Wednesday Watch

Evening Headlines 
Bloomberg: 

• China’s Manufacturing Weakens Further as Slowdown Deepens. China’s manufacturing weakened further in July, signaling the worst of the nation’s slowdown has yet to be reached, according to a preliminary survey of purchasing managers. The reading of 47.7 for an index released today by HSBC Holdings Plc and Markit Economics, was less than estimated and if confirmed in the final report Aug. 1, would be the lowest in 11 months. “The key thing now is confidence,” Qu Hongbin, HSBC’s chief China economist in Hong Kong, said on Bloomberg Television. “The confidence now is pretty weak both in the financial market and the corporate sector.” The median estimate of 19 economists surveyed by Bloomberg News for the preliminary, or Flash Purchasing Managers’ Index, was for 48.2, the same level as in June.

• China Coal-Fired Economy Dying of Thirst as Mines Lack Water. Daliuta in Shaanxi province sits on top of the world’s biggest underground coal mine, which requires millions of liters of water a day for extracting, washing and processing the fuel. The town is the epicenter of a looming collision between China’s increasingly scarce supplies of water and its plan to power economic growth with coal.

• China to Punish Hospital Staff for Kickbacks as Crackdown Widens. China will punish 39 hospital employees for taking illegal kickbacks from drugmakers, reflecting widening efforts to root out medical corruption that includes an investigation of GlaxoSmithKline Plc. (GSK).

• BlackRock(BLK) Sees Aussie at 80 Cents After Short. BlackRock Inc. (BLK), the world’s biggest fund manager, said Australia’s dollar may drop as low as 80 U.S. cents in the coming nine months after bets against the currency helped give one of its bond funds the nation’s best returns.

• China’s Stocks Fall After Unexpected Drop in Manufacturing Gauge. China’s stocks fell for the first time in three days, led by financial and commodity companies, as an unexpected decline in a preliminary manufacturing index boosted concern the economic slowdown is deepening. Jiangxi Copper Co., the nation’s biggest producer of the metal, declined 2 percent, while China Petroleum and Chemical Corp., Asia’s largest refiner, dropped the most in a week. China Merchants Bank Co. led losses for lenders, sliding to a one-month low after its rights offering was approved. The Shanghai Composite Index (SHCOMP) fell 1.1 percent to 2,021.66 at 10:24 a.m. local time.

• Asian Stocks Decline as Preliminary China PMI Contracts. Asian stocks fell, with the regional benchmark index retreating from a two-month high, after a private survey showed China’s manufacturing contracting at a faster-than-estimated pace. Jiangxi Copper Co. (358), China’s biggest producer of the metal, slipped 2.1 percent in Hong Kong. Kao Corp., a maker of household and chemical products, fell 4.5 percent in Tokyo after giving an update on a product recall. Murata Manufacturing Co., a Japanese supplier to Apple Inc., gained 4 percent after Apple’s profit topped estimates. The MSCI Asia Pacific Index fell 0.1 percent to 137.08 as of 11:59 a.m. in Tokyo, erasing gains of as much as 0.2 percent. 

• Rubber Futures Decline After China Flash PMI Misses Estimate. Rubber snapped a five-day winning run after a private survey showedthat China’s manufacturing contracting at a faster-than-estimated pace this month, increasing concern that demand may slow in the largest user. Rubber for delivery in December dropped as much as 0.7 percent to 254.4 yen a kilogram ($2,553 a metric ton) on the Tokyo Commodity Exchange and traded at 255 yen at 11:05 a.m. local time. Earlier, the price rose to 259.3 yen, the highest intraday price since July 19. 

• Spanish Pension Raids Spell Bad News for Bond Sales: Euro Credit. Spain's Treasury may find one of its best customers less eager to buy its bonds as budget woes lead Prime Minister Mariano Rajoy to raid a government piggy-bank for a second year. "The fund isn't in a position to accumulate assets anymore, it may even have to sell," said Jose Antonio Herce, a partner at consultancy firm Analistas Financieros Internacionales in Madrid. "There are more and more pensions to pay and less and less money coming into the Social Security, the fund will melt quickly no that we've started taking money out of it."

• European Banks Face Capital Gap With Focus on Leverage. Europe’s biggest banks, which more than doubled their highest-quality capital to $1 trillion since 2007 to meet tougher rules, may have further to go as regulators scrutinize how lenders judge the riskiness of their assets. Deutsche Bank AG (DBK), Barclays (BARC) Plc and Societe Generale SA (GLE) are among European banks that issued stock, sold units or hoarded earnings to bring capital, as a proportion of assets weighted by risk, into line with new global rules. Now some regulators are questioning the weightings, typically set by the banks’ own models, and embracing a broader measure of equity to total assets known as the leverage ratio that ignores risk. “Europe’s banks are far from done on efforts to raise capital,” Lutz Roehmeyer, who helps manage more than 11 billion euros ($14.5 billion) at Landesbank Berlin Investment, said in an interview. “We have to take out the arbitrary method by which banks assign the risk of their assets.”

• IRS Executives Spent More Days on D.C. Travel Than at Home. A handful of Internal Revenue Service executives who live outside the Washington region commuted to the capital on most work days at taxpayer expense, an inspector general said in a report raising management issues. In fiscal 2011 and 2012, five IRS executives traveled for more than half the year to a single location, mostly Washington and in one case Atlanta, according to a report released today by the Treasury Inspector General for Tax Administration. 

• CLO Boom Takes Break as Sales Tumble on Bernanke: Credit Markets. Money managers are creating fewer collateralized loan obligations in the U.S. than any time since last July as concern the Federal Reserve may scale back its stimulus efforts pushes yields to a six-month high. About $2.3 billion of CLOs have been sold this month, plummeting from $7.2 billion in June, according to Royal Bank of Scotland Group Plc. Spreads on the top-rated portion of the funds have risen to 130 basis points more than lending benchmarks, from 113 basis points in May, the month Fed Chairman Ben S. Bernanke told Congress the central bank may start curtailing its bond buying this year. The slowdown may be a sign that banks are pulling back from buying CLOs, making it harder for money managers who create the funds to sell them after issuance quadrupled to $55 billion last year.

• Morgan Stanley(MS) Oil Tankers Raise Market Power Concern at Hearing. Morgan Stanley (MS)’s involvement in an oil tanker business, petroleum transportation service and crude markets raised concerns at a Senate hearing today that the owner of the world’s largest brokerage wields too much market power.

• Fed Draws Fire for Oversight of Bank-Owned Commodity Operations. The Federal Reserve faces new pressure to explain why it lets banks trade raw materials and control supplies after congressional witnesses said regulators can’t really grasp what lenders are doing in industrial businesses. Officials from the Fed and Commodity Futures Trading Commission may testify at hearings in September, U.S. Senator Sherrod Brown said in an interview yesterday after witnesses told his Senate subcommittee that commodities operations owned by lenders are hurting customers and endangering the financial system. He’ll also seek testimony from bankers.

Wall Street Journal: 

• Prosecutors Preparing to Charge SAC. Federal prosecutors are preparing to announce criminal charges as early as this week against SAC Capital Advisors LP. Federal prosecutors are preparing to announce criminal charges as early as this week against SAC Capital Advisors LP, the hedge-fund company that has been the target of a multiyear investigation into alleged insider trading, according to people familiar with the matter. The planned charges against SAC would mark the culmination of a yearslong probe into suspected securities fraud at one of the biggest, most successful hedge-fund firms in the country. The action is anticipated barring any last-minute pact with SAC or other reversal of government strategy, according to people familiar with the matter.

• Easing of Mortgage Curb Weighed. Regulators are concerned that tougher mortgage rules for banks could hamper the housing recovery. Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis. The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation. The plan, which hasn't been finalized and could still change, would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago.

• Egypt's Gaza Crackdown Hammers Economy. An aggressive crackdown by Egypt's interim government on smuggling tunnels between Egypt and the Gaza Strip is crushing the Palestinian enclave's economy, sparking concerns it could fuel a militant backlash. 

• Daddy, What Was a Truck Driver? Over the Next Two Decades, the Machines Themselves Will Take Over the Driving.

• At Center of Oil Boom, Electricity Costs Soar. Heavy Energy Use From Drilling in West Texas Strains Power Grid, Leading to Surcharges. An oil-production boom is delivering prosperity to pockets of the U.S., but in West Texas, the epicenter of activity, it is also bringing trouble in the form of surging electricity prices.

• Obama's New York Model. How the state destroyed its insurance market using ObamaCare rules.

Fox News: 

• US shipment of F-16s to post-Morsi Egypt hits delay. Four F-16 fighter jets were scheduled to fly to Egypt on Tuesday morning as part of a U.S. military aid package worth more than $1 billion a year -- but the shipment has run into delays over apparent "political" issues. If the Obama administration is able to send the planes, it will mark the first known military aid to Egypt since millions of Egyptians protested the rule of Mohammed Morsi, leading the Egyptian military to remove him from power earlier this month. Supporters say that such aid is critical because it gives the U.S. influence over the Egyptian military. But critics say it is a waste of money, or worse -- a gift of weapons that could later be turned against American interests. 

• Anthony Weiner admits to sending more lewd images, texts but vows to stay in mayor's race. With his wife by his side, Anthony Weiner said Tuesday he's not dropping out of the New York City mayoral race despite new revelations that he sent additional lewd photos and text messages after he left Congress in disgrace for his prior online chats. Weiner, who resigned his House seat in June 2011 after acknowledging having sexual conversations with at least a half-dozen women, told a hastily called news conference he would stay in the race despite the new onslaught of negative publicity. “I’m sure many of my opponents would like me to drop out of the race but I’m not going to do it,” he said, adding, he hoped the people of New York were "willing to still continue to give me a second chance."

MarketWatch.com: 

• Japan posts 12th trade deficit in a row for June. Japan on Wednesday reported a trade deficit of Y180.8 billion ($1.8 billion) for June, extending its streak of monthly shortfalls to 12 straight months--the longest spell in over three decades--as a weaker yen increased the import bill more than it lifted exports. The result undershot a Y155.7 billion deficit expected by economists polled by the Nikkei and Dow Jones Newswires. Japan recorded a trade surplus of Y56 billion in the same month of the previous year.

Zero Hedge: 

• China PMI Plunges To 11-Month Low, Employment Weakest In Over 4 Years. (graph)

• Cyprus Real Estate Prices Post Record Plunge.

• Previewing The Bad News That’s Likely To Complicate The Debt Ceiling Battle. (graphs)

• A Tour Of The Post-Crisis World Economy In 10 Easy Charts.

• Singapore Central Bank Rocked By Losses, Money-Laundering, And Terrorism-Financing.

• Watch The Banned HFT Spoofing Algo In Action.

• "No Taper" Versus "No Pain, No Gain".

Business Insider:

• McDonald's(MCD) Is Making 3 Drastic Changes To Lure Cash-Strapped Americans.

• The White House Blasts The 'Amash Amendment' That Would Hamper The NSA's Surveillance Powers.

• Meredith Whitney: 'Detroit Will Start A Wave of Municipal Bankruptcies'.

• REPORT: Larry Summers Is The Fed Frontrunner.

Washington Post:

• Moderate Democrats are quitting on Obamacare. The landmark health-reform law passed in 2010 has never been very popular and always highly partisan, but a new Washington Post-ABC News poll finds that a group of once loyal Democrats has been steadily turning against Obamacare: Democrats who are ideologically moderate  or conservative.

Sober Look: 

• RBI's battle with currency weakness inverts the yield curve; will cost India's economy dearly. The Reserve Bank of India decided it has had enough of rupee weakness and capital flight out of the country. The central bank is dealing with the problem by tightening liquidity conditions in the domestic money markets. By making it more expensive to borrow rupees, it reduces investors' ability to short the currency.

Reuters: 

• Apple's(AAPL) margins, China sales take shine off quarterly results. Investors breathed more easily after Apple Inc turned in a quarterly report card with a pleasant iPhone sales surprise. But the resultant share-price rally may prove short-lived as Wall Street frets about sliding margins and puzzles over a dramatic revenue drop-off in its No. 2 market of China. Without releasing a new product, Apple sold 31.2 million units of the iPhone - its most important device in the fiscal third quarter - or about 20 percent more than analysts had envisioned. The company's shares climbed 5 percent in after-hours trade, partly on Apple saying it will buy back stock at a faster pace. But revenue from all Apple products in greater China plummeted 43 percent from the previous quarter and 14 percent from a year earlier - worrying for a region where smartphone penetration is still low. Growing competition in a maturing global smartphone market, coupled with the rising number of lower-priced devices in Apple's line-up, such as iPad minis and older-model phones, pushed third-quarter profit margins to below 37 percent from more than 42 percent just a year earlier. Analysts and executives struggled to explain the slowdown in greater China, which includes Hong Kong and Taiwan and accounts for 13 percent of Apple's fiscal third-quarter revenue. Tuesday's stock rally may quickly lose steam, as Apple is dogged by issues such as lower selling prices and an uncertain product pipeline, said Colin Gillis, an analyst with BGC.

• EMERGING MARKETS-Brazil's yield curve flattens as economy falters.

• US opens probe into steel pipe imports from 9 countries. The U.S. Commerce Department on Tuesday launched one of its biggest trade investigations in years into charges that manufacturers in South Korea, India and seven other countries are selling steel pipe used by oil and natural gas producers at unfairly low prices in the United States. Imports of oil country tubular goods (OCTG) from the nine countries totaled nearly $1.8 billion in 2012, more than double their total in 2010, as rising U.S. oil and natural gas production have increased demand for the pipe.

• Norfolk Southern(NSC) profit falls 11 pct as coal use drops. Norfolk Southern Corp on Tuesday reported a 11 percent drop in quarterly profit, as demand to ship coal fell, to send shares down 1 percent after the bell. For the second quarter Norfolk, the country's third-largest railroad, earned $465 million, or $1.46 a share, on revenue of $2.8 billion. A year ago, Norfolk Southern reported $524 million net income, or $1.60 per share, on revenue of $2.87 billion. Analysts, on average, expected $1.49, according to Thomson Reuters I/B/E/S. Revenue from coal shipments was $626 million, down 17 percent from a year earlier.

• Broadcom's(BRCM) 3rd-quarter outlook adds to smartphone jitters. Broadcom Corp forecast third-quarter revenue below expectations, underscoring concerns on Wall Street that smartphone growth might be waning, and sending the chipmaker's shares lower. Investors have become increasingly concerned in the past month that the explosive growth of smartphones of recent years might be coming to an end. Such a slowdown would hurt not only handset makers such as Samsung Electronics and Apple, but their component suppliers as well, such as Broadcom and Qualcomm Inc, which posts its quarterly results on Wednesday.

• Panera(PNRA) cuts 2013 view after restaurant sales miss target. Panera Bread Co reported quarterly profit that missed analysts' views and cut its full-year forecast after sales growth at company-owned bakery-cafes fell short of expectations, sending shares tumbling more than 5 percent in after-hours trade. Panera is one of the restaurant industry's top-performing names and when it delivers results that miss or just match Wall Street's targets, investors punish its stock.

Financial Times: 

• Regulator turf war on access to EU bank books. US regulators are demanding the right to probe books, records and emails at the headquarters of Europe’s biggest financial groups, prompting deep EU unease over Washington intruding on its patch to collect highly sensitive data. The behind-the-scenes dispute over investigative powers to police complex markets has taken on new significance in the wake US spying revelations, which have amplified European fears about US over-reach.

China Securities Journal:

• China's 4Q Economic Growth May Be Less Than 7%. China's economic growth in 4Q may be less than 7% because "big" structural changes that were expected to help growth weren't realized, external demand remains weak and domestic overproduction can't be absorbed by internal demand, Wang Jian, a researcher at the National Development and Reform Commission's China Society of Macroeconomic wrote. Economic growth could be less than 6% in a "certain quarter" next year, he said. The Chinese government may be forced to intervene if growth is less than 6%, Wang said.

Securities Times:

• China's Lower Limit for Growth Misunderstood. China's economic lower limit points to the pace of growth below which China may see systemic and regional financial risk, citing Li Zuojun, a researcher at State Council's Development Research Center. To say that the lower limit is the 7% economic growth target for the five years through 2015 is "inaccurate," the report cites Li as saying.

Evening Recommendations 

• None of note.

Night Trading

• Asian equity indices are -.75% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 129.50 +3.0 basis points.

• Asia Pacific Sovereign CDS Index 99.5 +1.25 basis points.

• FTSE-100 futures -.02%.

• S&P 500 futures +.02%.

• NASDAQ 100 futures +.45%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GD)/1.62

• (PX)/1.48

• (LLY)/1.01

• (DAL)/.95

• (WYN)/.90

• (NOC)/1.71

• (ABC)/.74

• (WLP)/2.08

• (PEP)/1.19

• (EMC)/.41

• (F)/.37

• (CAT)/1.68

• (BA)/1.57

• (LCC)/1.52

• (OC)/.69

• (QCOM)/1.03

• (FFIV)/1.08

• (CAKE)/.57

• (RJF)/.67

• (SWFT)/.29

• (OI)/.79

• (SLG)/1.26

• (KNX)/.24

• (TSCO)/1.71

• (AKAM)/.45

• (RYL)/.64

• (WDC)/1.80

• (FLS)/.79

• (AVB)/1.52

• (LVS)/.68

• (V)/1.80

• (FB)/.14

• (CA)/.72

• (ETH)/.34

• (LL)/.61

• (BNNY)/.14

Economic Releases
8:58 am EST

• Preliminary Markit US PMI for July is estimated at 52.6.

10:00 am EST

• New Home Sales for June are estimated to rise to 484K versus 476K in May.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,800,000 barrels versus a -6,902,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +1,650,000 barrels versus a +3,055,000 barrel increase the prior week. Distillate inventories are estimated to rise by +1,850,000 barrels versus a +3,870,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.3% versus a +.4% gain the prior week.

Upcoming Splits

• (BEN) 3-for-1

Other Potential Market Movers

• The Eurozone PMI report, 5Y T-Note auction, weekly MBA mortgage applications report, (CPB) analyst meeting and the (DELL) shareholder meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and real estate 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.