Stocks Falling into Final Hour on Soaring Eurozone Debt Angst, Emerging Markets Inflation Fears, US Debt Ceiling Concerns, Global Growth Worries

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Every Sector Declining
  
• Volume: Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 18.91 +18.56%
  
• ISE Sentiment Index 77.0 -11.49%
  
• Total Put/Call 1.17 +14.71%
  
• NYSE Arms 3.66 +82.57%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 96.25 +3.48%
  
• European Financial Sector CDS Index 144.67 +9.64%
  
• Western Europe Sovereign Debt CDS Index 279.17 +10.78%
  
• Emerging Market CDS Index 219.51 +5.05%
  
• 2-Year Swap Spread 28.0 +3 bps
  
• TED Spread 23.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .01% -1 bp
  
• Yield Curve 255.0 -7 bps
  
• China Import Iron Ore Spot $171.30/Metric Tonne +.06%
  
• Citi US Economic Surprise Index -87.80 +3.6 points
  
• 10-Year TIPS Spread 2.29% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating -185 open in Japan
• DAX Futures: Indicating -3 open in Germany

Portfolio:

• Slightly Lower: On losses in my Retail, Biotech, Medical and Technology 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 trades near session lows on soaring eurozone debt angst, emerging markets inflation fears, US debt ceiling worries, financial sector pessimism and global growth concerns. On the positive side, Semi and Restaurant shares are holding up relatively well, falling less than -1.0%. Oil is falling -1.3% and the UBS-Bloomberg Ag Spot Index is down -.84%. On the negative side, Education, Gaming, Homebuilding, Construction, HMO, Hospital, I-Banking, Bank, Networking, Disk Drive, Steel, Oil Service, Energy, Oil Tanker, Alt Energy and Coal shares are especially weak, falling more than -3.0%. Gold is up +.67% and copper is falling -1.09%. Cyclicals and small-caps are underperforming. (XLF) has traded poorly throughout the day. The US price for a gallon of gas is +.03/gallon today to $3.63/gallon. It is up .49/gallon in less than 5 months. The Spain sovereign cds is up +4.78% to 329.17 bps, the Ireland sovereign cds is gaining +11.72% to 1,005.41 bps, the Russia sovereign cds is jumping +7.8% to 155.50 bps, the Italy sovereign cds is soaring +22.61% to 296.0 bps, the UK sovereign cds is rising +9.96% to 74.90 bps, the Belgium sovereign cds is up +14.18% to 197.0 bps, the Greece sovereign cds is surging +7.3% to 2,336.99 bps and the Portugal sovereign cds is up +10.91% to 1,134.48 bps. Moreover, the European Investment Grade CDS Index is up +8.9% to 95.53 bps. The Eurozone Financial Sector CDS Index is breaking out. The Western Europe Sovereign CDS Index is hitting another record high. The Spain and Belgium sovereign cds are breaking out. The Italy, Portugal, Greece and Ireland sovereign cds are hitting new record highs. Italy's cds has risen +60.5% in 5 days. European contagion fears continue to intensify and are beginning to spin out of control again. Brazil's Bovespa is the worst trading index in the world right now, falling another -2.25% today, and is now down -13.2% ytd. Moreover, Italian(-3.96%), French(-2.71%) and Spanish(-2.69%) stocks took another drubbing today and finished at session lows. Italy's FTSE MIB Index is now down -9.3% ytd. Investor complacency regarding the deteriorating situation in Europe was high last week and this is catching up with the major averages today as the indices remain somewhat overbought. As well, I continue to believe the slowing growth and rising inflation in emerging markets is a larger problem than perceived. China Pork Spot Prices rose another +3.36% in the latest weekly report. They are now up +70.63% over the last year. The situation in Europe needs to stabilize, commodity prices need to fall further, the US debt ceiling issue needs resolution and forward earnings guidance must be ok for stocks to build meaningfully on their recent rally. I expect US stocks to trade mixed-to-lower into the close from current levels on soaring eurozone debt angst, emerging markets inflation fears, US debt ceiling concerns, profit-taking, more shorting and global growth worries.

Today's Headlines

Bloomberg:

• Euro Chiefs Clash Over Greece as Concern on Italy Mounts. European finance chiefs clashed over how to dig Greece out of its financial hole just as markets battered the bonds of Spain and Italy, opening a new front in the debt crisis. Finance ministers weighed how to get private bondholders to maintain their exposure to Greek debt in a way that doesn’t prompt credit-rating companies to declare a formal default. Forcing bondholders to chip in would be “fatal,” Austrian Finance Minister Maria Fekter told reporters before a crisis meeting in Brussels today. “We will now in the eurogroup discuss the proposals on the table and their impact with respect to a Greek insolvency or classification as an insolvency.” Bonds of debt-strapped countries plunged, the euro sank and stocks dropped amid concern that European governments are powerless to prevent the financial distress spreading from Greece. Italian assets were upended by doubts whether Prime Minister Silvio Berlusconi, plumbing record-low approval ratings with two years left in office, will muster the political strength to push through 40 billion euros in planned deficit- cutting measures.
  
• Italy Is Two Percentage Points From Bailout as Yields Rise, Evolution Says. Italian bond yields are less than 2 percentage points away from disaster as its 10-year notes tumble, according to Gary Jenkins, head of fixed-income at Evolution Securities Ltd. Yields on Italy’s benchmark 10-year bonds closed above 5 percent for the first time since November 2008 on July 6 and were at 5.55 percent, a nine-year high, at 1:45 p.m. in London today. Italy is being dragged into the crisis because it has more than 1.6 trillion euros ($2.6 trillion) of bonds outstanding, the world’s third-largest pile of debt after the U.S. and Japan. “It is worth remembering how quickly bond yields can get out of control by looking at what happened to Greek, Irish and Portuguese 10-year yields,” said Jenkins, who predicted Greece’s bailout last year and who was formerly head of fundamental credit strategy at Deutsche Bank AG and global credit-research chief at Barclays Capital. “What would keep me awake at night if I was a European finance minister is that we are only about 2 percent away from a potential disaster scenario.” Greek, Irish and Portuguese 10-year bonds spent an average 43 days trading at more than 5.5 percent before rising above 6 percent “on a consistent basis,” said London-based Jenkins. They then spent an average of 24 days above 6 percent before breaching 6.5 percent, and 15 days above 6.5 percent before passing the 7 percent level and asking for a bailout, he said. The cost of insuring Italian government debt using credit- default swaps jumped to a record, helping also send the Markit iTraxx SovX Western Europe Index to an all-time high. Contracts on Italy surged 32 basis points to 283, according to CMA prices. The Markit iTraxx SovX WE climbed 33 basis points to a record 289. “The markets are focusing on Italy and Spain and combined they are too big to save,” said David Owen, an economist at Jefferies International Ltd. in London. “Note that they are all linked together by their banking systems -- the French banks are all over Spain and Italy.” The spread between yields on Italian and German 10-year debt rose 39 basis points today to 283, a euro-era high.
• Sovereign Credit-Default Swap Costs Surge to Record in Europe. The cost of insuring against default on European sovereign debt rose to a record, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 19 basis points to a record 275 at 8:30 a.m. in London. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 14 basis points to 438, the highest since Jan. 11, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3.75 basis points to 116.75, the highest since Nov. 30. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 9.5 basis points to 181 and the subordinated index climbed 13 to 318.
• Credit-Ratings Firms May Have to Show EU Data. Credit-ratings companies may be forced to disclose the internal analyses they use when they decide to cut a European Union government’s rating, the region’s financial services commissioner said. Nations may win the right to check the data used by the companies in advance of downgrades of their sovereign ratings, Michel Barnier said in the text of a speech in Paris speech today. The measures may be included in legislation to rein in the ratings firms, he said.
• Gold Gains to Two-Week High as Debt, Growth Concerns Spur Investor Demand. Gold climbed for a fifth day in New York, rising to a two-week high, as concerns over Europe’s debt crisis and slowing economic growth spurred demand for the metal as a protection of wealth. Gold for August delivery gained as much as $16, or 1 percent, to $1,557.60 an ounce, the highest price since June 22, and was at $1,556.30 by 10:30 a.m. on the Comex in New York. Immediate-delivery gold was up 0.8 percent at $1,556.15 in London. Gold is up 9.5 percent in 2011 after climbing the past 10 years, the longest run of gains in at least nine decades in London.
• Crude Oil Falls for Second Day in New York on Italian Debt, Chinese Demand. Oil declined for a second day in New York on speculation that a slump in Chinese imports and rising unemployment in the U.S. may indicate fuel demand will falter in the world’s biggest crude-consuming nations. Futures slipped as much as 2 percent after government reports in China showed net oil imports shrank 10 percent in June to the lowest in eight months, according to Bloomberg calculations, while inflation surged to a three-year high. Crude for August delivery on the New York Mercantile Exchange fell as much as $1.88 to $94.32 a barrel, the lowest since July 5, and was at $94.62 at 1:56 p.m. London time. The contract dropped $2.47 to $96.20 on July 8. The price has risen 26 percent in the past year.
• Copper Falls Most in Five Weeks on Concern European Debt Woes Will Spread. Copper futures for September delivery declined 6.95 cents, or 1.6 percent, to $4.3425 at 10:56 a.m. on the Comex in New York.
• Brazil Economists Boost 2011 Inflation Forecast for First Time in 10 Weeks. Economists covering the Brazilian economy raised their 2011 inflation forecast for the first time in 10 weeks after prices rose faster than expected in June. Consumer prices will rise 6.31 percent this year, according to the median forecast in a July 8 central bank survey of about 100 economists published today. The figure was up from 6.15 percent the previous week. Economists also raised their prediction for 2012 inflation. Prices, as measured by the IPCA index, will rise 5.20 percent next year, the survey found, compared with a forecast of 5.10 percent the previous week. The June inflation number increased doubts that the central bank will hit its targets, said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc. “The market has started to talk about how the central bank isn’t going to make it,” Tuesta said in a telephone interview. “More and more people are thinking that inflation inertia, especially on service prices, will push 2012 inflation up.” Policy makers raised interest rates for a fourth consecutive meeting last month, boosting the benchmark lending rate a quarter-point to 12.25 percent. Economists expect the bank to raise the rate to 12.75 percent by the end of this year, from a week earlier forecast of 12.50 percent, the survey found.
• Cisco(CSCO) May Eliminate About 5,000 Jobs in August, Gleacher Analyst Reports.
• Bulgaria Default Swaps to Rise on Euro Debt, Unicredit Says. The cost of insuring Bulgarian bonds against non-payment is likely to increase because of the Balkan country’s economic ties with Greece, according to UniCredit SpA. Investors should buy Bulgarian credit-default swaps at 220 basis points, or 2.20 percentage points, on expectations the five-year contracts will climb to 270 points, the bank said in a report dated yesterday.

Wall Street Journal:

• Moody's Raises 'Red Flags' at 61 Chinese Firms. Credit-ratings firm Moody's Investors Service warned of "red flags" at 61 rated Chinese companies as it sought to provide transparency on its approach to ratings amid rising investor concern about corporate governance at such entities. The flags are meant to "highlight issues meriting scrutiny to identify possible governance or accounting risks for non-financial corporate issuers in emerging markets" and relate to issues such as weak corporate governance, riskier or more opaque business models, fast-growing-business strategies, poorer quality of earnings or cash flow, and concerns over auditors and quality of financial statements, the report, issued Monday, said. Four Hong Kong-listed companies were highlighted as having a particularly large amount of red flags: West China Cement Ltd. had 12, Winsway Coking Coal Holdings Ltd. had 11, China Lumena New Materials Corp. had 10, and Hidili Industry International Development Ltd. had nine. Moody's wrote that Winsway, Lumena and Hidili, as companies that mine coal or other minerals, "tend to attract scrutiny because it is often hard to value these assets and reserves in terms of size, value, or ownership rights."
• China will keep "strong" curbs on property prices, citing China Vanke Co. Chairman Wang Shi.
• Some Spanish Banks May Fail Stress Tests - Finance Minister. Some Spanish savings banks may show a capital shortfall in the European Union stress tests due to be released Friday, finance minister Elena Salgado said. Salgado had earlier said that she expected no Spanish bank to fail the tests.
• Tough Era for 'Macro' Funds. Today's markets seem like they are tailor-made for money managers investing based on big-picture, "macro" themes such as the European debt crisis and economic woes in the U.S. Instead, many are struggling. Macro-focused managers have been tripped up by whiplash-inducing swings in stocks, currencies and commodities, often brought about by the latest twists and turns of impossible-to-time political developments. Stubbornly low U.S. Treasury yields have been a trap for managers worried about inflation and the deteriorating U.S. fiscal outlook. Making matters worse is a tendency of markets around the world to move in lock step.
• Saudis Offer Extra Crude But Find Lackluster Response - Source. Top oil exporter Saudi Arabia has offered extra crude to its customers for August but refiners, particularly from Asia, have largely declined, a person familiar with the matter said Monday. "The response received from buyers wasn't very encouraging, so it is early to say if Saudi will up its production more this month," the person told Dow Jones Newswires. Saudi Arabia in June produced an extra 467,000 barrels a day to lift its crude oil production to almost 9.5 million barrels a day, according to a Dow Jones survey. The kingdom pledged to boost output to as high as 10 million barrels a day in response to mounting demand in the second half.
  

MarketWatch:

• Europe Stocks Tumble on Debt Fears as Italy Sinks. European stock markets fell sharply Monday, led lower by banking and insurance shares as fears that the euro-zone debt crisis is spreading to Italy spooked investors. The Stoxx Europe 600 index XX:SXXP -1.41% dropped 1.4% to end at 269.90, with banks and insurers among the worst performers. BNP Paribas SA FR:BNP -6.75% dropped 6.8% in Paris, Commerzbank AG DE:CBK -7.72% fell 8.6% in Frankfurt, and Dexia SA BE:DEXB -8.04% slumped 8% in Brussels.
• China's US-Listed Stocks Are Junk.
  

Business Insider:

• The Nastiest Divorce Battle In History and the Hedge Fund It's Tearing Apart. New details have emerged about the nasty divorce battle that threatens to destroy Ikos, a multi-billion hedge fund.
• The 19 Most-Liked Companies in America.
• Anonymous Hackers Announce An Imminent Attack on the Intelligence Community.
• There Is No Single Cure For The Many Outbreaks of European Debt Disease.
• 10 Things You Need to Know About Italy.
• The Mind-Boggling Expenses That Make Fannie Mae The Least Profitable Corporation in America.
  

Zero Hedge:

• Does the US Government Want to Prevent You From Leaving? Recently, the State Department quietly proposed a new ‘biographical questionnaire’ in lieu of the traditional passport application. The new form requires you to provide things like: - names, birth places, and birth dates of your extended family members - your mother’s place of employment at the time of your birth - whether or not your mother received pre-natal or post natal care - the address of your mother’s physician and dates of appointments - the address of every place you have ever lived in your entire life - the name and address of every school you have ever attended. Most people would find it impossible to provide such information, yet the form requires that the responses ‘are true and correct’ under penalty of imprisonment. Naturally, the privacy statement on the application also acknowledges that the responses can be shared with other departments in the government, including Homeland Security. If this proposal passes, then US citizens will have a nearly insurmountable hurdle to obtain a passport and be able to leave the country at will. Even if it doesn’t pass, it’s a clear demonstration of what the people who run the country are thinking.
• Congressman Brad Miller Blasts Legality of Bank of America's(BAC) $8.5 Billion RMBS Settlement.
  

Reuters:

• Why Won't Obama Cut Spending? President Barack Obama could have done two things that might have saved his Mother of All Budget Deals. First, he could have embraced market-centered, consumer -focused reforms to Medicare. That was about as likely as him accepting an Obamacare rollback. Second, he could have agreed — as House Speaker John Boehner and Republicans suggested — to sharply reduce tax rates in return for fewer special tax deductions/breaks/loopholes/subsidies. Recall that is what his own debt commission recommended.
• Traders Bet on Future Dollar Funding Stress. Investors trading the FRA/OIS spread SMKR29A were betting a key funding spread would widen 10 basis points by September, a move analysts said was a measure of expectations for future stress in the short-term funding markets. The FRA/OIS spread is a bet on the future Libor/OIS spread, which is the difference between the dollar London interbank offered rate and the rate on an overnight indexed swap, a common interest rate swap. The current Libor-OIS spread widened on Monday as well, reaching 15 basis points.
• Fed Could Do More to Deflate Bubbles - Fed Paper. U.S. policymakers could and should do more to identify and deflate asset bubbles before they pop and harm the economy, research from the San Francisco Federal Reserve suggested on Monday.

Telegraph:

• News Corp(NWSA) Forces Government to Refer BSkyB Deal to Competition Commisison.
• Tim Harford: The Euro Will End in Tears. (video) Tim Harford, author of Adapt: why success always starts with failure, tells Robert Miller why he thinks the single currency in its present form is doomed.

Financial Times Deutschland:

• Olli Rehn, the European Union's economic and monetary affairs commissioner, is "extremely concerned" about the region's debt crisis reaching Italy, citing an interview with an EU official. The official said concern about Italy is bigger than fears over Portugal, adding that a common solution to the problem must be found for all countries.

Handelsblatt:

• The European Central Bank is seeking advice from a private-sector bank on what to do in the event of a sovereign default in the euro area. The ECB has written to "more than five" financial institutions in recent days, requesting that they apply to act as advisers.

Shanghai Daily:

• Chinese Bankcard Holders Go Slow on Spending. CHINESE bankcard holders trimmed their non-essential spending in June due to rising cost of food, especially pork, an industry index showed yesterday. The bankcard consumer confidence index dipped to 86.06 points in June, down 0.24 points from a year ago. It also slipped 0.05 points from May as the second straight monthly drop, China UnionPay Co said yesterday. The index tracks expenses of card users, including 200,000 individuals, in affluent cities who frequently use the cards to pay for 90 percent of their expenses. "Bankcard holders are cutting non-essential spending as rising food prices push them to shop less, aside from basic necessities," the Shanghai-based firm said in a statement. Its data from shops showed that contribution from restaurants, jewelers and entertainment facilities dropped to 12.68 percent, down 0.84 percentage points.
  

China Forex Magazine:

• The yuan may appreciate to as high as 6 yuan to the U.S. dollar and consumer prices may exceed 5% this year if global commodity prices continue to rise, citing Chen Bingcai, a researcher at the Chinese Academy of Governance's policy consultation department.

Bear Radar

Style Underperformer:

• Mid-Cap Growth (-2.41%)

Sector Underperformers:

• 1) Coal -3.70% 2) Homebuilders -3.21% 3) Construction -3.20%

Stocks Falling on Unusual Volume:

• TI, IOC, DB, BCS, E, PHG, TEF, TOT, CKP, NWSA, RRD, CCIX, SHLM, RAIL, VMED, TLEO, LHCG, BWLD, QSII, SYNT, BOOM, NEWP, VPHM, AMLN, AIXG, OZRK, LPSN, HAS, IXC, SWC, RPV, WAB, TTI, GRR, VE, IGT, EMF, EWI, VGK, LL, FDO, AINV, FST, WAB and KKR
  

Stocks With Unusual Put Option Activity:

• 1) SWC 2) LPS 3) INFY 4) AMAT 5) XLV
  

Stocks With Most Negative News Mentions:

• 1) ACN 2) TNK 3) HGG 4) TMK 5) STD
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value (-1.71%)

Sector Outperformers:

• 1) Semis -.31% 2) Restaurants -.51% 3) Food -.92%

Stocks Rising on Unusual Volume:

• JVA, CBOU, RBCN, LRCX and ARJ
  

Stocks With Unusual Call Option Activity:

• 1) IGT 2) NXPI 3) MAT 4) DHR 5) SO
  

Stocks With Most Positive News Mentions:

• 1) AAPL 2) GOOG 3) AMZN 4) WFM 5) GLD
  

Charts:

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

Monday Watch

Weekend Headlines
Bloomberg:

• Euro Drops as European Leaders to Meet Amid Contagion Concerns. The euro fell to a two-week low against the dollar and yen after a meeting of the chiefs of the European Union and European Commission was enlarged amid concern Italy may be engulfed in the region’s sovereign debt crisis. The meeting today will now include European Central Bank President Jean-Claude Trichet, Luxembourg Prime Minister Jean- Claude Juncker and European Economic Commissioner Olli Rehn, ahead of a monthly gathering of euro-area finance ministers, according to the European Union President’s office. “Italy is a very large economy, and if indeed we do see contagion spread toward Italy, then the ECB, EU and IMF will need to come up with a totally different plan to deal with it,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. News of the meeting has “got the market off to a nervous and risk-off start and we’re seeing the euro decline.” The 17-nation euro fell 0.4 percent to $1.4208 as of 8:09 a.m. in Tokyo from $1.4265 on July 8, after earlier touching $1.4198, the lowest level since June 27.
• Italy Moves to Curb Short Selling After Contagion Concerns Slam Markets. Italy’s financial-market regulator moved to curb short selling after the country’s benchmark stock index fell the most in almost five months and bonds tumbled on investor concern Italy would be the next victim of the region’s debt crisis. The regulator known as Consob ordered last night that short sellers must reveal their positions when they reach 0.2 percent or more of a company’s capital and then make additional filings for each additional 0.1 percent. The measure takes effect today and lasts until Sept. 9. Consob’s commissioners held the emergency meeting yesterday after the country’s benchmark FTSE MIB index (FTSEMIB) plunged 3.5 percent on July 8, led by a decline in UniCredit SpA (UCG) and other bank shares that are the among the largest holders of the country’s debt. The yield on Italy’s 10-year bond rose to a nine-year high of 5.27 percent, driving the premium investors demand to hold the country’s debt over German bunds to a euro-era high of 244 basis points. UniCredit, the country’s largest bank, plunged 7.9 percent and Banca Intesa SpA, the second-biggest lender, dropped 4.6 percent. Both hit lows not seen since the period when markets were emerging from the crisis spawned by the collapse of Lehman Brothers Holdings Inc.
• China Inflation Surging Past 6% Leaves Wen With 'Delicate' Balancing Act. China’s inflation accelerated to the fastest pace in three years, highlighting the challenge for policy makers of sustaining growth while taming prices. The consumer price index increased 6.4 percent in June, the National Bureau of Statistics said yesterday, exceeding the 6.2 percent median estimate of economists surveyed by Bloomberg News. The world’s second-biggest economy is already cooling after the government curbed lending by boosting lenders’ reserve requirements to a record and raising interest rates five times since September, most recently on July 6. A deeper-than- anticipated slowdown in China would curtail a global expansion imperiled by a potential default by Greece and signs the U.S. recovery is faltering. China “is in a delicate position right now,” said David Cohen, a Singapore-based economist for Action Economics Ltd. who previously worked at the U.S. Federal Reserve. The government “wants to remain vigilant on inflation, but they don’t want to slam on the brakes too hard,” Cohen said. Inflation was mainly driven by a 14 percent gain in food costs and also pushed up by an unfavorable base for comparison a year earlier. Pork, a Chinese staple, rose 57 percent. Producer prices rose 7.1 percent in June from a year earlier, the statistics bureau said yesterday, compared with 6.8 percent in May and the 6.9 percent median estimate in a Bloomberg News survey. Consumer-price inflation compared with 5.5 percent in May. Non-food consumer prices climbed 3 percent, the biggest gain since at least 2005, yesterday’s report showed. Housing- related costs rose 6.2 percent. “China’s inflation pressures remain strong,” said Liu Li- Gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The central bank is likely to raise interest rates again by the end of September, as “very high” producer-price inflation “implies that China’s inflation is unlikely to peak this month,” he said.
• PBOC Adviser Says China Needs Prudent Policy, Securities Reports. Chinese central bank adviser Xia Bin said the nation needs to maintain prudent monetary policy during the next several years, the China Securities Journal reported. The central bank should continue using open market operations and reserve requirement ratio increases to drain "unreasonable" additional cash from the economy, citing Xia. China should also keep the yuan's exchange rate flexible to some extent and gradually push real interest rates toward positive territory, Xia said. The country should introduce taxes on capital inflows and also institute reserve requirements for capital inflows, for which there are no interest payments, to deter "hot money," Xia said.
  
• ECB Seeks Expansion of Euro-Rescue Fund to Help Italy, Welt Says. The European Central Bank is seeking to have the euro-rescue fund expanded to include help for Italy, Die Welt reported, citing unidentified “high ranking” people at central banks. The fund may have to be doubled to 1.5 trillion euros ($2.14 trillion) to cover a crisis in Italy, the ECB said according to the German newspaper. Central banks are no longer ready to buy government debt, so the rescue fund should take on that task instead, according to the bankers, Die Welt said preview of an article for tomorrow's edition.
• Gillard Sets A$23 Carbon Tax to Reduce Australia’s Fossil Fuel Dependence. Prime Minister Julia Gillard unveiled Australia’s first tax on greenhouse gas emissions from July 2012 to reduce dependence on fossil fuels and encourage renewable energy in the world’s biggest-coal exporting country. Australia expects to raise some A$27.8 billion ($30 billion) in three years by making polluters pay an initial charge of A$23 ($24.74) a ton of carbon dioxide, then lifting the price by 2.5 percent a year, plus inflation, Gillard said today in Canberra. The tax will switch to a cap-and-trade system in 2015, while the plan provides about A$47 billion through 2020 to help households and industries and spur renewable energy. Gillard, Australia’s least popular prime minister for 13 years, wants to cut emissions in the developed world’s biggest per-capita polluter to at least 5 percent below 2000 levels by 2020. She already has support from the Greens party and the three independent lawmakers needed to pass the program after plans to price carbon and tax profits of miners cost her predecessor, Kevin Rudd, his job.
• Iron Ore Imports by China Decline as Monsoon Rains in India Slow Shipments. China, the world’s biggest buyer of iron ore, cut purchases by 4 percent in June from the previous month as India’s wet season curbed shipments and as Chinese mills sought supplies from domestic mines. Imports were 51.09 million metric tons last month compared with 53.3 million tons in May, according to China’s General Administration of Customs. That’s 8 percent higher than 47.2 million tons a year earlier, according to data compiled by Bloomberg.
• Investors Cut Bullish Agriculture Bets to One-Year Low on Supply Outlook. Funds trimmed bets on rising agriculture prices for a third straight week, sending holdings to the lowest in a year as supply concerns eased. Speculators reduced their net-long position in 11 U.S. farm goods by 6.6 percent to 564,174 futures and options contracts in the week ended July 5, government data compiled by Bloomberg show. That’s the lowest since July 6, 2010. Investors more than doubled their net-short bets for wheat. Corn holdings slumped 16 percent.
• Qaddafi Threatens Europe, Vows Regime Won't Fall. Libyan leader Muammar Qaddafi said his regime won’t fall and threatened to retaliate against Europe for its involvement in attempts to overthrow him. “Libyans will advance toward Europe willing to commit suicide, for we will go to heaven and they will go to hell,” Qaddafi said, according to a recording of his speech that was aired yesterday on Al Arabiya television. “Tens, hundreds or thousands of Libyans might die in Europe. We will raid their houses, women and children, like they raided us, and I told you an eye for an eye, a tooth for a tooth,” Qaddafi said. “We are threatening them now.”
• Big Companies 'A Bit Wary' on Technology Spending, HP Chief Says. Large corporations are exercising caution about large-scale information technology spending amid concerns about global economic growth and fiscal uncertainty, Hewlett-Packard Co. (HPQ) Chief Executive Officer Leo Apotheker said. While technology upgrades are under way at many companies, “everybody’s a bit cautious in an environment like this,” Apotheker said today on the sidelines of the Rencontres Economiques conference in Aix-en-Provence, France. “People are still a bit wary.”
• Kiplinger Warns Customers Hackers Got Account, Credit Card Information. Kiplinger Washington Editors Inc., the publisher of Kiplinger’s Personal Finance, warned customers that hackers breached its computer network at least as early as June 25 and stole account data, including credit card numbers. Doug Harbrecht, the company’s director of new media, said the attackers stole user names, passwords and encrypted credit card numbers from as many as 142,000 subscribers to the magazine or the company’s various newsletters, including the Kiplinger Letter.
• Asia Doubles Silicon Factories, Pursues Gain Through Glut as Prices Dive. Asia’s largest makers of silicon for solar panels are almost doubling their factory size this year just as surplus production sends prices tumbling for the main raw material for the $35 billion industry. Korea’s OCI Co. and GCL-Poly Energy Holdings Ltd. (3800) of China said they’ll increase capacity to a combined 88,000 metric tons a year from 48,000 tons. Global demand for the material, known as polysilicon, is growing at less than a third of that rate, and spot prices fell 32 percent in the second quarter, Bloomberg New Energy Finance estimated. Asians are deploying equipment to refine silicon crystals more quickly than Western competitors. They anticipate gaining share from the world’s largest suppliers, Hemlock Semiconductor Corp. of the U.S. and Germany’s Wacker Chemie AG (WCH), as customers increasingly demand lower prices for the key material used in panels to convert sunlight into electricity.
• Best Currency Forecasters Say Dollar Slump Over as Index Tumbles. The best currency forecasters say that the dollar’s 13 percent slide over the past year is coming to an end as Europe’s deepening debt crisis discourages bets against the world’s reserve currency.
• Fed on Hold Longest Since 1940s as Curve Shows Slower Growth. The Federal Reserve may keep interest rates at record lows for the longest period since World War II as the economic slowdown that sparked a four-month bond rally worsens, according to Treasury market signals. The 3 percentage point gap between yields for three-month and 10-year Treasuries indicates the economy may grow 1.1 percent in the 12 months ending June 2012, a study by the Federal Reserve Bank of Cleveland says. That’s less than half the central bank’s current forecast, and may delay any rate increase from the zero-to-25 basis point range held since December 2008.
• China Three-Year Local Government Debt Fails. China’s finance ministry failed to sell all of the three-year debt offered at an auction on behalf of local governments as a cash crunch curbed demand. The ministry sold 23.9 billion yuan ($3.7 billion) of bonds at a yield of 3.93 percent on behalf of 11 provinces and municipalities, falling short of its 25 billion yuan target, said a trader at a finance company required to bid at the auction. The Shanghai interbank offered rate, or Shibor, for three-month yuan loans, was fixed at 6.24 percent today, near a record high of 6.46 percent reached on June 28. “While the interbank borrowing cost is so high, investors won’t spend money on local government debt,” said Huang Yanhong, a bond analyst at Bank of Nanjing Co. in Nanjing. “Demand is low also because the debt’s secondary-market trading isn’t active. After you buy it, you can only hold it till maturity.”

Wall Street Journal:

• Deficit Negotiators Hit Reset. President Barack Obama and Republican leaders in Congress clashed Sunday over the scope of an effort to cut the federal deficit, one that could be shorn of its most ambitious elements, including revamping the tax code and significantly reducing growth in benefit programs.
• Little Hiring Seen by Small Businesses. The U.S. labor market could stay sluggish for a while, with small-business executives reluctant to hire amid the murky economic outlook. Almost two-thirds—64%—of small-business executives surveyed said they weren't expecting to add to their payrolls in the next year and another 12% planned to cut jobs, according to a U.S. Chamber of Commerce report to be released Monday. Just 19% said they would expand their work forces. This comes after a Labor Department report Friday showed employers added few jobs in June, and unemployment rose to 9.2%.
• A Falling Dollar Pushes Exports, Draws Risks. Since hitting a peak in February 2002, the dollar is down about 28%, according to an inflation-adjusted index from the Federal Reserve based on the values of a wide variety of other currencies. Aside from making U.S. products cheaper for foreigners, a weaker dollar raises the cost of imported items Americans want or need. Worse, if the dollar falls too far or too fast, foreign investors and creditors will lose confidence in the U.S. economy. "We shouldn't think that driving the dollar to the bottom of the sea is the answer to all our problems," said Robert Dye, a senior economist at PNC Financial Services Group Inc.
• Monsanto(MON), Sinochem in Deal Talks. Chemicals conglomerate Sinochem Corp. is in advanced discussions with Monsanto Co. to deepen their ties significantly, people familiar with the discussions said, an important sign of China's growing appetite for U.S. crops and biotechnology. The two companies have been in talks for months, the people said. It was unclear what form an agreement might take, though arrangements could include a large joint venture, the sale of a minority stake or Sinochem assuming a larger role marketing Monsanto products in China.
• Taxes Upon Taxes Upon... Obama wants $1 trillion in taxes on top of what he's already signed.

CNBC:

• Where Was SEC As Trouble Festered at Chinese Companies? Alarmed by widening accounting debacles at U.S.-listed Chinese companies, American regulators are scrambling to stem the damage from gaps in laws adopted to protect investors after the Enron scandal a decade ago.

IBD:

• Switch to Copper Drives Growth at Kulicke & Soffa(KLIC).

NY Times:

• U.S. Is Deferring Millions in Pakistani Military Aid. The Obama administration is suspending and, in some cases, canceling hundreds of millions of dollars of aid to the Pakistani military, in a move to chasten Pakistan for expelling American military trainers and to press its army to fight militants more effectively. Coupled with a statement from the top American military officer last week linking Pakistan’s military spy agency to the recent murder of a Pakistani journalist, the halting or withdrawal of military equipment and other aid to Pakistan illustrates the depth of the debate inside the Obama administration over how to change the behavior of one of its key counterterrorism partners. Altogether, about $800 million in military aid and equipment, or over one-third of the more than $2 billion in annual American security assistance to Pakistan, could be affected, three senior United States officials said.
• Summer Camps Make Shift to Build Competitive Skills.
• Shelia Bair's Bank Shot. ‘They should have let Bear Stearns fail,” Sheila Bair said. It was midmorning on a crisp June day, and Bair, the 57-year-old outgoing chairwoman of the Federal Deposit Insurance Corporation — the federal agency that insures bank deposits and winds down failing banks — was sitting on a couch, sipping a Starbucks latte. We were in the first hour of several lengthy on-the-record interviews. She seemed ever-so-slightly nervous. Long viewed as a bureaucratic backwater, the F.D.I.C. has had a tumultuous five years while being transformed under Bair’s stewardship.

Business Insider:

• The Sad Story of How Italy Got To Be Such a Wreck.
• The Rise of Karl Marx in China. Old school communism is popping up all over the place.
• The 15 Stocks That Everyone Is Shorting Like Crazy.
• How Obama Killed The Debt Ceiling "Grand Bargain".
• All Signs Indicate That Iran Is Accelerating Its Push For a Nuclear Weapon. The country has made significant progress recently in three crucial areas: producing the basic fissile material required for nuclear energy; turning that material into a nuclear weapon; and creating a suitable missile delivery system for a nuke.
• Communist Party VIP Warns of the Disintegration of Popular Support in China.
  

Zero Hedge:

• Several Inconvenient Truths About The Debt Ceiling and "Deficit Reduction".
• Europe Scrambles to Deal With Italy Contagion Fallout, Calls Emergency Meeting as Former ECB Official Says "Very Worried About Italy".
  

Boston Herald:

• Fukushima Government Eyes Drastic Measure on Cattle After Cesium Scare. As excessive levels of radioactive cesium have been detected in beef cattle shipped from near the Fukushima No. 1 nuclear power plant, the Fukushima prefectural government is considering asking livestock farmers to voluntarily stop shipping cows, officials said Saturday. The request would apply to cattle in areas that have been designated as "emergency evacuation preparation zones," which lie mostly between 12.42 and 18.64 miles from the nuclear plant.

Washington Post:

• Short-Termism and the Risk of Another Financial Crisis. The nation is still struggling with the effects of the most serious financial crisis and economic downturn since the Great Depression. But Wall Street seems all too ready to return to the same untenable business practices that brought it to its knees less than three years ago.And some in government who claim to be representing Main Street seem all too ready to help.

PostStar.com:

• Many Concerned About Impact of Proposed New Rule to Boost Mortgage Down Payments to 20%. When legislators passed the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year, they intended sweeping reform of the financial system, including unscrupulous mortgage practices responsible for the subprime meltdown. Many say they did not, however, have any intention of requiring 20 percent down payments on residential mortgages. Earlier this year, the regulatory agencies responsible for interpreting the Dodd-Frank mandates proposed some specific rules regarding mortgages, among them a requirement for larger down payments for the vast majority of loans. The proposal has spurred a vociferous reaction from some lawmakers, consumer organizations, lenders, real estate professionals and insurers, who say it would stifle the housing recovery and prevent a majority of buyers from obtaining loans.

TVNewser:

• CNBC Names Carl Quintanilla, Melissa Lee New 'Squawk on the Street' Anchors. CNBC has decided on its new anchors for the 2-hour “Squawk on the Street” morning show. The business channel is tapping several veterans to fill the seat left vacant following the death May 25th of longtime anchor Mark Haines and the departure three weeks earlier of co-anchor Erin Burnett, now at CNN. CNBC SVP Nik Deogun announced that starting tomorrow, Melissa Lee and Carl Quintanilla will co-anchor the show, with contributions from Jim Cramer, Simon Hobbs and David Faber.

Baltic Economy Watch:

• Smoke On The East European Horizon? With so much emphasis being placed on what has been happening farther to the South, economic realities on Europe's Eastern periphery have largely been escaping the close scrutiny of media and analyst attention.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 21% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty percent (40%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19 (see trends).

Reuters:

• EU Protectionism Blocking Bank Recapitalisation - Zhu. Protectionism in Europe is hampering the recapitalisation of the region's banks and the stabilisation of the financial sector, IMF adviser Min Zhu said on Sunday. "The key issue to stabilise the financial sector is to raise capital," Zhu told a conference in southern France. "The capital raising process in the banking sector in this region is being left behind the other countries in the world. Why? Because there is still protectionism." He cited state ownership of banks and barriers to cross-border mergers and acquisitions as two significant obstacles to recapitalisation. "If we can solve this issue, then the banking sector will be able to raise money from the private sector and raise their capital ratios," he said. IMF sources told Reuters this week that Zhu, a Chinese national who was a special adviser to former IMF Managing Director Dominique Strauss-Kahn, was expected to fill a new deputy managing director post to be created by the Fund's new chief, Christine Lagarde.

Financial Times:

• Europe May Accept Greek Bond Defaults in Bailout Plan. European leaders are prepared to accept that Greece should default on some of its bonds as part of a new bailout plan for the country that would put its total debt levels on a sustainable footing, citing unnamed senior officials. The new plan, to be discussed at a meeting of euro area finance ministers tomorrow, could also include new concessions by European lenders to reduce Greece's debt, including further lowering interest rates on bailout loans and a broad-based bond buyback program, the FT said.
• US Retail Industry Embraces Alternative Strategies.
• Hedge Fund Industry Faces Shake-Up. By 2013, a volley of regulatory missiles will descend on hedge funds, imposing considerable constraints on a once-unconstrained industry. The impact of Dodd-Frank, the Alternative Investment Fund Managers Directive , the Foreign Account Tax Compliance Act and others could see some smaller funds squeezed out. Funds of any size operating at marginal levels of profitability are also at risk. In addition, there is also a possibility that part of the industry currently domiciled in Europe and the US could migrate to Asia.
• US Hedge Funds Bet Against Italian Bonds. US hedge funds are placing large bets against the value of Italian government debt, directly shorting the bonds of the eurozone’s third-largest economy. The funds have increased the size of short positions in the last month, speculating that investor concerns over the country’s ability to fund itself may spread from Europe’s periphery to Italy, according to investors in the funds briefed on the strategy.
• US Banks Set for Lackluster Reporting Season. Tepid trading activity, low interest rates and mounting legal costs have all weighed on the profitability of US banks such as JPMorgan Chase and Bank of America, leaving investors in search of fresh signs of optimism as the big banks’ quarterly reporting season kicks off on Thursday.

Sunday Times:

• The U.K.'s economy may have shrunk by as much as .2% over the past three months, citing estimates by Citigroup Inc. and Scotia Capital.

Corriere della Sera:

• Italian Finance Minister Giulio Tremonti said a political attacks leading to his resignation may damage both Italian bonds and the euro, citing an interview. Such an attack may "bring the euro down," citing Tremonti.

El Economista:

• Regulation and supervision of bond rating companies is an "urgent" priority because of the "distortion" they create, Francisco Luzon, head of Banco Santander SA's Latin American business, was quoted as saying. Spain needs to complete its overhaul of the financial system and address regional financing and collective-wage bargaining to reduce borrowing costs, he said.

Caijing:

• China may halt banks from packaging loan-based assets, including trust and entrusted loans, in their wealth management products, citing an internal meeting by the China Banking Regulatory Commission.

Financial News:

• It is "difficult" to loosen monetary policy now as asset price bubbles including real estate and investment products are still "relatively serious," the Financial News newspaper reported today on its front page.

Hexun.com:

• China should cut public infrastructure investments as many projects yield low returns and fuel cost increases, citing Liu Yuhui, a researcher with the Chinese Academy of Social Sciences.

People's Daily:

• China's consumer prices will increase at a more than 5% pace in the third quarter, citing Ba Shusong, a researcher at the State Council's Development Research Center. Recently high levels of inflation don't mean that government polices to rein in prices are yet to take effect, Ba said. There is still the possibility of raising the reserve requirement ratio one or two more time in the second half, Ba said.
• Chinese local government officials may face monetary penalties for allowing "excessive" debt in their administration, citing Yuan Shuhong, deputy director of the State Council's Legislative Affairs Office.
  

gulfnews.com:

• China Oil Imports Fall to Eight-Month Low. Beijing: China's net imports of crude oil fell to an eight-month low in June amid refinery maintenance and slowing energy demand in the fastest-growing major economy. Net imports last month fell 10 per cent from a month earlier and 12 per cent from a year earlier to 19.43 million metric tonnes, or about 4.7 million barrels a day, according to Bloomberg calculations based on data released Sunday by the General Administration of Customs. That's the lowest since October, the data show, as the nation imported 19.7 million tonnes and exported 270,000 tons of crude.

Weekend Recommendations
Barron's:

• Made positive comments on (RUTH) and (ELY).
• Made negative comments on (SYT).
  

Night Trading

• Asian indices are -1.25% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 115.0 +3.5 basis points.
• Asia Pacific Sovereign CDS Index 118.0 +1.5 basis points.
  
• S&P 500 futures -.58%.
• NASDAQ 100 futures -.61%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AA)/.32
• (NVLS)/.76

Economic Releases

• None of note

Upcoming Splits

• (LULU) 2-for-1
• (OKS) 2-for-1
• (TGI) 2-for-1
  

Other Potential Market Movers

• The 3-Month/6-Month Treasury Bill Auctions could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by technology and commodity shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on US debt ceiling concerns, more shorting, global growth worries, profit-taking and emerging market inflation fears. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 75% net long heading into the week.