Tuesday Watch

Evening Headlines 
Bloomberg:

• Kurds Grab Fourth-Largest Iraq Oilfield Amid ISIL Advance. Kurdish troops were defending Iraq’s fourth-biggest oilfield against Islamist militants after deploying outside their semi-autonomous region in the country’s north to seize the deposit claimed by the central government. More than 100,000 Kurdish fighters, known as peshmergas, are guarding a “front line” from Iraq’s eastern border with Iran to the northern town of Fishkabur near Turkey, Jabbar Yawar, Peshmerga Ministry secretary-general, said yesterday in an interview in Erbil, the Kurdish region’s capital. They now occupy areas around the contested city of Kirkuk where BP Plc has been in talks with Iraq’s government to help reverse declining output at the oilfield discovered in 1927. 

• French Jihadis With ISIL Leave Europe at Risk of Iraq Blowback. The young man in a video posted on YouTube last July identified himself as Abu Abd Al-Rahman and told his French “brothers” it was their religious duty to join him in Syria to fight the Assad regime. In perfect French, he called on President Francois Hollande to convert to Islam and to distance himself from Jewish and American allies. His real name was Nicolas Bons and he was from Toulouse. On Jan. 2, his mother Dominique Bons received an SMS saying her 30-year-old son was dead. She called the number and someone told her in French he’d died in a suicide attack near Homs. Her stepson and Nicolas’s half-brother Jean-Daniel, 22, had already died in combat in August near Aleppo. The Bons brothers aren’t unique. The Islamic State of Iraq and the Levant, the group that burst into prominence last week by seizing much of northern Iraq, is the destination of choice for Europeans who have joined the radical Islamist cause in Syria.

• China's Brewing Subprime Crisis by William Pesek. China's infamous "ghost cities" are even scarier than they sound.

• China Aggression Sounds Wake-Up Call for Vietnam’s Manufacturers. For more than eight years, Luong Thi Kim Oanh bought cases of thread from China for her garment factory in Hanoi. Last month, rattled by an anti-China riot in her country, she placed her first order from South Korea. “I used to buy 90 percent of my thread from China,” said Oanh, 52, who employs about 200 people at Viet Hung Garments & Embroidery. “Shifting sourcing may cost us more, but we need to think of it now, or it may be too late. You never know how things may turn out.” 

• Macau Tightens Chinese Visitor Stays in Visa-Abuse Crackdown. Macau will reduce the maximum number of days that Chinese passport holders with transit visas can stay in the city to five days from a week, in an attempt to prevent them from abusing the law. Transit visitors from China who don’t depart for another destination within the five days will be in violation of the new rules, effective July 1, and will be penalized upon their next visit, the city’s Public Security Police Force said in a statement yesterday. Repeat violations will result in denial of entry, according to the statement. 

• Asia Stocks Swing; Energy Explorers Fall, Drugmakers Rise. Asian stocks swung between gains and losses as a decline in telecommunication shares countered gains by health-care firms. SoftBank Corp. (9984) fell 2 percent in Tokyo as telecom companies posted the largest drop among the regional index’s 10 industry groups. Takeda Pharmaceutical Co., Asia’s largest drugmaker, advanced 1 percent in Tokyo. Konica Minolta Inc. surged 8.7 percent, the biggest advance on the regional index, after JPMorgan Chase & Co. advised buying shares in the Japanese office-equipment maker. New World China Land Ltd. plunged as much as 22 percent in Hong Kong after a $2.4 billion plan by its parent to privatize the China property business collapsed. The MSCI Asia Pacific Index (MXAP) was little changed at 143.71 as of 11:26 a.m. in Hong Kong, with about four shares rising for every three that fell.

• Republicans Demand Answers From IRS on Missing E-Mails. Congressional Republicans are seeking answers from the Internal Revenue Service, which has lost more than two years’ worth of e-mails requested by lawmakers. The e-mails belonged to Lois Lerner, who was the director of exempt organizations during the period when the IRS gave extra scrutiny to some Tea Party groups seeking tax-exempt status.

• GM’s(GM) Recall Tally Hits 20 Million With New Ignition Fix. General Motors Co. (GM) is calling back 3.36 million more vehicles, the latest order related to ignition flaws, and said second-quarter charges for such moves would reach $700 million.

Wall Street Journal: 

• Unlikely Allies Aid Militants in Iraq. Radical Sunni Fighters Are Aided by Local Tribes Who Sympathize With Their Goal to Oust Baghdad Government. Radical Sunni fighters, who seized another northern Iraqi city on Monday, are being aided by local tribes who reject the Islamists' extreme ideology but sympathize with their goal of ousting the Shiite-led government in Baghdad. The uneasy alliance helps explain how several hundred insurgents from Islamic State of Iraq and Al Sham, or ISIS, have handily defeated a far larger, better-equipped Iraqi army and come to control about a...

• Russia's Gazprom Cuts Gas to Ukraine, Sparking EU Shortage Fears. Natural-Gas Shutoff Threatens to Further Destabilize Ukrainian Economy. Russian state gas giant OAO Gazprom said it suspended natural-gas deliveries to Ukraine on Monday, a move that threatens to further destabilize the country's crippled economy and sparked concerns of possible gas shortages in Europe. After a final round of late-night talks mediated by the European Union to resolve the impasse ended in failure, Gazprom made good on a threat it has held out for weeks and halted shipments... 

• The Pace of Obama's Disasters. Bergdahl one week. Then Ukraine. Now Iraq. What could be next? Was it only 10 months ago that President Obama capitulated on Syria? And eight months ago that we learned he had no idea the U.S. eavesdropped on Angela Merkel? And seven months ago that his administration struck its disastrous interim nuclear deal with Tehran? And four months ago that Chuck Hagel announced that the United States Army would be cut to numbers not seen since the 1930s? And three months ago that Russia seized Crimea? And two months ago that John Kerry's Israeli-Palestinian peace effort sputtered into the void? And last month that Mr. Obama announced a timetable for total withdrawal from Afghanistan—a...

Fox News: 

• 'Wave of humanity': Border Patrol overwhelmed by flow of illegal immigrants. At daybreak in this border town, two women from Guatemala – one with a small child strapped to her back – wait patiently on the levee overlooking the Rio Grande.

• House GOP investigators argue IRS targeting influenced by Obama. House Republicans seeking a direct link between President Obama and the IRS targeting of conservative groups -- a connection Democrats say is essential for a legitimate White House scandal -- have released a report detailing dozens of examples that they say prove the president and fellow Democrats pressured the agency to act.

CNBC:

• Few-strings-attached loans at record levels. Bank lending to companies with few restrictions has surged back since the financial crisis virtually killed the practice. The record issuance of so-called covenant-lite loans raises questions over whether a fresh wave of debt defaults and losses will return—probably not in the short term, according to experts, but becoming more likely as the trend plays itself out in coming years. U.S. "cov-lite" loan volume recently hit $83.6 billion over 82 deals in 2014, up 41 percent from the same period in 2013 ($59.4 billion over 68 deals), according to data tracker Dealogic. That represents the highest year-to-date volume and deal activity on record.

Zero Hedge:

• Obama Sends 275 Troops To Iraq As Explosions Rock Baghdad Airport.

• Fed Prepares For Bond-Fund Runs, Looking At Imposing "Exit Fee" Gates.

• Obama Urges Bailed-Out Students Recant Their "Climate-Change Skepticism".

• This Pretty Much Sums It Up... (graph)

• John Hussman's Formula For Market Extremes.

• Stunning Fact Of The Day: In 2014 GM Has Recalled More Cars Than It Sold In 2013 And 2012.

• "US Willing To Work With Iran" But John Kerry Claims ISIS Doesn't Have Ability To Overrun Baghdad.

• The Keynesian Jabberwocky Gets Downright Dumb.

• Shanghai Limits Individual Purchases Of Risky Bonds As China Overtakes US As Biggest Corporate Borrower.

• Iraq Breaks Down, Oil Surges - The Context Underlying The Growing Crisis.

Washington Post:

• Obama’s Iraq disaster. In 2011, the situation in Iraq was so good that the Obama administration was actually trying to take credit for it, with Vice President Joe Biden declaring that Iraq “could be one of the great achievements of this administration.”
  Now in 2014, as Iraq descends into chaos, Democrats are trying to blame the fiasco on — you guessed it — George W. Bush.

Reuters: 

• FINRA chief warns about illiquid investments that come with high fees. The chief of the Financial Industry Regulatory Authority, Wall Street's self-regulator, said on Monday he is worried about investors continuing to stretch for yield by going with complex products that sometimes carry high commissions. 

• Morgan Stanley(MS) calls Valeant(VRX) 'house of cards' in Allergan(AGN) pitch. Morgan Stanley (MS.N), an adviser to Valeant Pharmaceuticals International Inc (VRX.TO) in its $53 billion hostile bid for Allergan Inc (AGN.N), initially tried to get hired by Allergan and in its pitch called the unsolicited bidder a "house of cards," according to Allergan.

Obama takes on coal with first-ever carbon limits
Read more at http://www.philly.com/philly/news/politics/20130919_ap_0f857b20e0c144a5a1e1b9dddc9f9d72.html#YRThyDOhArykUeYy.9

Financial News:

• China Local Govt Bond Sale Necessary, Researcher Says. Allowing local govts to sell bonds can help stabilize economy as it faces increasing downward pressure this year, according to Wei Jianing, a researcher from the State Council's Development Research Center. Local govts need huge funds for infrastructure construction, Wei wrote. Central govt can have better risk-control if they allow local govt to issue debt as it boosts transparency.

Evening Recommendations

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 105.0 -1.0 basis point.

• Asia Pacific Sovereign CDS Index 77.5 +.25 basis point.

• FTSE-100 futures +.18%.

• S&P 500 futures +.13%.

• NASDAQ 100 futures  +.12%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JW/A)/.68

• (FDS)/1.25

• (BOBE)/.41

• (ADBE)/.30

• (LZB)/.32

Economic Releases
8:30 am EST

• The CPI for May is estimated to rise +.2% versus a +.3% gain in April.

• The CPI Ex Food and Energy for May is estimated to rise +.2% versus a +.2% gain in April.

• Housing Starts for May are estimated to fall to 1030K versus 1072K in April.

• Building Permits for May are estimated to fall to 1050K versus 1080K in April.

Upcoming Splits

• (UFS) 2-for-1

• (TRN) 2-for-1

Other Potential Market Movers

• The UK inflation/retail sales reports, Eurozone ZEW Index, weekly US retail sales, (BLK) investor day, (ADI) analyst day, RBC Metals/Mining Conference and the Wells Fargo Healthcare Conference could impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.