Monday Watch

Weekend Headlines 
Bloomberg:

• Russia Vows to Respond After Shelling From Ukraine. Russia pledged to respond to a Ukrainian shelling that it said killed one person in the south of the country as President Vladimir Putin prepared to meet German Chancellor Angela Merkel in Brazil. One Russian citizen died and two others were seriously wounded today after the Ukrainian army fired a shell into the Rostov region, the Foreign Ministry said in a website statement. Ukraine did not shoot at its neighbor, Andriy Lysenko, a spokesman for the Defense Ministry, told reporters in Kiev. As Russia described events as an “aggressive act,” Merkel arrived in Rio, where she will attend soccer’s World Cup final and meet Putin, Steffen Seibert, a German government spokesman, said on Twitter. Ukrainian President Petro Poroshenko, who had earlier been reported as planning to attend the match as well, won’t be making the trip, his office said. The Rostov incident is an “escalation of the danger to our citizens on our own territory,” Russian Deputy Foreign Minister Grigory Karasin said on state television. “Clearly, this won’t go unanswered.” 

• Israel Extends Offensive as Gazans Seek Shelter. Israel’s airstrikes against Hamas entered a seventh day as militants in the Gaza Strip kept firing cross-border rockets and thousands of Palestinians fled their homes in advance of a possible ground invasion. Israeli forces dropped leaflets yesterday and left voice and text messages urging residents in the northern Gaza town of Beit Lahiya to leave because it intends to attack “terrorists and terror infrastructure,” the army said. About 17,000 Gazans of all ages sought refuge in shelters run by the United Nations Relief and Works Agency, spokesman Chris Gunness said on Twitter. As trucks carrying tanks traveled south to the Gaza border, Israel edged closer to its first ground assault on the territory since 2009 and world leaders appealed for a cease-fire. The Palestinian Authority appealed to the United Nations yesterday for international protection.

• Merkel Warns of Euro Fragility, Citing Portugal Turmoil. German Chancellor Angela Merkel said turmoil in global markets caused by a Portuguese bank underscores the euro region’s fragility and shows the need for governments to respect debt and deficit limits. Merkel’s warning at a campaign rally of her Christian Democratic Union today was a renewed message to France and Italy to refrain from softening euro-area rules as she revived rhetoric reminiscent of the peak of Europe’s debt crisis. While policy makers put “many rules” in place to prevent a repeat of the crisis, “if we now move away from those rules, for instance on the Stability and Growth Pact, on everything we’ve done to stabilize the euro, we could very quickly get into a situation where we start foundering,” Merkel said in a speech in the eastern German city of Jena.

• Europe Needs $795 Billion Problem Property Loan Solution. European banks and asset managers plan to sell or restructure 584 billion euros ($795 billion) of riskier real estate as they try to clean up their balance sheets, Cushman & Wakefield Inc. said. The region’s lenders, asset managers and bad banks, such as Spain’s Sareb, sold 40.9 billion euros of loans tied to property in the first six months, 611 percent more than a year earlier, the New York-based broker said in a report today. Transactions will reach a record 60 billion euros this year, Cushman & Wakefield estimates.

• Singapore GDP Unexpectedly Shrinks as Manufacturing Declines. Singapore’s economy unexpectedly contracted in the second quarter as a tight labor supply and company moves to shift production overseas hurt manufacturing. Gross domestic product fell an annualized 0.8 percent in the three months through June from the previous quarter, when it expanded a revised 1.6 percent, the trade ministry said in a statement today. The median of 17 estimates in a Bloomberg News survey was for a 2.4 percent gain. Manufacturing fell 19.4 percent in the second quarter from the previous three months, data showed.

• Las Vegas Sands(LVS), Adelson Face $5 Billion Macau Plan Suit. The Las Vegas Sands Corp. (LVS) and Chairman Sheldon Adelson were sued by a former potential partner in a casino venture for as much a $5 billion over claims of trade-secret theft.

• Asia Stocks Rise First Time in 5 Days, Led by Health Care. Asian stocks rose, with the regional benchmark gauge on course for its first gain in five days, as telecommunications firms and health-care shares advanced. SoftBank Corp. added 1.4 percent in Tokyo, leading phone companies to the largest gain among 10 industry groups on the regional index. Sumitomo Dainippon Pharma Co. surged 4 percent after Canada approved the use of one of the Japanese pharmaceutical manufacturer’s drugs. Hyundai Hysco Co. slumped 3.2 percent as the U.S. government imposed duties on steel pipe from South Korea and eight other nations. The MSCI Asia Pacific Index added 0.3 percent to 146.47 as of 9:42 a.m. in Hong Kong.

• Gold Near 4-Month High as Investors Assess Geopolitical Tensions.

• Individuals Pile Into Stocks as Pros Say Bull Is Spent. Main Street and Wall Street are moving in opposite directions. Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute. The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.

Wall Street Journal:

• Obama Contends With Arc of Instability Unseen Since '70s. Convergence of Security Crises Poses Serious Challenge to Barack Obama's Foreign Policy. A convergence of security crises is playing out around the globe, from the Palestinian territories and Iraq to Ukraine and the South China Sea, posing a serious challenge to President Barack Obama's foreign policy and reflecting a world in which U.S. global power seems increasingly tenuous. The breadth of global instability now unfolding hasn't been seen since the late 1970s, U.S. security strategists say, when the Soviet... 

• Flood of Child Migrants Spurs Local Backlash. The federal government is scrambling to find temporary housing for thousands of children streaming across the Mexican border, asking states for help as an increasing number of governors and local officials protest efforts to send the migrants to their communities. While some officials are welcoming the children, concerns voiced in states and communities near the southwest border and beyond demonstrate the depth of the Obama...

• Spanish Bad-Debt Data Tell Divergent Stories. Nonperforming Loans Are Falling; Analysts Point to Broader Measure. (graph) 

• Portugal Isn't Euro Zone's Biggest Problem. What should worry investors is how growth appears to be stalling in some of the euro zone's biggest economies.

• The Full-Time Scandal of Part-Time America. Fewer than half of U.S. adults are working full time. Why? Slow growth and the perverse incentives of ObamaCare.  

MarketWatch.com:

• U.S. stocks will be ‘very disappointing’ for 10 years. Opinion: Equities have been overvalued for some time, six gauges show.

Fox News:

• ISIS destroys shrines and mosques, may be targeting Mecca. ISIS is leaving a path of destroyed churches, shrines and mosques in its wake as it storms across Syria and Iraq, and has even set its sights on Mecca -- Islam's holiest site.

CNBC: 

• Lindt poised to acquire Russell Stover.

• US oil output booms—now refiners have to catch up.

• What happened to Japan's yen-driven export boom? When Japan's Prime Minister Shinzo Abe came to power in late 2012, he hoped a weaker yen would give exporters a much-needed boost as well as spur the inflation needed to revive the world's third biggest economy. Eighteen months on and after an almost 30 percent decline in the yen's value driven by massive monetary stimulus from the Bank of Japan, the currency has failed to lead to the export boom the government had hoped for.

• Are the Fed and the ECB falling behind the curve? If you believe some of the U.S. Federal Reserve (Fed) governors' forecasts, the answer for the Fed's case is a resounding "yes."

Zero Hedge:

• Russell 2000 Slumps Into Red For 2014; Gold Best Year-To-Date. (graph)

• 5 Things To Ponder: The Everything Boom.

• Is It Time To Sell The "Old Guy At A Club" Market?

• Goldman(GS) Warns, Congress Is Preparing To Tame The Fed.

• About That China PMI Number... (graph)

• NSA Whistleblower Speaks: "The Ultimate Goal is Total Population Control".

• Trump Plaza To Close In September As Atlantic City Implosion Claims Fourth Casino.

• When Perfect "There Can't Be A Recession" Indicators Fail.

• Bundesbank Warns Draghi: "Monetary Policy... Is Too Loose".

• Ignoring Occam's Razor (Or Why It's Not Different This Time).

• Forget Puerto Rico, German Munis Are In Trouble.

• Goldman Admits Market 40% Overvalued, Economy Slowing, So... Time To Boost The S&P Target To 2050 From 1900.

• JPMorgan(JPM) Blows Up The Fed's "We Can 'Control' The Crash With Reverse Repo" Plan. (graph)

• Are The 12 Regional Banks Of The Fed Private Entities?

• Merkel Slams Obama's "Cold War" Espionage "Doesn't Belong In 21st Century".

• What Is Power Consumption Telling Us About The US Economy? (graph)

• Orwell Would Be Proud: US Media Admits Divine Right To Decide What Public Needs To Know.

• Fed Members Reach Peak Complacency. (graph)

• "Pot-For-Poverty": Bastion Of Liberalism Unveils Free Marijuana For The Poor.

• China - It's Politics, Not Just Finance.

Business Insider:

• The Pentagon Has Successfully Tested Self-Guided Bullets.

• Putin's Critics Face 'Soviet Fear' In Moscow.

• The Savings That Come From Switching To Alternative Fuel Vehicles Are Tumbling.

• The Polar Vortex Is Coming Back Next Week.

• China's Top Paper Warns Against 'New Cold War' With US.

• UN: Iraq Is Headed For Chaos.

• This Map Shows Why The South China Sea Could Lead To The Next World War.

• China Is Making A Huge Arctic Play — Even Though It Has No Claim.

• Close Aide To Saddam Praises ISIS Extremists And Calls For The Fall Of Baghdad.

• Russia Warns Ukraine Of 'Irreversible' Consequences After Shells Land In Russia.

• Obama's Middle East Policy Enters The 'Dark Unknown' As It Reconsiders Assad.

Reuters:

• Whiting to buy Kodiak for $3.8 bln, create No. 1 Bakken producer. Whiting Petroleum Corp said on Sunday it would acquire Kodiak Oil & Gas Corp for $3.8 billion in stock, to become the largest producer in North Dakota's Bakken shale oil formations, eclipsing Harold Hamm's Continental Resources Inc.

Telegraph:

• BIS chief fears fresh Lehman from worldwide debt surge. Jaime Caruana says investors are ignoring prospect of higher interest rates in the hunt for returns. The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned. Credit spreads have fallen to to wafer-thin levels. Companies are borrowing heavily to buy back their own shares. The BIS said 40pc of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors. The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West. Their debt ratios have risen 20 percentage points as well, to 175pc. Average borrowing rates for five-years is 1pc in real terms. This is extemely low, and could reverse suddenly. “We are watching this closely. If we were concerned by excessive leverage in 2007, we cannot be more relaxed today,” he said.

Welt am Sonntag:

• ECB Loose Policy Jeopardizes Reform Effort. ECB's "expansionary measures and announcements" could further weaken countries' will for reform and budget consolidation, putting more pressure on monetary policy, ECB Governing Council member Jens Weidmann says. Weidmann rejects ECB plans to buy asset-backed securities linked to loans to enterprises, as central bank would risk "becoming Europe's bad bank".

Der Spiegel:

• Germany's Merkel to Resign Voluntarily Before Term Ends. Chancellor Angela Merkel "determined" to step down willingly, not wait until electoral defeat or replacement by another party member, citing members of her cabinet, CDU party. Merkel undecided whether to run in future for top UN or EU posts.

Hong Kong Economic Times:

• China May Need 4-5 Years to Restabilize Property Market. China economic situation in 2H depends on the performance of the property market, citing an exclusive interview with Zhu Baoliang, head of the State Information Center's economic forecasting department in Beijing. If the govt doesn't handle the situation properly, a property market crisis may emerge next year, Zhu says. Downward pressure for the economy exists as government stimulus can't "genuinely" help stabilize the economy, Zhu said.

Weekend Recommendations

Barron's:

• Bullish commentary on (WFM), (GME), (TJX), (BBBY), (SPLS), (TGT), (JCI), (BA) and (DOV).

• Bearish commentary on (SHLD), (JCP), (HE) and (AMZN).

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 102.50 -1.0 basis point.

• Asia Pacific Sovereign CDS Index 72.0 +.5 basis point.

• FTSE-100 futures +.28%.

• S&P 500 futures +.13%.

• NASDAQ 100 futures +.14%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (C)/1.05

Economic Releases

• None of note

Upcoming Splits

• (AAON) 3-for-2

• (OILT) 2-for-1

• (SFBS) 3-for-1

Other Potential Market Movers

• The RBA minutes could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by health care and commodity 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 week.