Stocks Falling into Final Hour on Soaring Eurozone Debt Angst, US Tax Hike Worries, Global Growth Concerns, Technical Selling

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Almost Sector Declining
  
• Volume: About Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 23.83 +.72%
  
• ISE Sentiment Index 98.0 +13.95%
  
• Total Put/Call 1.18 +2.61%
  
• NYSE Arms 3.01 +53.32%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 96.91 +1.44%
  
• European Financial Sector CDS Index 172.68 +11.50%
  
• Western Europe Sovereign Debt CDS Index 290.17 +1.16%
  
• Emerging Market CDS Index 214.12 +1.26%
  
• 2-Year Swap Spread 25.0 +3 bps
  
• TED Spread 23.0 +4 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .04% -3 bps
  
• Yield Curve 231.0 -6 bps
  
• China Import Iron Ore Spot $177.40/Metric Tonne +.74%
  
• Citi US Economic Surprise Index -90.40 +2.2 points
  
• 10-Year TIPS Spread 2.35% -7 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -91 open in Japan
• DAX Futures: Indicating -12 open in Germany

Portfolio:

• Slightly Lower: On losses in my Technology, Medical, Retail and Biotech sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and 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 breaks convincingly below its 200-day moving average on soaring eurozone debt angst, rising food prices, US tax hike concerns, more poor US economic data, emerging market inflation fears, financial sector pessimism and global growth worries. On the positive side, Computer Service and Telecom shares are holding up relatively well, falling less than -.75%. Oil is falling -1.7%. Weekly retail sales rose +4.3% versus a +4.2% gain the prior week. On the negative side, Airline, Road & Rail, Gaming, REIT, Homebuilding, Bank, Disk Drive, Paper, Oil Tanker, Coal and Alternative Energy shares are under significant pressure, falling more than -2.75%. (XLF)/(IYR) have underperformed throughout the day. Cyclicals are also relatively weak. The Transports are breaking convincingly below their 200-day moving average on volume. The Networking Sub-Index is down -26.3% from its April 27th high. The 10-year yield is again falling too much, down -13 bps to 2.61%. My intermediate-term technical indicators are now giving sell signals on the yield curve. The UBS-Bloomberg Ag Spot Index is rising +1.47%, Lumber is dropping another -4.2%, gold is surging +2.4% and Copper is down -.43%. Lumber is now back to its June 16th 52-week low. Rice is rising another +.8% today and is still near a multi-year high, soaring about +27.0% in less than 1 month. The US price for a gallon of gas is unch. today at $3.71/gallon. It is up .57/gallon in less than 5 months. The Italy sovereign cds is jumping +9.2% to 359.17 bps, the France sovereign cds is rising +6.77% to 134.0 bps, the Spain sovereign cds is surging +4.80% to 404.62 bps, the Germany sovereign cds is rising +2.26% to 65.46 bps, the UK sovereign cds is rising +3.44% to 76.53 bps, the Belgium sovereign cds is rising +8.77% to 225.50 bps and the Ireland sovereign cds is rising +3.06% to 841.47 bps. The Italy sovereign cds has soared +144 bps in 8 days. The Spain, Italy and France sovereign cds are making new record highs today. The German sovereign cds is breaking out to a multi-year high. The Eurozone Financial Sector CDS Index is very close to record highs, as well. Asian indices were weak overnight despite the US debt deal, with India's Sensex falling another -1.1%, which leaves it down -11.7% ytd. Germany's DAX has broken down badly over the last 2 days and is now down -1.7% ytd. French(-1.8%), Italian(-2.53%) and Spanish(-2.18%) stocks continue to trade very poorly. Italian stocks are now down -14.4% ytd and are down -23.3% from their Feb. 17th 52-week high. The action in European equities and cds remain a huge concern. The situation again appears to be spinning out of control. Most gauges of investor angst are registering too much complacency given the magnitude of current headwinds. While the US debt ceiling situation has been resolved, talk of super committee imposed significant tax hikes in the future still leaves significant uncertainty for businesses and thus hiring. It is somewhat amazing that we appear to be following the European spending cut/tax hike model that has so miserably failed and left their budgets in even worse shape as economic growth falters. I am hearing QE3 talk again, notwithstanding how badly QE2 failed in its stated goals. With oil still near $100/bbl and the UBS-Bloomberg Ag Spot Index trading as if another record high is in the offing, the odds of QE3 are likely pretty low and would prove another huge mistake if implemented. I expect US stocks to trade mixed-to-lower into the close from current levels on soaring eurozone debt angst, US tax hike worries, global growth concerns, technical selling, emerging markets inflation fears, rising food prices and financial sector pessimism.

Today's Headlines

Bloomberg:

• Italy, Spain 10-Year Bond Spreads Reach Euro-Era Record on Growth Concern. Italian and Spanish 10-year bonds dropped, pushing yields up to euro-era records versus benchmark German bunds, on concern that slowing growth will hamper efforts to tame the nations’ debt loads. “This has all the features of a self-fulfilling crisis,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Plc in London. “The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.” The yield on 10-year Italian bonds rose six basis points to 6.06 percent at 3:20 p.m. in London. It earlier surged to 6.25 percent, the most since November 1997. The 4.75 percent security maturity in September 2021 fell 0.39, or 3.9 euros per 1,000- euro ($1,427) face amount, to 90.845. That pushed the difference in yield, or spread, over bunds, to as much as 384 basis points, the most since before the euro was introduced in 1999. “Suddenly, Italy joined the other peripherals,” said Justin Knight, a European rate strategist at UBS AG in London. “Investors are, in general, overweight Italy versus other peripheral markets, and it’s going to be a difficult position to unwind.” Spanish 10-year yields rose four basis points to 6.24 percent, after climbing to 6.46 percent, the most since 1997. That pushed the spread over similar-maturity German debt as high as 404 basis points. The crisis risks worsening should the Spanish yield touch 6.5 percent, RBS’s Sian said. “Anything materially above that risks an acceleration like we saw for Greece, Ireland and Portugal,” he said. “The political willingness to backstop the European Union is now what the market needs.” The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 11 basis points to 288, approaching the all-time high closing price of 306.5 set July 18. The 10-year euro swap spread, which shows the difference between the swap rate and the yield on benchmark German bunds and is used as a measure of perceived risk, rose for a seventh day, climbing as high as 73 basis points, the most since January 2009. The yield premium investors demand to hold Belgian 10-year bonds instead of benchmark bunds widened to a euro-era record of 207 basis points, even as demand improved at a debt sale.
• Obama Says Debt Plan Is 'First Step' on Path Toward Balancing U.S. Budget. President Barack Obama said final congressional passage of legislation to raise the federal debt ceiling and trim the deficit is a “first step” on a path that must include both increased revenue and spending cuts to narrow the government’s long-term budget shortfall.
• Consumer Spending in U.S. Fell in June. U.S. consumer spending unexpectedly dropped in June for the first time in almost two years and savings climbed, adding to evidence that the slump in hiring is hurting household confidence. Purchases declined 0.2 percent after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November. The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending, which accounts for 70 percent of the world’s largest economy. “The third quarter is looking very soft too. Consumers are facing lackluster wage growth in this phase of still-high gas prices.” Americans boosted savings, a sign of growing concern over the economy and jobs. The savings rate climbed to 5.4 percent, the highest since September, from 5 percent. Weekly earnings adjusted for inflation dropped 0.9 percent in the 12 months ended June on average, according to figures from the Labor Department. The cost of regular gasoline climbed in May to about a three-year high of $4 a gallon, and remained above $3.70 at the end of July, according to AAA, the nation’s biggest auto group.
• Zapatero Postpones Planned Vacation as Spanish Bond Yields Surge Towards 7%. Spanish Prime Minister Jose Luis Rodriguez Zapatero delayed a planned vacation as the country’s borrowing costs approached the 7 percent mark that heralded bailouts of Greece, Portugal and Ireland. The prime minister is in “permanent” contact with Finance Minister Elena Salgado and has spoken with European Commission President Jose Manuel Barroso, according to his office. Zapatero’s economic advisers have discussed developments in financial markets with counterparts in Germany, France and Italy, according to one official, who asked not to be identified in line with government policy. Ten-year bond yields for Spain and Italy reached euro-era records today on concern that rising debt-servicing costs may wipe out the benefits of austerity measures and slow growth. “It’s extreme -- parallels to 2008 have been drawn,” said Peter Chatwell, a fixed income strategist at Credit Agricole CIB in London, referring to the height of the financial crisis when Lehman Brothers Holdings Inc. went bankrupt. “The problem we’ve got here is an extremely risk averse market, very thin liquidity and nothing of substance to stop the negative periphery trades being put on.”
• Barclays Will Cut 3,000 Jobs This Year as Investment Bank Revenue Declines. Barclays Plc (BCS), Britain’s second- largest bank by assets, said it’s eliminating about 3,000 jobs this year as second-quarter investment banking profit fell by more than a quarter.
• 2-year swap spread may reach 30 basis points as 2-year Treasury yields have "little space to drop with Libor belatedly rising," Credit Agricole's David Keeble writes.
• Rice, the best-performing grain this year, may sustain a rally as acreage in the U.S. slumps, reducing production from the third-largest exporter, according to Standard Chartered Plc. Futures may average $15 per 100 pounds in Chicago this quarter, Abah Ofon, an analyst at the bank, said by phone today, raising his forecast from $13. Higher prices of rice, staple for half the world, would fuel global food costs that reached an all-time high in February, according to the Food & Agriculture Organization.
• Gold Surges to Record as Fragile Global Economy Bolsters Demand for Haven. Gold futures surged to a record $1,645.80 an ounce as escalating concern that the global economy is losing momentum spurred demand for the precious metal as an investment haven. Gold futures for December delivery rose $23.60, or 1.5 percent, to $1,645.30 at 11:47 a.m. on the Comex in New York. Before today, the price gained 37 percent in the past 12 months.
• Oil Declines for Third Day on U.S. Economic Outlook; Stockpiles May Climb. Oil declined for a third day in New York, the longest losing streak since May, as signs that the U.S. economy is slowing countered speculation the world’s biggest crude consumer will resolve its debt crisis. Crude for September delivery dropped as much as $1.08 to $93.81 a barrel in electronic trading on the New York Mercantile Exchange and was at $94.18 at 1:08 p.m. London time. The contract yesterday fell 81 cents to $94.89, the lowest close since June 29. Prices are 16 percent higher the past year.
• China's Auditor Finds 'Questions' Over $51 Billion of Spending. China’s national auditor said it found 328 billion yuan ($51 billion) of spending at government agencies and companies last year that raised “questions.” The National Audit Office discovered 42.8 billion yuan in wasteful spending, 165.1 billion yuan in misstatements, and 3.4 billion yuan in misused public benefits, according to the report posted on the agency’s website. Local branches of the auditor also examined 36,900 individuals, with 82 officials referred to judicial or investigative bodies for further action, according to the report dated Aug. 1. Waste and misuse are adding to concerns that local governments will struggle to repay money they borrowed to fund infrastructure projects that the national auditor put at 10.7 trillion yuan as of the end of 2010.
• Tepco Reports Second Deadly Radiation Reading at Fukushima Plant. Tokyo Electric Power Co. reported its second deadly radiation reading in as many days at its wrecked Fukushima nuclear plant north of Tokyo. The utility known as Tepco said yesterday it detected 5 sieverts of radiation per hour in the No. 1 reactor building. On Aug. 1 in another area it recorded radiation of 10 sieverts per hour, enough to kill a person “within a few weeks” after a single exposure, according to the World Nuclear Association.
• U.S. 30-Year Yield Falls Below 4% on Debt Deal Vote, Slow Economy. Treasuries rose, pushing 30-year bond yields below 4 percent for the first time this year, as the Senate approved a deal to boost the debt limit and a government report showed consumer spending unexpectedly fell in June, reinforcing speculation the economy is slowing.
• Coach(COH) Falls Most Since March on Margins. Coach Inc. (COH), the largest U.S. luxury handbag maker, fell the most in more than four months after saying that a measure of profitability may not improve this year amid higher costs. The shares fell $3.65, or 5.6 percent, to $61.64 at 11:38 a.m. in New York Stock Exchange composite trading. Coach earlier dropped 6.6 percent, the biggest intraday decline since March 15.
• Syria Targets Hama as Europeans Push for Condemnation at UN. Syrian forces shelled Hama with tanks and artillery for a third day as European countries pushed for a United Nations resolution condemning President Bashar al-Assad’s latest crackdown. The army assault on the city of 800,000 drew protesters into the streets of Damascus and elsewhere in the country late yesterday and overnight into the second day of the Muslim holy month of Ramadan, Mahmoud Merhi, head of the Arab Organization for Human Rights, said by telephone from the capital.

Wall Street Journal:

• U.S. Averts Default as Obama Signs Bill. The Senate voted 74-26 Tuesday to approve sweeping legislation to raise the country's $14.29 trillion debt ceiling and cut the budget deficit by at least $2.1 trillion over the next decade, a major victory for Republicans who have long battled to shrink the size of the U.S. government.
• Live Blog: The Next Stage.
  
• Billionaire: Debt-Deal Totals Are 'Rounding Errors'. Billionaire investor Wilbur Ross, who has made his name in distressed assets, said the debt deal reached in Congress is unlikely to have much of an effect on the actual economy. Mr. Ross, appearing on the WSJ News Hub, said the deficit reductions planned by lawmakers as part of the deal to raise the federal borrowing limit amount to only "rounding errors" in terms of size. He said the deal hasn't put the debt issues behind the country and that the U.S. lacks an "overall strategy" that would help settle the various debates on energy, spending and, especially, taxes.
• Exploration Raises Tensions in South China Sea. After appearing to make progress in cooling tensions over the South China Sea in recent weeks, Southeast Asia and China face the potential for more trouble ahead as oil and gas companies expand their exploration work in the contested waters.
• Japan Intensifies China Rhetoric. Japan intensified its rhetoric against China's military Tuesday, accusing Beijing for the first time of "assertiveness" and saying it needs to keep a closer watch on how China views the contested waters between the two countries.

CNBC.com:

• Industrials Break Down, Now in Correction Mode.
• Europe on Brink of 'Major Financial Collapse': Guggenheim CIO.
  

Business Insider:

• The Biggest Middle Class Tax Increase In History Will Come In Five Months.

Zero Hedge:

• You Want to Create Jobs? Here's How. 1. The only engine for jobs is small business, so quit pandering to global corporations and start pandering to the people who might actually hire someone in America.

New York Times:

• Revolving Door at SEC Is Hurdle to Crisis Cleanup. A senior lawyer for the Securities and Exchange Commission recently took center stage in a major case involving a controversial mortgage security sold by Goldman Sachs. There was just one slight twist in the legal proceedings. The S.E.C. lawyer was not the prosecutor taking the deposition. He was the witness.
• Pressure Builds on Italy and Spain Over Finances.
  

HedgeCo.Net:

• Hedge Funds Bullish on US Equities, Will Need to Invest Aggressively to Pass 2008 Highwater Marks. Even ahead of the US debt ceiling agreement, hedge fund managers have been turning increasingly bullish on US equities. With TrimTabs and BarclayHedge reporting 43% of managers expressing bullish sentiments about the S&P 500 (in July), it seems as though hedge funds are holding tight to the belief that the US has turned the corner in its financial crisis. The bullish equities outlook is the highest it has been since December of last year, and was up 15% over the outlooks expressed only one-month prior. “This reversal is striking,” Sol Waksman , Founder and President of BarclayHedge. “Hedge fund managers were meaningfully bullish on domestic stocks in only one month in the first half of the year.

Market Folly:

• Hedge Fund Third Point Reduces Equity Exposure For Third Consecutive Month.

Seeking Alpha:

• European Default Risk Spikes. (graphs)
  

Politico:

• Obama's Approval Dives in Pennsylvania. President Obama's approval numbers have taken a hit in swing-state Pennsylvania, the latest Quinnipiac University survey out this morning shows. Just 43 percent of voters approve of the job he's doing, while 54 percent disapprove, according to the survey.
  

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 23% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-one percent (41%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -18 (see trends ).
• Rasmussen Employment Index Down Sharply: Just 18% Report Their Firms Hiring. The Rasmussen Employment Index, which measures workers’ perceptions of the labor market each month, fell nearly eight points in July to the lowest level since March. At 70.1, the Employment Index is down seven points from the beginning of the year and down 13 points since last November when hiring expectations peaked. Generally speaking, a decline in the Rasmussen Employment Index suggests the upcoming government reports on job creation will be worse than prior months.

Reuters:

• Frontline(FRO) is pulling some of its largest oil carriers from the market, citing an interview with CEO Jens Martin Jensen. Jensen sees "few signs" of short term improvement in the tanker market. "There is no point in us transporting oil for free in any case, so we have decided that, given the market situation, to pull some ships out to see what happens," he said.
• Italian Banks Caught in Sovereign Debt Crossfire. Big holdings of Italian bonds by the country's banks are making them a proxy for funds responding to debt concerns by cutting their exposure to Italy. Italian banks had hitherto weathered the financial crisis better than their European peers, thanks to a tradition of conservative lending and relatively limited exposure to riskier assets, such as Greek bonds. But that inward culture, once seen as a strength at times of market turbulence, is now being perceived as a weakness -- making the banks inextricably linked to the fate of Italy's borrowing costs. Shares in Italy's two biggest banks, UniCredit and Intesa Sanpaolo have dropped about 20 percent since investors began dumping Italian assets at the start of July.

Foreign Policy:

• The End of the Roman Holiday. With their economy teetering on the brink, Italians are going to have to make major changes to save La Dolce Vita. The Bank of Italy has admitted that if the interest rates on Italian bonds don't lower sometime soon, it will pose a "substantial" problem for the Italian economy, perhaps pushing the country back into recession -- and perhaps, in the worst case scenario, out of the eurozone.

Telegraph:

• Italy Calls Emergency Meeting as Eurozone Crisis Resurfaces. A fresh wave of eurozone panic prompted Italian authorities to call an emergency meeting on Tuesday and Spain's prime minister to delay his holiday as borrowing costs for the two nations hit fresh highs.
• IMF: UK's George Osborne May Miss Plan to Eliminate Deficit. Chancellor George Osborne is in danger of missing his key performance yardstick of eliminating the structural deficit over the next five years, the International Monetary Fund (IMF) has warned.

Sueddeutsche Zeitung:

• Lars Feld, a member of German Chancellor Angela Merkel's council of economic advisers, said he expects financial market turbulence stemming from Europe's debt crisis to return by September "at the latest," citing an interview. Markets will question whether Greece's rescue package is big enough and if other debt-stricken countries will have sufficient discipline, Feld said.

Handelsblatt:

• German banks may still be harmed by the sovereign debt crisis even if they passed European stress tests, citing Raimund Roeseler, executive director of BaFin, the country's regulator. Roeseler said the default of a single euro-area country would be "very painful" for German banks, though it still could be dealt with.

la Repubblica:

• Greece, Portugal and Ireland will likely be forced to quit the euro within a year and Italy may need a European Union-led rescue, Allen Sinai, president of Decision Economics, said in an interview. Sinai told the newspaper he was "pessimistic" about Italy and that the country may soon need "an intervention along the lines of the Greek model." Managing the debt crisis has been undermined by the lack of a central fiscal authority for the region, and the euro-area may end up a club for only Europe's strongest economies, he said.

Shanghai Daily:

• Shanghai Manufacturing Activities See 1st Decline. SHANGHAI'S industrial activities shrank for the first time in 10 months in June as the government tightened policies and the city embarked on an economic restructuring. The city's Purchasing Managers' Index, a gauge of manufacturing activities, lost 1 point from a month earlier to 49.3 in June, the Shanghai Statistics Bureau said yesterday. A reading below 50 means manufacturing activities contracted.
  

Bear Radar

Style Underperformer:

• Mid-Cap Growth (-2.41%)

Sector Underperformers:

• 1) Oil Tankers -5.61% 2) Road & Rail -3.31% 3) Alternative Energy -3.31%

Stocks Falling on Unusual Volume:

• AIXG, DB, UBS, TIE, BP, SU, PFE, OME, RRD, IIVI, CTRP, AMED, TXRH, LEAP, IPHS, FDML, ECPG, HSII, VRA, GTIV, ATPG, SHOO, TEVA, DXPE, TRLG, ZOLL, EXPD, CNMD, PRAA, JKL, VB, GET, IAI, EFG, RXI, FOE, BGC, VTI, IBB, PH, IYT, AWI, EZU, PWR, VECO, CFN, MLM, STE, MDRX, FMC, H, VMC, CACI, ASH, HS, JBL, HOT, VQ, THO, CQB, COH, EXPD, CRK, VRA, PPO, GGP, ATPG, OSG, BPI, BGC, MTOR and PCS
  

Stocks With Unusual Put Option Activity:

• 1) CTRP 2) TIE 3) SWY 4) DIG 5) ANR
  

Stocks With Most Negative News Mentions:

• 1) ZOLL 2) ITW 3) AMR 4) AKS 5) SU
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (-.81%)

Sector Outperformers:

• 1) Gold & Silver +1.29% 2) Computer Services +.19% 3) Education -.31%

Stocks Rising on Unusual Volume:

• LQDT, TIMX, JCOM, SNCR, CGNX, CVLT, FWLT, SBRA, IPGP, MDAS, VOLC, SOHU, NVDA, TMX, IIT, OIS, HLF, ROG, CVG, SM, CCC, NUS, UIS, SBRA, WRC and KND
  

Stocks With Unusual Call Option Activity:

• 1) BZ 2) HTZ 3) LEAP 4) CI 5) VVUS
  

Stocks With Most Positive News Mentions:

• 1) JCP 2) PH 3) NWSA 4) RT 5) PCL
  

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume
  

Tuesday Watch

Evening Headlines

Bloomberg:

• House Passes $2.1 Trillion U.S. Debt Ceiling Plan. The House of Representatives approved legislation to raise the U.S. debt limit by at least $2.1 trillion and cut federal spending by $2.4 trillion or more, one day before a threatened default. The House voted 269-161 for the plan negotiated by leaders and President Barack Obama over the weekend. Ninety-five Democrats voted in favor and 66 Republicans in opposition. The measure goes to the Senate for a final vote planned tomorrow. “We’re coming up to a deadline we all must recognize: default,” said Representative Paul Ryan, a Wisconsin Republican and chairman of the Budget Committee. “Both parties got us in this mess; both parties are going to have to work together to get us out.” Ryan called the spending cuts connected to the debt-ceiling increase “a huge cultural change” for Congress.
• Italy, Spain Stuck in No-Go Debt Zone for Merrill, DWS Funds: Euro Credit. Merrill Lynch Global Wealth Management, unconvinced that the second Greek bailout has stemmed the debt crisis, won’t put any of its $1.5 trillion of assets into Italian or Spanish bonds.The unit of Bank of America Corp. (BAC) has spurned bonds from Greece, Portugal, Ireland, Spain and Italy since deciding to avoid them in April of last year, according to Johannes Jooste, a senior Merrill portfolio strategist in London. Merrill isn’t alone: Frankfurt-based DWS Investment, which oversees $390 billion for clients, and Legal & Investment Management say they are “underweight” Spanish debt. The lack of enthusiasm from bond buyers threatens the latest rescue deal for Greece, which was struck two weeks ago to reassure investors as contagion from the debt crisis sent Italian and Spanish bond yields soaring. “We are not convinced that this is the finality of the haircuts,” Jooste said in an interview, referring to losses absorbed by those private investors through the debt-exchange program. “There is still a question mark of whether there will be haircuts for countries apart from Greece.” The extra yield investors demand to hold 10-year Italian bonds instead of benchmark German bunds rose to 355 basis points yesterday, a euro-era record. Spanish 10-year yields have jumped almost 50 basis points to 6.2 percent since the summit. “The recent solution for Greece has not changed our perception about the peripheral market, and we are not quite sure if the problem is contained,” said Ralf Schreyer, head of European fixed income at DWS. The additional yield investors demand to hold 10-year Spanish debt over bunds reached 375 basis points yesterday, compared with the average of 44 basis points in the past decade. Yields on 10-year Spanish and Italian bonds are only about a percentage point away from the 7 percent mark that prompted Greece, Portugal and Ireland to seek bailouts. Rising borrowing costs and a poor growth outlook are two reasons Jonathan Cloke, a portfolio manager at Legal & General, cited for holding off on purchasing of Italian and Spanish government securities. In addition to being underweight Spanish bonds, Legal & General no longer owns Greek, Irish and Portuguese debt. “I don’t think Italy and Spain can carry on financing at the current yield levels,” said Cloke. “There will have to be some ways of reducing their interest rates, although I’m not quite sure how. And with the European Central bank expected to keep raising interest rates, I’m worried these countries are not going to get growth they need to reduce debt.”
• Democrats Renew Push for Business Tax Increases After Deal. The private equity managers, oil companies and high-income earners that have been the Obama administration’s prime targets for tax increases will be in Democrats’ crosshairs again in the next phase of deficit- reduction efforts. The debt-limit bill being considered in Congress today would empower a 12-member joint committee of lawmakers to seek $1.5 trillion in deficit cuts, with a Dec. 23 deadline for the House and Senate to act. Democrats, who didn’t get any specific revenue increases in the debt ceiling compromise Congress is considering today, are likely to return to their previous proposals, said Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee. “The joint committee would be tasked to look at ways to reduce the deficit, and it has to be done in a balanced fashion,” Van Hollen told reporters. “It has to include closing these corporate tax loopholes for special interests and looking at other revenue sources from the very top income earners.” President Barack Obama in his budget recommended taxing the profit share -- or carried interest -- earned by private equity managers, venture capitalists and others at ordinary income tax rates and not the more lightly taxed capital gains rate. He called for ending tax benefits for oil and gas companies and for capping the itemized deductions of upper-income Americans.
• China's Stocks Decline to 6-Week Low on Manufacturing Slowdown, Inflation. China’s stocks fell, driving down the benchmark index to a six-week low, after manufacturing growth slowed in the world’s two largest economies and an official Chinese newspaper said inflation pressure is still high. Industrial & Commercial Bank of China Ltd. led declines for lenders on concern the government will intensify measures to curb inflation. Jiangxi Copper Co., China’s biggest producer of the metal, lost 2.4 percent on speculation a slowing global economy will curb demand for metals. “Economic data from around the world seem to suggest that global growth is slowing and that’ll sour sentiment especially when there’s still uncertainty over the debt crisis in Europe,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Inflation is still the biggest domestic problem for China and no one knows how soon it will peak.” The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, lost 34.17 points, or 1.3 percent, to 2,669.61 as of 9:46 a.m. local time, the lowest since June 22.
• Auto Sales Stall as Unemployment Curbs Chance of Return to U.S. Peak: Cars. U.S. auto sales have stalled, casting doubt on a rebound this year as persistent unemployment and tighter lending deter buyers. Light-vehicle deliveries in July, to be released tomorrow, may have run at an 11.8 million seasonally adjusted annual rate, the average estimate of 12 analysts surveyed by Bloomberg. That would trail the 12.5 million rate in the first half. The auto industry may lose 1.5 million in projected sales in 2011, according to consultant AlixPartners LLP. The economy isn’t picking up as fast as anticipated, and the drag may continue beyond this year, AlixPartners said. That may put a return to average annual sales of 16.8 million vehicles from 2000 to 2007 out of reach. Unemployment reached the highest level this year in June. “This curve of unemployment looks like it’s got a lot of legs,” Mark Wakefield, an AlixPartners director in Southfield, Michigan, said in a telephone interview. “This is one of the first recent cycles where demand is not going to go back above its prior peak, because there are just so many structural things that are different this time around.”
• Minnesota Has Outlook Revised to Negative by Moody's. Minnesota had the outlook on its debt revised to negative from stable by Moody's Investors Service, which cited "political intractability" resulting in one-time budget moves to end a 20-day government shutdown last month. "Sooner or later, we need to fix the state's budget so that it does not rely on one-time solutions," said Jim Schowalter, the state's Management & Budget commissioner, in a statement.
• Tanker Demolitions Slowing Creates Worst Glut in 29 Years: Freight Markets. Demolitions of supertankers, which carry about 20 percent of the world’s oil, are slowing as ship owners accept unprofitable rates rather than write off assets, creating the industry’s biggest glut in 29 years. Scrapping vessels, each the size of the Chrysler Building, will drop 19 percent to 2.8 million deadweight tons of carrying capacity this year, according to London-based Clarkson Plc, the world’s largest shipbroker. The fleet will expand 7.5 percent to 176.7 million deadweight tons, the most since 1982, as demand for seaborne crude advances 2.8 percent, the broker estimates. Owners are effectively paying clients $1,037 a day to charter vessels on the industry’s benchmark route in the single- voyage market, the first negative rate since at least 2008. Frontline Ltd., the biggest operator of the ships, needs $29,700 to break even. Unprofitable voyages may still be preferable to the $22.5 million that BW Maritime Pte Ltd. estimates owners would lose by scrapping tankers five years earlier than the standard lifetime of about 25 years. “Hope springs eternal,” said Andreas Sohmen-Pao, chief executive officer of Singapore-based BW Maritime, which has 15 supertankers in its fleet of 105 ships. “Faced with a choice of crystallizing a loss which could have knock-on consequences for financing arrangements and bank loans and so on, people say, well, better to sweat it out and see if something changes.”
• China's Expanding Naval Reach Worries Japan Over Routine Warship Presence. Japan expressed mounting concern over China’s expanding naval reach, saying in the government’s annual defense report that it expects the rising maritime power’s ships to become commonplace near its waters. “China plans to expand its sphere of maritime activities, carrying out operations and training as an ordinary routine practice in waters surrounding Japan,” said the report, which was released today in Tokyo. The areas Japan believes it will encounter China’s navy include the “East China Sea and the Pacific Ocean, as well as the South China Sea.”
• European Stocks Slide 10% From 2011 High as Debt Crisis Spreads. European stocks dropped 10 percent from this year’s high, becoming the first major region to enter a so-called correction, as falling Spanish and Italian bonds showed the debt crisis is spreading and U.S. manufacturing trailed forecasts. Banks, insurers and technology companies led the decline in the benchmark Stoxx Europe 600 Index from a 2 1/2-year high on Feb. 17, driving the measure to a 2011 loss of 5 percent. Every industry decreased more than 17 percent, according to data compiled by Bloomberg. UniCredit SpA, Italy’s largest bank, plunged 40 percent in the period and Commerzbank AG, Germany’s second-largest lender, tumbled 47 percent.

Wall Street Journal:

• Uneasy House OK's Debt Deal. Both Parties Find Fault With Bill; Senate to Vote Tuesday. The House passed a $2.4 trillion debt-ceiling increase Monday night with the Senate planning to follow on Tuesday, after one of the most ferocious fights ever over government spending.
• Giffords Returns to House to Cast a ''Yes' Vote. In a surprise, Rep. Gabrielle Giffords (D., Ariz.) on Monday returned to Congress for the first time since being shot in the head nearly seven months ago, putting aside the effects of a grave injury to vote in favor of the debt package.
• Live Blog: The U.S. Debt Battle.
• Left for Extinct, a Steel Plant Rises in Ohio. On the edge of the Mahoning River, where once stood dozens of blast furnaces, more than 400 workers are constructing what long has been considered unthinkable: a new $650 million steel plant. When complete, it will stand 10 stories tall, occupy one million square feet and make a half million tons of seamless steel tubes used in "fracking" or drilling for natural gas in shale basins.
• Egyptians Turn Against Liberal Protesters. Mobs of ordinary Egyptians joined with soldiers to drive pro-democracy protesters from their encampment in Tahrir Square here Monday, showing how far the uprising's early heroes have fallen in the eyes of the public. Six months after young, liberal activists helped lead the popular movement that ousted President Hosni Mubarak, the hard core of these protesters was forcibly dispersed by the troops. Some Egyptians lined the street to applaud the army. Others ganged up on the activists as they retreated from the square that has come to symbolize the Arab Spring. Squeezed between an assertive military and the country's resurgent Islamist movement, many Internet-savvy, pro-democracy activists are finding it increasingly hard to remain relevant in a post-revolutionary Egypt that is struggling to overcome an economic crisis and restore law and order.

MarketWatch:

• China Must Psych Out Inflation by Andy Xie. A cost-price spiral psychology has become a powerful multiplier influencing China’s inflation dynamic. Will it spiral out of control? This cost-price spiral could be broken with an interest rate overshoot. But since policy makers are currently reluctant to raise rates, inflation psychology is strengthening its grip on the economy. Some analysts and government officials point to price trends for one or two consumer items, and then use these patterns to reach conclusions about inflation. This is erroneous and dangerous.

CNBC:

• Signs of a Double-Dip Have Emerged: Meredith Whitney.

Business Insider:

• Will Cyprus Be The Straw That Breaks The EU? I’m always amazed when relatively minor events somehow conspire to change the course of history. In this example a lousy brush fire may be the catalyst for an unwinding of the EU.
• China Also Fakes These Stores: Disney, Nike, D&G, McDonald's, Starbucks and More.
  

IBD:

• From Gas to Fiber Optic, MasTec(MTZ) Builds Cables.

NY Times:

• India's Widening Iron Ore Scandal Hurts Stocks. India’s wave of corruption scandals has hit yet another industry, iron ore mining, implicating companies that include the flagship of one of this nation’s richest men.

Washington Post:

• Chinese Police Shoot Dead 2 Suspects in Attack Blamed on Militants Trained in Pakistan. Police in far western China shot dead two suspects sought for their alleged involvement in a deadly attack blamed on Muslim extremists trained in Pakistan, the government said. The pair, identified as 29-year-old Memtieli Tiliwaldi and 34-year-old Turson Hasan, were discovered late Monday hiding in corn fields in a suburb of the Silk Road city of Kashgar, where a pair of weekend attacks killed a total of 20 people, according to a notice posted on the Xinjiang regional government website.

Nature.com:

• The Impact of Mergers on Pharmaceutical R&D. Mergers and acquisitions in the pharmaceutical industry have substantially reduced the number of major companies over the past 15 years. The short-term business rationale for this extensive consolidation might have been reasonable, but at what cost to research and development productivity?

The Blaze:

• Horrific Video Captures The Reported 'Ramadan Massacre' In Syria.

Politico:

• Sources: Joe Biden Likens Tea Partiers to Terrorists. Vice President Joe Biden joined House Democrats in lashing tea party Republicans Monday.

Reuters:

• Putin Says U.S. Is a "Parasite" on Global Economy. Russian Prime Minister Vladimir Putin accused the United States Monday of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets. "They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told a Kremlin youth group while touring its summer camp north of Moscow. "They are living like parasites off the global economy and their monopoly of the dollar." "Countries like Russia and China hold a significant part of their reserves in American securities ... There should be other reserve currencies." U.S.-Russian relations soured during Vladimir Putin's 2000-2008 presidency but have warmed significantly under President Barack Obama, who took office in 2009 promising a "reset" in bilateral ties.

Financial Times:

• Euro Area 'Fiscal Federalism' Won't Happen, Buiter Writes. Recent developments in the euro area sovereign debt and banking sector crises have shown that "fiscal federalism is not going to happen," Citigroup Inc. Chief Economist Willem Buiter wrote. The euro area is left with two alternatives, he said. "The first is to disband" and the second is for the bloc to move to a "you break it you own it" policy, where insolvency of a nation is settled between its taxpayers and its creditors, without any permanent financial support from any other members' taxpayers. Before the end of the Greek bailout program, there will be "deep coercive debt restructurings for Greece and other periphery sovereigns," Buiter wrote.

Telegraph:

• Italy in Eye of the Storm as Cash Runs Low. Fears of a double-dip downturn on both sides of the Atlantic have set off fresh mayhem in Southern European bond markets, dashing hopes that Europe's summit deal in late July would contain the escalating crisis. "The markets know that the EU's bail-out find (EFSF) won't be able to buy Italian and Spanish bonds on the secondary market for another three or four months because the deal has to be ratified by national parliaments," said David Owen from Jefferies Fixed Income. The summit accord did not increase the EFSF's firepower above €440bn (£380bn), leaving it unclear how EU leaders expect to cope as contagion engulfs the eurozone's bigger players. "The longer this paralysis goes on, the more investors fear a break-up scenario where the core countries pull out and leave the rest with the euro," Mr Owen said. JP Morgan warned clients that Italy has a thin margin of safety and risks running out of cash to cover spending as soon as September. "Italy and Spain will run out of cash in September and February respectively, if they lose access to funding markets," said the bank's fixed income team of Pavan Wadhwa and Gianluca Salford. Worries about Italy's immediate cash level risks leading to "a self-fulfilling negative spiral." While Italy has low private debt and avoided much of the credit bubble, it suffers from economic stagnation and a steady loss of competitiveness. Monetary tightening by the European Central Bank has compounded the problem, triggering a collapse of all key measures of the Italian money supply. The warning came as the eurozone's PMI manufacturing data for July dropped to a 21-month low, with clear signs of a slowdown spreading to Germany, Austria and Holland. "It makes pretty dismal reading," said Howard Archer from IHS Global Insight. "It points to a marked loss of momentum in the previously healthily expanding core northern eurozone economies, as well as deepening growth problems in the struggling southern periphery."

Xinhua:

• China may raise interest rates around Aug. 10, Xinhua08.com, Xinhua News Agency's financial serives website, said yesterday, citing its own research. China's consumer price index growth in July may hit 6.3%, according to the report.

21st Century Business Herald:

• China Minmetals Non-Ferrous Metals Co. has proposed that all domestic producers of rare earths voluntarily halt output from early August because the national output quotas for 2011 have been reached, citing the company. Halting output of the minerals would also help ensure the stability of the rare earths market, citing a company official.
  

Financial News:

• China's inflation pressure is still high and the rising prices are the most prominent problem facing its economy, the Financial News said in a front-page commentary today. China's economic growth faces a complex environment as the world economy continues to recover slowly with many uncertainties still existing, according to the commentary. The nation needs to study the possible impact the persistent sovereign debt crisis in Europe, the U.S. debt issues and the rising fiscal deficit in Japan may have on the country.

Evening Recommendations
Citigroup:

• Rated (TA) Buy, target $8.

Night Trading

• Asian equity indices are -1.75% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 116.50 +3.0 basis points.
  
• Asia Pacific Sovereign CDS Index 117.0 -1.0 basis point.
  
• S&P 500 futures -.35%.
  
• NASDAQ 100 futures -.30%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (NYX)/.59
• (PH)/1.80
• (VSH)/.51
• (IT)/.31
• (BDX)/1.43
• (MRO)/1.16
• (EXPD)/.46
• (MLM)/1.07
• (PFE)/.58
• (OSG)/-1.39
• (EMR)/.90
• (OMX)/.00
• (ADM)/.85
• (DUK)/.31
• (COH)/.65
• (AMT)/.23
• (H)/.15
• (THC)/.08
• (WBMD)/.22
• (CEPH)/2.07
• (VMC)/-.05
• (MDRX)/.22
• (SFSF)/.00
• (CBS)/.46
• (OPEN)/.27
• (IPGP)/.55
• (MSTR)/.59
  

Economic Releases
8:30 am EST

• Personal Income for June is estimated to rise +.2% versus a +.3% gain in May.
• Personal Spending for June is estimated to rise +.1% versus unch. in May.
• The PCE Core for June is estimated to rise +.2% versus a +.3% gain in May.
  

Afternoon

• Total Vehicle Sales for July are estimated to rise to 11.8M versus 11.41M in June.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports, Keefe Bruyette Woods Community Bank Conference, Goldman Sachs Small-cap Healthcare Day and the Deutsche Bank Small Cap Value Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by technology and industrial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.