Stocks Falling into Final Hour on Rising Eurozone Debt Angst, US Debt Ceiling Concerns, Tech Sector Pessimism, More Shorting

Broad Market Tone:

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

Equity Investor Angst:

• VIX 20.91 +5.02%
  
• ISE Sentiment Index 79.0 -22.55%
  
• Total Put/Call 1.07 +8.08%
  
• NYSE Arms 1.18 +41.47%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 96.0 +1.33%
  
• European Financial Sector CDS Index 143.50 +3.01%
  
• Western Europe Sovereign Debt CDS Index 283.50 -1.05%
  
• Emerging Market CDS Index 222.30 +.92%
  
• 2-Year Swap Spread 27.0 -1 bp
  
• TED Spread 24.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 258.0 +5 bps
  
• China Import Iron Ore Spot $174.10/Metric Tonne unch.
  
• Citi US Economic Surprise Index -96.10 +1.9 points
  
• 10-Year TIPS Spread 2.26% -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -21 open in Japan
• DAX Futures: Indicating -15 open in Germany

Portfolio:

• Slightly Higher: On gains in my ETF hedges and Emerging Markets shorts
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 reverses to session lows despite gains in Asian equities, less financial sector pessimism, a bounce in the euro and some positive economic data. On the positive side, Restaurant shares are higher on the day. Oil is falling -2.1% and the UBS-Bloomberg Ag Spot Index is down -1.17%. On the negative side, Airline, Education, Wireless, Networking, Internet, Steel, Hospital, I-Banking, Disk Drive, Semi, Software, Oil Service, Oil Tanker, Defense and Alt Energy shares are especially weak today, falling more than -1.5%. Small-caps and cyclicals are underperforming. Tech shares continue to trade poorly. The Transports, which had been leading the market, are now testing their 50-day moving average. Gold is up +.2%, copper is falling -.36% and lumber is down -1.32%. Rice is jumping another +1.9%. Rice is hitting a new multi-year high and has soared +30.0% in less than 2 weeks. The US price for a gallon of gas is +.01/gallon today to $3.66/gallon. It is up .52/gallon in less than 5 months. The Spain sovereign cds is up +1.43% to 3223.13 bps, the Portugal sovereign cds is up +2.22% to 1,097.37 bps and the Ireland sovereign cds is up 2.25% to 1,081.77 bps. Moreover, the US sovereign cds is jumping +7.92% to 54.50 bps. The Western Europe Sovereign CDS Index is hovering near its record high and the European Financial Sector CDS Index is near its recent high. The Ireland sovereign cds is making a new record high today, as well. The 2-yr euro swap spread is moving +6.75% today to 72.94 bps, which is near its recent record. The Libor-OIS spread has moved up +4 bps to 16.0 bps over the last 9 days. Shanghai copper inventories have risen +33.0% in 5 days. Brazil's Bovespa fell another -1.9% today to the lowest since May 2010 and is down -14.1% ytd. Italian equities fell another -1.1%, finishing at session lows, and are down -7.6% ytd. The euro currency put in a fairly large reversal lower today. The currency looks vulnerable over the short and longer-run. The AAII % Bulls fell to 39.31 this week, while the % Bears rose to 29.25, which is still a negative considering the magnitude of the current headwinds. The broad market feels heavy today. The damage is worse than the major averages suggest. I expect US stocks to trade modestly lower into the close from current levels on rising eurozone debt angst, emerging markets inflation fears, tech sector pessimism, US debt ceiling concerns, profit-taking, more shorting and global growth worries.

Today's Headlines

Bloomberg:

• Europe Is Said to Face IMF Doubts on Greek Financial Aid Without Debt Cut. European finance ministers are concerned that the International Monetary Fund will curb its share of a Greek rescue of as much as 115 billion euros ($163 billion) unless the plan includes deep cuts in Greece’s debt burden, two people with knowledge of the talks said. A program that fails to generate a sustainable reduction in Europe’s biggest debt load may require governments to finance a bigger share of the three-year lifeline, said the people, who declined to be named because the talks are in progress. The IMF has provided one third of the three previous euro bailouts, including Greece’s in 2010. Doubts over the IMF’s role represent an added obstacle in the effort by policy makers to stem a crisis that spread to Italy this week, increasing the urgency for a solution as yields soared to euro-era records in the most debt-laden nations. “European policy makers still misunderstand market dynamics,” Royal Bank of Scotland Group Plc (RBS) economists led by London-based Jacques Cailloux said in a research note. “We expect the crisis to continue deteriorating and threaten the entire euro area.”
• Italian Banks Face Higher Borrowing Costs as Debt Crisis Enters New Phase. Italian banks, saddled with the nation’s record borrowing costs, may struggle to reverse a drop in profitability that’s already turned UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP) into European laggards. Italy’s two biggest lenders have about 55.4 billion euros ($78.4 billion) of debt maturing in 2012, according to the banks. Investor concern that the sovereign debt crisis is spilling over to Italy, which has the region’s largest debt, pushed the country’s 10-year bond yields to their highest relative to German bunds since the introduction of the euro, adding about 1 percentage point to funding costs this month. The crisis has entered a new phase and higher financing costs for some European nations are here to stay, Bank of Italy Governor Mario Draghi said yesterday. For the banks, that translates into pressure on earnings and may force cost cutting, greater competition for deposits and a contraction in lending, mirroring the challenges Spanish lenders are also facing. “The widening of sovereign spreads is so critical for southern European banks,” Morgan Stanley analyst Huw van Steenis wrote in a note to clients July 12. “Deleveraging remains the base case for those banks with high funding costs and impacts bank earnings and is a drag on economies.”
• Sovereign, Corporate Bond Risk Rises, Credit-Default Swaps Show. The cost of insuring against default on European sovereign bonds rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 1 basis point to 284 at 1:30 p.m. in London. An increase signals deterioration in perceptions of credit quality. Swaps on Italy jumped 8 basis points to 291, according to CMA. Belgium increased 3 basis points to 188, Ireland climbed 9 to 1,073 and Portugal rose 10 to 1,096, while Spain was 12 higher at 326. Greece dropped from a record, falling 70 basis points to 2,280. The cost of insuring corporate debt rose. The Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 2 basis points to 443, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 0.5 basis point to 118.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 2.5 basis points to 178.5 and the subordinated index rose 2 to 312.5.
• ECB, Banks, EU Meet in Rome on Greek Plan, Official Says. Officials from the European Central Bank, the European Commission and private lenders are meeting in Rome to discuss a second rescue plan for Greece, an Italian Treasury official said. Today’s talks are part of European efforts to get creditors to share the burden of a second Greek bailout a year after a 110 billion-euro ($158 billion) package failed to stop the debt crisis from spreading.
• Bernanke: No Plans Now for Bond Purchases. Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank isn’t currently ready to embark on a third round of government bond-buying to stimulate the economy. “We’re not prepared at this point to take further action,” Bernanke said today, in response to a question from Senate Banking Committee Chairman Tim Johnson, a Democrat from South Dakota. Johnson asked Bernanke why the Fed wasn’t immediately starting a new stimulus program given the weak economic recovery and rising unemployment. “Today the situation is more complex,” Bernanke told lawmakers. “Inflation is higher. Inflation expectations are close to our target,” he said. “We are uncertain about the near-term developments in the economy. We’d like to see if, in fact, the economy does pick up, as we are projecting.”
• U.S. Jobless Claims Declined More Than Forecast Last Week. The number of Americans filing first-time claims for unemployment benefits dropped last week to the lowest level since April, a sign weakness in the labor market may be starting to abate. Applications for jobless benefits decreased 22,000 in the week ended July 9 to 405,000, Labor Department figures showed today. Economists forecast 415,000 claims, according to the median estimate in a Bloomberg News survey.
• UBS May Cut 5,000 Jobs to Save $1.2 Billion Annually, Tages-Anzeiger Says. UBS AG (UBSN) may cut 5,000 jobs to help save 1 billion Swiss francs ($1.2 billion) a year, Tages- Anzeiger reported today, citing unidentified “insiders.”
• Qaddafi May 'Blow Up' Tripoli: Russian Envoy. Libyan leader Muammar Qaddafi may “blow up” the capital Tripoli if rebels seize the city, Mikhail Margelov, Russia’s envoy for negotiating Qaddafi’s departure, told the Izvestiya newspaper. Prime Minister Baghdadi Mahmudi told Margelov the regime is ready to implement a “suicidal plan” if insurgents overrun Tripoli, the envoy said in an interview with the Moscow-based newspaper. “Qaddafi has plenty of missiles and explosives.” His comments were confirmed by his spokeswoman, Varvara Paal.
• India's Inflation Accelerates to 9.44%, Adding to Interest-Rate Pressure. India’s inflation accelerated, sustaining pressure on the central bank to tighten monetary policy this month, even as price gains that were less than economists estimated boosted optimism the longest stretch of interest-rate increases in a decade is nearing an end. The benchmark wholesale-price index rose 9.44 percent in June from a year earlier after a 9.06 percent jump in May, according to the commerce ministry. Food-price inflation quickened to a three-week high of 8.31 percent in the week ended July 2, the ministry said in a separate statement today.
• Euro Crisis in 'Uncharted Territory' Menaces Eastern States. The European debt crisis has entered “uncharted territory,” rekindling concern it will spread eastward through banking and trade links, according to the European Bank for Reconstruction and Development. Italy’s Unicredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), two of eastern Europe’s biggest lenders, fell to the lowest in more than two years July 11 as political infighting threatened to delay efforts to cut the budget deficit in the country with Europe’s largest debt burden. European leaders this week failed to agree on a new aid package for Greece. “We are in uncharted territory,” Erik Berglof, chief economist at the London-based EBRD, which invests in eastern Europe and Central Asia, said in a July 12 interview. “The source of the contagion seems to be in worse shape.”
• JPMorgan(JPM) Shares Rise as Profit Beats Estimates. JPMorgan Chase & Co. (JPM) rose the most in eight months in New York trading after earnings beat analysts’ estimates and revenue unexpectedly climbed on gains from underwriting stocks and bonds. JPMorgan shares jumped as much as 4.1 percent after the New York-based bank reported its highest half-year profit ever, at almost $11 billion. Second-quarter net income increased 13 percent from a year earlier, to $5.43 billion, or $1.27 a share, six cents higher than the average estimate of analysts surveyed by Bloomberg.
• Crude Oil Futures Decline After Bernanke's Comments on More Fed Stimulus. Crude oil fell after Federal Reserve Chairman Ben S. Bernanke said the Fed isn’t planning more bond- buying to stimulate economic growth. Futures dropped as much as 2.1 percent after Bernanke testified to Congress that the central bank would be cautious about initiating a third round of quantitative easing because of higher inflation this year

Wall Street Journal:

• Reid Criticizes Cantor as Debt Talks Stall. House Majority Leader Eric Cantor "has shown that he shouldn't even be at the table" in negotiations over raising the U.S. borrowing limit, Senate Majority Leader Harry Reid said Thursday, reflecting Democratic frustration with House Republican conservatives in the continuing battle over raising the debt ceiling and cutting the deficit.
  
• Asia Quietly Frets Over U.S. Debt. Officials and analysts in some of the nations with huge holdings of U.S. Treasury bonds voiced concern about Washington's handling of its debt but said they have few alternatives for parking their cash. The announcement by Moody's Investors Service that it is considering an unprecedented downgrade of the U.S. government's top Aaa bond rating highlighted a big potential problem for China, Japan and other countries that have turned their trade surpluses into trillions of dollars in American debt instruments. U.S. debt looks less safe than it has long been considered, but there's a lack of alternatives that are both more attractive and liquid enough to absorb such sums. Asian government officials were largely circumspect on Thursday, reflecting in part concerns that being too critical risks further hurting the value of their holdings.‬
• Credit Suisse To Ax 1,500 Jobs, Including at Private Bank - Source. Credit Suisse Group (CS) is preparing to ax roughly 3% of its total workforce, or at least 1,500 jobs, including staff cuts at its private banking unit which is struggling with a costly surge in the Swiss franc, a person familiar with the situation told Dow Jones Newswires.
• FBI Opens News Corp.(NWSA) Hacking Probe.
  

Business Insider:

• Boehner Has "No Idea" If Last Ditch Debt Limit Plan Can Pass House.
• ORSZAG: This Economy is MUCH Weaker Than It Appears. In a column for Bloomberg, former White House budget man Peter Orszag argues that nobody has even yet begun to understand how frail the American economy is, and how long it will take to get back on solid footing.
• China is Building a Giant Stadium in the Middle of Nowhere, Finance by Insanely Optimistic Borrowing. (video)
  

Zero Hedge:

• Some Perspective On Italian Bonds. It seems like the market is enjoying the "success" of the Italian bond auctions. Given the extreme intraday volatility we have had this week, it is hard to argue that we won't see a spike higher in stocks on this news, but the reality is that:
• It Begins: JPMorgan(JPM) Lowers Q3 GDP.
  

New York Times:

• ConocoPhillips(COP) to Split Into Two.

Safehaven:

• Europe's Default Crisis: It's the CDS, Stupid. Greek bonds have lost half to three-quarters of their face value. Six national strikes have all ended in violence already this year. In the three months to April, public investment spending fell 42% from the start of 2010, but total spending still rose - and tax revenues sank - forcing the budget deficit still wider as the economy shrank 5.5% year-on-year. What to do? Greece's debt cannot be serviced, much less repaid. Everything says default - stop paying, write it down or write it off, with or without the lenders' consent. Default is certain, and history (that old balls-ache) says it would be better for creditors if the "restructuring" came before Greece misses a payment. Yet incredibly, most everyone outside Greece - everyone who thinks they have a vested interest, at least - wants restructuring delayed and delayed again. Why? Because of the banks, stupid.

Gallup:

• Generic "Republican Candidate" Extends Lead vs. Obama to 47% to 39%.

Reuters:

• Ireland Needs Quick Solution to Euro Crisis - IMF. Ireland's debt burden is manageable but it needs European leaders to quickly agree on a solution to the bloc's debt crisis if its sky-high borrowing costs are to fall, a senior IMF official said on Thursday.

Financial Times:

• Subprime Selling Off, Again. Securitised subprime — it’s still not doing well. It’s worth asking the obvious question — why? Here’s Goodman: In other words, Goodman reckons subprime has now over-sold. But there’s another reason Goodman mentions to explain the sell-off — fear in the market regarding Greek-exposed European banks selling their assets. It’s a not-so-nice example of how interconnected the financial system remains.

Telegraph:

• Italy Pays High Price in Debt Sale as Senate Clears Cuts. Italy's Senate has approved a crucial austerity package and got a key bond auction away as it moved to persuade investors that the debt-laden country will not become the next victim of the eurozone crisis.

Napi Gazdasag:

• The number of Hungarians with loans overdue more than 90 days rose to a record 806,000 in June, an 18% increase from a year earlier, citing BISZ Zrt. that manages the central loan information database.

El Mundo:

• Four Spanish savings banks, or cajas, and one bank will fail the stress tests, citing people in the financial markets.

Imerisia:

• Greek Prime Minister George Papandreou yesterday held a meeting with this finance minister and the chairman and chief executive of the country's biggest bank to discuss the implications of a "selective default" on Greek debt.

China Securities Journal:

• Some commercial banks in Chinese cities of Chongqing and Nanchang have suspended loans to individuals for home purchases, citing bank officials in the cities.

AsiaOne:

• China Expands Home Purchase Caps. China's cabinet on Thursday extended home purchase restrictions to more cities and reminded local governments to keep in place measures to tighten the property market, in its latest move to curb housing inflation. It also ordered local governments to step up efforts in building more affordable homes and curbing rental prices. Rising home and rental prices are fuelling broader inflation in China. Beijing has made it a top priority to check soaring prices which have in the past led to social unrest, threatening the rule of the Communist Party. "Right now, the property tightening campaign is at a critical point and we must stick to the same direction and maintain the same force of tightening measures," the cabinet said in a statement published on its website, www.gov.cn. Average annual home price rises across the nation slowed to 4.2 per cent in May, a touch down from April's rise of 4.3 per cent. The National Bureau of Statistics is set to announce the June data next Monday. "That means the central government will not relax its tightening policy anytime soon and that's within market expectations," said Li Shaoming, an analyst with China Jianyin Investment Securities in Beijing.

Bear Radar

Style Underperformer:

• Small-Cap Growth (-1.10%)

Sector Underperformers:

• 1) Networking -1.81% 2) Steel -1.52% 3) Road & Rail -1.41%

Stocks Falling on Unusual Volume:

• SWC, COHR, AVAV, NIHD, TIBX, VECO, TIE, CBOU, STO, HNT, CLNE, SONO, JVA, ASMI, ADTN, CHKP, ZION, RBCN, HOGS, HAS, CBSH, LQDT, NTGR, CENX, MCRS, CTXS, PCAR, ASML, COF, HST, UCO, MRX, H, RTI and MAR
  

Stocks With Unusual Put Option Activity:

• 1) STEC 2) RSX 3) MAR 4) CIEN 5) COP
  

Stocks With Most Negative News Mentions:

• 1) MTH 2) MMM 3) MTH 4) CLNE 5) NTGR
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value (+.29%)

Sector Outperformers:

• 1) Coal +.91% 2) Restaurants +.90% 3) Energy +.90%

Stocks Rising on Unusual Volume:

• COP, JPM, PL, UTEK, REDF, JAZZ, RMD and SUG
  

Stocks With Unusual Call Option Activity:

• 1) VMED 2) CLSN 3) PAL 4) COP 5) SUG
  

Stocks With Most Positive News Mentions:

• 1) GOOG 2) WMT 3) ENOC 4) COP 5) RIMM
  

Charts:

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

Thursday Watch

Evening Headlines

Bloomberg:

• Italy Braves Yield Surge With $7 Billion Bond Sale as Senate Votes on Cuts. Italy taps bond markets today as the Senate votes on budget cuts to tame a debt burden that is the second largest in Europe and has prompted investors to drive borrowing costs to a 14-year high. The treasury plans to sell as much as 5 billion euros ($7 billion) of four different bonds with maturities ranging from five to 15 years. It’s the first sale of longer-term debt since the country’s 10-year yield reached 6.02 percent on July 12, the highest since 1997. The yield fell from that peak after Italy successfully sold treasury bills the same day. “The auctions will go well, in the sense that they must go well,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. “There will be a galvanizing of opinion in the domestic sector certainly.” The failure of European Union policy makers to complete a second aid package for Greece and contain the region’s debt crisis fueled concern about the sustainability of Italy’s 1.8 trillion-euro debt, which is larger than that of Greece, Ireland, Spain and Portugal combined.
• Greece Gets World's Lowest Rating From Fitch in Catch-up Downgrade to CCC. Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any country in the world as the company followed rivals and said that a default is a “real possibility.” The move to CCC from B+ “reflects the absence of a new, fully funded and credible” program by the International Monetary Fund and the European Union, the ratings company said yesterday in a statement in London. It also reflects “heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece’s weakening macroeconomic outlook.” Fitch is the third ratings company to cut Greece to the bottom tier of its rankings, reflecting concerns that a new aid package being negotiated for the nation will inflict losses on investors.
• Default Inevitable as Every Greek $40,000 in Hock: Euro Credit. Greece has about a one in ten chance of sidestepping default, according to credit traders who are betting the country will be crippled by $490 billion of debt - more than $40,000 for every man, woman and child. Investors who bought 10-year Greek debt last year have lost almost half their money, with yields soaring to more than 16% as the budget deficit swelled by 28% since January. A $155 billion bailout hasn't stopped the nation's debt from becoming riskier than Venezuela, credit-default swap prices show, while Greek stocks lost 16% of their value this year and are down about 46% since the beginning of 2010.
• Commodities Rise to Four-Week High as Bernanke Signals More U.S. Stimulus. Commodities rose to a four-week high as Federal Reserve Chairman Ben S. Bernanke indicated he may provide more U.S. economic stimulus, driving down the dollar and boosting demand for raw materials as a hedge against inflation. Gold futures rose to a record $1,588.90 an ounce in New York, and silver closed up 7.1 percent, the most among GSCI components. Corn capped the biggest two-day gain in eight weeks, and soybeans posted the longest rally since August.
• Dial-a-Crowd Confronts Debt-Laden Spanish Banks by Thwarting Foreclosures. Rising unemployment in Spain may lead to 300,000 foreclosures this year and next, according to Adicae, a rights group representing bank customers. Spain has become a battleground between banks hurt by a five-fold increase in residential mortgage arrears since 2007 and debt-laden homeowners who are appealing to the government to reduce the burden on those facing foreclosure. The number of foreclosed homes advertised by Idealista.com, Spain’s largest real-estate website, has risen 10-fold to 30,000 in three years. The properties are valued at about 4.6 billion euros and owned by 40 banks. “If the banks had to assume all the losses resulting from the bad mortgages they granted during the property boom, the whole financial system would collapse,” Jesus Encinar, Idealista.com’s chief executive officer, said in an interview. Spanish banks have about 614 billion euros of outstanding residential mortgages, according to data from the Bank of Spain. At 21 percent, the jobless rate is the highest in Europe, making it harder for borrowers to keep up with their payments. Home prices may fall by an additional 20 percent in the next four years before bottoming out, R.R. de Acuna & Asociados, a Madrid-based real-estate consulting firm, said at a briefing last month. The company estimates there are about 1.5 million unsold homes, which won’t be absorbed for another six years. Jaime Alvarez, professor of finance at Madrid’s Complutense University, said there’s is no way of helping homeowners to reduce their debts without hurting lenders. “The committee is merely cosmetic and won’t recommend any changes that will hurt the banks because they’re Spain’s sacred cows,” said Alvarez, who was also a co-founder of Publica Subasta, Spain’s largest complier of data on public auctions.
• China Cities Sell Land With Bonds Seen Toxic. Workers toil by night lights with hoes, carving out the signs for Olympic rings in front of an unfinished 30,000-seat stadium, bulb-shaped gymnasium and swimming complex in a little-known Chinese city. Loudi, home to 4 million people in Chairman Mao Zedong’s home province of Hunan, is paying for the project with 1.2 billion yuan ($185 million) in bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year. In Loudi, people take home $2,323 annually and there are no Olympics here on any calendar. “The debt isn’t a problem as Loudi is not a developed place,” Yang Haibo, an official at the city’s financing vehicle, says as he sits with colleagues in a smoke-filled meeting room under a No Smoking sign. “It’s an emerging city.”
• Debt ratings for Indian companies are being cut at the fastest pace since 2009 as a record increase in rupee interest rates and a slowing economy add to the risk of defaults. ICRA Ltd., the local unit of Moody's Investor Service, reduced rankings for 34 firms and raised ratings for 24 last quarter. There were only seven upgrades for every ten downgrades, the worst ratio since 2009. Yields on top-rated two-year notes jumped 225 basis points, or 2.25 percentage point, in the past year to 9.48 percent. A similar rate in the U.S. fell 44 basis points to .69%. "The rise in interest cost is hurting capital-intensive businesses the most and all those who can defer projects are deferring," said D.R. Dogra, CEO at Mumbai-based ratings provider Credit Analysis & Research Ltd.
• Wall Street Generated Losses on Proprietary Trading Since 2006, GAO Says. The six largest U.S. banks had a net loss of about $221 million from standalone proprietary trading from June 2006 through the end of 2010, according to the Government Accountability Office. The business of betting money for banks’ own accounts produced positive net revenue in 13 of the 18 quarters examined, totaling $15.6 billion, and generated losses of $15.8 billion in the other five quarters, the Washington-based GAO said today in a report.
• Singapore's Economy Shrank Last Quarter. Singapore’s economy shrank for the first time in three quarters as manufacturing slumped, adding to evidence the slowdowns in Europe and the U.S. are curbing growth in Asia. The island’s currency weakened from a record. Gross domestic product fell an annualized 7.8 percent in the second quarter from the previous three months.
• Beef Contaminated by Radiation Intensifies Food-Safety Concerns in Japan. Beef contaminated by radiation from Fukushima prefecture has been eaten by consumers in Japan, intensifying food-safety concerns and stoking criticism against a government testing program that checks only selected products. About 437 kilograms of beef from a farm in Minami-Soma city, 30 kilometers from the stricken Fukushima Dai-Ichi nuclear station, was consumed in eight prefectures, according to the Tokyo metropolitan government, which detected the first case of tainted beef from the farm earlier this month. Four months after a record earthquake and tsunami crippled the power plant in Fukushima, site of the worst nuclear disaster since Chernobyl, local government offices are struggling to check every farm product due to a shortage of testing equipment, staff and budget. Prolonged exposure to radiation in the air, ground and food can cause leukemia and other cancers, according to the London-based World Nuclear Association.
• China Bank Stocks Seen Extending Slump. Chinese banks, the cheapest among major emerging markets’ lenders, may drop lower as overseas banks and funds trim stakes to meet capital rules and curb risks amid concerns that the nation’s record credit boom will unravel. The three biggest Chinese banks posted their worst quarterly stock performance in 2 ½ years on concern that local governments may default on loans. The lenders’ credit outlook may sour in the absence of a government plan to deal with the issue, Moody’s Investors Service said this month, while regulators globally are demanding banks increase buffers. “You will certainly see share sales by some of these cornerstone investors,” said Sandy Mehta, chief executive officer for Hong Kong-based Value Investment Principals Ltd. “The U.S. and European financial companies obviously need capital for themselves. And there are more distressed opportunities in financial sectors” elsewhere, he said.
• Pickens Water-to-Riches Dream Unravels as 11 Texas Cities Scoop Up Rights.
  

Wall Street Journal:

• Raters Put U.S. on Notice. Moody's, S&P Sound Alarms on Debt; President Obama Walks Out of Talks. Credit rating agencies moved closer to an unprecedented downgrade of the U.S. government's debt amid deteriorating talks in Washington, with President Barack Obama abruptly walking out of a key meeting Wednesday with Republicans seeking a deal to raise the federal borrowing limit. Moody's Investors Service said it was reviewing the government's top Aaa bond rating for a possible downgrade, citing the "rising possibility" that the government's $14.29 trillion borrowing limit won't be raised soon enough to prevent the U.S. from running out of money to pay its bills.
• Triple Blasts Hit Mumbai, Killing 21. Attacks, Worst Since City's 2008 Siege, Cast Doubt on India Security Gains and Pakistan Détente; 'Coordinated' Terrorist Bid. The city was placed on high alert after the blasts, which officials believed were "a coordinated attack by terrorists," Home Minister P. Chidambaram said at a news conference. He didn't say whether he believed the perpetrators were homegrown or foreign-based. The attacks underscored India's significant domestic security vulnerabilities, despite efforts in recent years to bolster intelligence-gathering and coordination between local and national-security officials. The attacks could also complicate nascent efforts at establishing peace between India and neighboring rival Pakistan.
• Financial Oversight Panel to Delay Guidance. Federal regulators will not complete guidance detailing how the U.S. will determine which large firms could pose a risk to the financial system in time for a Monday meeting, according to people familiar with the matter. The Financial Stability Oversight Council, a new federal body created by the Dodd-Frank financial-overhaul law, had planned to issue the guidance Monday but it likely will be several weeks before it is complete, these people said.
• In Shift, Municipalities Turn to Banks for Loans. Time was running out for the Orange County School Board. A $105 million debt deal was about to expire, triggering painful penalties for the approximately 175,000-student district in the Orlando, Fla.-region. Along came Wells Fargo & Co. with a deal that avoided the penalties: Wells bought the $105 million debt from investors and negotiated new terms with the district.
• Bank Liabilities Facing Scrutiny. As big banks prepare to report their second-quarter results, federal regulators are scrutinizing what these institutions are telling shareholders about possible payouts to clean up mortgage-related messes, according to people familiar with the matter. Officials at the Securities and Exchange Commission are looking closely at banks' estimates of possible liability in the wake of a surprise June 29 announcement that Bank of America Corp. would take mortgage-related charges of $20.6 billion during the second quarter, the people added. The total cost was greater than some investors and analysts had expected.

Fox Business:

• Morgan Stanley(MS) Could Be Next Wall Street Giant to Cut Staff. Morgan Stanley & Co. could be the next Wall Street firm to announce a major round of layoffs, joining its arch rival Goldman Sachs in slashing possibly thousands of jobs, the FOX Business Network has learned. The firm is “running layoff scenarios into several thousand folks,” said one person with direct knowledge of the matter. This possible new round of job cuts would go well beyond the pruning of low-producing brokers (also known as financial advisers) the firm has already announced.
  

CNBC:

• Pigs at Front Line in China Inflation Battle. In the past year, pork prices in China have rocketed 57 percent, and are again helping to drive Chinese inflation, which hit a three-year high in June. For economists bringing the price of China’s pork under control represents one of the keys to bringing Chinese inflation under control.
• Yum(YUM) Posts Profit Beat, Raises 2011 Estimate.
  

Business Insider:

• Hezbollah Hooks Up With Mexican Drug Cartels.
• The Truth Behind Fannie and Freddie: Why The Government Didn't Make a Profit From The Bailout.
• A Guide to the Political Impasse That Could Tear Belgium Apart.
• Turkey Thwarts Potentially Devastating Al-Qaeda Attack on U.S. Embassy. Turkish authorities in three different cities arrested 15 individuals today who it accused of planning attacks in multiple locations, including one on the U.S. embassy in Ankara.

Zero Hedge:

• Quantitative Easing Rounds 1 and 2 Hurt the Economy ... Bernanke Proposes Round 3.
• Chart of the Day: Evolution of U.S. Federal Public Debt Held by the Public(in % of GDP).
  

CNNMoney:

• PC Sales Continue Slump Amid iPad Takeover. Shipments of personal computers in the United States tumbled in the second quarter as manufacturers, retailers and consumers shift their focus to tablets. U.S. PC shipments fell 5.6%, compared to the same three-month period a year ago, according Gartner. Worldwide PC shipments grew just 2.3%, well below the tech consultancy's modest 6.7% growth forecast. "Given the hype around media tablets such as the iPad, retailers were very conservative in placing orders for PCs," said Mikako Kitagawa, principal analyst at Gartner. "Instead, they wanted to secure space for media tablets."

NY Times:

• Utility Shelves Ambitious Plan to Limit Carbon. A major American utility is shelving the nation’s most prominent effort to capture carbon dioxide from an existing coal-burning power plant, dealing a severe blow to efforts to rein in emissions responsible for global warming.
• Borders Faces Liquidation After Takeover Bid's Rejection.
  

Salon.com:

• US More Unpopular in the Arab World Than Under Bush. I've written numerous times over the last year about rapidly worsening perceptions of the U.S. in the Muslim world, including a Pew poll from April finding that Egyptians view the U.S. more unfavorably now than they did during the Bush presidency. A new poll released today of six Arab nations -- Egypt, Lebanon, Jordan, Saudi Arabia, the United Arab Emirates and Morocco -- contains even worse news on this front:

Lloyd's List:

• Hedge Funds Jump On The Ship Finance Bandwagon.

Rasmussen Reports:

• 25% Say U.S. Heading In Right Direction. Sixty-eight percent (68%) of voters say the country is heading down the wrong track, showing no change from last week.

USA Today:

• Some Netflix(NFLX) Customers Threaten to Quit Over Price Increases.
• Who Exactly Has The Tax Target on Them? Individuals earning $200,000, couples earning $250,000 and, to a lesser extent, all taxpayers could lose money in the deal as their tax rates rise or they move into higher tax brackets. How much would be raised and from whom?

Reuters:

• UAW Sees Its Future: Organize Southern US Plants. The time for the United Auto Workers to win the hearts and minds of nonunion workers in southeastern U.S. plants is now in one top union executive's opinion. "If not now, when? We are going to fix it or we continue to do what we're doing. You keep kicking the can down the road or we're going to fix it," said Gary Casteel, director of the UAW region that includes Tennessee, South Carolina, Alabama and Georgia where most of the nonunion auto plants are located. Casteel echoes the belief of his boss, UAW President Bob King, who has staked his reputation and the union's future growth on winning votes to represent workers at those plants. A failure would likely result in a marginalized organization.
• No Link Seen Between Cell Phones, Brain Tumor. People who have used a cell phone for more than a decade do not appear to be at increased risk of a type of non-cancerous brain tumor, a large study suggests. Looking at data on more than 2.8 million Danish adults, researchers found that those who'd used a cell phone for 11 to 15 years were no more likely than newer users or non-users to develop an acoustic neuroma.
• US Board Changes Swaps Accounting for Local Govts. The board that sets accounting standards for state and local governments on Wednesday changed some financial reporting requirements for swaps and other hedging instruments the governments use. The Governmental Accounting Standards Board said that "deferred outflows" and "deferred inflows" of resources should be reported separately from assets and liabilities on financial statements. A deferred outflow would, for example, be an interest rate swap agreement with a negative value, GASB said. A deferred inflow could be a payment from a public-private partnership. The board then used the separation to tackle how states and local governments would account for the replacement for a swap counterparty or a counterparty's credit support. They can continue to list the value changes of the derivative as a deferred outflow or inflow, rather than as changes in investment income, if they are likely to still collect payments from the swaps, the replacement counterparty meets certain GASB-defined criteria, or when the termination of the swap is the fault of the counterparty. GASB said the changes were "intended to improve financial reporting by providing citizens and other users of state and local government financial reports with information about how past transactions will continue to impact a government's financial statements in the future."
• Marriott(MAR) Earnings Match Estimates, Stock Declines. Marriott International Inc reported higher quarterly earnings that matched analyst estimates and gave a tepid forecast for the year. Shares of the hotel operator dropped more than 4 percent after-hours.

Financial Times:

• High-Frequency Traders Slowed by Headwinds.

Guardian:

• BSkyB 'Bloodbath' Hits Hedge Funds. Hedge funds have suffered one of their worst setbacks in years, losing tens of millions of pounds by betting that Rupert Murdoch's News Corporation was on the verge of taking full control of BSkyB. Short-term speculators expected to make a killing by investing in a company viewed as a prime bid target, but instead have seen shares in the satellite television company plunge. One trader said: "It's a bloodbath out there. The hedgies have dumped their holdings and some of them will be nursing big losses."

The Standard:

• Hong Kong Home Prices to Plateau as Buyers Hit Pocket Limit. Cheung Kong (0001) executive director Justin Chiu Kwok-hung said: "Price levels are now challenging buyers' affordability, so there is very limited room for large hikes," adding that home prices have already climbed 10-15 percent in the first half of the year. Any substantial hikes in home prices are unlikely in the second half, as they have reached the affordability limit of local buyers, a top developer forecast.

South China Morning Post:

• Broker Sees 20% Fall in Hong Kong Home Prices. Real estate risks include a stock market shock and lagging interest by mainland buyers, analyst warns. Property bulls beware: the city's real estate sector could be vulnerable to a slowdown or even a significant fall, according to broker CLSA Asia- Pacific Markets.

21st Century Business Herald:

• The slowing trend for Chinese exports may continue in the second half as overseas demand is unlikely to improve, citing Huo Jianguo, head of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

Economic Information Daily:

• China's monetary policy should remain prudent in the second half of this year to maintain stable economic growth and keep prices stable, citing central bank adviser Xia Bin.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 122.00 +.5 basis point.
  
• Asia Pacific Sovereign CDS Index 122.50 -2.5 basis points.
  
• S&P 500 futures -.42%.
  
• NASDAQ 100 futures -.36%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FCS)/.40
• (JPM)/1.21
• (VMI)/1.45
• (JBHT)/.53
• (PGR)/.39
• (CBST)/.41
• (GOOG)/7.85
• (CBSH)/.72
  

Economic Releases
8:30 am EST

• The Producer Price Index for June is estimated to fall -.2% versus a +.2% gain in May.
• The PPI Ex Food & Energy for June is estimated to rise +.2% versus a +.2% gain in May.
• Advance Retail Sales for June are estimated to fall -.1% versus a -.2% decline in May.
• Retail Sales Less Autos for June are estimated unch. versus a +.3% gain in May.
• Retail Sales Ex Autos & Gas for June are estimated to rise +.4% versus a +.3% gain in May.
• Initial Jobless Claims for last week are estimated to fall to 415K versus 418K the prior week.
• Continuing Claims are estimated to fall to 3680K versus 3681K prior.
  

10:00 am EST

• Business Inventories for May are estimated to rise +.8% versus a +.8% gain in April.

Upcoming Splits

• (TGI) 2-for-1
• (SNHY) 3-for-2
  

Other Potential Market Movers

• The Fed's Bernanke speaking, 30-yr Treasury Bond Auction, weekly EIA natural gas inventory, Fed's weekly balance sheet report and the (FUL) analyst/investor day report could also impact trading today.
  

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

Stocks Rising Slightly Into Final Hour on Euro Bounce, Dovish Fed Commentary, Overseas Equity Strength, Short-Covering

Broad Market Tone:

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

Equity Investor Angst:

• VIX 18.93 -4.13%
  
• ISE Sentiment Index 109.0 -19.26%
  
• Total Put/Call .92 -13.21%
  
• NYSE Arms .64 -55.02%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 94.74 -2.09%
  
• European Financial Sector CDS Index 137.33 -3.06%
  
• Western Europe Sovereign Debt CDS Index 286.50 -.69%
  
• Emerging Market CDS Index 219.86 -.20%
  
• 2-Year Swap Spread 28.0 +1 bp
  
• TED Spread 24.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% -2 bps
  
• Yield Curve 253.0 -1 bp
  
• China Import Iron Ore Spot $174.10/Metric Tonne +.58%
  
• Citi US Economic Surprise Index -98.0 +1.1 points
  
• 10-Year TIPS Spread 2.29% unch.
  

Overseas Futures:

• Nikkei Futures: Indicating -15 open in Japan
• DAX Futures: Indicating -9 open in Germany

Portfolio:

• Higher: On gains in my Retail, Biotech and Medical sector longs
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and then added them back
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades just slightly higher despite strong gains in overseas equities, a bounce in the euro and dovish comments from Bernanke. On the positive side, Coal, Disk Drive, HMO, Education, Oil Service, Ag and Steel shares are especially strong, rising more than +1.0%. Cyclical and small-cap shares are outperforming. The Japan sovereign cds is falling -3.62% to 90.50 bps, the Belgium sovereign cds is down -4.6% to 185.54 bps and the US Muni CDS Index is down -3.49% to 131.69 bps. On the negative side, Defense, Utility, Semi, Telecom, Wireless, REIT and Airline shares are lower on the day. Tech shares continue to underperform. The 10-year yield is unch. at 2.88% despite more qe talk, a global equity rally and debt ceiling concerns. Gold is up +.71%, oil is rising +1.0% and the UBS-Bloomberg Ag Spot Index is gaining +1.8%. Rice is jumping another +3.1%. Rice is hitting a new multi-year high and has soared +27.4% in less than 2 weeks. Moreover, the UBS-Bloomberg Ag Spot Index is breaking out of its recent downtrend and is poised to test its 52-week high, which is also a large negative. The US price for a gallon of gas is +.01/gallon today to $3.65/gallon. It is up .51/gallon in less than 5 months. The Portugal sovereign cds is rising +.32% to 1,073.70 bps, the Ireland sovereign cds is rising +6.5% to 1,059.40 bps and the UK sovereign cds is rising +.23% to 74.33 bps. The Western Europe Sovereign CDS Index is hovering near its record high and the Ireland sovereign cds is making another new record today. Data over the last 24 hours, Bernanke's dovish commentary and the surge in oil/food prices have raised the odds of hard-landings in some key emerging market economies. The US government's weak dollar policies continue to be a massive mistake for the long-term health of the broad economy, in my opinion. Despite today's weak close, stocks remain very resilient in the face of still-developing negative headwinds. I will closely monitor tomorrow's opening reaction to earnings forecasts before further shifting market exposure. I expect US stocks to trade modestly lower into the close from current levels on eurozone debt angst, emerging markets inflation fears, rising food/energy prices, tech sector pessimism, US debt ceiling concerns, profit-taking, more shorting and global growth worries.