Friday Watch

Evening Headlines
Bloomberg:

• Balkan Democracies Fray as Anti-Austerity Boosts Orban Followers. Austerity is starting to tug at the seams of Europe’s youngest democracies. Romanian Prime Minister Victor Ponta’s drive to oust the president, whose budget cuts drew praise from German Chancellor Angela Merkel, will come to a head in a July 29 referendum. Incoming Serbian Premier Ivica Dacic threatened to sack the central bank chief and declared foreign banks an “enemy.” The leu and the dinar fell to record lows against the euro as debt costs soared. Politicians in the region are riding anti-austerity sentiment that has also bolstered radicals in more established European democracies such as Greece, France and the Netherlands. The post-communist leaders are following Hungarian Prime Minister Viktor Orban, who has battled the EU for two years as he sought to consolidate his power, said Lars Christensen, chief analyst at Danske Bank A/S. (DANSKE) “The politics and the rhetoric of the Hungarian government and what we now see in southeastern Europe -- it’s the same sentiment,” Christensen said. Many Balkan countries “are moving in the wrong direction at the same moment as Hungary. They have all kinds of attempts to rig the process. Democratic institutions are not really respected.”
• Draghi Boxes Himself Into a Corner With Bond Signal: Euro Credit. ECB President Mario Draghi may have boxed himself into a corner. Spanish and Italian bond markets rallied yesterday as investors cheered Draghi's signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts aid. This risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. "Draghi is damned if he does and damned if he doesn't," said Carsten Brzeski, senior economist at ING Group in Brussels. "He maneuvered himself into an extremely difficult situation. Expectations are very high."
• Libor Criminal Probe in U.K. Starts as U.S. Readies Indictments. The U.S. Justice Department is preparing to file charges this fall against traders from several banks in the global probe of interest rate-rigging. Meanwhile, U.K. prosecutors haven’t even decided whether they have a case. The U.K. Serious Fraud Office opened a criminal investigation this month after Barclays Plc (BARC) was fined a record 290 million pounds ($450 million) by U.K. and U.S. authorities. Politicians including U.K. Chancellor of the Exchequer George Osborne and Ed Miliband, leader of the opposition Labour Party, called for a criminal probe, and the agency was told it would be given a budget to take on the case.
• China Industrial Companies’ Profits Drop for Third Month. Chinese industrial companies’ profits fell for a third month in June, a government report showed today, as decelerating growth in the world’s second- biggest economy hurt corporate earnings. Income fell 1.7 percent from a year earlier to 467.2 billion yuan ($73 billion), the National Bureau of Statistics said on its website today. That compares with a 5.3 percent decline in May and 2.2 percent drop in April. “The current slowdown has undoubtedly inflicted a lot of pain on the corporate sector,” Yao Wei, a China economist at Societe Generale SA in Hong Kong, said before the release. Taxes and wages are squeezing companies “from both ends,” and the limited room private businesses have to grow is helping push China “into a state of profitless growth,” Yao said. Industrial profits in the first six months of the year declined 2.2 percent from a year earlier to 2.31 trillion yuan, the statistics bureau said. That compares with a 2.4 percent drop in the first five months and 28.7 percent gain in the same period in 2011.
• Corn output in Iowa, the biggest U.S. producing state, will fall 33% from a year ago after the hottest July since 1956 damaged yields, Doane Advisory Services Co. said. Soybean output may drop to the lowest in nine years.
• China Job Market for Graduates Shows Stress on Slowdown. China’s job market for university graduates is showing signs of stress as the nation’s deepest economic slowdown since the global financial crisis coincides with a record 6.8 million students completing their studies. “The job market for graduates is the worst since 2009,” said Jennifer Feng, chief human resources expert at 51job Inc. (JOBS), a Shanghai-based online recruiter. In Beijing, Tang Wen, a spokesman at ChinaHR.com, a Chinese subsidiary of Monster Worldwide Inc. (MWW), said conditions “may be slightly worse compared with 2011, but not too much.”
• Japan Expansion Shows Signs of Cooling as Data Misses Estimates. Japan’s consumer prices unexpectedly fell and retail sales missed analysts’ forecasts, adding to evidence that the economy’s expansion is faltering as gains in the yen and austerity measures in Europe hit exports. Consumer prices excluding fresh food fell 0.2 percent in June from a year earlier, the statistics bureau said in Tokyo today after the median estimate in a Bloomberg News survey for no change. Retail sales rose 0.2 percent, a separate report showed, the smallest gain since November and less than a median forecast for a 1.1 percent increase.
• Syria Pounds Rebel-Held Areas as U.S. Warns of ‘Massacre’. Syrian troops loyal to President Bashar al-Assad used helicopter gunships and artillery to pound rebel-held areas in Aleppo as the U.S. warned of an impending “massacre.” About 80 tanks are stationed outside the southern entrance to Aleppo in a sign that Assad’s forces may be preparing to storm Syria’s biggest city, Ahmed Zaidan, a member of the main opposition group, the Syrian National Council, said yesterday in a phone interview from Bab al-Hawa, a rebel-held border post.
• Facebook(FB) Falls as Report Fails to Quell Concerns Over Growth. Facebook Inc. fell in late trading after its first earnings report as a public company showed a slower sales gain and narrower profit margins, failing to allay the concerns over growth that have sliced shares 29 percent. Facebook executives led by Chief Executive Officer Mark Zuckerberg, addressing analysts for the first time since the company’s May 17 initial public offering, issued no growth forecasts and said little else to reassure investors who fret that the company is overvalued. The largest social network is adding users faster than it can generate ad sales, the company said, reiterating remarks it made on the cusp of the IPO. “It has become a show-me story,” said Nabil Elsheshai, a senior equity research analyst at Thrivent Financial. “The problem is deceleration, and there wasn’t anything from an outlook perspective that would indicate that is going to stop.” Facebook shares slumped 12 percent to as low as $23.75 after the results were released. It had dropped 8.5 percent to $26.85 by the close in New York, and it’s down from $38 at the IPO.
• Amazon(AMZN) Profit Tumbles as Bezos Splurges on Warehouses. Amazon.com Inc. (AMZN), the largest Internet retailer, reported the biggest drop in net income since it reached profitability a decade ago after ramping up spending to capture more business during the holidays. The shares increased less than 1 percent to $221.88 in extended trading after earlier gaining 1.4 percent at the close in New York.

Wall Street Journal:

• Will Obamacare Raise the Price of a Big Mac? In exchange for lower health premiums under Obamacare, experts say shoppers could pay higher prices on everything from printer paper to French fries. Complying with the Affordable Care Act will cost as much as $420 million annually, McDonald’s CFO Peter Bensen said during a conference call Monday, according to CFO Journal. And when the new law goes fully into effect in 2014, it’s possible menu prices will be raised to cover the health costs.
• Geithner's 'Best Rate Available'. If Libor was a fraud, why did regulators use it themselves?

Business Insider:

• Number of Months It Takes to Sell a New House Still High. (graph)

Zero Hedge:

• On Europe's Broken Transmission Channels.
• Biderman Batters 'Believe-Me'-Draghi.
• Multiple Expansion Boosting Stocks. (graphs)
  

CNBC:

• Why Asia’s Retail Investors Are Ditching the Market.
• Starbucks(SBUX) Earnings Fall Short of Street's Expectations. Starbucks reported quarterly earnings that missed Wall Street's expectations on Thursday, sending its shares lower in after-hours trading. “We missed our estimate, but we are dealing with significant economic and global headwinds in Europe. And in June, we felt the beginning of a slowdown in the U.S. business,” Howard Schultz, Starbucks CEO, told CNBC after results on Thursday.

IBD:

• Foot Locker(FL) Sprints Ahead Thanks To Strong Shoe Sales.

NY Times:

• For Big Drug Companies, a Headache Looms.

Washington Post:

• Iran bolsters retaliation capability in gulf, experts say. Iran is rapidly gaining new capabilities to strike at U.S. warships in the Persian Gulf, amassing an arsenal of sophisticated anti-ship missiles while expanding its fleet of fast-attack boats and submarines, U.S. and Middle Eastern analysts say. The new systems, many of them developed with foreign assistance, are giving Iran’s commanders new confidence that they could quickly damage or destroy U.S. ships if hostilities erupt, the officials say.
• Europe is Addicted to Spending & Debt.
  

Forbes:

• Texas Entrepreneurs Tell President Obama: 'I Built This'.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows Mitt Romney attracting 48% of the vote, while President Obama earns support from 44%. Four percent (4%) prefer some other candidate, and five percent (5%) are undecided.

Reuters:

• Coinstar(CSTR) sees revenue largely below Street; shares fall. Redbox kiosks owner Coinstar Inc forecast full-year revenue largely below estimates on rollout delays in Canada, sending its shares down 13 percent after market.
• KLA-Tencor(KLAC) sees lower revenue as economy weighs. KLA-Tencor Corp forecast weaker-than-expected revenue for the current quarter as memory chipmakers and foundries concerned about the global economy hold off on new investments in semiconductor manufacturing gear. Chip gear-makers, including KLA-Tencor and ASML Holding NV have benefited from booming smartphone and tablet sales, but worries about future demand have weighed on some of their customers, with PC sales barely growing. "The industry demand outlook for the rest of calendar year 2012 has backed off recently due to a combination of weaker memory forecasts and some softening in near-term foundry demand," Chief Executive Rick Wallace told analysts on a conference call.

Financial Times:

• Since 1975 the countries now in the euro zone have given birth to just one company currently among the world’s 500 biggest (ironically it is from Spain: Inditex); by contrast California alone has created 26.

Telegraph:

• Sceptics abound as Mario Draghi's ECB bond 'bluff' electrifies global markets. The European Central Bank has opened the door to emergency support for the Spanish and Italian bond markets, setting off a blistering rally on bourses across the world. The euphoria is unlikely to last long unless the ECB comes through with concrete action after its pre-holiday meeting next week. Angel Gurria, head of the OECD, honed in on Mr Draghi's caveat, saying the legal constraints are the nub of problem. The ECB must "explore the flexibility of its mandate", he said. Others were blunter. Marc Ostwald from Monument Securities said Mr Draghi's words were "cheerleading bluster", while Gary Jenkins from Swordfish called them "a bluff to get through the summer". "Spain is very close to the precipice, and its pretty much game over already, " said Mr Jenkins. "Today's action was a short-covering rally. The real trick is get bond investors to come in alongside the ECB, and that is much harder."

The Economist:

• The Flight From Spain. Spain can be shored up for a while; but its woes contain an alarming lesson for the entire euro zone.

Passauer Neue Presse:

• Europe's car market faces five very tough years, Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the Univ. of Duisburg-Essen. Carmakers with a strong focus on the European market will have no choice but to cut jobs and close factories, he said.

South China Morning Post:

• China's Guangdong province has closed down at least seven non-governmental groups that advocated for the rights of migrant workers, citing activists.

Xinhua:

• Chinese finance minister Xie Xuren said the ministry will strictly implement a "differentiated" housing tax policy in the second half of the year to curb speculation in the real estate market, citing his comments.

Shanghai Securities News:

• Chinese banks may have until 2018 to meet new capital-adequacy rules that take effect next year, citing a person familiar with the matter.

China Business News:

• More Than Half of Industrial Companies' Output Falls in Wehzhou. Output fell in 2,276 industrial companies in the eastern Chinese city of Wenzhou from a year earlier, citing a survey by Zhejiang Province Economic and Information Commission. One hundred and forty industrial companies halted production this year. There are 3,998 industrial firms involved in the survey.

Evening Recommendations
BMO Capital:

• Rated (AGCO) Outperform, target $53.
• Rated (ITW) Outperform, target $62.
• Rated (NAV) Underperform, target $20.
  

Night Trading

• Asian equity indices are unch. to +1.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 170.0 -4.0 basis points.
  
• Asia Pacific Sovereign CDS Index 140.75 -3.0 basis points.
  
• FTSE-100 futures +.32%.
  
• S&P 500 futures +.24%.
  
• NASDAQ 100 futures +.36%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (B)/.47
• (CVX)/3.27
• (DHI)/.21
• (MRK)/1.02
• (NWL)/.45

Economic Releases
8:30 am EST

• Advance 2Q GDP is estimated to rise +1.4% versus a +1.9% gain in 1Q.
• Advance 2Q Personal Consumption is estimated to rise +1.3% versus a +2.5% gain in 1Q.
• Advance 2Q GDP Price Index is estimated to rise +1.5% versus a +2.0% gain in 1Q.
• Advance 2Q Core PCE is estimated to rise +1.8% versus a +2.3% gain in 1Q.
  

9;55 am EST

• Final Univ. of Mich. Consumer Confidence for July is estimated at 72.0 versus 72.0 in June.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

BOTTOM LINE: Asian indices are higher, boosted by technology and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Surging into Final Hour on Less Eurozone Debt Angst, Global Central Bank Stimulus Hopes, Short-Covering, Bargain-Hunting

Broad Market Tone:

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

Equity Investor Angst:

• VIX 17.83 -7.81%
  
• ISE Sentiment Index 90.0 -24.37%
  
• Total Put/Call .94 +1.08%
  
• NYSE Arms .79 -33.44%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 111.53 bps -3.39%
  
• European Financial Sector CDS Index 279.71 bps -4.82%
  
• Western Europe Sovereign Debt CDS Index 270.71 -3.60%
  
• Emerging Market CDS Index 265.33 -3.60%
  
• 2-Year Swap Spread 21.0 -.75 basis point
  
• TED Spread 34.50 -.75 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -40.75 +3.0 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .10% unch.
  
• Yield Curve 120.0 +2 basis points
  
• China Import Iron Ore Spot $117.30/Metric Tonne -1.10%
  
• Citi US Economic Surprise Index -53.80 +5.8 points
  
• 10-Year TIPS Spread 2.02 +2 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating +93 open in Japan
• DAX Futures: Indicating -7 open in Germany
  

Portfolio:

• Higher: On gains in my Tech, Retail and Biotech sector longs.
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and covered some of my (EEM) short
  
• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg:

• Draghi Says ECB Will Do What's Needed To Preserve Euro: Economy. European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc. “To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.” Financial markets surged on speculation the ECB will act to lower Spanish borrowing costs after yields on the nation’s bonds rose to levels that prompted bailouts for Greece, Portugal and Ireland. The ECB reluctantly started buying Spanish and Italian debt in August last year as part of its bond purchase program. The buying had little lasting effect and the ECB suspended the program in March. “His comments certainly suggest that ECB purchases of Spanish and Italian bonds are back on the table for discussion,” said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe. “But -- just like last summer -- we would expect any new ECB bond purchases to be temporary and limited until other policies are put in place.”
• German Bailout Skeptics Criticize Draghi, Handelsblatt Says. German coalition lawmakers Frank Schaeffler and Klaus-Peter Willsch, who’ve voted against measures to bail out cash-strapped euro-region nations, criticized European Central Bank President Mario Draghi’s announcement that the bank will do whatever is needed to preserve the euro, the Handelsblatt newspaper reported. Schaeffler, a Free Democrat, said Draghi is pillaging German savings as his policies will boost inflation, according to the newspaper. Willsch, a budget-committee member from Chancellor Angela Merkel’s Christian Democratic Union, said rising prices for houses, farmland, gold, coins and classic cars in Germany reflect a flight to tangible assets as a precursor to accelerating inflation.
• Spain at 7% Stresses Inadequacies of Rescue Options: Euro Credit. Money managers with more than $800 billion are betting European policy makers can only offer Spain a temporary respite from record borrowing costs. Yields on Spain’s two-, five-, 10- and 30-year government securities climbed to euro-era highs this week amid speculation the nation will need a bailout to backstop its regions and banks. While the Organization for Economic Cooperation and Development called for the European Central Bank to buy Spanish debt, investors including AllianceBernstein Ltd. and M&G Group Plc said policy makers are hamstrung in how to rescue an economy twice the combined size of Greece, Ireland and Portugal.
• Italy Needs 10 Billion Euros in New Cuts After Yield Rises: MF. Italy may need to pass new budget cuts worth as much as 10 billion euros ($12.1 billion) this year after debt-financing costs rose more than forecast, MF reported, citing an estimate by the general accountant. The projection was submitted earlier this month to Prime Minister Mario Monti, MF said. The premier decided to wait until after a meeting of the European Central Bank next month before considering additional austerity measures, the Milan-based newspaper said.
• Greek Budget Talks Stumble as Citigroup Sees Euro Exit at 90%. Greek political leaders struggled to clinch agreement on an 11.5 billion-euro ($14 billion) package of budget cuts, as international creditors began a review of Greece’s progress that may determine its future in the euro. Prime Minister Antonis Samaras and his coalition partners, Evangelos Venizelos of Pasok and Fotis Kouvelis of Democratic Left, are to meet again on July 30 to determine the savings required to receive the funds pledged under Greece’s two rescue packages totaling 240 billion euros.
• Swaps Outlook Bleakest Since '09 as Growth Slows: Credit Markets. Investors are the most pessimistic about the outlook for corporate credit in three years as the global economy shows signs of faltering, with euro-area leaders struggling to contain the sovereign-debt crisis and U.S. unemployment stuck above 8 percent for 41 months. A three-month forecast for a benchmark credit-default swaps index in the U.S. swung negative in July, dropping to -19.1 from 15.2 at the start of April, according a survey by the International Association of Credit Portfolio Managers. The outlook for a European index fell to -30 from -9.8. Negative readings indicate expected deterioration in credit conditions.
• Goods Orders Signal Slowdown in U.S. Business Spending: Economy. A slump in June orders for equipment such as computers and machinery signals U.S. business investment will probably cool in the second half of the year and contribute less to the economic expansion. Bookings for non-defense capital goods excluding aircraft, a proxy for future corporate spending, dropped 1.4 percent, the third decrease in the past four months, according to Commerce Department data issued today in Washington. Another report showed claims for unemployment benefits declined more than forecast last week, which may have resulted from difficulty adjusting data for seasonal shutdowns of auto factories. Softening overseas demand, slowing U.S. consumer spending and gridlock in Washington over fiscal policy may prompt businesses to put off replacing old equipment, hurting profits at companies like Xerox Corp. (XRX) A report tomorrow is projected to show the world’s largest economy expanded in the second quarter at the weakest pace in a year. “Business investment has definitely shifted lower,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. The European debt crisis and fiscal cliff “will put downward pressure on orders, which will translate into weaker growth in the U.S.”
• Pending Home Sales of U.S. Homes Unexpectedly Fell 1.4% In June. Contracts to purchase previously owned homes unexpectedly dropped in June for the second time in the last three months, a sign of limited momentum in housing. The index of pending home resales decreased 1.4 percent to 99.3 after a revised 5.4 percent gain in May that was less than initially reported, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.3 percent June increase. Slower job growth that’s holding down confidence and strict lending standards are restraining housing even with cheaper properties and mortgage rates at all-time lows.
• Gold Climbs on Draghi’s Euro Pledge, U.S. Stimulus Speculation. Gold rose for the second day after the European Central Bank president said policy makers will do whatever is needed to preserve the euro and amid increasing expectations of further stimulus measures in the U.S. “To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” ECB President Mario Draghi said today. Orders for U.S. durable goods excluding the transportation category unexpectedly dropped 1.1 percent in June, the most in five months, a Commerce Department report showed, boosting speculation that the Federal Reserve will step up measures to stabilize growth. “Prices are up today because of what we heard from Draghi and as investors are getting more confident that some form of easing will be announced in U.S.,” Jeffrey Christian, the managing director at New York-based CPM Group Inc., said in a telephone interview.
• China’s Stocks Decline to Lowest Level Since March 2009. China’s stocks fell to the lowest level since March 2009 as speculation the government will maintain real-estate curbs overshadowed a State Council plan to develop the nation’s central provinces. China Vanke Co. (000002) and Poly Real Estate Group Co. paced declines among developers after the official Xinhua News Agency said China must prevent local governments from weakening real- estate controls. Hunan Valin Steel Co. (000932), part-owned by the world’s biggest mill ArcelorMittal, surged to a one-month high as the China News Service said Hunan province’s Changsha city unveiled an 829.2 billion yuan ($130 billion) investment plan. “Market sentiment is pretty weak and it will take a while for investors to reverse their pessimistic expectations about the economy,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “We’ll probably see more stimulus packages from the government going forward.” The Shanghai Composite Index (SHCOMP) dropped 0.5 percent to 2,126 at the close, erasing a 0.5 percent gain. The CSI 300 Index (SHSZ300) lost 0.5 percent to 2,347.49. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, retreated 0.3 percent in New York yesterday. The Shanghai index has fallen 14 percent from this year’s high on March 2 amid concern the economic slowdown is deepening.
• China Shipyards Falter as Vessel Glut Triggers 49% Order Slump. China has too many ships. The glut has pushed new vessel prices to eight-year lows and caused a 49 percent plunge in first-half orders at the nation’s more than 1,500 shipbuilders. It’s also tipped smaller yards into bankruptcy and hit earnings at larger players. “It is a pretty depressing environment,” said Ajay Mirchandani, a Singapore-based JPMorgan Chase & Co. analyst. “You just have too many yards and too few orders, which is hurting pricing and profitability.” Orders have tumbled as a global excess of commodity, oil and container ships has damped cargo rates and deterred owners from ordering more vessels. China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the nation’s biggest shipbuilder outside state control, hasn’t announced any vessel contracts this year, while Yangzijiang Shipbuilding Holdings Ltd. (YZJ)’s backlog shrank 27 percent in the year ended March because of the slowdown. “It might take two to three years before the situation improves,” said Zhang Yao, Yangzijiang’s investor relations spokesman. “There’s definitely an adverse impact on our profits.” Guangzhou Shipyard International Co.’s first-half profit probably fell more than 50 percent, partly because the price of under-construction vessels “dropped sharply” from a year earlier, the company said this week.
• Syrian Troops Pound Rebel-Held Areas of Aleppo. Syrian troops loyal to President Bashar al-Assad are using helicopter gunships and artillery to pound rebel-held areas in Aleppo and the suburbs of Damascus, opposition groups said today. About 80 tanks are stationed outside the southern entrance to Aleppo in a sign that government forces may be preparing to storm Syria’s biggest city, Ahmed Zaidan, a member of the main opposition group, the Syrian National Council, said today in a phone interview from Bab al-Hawa, a rebel-held border post.
• Tech Industry Leads the Way in 2012 U.S. Job Cuts. (video) Bloomberg's Carol Massar reports that the tech industry is responsible for the biggest share of the nearly 107,000 job cuts announced in the United States in 2012.
• Siemens Cautions on Outlook as Earnings Fall Short. Siemens AG (SIE), Europe’s largest engineering company, said reaching its full-year earnings goal has become harder after reporting fiscal third-quarter profit and sales that fell short of analysts’ estimates. It has become “clearly more ambitious” to reach the target of 5.2 billion euros ($6.31 billion) to 5.4 billion euros in net income from continuing operations, Munich-based Siemens said today. Profit on that basis climbed to 1.23 billion euros in the three months ended June 30, from 763 million euros a year earlier. The average estimate of nine analysts surveyed by Bloomberg was 1.4 billion euros.
• Alcatel-Lucent to Cut 5,000 Jobs After Reporting Loss. Alcatel-Lucent SA (ALU) will cut 5,000 jobs after slumping to a loss, signaling Chief Executive Officer Ben Verwaayen’s effort to revive the company is losing steam and sending the stock to its lowest level since at least 1989. France’s biggest phone-equipment supplier said today it will save an extra 750 million euros ($911 million) with the cuts, equal to about 6 percent of staff.
• Dow Chemical(DOW) Profit Trails Estimates on 'Bleak' Demand. Dow Chemical Co., the largest U.S. chemical company, reported a bigger drop in second-quarter earnings and sales than analysts estimated and said the outlook for global demand for the rest of the year is “bleak.” Chairman and Chief Executive Officer Andrew Liveris is struggling to increase earnings as contracting economies in Europe and slower Chinese growth curb demand for products such as plastics used in packaging and autos. Sales fell around the world, led by a 15 percent decline in Europe, the Middle East and Africa, Dow said. Liveris plans to accelerate cost-reduction efforts to counter weaker global economies. “These are about the worst operating conditions we have seen since 2009,” Liveris, 58, said today in a telephone interview. “That gives you a fairly bleak outlook, and it’s a weak one for the rest of 2012.”
• Consumer Comfort in U.S. Falls to Lowest Level in Two Months. Consumer confidence in the U.S. fell last week to the lowest level in two months as Americans became more concerned about sluggish growth in employment. The Bloomberg Consumer Comfort Index fell to minus 38.5 in the week ended July 22 from minus 37.9 in the previous period. An index of the buying climate, one of the three components of the index, fell to minus 44.7, its lowest reading since May. The confidence of full-time workers dropped to minus 32, the lowest level since February.

Wall Street Journal:

• Bo Xilai's Wife Indicted on Homicide. Chinese officials have indicted Gu Kailai, the wife of fallen Chinese politician Bo Xilai, on the charge of intentional homicide, state media reported on Thursday. The state-run Xinhua news agency said Ms. Gu was prosecuted by officials in China's Anhui province. Xinhua also said a person named Zhang Xiaojun had been charged, without providing further identification.
• Apple(AAPL)-Amazon(AMZN) War Heats Up. Tech Giants Scramble to Take Rival Ground in Phones, Tablets and Apps. The long-simmering war between Amazon.com Inc. and Apple Inc. is starting to boil over. The two technology giants are going head to head in an increasing number of areas as they move to consolidate their positions as control points to consumers' digital lives. And their battle stands out from other tech rivalries because of the combatants' similar playbooks—from the tight control they exert over software to their secretive corporate cultures to the breadth of their customer data.
• Henninger: America's Two Economies. With Barack Obama, the competition between the private economy and the public economy is clear.
  

MarketWatch:

• New Geithner disclosures further cloud his record. Commentary: Treasury chief too timid with the big banks.

Business Insider:

• THIS IS WAR: Google(GOOG) Just Announced Plans To Be A Cable TV Provider.
• Beijing's Olympic Stadiums Are Wasting Away.
• CHART OF THE DAY: The US Garbage Indicator Is Sending An Ominous Sign For The Economy.
• Bill Gross Rains On Spain's Parade.
• GOLDMAN SACHS: These Charts Tell You Everything You Need To Know About The World Right Now.

Zero Hedge:

• Here Is Why Angela Merkel Has Not Responded To Draghi Just Yet.
• Barofsky On Geithner: "We Should See People In Handcuffs".
• A Quick Reminder On The Effectiveness Of The ECB's Bond Buying. (graphs)
• Citi On Draghi: Expect Nothing From The ECB Before The ESM Is Active (In September At The Earliest).
• Asian Contagion Strikes Again Thanks To US Drought.

Reuters:

• Santander profit halves on real estate losses. The euro zone's biggest bank, Santander (SAN.MC), said on Thursday net profit halved in the first six months of the year after it took writedowns on toxic Spanish real estate assets.
• US earnings now seen falling in Q3, first time in 3 yrs. It's ugly out there and it could get worse. Dismal U.S. corporate outlooks and worries about slower worldwide growth have pushed third-quarter earnings estimates into negative territory, which, if it came to pass, would be the first drop in three years. Third-quarter earnings of Standard & Poor's 500 companies are now expected to fall 0.1 percent from a year ago, a sharp revision from the July 1 forecast of 3.1 percent growth, Thomson Reuters data showed on Thursday. That would be the first decline in earnings since the third quarter of 2009, the data showed.

Financial Times:

• US industrials warn over Europe. The wide effects of Europe’s economic crisis were on display on Thursday as several large US manufacturers joined a growing chorus warning of slowing global growth. “World economic activity saw marked deterioration throughout the second quarter, driven primarily by Europe’s persistent recessionary conditions,” said Andrew Liveris, chief executive of Dow Chemical.

MNI:

• IMF Lagarde: US Fiscal Cliff Key Global Risk; Oil A Worry. The looming US fiscal cliff is the number one risk globally at present, followed by the Eurozone and then the threat of another oil price surge, IMF head Christine Lagarde says. Lagarde, speaking at the Global Investment Conference here, said the Eurozone is clearly at the epicentre of the crisis right now but is far from the only risk at present. "Risk number one ... is clearly the fiscal cliff in the United States of America, where the deficit and debt to GDP ratios are actually worse than in the Eurozone," she said.

La Nueva Espana:

• Francisco Alvarez-Cascos, the head of the Foro Asturias party, said EU policy on the crisis is leading Spain towards an exit form the single currency as the only "viable solution." Alvarez-Cascos, a former member of the ruling People's Party who now leads his own breakaway group, said Prime Minister Mariano Rajoy should tell European colleagues that amid a lack of union in the currency area, "the only viable solution to which they are leading Spain is to the exit from the euro," citing him. Alvarez-Cascos, the former president of the Asturias region, accused the government of "begging for measures to re-establish normality in the currency union," and called for early elections.
  

Shanghai Daily:

• Shanghai Developers Nixing Discounts. THE number of residential property projects offering price cuts may fall to the lowest in Shanghai in six months as improved sentiment among buyers helped boost developers' confidence.
  

Bear Radar

Style Underperformer:

• Small-Cap Growth +.43%

Sector Underperformers:

• 1) Education -5.16% 2) Gaming -1.32% 3) Hospitals -.81%

Stocks Falling on Unusual Volume:

• STMP, STRA, ESI, GRPN, LVS, DOW, TMK, IGT, WLP, ENI, NIHD, LVLT, EOC, RDS/A, RDWR, LOGM, FORR, STRA, QSII, MNRO, PSSI, DNKN, NUVA, ACIW, ARRS, CTXS, UBNT, HURN, TRIP, VIVO, NFLX, IBKC, CPSI, ZMH, EFX, RJF, BEAV, TREX, ORLY, LRN, ETH, CRR, CLR, BCR, TWI, VAR, UAL, CYH, VMC, FICO, HRC, CSH and TKR
  

Stocks With Unusual Put Option Activity:

• 1) PHM 2) STP 3) KORS 4) AGO 5) DECK
  

Stocks With Most Negative News Mentions:

• 1) LVS 2) VAR 3) GRPN 4) F 5) CLF
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Value +1.20%

Sector Outperformers:

• 1) Computer Hardware +4.98% 2) Disk Drives +4.59% 3) Telecom +4.1%

Stocks Rising on Unusual Volume:

• VDSI, PMTC, TEF, UN, UL, E, TOT, AIZ, HSTM, CROX, SHOO, AKAM, FTNT, TSCO, ACOM, SPRD, WFM, MLNX, CAKE, STX, SFLY, PTEN, LKQ, TEX, TRN, FNP, PHM, CAB, KEX, KBR, DAN, EQIX, MCO, MTW, VCI, TER, NOV, FLIR, CAM and SWI
  

Stocks With Unusual Call Option Activity:

• 1) DISH 2) DNR 3) IPG 4) AKAM 5) NOK
  

Stocks With Most Positive News Mentions:

• 1) LSI 2) EQIX 3) AKAM 4) TFM 5) LMT
  

Charts:

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

Thursday Watch

Evening Headlines
Bloomberg:

• Citigroup Sees 90% Chance That Greece Leaves Euro. Citigroup Inc. (C) raised its estimate of the chances Greece will drop the euro in the next 12 to 18 months to about 90 percent, with prolonged economic weakness and spillover for the euro area. In an analyst note, Citigroup updated its forecast for a Greek exit from the 17-nation currency union from a previous estimate of 50 percent to 75 percent, and said it would most likely happen in the next two to three quarters. Specifically, the bank assumes a Greece exit would occur on Jan. 1, 2013, while saying that is not a forecast of a precise date. “Our base case is for prolonged economic weakness and financial market strains in periphery countries, spilling over into renewed recession for the euro area as a whole this year and the next,” the Citigroup note said. Citigroup also said that even with the Spanish bank bailout, both Spain and Italy are “likely” to enter some form of bailout by the end of 2012.
• Spain at 7% Stresses Inadequacies of Rescue Options: Euro Credit. Money managers with more than $800 billion are betting European policy makers can only offer Spain a temporary respite from record borrowing costs. Yields on Spain's two-, five-, 10- and 30-year government securities climbed to euro-era highs this week amid speculation the nation will need a bailout to backstop its regions and banks. While the OECD called for the ECB to buy Spanish debt, investors including AllianceBernstein Ltd. and M&G Group Plc said policy makers are hamstrung in how to rescue an economy twice the combined size of Greece, Ireland and Portugal. "This crisis is unprecedented so the responses need to be unprecedented," said Arif Husain, the London-based director of European fixed-income at AllianceBernsteain, which oversees $407 billion. "Anything the ECB can do would prove temporary. The whole problem is that anything that's happening at the moment is unconvincing, and markets hate uncertainty."
• BNP, Credit Agricole Seek to Escape Euro Area’s ‘Shifting Sands’. France’s biggest banks are rushing to cut the more than 140 billion euros ($171 billion) they provide their operations in Europe’s troubled economies, seeking to protect themselves against a possible breakup of the euro. In a retreat, French banks, especially BNP Paribas SA (BNP) and Credit Agricole SA -- the largest by assets -- are trying to make their businesses in Italy, Spain, Greece, Portugal and Ireland less reliant on funds from the parent company.
• Fidelity Joins BlackRock in Weighing Libor Action Against Banks. BlackRock Inc. (BLK), Fidelity Investments and Vanguard Group Inc., firms that collectively manage more than $7 trillion, are gauging how their clients have been hurt by Libor manipulation and whether to take legal action as at least a dozen banks are being investigated for rate-rigging. The money managers can take cues from Charles Schwab Corp. (SCHW) and the city of Baltimore, which in lawsuits predating the record fine levied on London-based Barclays (BARC) Plc last month, sued lenders for artificially suppressing, Libor, or the London interbank offered rate. Schwab alleged last year that returns on money funds and short-term debt strategies were depressed by the banks’ actions, while Baltimore’s lawsuit against Barclays and other banks stems from lower returns on interest-rate swaps.
• China’s Stocks Swing Between Gains, Losses; Developers Retreat. China’s stocks swung between gains and losses as property developers declined on concern the government will maintain curbs on the real estate market while consumer staples producers rose on earnings prospects. China Vanke Co. led declines for developers after the Xinhua News Agency said China must prevent local government “fine tuning” of property policies from leading to a weakening of controls on the real estate market. Shanghai Lujiazui Finance & Trade Zone Development Co. (600663) slumped for a fourth day after the developer said first-half profit slid 54 percent. Wuliangye Yibin Co. and Luzhou Laojiao gained more than 1 percent on speculation earnings for liquor companies jumped in the first half of the year.
• Making the Rich Poorer Doesn’t Enrich the Middle Class by Caroline Baum.
• Canon Falls Most in 13 Years After Cutting Forecast: Tokyo Mover. Canon Inc. (7751), the world’s largest camera maker, plunged the most in more than 13 years in Tokyo trading after cutting its full-year profit forecast because of a stronger yen and expectations for weaker global growth. The shares declined as much as 14 percent to 2,308 yen, the biggest intraday drop since Oct. 9, 1998, and changed hands at 2,430 yen as of 11:29 a.m.
• Hong Kong to Oslo Flirt With Bubbles on Cheap Cash: Mortgages.
• China Car Sales Prove Impossible to Know for Shareholders. Forget spreadsheets. Yankun Hou, an award-winning auto industry analyst at UBS AG (UBSN), counts Toyotas and BMWs in the parking lots of car factories in China using satellite images from Google Maps to gauge inventory buildups. Recently, the absence of official retail vehicle sales and inventory data has led to a divergent picture of auto demand in China. Auto manufacturers are reporting better-than-estimated deliveries to dealerships, while distributor groups tell of rising stockpiles at showrooms.
• U.S. Finds China’s Human Rights Situation Is Deteriorating. Human rights conditions in China are worsening, with the repression of lawyers, journalists and bloggers increasing, Assistant Secretary of State Michael Posner said today. “The overall human rights situation in China continues to deteriorate,” said Posner, who oversees democracy, human rights and labor issues for the State Department, after the 17th U.S.- China Human Rights Dialogue.
• Sands China Earnings Decline 40% on Impairment, Winnings. Growth is slowing in the world’s largest gaming hub as high-stake gamblers, or the VIPs who contribute more than 70 percent of Macau’s revenue, cut back spending amid a weaker Chinese economy. Smaller Wynn Macau Ltd. reported a drop in revenue for the second quarter. The stock dropped 5.2 percent to HK$21.10 at 9:54 a.m. in Hong Kong trading. The benchmark Hang Seng Index lost 0.16 percent.

Wall Street Journal:

• Europe's Crisis Hits Profits. Weaker Results at Ford(F), Apple(AAPL), Glaxo(GSK) Show Ripple Effect of Continent's Troubles. Europe's deepening economic crisis is cutting into corporate earnings, with the continent's woes threatening to exert a drag on multinational corporations around the world into next year. This week, U.S. companies ranging from Ford Motor Co. to Apple Inc. have blamed disappointing results on slowed spending by European consumers. Meanwhile European heavyweights including steelmaker ArcelorMittal and pharmaceutical company GlaxoSmithKline PLC said they are suffering more than expected on their home turf. In a sign of how bad companies think it could get, hard-hit Spanish communications company Telefónica SA said Wednesday it is suspending dividend payments and share buybacks.
• Business Confidence is Low in Europe's Core. Economic weakness in the euro zone is penetrating the bloc's stronger countries, data published Wednesday suggest, at a time when those nations could be called on to provide more aid to weaker members. Germany's closely watched Ifo index of business confidence for July was weaker than expected, falling to its lowest level in more than two years, the Munich-based Ifo institute said Wednesday. The German manufacturing sector saw its current business situation "much less favorably" than in the previous month, the institute said, and capacity utilization was "clearly lower." Manufacturers' expectations dropped sharply.
• House Passes Ron Paul’s ‘Audit the Fed’ Bill. The House voted Wednesday to open up the Federal Reserve‘s core monetary policy decisions to the scrutiny of the federal government.
• Russian Spy Ring Aimed to Make Children Agents. A Russian spy ring busted in the U.S. two years ago planned to recruit members' children to become agents, and one had already agreed to his parents' request, according to current and former U.S. officials.

MarketWatch:

• China’s green policy, forex hit European buyers. For now, boomtime is over for Sino-European trade. There was a time when buyers from across Europe would flock to China to buy up everything from stone tiling to children’s clothing, fueling a booming trade between the two economies. But Beijing’s push to clean up its polluting industrial base, along with rising labor costs and unfavorable foreign-exchange rates, is altering the nature of China’s role in global trade, and with European buyers in particular.

Business Insider:

• Zynga(ZNGA) Cuts Forecast, Stock Falls 40%.

Zero Hedge:

• Deep Fried Black Swan Goes Global As Drought Spreads From US To Asia, And Now To Southern Europe.
• The Amazing Hockey-Stick Of Q4 Consensus Earnings. (table)
• Guest Post: You Didn’t Build That. Even if Obama was talking about infrastructure and the wider economic system (which I suspect was the case) it is taxpayers who fund infrastructure creation, and the overwhelming majority of businesses and business owners (other than the bailed-out financial institutions and similar) contribute heavily to tax revenue.
• Fukushima - Local Children Unwitting (And Unwilling) Radioactive Guinea Pigs.
• Why Listen To Keynes In The First Place?

CNBC:

• Oil Rallies Amid Talk of More Fed Easing. Oil prices staged a sharp turnaround ahead of the close in floor trading at the NYMEX Wednesday, as traders speculated about the prospects for more Fed easing.
• Despite Economy, Whole Foods(WFM) Earnings Top Estimates. Whole Foods reported quarterly profit that topped Wall Street's view after sales at established stores defied the softening U.S. economy, sending the upscale grocer's shares surging in an after-hours relief rally.
• Visa(V) Posts Net Loss but Results Beat Expectations.

CFO:

• Portfolio Managers Say Credit Costs Will Rise. After indicating last quarter that U.S. credit conditions were diverging from Europe’s, credit portfolio managers have a negative outlook on short-term domestic corporate debt. Credit portfolio managers at banks, insurance companies, and asset management firms foresee higher credit risk in the United States in the next three months, a change from last quarter’s view that credit conditions were worsening in Europe but improving domestically. If the forecast proves true, its means investors could demand higher premiums on corporate debt, and more indebted companies than previously forecast could default. The credit managers’ outlook for five-year credit spreads in the United States – for both investment-grade and high-yield credits – turned “sharply negative,” says Som-lok Leung, executive director of the International Association of Credit Portfolio Managers (IACPM), which surveyed its members. In the United States, the three-month outlook for spreads on investment-grade bonds changed from a positive reading of 15.2 in April to a negative reading of -19.1 at the beginning of July. In Europe, the outlook on spreads worsened to -30 from -9.8. The IACPM survey uses a “diffusion index” to measure credit sentiment. The farther a reading is from zero, either positive or negative, the greater the consensus among portfolio managers that credit conditions will move in a certain direction. A negative number means credit spreads will widen.

Gallup:

• Democratic Voting Enthusiasm Down Sharpy From 2004, 2008. (graph)

Reuters:

• Las Vegas Sands(LVS) earnings slump, miss forecasts. Las Vegas Sands Corp earnings fell, missing forecasts, as its "hold," or money won from gamblers, fell at its casinos in Las Vegas, Macau and Singapore, and legal fees rose, sending its shares down 5.8 percent in after-hours trading.
• US congressman says no legal power to stop China-Canada oil deal. Congressman Randy Forbes, a Republican who has been wary of China's military and economic power, said he is alarmed by a bid by China's state oil company CNOOC for Canadian oil company Nexen. But Forbes said there is not much he can do about it.
• Brazil's Vale profit slumps on China, currency woes. Brazil's Vale became on Wednesday the latest victim of China's economic slowdown after second-quarter profit tumbled because of slowing demand for iron ore that will spill over into the coming quarters. Net income at the world's largest producer of the mineral hit its lowest level in more than two years, underscoring its dependence on Chinese purchases of its flagship product.
• Western Digital(WDC) bets on enterprise, high prices in 2013. Western Digital Corp trounced lofty Wall Street expectations on record sales, and the hard disk drive (HDD) maker is banking on the enterprise market to help maintain its high margins. Western Digital shares jumped 20 percent in after-market trade to $38.77.

Telegraph:

• Euro exit beats begging bowl, says Spanish elder statesman. The regional leader of Asturias in Spain has become the country’s first major figure to call for a radical change of strategy and exit from the euro, unless monetary union is fundamentally reformed.

BBC:

• BBA 'warned weekly' about Libor says former rate-compiler. The British Bankers Association was given weekly warnings in 2008 that the process of setting the Libor interest rates was being distorted.

Sydney Morning Herald:

• Moody's downgrades outlook for 17 German banks. Moody’s has downgraded the outlook for 17 German banks after a similar move against the government’s credit rating earlier this week. Moody’s on Wednesday cut the outlook on a swathe of state-backed regional banks, known in Germany as landesbank, but also included IKB Deutsche Industriebank and Deutsche Postbank. Many of the landesbank have struggled since the 2008 financial crisis and amid Europe’s ongoing economic crisis, which has seen growth slow.

Xinhua:

• China Must Prevent Weakening of Property Controls. China must prevent local government "fine tuning" of property policies from leading to a weakening of controls on the real estate market, according to a commentary. Fine-tuning policies that compromise the central government's macro control "bottom line" on the real estate market must be stopped, according to the commentary, written by a reporter named Wang Libin.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 174.0 -5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 143.75 +2.25 basis points.
  
• FTSE-100 futures +.03%.
  
• S&P 500 futures -.15%.
  
• NASDAQ 100 futures -.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (RCL)/.03
• (KMB)/1.28
• (PHM)/.05
• (STRA)/1.85
• (UTX)/1.41
• (VMC)/.06
• (HSY)/.61
• (LLL)/1.88
• (XOM)/1.95
• (HOT)/.61
• (ZMH)/1.32
• (CME)/82
• (ABC)/.69
• (RTN)/1.22
• (CL)/1.33
• (MMM)/1.65
• (BWA)/1.37
• (MCK)/1.48
• (CA)/.60
• (AMGN)/1.55
• (CERN)/.54
• (EXPE)/.72
• (KLAC)/1.32
• (AMZN)/.03
• (CSTR)/1.16
• (CB)/1.14
• (SBUX)/.45
• (FB)/.11
• (AGCO)/1.78
• (DECK)/-.59

Economic Releases
8:30 am EST

• Durable Goods Orders for June are estimated to rise +.3% versus a +1.1% gain in May.
• Durables Ex Transports for June are estimated to rise +.1% versus a +.4% gain in May.
• Cap Goods Orders Non-Defense Ex Air for June are estimated to rise +.1% versus a 1.6% gain in May.
• Cap Goods Shipments Non-Defense Ex Air for June are estimated to rise +.6% versus a +.4% gain in May.
• Initial Jobless Claims are estimated to fall to 380K versus 386K the prior week.
• Continuing Claims are estimated to fall to 3300K versus 3314K prior.
  

10:00 am EST

• Pending Home Sales for June are estimated to rise +.3% versus a +5.9% gain in May.

11:00 am EST

• Kansas City Fed Manufacturing for July is estimated to rise to 4.0 versus a reading of 3.0 in June.
  

Upcoming Splits

• (RAVN) 2-for-1
• (TROX) 5-for-1
  

Other Potential Market Movers

• The 7Y T-Note auction, Geithner's LIBOR testimony, weekly EIA natural gas inventory report and the weekly Bloomberg Consumer Comfort Index could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, boosted by commodity and consumer staples shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.