Monday Watch

Weekend Headlines
Bloomberg:

• EU Stress Tests May Be 'Missed Opportunity' to Fortify Banks. European Union stress tests found banks need to raise 3.5 billion euros ($4.5 billion) of capital, about a tenth of the lowest analyst estimate, leaving doubts about whether regulators were tough enough. “The stress tests are a helpful step forward in a number of areas,” Huw van Steenis, head of European banks research at Morgan Stanley in London, said on a conference call yesterday. “But they are not going to be the game changer that we were really hoping and in some cases are a missed opportunity.” The European tests ignored the majority of banks’ holdings of sovereign debt. Regulators don’t believe there will be a national default, European Central Bank Vice President Vitor Constancio said July 23. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity, CEBS said. “The fact that they did not stress the bank book is going to be seen as a weakness,” said Robert Talbut, chief investment officer at Royal London Asset Management Ltd., which oversees about $52 billion. “I don’t think the results of the tests will resolve anything.”
• BP(BP) Said to Prepare Dudley as CEO as Board Looks for Recovery. BP Plc to succeed plans to name Robert DudleyTony Hayward as chief executive officer as the board looks to recover the company’s position in the U.S., two people with knowledge of the matter said. Dudley, the director of BP’s oil spill response unit, is ready to be announced as the company’s first American chief and to take the helm Oct. 1, one of the people said, asking not to be identified because a final decision hasn’t yet been made.
• FINRA Said to Probe Morgan Stanley(MS), Credit Suisse, Barclays. A Financial Industry Regulatory Authority investigation of abuses in mortgage-linked investments has focused on the activities of Morgan Stanley, Barclays PLC and Credit Suisse Group AG, a person with direct knowledge of the matter said. The brokerage regulator has sought information on so-called synthetic collateralized debt obligations the firms created, according to the person, who declined to be identified because the inquiry is confidential. Finra has concentrated on whether the banks became mired in a conflict of interest by betting that their own CDOs, tied to home loans, would lose value.The probe has also focused on the firms’ sales practices and on how they picked the mortgage bonds that underpinned the investments, the person said.
• U.S. Condemns Release of Documents on Afghan War. The U.S. condemned as “irresponsible” the disclosure of about 92,000 classified documents on the war in Afghanistan covering the years 2004 through 2009. National Security Adviser James Jones said the release of the documents by the website Wikileaks could put lives at risk and threaten national security. The New York Times said the reports show the difficulties of fighting a war while hamstrung by “an Afghan government, police force and army of questionable loyalty and competence” and by a Pakistani military that at times appeared to be helping the insurgents the U.S. is trying to defeat. The Times said it obtained the documents several weeks ago from Wikileaks. “The United States strongly condemns the disclosure of classified information by individuals and organizations which could put the lives of Americans and our partners at risk, and threaten our national security,” Jones said in a statement issued by the White House yesterday. Wikileaks “made no effort to contact” the administration about the documents, he said.
• Genzyme(GENZ) Rally Prompts Two Circuit Breakers, Spurring Complaints. Genzyme Corp.’s rally after reports the drugmaker was approached about a takeover triggered two halts under market circuit breakers adopted in June, frustrating traders trying to speculate on the stock. Shares of the Cambridge, Massachusetts-based company were paused for five minutes at 1:18 p.m. New York time yesterday after surging 10 percent in less than a minute. A second halt began at 1:25 p.m., when Genzyme climbed another 10 percent.
• California City's $800,000 Manager Quits Amid Outcry. When Bell, California, resident Roger Ramirez heard in 2008 that the manager of his town of 38,000 residents may be the state’s highest-paid municipal employee, he asked City Hall. He got only part of the answer. City Clerk Rebecca Valdez sent him a one-page memo that gave Chief Administrative Officer Robert Rizzo’s annual salary as $185,736 and that of city council members as $8,076. “I should have asked for other benefits,” Ramirez, an emergency-call operator, said in a telephone interview. “I went in and just asked for the salary and that’s what they sent me.” Rizzo resigned July 22 after the Los Angeles Times reported July 15 that his total compensation was almost $800,000 a year and that Bell’s part-time council members took in almost $100,000 annually, mostly by serving on city-affiliated boards and commissions. Had Rizzo been an executive at a public company, his total compensation would have been available on the Securities and Exchange Commission’s website, a convenience not open to citizens or bondholders of local governments. “Transparency, there is none,” former Los Angeles Mayor Richard Riordan said of municipal disclosure in an interview. “The things they hide from the public are just monstrous.”
• Putin Sings Patriotic Songs From Soviet Era With 10 Deported Russian Spies. Russian Prime Minister Vladimir Putin met with 10 spies deported from the U.S. earlier this month and sang Soviet era patriotic songs with them. Their return was the result of betrayal by traitors whose names are known to the Russian state, Putin said in Ukraine yesterday, according to a Russian government website. “Traitors always end badly,” Putin said.
• Obama Defines Dysfunction With One Appointment: Kevin Hassett. If Democrats wonder why their political fortunes have shifted so much, they should study the appointment of Craig Becker to a body that adjudicates labor disputes. It captures everything that is wrong with the Obama administration in a nutshell. Republicans should study the case of Becker as well, as it illustrates everything that is wrong with Washington. Democrats should run from Becker; Republicans should run against him. One of President Barack Obama’s first acts in office was signing Executive Order 13502, which urged agencies to consider requiring that contractors who do government work use unionized workers.
• China Banks Said to See Risks in 23% of $1.1 Trillion Infrastructure Loans. Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator. About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said. Commission Chairman Liu Mingkang said last week borrowing by the so-called local government financing vehicles may threaten the banking industry. The nation’s five-largest banks, including Agricultural Bank of China Ltd., are raising as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year. “Unfortunately this smells just like déjà vu of China’s last banking crisis a decade ago,” said Shen Minggao, Hong Kong-based head of China research at Citigroup Inc. “Non- performing loans will increase as a result of last year’s lending spree, which to a certain extent was a delayed form of fiscal spending, and eventually the central government will step in and share the costs.”

Wall Street Journal:

• Website Releases Secrets on War. Thousands of secret military documents were released Sunday by a Web-based organization, a gigantic leak of classified information that appeared to present a bleak view of the Afghanistan war and could have a profound impact on the public perception of the conflict. The release of the documents, which were obtained and made public by the website WikiLeaks, evoked the Pentagon Papers, the secret history of the Vietnam War, which when published contradicted the public narrative of that war and played a role in turning public opinion against it. Coming at a time when President Barack Obama's Afghanistan strategy has come under increasing criticism, the release will likely stoke criticism of the war effort, as well as spark a debate about the manner in which the information was made available.
• Health Law Augurs Transfer of Funds From Old to Young. The new health care law changes how the government spreads its social safety net, by tapping a program for the elderly to help provide insurance to 32 million Americans of younger generations.
• Greek Truck Drivers Call Indefinite Strike Against Reforms. Greek truck drivers have called an indefinite strike beginning 2100GMT Sunday in protest at reforms to open up their profession proposed by the government. Liberalizing and opening up so called "closed professions" like transportation is one of the tough reforms that the socialist government has promised the European Union and the International Monetary Fund it will carry out, in exchange for access to a EUR110 billion bailout package. The truck drivers' main point of contention is that within three years of the passage of the proposed liberalization bill, the expensive vehicle licenses that they had purchased from the state--which until now tightly regulated the sector--will be worthless. "We vow to fight these reforms until the bitter end," said Giorgos Tsamos, president of the truckers' union.
• Genzyme(GENZ) Catches Eye of Others. France's Sanofi-Aventis SA may not be the only large drug maker to set its eyes on struggling biotechnology company Genzyme Corp. After news of Sanofi's interest in the U.S. company became public Friday, investors and bankers are scrambling to find out whether Sanofi's rivals could also be interested in making a play for Genzyme, which makes drugs for rare, inherited disorders. Britain's GlaxoSmithKline PLC(GSK) and New Jersey-based Johnson & Johnson(JNJ) are seen as the most logical suitors for Genzyme, bankers and analysts said.
• The Democratic Fisc. The White House budget office offers a scorecard on Obamanomics.

Bloomberg Businessweek:

• Commodity Traders Boost Bets on Price Gains by 50%, Data Shows. Commodity traders increased bets on price gains for raw materials by 50 percent in the past two weeks at futures exchanges in New York and Chicago. Hedge-fund managers and other large speculators held net- long position in gold, copper, crude oil and 17 other commodities totaling 782,247 contracts in the week ended July 20, according to data from the U.S. Commodity Futures Trading Commission compiled by Bloomberg. That compares with 520,530 contracts in the week ended July 6. The 50 percent gain was the biggest two-week jump since May 2009.
• Anadarko(APC), BP(BP) Lead Energy Bonds in Biggest Gains: Credit Markets. Energy bonds are leading corporate debt returns this month after BP Plc sealed a well that had been spewing oil into the Gulf of Mexico and investors wagered on higher demand for petroleum in the global economic recovery.

CNBC:

• 5 New Internet Companies You Should Know About.

NY Post:

• The Fix Was In. In 2007, when Washington Post blogger Ezra Klein founded JournoList, an online gathering place for several hundred liberal journalists, academics and political activists, he imagined a discussion group that would connect young writers to top sources. But in the heat of a bitter presidential campaign in 2008, the list’s discussions veered into collusion and coordination at key political moments, documents revealed this week by The Daily Caller show.

Business Insider:

• JPMorgan(JPM) Shreds The Stress Tests, Says 54 Banks Should Have Failed, And That Investors Will Lose Confidence. Here are the key bullet points:
• If Obama Doesn't Nominate Elizabeth Warren, He's Going to Infuriate His Base. There's been some chatter that perhaps President Obama might not nominate Elizabeth Warren to head the Consumer Financial Protection Agency (her brainchild, basically), especially since Tim Geithner was said to oppose the nomination.
• There Are Now 40% More Chinese Property Loans Than Just One Year Ago. Outstanding property loans held by Chinese financial institutions in June were 40.2% higher year over year according to the People's Bank of China (PBOC).
• Tim Geithner: Sorry, We're Letting The Bush Tax Cuts Expire. If you're still holding out hope that perhaps the Obama administration is going to keep the Bush tax cuts, you can stop that now. Tim Geithner is making the administration's views known pretty clearly.

Zero Hedge:

• How Goldman's(GS) Counterparty Valuation Adjustment Desk Saved the Firm From an AIG Blow Up(And Opens Up a Whole New Can of Wormy Questions). In today's NYT, Gretchen Morgenson does a good summary of how Goldman was demonstratively net short AIG (or net long its CDS, depending how you look at it) via nearly 100 counterparties to the tune of just over $1.7 billion in net notional, after Chuck Grassley released several previously classified documents disclosing Goldman's CDS position as of September 15, 2008, the day of Lehman's bankruptcy.
• German Banks Hiding Stress Test Data Further Undermine Geithner's European Scammery Tour. Hot on the heels of our earlier disclosure that the Landesbank stress test passage is either a joke or a scam, comes the knowledge that 6 out of the 14 tested German banks, including Landesbanks, have decided against posting their stress test details, specifically withholding the breakdown of their sovereign debt holdings.

NJ.com:

• Centenary College Closes Satellite Schools in China, Taiwan After Finding Rampant Cheating. Centenary College is closing its satellite business schools in China and Taiwan after discovering rampant cheating among local students, campus officials said. The cheating was so extensive that the Hackettstown college is withholding degrees from all 400 Chinese-speaking students in its master’s of business administration programs in Beijing, Shanghai and Taiwan, said Debra Albanese, Centenary’s vice president for strategic advancement. The students were told they have until the end of the month to decide whether to take a comprehensive exam to earn their degree or accept a full tuition refund So far, school officials said, most students have opted for the refund of their $1,200-to-$1,400 tuition. Centenary isn’t the first college to run into problems regarding academic integrity in China, which has a long history of student-cheating scandals.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 25% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-five percent (45%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -20 (see trends).

Politico:

• Veto Likely on Bills Blocking EPA Regs. President Barack Obama would veto legislation suspending the EPA's plans to write new climate change rules, a White House official said Friday. Coal-state Democrats, led by Sen. Jay Rockefeller (W. Va.), Reps. Rick Boucher (Va.) and Nick Rahall (W. Va), are trying to limit the federal government’s ability to control greenhouse gases from power plants. The coal-state proposals, which would block the Environmental Protection Agency's authority for two years, would undercut what is widely seen as Obama’s alternative climate policy, now that Congress has punted on cap-and-trade legislation for the year. The Obama aide said the proposals won’t win the president’s signature if they managed to pass on Capitol Hill.
  

USA Today:

• Quarterly Economic Forecast Takes a Turn for the Worse. More than eight in 10 economists surveyed by USA TODAY have downgraded their economic outlook amid the European debt crisis and a flurry of disappointing reports, but nearly all expect the nation to avoid a double-dip recession.

AP:

• White House Predicts Record $1.47 Trillion Deficit. New estimates from the White House on Friday predict the budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends. Next year's predicted $1.42 trillion worth of red ink — that's 37 cents of borrowing for every dollar spent — is looking worse. It's about $150 billion more than previously predicted, because of still-slumping tax revenues. The new estimates paint a grim unemployment picture as the economy experiences a relatively jobless recovery. The unemployment rate, presently averaging 9.5 percent, would average 9 percent next year under the new estimates. The Office of Management and Budget report has ominous news for President Barack Obama should he seek re-election in 2012 — a still-high unemployment rate of 8.1 percent. That would be well above normal, which is closer to a rate of 5.5 percent to 6 percent. Private economists don't think the unemployment rate will drop to those levels until well into this decade. The gaping deficits are of increasing concern to voters. But Obama and Democrats controlling Congress are mostly taking a pass on deficit reduction this year as they await possible recommendations from Obama's deficit commission.

Reuters:

• Chavez Threatens U.S. Oil Cut in Colombia Dispute. Venezuelan President Hugo Chavez threatened on Sunday to cut oil supplies to the United States in case of a military attack from Colombia as a dispute escalated over charges his country harbors Colombian rebels.

Financial Times:

• Merger Arbitrage Funds Eye Takeover Revival. Investors are rushing to put money into merger arbitrage funds ahead of an expected recovery in dealmaking in spite of growing fears for the health of western economies. After a dearth of M&A for much of the past two years, the first half of 2010 has seen a series of start-ups of hedge funds looking to profit from higher levels of takeover activity. Merger arbitrage specialists, which aim to profit from the spread between a target group’s share price after a takeover announcement and the closing price at completion of the deal, have seen $841m in net inflows since January, according to Hedge Fund Research. Managers see increasing opportunities to put new money to work. “M&A activity tends to go in cycles. There is a growing view that we’re at the beginning of a new cycle,” Gerard Griffin, head of GLG Partners’ event-driven team, said. “Companies have built up larger cash balances and the economy is not looking particularly strong, so earnings growth will have to come through synergies.”
• Goldman(GS) Threatened With Audit by US Panel. Goldman Sachs is facing a threat by the Financial Crisis Inquiry Commission to bring in outside accountants to comb through the bank’s systems for data on its derivatives business, the panel’s chairman has said. The commission will not back down from demands for information Goldman’s executives have maintained they do not track, Phil Angelides told the Financial Times. “We have a deep level of questioning about whether we’re getting the straight scoop here and whether Goldman is working with us on information that they surely have,” Mr Angelides, chairman of the US Congress-appointed commission.His comments mark the latest episode in the dispute between Goldman and the commission, which has scolded the bank for its “abysmal” response to the inquiry.

Telegraph:

• Obama signs a bill that lets banks have US over a barrel once more. "Because of this law, the American people will never again be asked to foot the bill for Wall Street's mistakes," Obama boomed at the schmaltzy signing ceremony, amid bursts of applause. "These reforms will put a stop to a lot of the bad loans that fuelled this debt-based bubble," the President gushed to America and the rest of the world. "This bill also empowers consumers, delivering the strongest consumer financial protections in history." It would be reassuring if we could agree with Obama, concluding that Dodd-Frank will help to prevent the next systemic crisis and associated bail-out of "too-big-to-fail" banks. Reassuring, but wrong. For despite some marginal regulatory improvements, this is no Rooseveltian legislative milestone. Amid the hype and back-slapping of last week's launch, the sad reality is that Dodd-Frank fails to address the fundamental problems that resulted in the sub-prime fiasco and the related damage to not just America, but the entire global economy. The inherent feebleness of this door-stopping bundle of statute and its lack of desperately needed substance, was brilliantly captured by Laurence Kotlikoff, a highly-respected professor of economics at Boston University. "This law is like being invited to dinner and served pictures of food," Kotlikoff remarked. It would be tempting to smile at such a wry observation if the situation it described wasn't so depressing. For what the US political establishment's non-response to the credit crunch illustrates is this: such is the lobbying power of the big Wall Street institutions that they not only caused a global economic crisis and then forced the US government to pay for a massive bail-out, but then used a slice of that bail-out cash to bribe politicians with campaign donations in order to block rule changes that might prevent a repeat performance. That leaves the politicians and high-flying bankers happy, of course, while regular citizens – and their children and grandchildren – foot the multi-billion dollar bill. The principal function of a financial services industry is to link savers with investors and creditors with borrowers, so facilitating broader commercial activity. Such intermediary functions are crucial to economic progress and can be the basis of a profitable and socially useful business. What we've created, instead, is a group of institutions that between them comprise nothing less than a financial oligarchy. These guys have Western taxpayers over a barrel. And what's alarming is that there is almost nothing in this bill that will stop yet more too-big-to-fail calamities. Mr President, you have missed a historic opportunity and, for that, history's judgment will be severe.

Kathimerini:

• Greece's economy will shrink further in the second half of the year with the full-year contraction seen at 4%, citing comments from a European Union official. Greece's economy will begin recovering from the middle of next year, Servaas Deroose, deputy director general of the European Commission's economic and financial affairs department, said in an interview. Deroose is a member of the team of EU and IMF officials who begin an evaluation of Greece's austerity measures under a $137 billion package of rescue loans this month.

Der Spiegel:

• Death Toll Rises to 19. Focus Shifts to Organizers after Love Parade Stampede. German officials confirmed on Sunday that 19 people died and 342 were injured during the mass panic that turned Saturday's Love Parade in Duisburg into a tragedy. Prosecutors have launched an investigation, with initial questions focusing on the organizers' crowd control strategy.

O Globo:

• Petroleo Brasileiro SA(PBR) plans to begin oil production at its Tupi field in the Campos Basin by September, three months earlier than previously forecast, citing an aide to President Luiz Inacio Lula da Silva. Petrobras plans to produce as much as 100,000 barrels of crude a day in five wells.
  

The Economic Times:

• Documents Detail $4.3 Billion in Goldman Sachs(GS) Payouts. A new document discloses the list of banks and hedge funds that received $4.3 billion from Goldman Sachs after the government's bailout of AIG.
  The money was to cover bets that went bad because of the housing bust. According to Republican Sen. Chuck Grassley, American International Group owed the money to Goldman, and Goldman owed the money to the banks and hedge funds. Grassley released the documents, which were supplied by Goldman, showing the payments late on Friday. They include $1.18 billion to DZ Bank AG in Germany and $484 million to Banco Santander Central Hispano SA of Spain. The payments have been controversial because of concerns that the banks should have taken greater losses on their investments rather than be made whole with money that ultimately came from taxpayers.

Shanghai Securities News:

• China's central government plans to issue rules for the "cleanup" of local government financing vehicles. The National Development and Reform Commission, the Ministry of Finance, the People's Bank of China and the China Banking Regulatory Commission plan to jointly issue the rules. Financing vehicles that rely on fiscal government funds to repay loans will no longer be allowed to borrow.
• China plans to announce additional regulations limiting local government liability for debt issued by their financing arms, according to a draft of the proposed rules. Local governments will no longer be able to back financing vehicle debt with revenues or government assets.

China Business News:

• China should maintain the direction of its property measures, central bank adviser Xia Bin wrote in a commentary. Property measures should not be implemented too quickly as China's economic growth may slow in the second half, Xia wrote. Real estate should be treated as a consumer good and not a financial good, Xia wrote.

China Daily:

• Checks of children in the southwestern Chinese province of Yunnan have found 84 kids with excessive levels of lead in their blood, citing the local government.
• China's export growth will slow in the second half of this year on effects from the European debt crisis, inflation expectations and higher costs, citing Zhang Yansheng, a researcher at the National Development and Reform Commission.
  

Financial News:

• Jia Kang, head of the Chinese Ministry of Finance's research institute, said the nation's state-owned companies should pay more dividends to the government. The government should also sell more of its shares in state-owned companies while keeping a controlling stake in the enterprises, Jia said.

China Securities Journal:

• There is no basis for a large-scale appreciation of the Chinese currency, citing a report from the State Information Center, a research unit of the nation's top economic planning agency. The report called for close monitoring of cross-border capital flows and speculative funds that might boost the yuan and hurt China's exports.
• China will introduce credit-default swaps before the end of this year, citing Shi Wenchao, secretary general of the National Association of Financial Market Institutional Investors. The contracts can be a "life buoy" to protect investors because there is a "very large" amount of corporate bonds, financial debt and loans in China, Shi said.
  

Sydney Morning Herald:

• Abu Dhabi Feels Dubai Chill as Emirate Accepts Money is Scarcer. Times have changed for the Alimad Engineering and Contracting Company in Abu Dhabi. Two years ago, the developer was building everything from 20-story glass towers to luxury villas. It's now shelving projects, the latest a $US12 million contract with a client who has $US2 million and the banks won't give him any more money, said Ziad Ali, whose father founded the company 20 years ago. "When investors don't get funding, we don't get their business," Ali, 24, said by telephone from his office. If the palm-shaped islands and skyscrapers of Dubai came to symbolize the excesses of the economic boom in the Gulf, the less glitzy Abu Dhabi represented the sobriety. Yet after Abu Dhabi, home to more than 7 per cent of the world's oil supply, spent $US20 billion bailing out its desert neighbor, it too is having to accept the financial crisis is catching up.

Weekend Recommendations
Barron's:

• Made positive comments on (AAPL), (AFL), (CBI), (TEL), (WMS), (SLW), (MSFT), (PAAS), (SLV) and (RSG).

Citigroup:

• Reiterated Buy on (SLB), target $77.
• Reiterated Buy on (VECO), target $52.

Night Trading

• Asian indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 118.0 -3.0 basis points.
• Asia Pacific Sovereign CDS Index 115.0 -4.0 basis points.
• S&P 500 futures +.15%.
• NASDAQ 100 futures +.29%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LM)/.32
• (PCL)/.15
• (FLR)/.70
• (VECO)/.84
• (ADVS)/.17
• (SLG)/1.01

Economic Releases
10:00 am EST

• New Home Sales for June are estimated to rise to 311K versus 300K in May.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Chicago Fed National Activity Index for June and the Dallas Fed Manufacturing Activity Index for July could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 100% 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 higher on diminishing sovereign debt angst, short-covering, less financial sector pessimism, technical buying and bargain-hunting. My intermediate-term trading indicators are giving mixed signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 1,102.66 +3.55%*



The Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices

• S&P 500 1,102.66 +3.55%
  
• DJIA 10,424.62 +3.24%
  
• NASDAQ 2,269.47 +4.15%
  
• Russell 2000 650.65 +6.59%
  
• Wilshire 5000 11,386.87 +3.89%
  
• Russell 1000 Growth 493.52 +4.07%
  
• Russell 1000 Value 564.76 +3.26%
  
• Morgan Stanley Consumer 678.39 +2.94%
  
• Morgan Stanley Cyclical 865.50 +7.05%
• Morgan Stanley Technology 563.43 +3.39%
  
• Transports 4,369.71 +6.09%
  
• Utilities 386.76 +2.41%
  
• MSCI Emerging Markets 40.87 +4.49%
  
• Lyxor L/S Equity Long Bias Index 951.17 -.69%
  
• Lyxor L/S Equity Variable Bias Index 845.26 -.53%
  
• Lyxor L/S Equity Short Bias Index 897.26 +.39%
  

Sentiment/Internals

• NYSE Cumulative A/D Line +89,958 +2.58%
  
• Bloomberg New Highs-Lows Index +11 +140
  
• Bloomberg Crude Oil % Bulls 29.0 +20.8%
  
• CFTC Oil Net Speculative Position +36,145 +4.33%
  
• CFTC Oil Total Open Interest 1,214,183 -4.87%
  
• Total Put/Call .83 -24.55%
  
• OEX Put/Call 2.87 +143.22%
  
• ISE Sentiment 114.0 72.73%
  
• NYSE Arms 1.02 -81.95%
  
• Volatility(VIX) 23.47 -10.59%
  
• G7 Currency Volatility (VXY) 12.15 -3.11%
  
• Smart Money Flow Index 8,716.0 -.06%
  
• Money Mkt Mutual Fund Assets $2.798 Trillion -.60%
  
• AAII % Bulls 32.16 -18.31%
  
• AAII % Bears 45.03 +19.13%
  

Futures Spot Prices

• CRB Index 266.62 +1.68%
  
• Crude Oil 78.98 +3.69%
  
• Reformulated Gasoline 212.22 +3.84%
  
• Natural Gas 4.58 +.84%
  
• Heating Oil 205.05 +2.01%
  
• Gold 1,187.80 -.44%
  
• Bloomberg Base Metals 197.15 +4.09%
  
• Copper 318.50 +8.43%
  
• US No. 1 Heavy Melt Scrap Steel 323.33 USD/Ton unch.
  
• China Hot Rolled Domestic Steel Sheet 4,138 Yuan/Ton +6.40%
• S&P GSCI Agriculture 331.64 -.16%
  

Economy

• ECRI Weekly Leading Economic Index 120.70 unch.
  
• Citi US Economic Surprise Index -37.0 -3.5 points
  
• Fed Fund Futures imply 63.40% chance of no change, 36.60% chance of 25 basis point cut on 8/10
• US Dollar Index 82.46 +.04%
  
• Yield Curve 240.0 +7 basis points
  
• 10-Year US Treasury Yield 2.99% +7 basis points
  
• Federal Reserve's Balance Sheet $2.315 Trillion -.36%
  
• U.S. Sovereign Debt Credit Default Swap 36.31 -4.72%
• U.S. Municipal CDS Index 218.53 -2.65%
  
• Western Europe Sovereign Debt Credit Default Swap Index 127.77 -4.32%
  
• 10-Year TIPS Spread 1.77% +5 basis points
  
• TED Spread 35.0 -3 basis points
  
• N. America Investment Grade Credit Default Swap Index 107.42 -2.88%
  
• Euro Financial Sector Credit Default Swap Index 121.27 -3.68%
  
• Emerging Markets Credit Default Swap Index 231.19 -5.92%
  
• CMBS Super Senior AAA 10-Year Treasury Spread 267.0 -2 basis points
  
• M1 Money Supply $1.705 Trillion -1.25%
• Business Loans 596.30 +.51%
  
• 4-Week Moving Average of Jobless Claims 456,000 +.3%
  
• Continuing Claims Unemployment Rate 3.5% -20 basis points
  
• Average 30-Year Mortgage Rate 4.56% -1 basis point
  
• Weekly Mortgage Applications 753.50 +7.60%
  
• ABC Consumer Confidence -45 -1 point
  
• Weekly Retail Sales +2.90% -20 basis points
  
• Nationwide Gas $2.72/gallon unch.
  
• U.S. Cooling Demand Next 7 Days 25.0% above normal
• Baltic Dry Index 1,801 +5.94%
  
• Oil Tanker Rate(Arabian Gulf to U.S. Gulf Coast) 42.50 -5.56%
  
• Rail Freight Carloads 227,661 +17.99%
  
• Iraqi 2028 Government Bonds 83.47 -.33%
  

Best Performing Style

• Small-Cap Growth +6.69%

Worst Performing Style

• Large-Cap Value +3.26%

Leading Sectors

• Steel +12.75%
• Coal +11.39%
• Oil Tankers +9.01%
• Papers +8.73%
• Construction +7.46%

Lagging Sectors

• Disk Drives +.75%
• Computer Hardware +.19%
• HMOs -.25%
  
• Medical Equipment -.37%
• Drugs -1.35%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Higher into Final Hour on Falling Sovereign Debt Angst, Less Economic Fear, Short-Covering, Technical Buying

Broad Market Tone:

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

Equity Investor Angst:

• VIX 23.55 -4.38%
  
• ISE Sentiment Index 119.0 +4.39%
  
• Total Put/Call .80 -1.23%
  
• NYSE Arms 1.01 +46.76%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 107.42 bps -1.34%
  
• European Financial Sector CDS Index 123.38 bps +2.52%
  
• Western Europe Sovereign Debt CDS Index 127.67 bps -3.19%
  
• Emerging Market CDS Index 231.53 bps -.90%
  
• 2-Year Swap Spread 24.0 +3 bps
  
• TED Spread 35.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .15% unch.
  
• Yield Curve 241.0 +4 bps
  
• China Import Iron Ore Spot $127.0/Metric Tonne +1.76%
  
• Citi US Economic Surprise Index -37.0 -.2 point
  
• 10-Year TIPS Spread 1.76% +1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +115 open in Japan
• DAX Futures: Indicating +24 open in Germany

Portfolio:

• Higher: On gains in my Medical, Retail, Biotech and Technology long positions
  
• Disclosed Trades: None
  
• Market Exposure: 100% Net Long

BOTTOM LINE: Today's overall market action is very bullish as the S&P 500 trades near session highs, despite worries over the usefulness of the European bank stress test results. On the positive side, Education, Road&Rail, Gaming, Steel, Alt Energy, Construction, Homebuilding, Paper and Ag stocks are especially strong, rising 1.5%+. Small-cap and cyclical shares are outperforming again and the Transports continue to trade very well, moving convincingly through their 50-day moving average. Copper is rising another +.9%. The European Investment Grade CDS Index is falling another -1.5% to 110.92 bps. The UK sovereign cds is falling another -4.98% to 69.83 bps, which is the lowest level since mid-March. The 10-year yield is rising +5 bps to session highs, which is also a positive. China Import Iron Ore spot continues its recent bounce higher after sharp declines and lumber has traded better over the last 4 days, rising another +1.44% today. On the negative side, Drug, Restaurant, Oil Service and Utility shares are lower on the day. The Hungary sovereign cds is climbing +2.8% to 344.31 bps and the 2-year swap spread is rebounding a bit, which are negatives. As expected, the European bank stress tests did not include key things that investors wanted to see. However, the market's reaction to this lack of clarity is a major psychological positive. More stringent parameters will be applied to these tests over the weekend by analysts, which will likely provide much more clarity early next week. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic fear, short-covering, diminishing sovereign debt angst and technical buying.

Today's Headlines

Bloomberg:

• Seven EU Banks Fail Stress Tests With $4.5 Billion Shortfall. Seven of 91 European Union banks subject to stress tests failed with a combined capital shortfall of 3.5 billion euros ($4.5 billion), stirring concern the evaluations weren’t strict enough. Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks have insufficient reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said today.The banks are in “close contact” with national authorities over the results and the need for more capital, said the Committee of European Banking Supervisors, which coordinated the tests. Governments are seeking to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal.“It would have aided credibility if there had been a higher number of fails and a higher amount of capital raised,” said Jon Peace, a London-based analyst at Nomura International Plc. “People will be surprised that it is as small as that.”The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity, according to CEBS. That means the tests ignored the majority of banks’ holdings of sovereign debt, analysts said.
  
• GE(GE) Raises Dividend 20%, Extends Share Buyback to 2013. General Electric Co., emerging from the global recession with a hoard of cash, raised its quarterly dividend by 20 percent and will resume stock buybacks sooner than it had predicted. The shares rose.
  
• Copper Heads for Best Week Since February as Inventories Shrink. Copper rose for a fifth straight day, heading for the biggest weekly gain since February, as shrinking inventories signaled an improved outlook for demand. Stockpiles tracked by the London Metal Exchange have dropped for 22 straight weeks, the longest slide since 2004. Bookings to remove metal from warehouses increased 15 percent this week, the most in two months. Inventories also contracted in China, the world’s biggest user of the metal.
• Commodity Advance May Falter, Barclays Says: Technical Analysis. The recovery in commodities may be faltering as trading patterns are “throwing out bearish signals,” Barclays Capital said.
• Europe Shows Strength as U.K., German Indicators Top Forecasts. The British economy grew at the fastest pace in four years in the second quarter and German business confidence surged to a three-year high this month, indicating Europe’s recovery may be stronger than forecast. U.K. gross domestic product rose 1.1 percent in the three months through June, almost twice as fast as the 0.6 percent gain predicted by economists in a Bloomberg News survey, the Office for National Statistics said in London today. In Munich, the Ifo institute said its business climate index, based on a poll of 7,000 executives, jumped to 106.2 this month, confounding expectations of a decline. The reports suggest two of Europe’s largest economies are being buoyed by slides in the pound and the euro just as factories step up production to meet global demand.
• Obama Law May Cost Children Coverage as UnitedHealth(UNH) Ends Plans.
• New York Fed's Dahlgren to Direct Bank Supervision. Sarah Dahlgren, who manages assets acquired by the Federal Reserve Bank of New York during the financial crisis, will become its top bank supervisor after the regulatory overhaul enacted this week expanded the central bank’s authority.

Wall Street Journal:

• Seven European Banks Fail Stress Tests.
  
• Greek, Spanish Bank CDS Among Biggest Movers After Stress Tests. Credit default swaps on Greek and Spanish financial institutions were among the biggest movers after the Committee of European Banking Supervisors released euro-area bank stress-test results at noon EDT. The cost to insure debt from the National Bank of Greece using CDS fell 11% from Thursday's levels to 758 basis points, equivalent to $758,000 per year to cover $10 million of debt for five years. CDS on Greece's third-largest bank, EFG Eurobank Ergasias, fell 13% to 755 basis points. And CDS on Banco Popolare Societa Cooperativa and Banco de Sabadell fell 8% and 7% to 277 and 272 basis points, respectively. The cost to insure Greek debt against non-payment or default using CDS fell 1.55% from Thursday's levels to 749.3 basis points, according to Markit data, equivalent to $749,300 a year to cover $10 million. CDS on Portugal were 8.22% cheaper, Italy's were 4.82% cheaper, and Ireland's fell 2.48%%. By contrast, Spain's were roughly flat and CDS on Germany rose 2.45% after one of its banks failed the test. The iTraxx Europe Senior Financials index--a key barometer of financial institutions' health in the region--was trading around 132 basis points before the results, 1.5% better than Thursday's close, but after the results it deteriorated marginally to 133.8 basis points. Based on current CDS prices and assumed recovery levels, the probability of a Greek default is 48.41%, Portugal's is 20.88%, Ireland's is 18.86%, Italy's is 13.23%, Spain's is 16.13%, Germany's is 3.51%, Hungary's is 26.08%, France's is 6.08% and the U.K.'s is 5.67%.
• Nigeria Aims to Export 2.05 Million Barrels/Day Crude In September - Traders. Crude export programs from Nigeria's state oil company show it plans to ship at least 2.05 million barrels of oil a day in September, traders who have tracked details of the provisional plans said Friday. Nigeria is one of Africa's largest energy exporters and as a member of the Organisation for Petroleum Exporting Countries, its current quota stands at 1.673 million barrels a day.
• Cellphone Memory Revenue Expected to Jump 50% in 2010 - iSuppli. Global cellphone memory revenue is expected to make a sharp jump this year from 2009 as smartphones continue to use increasing densities of memory, an industry researcher said. Revenue is expected to climb 50% to $10.2 billion in 2010 for cellphone memory.
• Sanofi-Aventis Approaches Genzyme(GENZ) for Deal. France's Sanofi-Aventis SA has made an informal acquisition approach to biotechnology drug maker Genzyme Corp, people familiar with the matter said. The two sides have begun sounding out each other's interest in a deal before entering into talks, but the talks remain at early stages and a completed transaction is far away, these people said. Genzyme shares surged Friday afternoon, climbing $8.83, or 16%, to $63 on the Nasdaq Stock Market. Should Genzyme view Sanofi's offer as opportunistic, it's likely to spurn any transaction, said people familiar with the company. Genzyme is likely to push for a price that it views reflects the potential for a company turnaround, these people added.

CNBC:

• Republicans Urge Hearing for New Consumer Watchdog. The three Republican senators who backed the financial regulatory overhaul urged President Barack Obama not to appoint a new consumer protection watchdog while Congress is in recess.

NY Post:

• Koch Eyeing Pactiv(PTV). It's not the time to throw merger rumors about listed Pactiv Corp. in the trash. Koch Industries is now in deep discussions to buy Pactiv, the maker of Hefty bags -- with final bids likely due in early to mid-August, sources close to the situation said.
• Bloomy Blitz Aims to Halt Hedge Clippers. Mayor Bloomberg blasted Albany leaders yesterday for trying "to kill the golden goose here" by pushing a tax that would drive hedge funds out of the state -- as he quietly called key Wall Street figures to plead with them to stay. "When people say, 'Oh, the rich, they've got more money. We can tax more of them' -- they're going to move," Bloomberg told reporters. "You can't just keep going to taxing more. It doesn't work." Bloomberg was reacting to The Post's disclosure yesterday that Connecticut Gov. Jodi Rell is brazenly trying to poach hedge-fund managers by inviting them to an "intimate" dinner to discuss moving to the lower-taxed Nutmeg State.

Business Insider:

• 17 Reasons to Be Bullish.

TheStreet.com:

• Humbled Hedge Funds Bow to Investor Wishes. The mood has changed. Scrambling to attract investors, many funds are lowering fees and offering easier terms. "The top 10% of funds can still get whatever they want, but most of the rest are willing to negotiate concessions," says Jon Sundt, president of Altegris, a hedge fund adviser. Investors are demanding detailed lists of portfolio holdings, a big change from when many hedge funds provided only vague descriptions of their holdings in reports that came out monthly or quarterly.
• Morgan Stanley(MS) Looks Like FinReg Winner: Analysts.

Boston Globe:

• Ringing Up Sales. Phones are retailers’ latest route to back-to-school shoppers’ wallets. Merchants looking to boost sales during the critical back-to-school season are courting students where they spend most of their time — on their phones.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 27% 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 -17 (see trends).

Reuters:

• Ford(F) Profit Tops Street View; Shares Climb. Ford Motor Co (F) posted a stronger-than-expected quarterly profit of $2.6 billion and said it was on track for higher earnings and lower debt in 2011, sending its shares up 4 percent. The No. 2 U.S. automaker lowered the top end of its range for U.S. auto industry sales for 2010, citing in part the slow recovery in the U.S. economy. But it said the recovery was sustainable.

Kyodo News:

• North Korea Says Fresh U.S. Sanctions Will Have No Effect. A senior North Korean delegation official said here Friday that fresh sanctions imposed by the United States against North Korea over its nuclear weapons program will have little effect.
  

Referans:

• Kardemir Karabuk Demir Celik Sanayi & Ticaret AS, a Turkish steelmaker, cut prices for some of its steel products by $45 per ton because global demand continues to decline.