submissions. Bank of America Corp., the second- biggest U.S. lender, received formal inquiries from investigators pressing their probe into the possible rigging of a key international lending benchmark. The bank received “subpoenas and information requests” from the U.S. Department of Justice, Commodity Futures Trading Commission and the United Kingdom Financial Services Authority “concerning submissions made by panel banks in connection with the setting of London interbank offered rates (Libor) and European and other interbank offered rates,” according to a quarterly securities filing today. Bank of America, based in Charlotte, North Carolina, said it’s cooperating.
• Corn’s 60% Surge Is More Dangerous Than Euro Mess. Rising food prices limit how much central bankers can cut interest rates to safeguard growth. More troubling would be the potential setback to poverty-reduction programs for decades to come.
• Bull Market in Crops Extends With Spreading Drought: Commodities. Corn and soybean traders are bullish for a 15th consecutive week on speculation that the drought spreading across fields in the U.S. will spur the government to make more cuts to its production forecasts. Fourteen analysts surveyed by Bloomberg predicted soybeans will climb next week and a further seven were bearish. Twelve expect gains in corn, six saw a decline and three anticipated little change. Hedge funds are holding the biggest bet on higher corn prices since September and almost the largest wager on costlier soybeans since at least 2006, U.S. Commodity Futures Trading Commission data show.
• UN’s Syria Envoy Kofi Annan Resigns as Fighting Escalates. Former United Nations Secretary- General Kofi Annan abandoned his effort to mediate a cease-fire in Syria, saying his task was thwarted by “finger-pointing and name-calling” in the UN’s most powerful body. Annan blamed both sides for the increasing militarization of the conflict, and said that a “clear lack of unity” in the UN’s decision-making body -- where Russia has used its veto three times to protect the Assad regime -- has “fundamentally changed” his ability to be effective.
• The Bad History Behind ’You Didn’t Build That’ by Virginia Postrel. Although his supporters pooh-pooh the controversy, claiming the statement has been taken out of context and that he was referring only to public infrastructure, the full video isn’t reassuring. Whatever the meaning of “that” was, the president on the whole was clearly trying to take business owners down a peg. He was dissing their accomplishments. As my Bloomberg View colleague Josh Barro has written, “You don’t have to make over $250,000 a year to be annoyed when the president mocks people for taking credit for their achievements.”

Wall Street Journal:

• Europe's Bank Rattles Investors. European Central Bank President Mario Draghi dashed hopes the central bank would take imminent action in troubled euro-zone debt markets, unleashing a global selloff. A week after promising to do "whatever it takes" to save the euro, Mr. Draghi, under pressure from Germany, softened his rhetoric. The ECB would only deploy the full force of its arsenal, he said, after the region's governments begin using their own rescue funds to stabilize the markets.
• Trade Gap Strains India-China Ties. India is pressing China to buy more of its goods—from pharmaceuticals to software—and taking steps to reduce Chinese imports as it grows increasingly worried about its widening trade gap with its Asian rival.
• J.P. Morgan(JPM) 'Whale' Was Prodded. Bank's Probe Concludes Trader's Boss Encouraged Boosting Values of Bets That Were Losing. A J.P. Morgan Chase & Co. executive encouraged the trader known as the "London whale" to boost valuations on some trades, said a person who reviewed communications emerging from the bank's internal probe of recent trading losses.
• The Dark of Knight. Wall Street trading glitches aren't caused by a lack of rules.

MarketWatch:

• China landlords push urban rents higher. Tenants are paying a heavy price for a missing element in policy.

Business Insider:

• The Global Economic 'Canary In The Coalmine' Is Gasping For Air.
• Exec Bullies Chick-Fil-A Worker, Then Promptly Gets Fired For It. (video)
• Here's The Fantastic Floor Routine That Won Gabby Douglas The Gold Medal. (video)
  

Zero Hedge:

• US Export Orders Are Collapsing. (graph)
• Of Beggars, Choosers, Unemployment, And Bailouts In Europe.
• Lacy Hunt On The Unintended Consequences Of Well-Intended Policies.
• Bank Of America(BAC) Has Lost Money Trading On Only Three Days In 2012.

CNBC:

• China Services PMI Falls as New Orders Growth Eases. China's official purchasing managers' index (PMI) for the services sector fell to 55.6 in July from 56.7 in June as growth in new orders eased, although a construction services sub-index strengthened, the National Bureau of Statistics said on Friday.
• Has Draghi Put the Euro in No-Man's Land? The European Central Bank (ECB) may have warned markets not to bet on a break-up of the euro zone, but it did little to back it up with action sending the already battered euro into further decline.

LA Times:

• What's in your vault? Uncle Sam audits its stash of gold at the New York Fed. The gold audit is a first for the institution and includes drilling into several hundred ingots. It could put the conspiracy theories to rest.

Breitbart.com:

• Obama Campaign Sues to Restrict Military Voting. On July 17th, the Obama for America Campaign, the Democratic National Committee and the Ohio Democratic Party filed suit in OH to strike down part of that state's law governing voting by members of the military. Their suit said that part of the law is "arbitrary" with "no discernible rational basis." Currently, Ohio allows the public to vote early in-person up until the Friday before the election. Members of the military are given three extra days to do so. While the Democrats may see this as "arbitrary" and having "no discernible rational basis," I think it is entirely reasonable given the demands on servicemen and women's time and their obligations to their sworn duty.
  

Washington Times:

• Dodd-Frank's Small-Business Lending Time Bomb. Under Section 1071, Subtitle G, labeled “Regulatory Improvements” (who says Congress doesn’t have a sense of humor?), the act establishes a system of small business loan data collection. The claimed purpose is to “facilitate enforcement of fair lending laws and enable communities, governmental entities and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small business.” Translation: Push affirmative action in small-business lending. Recall that the same scheme of statutory social engineering contributed to the boom in subprime lending that eventually imploded the mortgage market. It appears Dodd-Frank is determined to drive small business lending down the same path.

Reuters:

• U.S. online job demand slips in July. A monthly gauge of online labor demand in the United States slid in July from June but still posted year-over-year growth, th e operator of a job search website said on Friday. Monster Worldwide Inc, an online careers and recruiting firm, said its employment index dipped 4 percent to 147 points from 153 points in June. The index was up 2 percent from 144 a year ago.
• IMF says not enough done to stop spread of euro zone crisis. The International Monetary Fund on Thursday called for a "policy game changer" in the euro zone to arrest the spread of the debt crisis it now says is clearly engulfing the entire currency bloc and its smaller neighbors.
• LinkedIn(LNKD) defies social media slump, raises outlook. Professional networking site LinkedIn Corp reported higher-than-expected revenue and raised its full-year outlook as it pocketed more money from subscribers, services aimed at businesses and advertising. Shares of the company rose about 6 percent in after-market trade after closing at $93.51 on the New York Stock Exchange on Thursday.
• Syrian forces kill 50 in Hama clashes - residents. Syrian forces killed at least 50 people, among them 21 members of three families, during clashes with rebels in the central city of Hama, activists and residents said on Thursday. "During the clashes the army entered the neighbourhood of Arbaeen and conducted raids, during which they killed members of three families," resident Abu Ammar told Reuters from the city.
• Big hedge funds seen unlikely to diet after Bacon slims down. Hedge fund titan Louis Bacon's surprise move to slim down his fund in order to boost returns has industry experts debating whether other big managers will follow suit. "This is the question that every investor who has money with a manager who oversees $10 billion or more is going to have to ask," said Charles Gradante, co-founder of the Hennessee Group, which invests with Bacon's $15 billion Moore Capital Management.

Financial Times:

• Hedge funds buffetted by volatility. Alternative asset managers were buffeted by volatile markets in the second quarter as hedge funds struggled to perform while weaker stock prices put private equity valuations under pressure for some and discouraged deal making. Hedge fund specialist Och Ziff Capital Management produced the best all round investment performance of the three listed asset managers to report on Thursday, with all four of its main hedge funds in positive territory for the year at the end of June.

21st Century Business Herald:

• China Big 4 Banks Lost About 1.5t Yuan Deposits in July. Industrial and Commercial Ban of China Ltd., China Construction Bank Corp., Bank of China Ltd. and Agricultural Bank of China Ltd. saw net deposits decline by about a combined 1.5t yuan last month, citing bank data.
• China's housing ministry is assessing and studying the timing to cancel policies allowing a pre-sale of homes and how this would impact the property market, citing a person close to the ministry. Eliminating the pre-sale of homes has been proposed by "experts" to the central government as a measure to tighten control over the property market.
  

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 164.0 +6.0 basis points.
• Asia Pacific Sovereign CDS Index 130.75 +.75 basis point.
  
• FTSE-100 futures -.01%.
  
• S&P 500 futures unch.
  
• NASDAQ 100 futures +.02%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FSS)/.11
• (ITT)/.37
• (NYX)/.51
• (PG)/.77
• (SUP)/.29
• (TDS)/.44
• (WCG)/1.20
  

Economic Releases
8:30 am EST

• The Change in Non-Farm Payrolls for July is estimated to rise to 100K versus 80K in June.
• The Unemployment Rate for July is estimated at 8.2% versus 8.2% in June.
• Average Hourly Earnings for July is estimated to rise +.2% versus a +.3% gain in June.
  

10:00 am EST

• ISM Non-Manufacturing for July is estimated to fall to 52.0 versus 52.1 in June.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Eurozone Services PMI data and ICSC Chain Store Sales for July could also impact trading today.
  

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