Wednesday Watch

Evening Headlines
Bloomberg:

• Greece Rating Outlook Cut to Negative by S&P. Greece’s credit rating may be cut again by Standard & Poor’s on concern a worsening economy raises the likelihood the troubled nation will need more support from European Union lenders. The outlook on Greece’s CCC rating, already eight levels below investment grade, was revised to negative from stable, S&P said yesterday in a statement. The change reflects the risk of a downgrade if Greece is unable to obtain the next disbursement from the European Union and International Monetary Fund rescue package, the rating company said. Greece’s economy has been squeezed by the fiscal tightening needed to qualify for rescue-loan disbursements, with gross domestic product shrinking for five straight years and unemployment rising to 22.5 percent from 7.9 percent. Finance Minister Yannis Stournaras said yesterday the government is still working on identifying almost a third of the cuts required by international creditors to resume the flow of bailout funds. Greece may need as much as 7 billion euros ($8.7 billion) in loans this year as gross domestic product shrinks as much as 11 percent in 2012 and 2013, S&P said.
• ECB's Rescue Worsens Spain, Italy Maturity Crunch: Euro Credit. ECB President Mario Draghi's bid to bring down Spanish and Italian yields may spur the nations to sell more short-dated notes, swelling the debt pile that needs refinancing in the coming years. The average maturity of Spanish debt is the shortest since 2004 as Spain, like Italy, hasn't issued 15- or 30-year bonds all year. As Prime Ministers Mario Monti and Mariano Rajoy fight to avoid bailouts that may threaten the euro's survival, the ECB's plan risks adding to pressure on the two nations' treasuries. "In a way what the ECB has done is making the situation worse," said Nicola Marinelli, who oversees $160 million at Glendevon King Asset Management in London. "Focusing on the short-end is very dangerous for a country because it means that every year after this they will have to roll over a much larger percentage of their debt."
  
• Lawsuit Could Undo Sale That Created New GM(GM), Company Says. The new General Motors Co. could be undone by a lawsuit that pits general creditors against hedge funds including Elliott Management Corp. and Fortress Investment Group LLC (FIG) over $3 billion, the car company said in a lawsuit that went to trial today.
• Coal to Drop as Steel Output Slows in BHP Setback: Commodities. Coal used to make steel is set to drop to the lowest price in two years, eroding earnings at BHP Billiton Ltd. (BHP) and Rio Tinto Group (RIO), as European demand wanes and China shifts supply contracts to Mongolia from Australia. The contract price may drop 11 percent to $200 a metric ton in the three months to Dec. 31 from $225 a ton this quarter, according to seven analysts and industry officials in a Bloomberg survey. The spot price in China fell 24 percent to $179.50 as of Aug. 2, the lowest this year, according to data compiled by Bloomberg. A deepening debt crisis in the eurozone has dragged down demand and prices of commodities, forcing the world’s largest steelmaker ArcelorMittal (MT) to shutter or idle plants in the region. Slowing economic growth in China, the second-biggest importer of metallurgical coal, has increased chances of output cuts at mills and further shrinkage in demand for the fuel. “Steel demand in Europe is very weak and consumption has slowed dramatically in recent months,” said Tim Cahill, an analyst at J&E Davy Holdings Ltd. in Dublin. “It’ll get worse in the second half as government spending slows and banks stop lending to home buyers. Unless the U.S., Europe, China pump in serious stimulus, global steel demand will remain subdued.”
• Foreigners Flee Indian State Companies on Intervention. Foreign investors are cutting their holdings in India’s state-controlled companies to a three-year low as Prime Minister Manmohan Singh’s government sacrifices shareholder return to revive the weakest economy in nine years.

Wall Street Journal:

• SEC-Money Fund Showdown: Aug. 29. After months of wrangling in Washington, U.S. regulators are planning to vote later this month on a proposal to tighten rules governing the $2.6 trillion money-market mutual-fund industry. Securities and Exchange Commission Chairman Mary Schapiro has waged a public campaign this year to rein in money funds. Her goal: to avoid a repeat of 2008, when a run on one fund threatened to destabilize the financial system. But the proposal has faced stiff opposition from the mutual-fund industry, which argues that the rules effectively would kill their businesses.
• Best Buy(BBY) Founder Envisions New Tack. Best Buy Co. founder Richard Schulze envisions a turnaround plan for the electronics retailer that involves cutting prices to better compete against Amazon.com Inc. and other online retailers while ensuring that the in-store customer-service experience is as good as Apple Inc.'s, according to people familiar with the matter.
• Wall Street Cooks Up New CMBS, CDS Alphabet Soup. Two of the most notorious financial acronyms of the credit crisis – CDS and CMBS – are back. Markit, the leading provider of credit default swap indexes, is preparing to launch in January the first index of swaps on commercial mortgage backed bonds since 2008, called CMBX 6.
• Tensions Rise Over Iranian Hostages. Evidence Emerges Men Held by Syria Rebels Are Linked to Iran's Revoltionary Guard, as Tehran Warns U.S. on Their Fate. A band of 48 Iranians being held hostage by Syria's rebel army journeyed from Tehran on a trip organized by a travel agency owned by the elite troops who support and protect the Iranian regime, people familiar with the trip said. That connection—denied by Iran, a staunch supporter of the Assad government—suggests the hostages have strong ties to Iran's elite Revolutionary Guard Corps, as the rebels claim. Tehran, which says the hostages are religious pilgrims, warned it would hold the U.S. responsible for their fate due to its support of the opposition.
• ObamaCare's Phony Deficit Reduction. Lost in the fuzzy budgetary math is a simple truth: Repealing the law means lower taxes and spending. Defenders of President Obama's health law are flaunting a Congressional Budget Office claim that overturning the law would worsen the federal deficit. Repeal, said a CBO report late last month, would cancel $890 billion in new entitlement spending but eliminate revenues of even greater magnitude. Don't be bamboozled. Even if it were true that ObamaCare raises more money than it spends, that would hardly be reason to keep it, or any law.

Business Insider:

• Morgan Stanley's(MS) Entire US Economic Outlook In One Huge Slide.
• Police Radio Transmissions Raise The Possibility There Were Multiple Shooters In The 'Dark Knight' Massacre.

Zero Hedge:

• Europe's Scariest Chart In More Detail.
• And You Thought Q2 Earnings Were Bad?
• US Midwest Hit By Perfect Gasoline Storm.
• Consumer Credit Misses As Revolving Credit Has Biggest Contraction Since April 2011.

CNBC:

• China Reforms Fail to End Stocks’ Bad Run. When Guo Shuqing became China’s top securities regulator in October, investors hoped that he would bring a reformist zeal to the job that would help break the stock market’s two-year losing streak. They were right about the zeal but wrong about the impact on the market. Barely a week has gone by without the regulator announcing another new measure to improve the functioning of the country’s beleaguered market. But after a brief climb upwards, the benchmark Shanghai Composite Index is down nearly 13 percent since Mr. Guo took office.
• Fiscal Cliff Looms Large as Congress Leaves Town. A much-reviled Congress has now departed for a five week vacation — leaving behind a mountain of unfinished work as well as renewed anxiety that lawmakers and President Obama will be unable to get their act together in time to avoid slipping off the fiscal cliff at the end of the year.
• Dwindling US Crops Are a Global Concern. The U.S. government is expected this week to slash another 15 percent off its estimate of this year's drought-decimated corn crop, likely adding to growing angst in nations like China and India that are fighting to tamp down inflation.

IBD:

• United Therapeutics(UTHR) Gets Lift From Expanded Lineup.

CleanEnergyAuthority:

• Army to Issue $7 Billion RFP for Solar, Renewables.

Read more here: http://blogs.sacbee.com/capitolalertlatest/2012/08/fiscal-analyst-hundreds-of-millions-at-risk-from-facebook-slide.html#storylink=cpy

CNN:

• Monti under pressure to renounce bailout. "We can do it alone" is the latest rallying cry to be heard in Italy as economists and politicians shower Mario Monti with proposals to use the country's own vast but often dormant resources to slash its debt mountain rather than become hostage to the perceived diktat of Germany and Brussels. Initiatives range from the patriotically modest to politically opportunist. But they add up to a crescendo of protests that the prime minister will find hard to ignore as he considers giving up sovereignty in exchange for the uncertain outcome of intervention to prop up Italy's debt by eurozone bailout funds and the European Central Bank.
• Gas prices climb 30 cents a gallon. Gas prices continued their slow but steady march higher Tuesday, surpassing a nationwide average of $3.63 cents a gallon on the back of refinery problems in the United States and higher crude oil prices globally.

CFO:

• Banks’ Liquidity Hinges on Risky Assets. By funding short-term cash needs with structured-finance securities, banks are creating significant liquidity risks for themselves and some of their markets, says Fitch Ratings. Repos, or repurchase agreements, are a key source of short-term financing for Wall Street banks and other financial institutions, and they are under scrutiny once again for being fraught with risk. A Fitch Ratings report last week found a significant weak point in repo markets, a part of the “shadow banking” system that finances trillions of dollars in banks’ trading activities. The repo market is “an important utility in the financial system and promotes liquidity,” says Martin Hansen, senior director of macro credit research at Fitch Ratings. The problem with the repo market currently, though, is the quality of the collateral Wall Street banks and other financial institutions are using to borrow this short-term cash, says Fitch.

Techcrunch:

• Report: Pinterest’s Growth Slows, But Still On Track To Pass Yahoo(YHOO) Referrals In August.

Breitbart.com:

• Lovitz Says Obama Mockery Drew Death Threats. Jon Lovitz spent much of George W. Bush’s presidency doing what nearly all of his peers did – making fun of the Commander in Chief. And no one said a peep. When the “Saturday Night Live” alum chided President Barack Obama for saying the rich don't pay their fair share earlier this year, he ended up letting a security escort walk him to his car. Lovitz tells Big Hollywood that his now infamous podcast rant against Obama’s class warfare rhetoric led to death threats left on the voice mail of his Universal City-based comedy club.

Rasmussen Reports:

• 44% Say Jobs Market Worse Than A Year Ago. Confidence in the U.S. job market has fallen again, with the highest number of Americans in 10 months describing the employment situation as worse than it was a year ago.

Reuters:

• EBay(EBAY) lures big retailers in Amazon(AMZN) battle. EBay Inc, once a scrappy auction site for mom and pop sellers, is enticing some of the world's largest retailers by arguing it can help them compete better against e-commerce leader Amazon.com Inc. EBay Chief Executive John Donahoe and other executives have been telling retailers that Amazon is their enemy, while eBay is a friend because, unlike Amazon, it holds no inventory.
• Egypt launches air strikes on suspected militants in Sinai-state media. Egypt launched air strikes in the Sinai region close to the border with Israel on Wednesday, killing more than 20 suspected Islamic militants, the state-run Ahram news website said. The air strikes on positions in the town of Sheikh Zouaid followed the deaths of 16 border guards last Sunday in an attack blamed partly on Palestinian militants.
• Morgan Stanley(MS) considers shutting offices, cutting staff-sources. Morgan Stanley, under fire to boost profit margins in its retail brokerage arm, is considering closing brokerage offices, laying off support staff and requiring some branch managers also to generate revenue as advisers under a cost-cutting drive, three people briefed on internal discussions said.
• Weak credit quality of US cities bigger concern than bankruptcies-Morgan Stanley(MS). Morgan Stanley's municipal debt strategists said on Tuesday that weaker local credit quality should be a greater concern for municipal debt investors than Chapter 9 bankruptcy filings. "Our updated case study analysis of recent Chapter 9 filings affirms that bankruptcies may pick up somewhat, but the ongoing deterioration of local credit quality is a more relevant systemic risk," Morgan Stanley Research's Michael Zezas and Meghan Robson said in a report.
• Congress to extend wind energy tax credit, says Senate's Reid. Congress will vote to extend a $12 billion federal tax credit for utility-scale wind energy projects that is in danger of expiring at the end of the year, Senate Majority Leader Harry Reid said at a clean energy summit in Las Vegas on Tuesday.
• Priceline(PCLN) shares fall as outlook trails Street forecast. Priceline.com, the online travel agency, topped quarterly profit estimates on Tuesday, but its shares slumped about 15 percent in extended trading as it said weakening conditions in Europe could hurt growth in the current period. Priceline.com, which competes with Expedia Inc and Orbitz Worldwide Inc, owes much of its success to international bookings on its popular European travel site Booking.com. But the weakness of the euro against the U.S. dollar has hurt the value of international bookings. The company said more deterioration could come in Europe, which represents 60 percent of its total booked room nights.
• Express Scripts(ESRX) ups view after strong results with Medco. Express Scripts Holding Co on Tuesday raised its full-year earnings forecast, citing a strong second quarter, increased use of more profitable generic drugs and sooner-than-expected cost savings from its $29 billion acquisition of rival pharmacy benefit manager Medco Health Solutions. Express Scripts shares, which were already up about 25 percent this year, rose more than 7 percent.
• Cree(CREE) forecasts weak 1st-qtr as rising costs dent margins. LED maker Cree Inc forecast weak results for the current quarter after its fourth-quarter profit almost halved on rising costs.

Shanghai Securities News:

• China Able to Expand Property Controls If Prices Rebound. China will be able to expand property market controls if home prices rebound, citing a ministry official. The government may further tighten property lending and increase land supply, citing an industry official. China may also speed up a property tax trial, expand and extend home purchase restrictions. The authority will also probably adopt "target-based" management on home prices. The housing ministry has asked local governments to report land sales on a weekly basis to manage the market, citing a person close to the ministry.
• China Considers New Iron-Ore Pricing Mechanism. China is considering setting up a new iron-ore pricing mechanism amid declining ore prices and falling earnings at domestic steelmakers, citing the Ministry of Industry and Information Technology.
• China GDP Slowdown Not Part of Temporary Trend. China's slowdown in gdp growth isn't temporary and constitutes a trend, Li Zuojun, vice director of resources and environment at the State Council's development research center, wrote today.
  

Al Arabiya News:

• FSA Claims It Killed Russian General in Syria Who Had Been Aiding Assad Regime.

Evening Recommendations
Oppenheimer:

• Rated (NDSN) Outperform, target $64.

RBC Capital:

• Rated (TSCO) Outperform, target $105.

Night Trading

• Asian equity indices are -.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 149.50 unch.
• Asia Pacific Sovereign CDS Index 127.50 +2.0 basis points.
  
• FTSE-100 futures -.15%.
  
• S&P 500 futures -.11%.
  
• NASDAQ 100 futures +.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (TDW)/.59
• (RL)/1.78
• (CSC)/.22
• (NWSA)/.32
• (CXW)/.37
• (MDRX)/.18
• (MNST)/.61
• (JACK)/.35
• (M)/.64
• (DISH)/.66

Economic Releases
8:30 am EST

• Preliminary 2Q Non-farm Productivity is estimated to rise +1.4% versus a -.9% decline in 1Q.
• Preliminary 2Q Unit Labor Costs are estimated to rise +.5% versus a +1.3% gain in 1Q.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,550,000 barrels versus a -6,522,000 barrel decline the prior week. Distillate inventories are estimated to rise by +250.000 barrels versus a -974,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,750,000 barrels versus a -2,174,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.5% versus a -.8% decline the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Spain Industrial Production report, China inflation data, 10Y T-Note auction and the weekly MBA mortgage applications report could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted 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.