North American Investment Grade CDS Index 108.87 bps -1.23%
European Financial Sector CDS Index 121.55 bps +1.16%
Western Europe Sovereign Debt CDS Index 132.0 bps -1.36%
Emerging Market CDS Index 232.97 bps -3.98%
2-Year Swap Spread 21.0 -2 bps
TED Spread 35.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .15% unch.
Yield Curve 237.0 +5 bps
China Import Iron Ore Spot $124.80/Metric Tonne +2.63%
Citi US Economic Surprise Index -36.80 -1.2 points
10-Year TIPS Spread 1.75% +4 bps
Overseas Futures:
Nikkei Futures: Indicating +190 open in Japan
DAX Futures: Indicating -3 open in Germany
Portfolio:
Higher: On gains in my Medical, Retail, Biotech and Technology long positions
Disclosed Trades: Covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short
Market Exposure: Moved to 100% Net Long
BOTTOM LINE: Today's overall market action is very bullish as the S&P 500 trades near session highs, despite more negative US economic data. On the positive side, Airline, Road&Rail, Gaming, Bank, Wireless, Steel and Coal stocks are especially strong, rising 4.0%+. Small-cap and cyclical shares are outperforming and the Transports are surging +4.0%. (IYR) has traded well throughout the day. Copper is rising another +2.2%. The European Investment Grade CDS Index is falling -3.5% to 109.42 bps. The AAII % Bulls fell to 32.2 this week, while the % Bears rose to 45.0, which is also a positive. The 10-year yield is rising +5 bps. On the negative side, Education, Food, Hospital and Ag shares are underpeforming. Given the magnitude of today's equity rally and recent bond market strength, I would have expected the 10-year yield to have risen more today. I would not be surprised to see some mild profit-taking in European banks on tomorrow's stress test results. However, it is a big positive that that S&P 500 is finally able to penetrate its 50-day moving average. After any "sell the news" morning weakness tomorrow, I would expect to see stocks rebound into the afternoon. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic fear, short-covering, diminishing sovereign debt angst and technical buying.
Europe's Services, Manufacturing Growth Accelerates. Growth in Europe’s services and manufacturingindustries unexpectedly accelerated in July as concern over the sovereign-debt crisis eased and an increase in global trade spurred exports. A composite index based on a survey of euro-area purchasing managers in both industries rose to 56.7 from 56 in June, London-based Markit Economics said today. Economists had projected a drop to 55.5, the median of 18 estimates in a Bloomberg survey showed.
China's Banks Face Rising Credit Risks, S&P Says. Chinese banks face rising credit risks and their non-performing loan ratios are likely to climb as the nation’s economy slows and lending for government projects comes due for repayment, according to Standard & Poor’s. It’s “highly likely” that some loans to local government financing vehicles will turn bad over the next few years, S&P said today. Loans to these entities account for about 18 percent to 20 percent of total lending, the rating company said. The banking regulator aims to cap new loans at 7.5 trillion yuan ($1.1 trillion) this year, down 22 percent from 2009, and has told lenders to report risk exposure to local-government financing vehicles by the end of June to prevent a pileup of bad loans. Quality of loans offered last year to support government stimulus is “probably one of the weakest in recent years,” Ryan Tsang, a senior director at S&P, said today in a teleconference. Many of the projects are not commercially viable even if they may benefit the macro economy, he said. Fitch Ratings last week estimated that bank lending in the first half of the year was 28 percent higher than the official 4.6 trillion yuan figure as loans were repackaged into off-balance sheet investment products. The regulator imposed a temporary ban on such “informal securitization” earlier this month, according to Fitch.
Hungary's Survival Without IMF Support Is 'a Myth,' Nomura Says. Hungary won’t be able to access capital markets if it can’t reach agreement with the International Monetary Fund and the European Union on the terms of its bailout loan, Nomura International Plc said.
Jobless Claims in U.S. Increased More Than Forecast. More Americans than projected filed applications for unemployment benefits last week, a sign firings remain elevated even as the economy is expanding. Initial jobless claims jumped by 37,000 to 464,000 in the week ended July 17, exceeding the highest estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The survey median projected claims would climb to 445,000. “Underlying demand for labor is fairly sluggish,” said Omair Sharif, an economist at RBS Securities in Stamford, Connecticut, who had forecast claims would rise to 460,000. “If that continues, it will have an impact on wages and salaries and clearly have some negative implications for consumer spending.” The four-week moving average, a less volatile measure than the weekly figures, climbed to 456,000 last week from 454,750, today’s report showed. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, fell to 3.5 percent in the week ended July 10 from 3.7 percent in the prior week. Thirty-four states and territories reported an increase in claims, while 19 reported a decline.
3M(MMM) Boosts Profit Forecast as Earnings Top Estimates. 3M Co., the maker of stethoscopes and sandpaper, raised its full-year forecast and posted profit that beat analysts’ estimates as sales climbed at all divisions for the third straight quarter. Profit excluding Medicare-related charges will be as much as $5.80 a share this year, up from a maximum of $5.60 forecast in April, the St. Paul, Minnesota-based company said today in a statement. Analysts had predicted $5.64, the average of 16 estimates compiled by Bloomberg.
Caterpillar Raises Forecast as Profit Tops Estimates. Caterpillar Inc., the world’s largest maker of construction equipment, raised its full-year earnings forecast and posted second-quarter profit that topped analysts’ estimates as demand rose in developing countries. Full-year earnings may be $3.15 to $3.85 a share, more than its April forecast of $2.50 to $3.25, the Peoria, Illinois-based company said in a statement today. The average estimate was $3.27 in a Bloomberg survey of analysts. Second-quarter profit was $1.09 a share, beating the 84-cent estimate.
Purchases of U.S. Existing Homes Fell in June. Sales of U.S. previously owned homes fell in June for a second month, adding to evidence the market will slump as the effects of a federal tax credit fade. Purchases of existing houses dropped a less-than-forecast 5.1 percent to a 5.37 million annual rate, figures from the National Association of Realtors showed today in Washington. The number of transactions will be “very low” in coming months, reflecting the end of the government incentive, the group’s chief economist said in a news conference. The median price increased 1 percent to $183,700 from $181,800 in June 2009. The number of previously owned homes on the market climbed 2.5 percent to 3.99 million. At the current sales pace, it would take 8.9 months to sell those houses compared, the most since August 2009. The supply is likely to jump to 10 or more in coming months as sales slow, said Lawrence Yun, the group’s chief economist. Foreclosures and short-sales are boosting the so-called shadow inventory, and competing with owners trying to sell properties. Home seizures jumped 38 percent in the second quarter from a year earlier, RealtyTrac Inc. said last week, putting lenders on pace to claim more than 1 million properties this year.
Hamptons Home Sales Jump as Wall Street Buyers Return. Hamptons, New York, home sales more than doubled in the second quarter from a year earlier, solidifying a turnaround after two years of Wall Street reluctance to splurge on beachfront property. Transactions climbed to 479 in the towns on Long Island’s East End, the second-biggest jump in at least a decade of record keeping. Larger, more expensive homes boosted the median price 17 percent to $900,000, New York-based appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said in a report today.
Feinberg Said to Cite 17 Companies for Unwarranted Payments. Kenneth Feinberg, the Obama administration’s special master on executive compensation, will cite 17 bailed-out companies for making unwarranted or ill- advised payments to executives during the financial crisis, a person with knowledge of the matter said. Almost all the firms Feinberg plans to disclose tomorrow are banks, said the person, who declined to be identified because the findings haven’t been released. Feinberg has been reviewing pay at 419 companies covering the period from October 2008, when U.S. government bailout money was first awarded, to February 2009, when President Barack Obama signed economic stimulus legislation that included executive-pay curbs.
Wall Street Journal:
Five of Six Greek Banks Seen Passing Stress Test. Greece's leading private lenders are expected to pass an upcoming health check of Europe's banking sector, but questions remain over whether one of two state-controlled banks being tested may be forced to seek new capital under a worst-case scenario. The so-called stress tests, the results of which are due Friday at noon ET, are being conducted by Europe's banking regulators on 91 European banks, including six Greek lenders, to see how the banks would fare in the event of an economic slowdown or sovereign loan default.
Bill Would Make Half of All Cars Electric by 2030. The bill approved by the committee would allocate about $3.9 billion over 10 years toward building infrastructure for charging electric vehicles, continuing their development and for incentives to encourage consumers to buy battery-powered cars. The goal is to electrify half the country’s cars and trucks by 2030, which could reduce demand for oil in the U.S. by as much as one-third. The legislation, which passed 19-4 in favor, was one of several bills cleared by the committee that could become part of a larger energy and climate bill. The committee also approved a bill that would provide incentives for homeowners and businesses to install solar energy systems.
CNBC:
30-Year Mortgage Rate Falls to New Low. Interest rates on U.S. 30-year fixed-rate mortgages, the most widely used loan, averaged 4.56 percent for the week ended July 22, down from the previous week's 4.57 percent and its year-ago level of 5.20 percent, according to the survey.
NY Post:
Comcast's(CMCSA) No. 4 Claim Surprises. Comcast, General Electric and NBC Universal claim their new joint venture entity won't dominate the TV market -- declaring it ranks fourth among media companies in terms of its advertising and affiliate revenue. The proposed $28 billion entity will have only a 12 percent share of advertising and affiliate revenue in the national cable market -- and will sit behind Disney, Time Warner and Viacom and only just ahead of News Corp. (owner of The Post), Comcast claimed in a 327-page filing with the Federal Communications Commission in response to the regulator's request for information.
Barr Wins Support as Consumer Watchdog. Assistant Treasury Secretary Michael Barr appears to have the inside track as the candidate to lead the new consumer-oriented watchdog -- a key post established as part of new regulatory measures to clean up Wall Street. As the financial regulation was signed into law by President Obama, many Washington and Wall Street sources voiced their support for a Barr nomination. One Washington insider said Obama is expected to select a nominee for the consumer post within the next two weeks -- one of his first moves after signing off on the historic law. Barr's name is emerging as a candidate amid growing opposition to brainy Harvard law professor Elizabeth Warren-- a front-runner in the early going to run the Consumer Financial Protection Bureau. Praised by fans as a sharp-tongued advocate for average people, critics believe Warren could create divisiveness in Washington due to her tendency to pursue philosophical objectives like a personal crusade, according to one source. "We need someone who is going to be a traffic cop for consumers, not someone who is going to try and become an urban planner," said Rep. Mike McMahon (D-SI), who attended the president's signing.
O's Jobs Errors. The White House last year released a supposedly sci entific analysis that claimed to show that adopting the "stimulus" bill would cut unemployment. Indeed, the report specifically estimated that the unemployment rate today would be down to 7.5 percent. Something obviously went wrong. The actual unemployment rate is 9.5 percent, a statistic that doesn't include the millions who've given up looking for work or can only find part-time jobs. What were President Obama's biggest mistakes?
Brewing Coup Against Microsoft(MSFT) CEO. Senior Microsoft executives, disenchanted with the company's stagnant stock, have been secretly discussing how to kick Chief Steve Ballmer, and maybe the board, to the curb.
Dealbreaker:
Attention New York Hedge Fund Managers: Jodi Rell Wants a Piece of You. As you may have heard, Albany is currently debating whether or not to lay a $50 million tax upon the asses of certain hedge fund managers. Though nothing is set it stone yet, said managers are none too pleased with the proposal and have aired their grievances in public. Sensing friction on the home-front, Connecticut Governor Jodi Rell has jumped all over the situation. Earlier this month she conveyed, in her own words, a “simple yet heartfelt message” (which was “Connecticut welcomes you”) and now she’s hoping to win the boys over with raw meat, having invited Timothy Selby, president of the New York Hedge Fund Roundtable, and all of his friends, to an “intimate” steak dinner.
Onward Toward an Entitlement Society. Are we, by having the government doing so much to help everyone, encouraging an entitlement mentality in this country that is making problems worse? In my view, we are already well along this troubling road. Consider:
Politico:
Obama's Words Sting CEOs. In the eyes of corporate America, President Barack Obama relied on a healthy dose of industry-bashing to sway votes in Congress for health reform and the new Wall Street regulations signed into law Wednesday. Now those efforts threaten to undermine the one agenda item essential to Democrats’ hopes in the midterms and Obama’s chances for reelection: turning around an economy still just a half step out of recession. Some corporate leaders said Obama’s comments prove that he’s hostile to business. Others cited corporate fears of a credit crunch as banks comply with financial reform or the possibility of significant tax hikes if the Bush administration tax cuts are allowed to expire. But it all adds up to a lack of confidence in Obama among some in corporate America — and that’s fueling a reluctance among executives from Wall Street to Main Street to deploy their large cash reserves to make new investments and hire new workers.
Boxer: "We don't have the 60 votes." Senate Majority Leader Harry Reid appears set to punt on a controversial climate proposal while moving to the floor next week with a more limited bipartisan bill that responds to the Gulf of Mexico oil spill and contains other more popular energy items, according to aides and senators.
Reuters:
U.S. Senate Asking BP(BP) CEO to Testify on Lockerbie. A U.S. Senate panel is inviting BP Plc (BP) chief executive Tony Hayward to testify next week at a hearing on the release of the Lockerbie bomber, a Senate source told Reuters on Wednesday. The Senate Foreign Relations Committee also is requesting testimony from Mark Allen, who has served as an advisor to BP, said the source, who asked not to be named.
Trichet Calls for Global Tightening. Public spending cuts and tax increases should be imposed immediately across the industrialised world as evidence of a healthy European recovery mounts, according to Jean-Claude Trichet, president of the European Central Bank. In a strident article for the Financial Times, Mr Trichet argues that policymakers who want to prolong the stimulus are mistaken and that cutting borrowing would have “very limited” effects on growth. The view from Europe’s senior economic policymaker contrasts with continued US demands for fiscal tightening to be delayed at least until 2011 and suggests there is still little agreement over the best way to foster a strong global recovery from the financial and economic crisis of the past two years. Firing a shot at the US administration and the International Monetary Fund, Mr Trichet criticises last year’s global push for budgetary stimulus. “With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: ‘stimulate’, ‘activate’, ‘spend’.”
Globe and Mail:
GM Turns to Subprime. General Motors Co.'s decision to buy AmeriCredit Corp. (ACF-N24.014.3121.88%) is getting some traction among observers on Thursday. No, it's not the price tag of the deal, at $3.5-billion (U.S.). Nor is it the perplexing move by GM to expand into auto financing so soon after selling its GMAC financial division in 2006. Rather, it's because the deal will give GM the ability to give subprime loans to prospective car buyers. Yes, subprime: the dirty word that got the U.S. economy into big trouble earlier this decade, at least in its application to the real estate sector.
DigiTimes:
Strong iPad, iPhone Demand Causing Tight Touch Panel Supply. Strong channel demand for Apple's iPad and iPhone has resulted in tight supply of touch panels, and with the IT market entering the third quarter, the traditional peak season, the pressure is expected to continue rising, according to sources with touch panel suppliers. The sources said suppliers are now trying to increase output by improving yield rates. They are also expanding their production lines, with the new capacities expected to go online at the end of third quarter and in the fourth quarter, the sources said, adding that their overall capacities will still not be sufficient to satisfy all demand, market sources added.
China's Car Dealers Cut Prices, Hand Out iPods as Sales Slow. China’s appetite for cars has slowed and Zhu Dongwei, an auto salesman in the central Chinese city of Zhengzhou, is doing all he can to whet it. Customers at Zhu’s General Motors Co. dealership get a 14 percent discount, a refund of sales tax and a chance to win a free iPod if they buy a 41,800 yuan ($6,170) Matiz compact car. “This is our biggest promotion this year,” Zhu said. “Without discounts, many people would wait, not buy.” Demand in the world’s largest vehicle market may drop from year-earlier levels in the second half of this year, triggering price wars as dealers compete to clear inventories, according to Credit Suisse Group AG and IHS Automotive. Wholesale passenger-car deliveries in June gained at the slowest pace in 15 months as inflation reduced buyers’ purchasing power. “Some dealers and automakers may panic and offer the largest discounts they can,” said Yale Zhang, a Shanghai- based analyst at IHS Automotive. “If prices of daily necessities keep soaring, people’s expectations of their future financial security will be undermined, reducing their desire to buy a car.” “The uncertainty of the macro-economy will influence people’s confidence, leading to a slowdown in auto sales growth,” said Xu Minfeng, an analyst at Central China Securities in Shanghai. Average prices of China’s locally made passenger cars fell by 2.08 percent in June from a year earlier, the biggest decline this year, according to National Development and Reform Commission. Even as car demand may stall, automakers including GM, Volkswagen AG, Honda Motor Co. and Nissan Motor Co. are rushing to boost capacity and introduce new models as they compete for bigger market share. Nissan, the largest Japanese carmaker in China by sales, aims to expand production capacity in the nation 68 percent to 900,000 vehicles a year by 2012 and plans further increases after that, CEO Carlos Ghosn said in April. GM’s venture SAIC-GM-Wuling Automotive Co. said last month it plans to boost capacity by 47 percent to 1.31 million vehicles annually by 2012. Domestic auto output exceeded sales by 1.29 million vehicles in the first half of this year, the China Automotive Technology & Research Center said on July 5. The average stockpile period, a measure of the time between car production and registration, was 55 days in June, compared with 41 days in February, the center said. “Automakers should reduce supply rather than getting into a price war,” said Zhao Hang, president of the center.
PIMCO Says Extreme Events to Drive Returns as 'Great Moderation' Is Over. Investors will make money based on their ability to anticipate extreme events after the end of the period of stability known as the “Great Moderation,” said Richard Clarida of Pacific Investment Management Co. The Great Moderation, an era from 1987 to 2007 of “predictable policy, low inflation, and modest business cycles,” allowed investors to make money using debt to magnify profits on bets that actual outcomes would match the average of a range of possibilities, Clarida wrote in an article today on the Web site of Pimco, which manages $1.1 trillion. “We are in a New Normal world in which the distribution of outcomes is flatter and the tails are fatter,” said Clarida, global strategic adviser for Newport Beach, California-based Pimco. “Investors had 25 years to get comfortable with the Great Moderation. The sooner they recognize those days are over, the better.” The financial crisis and its aftermath mean historical correlations are probably irrelevant or misleading, Clarida said. Investors have less confidence the distribution of events they anticipate is correct. With more returns or losses tied to extreme events and less on the average, money managers will probably adjust their portfolios more often, creating “risk- on” and “risk-off” trading days, he said.
EU Banks May Disclose Sovereign-Debt Holdings With Stress Tests. Europe’s largest banks may give breakdowns of their sovereign-debt holdings when they release stress-test results, according to a document from the Committee of European Banking Supervisors. European regulators asked the region’s biggest banks to publish a list of each lender’s gross and net exposure to central and local governments in 30 countries in the region, including Greece, Spain, Ireland, Italy and Portugal, according to a confidential draft template obtained by Bloomberg News. Banks will be asked to provide details of whether they booked their sovereign-debt holdings in the banking or trading book, according to the template, which was dated July 15. The document will show debt holdings for the 27 EU members as well as Liechtenstein, Norway and Iceland.
New York City Pension Funds Consider Making First Hedge-Fund Investments. New York City’s pension funds for police officers, firefighters and civil employees are seeking proposals from hedge fund consultants as they weigh whether to invest in the loosely regulated investment pools. One of five tax dollars collected by New York City, about $7.6 billion, will go into the pension funds this year.
Copper Drops for First Day in Four as Bernanke's Comments Damp Sentiment. Copper declined for the first time in four days in Asia as some investors deemed the climb to a seven-week high as excessive amid concerns that the economic recovery may falter. Copper for three-month delivery on the London Metal Exchange declined as much as 1.6 percent to $6,752 a metric ton before trading at $6,761.50 at 9:20 a.m. in Singapore. Federal Reserve Chairman Ben S. Bernanke said yesterday that the U.S. economic outlook “remains unusually uncertain,” without offering additional measures to stimulate growth. “Market sentiment today has been affected by Bernanke’s comments overnight,” Liu Xu, an analyst at China International Futures Co., said from Shenzhen. “It’s a good excuse to take profit.”
Goldman's(GS) V Shape Is Starting to Look Vulnerable: William Pesek. Journalists call it a buried lead. It’s when the real story is below the newspaper fold and drowned out by a tidbit that seems more sexy or appealing. Such is the case with the Asian Development Bank’s latest outlook. Markets moved on the headline: the ADB upgraded its 2010 forecast for 14 East Asian economies to 8.1 percent from 7.7 percent projected in April. Buried was the news that three major risks must break Asia’s way to keep prosperity alive: a double- dip global recession, destabilizing capital flows and the successful unwinding of stimulus measures.
Goldman Sachs(GS) Doubled Lobbying Expenses Amid Financial Revamp, SEC Probe. Goldman Sachs Group Inc. doubled its lobbying expenses as it focused on proposed financial regulations and faced U.S. Securities and Exchange Commission charges that it misled investors. New York-based Goldman, which paid $550 million last week to settle the SEC suit, spent $2.7 million to lobby during the first six months of 2010, more than double the $1.3 million it spent during the same period a year earlier, according to new congressional filings.
Myanmar Nuclear Weapon Program Claims Supported by Photos, Jane's Reports. Allegations by a Myanmar defector that the military-run country is pursuing a nuclear program are corroborated by newly available commercial satellite images, Jane’s Intelligence Review said in an article released yesterday. The photos of buildings and security fences near the country’s capital, Naypyidaw, confirm reports by Major Sai Thein Win of machine tool factories and other facilities alleged to be part of a nascent program to build nuclear weapons, the magazine reported from London. “They will not make a bomb with the technology they currently possess or the intellectual capability,” Jane’s analyst Allison Puccioni said in an interview. “The two factors do make it possible to have a route to one.” U.S. Secretary of State Hillary Clinton expressed concern about reports that North Korea and Myanmar are expanding military ties and sharing nuclear technology at a meeting of Southeast Asian foreign ministers in Thailand last year. While Myanmar is a signatory to international agreements to control nuclear weapons use, it hasn’t agreed to more recent changes in the treaties and therefore isn’t subject to international inspections, the magazine said. “With Myanmar’s current freedom from sanctions and relative economic prosperity, the junta may be able to outsource the technical know-how and tools to reach its goals far sooner than expected,” Christian Le Mière, editor of Jane’s Intelligence Review, said in a statement. “Someone had to be assisting them, that’s the frightening thing,” said David Kay, a former United Nations weapons inspector and now a fellow at the Potomac Institute for Policy Studies in Arlington, Virginia, in an interview.
Oil Refinery Profits in U.S. May Slide as Growth Sputters: Energy Markets. The profit from making gasoline may slide to the lowest level in 10 months as faltering U.S. consumer growth hurts refiners that have boosted production in anticipation of an economic rebound. Margins on gasoline, the difference between what producers pay for crude and how much they get for the refined fuel, are poised to drop as much as 75 percent in coming months, according to James Cordier, president of futures brokerage Liberty Trading Group in Tampa, Florida. Refiners have accelerated output by 11 percent since the end of March on forecasts of rising demand, driving stockpiles to a two-month high as of the week ended July 16, according to the Energy Department. Now the profit is being eroded by declining factory output and consumer confidence at the lowest level in a year. “Over-optimism has created an excess of output relative to demand and the economy is struggling under the weight of a continued stream of bad, disappointing news,” said Walter J. Zimmerman Jr., vice president of market analysis at United-ICAP in Jersey City, New Jersey. Refinery use, after dipping to a 16-month low of 77.7 percent on Jan. 29, reached 91.5 percent last week, the highest level since August 2007, Energy Department data shows. “If, as it appears, the pace of economic recovery is slowing significantly and demand continues to show weakness, the cracks are subject to significant declines,” said Tom Knight, vice president of trading and supply at Truman Arnold Cos. in Texarkana, Texas. “Refiners have to go back to low runs or else face collapsing margins,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.
Cameron Travels Commercial to Show Britons He Pinched Pennies on U.S. Trip. U.S. politicians may dream of one day sinking into the presidential bed aboard Air Force One. David Cameron, returning last night from his first trip to the U.S. as British prime minister, took a business-class seat on board a scheduled British Airways flight. Cameron, trying to cut Britain’s deficit, its largest since World War II, is scaling back on the chartered jets his predecessors used for overseas travel and told his staff to book him on regular flights. Yesterday he traveled to New York from Washington on Amtrak’s Acela train. “We have got a lot of money to save,” the prime minister told ABC News July 20. “We’ve got a very big budget deficit, so we can’t go spending money on executive planes, sadly.” While Cameron’s office estimates it is saving several hundred thousand pounds by forgoing chartered jets, that isn’t the only consideration. His party fought the May 6 general election arguing “We’re all in this together.”
Motorola(MOT) Accuses Huawei of Stealing Mobile-Phone Trade Secrets. Motorola Inc., the U.S. maker of mobile phones and two-way radios, sued rival Huawei Technologies Co. for allegedly conspiring with former employees to steal trade secrets. Huawei began receiving the information as early as 2001, Schaumburg, Illinois-based Motorola claimed in an amended lawsuit filed July 16 in federal court in Chicago. In the amended complaint, Motorola claims a staff engineer shared information about a new transceiver and other Motorola technology with Ren Zhengfei, the founder of Shenzhen, China-based Huawei, which today called the complaint “groundless.” Motorola said it has recovered e- mail from the engineer’s computer showing transmission of Motorola product specification documents marked “confidential” to Huawei. “Huawei and its officers knew they were receiving stolen Motorola proprietary trade secrets and confidential information without Motorola’s authorization and consent,” according to the complaint.
Citigroup(C) Lowers China's 2010 Economic Growth Forecast by Most Since 2001. Global gross domestic product will increase by 3.7 percent this year and 3.3 percent in 2011, Citigroup said, cutting its previous forecasts by 0.1 percentage point each. The U.S. forecast was reduced by 0.4 percentage points, to 2.8, according to the report dated July 21. China’s GDP growth forecast was cut by 1 percentage point to 9.5 percent, Citigroup’s biggest one-month cut in the country’s outlook since late 2001, the report said. The bank said China would grow at an 8.8 percent rate next year, 0.5 percentage points lower than previously forecast.
Bush Tax Cuts Roil Democrats. Two more Senate Democrats called for extending tax cuts for all earners—including those with the highest incomes—in what appears to be a breakdown of the party's consensus on the how to handle the expiration of Bush-era tax cuts.
Apple(AAPL) Seeks Growth Beyond Consumers. Apple Inc. is boosting efforts to appeal to a new type of customer: small businesses. The consumer electronics giant responsible for the iPhone is seeking to hire engineers in as many as a dozen U.S. retail stores to put together Apple-based computer systems for small businesses, according to recent job postings on Apple's website. The employees would implement computer systems for clients and are expected to be proficient in networking hardware and server platforms. "Thousands of businesses run on Apple products," the posting reads. "Many more would like to, and that's where you come in." The new positions mark the latest development in Apple's evolving strategy, which has historically focused on the consumer market and niche businesses, like design and media firms. Now, Apple wants to leverage its popular iPhone and iPad devices, using their appeal as a selling point for more expensive products, including its line of Macintosh computers and servers.
Friendly Fire on Capitol Hill. Democrats are saying unkind things about the White House. Describing the White House last week, Congressional Democrats used words like "ineptness," "neglected" and "disconcerting," and phrases like "isn't aggressive enough." President Barack Obama has only himself to blame for these protests.
Payback Time for State Firms Tied to Payoffs. Dozens of Chinese state firms are in hot seat after U.S. admission of bribery. Many of these alleged bribe-takers have extra reason to worry: DOJ's detailed disclosure has given authorities in China clear evidence that could be used to press domestic criminal cases and step up the nation's battle against corruption.
NY Times:
Will Stress Tests Overcome Resistance to German Bank Reform? The debt crisis rattling Spain has finally allowed the central bank to override powerful local politicians and push through an overhaul of the very same institutions whose extravagant lending contributed to the country’s woes. In Germany, which also has a large, troubled banking sector with political patrons, forcing change has proven a lot more difficult. But the release of the results of bank stress tests on Friday could finally be a catalyst for a reordering of the landesbanks, several of which have a history of scandal and have already required billions of euros in government aid to survive the financial crisis. “Nearly all the landesbanks are in heavy trouble and have a lot of restructuring to do,” said Dirk Schiereck, a professor of banking at the Technical University of Darmstadt.
Morgan Stanley(MS) May Shift Derivatives Trading. Morgan Stanley could benefit considerably from exemptions included in the new financial regulations governing derivatives. The firm is considering moving its multibillion-dollar foreign-exchange and interest-rate derivatives trading units out of its separately capitalized broker-dealer and into its bank holding company, its chief financial officer, Ruth Porat, said Wednesday. The firm could win more business and increase its trading profits if these trading units were inside the government-backed bank holding company. The prospective move highlights some of the unintended consequences in allowing some derivatives to escape rules intended to separate trading risk from bank depositors. Trading derivatives under the umbrella of a bank holding company has some major advantages. Most notably, banks have access to the Fed discount window, giving them access to cheap funding. Banks also have an implicit government guarantee, so if something goes wrong and depositors’ money is at risk, a bank could get bailed out.
Poor Chinese Are Throwing Money Into An Unescapable Capital Trap. Chinese citizens have poured their life savings into speculative real estate. This is not just misallocation, it is an inescapable capital trap. China's citizens have few options for investing their immense savings. Chinese households are prodigious savers: China boasts a savings rate of 38%, fully ten times that of the U.S. But Chinese savers have few choices on where to invest their money: they can either leave it in a savings account which draws 2.25%, less than the inflation rate of 3.1%, or invest in real estate or domestic stocks. The money pouring into property has created a worrisome asset bubble in housing.
20% of Americans Hit by Major Economic Loss. A new study released Wednesday estimates that 20% of Americans suffered a significant economic loss last year - the highest level in the past 25 years.
CFTC:
CFTC Rulemakings. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC will write rules to regulate the over-the-counter derivatives marketplace. The CFTC has identified 30 areas where rules will be necessary. The public is encouraged to provide input on the rule-writing process. Information regarding each rule-writing area will be published as it becomes available.
Politico:
Senate Extends Jobless Benefits. A $34 billion bill restoring jobless benefits for millions of idled workers is poised to clear Congress after finally passing the Senate on a 59-39 vote Wednesday evening. Running past November’s elections, the six-month extension will be quickly approved by the House and sent on to President Barack Obama Thursday.
Senate Rejects Attempts to Kill Arizona Lawsuit. The Senate decided Wednesday it didn’t want to interfere with the Obama administration’s lawsuit challenging Arizona’s strict new immigration law.
Poll: Obama Approval Hits Low. President Barack Obama’s approval rating has dropped to its lowest point yet in a new Quinnipiac University poll out Wednesday. Only 44 percent of the 2,181 registered voters surveyed said they approve of the way Obama is handling his job. Forty-eight percent disapprove of the president’s performance. The president’s numbers are upside-down on many of the key issues on voters’ minds. On the economy, which consistently rates as voters’ top concern, 56 percent of those surveyed disapprove of Obama’s performance, compared with 39 percent who approve. Fifty-one percent disapprove of his handling of the Gulf Coast oil spill, and 58 percent said the same of the president’s job on immigration. Support for the war in Afghanistan too has hit a new low, with 48 percent saying it is the “right thing to do.” In April, 56 percent thought the war was the “right thing to do.” All of the bad polling data for the president is reflected in the fact that a plurality say they would vote for an unnamed Republican challenger over the president in 2012. Thirty-seven percent of those surveyed said they intend to vote for a Republican in the next presidential election, compared with 27 percent who said they plan to vote for Obama.
White House Keeps Obama Above Racial Fray. The White House struggled mightily Wednesday to make things right with an aggrieved Shirley Sherrod — but it is working nearly as hard to distance President Barack Obama and his top aides from the racially tinged firing fiasco. Administration officials unanimously leveled the finger of blame at Agriculture Secretary Tom Vilsack on Wednesday for sacking Sherrod on “insufficient evidence” — even as West Wing officials admitted they did nothing to stop Sherrod from being let go on the basis of a single, shabbily edited video clip.
AP:
New Provision on Credit Raters Could Chill Markets. Nestled in the 2,300 pages of the new law that reshapes the U.S. financial landscape is a change affecting credit rating agencies, which were accused of helping cause the 2008 crisis. That change could have an unintended consequence, some experts say: Chilling the markets for securities linked to mortgages, credit cards and auto loans. Those markets froze up during the crisis and have been struggling to revive. That's because the change will make it easier for investors to successfully sue credit rating agencies for assigning unrealistically high ratings. As a result, the three major agencies — Moody's Investors Service, Standard & Poor's and Fitch Ratings — say they'll no longer let bond issuers list their ratings in public sale documents. That could dampen the markets for asset-backed securities, because the agencies' ratings help set the prices that investors such as banks, mutual funds and local governments agree to pay. Most securities tied to consumer loans are required to include ratings in formal offering documents. But because their legal liability has potentially risen, the rating agencies "are going to be very reluctant" to have their ratings in offering documents, said Jesse Litvak, a managing director at Jefferies & Co. "It's like pouring gasoline on a fire," Litvak said. "That's going to clog up the ability for any deals to get done." The effect "is going to be extraordinarily negative," said Herb Kaufman, professor emeritus of finance at the W.P. Carey School of Business at Arizona State University. "Credit has just recovered to some degree, and this could put a damper on those securities." House lawmakers proposed making it easier to sue the agencies successfully. Their proposal deemed the ratings to be expert advice in public offering documents, not just an expression of opinion protected by the First Amendment. The House provision made it into the final legislation once the House and Senate versions were melded. Also under the new law, the agencies must explain more fully how they assign ratings. If an agency performs poorly over time, the SEC could cancel its registration.
Reuters:
Western Digital(WDC) Warns of Weak Q1, Shares Slide. Hard drive maker Western Digital Corp (WDC) gave a quarterly financial forecast that lagged analysts' expectations, citing concerns about slow back-to-school spending and debt worries in Europe.
Hynix Sees Q3 DRAM Shipments Up; Prices to Drop. Hynix Semiconductor Inc, the world's No. 2 memory chip maker, expects third-quarter DRAM shipments to grow by a mid-single digit percent from the previous three months, though prices are seen falling slightly.
Intuitive Surgical(ISRG) Profit Tops Street, Shares Fall. Intuitive Surgical Inc (ISRG) reported better-than-expected second-quarter earningson Wednesday on increased demand for its high priced da Vinci surgical robot systems and robotic procedures. Intuitive also raised its full-year revenue growth outlook to between 30 percent and 33 percent from its previous view of of 27 percent to 30 percent growth. But the company's shares, which tend to be extremely volatile around earnings reports, fell more than 6 percent in extended trading. Revenue for the quarter rose 34 percent to $351 million, exceeding Wall Street estimates of $334.9 million.Second quarter systems revenue was $168 million, up from $124 million a year earlier.The company sold 108 da Vinci systems in the quarter, up from 76 a year ago. Of the 108 sold, 89 were the newer da Vinci Si model. The newer da Vinci systems cost about $1.4 million each and also carry higher annual service fees.Twenty-two of the systems sold in the quarter were purchased outside of the United States, including 14 in Europe. Intuitive management said capital spending in Europe "continues to be challenging," although it is seeing solid procedure growth there. Instruments and accessories revenue increased 33 percent to $128 million, driven by 36 percent growth in da Vinci procedures.
Financial Times:
IMF Calls for More 'Stress-Test' Openness. Europe must ensure its stress tests are transparent to guarantee their credibility, according to staff at the International Monetary Fund . But some market participants have criticised the lack of information about the scenarios being tested, fuelling suspicions they are being engineered to produce a favourable outcome. Too many banks were still dependent on government support and were vulnerable to lapses in confidence, the IMF said. A staff report finalised on July 1 said: “To reduce aggregate uncertainty and induce a greater willingness to tackle troubled banks, [IMF] staff called for a more detailed disclosure of inputs and outcomes, possibly at the institution level.” But it reported resistance from eurozone authorities to the idea of more transparency. “Supervisors felt that disclosure of individual bank results could prove too market-sensitive and some national authorities noted legal impediments to publication,” the fund said.
Telegraph:
Double Dip in the Baltic. The raging dispute over the Baltic Dry Index is starting to feel like the Jansenists debate with the Ultramontanists, with the Big Media playing the enforcement role of Pope Innocent X against heretical bloggers such as Zero Hedge. Is the latest collapse in the BDI a leading indicator of a wilting souffle in China/US/world, or is it just the lagging effect of new ships flooding the market? Or both at once.
Globe and Mail:
Patient Wait Times Get Worse in Canada. And the worst record on timely access to primary care goes to … With all the money Ontario’s been throwing at its health-care system, a reasonable citizen might expect better. How satisfied are Canadians with the availability of quality health care? They’re more satisfied than dissatisfied but less satisfied than people in most other advanced industrial countries. In the country’s largest province, the Ontario Health Quality Council recently reported that only one-third of MRI scans are being done on time. In a classic (and understandable) case of triage, the council found that high-priority cases were being dealt on time in 88 per cent of CT cases and 70 per cent of MRI ones, but “wait times have gotten worse for patients at lower priorities.” The council found that “emergency department wait times are among the worst in the world.” It said “a majority of patients did not get to see a doctor within the time frame recommended by national experts.” A huge systemic problem is allocation of hospital beds. A chronic shortage of long-term-care beds exists, so frail individuals who can’t return home wait in hospital for space in a long-term-care institution. The council estimates that a staggering 16 per cent of hospital beds are occupied by those who don’t need to be there – that is, they need a long-term-care bed. And, of course, with those beds being occupied in hospitals, it sometimes becomes hard to free up space for someone who needs to be there. Cancer treatment is supposed to be a major area of improvement in Ontario, but the council reports that “only 53 per cent of urgent cancer cases are completed within the two-week target.” Then there’s the old bugbear: access to a family doctor. Arguably, this part of the health-care system influences attitudes toward it more than anything else. Reports the council: “Compared to 10 other countries, Ontario and Canada have the worst record on timely access to primary care.” Yikes. In a system that eats up so many taxpayer dollars?
Evening Recommendations Citigroup:
Reiterated Buy on (EMC), target $25.
Reiterated Buy on (RHI), target $33.
Night Trading
Asian equity indices are -.75% to +.25% on average.
Asia Ex-Japan Investment Grade CDS Index 126.50 -.5 basis point.
Asia Pacific Sovereign CDS Index 121.50 -3.0 basis points.
Initial Jobless Claims for last week are estimated to rise to 445K versus 429K the prior week.
Continuing Claims are estimated to fall to 4590K versus 4681K prior.
10:00 am EST
Existing Home Sales for June are estimated to fall to 5.1M versus 5.66M in May.
The House Price Index for May is estimated to fall -.3% versus a +.8% gain in April.
Leading Indicators for June are estimated to fall -.3% versus a +.4% gain in May.
Upcoming Splits
None of note
Other Potential Market Movers
The Fed's Bernanke speaking before the Senate, Fed's Dudley speaking and the weekly EIA natural gas inventory report could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and commodity 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.
North American Investment Grade CDS Index 110.23 bps -2.71%
European Financial Sector CDS Index 119.33 bps -6.13%
Western Europe Sovereign Debt CDS Index 134.0 bps -1.66%
Emerging Market CDS Index 243.11 bps +1.90%
2-Year Swap Spread 23.0 unch.
TED Spread 36.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .15% +1 bp
Yield Curve 232.0 -3 bps
China Import Iron Ore Spot $121.60/Metric Tonne unch.
Citi US Economic Surprise Index -35.60 -1.5 points
10-Year TIPS Spread 1.71% unch.
Overseas Futures:
Nikkei Futures: Indicating -53 open in Japan
DAX Futures: Indicating -27 open in Germany
Portfolio:
Slightly Lower: On losses in my Medical and Technology long positions
Disclosed Trades: Added (IWM)/(QQQQ) hedges, added to my (EEM) short
Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 reverses to session lows despite some key positive earnings reports and diminishing sovereign debt angst. On the positive side, Steel, Oil Tanker and Coal stocks are rising on the day. Gold is falling -.5%, despite the equity market and euro declines. Copper is rising +2.3%. The Spain sovereign cds is falling -3.9% to 204.45 bps and the Portugal cds is falling -3.7% to 275.0 bps. On the negative side, Education, REIT, Insurance, HMO, Hospital, Medical Equipment, Disk Drive, Computer and Oil Service shares are under significant pressure, falling more than -2.0%. Tech shares are underperforming. The 10-year yield is falling too much again, declining -9 bps to the lowest level since April 2009. The S&P 500 was turned away again at its 50-day moving average, but is holding its low of yesterday so far. If that low holds we should see a push higher through the 50-day, however a break below that level will likely lead to further losses. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, rising economic fear, increasing financial sector pessimism, tax hike worries and regulatory concerns.
