Wednesday Watch

Evening Headlines
Bloomberg:

• Rajoy Risks Riling ECB in Bid to Avoid Union Ire: Euro Credit. Spanish Prime Minister Mariano Rajoy risks irking the European policy makers he needs on his side after he extended unemployment benefits to avoid stoking social unrest. Rajoy said yesterday his government will continue to make payments to the long-term unemployed, extending for six months a benefit adopted by his Socialist predecessor three years ago that was due to expire today. Rajoy, who reiterated he may consider seeking European help to tame 10-year bond yields hovering near 7%, didn't say how he'd pay for the measure he described as "just."
• China’s Stocks Decline on Slowdown Concerns; Brokers Retreat. China’s stocks fell, dragging down the benchmark index for the third time in four days, on concern the nation’s economic slowdown will curb demand for commodities. Jiangxi Copper Co. and Aluminum Corp. of China Ltd. led losses for metal stocks after Vale SA, the world’s biggest iron- ore producer, said China’s “golden years” are gone as growth decelerates. Citic Securities Co. and Haitong Securities Co., the nation’s biggest-listed brokerages, slid at least 1 percent on speculation stock commissions will be cut, hurting profit growth. China International Marine Containers (Group) Co.’s B shares jumped after it said it will list them in Hong Kong. “There’s no stimulus from the government recently and without strong policies, the economy will have a hard time rebounding on its own,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “The market weakness will persist.” The Shanghai Composite Index (SHCOMP) slid 0.8 percent to 2,126.24 at 10:07 a.m. local time. The CSI 300 Index (SHSZ300) fell 1 percent to 2,334.66.
• Israel Plans for Iran Strike as Citizens Say Government Serious. Dozens of Israelis crowded in front of a storefront at a Jerusalem shopping mall yesterday to pick up new gas masks, part of civil defense preparations in case the military strikes Iran and the Islamic Republic or its allies retaliate. “Our leaders seem to have gotten very hawkish in their speeches and this time it seems they mean what they say,” said Yoram Lands, 68, a professor of business administration, who was picking up new masks for himself and his wife at a distribution center in the mall.
• Junk-Bond Rally 'Defying Laws of Gravity,' Bank of America(BAC) Says. High-yield bond prices are approaching the highest ever as investors pour more money into credit funds, according to strategists at Bank of America Corp.(BAC), the second-biggest underwriter of the debt this year. Flows into fixed-income funds of $170 billion this year are "reaching bubble levels,' Oleg Melentyev, a straegist at the bank, wrote today. "The price maximum has been tested multiple times in very different macro environments over the past quarter century and has never been breached," Melentyev wrote. "There is little reason to believe why this time would be any different." The high-yield index is "defying the laws of gravity" by rising even as most companies report "lukewarm" second-quarter earnings for most companies, Melentyev said.
  
• Moore Capital Sold JPMorgan(JPM), Wells Fargo(WFC) Last Quarter. The hedge fund sold 6.47 million shares of New York-based JPMorgan, 6.83 million shares of Wells Fargo in San Francisco, and 5.15 million shares of Minneapolis-based U.S.Bancorp, according to a filing today with the U.S. Securities and Exchange Commission. The stakes had a combined value of $639.4 million at the end of the first quarter.
• Paulson, Soros Add Gold as Price Declines Most Since 2008. Billionaire investors George Soros and John Paulson increased their stakes in the biggest exchange- traded fund backed by gold as prices posted the largest quarterly drop since 2008.
• Facebook(FB) Director Thiel Gets More Flexibility to Sell. Facebook Inc. director Peter Thiel, who sold more than 16 million shares in the company’s initial public offering, has given himself added flexibility to sell more of his holdings, a regulatory filing shows.
• Obama Delays U.S. Fuel-Economy Rule Past Self-Imposed Deadline. U.S. auto and environmental regulators are delaying, past a self-imposed deadline of tomorrow, the release of a final rule requiring automakers to raise the average fuel-economy of their fleets to 54.5 miles per gallon by 2025. President Barack Obama’s administration didn’t say when it will issue the rule, which would take effect for model-year 2017 passenger vehicles sold in the U.S.
• Japan Minister Visits War Shrine Fraying Ties With South Korea. A Japanese cabinet minister visited a controversial war shrine in Tokyo in a move that may worsen ties with China and South Korea that have frayed over maritime territorial disputes.
• Australia Recalls 23,000 Chinese-Made Cars Over Asbestos. Australia’s consumer protection agency said asbestos was found inside vehicles made by China’s Great Wall Motor Co. (2333) and Chery Automobile Co., prompting a safety investigation and the recall of about 23,000 units.
• China Nickel Pig Iron Makers Cut Output by Half as Prices Slump. Nickel pig iron producers in China, the biggest user, have suspended almost 50% of capacity as prices fell below costs. The utilization rate is about 51% now, based on surveys of about 90 producers, which account for more than 80% of the nation's capacity, said Celia Wang, a senior market analyst at Shanghai Tsingshan Mining Investment Co., a unit of Tsingshan Holding Group, China's largest privately held stainless-steel producer.
• Korean Banks’ Household Bad-Loan Ratio Rises to Near 6-Year High. South Korean banks’ ratio of soured household debt to total lending in the category rose to almost a six-year high in June as the country’s slowing economy weighed on property values.

Wall Street Journal:

• Twitter Founders Launch Medium, a New Collaborative Publishing Platform. The launch is particularly notable given the Obvious team’s storied history of providing the world with new publishing platforms, first Blogger and then Twitter.
• Europe Contracts, Concerns Widen. The euro zone's $13 trillion economy is shrinking, data published Tuesday showed, a development that threatens to worsen a global slowdown and intensify the debate about Europe's attempts to restore confidence in the currency union. Economic activity in the 17-country currency bloc fell at an annualized rate of 0.7% in the second quarter after stagnating in the first three months of 2012, according to the European Union's statistics arm. German growth slowed to an annualized 1.1% rate—not enough to lift the troubled region, whose southern members, including Italy and Spain, are caught in increasingly severe recessions.
• Ryan Has Crossover Appeal at Home. The southeastern Wisconsin district that is home to Rep. Paul Ryan should be risky terrain for the conservative Republican. It is packed with blue-collar families and union workers in a state that until recently was reliably Democratic. But Mr. Ryan, Mitt Romney's recently minted running mate, has coasted to re-election by huge margins since he first was elected in 1998.
• Investors Shift Money Out of China. New Figures Show Capital Leaving Amid Concerns Over Nation's Growth Prospects; Real-Estate Buyers Also Look Abroad. Investors and companies are increasingly pulling money out of China and its currency in a vote of concern over its growth prospects, a development that could hinder Beijing's efforts to spark a turnaround. New data published by China's central bank Tuesday showed China's banks were net sellers of 3.8 billion yuan ($597 million) in foreign exchange in July, suggesting that China's exporters aren't converting their dollar earnings into yuan and some investors are taking funds out of the country.
• Obama's Iowa Hostage. He blocks drought relief in order to pass a $1 trillion farm bill. President Obama is in Iowa this week to play farm politics, blaming Republicans for a legislative stalemate that is delaying drought relief in the parched Midwest. The all-powerful Paul Ryan, the President declared, is "standing in the way." That's a good one. The truth is that Mr. Obama has taken drought relief as a hostage in order to pass another trillion-dollar farm and food-stamp blowout.

Fox News:

• Soros, Paulson Reduce Bank Stakes. Hedge fund managers reported significantly reduced--and in some instances eliminated--stakes in big banks, including J.P. Morgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), as well as food companies such as Kraft Foods Inc. (KFT) in the second quarter.

MarketWatch:

• Battle of wills erupts in China property market. Local governments parry Beijing’s moves, inviting counter-offensive. China’s real estate market has become a battlefield for central and local government warring over policy measures. Over the past six months local governments have introduced various policies to stimulate real estate markets, which they see as a source of much-needed funds. This is in contrast to efforts by the central government, which in 2010 implemented controls to cool the market, something many fear was a dangerous bubble in the making.
• NY Times names BBC's Thompson as CEO.
• When will the euro collapse? It’s already dead. Commentary: It’s just the shell of a real currency. It no longer meets most of the criteria of a working form of money. There is an important point in that for investors. It is right now — while the currency no longer lives but still staggers on like a zombie — that the euro is wreaking most havoc on the countries of Europe. Once it is finally taken apart, markets in those nations can start to recover — potentially very rapidly.

Business Insider:

• Greenlight's David Einhorn Dumps Stake In Research In Motion(RIMM) And Dell(DELL).'
• Take It From A Marine Who Was There — We're Losing Hearts And Minds In Afghanistan.
• French President François Hollande Is Facing A Post-Election Reality Check.
• The Number Of Desperately Poor People In Japan Is Growing At An Alarming Rate.

Zero Hedge:

• Complete Q2 Hedge Fund Holdings Summary.
• Fisker Lights Fire Under CEO Post, Hires Former Chevy Volt Head.

NY Times:

• Spanish Construction Rivals Battle on New York Turf. For two ambitious Spanish construction conglomerates, underground Manhattan has emerged as the battleground in a furious legal dispute over which company will bear the brunt of losses plentiful enough to raise questions about the management of one of New York’s biggest public works projects ever — and the capacity of one of Spain’s most indebted public companies to stomach them.

CNN:

• Greece seeks two-year austerity extension. Greece is seeking a two-year extension of its latest austerity programme aimed at improving the country's debt sustainability and prospects for a return to growth, according to a document obtained by the Financial Times. Antonis Samaras, the centre-right prime minister, is expected to outline the proposal during talks next week with Angela Merkel, German chancellor, in Berlin and French President François Hollande in Paris.
• Europe is not fixed. Not by a long shot. Investors seemed relieved by the latest GDP figures out of Europe Tuesday. But why?

Defining Ideas:

• The Obamacare Quagmire. The law will hurt the very people it's supposed to help.

Gallup:

• Election 2012: Romney 47%, Obama 45%. (graph)

Reuters:

• Special ops group attacks Obama over bin Laden bragging, leaks. A group of former U.S. intelligence and Special Forces operatives is set to launch a media campaign, including TV ads, that scolds President Barack Obama for taking credit for the killing of Osama bin Laden and argues that high-level leaks are endangering American lives. Leaders of the group, the Special Operations OPSEC Education Fund Inc, say it is nonpartisan and unconnected to any political party or presidential campaign. It is registered as a so-called social welfare group, which means its primary purpose is to further the common good and its political activities should be secondary. In the past, military exploits have been turned against presidential candidates by outside groups, most famously the Swift Boat ads in 2004 that questioned Democratic nominee John Kerry's Vietnam War service. The OPSEC group says it is not political and aims to save American lives. Its first public salvo is a 22-minute film that includes criticism of Obama and his administration. The film, to be released on Wednesday, was seen in advance by Reuters. "Mr. President, you did not kill Osama bin Laden, America did. The work that the American military has done killed Osama bin Laden. You did not," Ben Smith, identified as a Navy SEAL, says in the film. "As a citizen, it is my civic duty to tell the president to stop leaking information to the enemy," Smith continues. "It will get Americans killed."

Financial Times:

• ECB Right to Link Bond Buying to Govt Action, Rubin Writes. Buying bonds without insisting that European governments make policy changes would do nothing to resolve the crisis and risks creating bigger debt, growth and banking hurdles, former US Treasury Secretary Robert Rubin wrote. Bond purchases without policy conditions would threaten the loss of ECB credibility, which could raise worries over long-term inflation, spurring a capital markets crisis, he said.

The Guardian:

• Julian Assange will be granted asylum, says official. Ecuador's president Rafael Correa has agreed to give the WikiLeaks founder asylum, according to an official in Quito.

AFR:

• Crack Down on High Frequency Trading: Fund Managers. Leading fund managers are calling for greater regulation of high frequency trading which they warn is resulting in market manipulation and insider trading at the expense of retail shareholders. Perpetual Investments said yesterday it would join Schroders Australia and Antares Capital in questioning major stockbrokers about the way high-speed trades were conducted and the risk systems in place. Matt Williams, head of Australian equities at Perpetual, welcomed an investigation by the corporate regulator this week of the impact on the market of HFT but said it did not go far enough. “Whilst the impact on volatility and avoiding a flash crash/Knight Capital scenario is important, to us the bigger issues are around market integrity,” Mr Williams told The Australian Financial Review. “In my view HFT is at best front running of real client orders, and at worst market manipulation. I urge ASIC to look at these issues.”

Financial News:

• No new policies will be needed if China can practically check and hold local governments accountable for property controls, according to a commentary written by Xu Shaofeng.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.25% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 148.0 -3.5 basis points.
• Asia Pacific Sovereign CDS Index 125.5 -.25 basis point.
  
• FTSE-100 futures -.31%.
  
• S&P 500 futures -.26%.
  
• NASDAQ 100 futures -.19%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SPLS)/.22
• (ANF)/.17
• (DE)/2.32
• (TGT)/1.00
• (PETM)/.66
• (CSCO)/.45
• (A)/.83
• (NTAP)/.38
• (LTD)/.48
• (AMAT)/.22
• (SINA)/-.01
• (NTES)/1.10
  

Economic Releases
8:30 am EST

• The Consumer Price Index for July is estimated to rise +.2% versus unch. in June.
• The CPI Ex Food & Energy for July is estimated to rise +.2% versus a +.2% gain in June.
• Empire Manufacturing for August is estimated to fall to 7.0 versus 7.39 in July.
  

9:00 am EST

• Net Long-term TIC Flows for June are estimated to fall to $40.0B versus $55.0B in May.
  

9:15 am EST

• Industrial Production for July is estimated to rise +.5% versus a +.4% gain in June.
• Capacity Utilization for July is estimated to rise to 79.2% versus 78.9% in June.

10:00 am EST

• The NAHB Housing Market Index for August is estimated at 35.0 versus 35.0 in July.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,500,000 barrels versus a -3,729,000 barrel decline the prior week. Distillate inventories are estimated to fall by -275,000 barrels versus a -724,000 barrel decline the prior week. Gasoline supplies are expected to fall by -2,000,000 barrels versus a -1,801,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.6% versus a +.4% gain the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Kocherlakota speaking, BoE's Minutes and the weekly MBA mortgage applications 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 mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.