Bull Radar

Style Outperformer:

• Small-Cap Value (+2.25%)

Sector Outperformers:

• Coal (+4.24%), REITs (+2.76%) and Banks (+2.75%)

Stocks Rising on Unusual Volume:

• STT, WBSN, STD, NTRS, MSG, CEDC, NETL, SNPS, IMAX, BT, EWP, AKS and DTG
  

Stocks With Unusual Call Option Activity:

• 1) MDR 2) STT 3) SWKS 4) AKS 5) EXPE
  

Stocks With Most Positive News Mentions:

• 1) FDO 2) BP 3) SNCR 4) AAPL 5) KFT

Wednesday Watch

Evening Headlines
Bloomberg:

• Samsung Posts Record Operating Profit on Chip Prices. Samsung Electronics Co., Asia's biggest maker of semiconductors, flat screens and mobile phones, posted record profit last quarter, fueled by a recovery in demand for computer-memory chips that drove up prices. Second-quarter operating income jumped 87 percent to 5 trillion won ($4.1 billion), plus or minus 200 billion won, from 2.67 trillion won a year earlier, the Suwon, South Korea-based company said in a statement today. Sales increased about 14 percent, it said. Profit beat the 4.74 trillion won average of 14 analyst estimates compiled by Bloomberg. The higher earnings may help Samsung fund a record 18 trillion won capital spending plan to widen its lead over Micron Technology Inc. and Hynix Semiconductor Inc. The Dramexchange Index, which tracks prices of the most widely used computer- memory chips, rose 9.3 percent this year as the global economic recovery spurred demand for electronics, lifting earnings for chipmakers.
• Lumber Falls Most Allowed on Declining Construction Demand, Ample Supplies. Lumber fell the most allowed by the Chicago Mercantile Exchange on declining construction in the U.S. and Canada and speculation that wood processors will not curb production, adding to already ample supplies. The value of Canadian building permits tumbled more than five times as much as expected, falling 11 percent, because of drops in single-family houses and commercial buildings, Statistics Canada said today. Economist surveyed by Bloomberg News expected a 2 percent drop. “We’re not seeing anything good on the housing-demand side, and people are nervous about how much production there is out there,” said Paul Quinn, an analyst at RBC Capital Markets in Vancouver. “I see us staying in this $180 to $220 range for a while until get some direction in the housing market.” Lumber futures for September delivery fell the limit of $10, or 4.6 percent, to $209.40 per 1,000 board feet in Chicago. Lumber has plunged 38 percent since its 12-month high on April 21 on sluggish demand for building materials.
• Bartels Abandons Bullish Forecast for Stocks in U.S.: Technical Analysis. Mary Ann Bartels, the Bank of America Corp. analyst who had forecast the Standard & Poor’s 500 Index to rise to 1,300 this year, reversed her bullish call and said stocks may extend their biggest decline since the rally began. Bartels, ranked second among analysts who study price charts in Institutional Investor magazine’s most recent survey, shifted her view after the S&P 500 last week broke the February intraday low of 1,044.50 on increased volume while its 50-day moving average fell below the 200-day average in a so-called “dark cross.” The benchmark may sink as low as 950 and that “would fit with an economic slowdown scenario.” Should the market fail to stay above 950, Bartels said, the S&P 500 may retreat to as low as 869 -- the July 2009 low -- and that would suggest “the market is discounting a potential double dip for the U.S. economy.” Investors should favor “defensive stocks,” or companies whose earnings are less affected by economic swings, such as utility and phone shares, she said.
• Excessive Debt May Push Stocks Down, First State Says. The stimulus-driven global economic recovery is threatened by excessive corporate and government debt that may push global stocks to below their post-credit- crisis lows, said Alistair Thompson of First State Investments. This could occur within the next 18 months, according to Thompson, who co- manages First State’s Asia Pacific (ex-Japan)/Global Emerging Markets fund. First State managed about $126 billion as of December 31, according to its website. The fund is skewed toward “defensive” stocks, he said.
• Ctrip.com(CTRP), Chinese Travel Agencies Tumble on Report Commission Rates Cut. Ctrip.com International Ltd., a consolidator of hotel and airline bookings in China, tumbled in New York after Goldman Sachs Group Inc. said the nation’s three biggest carriers cut commission rates paid to travel agencies. Ctrip.com declined 14 percent to $32.81, the biggest drop since December 2008. eLong Inc., a Chinese web-based travel service company, fell 8.4 percent to $12.

Wall Street Journal:

• Revived Push for Drilling Ban. The Obama administration asked a federal appeals court Tuesday to reinstate a moratorium on deepwater petroleum drilling, saying it is needed to reduce the chance of a second spill similar to the one now spewing crude into the Gulf of Mexico.
• The Massachusetts Health-Care 'Train Wreck'. The future of ObamaCare is unfolding here: runaway spending, price controls, even limits on care and medical licensing. President Obama said earlier this year that the health-care bill that Congress passed three months ago is "essentially identical" to the Massachusetts universal coverage plan that then-Gov. Mitt Romney signed into law in 2006. No one but Mr. Romney disagrees. As events are now unfolding, the Massachusetts plan couldn't be a more damning indictment of ObamaCare. The state's universal health-care prototype is growing more dysfunctional by the day, which is the inevitable result of a health system dominated by politics.
• Blackstone Group(BX) Delays Final Close For Mega Fund. Blackstone Group LP (BX) has delayed the final close of its latest mega fund until later this year, hoping to raise more capital, said two people familiar with the matter. The firm was slated to wrap up Blackstone Capital Partners VI LP on June 30, after two and a half years of fund-raising.
• European Governments to Ramp Up Property Sales. Questions of Asset Quality and Disposal Strategies Could Undermine Efforts; a Greek Real-Estate Investment Trust. As debt-laden European governments push in on measures to cut spending and raise funds, a number of countries are preparing to accelerate efforts to sell public property. European countries for years have been selling public assets such as office buildings and residential units in order to raise money. However, the global banking crisis and subsequent recession have caused such a sharp deterioration in public finances that a number of countries—including Germany, the U.K., France and Greece—are expected to sell assets more actively and on a larger scale in the coming years.
• Behold, the Subprime Shmoe. It helps never to have been a household name in the first place, but somebody who perhaps is getting his reputation back is Joseph Cassano. He can thank Phil Angelides. Mr. Cassano ran AIG's Financial Products unit and was creator of the portfolio of credit default swaps that contributed to bringing down the company and necessitating a government bailout. Mr. Cassano, who lived and worked in London, has been the Harry Lime of the subprime drama, invisible, uncommunicative and all the easier to vilify for that reason. His appearance before Financial Crisis Inquiry Commission was his first public surfacing and, lo, he was neither groveling nor defiant. In his written statement, he acknowledged that AIG had been "long" on housing going into the greatest housing meltdown in memory. When quizzed about his compensation, he minced no words: "I made over $300 million during my career at AIG." It helped, of course, that both SEC and Justice Department investigations, which many had expected to expose the ultimate subprime malefactor, recently evaporated overnight, apparently clearing Mr. Cassano of wrongdoing. It doesn't hurt either that it now appears clearer than ever that a big chunk of the losses that doomed AIG were run up by its securities lending operation, not by Mr. Cassano. Most of all, it doesn't hurt that Mr. Angelides is apparently a man with a bone in his teeth. Evidence increasingly suggests that a more shrewdly structured AIG bailout would have been as costless to taxpayers as the bailouts of other large financial institutions ultimately proved to be. Costless, that is, in terms of any long-term cash expenditures, so unlike those world-historical rat holes Fannie and Freddie. But there's another lesson here. If AIG, which before 2008 was mentioned exactly once in the Factiva database in connection with the phrase "too big to fail," proves anything, it proves the folly of pretending that Washington is out of the business of bailing out large financial institutions in an emergency. We can perhaps make such emergencies less likely by correcting some of the system's bad incentives. But that would require a Congress that thinks before it acts. Notice that the Congress we have is busy legislating even as the Angelides commission is months away from completing its work.

Bloomberg Businessweek:

• Schonfeld to Fire 50 Traders as Speed Curbs Profits. Schonfeld Group Holdings LLC, the firm founded in 1988 by Steven Schonfeld, plans to fire 50 traders as competitors with computer-driven strategies and linkages between asset prices wipe out potential profits. The cuts represent 15 percent of the staff at the Jericho, New York-based firm’s proprietary trading division, CNBC reported today, citing an e-mail sent last week by Schonfeld. Schonfeld’s employees, who use the firm’s money to wager on securities instead of managing money for clients, are facing competition from companies using high-frequency trading strategies that account for 65 percent of U.S. equities volume, according to data compiled by Aite Group LLC. “There is no doubt that manual point-and-click-type day traders are at a disadvantage,” said Paul Zubulake, a senior analyst at Aite, a Boston-based research firm. “It just is that if you are in a marketplace, especially arbitrage, if you are not trading at a high speed, you cannot compete, you have no chance. A few years ago you could maybe survive by seeing something visual, but now the machine will take out the price inconsistency very quickly.”
• Commodities May Extend Drop on 'Open Gap': Technical Analysis. Commodities may extend the worst slump since 2008 this quarter after an advance in June proved short-lived, Barclays Capital said, citing trading patterns. The Reuters/Jefferies CRB Index of 19 raw materials ended the second quarter with a decline of 5.4 percent, the most since the final three months of 2008, after the first quarter’s 3.5 percent loss. The gauge may fall to 251, compared with 253.80 on July 6, and a break of that level may lead to further declines to near the 2010 low of 247.25 in July, Dhiren Sarin, Barclays’ technical analyst said. “The outlook is bearish for the CRB Index,” London-based Sarin said in an interview. The trend “is likely to remain in play into this quarter as the market is caught within its weekly cloud and is still within a larger bearish channel.”

CNBC:

• June Retail Sales Seen Rising, Masking Weakness.

NY Times:

• Author Is Threatened Over Book on Chinese Premier. A best-selling Chinese author and democracy advocate detained by security agents on Monday said Tuesday that the agents threatened to imprison him if he proceeded with plans to publish a book criticizing Wen Jiabao, China’s prime minister. The author, Yu Jie, said in a telephone interview that he still intended to publish the book, titled “China’s Best Actor: Wen Jiabao,” by autumn. Because his books are banned in mainland China, Mr. Yu said, he is negotiating with a Hong Kong publisher. Mr. Yu, 36, said he was questioned for four hours on Monday by police officers and agents of Beijing’s public security bureau who specialize in dealing with political dissidents. One security agent “told me that Wen Jiabao is not some ordinary guy,” he said, “and my criticism against him will be considered as harming state security and the national interest.”“ ‘If you insist on publishing this book,’ ” he said he was told, “ ‘you will probably end up like Liu Xianbin, who suffered imprisonment of many years.’ ” Mr. Liu, another writer and rights activist, was sentenced last December to 11 years in prison after leading a public movement calling for democratic reforms and an end to Communist Party rule.

Business Insider:

• Older, More Educated Workers Are Getting Crushed By The Jobs Crisis.

Zero Hedge:

• US Ends June with $13.2 Trillion in Debt, Adds $210 Billion in Total Debt, On Track to Breach Debt Ceiling in Under Six Months. In case one is wondering why the House Democrats attached a document to the emergency war supplemental bill that "deemed as passed" a non-existent $1.12 trillion budget, which basically allows the ruling party to start spending money for Fiscal Year 2011 without the constraint of an actual budget, here is the answer: on June 30, the US closed the books with just over $13.2 trillion in total debt, an increase of $210 billion in one month, or $2.5 trillion annualized. There is just $1.1 trillion left on the ceiling. As we have long been warning, at the current run rate, the ceiling will be breached in under six months, or just around November 2.

CNNMoney:

• Job Gloom at All-Time High. More Americans than ever before feel they have no hope of finding a job. A record 1.21 million people want to work, but said they aren't looking because of the weak labor market, according to federal statistics released Friday. The June figure is up from 793,000 a year ago.

Institutional Investor:

• Galleon Wiretap Hearing Casts Shadow Over Insider Trading Investigation Tactics. On July 27, U.S. District Court Judge Richard Holwell will hold a hearing on whether the wiretap evidence at the center of the case against Rajaratnam should be suppressed. It’s a decision that could shape the way white-collar enforcement officials do their job — and how Wall Streeters, in turn, do theirs. “The Department of Justice is increasingly using blue-collar tactics to investigate white-collar cases,” says Frank Razzano, a former assistant U.S. attorney and Securities and Exchange Commission enforcement official who now defends securities clients at Washington law firm Pepper Hamilton. Whereas the feds would once send a gentlemanly subpoena and wait for a suspect to appear with his or her lawyer, FBI agents now get a warrant to rip suspects’ offices apart or camp in their driveways to scare them into talking, says Razzano.
  

U.S. News:

• Why Pelosi, Democrats Are Wrong on Unemployment Extension. I’m no economist, but three things jump out at me:

Politico:

• Obama to Bypass Senate on CMS Head. The White House announced late Tuesday that President Barack Obama will use a recess appointment to make Donald Berwick administrator of the Centers for Medicare and Medicaid Services, angering Republicans who had opposed his nomination. A Harvard professor and pediatrician, Berwick has won endorsements from most major medical societies. But his nomination has drawn vicious criticism from Republicans, who have seized on his professed admiration for Britain's National Health Service as an "example" for the United States to follow. "This recess appointment is an insult to the American people," said Sen. John Barrasso (R-WY), a physician and leading Berwick opponent. "Dr. Berwick is a self professed supporter of rationing health care and he won't even have to explain his views to the American people in a hearing. Once again, President Obama has made a mockery of his pledge to be accountable and transparent." "It would confirm the obvious, which is the direction in which we're headed," Minority Leader Mitch McConnell (R-Ky.), has previously said of Berwick's nomination. "Massive rationing."

USA Today:

• EU Suggests Raising Retirement Age to 70. The European Union's executive says Europeans should not retire before 70 to save cash-strapped state pension funds. In a paper to be published Wednesday, the European Commission says it now takes four workers' contributions to state pensions to help support two retirees. Lower birth rates and longer life expectancy mean retiring earlier will not be sustainable.
• Airlines Put Mobile Agents with Handheld Devices into Service. Airline agents are increasingly going mobile at airports, with tools in hand to help passengers — and eventually help sell them something.
• Small-Stock Index Russell 2000 in Bear Market. On the outer fringe of the stock market, there's no longer a debate over if we're headed for a bear market. We're already here. The Russell 2000, a key measure of small-company stocks, on Tuesday fell 1.5%, leaving it 20.5% below its recent high in April. While Tuesday's drop was minor, a decline of 20% or more is an attention-grabber because it meets the unofficial definition of a bear market.

Reuters:

• China Commentary Slams U.S. for Steel Suspicions. China's official Xinhua news agency on Tuesday criticised a group of 50 U.S. lawmakers for calling for a probe into Chinese investment in the U.S. steel sector, saying protectionism was rearing its ugly head again. The bipartisan group of U.S. lawmakers pushed for an investigation into whether the Chinese investment in the U.S. steel sector should be blocked on national security grounds.
• Alcon(ACL) to Buy Laser-Surgery Firm LenSx for $362 Mln. U.S. eyecare group Alcon Inc (ACL), which Swiss drugmaker Novartis AG will take over this year, plans to buy laser eye-surgery company LenSx Lasers Inc for $361.5 million.
• Netflix(NFLX) Signs Movie Deal With Relativity Media. Netflix Inc (NFLX) has struck a deal with Relativity Media LLC to screen its movies ahead of pay-TV channels for the first time, putting it in competition with the likes of Time Warner's (TWX) HBO or Showtime.

Financial Times:

• Global Investment Bank Earnings Set for Steep Dip. Global investment banking earnings are expected to drop sharply for the second quarter after brutally tough market conditions saw trading commissions dry up and the market for takeovers and initial public offerings freeze. Analysts are predicting that many European banks will see a drop of 50 per cent year on year in sales, trading and advisory revenues from April to June. In the US, the boom in trading commissions that powered earnings in the past year also appears to have ground to a halt. Howard Chen, an analyst at Credit Suisse, expects revenues from operations in fixed income, currency and commodities at Goldman Sachs and Morgan Stanley to have fallen more than 30 per cent from the first three months of the year. Diversified banks like JPMorgan Chase, Bank of America and Citigroup are also expected to have suffered in their securities businesses, although their retail units and the UK retail banks such as Lloyds and Royal Bank of Scotland are likely to show signs of improvement as defaults on credit cards and other loans drop.

Telegraph:

• China's Property Market Braces for 30% Drop. Standard Chartered has told clients to prepare for a fall in property prices of up to 30pc in Beijing, Shanghai, Shenzen, and other large cities in China as the delayed effects of monetary tightening begin to bite. Stephen Green, the bank's China economist, said a glut of newly built homes were hitting the market just as buyers are restrained by higher down-payments and curbs on speculation. "We believe developers will be forced to cut prices," he said. Kenneth Rogoff, ex-chief economist for the IMF, told Bloomberg Television in Hong Kong that the denouement could prove abrupt after such a torrid boom. "You're starting to see that collapse in property and it's going to hit the banking system," he said. The government is trying to deflate the housing market gently, mostly using tools known as "financial repression" rather than Western style rate rises. Xu Shaoshi, land minister, said sales are already dropping. "In another quarter's time or so, the property market will probably come to a full correction and prices will fall. It's hard to say to what extent they will fall," he said. China views soaring house prices as a threat to social stability, since workers are shut out of the market. The price-to-earnings ratio is 13 in Beijing and Shanghai, four times Western levels. Charles Dumas from Lombard Street Research said China's boom had been driven by its fiscal stimulus of 13pc of GDP, the largest ever by major country in such a short period. The boost was concentrated in 2009, with credit growth running at 25pc of GDP. "The Chinese had nowhere to put their savings since real interest rates were negative and capital controls stopped them investing abroad, so they bought apartments," he said. Wealthier families often hold three, four, or more properties as a hard asset to store wealth, leaving many vacant. This has disguised the scale of excess inventory. It is unclear what will happen if there is the same sort of investor flight seen already on the Shanghai bourse, which is down 55pc from its peak.

Business Standard:

• India Iron Ore Exports Dip 15% in April-June. Slow offtake by Chinese steel mills and decline in spot prices. India’s iron ore exports declined 15 per cent in the first quarter of the financial year 2010-11 on slow offtake by Chinese steel mills. According to an estimate by the industry body, the Federation of Indian Mineral Industries (Fimi), the country’s exports of iron ore slipped to nearly 20.8 million tonnes in the first quarter of the current financial year as compared to 24.5 million tonnes in the corresponding quarter of the previous year.

Nikkei:

• Japan Prime Minister Naoto Kan suggested the government may raise income tax for high-income earners. Kan said the tax system's income redistribution needed to be made more effective if the rate of consumption tax was increased. The government is considering raising the 40% rate for income of more than $206,000.

South China Morning Post:

• Chinese dissident Liu Xianbin has been re-arrested on charges of subversion 19 months after he was released from prison for subversion of state power, citing Chen Mingxian, Liu's wife. Liu was taken into custody on June 28th after police raised his home and confiscated his computer and some documents. Liu, 41, a founding member of the China Democracy Party, was sentenced to 13 years in 1999 for subversion of state power.

China Business News:

• Shanghai Home Sales Hit 5-Year Low. New home sales in Shanghai in the first half of 2010 plunged to a five-year low, shrinking 60 percent compared with the same period last year, yicai.com reported Monday. The average price was 20,983 yuan ($3,098) per square meter, up 50.31 percent year-on-year, the report said, citing statistics by Centaline Property.

China News Service:

• China will implement a resource tax in the western regions of the nation on coal, oil and natural gas, citing Permier Wen Jiabao. The tax will be levied based on the sales price of the resources.

Evening Recommendations
Citigroup:

• Reiterated Buy on (ACL), target $165.
• Reiterated Buy on (CLF), target $87.
  

Night Trading

• Asian equity indices are -1.0% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 138.0 -2.0 basis points.
• Asia Pacific Sovereign CDS Index 133.75 +3.25 basis points.
  
• S&P 500 futures -.33%.
  
• NASDAQ 100 futures -.33%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FDO)/.76

Economic Releases

• None of note

Upcoming Splits

• (CLB) 2-for-1
  

Other Potential Market Movers

• The Fed's Kocherlakota speaking, weekly retail sales reports and the weekly MBA mortgage applications report could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by technology and automaker shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Reversing Lower into Final Hour on Rising Economic Fear, Real Estate Worries, More Shorting

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Below Average
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 30.38 +.86%
  
• ISE Sentiment Index 86.0 -3.37%
  
• Total Put/Call 1.08 +21.35%
  
• NYSE Arms 1.04 -40.76%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 120.81 bps -1.0%
  
• European Financial Sector CDS Index 137.85 bps -3.65%
  
• Western Europe Sovereign Debt CDS Index 150.0 bps -1.2%
  
• Emerging Market CDS Index 272.10 bps -1.3%
  
• 2-Year Swap Spread 36.0 -1 bp
  
• TED Spread 37.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .16% unch.
  
• Yield Curve 232.0 -4 bps
  
• China Import Iron Ore Spot $128.0/Metric Tonne -3.18%
  
• Citi US Economic Surprise Index -21.10 -1.2 points
  
• 10-Year TIPS Spread 1.72% -5 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -3 open in Japan
• DAX Futures: Indicating -36 open in Germany

Portfolio:

• Slightly Lower: On losses in my Biotech and Retail long positions
  
• Disclosed Trades: Added to my (IWM)/(QQQQ) hedges, added to my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 reverses morning gains and trades at session lows, despite a bounce in the euro, the market's oversold state, falling sovereign debt angst and a rally in overseas shares. On the positive side, Software and Coal stocks are relatively strong, rising 1.0%+. Copper is rising another +1.56% despite this morning's poor economic data, which is a positive. As well, the Spain sovereign cds is falling another -3.0% to 255.16 bps. On the negative side, REIT, Road & Rail, Restaurant, Hospital, Biotech, Drisk Drive, Paper, Gold and Oil Tanker shares are under meaningful pressure, falling 1.50%+. Small-cap and Cyclical stocks are underperforming. (IYR) has been heavy throughout the day, falling -2.4%, which is a large negative. Moreover, the Transports are very weak again today, falling another -1.4% to the lowest level since February. Despite improvements in some gauges of European credit angst, three-month euro Libor is rising another +1.3 basis points today to another multi-month high of 74.0 bps. The decline in the 10-year TIPS spread and the fall in the 10-year yield are also unwelcome at this point and indicate deflation worries continue to rise despite today's overseas stock rally and recent bounce in the euro. China Iron Ore Spot prices have now declined over -30% since April. Lumber looks like it is rolling over again, falling -4.5% today. Based on some of the investor angst gauges I follow, it appears too many may be positioned for the bounce higher I had expected, which is also a negative. I expect US stocks to trade mixed-to-lower into the close from current levels on technical selling, more shorting, rising economic fear and increasing real estate sector pessimism.

Today's Headlines

Bloomberg:

• Office Vacancy Rate in U.S. Climbs to 17-Year High, Reis Says. Office vacancies in the U.S. rose to the highest level since 1993 in the second quarter as the sluggish economic recovery damps demand from corporate tenants, Reis Inc. said in a report. The vacancy rate climbed to 17.4 percent from 16 percent a year earlier and 17.3 percent in the first quarter, the New York-based research company said today in a statement. Effective rents, the amount tenants actually pay landlords, fell 5.7 percent from a year earlier and 0.9 percent from the previous three months, according to Reis. Private employers made fewer hires in June than economists had forecast, reinforcing concerns the recovery will weaken, the Labor Department said July 2. Washington, D.C., remained the city with the lowest office vacancy rate, at 10 percent, according to the firm. New York vacancies stayed at 11.7 percent. Detroit had the highest vacancy rate, at 26.3 percent, amid declining employment in the auto industry, Reis said.
• Service Industries in U.S. Expand Less Than Forecast. Service industries in the U.S. expanded in June at a slower pace than forecast, indicating the economy was beginning to cool entering the second half. The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, fell to a four-month low of 53.8 from 55.4 in May. The June figure was less than the median forecast of 55 in a Bloomberg News survey. The group’s index of new orders for non-manufacturing industries declined to 54.4 in June, the lowest this year, from 57.1 a month earlier. The employment gauge fell to 49.7 last month from 50.4. Export orders dropped to 48 in June, the lowest since February, from 53.5. A gauge of prices-paid fell to 53.8 from 60.6.
• U.S. Banks Risk 'Untold Problem' as Muni Debt Holdings Swell. Citigroup Inc., State Street Corp. and U.S. Bancorp are among U.S. banks whose municipal bond holdings have reached a 25-year high just as state budget deficits swell to $140 billion, the most since the start of the recession. Commercial lenders added more than $84 billion to their holdings since 2003, according to the Federal Reserve, pushing total investments to $216.2 billion at the end of the first quarter. Bank regulators and ratings companies are ramping up scrutiny of banks most at risk of being forced to raise more capital should debt prices slide. “There is a huge untold problem here,” said Walter J. Mix III, a former commissioner of the California Department of Financial Institutions who closed 30 banks during the last banking crisis in the 1990s. “The economics lead to the conclusion that there will be downward pressure on these bonds.” At Cullen/Frost Bankers Inc., the biggest Texas lender, holdings of municipal debt exceeded Tier 1 capital, a key measure of a bank’s ability to absorb losses, by $491 million at the end of the first quarter, data compiled by Bloomberg show. For State Street, based in Boston, the holdings make up 50 percent of Tier 1 capital. U.S. Bancorp, the Minneapolis lender, has a ratio of 28 percent. It’s 11 percent at Citigroup, the data show. Default speculation drove municipal bond yields to a 13- month high relative to U.S. Treasuries in the first half of the year. Now, the Federal Deposit Insurance Corp. has asked analysts to look into the issue, according to spokeswoman Michele Heller. Citigroup had the largest municipal holdings among the biggest banks, with $13.4 billion of state and local government bonds, according to FDIC call reports. Bank of America Corp. held $8.5 billion, Wells Fargo & Co. owned $7.6 billion and JPMorgan Chase & Co. held $4.5 billion. Each accounted for less than 8 percent of Tier 1 capital, according to the FDIC. U.S. states are likely to face $140 billion in cumulative budget gaps in the coming year, according to the Center on Budget and Policy Priorities. Last year, 187 tax-exempt issuers defaulted on $6.4 billion of securities, the most since 1992, according to data from Distressed Debt Securities in Miami Lakes, Florida. “It’s a market where it’s clear that the underlying fundamentals are lousy,” said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc., a New York- based brokerage. “People can say fundamentals don’t matter but I’ve been doing this for 32 years. They do.”
• Sovereign Default Risk Climbs Average 30%, CMA Says. The cost of insuring sovereign debt against default climbed 30 percent on average last quarter amid Europe’s escalating fiscal crisis, according to CMA DataVision. Credit-default swaps on 93 percent of the 70 governments tracked by CMA rose, with Greece temporarily overtaking Venezuela as the country with the world’s highest bond risk, the CME Group Inc. unit said in a report published today. “The major widening action in European sovereign credits indicates that the eurozone remains the hub and focus of the global debt crisis,” according to CMA’s Global Sovereign Credit Risk report. “None of the Western European sovereign credit- default swaps tightened.” Protection costs for the quarter’s worst European performers more than doubled, with swaps on Greece soaring 190 percent, Belgium climbing 168 percent, Spain 129 percent and Portugal 127 percent, the report said. Swaps on South Korea climbed 65 percent as tensions with neighboring North Korea mounted when a warship sank, making it Asia’s worst-performing sovereign. With a 2 percent increase Vietnam was Asia’s best performer. The cost of insuring Australia’s debt increased 52 percent after a new mining tax was levied on resource companies. The U.S. was one of eight nations whose default swaps showed improvement in the quarter, falling 2.4 percent, according to CMA.
• Commodity prices are tracking swings in equities more closely than at any time on record, undermining the traditional role of investments in raw materials as a hedge against financial-market volatility, Commerzbank AG said. Inflows into structured notes, and exchange-traded and commodity-index-linked funds reached $8.6 billion in May, the second-highest on record, taking assets under management to $291 billion, Barclays Capital said. "Investors are looking to diversify their holdings and are likely to trim their investments in commodities should the strong correlation between commodities and equities continue," Commerzbank analyst Eugen Weinberg said. As of July 2, the correlation between weekly percentage changes in the S&P 500 and CRB was .73, from as low as minus .35 in August 2008.
• BNP Says Europe Should Be Ready to Break From U.S. Over Rules. BNP Paribas SA Chairman Michel Pebereau said European countries should be prepared to break from the U.S. on bank capital requirements and bonus rules if such regulations risk harming their economies. “There is a necessity, which is not to overreact at the level of regulation,” Pebereau said at the Europlace conference in Paris today. “At this period of time, it is clear we have a different situation if we compare the U.S. and Europe. The priorities are not the same.” His remarks reflect concern on the part of banking executives across Europe that Group of 20 plans to raise capital requirements risk choking off growth in the region, which is more dependent on banks for financing than the U.S. Within the G-20, the U.S. is pushing for faster implementation of new rules while European governments want a phasing-in period. “If we overreact on the field of banking regulation, we’re going to have a problem on the level of financing the economy in Europe,” Pebereau said. “The future of growth in Europe is totally dependent on that. It would be better to have good regulation in Europe than to try to have global regulation in which Europe will not be able to have growth.” He also expressed concern that stricter application of rules on banker pay than elsewhere risks driving business away. “We’re not on a level playing field,” Pebereau said, speaking in English. “In the U.S., there is a very low level of regulation for compensation. If in Europe we have very high level of regulation, you will have a situation in which it is no more possible for European banks to be competitive.”

Wall Street Journal:

• BP(BP) Won't Issue New Equity to Cover Spill Costs. BP PLC killed speculation Tuesday that it was looking for a white knight investor to take a large equity stake in the company by saying it won't issue new equity to raise money to cover the costs of the oil spill in the Gulf of Mexico.
• U.S. to Challenge Arizona Immigration Law. The Justice Department is expected later Tuesday to file its long-expected challenge to an Arizona state law intended to crack down on illegal immigration, two administration officials said. The law passed in April and set to take effect later this month makes illegal immigration a state crime and requires police to verify the immigration status of people stopped for other alleged crimes.

Bloomberg Businessweek:

• Crude is Poised to Test New Lows This Year: Technical Analysis. Crude oil is poised to resume its decline and test new lows for the year in the weeks ahead, according to a technical analysis by Barclays Capital. Crude futures are “heading to the lows last seen in July 2009,” MacNeil Curry, a Barclays analyst in New York, said in a telephone interview. “The bigger picture includes a trend in risk aversion, and we are seeing equities and risk assets breaking down pretty hard.” “Volume is picking up as we break down and volume tends to go with the trend, so it all points to further weakness,” Curry said. “Other commodities are trending down. The S&P is breaking down and risk assets will remain under pressure.”

CNBC.com:

• Italy Is the Ticking Time Bomb: Economist. As Silvio Berlusconi’s government calls for a vote of confidence over his unpopular €25 billion ($31.45 billion) austerity package, Roger Bootle and his team over at Capital Economics are questioning whether the country holds great danger for the euro zone.

Business Insider:

• A Closer Look at the Structural and Demographic Headwinds That Could Derail China's Rise.
• Illinois Construction Workers Make $50-68 Hour, Strike for 15% More. Illinois construction workers live in fantasy land of business-as-usual.

Zerohedge:

• Baltic Dry Index Dropping 4%, Posting Longest Consecutive Loss in 6 Years at 28 Days. (graph)

Forbes:

• Exclusive: Rolling Stone Writer Who Brought Down a General Gets a Big Book Deal.

Washington Post:

• Obama's Worst Foreign-Policy Mistake.
  

Rigzone:

• Shell to Award Deals to Develop Iraq's Oil Field. Shell and its Iraqi state partner are in the process of awarding a deal to drill new oil wells at Iraq's super giant Majnoon oil field in southern Iraq, the head of Iraq's state-run South Oil Co. Dhiaa Jaafar said Tuesday. Shell, which partnered Malaysia's state-run Petronas to develop Majnoon, will also award engineering, procurement and construction deal to build various production installations at the field, an Iraqi oil industry source familiar with the project said. Separately, the Iraqi oil industry source said that firms including Halliburton, Weatherford International, and Petrofac have been invited to submit bids for these two tenders. Shell said earlier that it was planning to drill 15 new wells over the next two years at Majnoon, that would help lift production to 175,000 barrels a day by 2012 from current 45,000 barrels a day. The Anglo-Dutch super major and Petronas were awarded a contract in December to develop the Majnoon field, which is located in Basra governorate and holds some 12.6 billion barrels of proven oil reserves. Shell owns 45% of the venture and Petronas 30%, with Iraq's state-run Missan Oil holding 25%.

The Hill:

• EBay(EBAY) Opposes Delahunt Bill That Would Expand States' Reach on Online Sales Tax. EBay is opposing federal legislation that would allow states to collect more sales taxes from online purchases. The legislation, introduced last week by Rep. William Delahunt (D-Mass.), would allow states to collect online sales taxes from all retailers, and not just those with a “physical presence” in the state. While supporters have argued it would level the playing field among businesses, eBay said the bill would stunt economic growth. “Year after year supporters of increased Internet sales taxes recommend legislation that would impose significant new costs on hundreds of thousands of online small businesses and e-commerce entrepreneurs, which is sure to harm the economy and kill small business jobs,” the company’s vice president for government relations, Tod Cohen, said in a statement. “At a time when unemployment rates are high and small businesses across the country are closing shop, we are confident that Congress will protect small internet retailers and the consumers they serve from another Internet tax scheme.”

National Real Estate Investor:

• CMBS Delinquency Rate Slowing. In another sign that the commercial real estate market is reaching bottom, the delinquency rate on commercial mortgage-backed securities (CMBS) increased in June by the smallest amount in the past 12 months. According to a new report from New York-based researcher Trepp, the CMBS delinquency rate, defined as loans that are 30 days or more past due, climbed just 17 basis points in June to 8.59%. Still, that’s no cause to break out the bubbly just yet. The June delinquency level is, once again, the highest in the history of the CMBS industry. In fact, if defeased loans were taken out of the equation, the overall delinquency rate would be 9.15% - breaking the 9% threshold for the fi­rst time. It is also more than double the rate of 4.07% in June 2009.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).

Reuters:

• Sub-50% Chance of Double-Dip Recession - Fitch. The risk of a double-dip recession is less than 50 percent, Brian Coulton, managing director of European ratings at Fitch Ratings told Reuters Insider Television in an interview on Tuesday. "We still think it's a long way below 50 percent, it's not our central forecast at all," Coulton said of the risk of a double-dip recession. "We do think there are problems in certain sector in particular the Spanish saving sector, but by and large, the major Spanish banks look pretty strong to us," he said. Asked about stress tests gauging the health of the banking sector, Coulton said large Spanish banks looked "pretty strong to us."
• Europe to Outline Bank Test Methods Wednesday - Sources.
• Global Annual Chip Sales Up 47.6% - SIA.
• Global PMI Sags in June as New Order Growth Tapers Off. The pace of global expansion in the private sector sagged in June to a four-month low, according to a survey on Tuesday that pointed to slowing growth in order books and employment. The Global Total Output index, produced by JPMorgan with research and supply management organisations, fell to 55.4 in June from 57.0 in May

Expansion:

• Spanish lenders increased their net investment in the country's treasury debt in May to a record 153.3 billion euros from 147.5 billion euros in April. Spanish banks and savings banks therefore covered 84% of Spain's net state debt in May, citing data from the treasury. The net amount of debt in the hands of investors outside Spain fell by 2.2 billion euros to 206.4 billion euros.

NetEase:

• BYD Co.'s China vehicle sales in June fell 21% to 35,356 units from May, citing the company. June sales rose 3% from a year earlier.

Bear Radar

Style Underperformer:

• Small-Cap Value (-1.17%)

Sector Underperformers:

• REITs (-2.0%), Road & Rail (-1.60%) and Disk Drives (-1.55%)

Stocks Falling on Unusual Volume:

• DECK, KSWS, CBL, EGO, IAG, AGM, DLLR, RLRN, VIV, CHBT, LNCR, IMAX, MATK, CPKI, AUXL, AMED, SHLD, AFAM, MNRO, PKOH, BOBE, RDEA, MLHR, STU and MTR
  

Stocks With Unusual Put Option Activity:

• 1) CTRP 2) FITB 3) PAYX 4) FWLT 5) ANR
  

Stocks With Most Negative News Mentions:

• 1) ED 2) CTRP 3) TEX 4) UXG 5) CERN