North American Investment Grade CDS Index 120.81 bps -1.0%
European Financial Sector CDS Index 137.85 bps -3.65%
Western Europe Sovereign Debt CDS Index 150.0 bps -1.2%
Emerging Market CDS Index 272.10 bps -1.3%
2-Year Swap Spread 36.0 -1 bp
TED Spread 37.0 unch.
Economic Gauges:
3-Month T-Bill Yield .16% unch.
Yield Curve 232.0 -4 bps
China Import Iron Ore Spot $128.0/Metric Tonne -3.18%
Citi US Economic Surprise Index -21.10 -1.2 points
10-Year TIPS Spread 1.72% -5 bps
Overseas Futures:
Nikkei Futures: Indicating -3 open in Japan
DAX Futures: Indicating -36 open in Germany
Portfolio:
Slightly Lower: On losses in my Biotech and Retail long positions
Disclosed Trades: Added to my (IWM)/(QQQQ) hedges, added to my (EEM) short
Market Exposure: Moved to 50% Net Long
BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 reverses morning gains and trades at session lows, despite a bounce in the euro, the market's oversold state, falling sovereign debt angst and a rally in overseas shares. On the positive side, Software and Coal stocks are relatively strong, rising 1.0%+. Copper is rising another +1.56% despite this morning's poor economic data, which is a positive. As well, the Spain sovereign cds is falling another -3.0% to 255.16 bps. On the negative side, REIT, Road & Rail, Restaurant, Hospital, Biotech, Drisk Drive, Paper, Gold and Oil Tanker shares are under meaningful pressure, falling 1.50%+. Small-cap and Cyclical stocks are underperforming. (IYR) has been heavy throughout the day, falling -2.4%, which is a large negative. Moreover, the Transports are very weak again today, falling another -1.4% to the lowest level since February. Despite improvements in some gauges of European credit angst, three-month euro Libor is rising another +1.3 basis points today to another multi-month high of 74.0 bps. The decline in the 10-year TIPS spread and the fall in the 10-year yield are also unwelcome at this point and indicate deflation worries continue to rise despite today's overseas stock rally and recent bounce in the euro. China Iron Ore Spot prices have now declined over -30% since April. Lumber looks like it is rolling over again, falling -4.5% today. Based on some of the investor angst gauges I follow, it appears too many may be positioned for the bounce higher I had expected, which is also a negative. I expect US stocks to trade mixed-to-lower into the close from current levels on technical selling, more shorting, rising economic fear and increasing real estate sector pessimism.
Office Vacancy Rate in U.S. Climbs to 17-Year High, Reis Says. Office vacancies in the U.S. rose to the highest level since 1993 in the second quarter as the sluggish economic recovery damps demand from corporate tenants, Reis Inc. said in a report. The vacancy rate climbed to 17.4 percent from 16 percent a year earlier and 17.3 percent in the first quarter, the New York-based research company said today in a statement. Effective rents, the amount tenants actually pay landlords, fell 5.7 percent from a year earlier and 0.9 percent from the previous three months, according to Reis. Private employers made fewer hires in June than economists had forecast, reinforcing concerns the recovery will weaken, the Labor Department said July 2. Washington, D.C., remained the city with the lowest office vacancy rate, at 10 percent, according to the firm. New York vacancies stayed at 11.7 percent. Detroit had the highest vacancy rate, at 26.3 percent, amid declining employment in the auto industry, Reis said.
Service Industries in U.S. Expand Less Than Forecast. Service industries in the U.S. expanded in June at a slower pace than forecast, indicating the economy was beginning to cool entering the second half. The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, fell to a four-month low of 53.8 from 55.4 in May. The June figure was less than the median forecast of 55 in a Bloomberg News survey. The group’s index of new orders for non-manufacturing industries declined to 54.4 in June, the lowest this year, from 57.1 a month earlier. The employment gauge fell to 49.7 last month from 50.4. Export orders dropped to 48 in June, the lowest since February, from 53.5. A gauge of prices-paid fell to 53.8 from 60.6.
U.S. Banks Risk 'Untold Problem' as Muni Debt Holdings Swell. Citigroup Inc., State Street Corp. and U.S. Bancorp are among U.S. banks whose municipal bond holdings have reached a 25-year high just as state budget deficits swell to $140 billion, the most since the start of the recession. Commercial lenders added more than $84 billion to their holdings since 2003, according to the Federal Reserve, pushing total investments to $216.2 billion at the end of the first quarter. Bank regulators and ratings companies are ramping up scrutiny of banks most at risk of being forced to raise more capital should debt prices slide. “There is a huge untold problem here,” said Walter J. Mix III, a former commissioner of the California Department of Financial Institutions who closed 30 banks during the last banking crisis in the 1990s. “The economics lead to the conclusion that there will be downward pressure on these bonds.”At Cullen/Frost Bankers Inc., the biggest Texas lender, holdings of municipal debt exceeded Tier 1 capital, a key measure of a bank’s ability to absorb losses, by $491 million at the end of the first quarter, data compiled by Bloomberg show. For State Street, based in Boston, the holdings make up 50 percent of Tier 1 capital. U.S. Bancorp, the Minneapolis lender, has a ratio of 28 percent. It’s 11 percent at Citigroup, the data show. Default speculation drove municipal bond yields to a 13- month high relative to U.S. Treasuries in the first half of the year. Now, the Federal Deposit Insurance Corp. has asked analysts to look into the issue, according to spokeswoman Michele Heller. Citigroup had the largest municipal holdings among the biggest banks, with $13.4 billion of state and local government bonds, according to FDIC call reports. Bank of America Corp. held $8.5 billion, Wells Fargo & Co. owned $7.6 billion and JPMorgan Chase & Co. held $4.5 billion. Each accounted for less than 8 percent of Tier 1 capital, according to the FDIC. U.S. states are likely to face $140 billion in cumulative budget gaps in the coming year, according to the Center on Budget and Policy Priorities. Last year, 187 tax-exempt issuers defaulted on $6.4 billion of securities, the most since 1992, according to data from Distressed Debt Securities in Miami Lakes, Florida. “It’s a market where it’s clear that the underlying fundamentals are lousy,” said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc., a New York- based brokerage. “People can say fundamentals don’t matter but I’ve been doing this for 32 years. They do.”
Sovereign Default Risk Climbs Average 30%, CMA Says. The cost of insuring sovereign debt against default climbed 30 percent on average last quarter amid Europe’s escalating fiscal crisis, according to CMA DataVision. Credit-default swaps on 93 percent of the 70 governments tracked by CMA rose, with Greece temporarily overtaking Venezuela as the country with the world’s highest bond risk, the CME Group Inc. unit said in a report published today. “The major widening action in European sovereign credits indicates that the eurozone remains the hub and focus of the global debt crisis,” according to CMA’s Global Sovereign Credit Risk report. “None of the Western European sovereign credit- default swaps tightened.” Protection costs for the quarter’s worst European performers more than doubled, with swaps on Greece soaring 190 percent, Belgium climbing 168 percent, Spain 129 percent and Portugal 127 percent, the report said. Swaps on South Korea climbed 65 percent as tensions with neighboring North Korea mounted when a warship sank, making it Asia’s worst-performing sovereign. With a 2 percent increase Vietnam was Asia’s best performer. The cost of insuring Australia’s debt increased 52 percent after a new mining tax was levied on resource companies. The U.S. was one of eight nations whose default swaps showed improvement in the quarter, falling 2.4 percent, according to CMA.
Commodity prices are tracking swings in equities more closely than at any time on record, undermining the traditional role of investments in raw materials as a hedge against financial-market volatility, Commerzbank AG said. Inflows into structured notes, and exchange-traded and commodity-index-linked funds reached $8.6 billion in May, the second-highest on record, taking assets under management to $291 billion, Barclays Capital said. "Investors are looking to diversify their holdings and are likely to trim their investments in commodities should the strong correlation between commodities and equities continue," Commerzbank analyst Eugen Weinberg said. As of July 2, the correlation between weekly percentage changes in the S&P 500 and CRB was .73, from as low as minus .35 in August 2008.
BNP Says Europe Should Be Ready to Break From U.S. Over Rules. BNP Paribas SA Chairman Michel Pebereau said European countries should be prepared to break from the U.S. on bank capital requirements and bonus rules if such regulations risk harming their economies. “There is a necessity, which is not to overreact at the level of regulation,” Pebereau said at the Europlace conference in Paris today. “At this period of time, it is clear we have a different situation if we compare the U.S. and Europe. The priorities are not the same.” His remarks reflect concern on the part of banking executives across Europe that Group of 20 plans to raise capital requirements risk choking off growth in the region, which is more dependent on banks for financing than the U.S. Within the G-20, the U.S. is pushing for faster implementation of new rules while European governments want a phasing-in period. “If we overreact on the field of banking regulation, we’re going to have a problem on the level of financing the economy in Europe,” Pebereau said. “The future of growth in Europe is totally dependent on that. It would be better to have good regulation in Europe than to try to have global regulation in which Europe will not be able to have growth.” He also expressed concern that stricter application of rules on banker pay than elsewhere risks driving business away. “We’re not on a level playing field,” Pebereau said, speaking in English. “In the U.S., there is a very low level of regulation for compensation. If in Europe we have very high level of regulation, you will have a situation in which it is no more possible for European banks to be competitive.”
Wall Street Journal:
BP(BP) Won't Issue New Equity to Cover Spill Costs. BP PLC killed speculation Tuesday that it was looking for a white knight investor to take a large equity stake in the company by saying it won't issue new equity to raise money to cover the costs of the oil spill in the Gulf of Mexico.
U.S. to Challenge Arizona Immigration Law. The Justice Department is expected later Tuesday to file its long-expected challenge to an Arizona state law intended to crack down on illegal immigration, two administration officials said. The law passed in April and set to take effect later this month makes illegal immigration a state crime and requires police to verify the immigration status of people stopped for other alleged crimes.
Bloomberg Businessweek:
Crude is Poised to Test New Lows This Year: Technical Analysis. Crude oil is poised to resume its decline and test new lows for the year in the weeks ahead, according to a technical analysis by Barclays Capital. Crude futures are “heading to the lows last seen in July 2009,” MacNeil Curry, a Barclays analyst in New York, said in a telephone interview. “The bigger picture includes a trend in risk aversion, and we are seeing equities and risk assets breaking down pretty hard.” “Volume is picking up as we break down and volume tends to go with the trend, so it all points to further weakness,” Curry said. “Other commodities are trending down. The S&P is breaking down and risk assets will remain under pressure.”
CNBC.com:
Italy Is the Ticking Time Bomb: Economist. As Silvio Berlusconi’s government calls for a vote of confidence over his unpopular €25 billion ($31.45 billion) austerity package, Roger Bootle and his team over at Capital Economics are questioning whether the country holds great danger for the euro zone.
Shell to Award Deals to Develop Iraq's Oil Field. Shell and its Iraqi state partner are in the process of awarding a deal to drill new oil wells at Iraq's super giant Majnoon oil field in southern Iraq, the head of Iraq's state-run South Oil Co. Dhiaa Jaafar said Tuesday. Shell, which partnered Malaysia's state-run Petronas to develop Majnoon, will also award engineering, procurement and construction deal to build various production installations at the field, an Iraqi oil industry source familiar with the project said. Separately, the Iraqi oil industry source said that firms including Halliburton, Weatherford International, and Petrofac have been invited to submit bids for these two tenders. Shell said earlier that it was planning to drill 15 new wells over the next two years at Majnoon, that would help lift production to 175,000 barrels a day by 2012 from current 45,000 barrels a day. The Anglo-Dutch super major and Petronas were awarded a contract in December to develop the Majnoon field, which is located in Basra governorate and holds some 12.6 billion barrels of proven oil reserves. Shell owns 45% of the venture and Petronas 30%, with Iraq's state-run Missan Oil holding 25%.
The Hill:
EBay(EBAY) Opposes Delahunt Bill That Would Expand States' Reach on Online Sales Tax. EBay is opposing federal legislation that would allow states to collect more sales taxes from online purchases. The legislation, introduced last week by Rep. William Delahunt (D-Mass.), would allow states to collect online sales taxes from all retailers, and not just those with a “physical presence” in the state. While supporters have argued it would level the playing field among businesses, eBay said the bill would stunt economic growth. “Year after year supporters of increased Internet sales taxes recommend legislation that would impose significant new costs on hundreds of thousands of online small businesses and e-commerce entrepreneurs, which is sure to harm the economy and kill small business jobs,” the company’s vice president for government relations, Tod Cohen, said in a statement. “At a time when unemployment rates are high and small businesses across the country are closing shop, we are confident that Congress will protect small internet retailers and the consumers they serve from another Internet tax scheme.”
National Real Estate Investor:
CMBS Delinquency Rate Slowing. In another sign that the commercial real estate market is reaching bottom, the delinquency rate on commercial mortgage-backed securities (CMBS) increased in June by the smallest amount in the past 12 months. According to a new report from New York-based researcher Trepp, the CMBS delinquency rate, defined as loans that are 30 days or more past due, climbed just 17 basis points in June to 8.59%. Still, that’s no cause to break out the bubbly just yet. The June delinquency level is, once again, the highest in the history of the CMBS industry. In fact, if defeased loans were taken out of the equation, the overall delinquency rate would be 9.15% - breaking the 9% threshold for the first time. It is also more than double the rate of 4.07% in June 2009.
Rasmussen Reports:
Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).
Reuters:
Sub-50% Chance of Double-Dip Recession - Fitch. The risk of a double-dip recession is less than 50 percent, Brian Coulton, managing director of European ratings at Fitch Ratings told Reuters Insider Television in an interview on Tuesday. "We still think it's a long way below 50 percent, it's not our central forecast at all," Coulton said of the risk of a double-dip recession. "We do think there are problems in certain sector in particular the Spanish saving sector, but by and large, the major Spanish banks look pretty strong to us," he said. Asked about stress tests gauging the health of the banking sector, Coulton said large Spanish banks looked "pretty strong to us."
Global PMI Sags in June as New Order Growth Tapers Off. The pace of global expansion in the private sector sagged in June to a four-month low, according to a survey on Tuesday that pointed to slowing growth in order books and employment. The Global Total Output index, produced by JPMorgan with research and supply management organisations, fell to 55.4 in June from 57.0 in May
Expansion:
Spanish lenders increased their net investment in the country's treasury debt in May to a record 153.3 billion euros from 147.5 billion euros in April. Spanish banks and savings banks therefore covered 84% of Spain's net state debt in May, citing data from the treasury. The net amount of debt in the hands of investors outside Spain fell by 2.2 billion euros to 206.4 billion euros.
NetEase:
BYD Co.'s China vehicle sales in June fell 21% to 35,356 units from May, citing the company. June sales rose 3% from a year earlier.
Spanish Savings Banks May Be Concealing Mortgage Losses, CreditSights Says. Spanish savings banks may be hiding losses on home loans by taking non-performing mortgages out of securitized transactions, according to CreditSights Inc. By carrying the bad loans on their own books the so-called cajas sidestep downgrades to their mortgage-backed securities, the independent bond research firm said in a report. The regional lenders helped fuel the nation’s real-estate bubble, which burst after the collapse of the U.S. subprime market. CreditSights follows a sample of 143 Spanish residential mortgage-backed securities collateralized by 136 billion euros ($170 billion) of loans, with about 45 percent originated by cajas. While the savings banks give little information about the state of their loan books, investor reports on the performance of the securitized debt suggest asset quality is weaker than at commercial lenders, CreditSights said. “Caja-originated mortgages are performing much worse than those extended by Spain’s commercial banks,” analysts David Watts, John Raymond and Hana Galetova wrote. By buying mortgages out of the pools “they could have been artificially reducing the level of bad loans in RMBS while simultaneously undermining the quality of the cajas’ own assets,” they wrote.
Euro Worst to Come for Most-Accurate Analysts as TD Securities Sees Parity. The most accurate foreign-exchange forecaster says the euro will continue to weaken and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy. Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the euro will depreciate to $1.13 in the third quarter, $1.08 by year-end and may near $1 in 2011 before recovering. Osborne, whose predictions were within 4.1 percent of the mark on average, according to data compiled by Bloomberg, was echoed by the nine following most-accurate forecasters anticipating a lower euro in the next two quarters.
China Property Market Beginning Collapse That May Hit Banks, Rogoff Says. China’s property market is beginning a “collapse” that will hit the nation’s banking system, said Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund. “You’re starting to see that collapse in property and it’s going to hit the banking system,” said Rogoff, 57, who also serves on the Group of 30, a panel of central bankers, finance officials and academics led by former Federal Reserve Chairman Paul Volcker. “They have a lot of tools and some very competent management, but it’s not easy.”
Record Profit Upgrades by Analysts Clash With El-Erian's Fizzling Recovery. Analysts are raising earnings estimates for U.S. companies at the fastest rate since at least 2004 just as stocks post the biggest losses in 16 months on concern that the economy will sink back into a recession. Profit for Standard & Poor’s 500 Index companies will jump 34 percent in 2010, compared with a projected gain of 27 percent on March 29, according to more than 8,000 estimates compiled by Bloomberg. The revision, the most during any quarter in at least six years, came as lower-than-forecast home sales, manufacturing and private-sector job growth sent the benchmark gauge for American equities down 16 percent since April 23.
Property Bonds Slump Most Since March '09 on Default Risk: Credit Markets. Bonds sold by real-estate companies are performing the worst compared with the rest of the market since March 2009 on concern the slowing economic recovery will cause more defaults. Yield premiums of bonds sold by real-estate investment trusts, shopping-mall owners and office landlords widened 9 basis points, or 0.09 percentage point, in June, more than those on other debt, and continued to rise this month, according to Bank of America Merrill Lynch indexes. Average spreads on real-estate bonds widened to 236 basis points more than benchmark government debt as of July 2, close to the highest spread in six months and up from 223 basis points at the end of May, Bank of America Merrill Lynch’s Global Corporates, Real Estate Index shows.
Commodities 'Relapse' May Last Through 1st Half of 2011, RBS's Moore Says. Commodities are in the early stages of a “price relapse” that may last through the first half of next year, said Nick Moore, head of commodity strategy at Royal Bank of Scotland Group Plc. The Reuters/Jefferies CRB Index tracking 19 raw materials slumped almost 9 percent in the first half of this year. Moore said prices are likely to drop further during the summer months in the Northern hemisphere, traditionally a period of lower demand for commodities. Declining prices for industrial metals, especially aluminum, are likely to trigger output cuts at smelters that are producing at levels close to, or at, a loss, he said. Supply surpluses, high inventories and a slowdown in imports into China, the biggest consumer of all industrial metals, are among factors weighing on prices, Moore said.
Crude Oil Drops for Sixth Day on Concern Over Slowing Chinese Recovery. Crude oil dropped below $72 a barrel in New York on concern that the pace of economic recovery is slowing in Europe and China, the world’s second-largest energy consuming nation, signaling global fuel demand may stall. Oil declined for a sixth day as the China Automotive Technology & Research Center said car sales growth slowed in June. European stocks declined for a fifth day, the longest losing streak in a year, as a report showed growth slowed in the region’s services and manufacturing industries. “Crude has come under a bit of pressure because of worries about the global economy,” said Peter McGuire, managing director of CWA Global Markets Pty in Sydney. “Sentiment is negative. Looking at mature markets, it’s pretty bleak. Europe is looking terrible.” Crude oil for August delivery dropped as much as 88 cents, or 1.2 percent, to $71.26 a barrel in electronic trading on the New York Mercantile Exchange, and was at $71.43 at 10:35 a.m. Sydney time.
Nasdaq-100 Index Posts Record Losing Streak. Technology companies are suffering some of the U.S. stock market’s biggest losses, sending the Nasdaq-100 Index to the longest losing streak in its 25-year history. The measure, which gets 63 percent of its value from computer-related companies such as Microsoft Corp. and Apple Inc., has declined 9.7 percent after slumping 10 consecutive days.
China Car Sales Growth Slows to 10.9%, Adding to Signs Economy Is Cooling. China’s auto sales grew at a slower pace in June and a services-industry index slid to a 15-month low, adding to signs that the economy leading the world recovery is cooling. Passenger-car purchases rose 10.9 percent from a year earlier, down from May’s 25 percent gain, the China Automotive Technology & Research Center said today. The services-industry measure fell to 55.6 from 56.4, HSBC Holdings Plc and Markit Economics said in an e-mailed statement. Today’s data adds to weaker numbers in June for manufacturing indexes and a second measure of the services industry after the government cracked down on property speculation and as the effects of stimulus measures fade. A slowing economy could lead officials to delay returning to pre- crisis policies. “It looks like growth will slow to 8 percent in the fourth quarter of this year with risks on the downside,” said Paul Cavey, an economist with Macquarie Securities Ltd. in Hong Kong.
Emerging-Markets Equities May Decline on Weaker Commodities, JPMorgan Says. The “markers” of a correction in emerging-market stocks will be “large redemptions” in commodity funds and a slump in crude oil prices below the May low of $65 a barrel, analysts led by Adrian Mowat said in a July 4 report. This may occur this quarter, the analysts predicted. The Baltic Dry Index, a measure of shipping costs for bulk commodities, has dropped 46 percent in 26 straight sessions, the longest losing streak since August 2005. Crude oil prices have declined 8.9 percent since the start of the year, while copper has tumbled 12 percent this year.
RBI May Raise Rates Second Time This Month as Subbarao Has Eye on the Ball. India’s central bank signaled it’s set to raise interest rates again after an unscheduled increase last week, on concern that increased consumer spending and higher fuel prices will stoke inflation. The Reserve Bank of India, led by Governor Duvvuri Subbarao, on July 2 boosted the reverse repurchase and repurchase rates by a quarter point each, to 4 percent and 5.5 percent, and added it will “take further action as warranted.” Subbarao may follow with another quarter point at the bank’s next meeting on July 27, Royal Bank of Scotland Group Plc and Barclays Plc said. India is acting ahead of counterparts in Asia from South Korea and Indonesia to the Philippines and Thailand as dangers from the fastest inflation among the Group of 20 nations outweigh risks from Europe’s debt crisis.
K1 Hedge Fund Manager Frerichs Committed Suicide, German Prosecutors Say. Dieter Frerichs, a suspect in an international investigation into hedge-fund firm K1 Group, shot and killed himself to avoid arrest, Spanish police and German prosecutors said. Frerichs was a managing director of two British Virgin Island-based K1 investment funds, which were part of a scheme to defraud banks and thousands of private investors of more than 300 million euros ($376 million), said prosecutors in Wuerzburg, Germany. The prosecutors had sought extradition of Frerichs, 72, who was staying in Palma on the Spanish island of Mallorca.
Wall Street Journal:
Hedge Fund Lending Draws Scrutiny. Companies that borrow money from hedge funds often see a sharp rise in bets against their shares before the loans or loan amendments are announced, new research shows, suggesting that fund managers or others privy to these deals may be illegally trading ahead of the announcements. The sharp spike contrasts with little change in the short selling of companies that borrow money from banks, according to the research.
Consumer Agency's Path Will Be Set by First Chief. More than 400 pages of legislation detail the duties and powers of the Consumer Financial Protection Bureau that Congress is set to create. But the first director of the powerful new agency will play a critical role in determining how it works.
Fed's Fisher Warns of US Economic Slowdown. Dallas Federal Reserve President Richard Fisher said the timing of monetary tightening will depend on conditions in the U.S. economy, which will slow in the latter half of this year, Japan's Nikkei newspaper reported on Tuesday. Weakness in private consumption may hurt growth and politicians might call for an expansion of monetary easing, although there is little more the Fed can do, Fisher said in an interview with the economic daily. But Richmond Fed President Jeffrey Lacker was more optimistic, telling the Nikkei that private consumption and corporate capital investment will expand enough to keep the U.S. economy on a sustained recovery later this year and through next year. Europe's credit problems were unlikely to severely hurt the U.S. economy, with the impact on real GDP growth likely to be around 0.1 percent to 0.2 percent, he said. With the U.S. recovery sustained, the key would be whether to drop the U.S. central bank's promise to keep interest rates low for an "extended period" late this year, Lacker said.
Illinois Stops Paying Its Bills, but Can't Stop Digging Hole. Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo. He picks the papers off his desk and points to a figure in red: $5.01 billion. “This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office. Mr. Hynes shakes his head. “This is not some esoteric budget issue; we are not paying bills for absolutely essential services,” he says. “That is obscene.” For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget. Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up. States cannot go bankrupt, technically, but signs of fiscal crackup are easy to see.
60% Favor Repeal of Health Care Law. Sixty percent (60%) of voters nationwide favor repeal of the recently passed health care law, including 49% who Strongly Favor repeal. A new Rasmussen Reports national telephone survey finds that 36% oppose repeal. That figure includes 24% who are Strongly Opposed.
Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 24% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -20 (see trends).
Location-based Services Lure Users, Advertisers, Investors. If there were any lingering doubts about one of the hottest new technologies, a big investment and burgeoning membership numbers are proving that location-based services are about to go mainstream.
San Francisco Chronicle:
California's Bankruptcies Soar Despite Overhaul. Five years ago, bankruptcies soared to record levels as debt-strapped consumers raced to seek court protection before Congress changed the law to curb what had been considered an epidemic of filings. For a while, filings dropped, but the recession has forced so many people into dire straits that bankruptcies in California are setting new records.
Internet Products Ready to Challenge Cable TV. Internet television is fast coming into its own, as high profile players have announced a series of products and initiatives that promise to fundamentally alter the way consumers digest video content.
AP:
Dutch Agency Admits Error in UN Climate Report. A Dutch environment agency says the seminal U.N. scientific report on climate change is too generalized and has even more errors than previously noted — including one contributed by the agency itself. The agency acknowledged Monday it is responsible for the erroneous statement that 55 percent of the Netherlands is below sea level, when only 26 percent is. The report should have said 55 percent is prone to flooding. It found a few other mistakes in the 3,000-page U.N. report issued in 2007, and said future reports should have a more robust review process.
Reuters:
China June Power Demand Growth Slows Sharply - Paper. China's power consumption growth in June slowed down sharply, as power use in the country's heavy industry trended lower, the official Shanghai Securities News said on Monday. Growth in June power consumption fell significantly, after exceeding 20 percent year on year for the first five months of the year, the paper said, quoting an official familiar with the data, without giving further details. Demand growth in July and August will continue to slow "significantly" while the outlook for electricity supplies during the peak summer season will be "relatively optimistic." Severe summer power shortages are unlikely to happen this year as government policies to curb excessive growth in energy-intensive industries take effect, and as supply is expected to remain stable, Xue Jing, head of the statistics department of the China Electricity Council, was quoted as saying by the paper.
Greece Plans No Further Austerity Steps. Greece plans no new austerity measures, Finance Minister George Papaconstantinou said on Monday, rejecting Greek media speculation that the country would be forced by international lenders to make further cuts."There is no way that there will be new measures, enough with this," he told a news conference.
Financial Times:
BP Plc(BP) may replace Chairman Carl-Henric Svanberg and CEO Tony Hayward after its leading Gulf of Mexico well has been capped, citing shareholders. Action to replace the top team at BP may be taken after an investigation into the handling of the spill, citing a UK shareholder. The changes may be combined with an attempt to raise capital through a bond sale, citing a person close to the company. BP will make a statement about its liabilities from the leak on July 27, when it's scheduled to release its second-quarter earnings.
China Eyes Shake-Up of Bank Holdings. China is considering stripping its $200bn sovereign wealth fund of the country’s banking stakes, in a move that could free it of some restrictions when it invests in the US. People familiar with the matter said that, under the proposal, China Investment Corporation would no longer be responsible for holding the state’s majority stakes in the country’s biggest banks, such as Bank of China. The move would end CIC’s status as a bank holding company in the eyes of the Federal Reserve Bank of New York. That would liberate CIC of certain restrictions when it makes investments in the US, where it is believed to be targeting equities, bonds and real estate deals.
Investors Fear Rising Risk of US Regional Defaults. Investors are worried that the risk of default for US local governments is growing, amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits as some eurozone countries. The yield attached to some forms of infrastructure municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans. Absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy. But any swings in municipal yields will be watched closely by investors, since they suggest that the fiscal anxieties about the eurozone could now infect the US. “The risk in the second half of the year is that investor attention switches from Europe to the US,” said Robert Parker, senior adviser at Credit Suisse Securities, who singled out parts of California, as well as towns and cities in Illinois, Michigan and New York state as among the most vulnerable. “You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market.” If these market swings are sustained, they could push up borrowing costs for local governments, which, in turn, could exacerbate the squeeze on local authority finances and place more stress on the federal budget. Local municipalities can default and, depending on the state, file for bankruptcy. Should a state come to the brink, which is not expected at this time, many believe that it would be likely to receive federal support. The sharpest swings in the muni market have been seen in the $100bn so-called “Build America bonds” – or Babs – a type of US muni debt that has characteristics similar to corporate bonds. This sector has attracted a fresh investor base, which is now demanding greater compensation for risk.
Telegraph:
Spain May Need Financial Rescue, Says Merrill. Spain's debt crisis may force the country to tap the EU-IMF rescue fund over the next two to three months and set off a political storm, according a confidential report by the Bank of America Merrill Lynch.
Europe's 'toothless' Bank Tests Making Matters Worse. RBS and other City institutions have warned that Europe’s stress tests for banks are almost useless and may further damage confidence if they fail to cover the risk of large losses on sovereign defaults by Greece and other Club Med states. “I don’t think it is going to work,” said Jacques Cailloux, Europe economist at RBS. “These stress tests are not rigorous enough. Investors are already pricing in a 50pc “haircut” on some Greek bonds so this has to be included, and perhaps 30pc for Spain.” “We have had a complete failure of communication by the eurozone over recent months with 16 countries all saying different things, and there is a very high chance of another failure this time.” Mr Cailloux, who has issued a “double dip alert” for Europe, said it would be unwise for EU policy-makers to go holiday this summer. Markets are no longer willing to take on exposure to some €2 trillion of household and company debt in Spain, and this gap cannot be plugged for much longer by three-month loans from the European Central Bank. “If by the end of the summer we have not had much more aggressive policy action, we’re back to contagion. This time it is no longer just a peripheral story. It is starting to infect the core eurozone as well, France in particular. I cannot understand why the ECB is not buying Spanish corporate bonds,” he said.
North Sea Oil: Hopes Rise of the Biggest Discovery in a Decade. Estimates of reserves in a new North Sea discovery have been raised for the second time in two weeks and the third in a month after further drilling found more oil in an area that had been regarded as a poor prospect. The four-field Catcher complex, 110 miles south-east of Aberdeen, is now estimated to contain up to 350m barrels and with more wells planned could emerge as the biggest North Sea discovery in a decade. Recent discoveries have been in the "tiddler" category with reserves of between 20m-30m barrels.
TimesOnline:
BP Plc(BP) is seeking a strategic investor that would help the company thwart takeover bids. BP's advisers approached oil companies and sovereign wealth funds to take a stake of between 5% and 10% for as much as $9.1 billion.
IMF Wants Bank Levy Triple the Size of Osborne's Bailout Tax. UK banks asked to pay £6bn to curb industry excesses and help guard against the impact of future financial crises. The International Monetary Fund is pressing for Britain's banks to pay an annual levy of up to £6bn, to protect against the impact of future crises and curb the more reckless behaviour of the industry, far higher than George Osborne's plan for a £2bn bailout tax on the sector.
The Scotsman:
Lockerbie Bomber 'may live 20 years.' NEW demands have been made for the Scottish Government to release the full medical reports behind the decision to release the Lockerbie bomber last year. SNP ministers have been urged to come clean on the medical evidence following two conflicting, unconfirmed reports on the health of Abdelbaset Ali Mohmed al-Megrahi. One report suggested that medical treatment had been withdrawn, which means he has just weeks to live, while another suggested that he might survive for another ten to 20 years.
Frankfurter Allgemeine Zeitung:
Germany's largest banks oppose European regulators possible use of extreme assumptions to conduct stress tests for capital adequacy, citing bankers. Extreme criteria might generate distorted results and prompt a new crisis, bankers said at a June 30 meeting with national regulators. The tests would require higher writedowns on German government bonds than on French or even Greek ones.
WirtschaftsWoche:`
Insurance companies would survive a breakup of the euro, Axa SA CEO Henri de Castries said. The industry is also preparing for the possibility, even if it is unlikely, the magazine reported de Castries as saying.
De Tijd:
A "limited" number of banks in Europe will need state support after stress tests on lenders are completed, Jan Hommen, CEO of ING Groep NV, the biggest Dutch financial-services company, said.
Der Spiegel:
The additional stress tests planned by European regulators won't include a scenario in which states default. Such a scenario won't be used because it might suggest regulators have no trust in the euro-area rescue fund, the magazine said. Instead, the tests will assume that prices for credit default swaps for states including Spain and Portugal will rise.
SonntagsZeitung:
UBS AG and Credit Suisse Group AG may be required to double or triple their equity under new rules expected to be announced in late August or early September, citing a participant in discussions being held by an expert commission. The panel, charged with studying the "too-big-to-fail" issue, is also considering moves to ensure that banks' overseas units operate independently of their Swiss headquarters and that they have their own equity.
Nikkei:
Samsung Electronics Co. raised its target for this year's global flat-panel television sales. The South Korean company expects to sell between 45 million and 50 million units in 2010, from a previous target of 39 million.
Economic Observer:
China's National Development and Reform Commission will stop the approval process for local government bonds intended to fund infrastructure projects as a way to curb local government debt burden, citing an official at the commission.
Securities Times:
China's property prices will likely see a correction in about three months, citing Xu Shaoshi, minister of Land and Resources, as saying. The nation's current market sales volumes are falling and prices are stagnant, Xu said.
Weekend Recommendations Barron's:
Made positive comments on (AAPL), (ARO), (BAC), (XOM), (INTC), (CVH) and (PBR).
Made negative comments on (AVB).
Citigroup:
Reiterated Buy on (QCOM), target $45.
Night Trading
Asian indices are -.50% to +1.0% on average.
Asia Ex-Japan Investment Grade CDS Index 140.0 +7.0 basis points.
Asia Pacific Sovereign CDS Index 130.50 -5.0 basis points.
The ISM Non-Manufacturing Index for June is estimated at 55.0 versus a reading of 55.4 in May.
Upcoming Splits
None of note
Other Potential Market Movers
The ABC Consumer Confidence reading could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the week.
BOTTOM LINE: I expect US stocks to finish the week mixed as rising global economic pessimism and oil spill concerns offset short-covering, less sovereign debt angst and bargain-hunting. My intermediate-term trading indicators are giving mostly bearish signals and the Portfolio is 75% net long heading into the week.
