Thursday Watch

Evening Headlines 
Bloomberg:

• Which Chinese City Will Become the Next Detroit? In 2010, China’s National Audit Office announced that local governments had amassed a debt of $1.73 trillion, driven largely by borrowing for construction, infrastructure and debt service. Easy credit meant to avert the worst of the global financial crisis only served to worsen the problem: Local debt will grow to $2.63 trillion by the end of the year, equal to 29 percent of gross domestic product, according to Huatai Securities Co. Ltd. A 2012 audit of 36 local governments found $624.6 billion in debt -- suggesting there are at least a few Chinese cities with debt equal to, or in excess of, the $18 billion that sunk Detroit. 

• China SouFun July Home Prices Rise on Hopes of Benign Policies. China’s new home prices jumped in July by the most since December as buyers don’t expect the government to tighten the property market further and push housing values lower. Prices surged 7.9 percent last month from a year earlier, to 10,347 yuan ($1,688) per square meter (10.76 square feet), SouFun Holdings Ltd. (SFUN), the nation’s biggest real estate website owner, said in an e-mailed statement after a survey of 100 cities. Prices began rising from a year earlier in December, when they climbed 0.03 percent after a 0.46 percent slide in November. 

• China’s Stock Market Dysfunctional Amid IPO Freeze, Neoh Says. China’s equity market has become “dysfunctional” after the regulator halted share sales and investors shifted to wealth-management products, said Anthony Neoh, a former government adviser who helped the nation open up to foreign money managers a decade ago. Smaller companies are losing access to capital as the China Securities Regulatory Commission extends a more than nine-month halt on initial public offerings and government-controlled banks focus on lending to state-owned enterprises, said Neoh, who helped start the Qualified Foreign Institutional Investor program as the CSRC’s chief adviser from 1999 to 2004. Many investors assume wealth-management products are guaranteed by the government, creating “tremendous moral hazard,” Neoh said.

• China Seeks Cuts of Unapproved Steel Capacity, Daily Reports. China plans to cut steel capacity from the 400 million metric tons of production that was built without proper approvals, the National Business Daily reported today, citing an unidentified person. Authorities will stop banks from lending to steelmakers with unapproved capacity if the companies have failed to meet environmental and land use rules, the Shanghai-based newspaper reported, citing the person who has seen a plan drafted by the National Development and Reform Commission and the Ministry of Industry and Information Technology. The 400 million tons of unapproved capacity accounts for more than 40 percent of China’s total, according to the report. Unapproved capacity operating within China’s environmental and land use standards may continue to be supported by banks because of considerations for local employment and tax revenue, the newspaper reported.

• Goldman Sachs(GS) Says Sell India Stocks as Capital Outflows Deepen. India’s capital outflows deepened in July, spurring Goldman Sachs Group Inc. to recommend reducing stock holdings as central bank efforts to support the rupee threaten to worsen the nation’s economic slump. Foreigners sold a net $2 billion of domestic debt last month through July 30, extending the record $5.4 billion withdrawal in June. The two-month outflow from stocks reached $2.8 billion, the most since the global financial crisis in November 2008, regulatory and exchange data compiled by Bloomberg show. Goldman Sachs cut its rating on the nation’s shares to underweight in a report dated July 31.

• Australian Manufacturing Slumps as Currency Fall Insufficient. A gauge of Australian manufacturing slumped in July as a decline in the currency and earlier interest-rate cuts failed to boost exports and local demand. The manufacturing index dropped 7.6 points to 42 last month, the biggest decline since April, the Australian Industry Group said in a survey released today. The last reading above 50, the divide between expansion and contraction, was in February 2012.'

• Asian Stocks Rise on China PMI Expansion, Fed Bond Buying. Asian stocks rose, paring this week’s losses, as a gauge of China’s manufacturing beat estimates and after the Federal Reserve maintained its bond-buying program at current levels. Jiangxi Copper Co., China’s biggest producer of the metal, gained 2.3 percent. Panasonic Corp., Japan’s largest consumer electronics maker, climbed 5.2 percent after posting profit that beat estimates. STX Offshore & Shipbuilding Co. (067250) jumped 11 percent in Seoul after agreeing to restructure debt with its creditors. Australian bank shares fell on a report the government will impose a new tax on lenders. The MSCI Asia Pacific Index advanced 0.9 percent to 133.46 as of 11:25 a.m. in Tokyo, with all 10 industry groups on the gauge rising.

• Rubber Rebounds From Two-Week Low on Oil, China Manufacturing. Rubber rebounded from a two-week low as oil rallied while manufacturing in China, the biggest user, unexpectedly strengthened and the Federal Reserve maintained its bond-buying program to support recovery. The contract for delivery in January gained as much as 2.1 percent to 245.3 yen a kilogram ($2,505 a metric ton) on the Tokyo Commodity Exchange and was at 244.1 yen at 10:52 a.m. The most-active contract settled at the lowest since July 16 yesterday, paring gains for July to 1.7 percent.

• Meister Says Europe Should Brace for More Years of Merkel Policy. Europe’s leaders should brace for four more years of unbending German policies to fight Europe’s debt crisis as Chancellor Angela Merkel leads the polls seven weeks before elections, one of her senior lawmakers said. If re-elected, Merkel will stick to her position that neither government nor bank debt can be mutualized as long as risk takers are free to make others pay for their own mistakes, Michael Meister, deputy chairman of Merkel’s Christian Union caucus in parliament, said in a July 31 telephone interview. “The German position is clearly stated” by Merkel and lawmakers and “none of its guiding principles will change after the election date,” Meister said. “The apologists in other countries should be prepared to deal with four more years of this German policy.” 

• Rajoy Faces Dissent From Regions Handing Valencia Widest Deficit. Prime Minister Mariano Rajoy is facing pushback from some regional leaders as he tries to rein in Spain’s budget deficit. Budget Minister Cristobal Montoro won only “majority” support at a meeting of regional government presidents in Madrid yesterday where he agreed that Valencia would be allowed the widest budget deficit this year, the minister said in an e-mailed press release late yesterday.

• Egypt Set to Move Against Pro-Mursi Sit-Ins as Islamists Charged. Egyptian authorities charged the top Muslim Brotherhood leader with inciting murder and ordered an end to sit-ins by supporters of ousted President Mohamed Mursi, moves that risk escalating a showdown with the Islamist group. The Interior Ministry was assigned to take steps against protests in Cairo that have persisted since Mursi’s ouster by the army on July 3, the military-backed cabinet said yesterday in a statement. Defying the government, Mursi supporters are calling for more protests tomorrow, Al Jazeera reported. 

• Leveraged Loans Pass '12 Level With Record Ahead: Credit Markets. The riskiest U.S. .companies are stepping up their borrowing in the market for leveraged loans, with the amount of financings completed this year already exceeding what they raised in all of 2012. Borrowers from HJ Heinz Co. to Valeant Pharmaceuticals Intl. have tapped non-bank lenders for $298.4 billion in 2013, more than the $295.3 billion obtained last year, according to S&P's Capital IQ Leveraged Commentary and Data. At the current pace, the record of $386.6 billion in 2007 will be eclipsed before year-end.

• Fed Chairman Search Expanded by Obama With Third Candidate Kohn. President Barack Obama has opened up the contest to become the next chairman of the Federal Reserve, adding former Fed Vice Chairman Donald Kohn to the list of names he’s considering. At a closed-door meeting with Democrats in the U.S. House, Obama yesterday rejected the notion that it’s a two-person race between former Treasury Secretary Lawrence Summers and current Fed Vice Chairman Janet Yellen to succeed Ben S. Bernanke, whose term expires Jan. 31.

• SEC Says Largest U.S. Hedge Funds’ Debt Tops $1 Trillion. The nation’s largest hedge funds had $1.47 trillion in net assets and more than $1 trillion in borrowings as of the fourth quarter, according to the first report compiled on confidential data they provided to the U.S. Securities and Exchange Commission. The SEC’s Division of Investment Management issued the report to Congress last week using figures from money managers who run private funds with gross assets of at least $150 million, including borrowed capital, and the agency broke out figures for the biggest firms. Congress ordered the SEC to collect information from private-equity and hedge-fund managers under a provision of the 2010 Dodd-Frank Act designed to help regulators monitor risk in the financial system. 

• Roc Capital Said to Shutter Main Hedge Fund After Losses. Roc Capital Management LP, the hedge-fund firm that counted Deutsche Bank AG (DBK) and the daughter of billionaire Lakshmi Mittal among its investors, is liquidating its main fund after losing money, according to a person with knowledge of the firm. The firm has already started selling its holdings and is scheduled to return all money to clients in the coming weeks, said the person, who asked not to be identified because the firm is private. New York-based Roc managed about $642 million as of March 1.

• J.C. Penney(JCP) Falls on Report CIT Stopped Funding Suppliers. J.C. Penney Co. (JCP:US), the department-store chain seeking to rebound from its worst sales year in more than two decades, tumbled 10 percent after the New York Post reported that CIT Group Inc. (CIT:US) has stopped funding some of its suppliers.

Wall Street Journal:

• Tepid Growth Restrains Fed. Easy Money to Keep Flowing for Now as Economy Plods Ahead; Inflation Stays Tame. The U.S. economy registered subpar growth and low inflation in the first half of the year, factors that led the Federal Reserve Wednesday to keep its easy-money policies in place. 

• Bond Slump Saddles Big Banks. Large Banks Can't Avoid Trouble When Interest Rates Rise. The recent market turmoil exposed a new weakness in the balance sheets of large banks: they hold so many bonds that they can't avoid trouble when interest rates rise. When long-term rates jumped by a full percentage point in May and June amid worries the Federal Reserve would taper its bond-buying stimulus program, bank investments in mortgage-backed securities and Treasuries got slammed. J.P. Morgan Chase JPM +0.72% & Co., Bank of America Corp., BAC +0.55% Citigroup Inc. C +0.70% and Wells Fargo WFC +0.55% & Co. saw a measure of the paper value of these holdings fall by more than $13 billion during the second quarter. The rout shows how difficult it can be for the biggest financial institutions to maneuver when markets get choppy.

• Mutual-Fund Assets Rise, Except for Muni Bonds. Money-Fund Assets Also Increase; Taxable Funds' Seven-Day Yield Steady at 0.01%. Long-term mutual funds rose $8.29 billion in the latest week, as investors added money across fund categories except for municipal bonds, according to the Investment Company Institute. Equity mutual funds have recorded weekly gains for most of 2013, after investors had avoided them for several years after the 2008 financial crisis. Money flowed in to bond funds in the latest week, following a seven-week streak of outflows amid a recent run-up in interest rates. For the week ended July 24, equity funds had inflows of $4.17 billion, up from $3.84 billion the prior week. Domestic equity funds rose $2.72 billion, while foreign equity funds rose $1.44 billion. Bond funds had inflows of $2.07 billion, against outflows of $3.48 billion in the previous week. Taxable-bond funds were up $4.08 billion, while municipal-bond funds fell $2.01 billion.

• Daniel Henninger: Obama's Creeping Authoritarianism. Imposed law replaces checks and balances. If we learned anything about Barack Obama in his first term it is that when he starts repeating the same idea over and over, what's on his mind is something else.

• Data of Prosperity Past. The latest GDP revisions underscore how subpar the current recovery is. The good news is that the Commerce Department's second-quarter GDP report shows that the U.S. is richer and the economy larger than previously believed. The bad news is that this has nothing to do with anything that has happened lately, and certainly not in the last nine months. The current not-so-great economic recovery trudges on.

Fox News:

• States argue for cutting off solar subsidies. Whether it is produced on a rooftop or in the desert, solar energy is generating profits and controversy. “We want to support renewable energy,” said Hawaii state Rep. Marcus Oshiro. “But not at the expense of all the taxpayers who are heavily subsidizing this one component.” So as the industry continues to grow, a number of utilities and officials are saying it’s time for solar to stand on its own – without the glut of subsidies.

MarketWatch.com:

• China’s rival factory gauges paint divergent image. For a third month in a row, the Chinese government’s data on the country’s manufacturers differed with a privately-compiled survey on whether activity was growing or contracting. China’s official Purchasing Managers’ Index (PMI), released Thursday morning, registered a surprise gain for July, rising to 50.3 from 50.1 the previous month. Any reading above 50 indicates activity is expanding, and the result beat expectations for a drop to 49.8, according to estimates reported by Dow Jones Newswires. But 45 minutes later, a separate China manufacturing PMI published by HSBC and Markit said activity was contracting, with the index sinking to an 11-month low of 47.7, down from June’s final reading of 48.2.

Zero Hedge:

• Financial Sense And Nonsense.

• NSA Admits: 'We Do Store All Your Data But We Don't Look At It All'.

• Elliott Management: "The Entire Developed World Is On A Slippery Slope".

• 44 Facts About The Death Of The Middle Class That Obama Should Know.

• China Bucks AsiaPac Trend With 'Miraculous' Rise In Its PMI. (graphs)

Business Insider:

• LIVE: Thousands Of Companies Around The World Reveal The Truth About The Economy.

• CHART OF THE DAY: Asia Has A Bad Track Record Of Hot Economies That Quickly Spiral Into Financial Crisis. (graph)

New York Times:

• An Analysis Finds a Bias for Banks in S.& P. Ratings. The Wall Street ratings game is back. Five years after inflated credit ratings helped touch off the financial crisis, the nation’s largest ratings agency, Standard & Poor’s, is winning business again by offering more favorable ratings. S.& P. has been giving higher grades than its big rivals to certain mortgage-backed securities just as Wall Street is eagerly trying to revive the market for these investments, according to an analysis conducted for The New York Times by Commercial Mortgage Alert, which collects data on the industry. S.& P.’s chase for business is notable because it is fighting a government lawsuit accusing it of similar action before the financial crisis.

Reuters:

• Government requests for Twitter users' data on the rise. Twitter is under increasing pressure from governments around the world to release user's private information, with requests rising 40 percent in the first six months of the year, the microblogging company said Wednesday in its semi-annual transparency report. 

• Marriott cuts earnings outlook as group bookings lag. Marriott International Inc, which runs the Marriott and Ritz-Carlton hotels, cut its 2013 earnings outlook to reflect lower-than-expected conference revenue, sending its shares down 3 percent in trading after the bell. 

• Chicago's budget gap seen jumping to $1 bln without pension fix. Chicago's preliminary budget gap is expected to fall next year but is on track to nearly triple in 2015 without pension reform, Mayor Rahm Emanuel said on Wednesday. 

• Sturm Ruger's(RGR) results beat as new firearms drive sales. Gun maker Sturm Ruger & Co Inc reported second-quarter results that beat analysts' estimates as new products such as the LC380 pistol and the SR45 pistol drove up sales. Sturm Ruger shares were up 8 percent in after-hours trading.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.25% to +1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 145.0 +3.0 basis points.

• Asia Pacific Sovereign CDS Index 114.25 +3.75 basis points.

• FTSE-100 futures +.37%.

• S&P 500 futures +.46%.

• NASDAQ 100 futures +.39%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ADP)/.57

• (PG)/.77

• (TWC)/1.65

• (COP)/1.29

• (XOM)/1.89

• (AVP)/.26

• (CLX)/1.34

• (BDX)/1.48

• (BZH)/-.34

• (CAH)/.77

• (CME)/.90

• (FIG)/.20

• (VMC)/.13

• (HCA)/.91

• (FLR)/1.00

• (DTV)/1.34

• (CI)/1.60

• (ITT)/.45

• (K)/.97

• (APA)/2.00

• (TSO)/1.43

• (AIG)/.86

• (MHK)/1.66

• (LNKD)/.31

• (OPEN)/.47

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to rise to 345K versus 343K the prior week.

• Continuing Claims are estimated to rise to 3000K versus 2997K prior.

10:00 am EST

• Construction Spending for June is estimated to rise +.4% versus a +.5% gain in May.

• ISM Manufacturing for July is estimated to rise to 52.0 versus 50.9 in June.

• ISM Prices Paid for July is estimated to rise to 53.8 versus 52.5 in June.

Afternoon

• Total Vehicle Sales for July are estimated to fall to 15.8M versus 15.89M in June.

Upcoming Splits

• (PRAA) 3-for-1

Other Potential Market Movers

• The Eurozone PMI report, ECB rate decision, BoE rate decision, Challenger Job Cuts report for July, Final Markit US PMI for July, RBC Consumer Outlook Index for August, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, CSFB Gaming/Lodging/Leisure/Restaurants Conference, (MYL) investor day and the (NEM) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted 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.