“Expect Volatility and Profit From It” — Benjamin Graham

1. Deadly Quebec crash raises doubts about oil trains — the blast, which killed at least five people in Quebec town of Lac-Megantic, is the most serious in a series of accidents involving freight trains. Those include Canadian Pacific (CP) and Berkshire Hathaway’s (BRK.A) BNSF. The accident could strengthen the case for approving TransCanada’s (TRP) Keystone oil pipeline.
2. German exports, industrial output slump — German exports dropped at the sharpest rate since 2009 in May, sliding 2.4% vs -1.4% in April and consensus of -0.4%. Imports grew 1.7% vs +1.2% previously, while the trade surplus tumbled 19.4% on month to €14.1B. The factors hurting German exports include the eurozone debt crisis and the slowdown in China. Meanwhile, industrial production dropped 1% in May vs growth of 2% in April and consensus of -0.5%.
3. Chinese Exports Signal Slowing — CNBC, China’s consumer inflation accelerated in June, driven by a rise in food prices. However, exports in June unexpectedly fell 3.1% vs. a year earlier, the worst drop in years; Chinese imports also sank 0.7%. The data reflect weakness both at home and overseas.
4. White House cuts GDP, deficit forecasts — the Obama administration has trimmed its economic outlook, predicting that GDP will grow 2% this year vs a prior forecast of 2.3%, and 3.1% in 2014 vs 3.2%. The White House’s Office of Management & Budget cited “serious headwinds” for the reduced estimate, such as sequestration, European austerity and China’s slowdown.
5. American Association of Individual Investors (AAII) bullish sentiment — courtesy of BIG, bullish sentiment increased from 30.3% to 42.0%. This is the largest weekly reading since 5/23 and the largest one-week increase since 3/14.

6. BOJ holds steady, cuts inflation outlook — the Bank of Japan has kept its monetary policy unchanged, leaving interest rates at minimum levels and maintaining its pledge to increase base money at an annual pace of ¥60-70T ($600-700B). The BOJ said the economy is “starting to recover moderately,” but cut its FY 2014 real growth forecast to 2.8% from 2.9% and median inflation outlook to 0.6% from 0.7%.
7. China Finance Minister Expects GDP Growth of 7% in 2013 — CNBC, China GDP expanded 7.5% on year in Q2, although that was down from 7.7% in Q1. China’s government has continued to dial down expectations for the country’s economy, with Finance Minister Lou Jiwei forecasting that GDP will rise 7% this year, below official targets of 7.5% and the 7.7% achieved in 2012.

The week ahead — Economic data from Econoday.com:

“When they start running the ‘dogs,’ it’s time to begin looking over your shoulder.” — unknown

1. EU officials ratchets up pressure on Greece — Reuters, EU officials has reportedly warned Greece that it has three days to show it can meet its bailout conditions in order to receive the next €8.1B of its rescue loans. The Troika could refuse to transfer the full amount, or break it up into three monthly payments if Greece fails to impress.
2. Egyptian army removed President Mohamed Mursi — in order to end widespread unrest, Egypt’s army removed President Mursi, suspended the constitution and installed an interim government pending new elections.
3. U.S. to impose stricter rules on large banks –the FDIC will introduce a draft of leverage limits for major banks (XLF) early next week. Banks affected are JPMorgan (JPM), Morgan Stanley (MS), Bank of America (BAC) and Citigroup (C). The regulations are expected to require banks to hold 3-6% of their total assets in capital compared with Basel III requirement of 3%. The Fed also eased rules on mortgates and community banks compared to earlier proposals.
4. Portuguese markets plunge on political turmoil — Portuguese markets have gone into meltdown as an austerity induced political crisis has threatened the government’s existence. Ministers from the CDS-PP, the ruling coalition’s junior partner resigned.
5. US health mandate delayed till 2015 — BBC, the Treasury Department will delay penalties for large employers who fail to provide workers with health insurance after being inundated by questions from firms about the healthcare overhaul. The requirements were initially scheduled to begin when the bulk of the law takes effect next year, but the administration will now wait until 2015 before enforcing mandatory employer and insurer reporting guidelines.
6. Major Asset Classes Final First Half Performance — courtesy of BIG, below is the performance numbers are for the various US-listed ETFs that cover those asset classes in the first half of 2013.

The week ahead — Economic data from Econoday.com:

“The difference between perception and reality is where our opportunities lie.” — unknown

1. Bond Fund Outflows Hit Record Level on the Fed Tapering Fears — CNBC, “Mutual and exchange-traded funds are unloading bonds at a record pace. The combined outflow of $47.2 billion in Junes is the highest in any month on record, handily eclipsing the previous record of $41.8 billion in October 2008,” reported by TrimTabs Investment Research.

2. EU Finance Mininsters agree on rules for bank rescues — EU Finance Ministers have agreed on measures to deal with failing banks. The proposals include imposing losses of up to 8% of a bank’s total liabilities on shareholders, creditors and then deposits of over €100,000, after which governments will be able to supply funds of up to 5% of liabilities.
3. New Rules Expected for Insurance Accounting May Lead to Erratic Earnings — NYTimes, The Financial Accounting Standards Board (FASB) stated that it will propose new rules for insurance accounting that seem likely to increase volatility in reported profits for many insurers and lower reported revenue for rapidly growing companies. Under the new rule, Insurers would have to recognize premium revenue over time, when insurance is being provided, rather than when it is received, while the reporting of costs might be delayed as well.
4. China Credit crunch spreads to China’s “Main Street.” — WSJ reported businesses turn to alternatives such as bankers’ acceptances to pay their bills instead of cash despite efforts by the People’s Bank of China to ease the credit crunch in the country’s financial markets.
5. Rising bond yields hurt bank balance sheets — falling bond prices and rising yields are threatening the recovery in the balance sheets of global banks, which have built up huge portfolios of liquid securities. i.e. Bank of America’s (BAC) $315B portfolio comprises of 90% in mortgage bonds and Treasurys. However some analysts believe that QE tapering should lead to an increase in interest margins and offset the one-time hit to book values because of rising bond yields.
6. EU agrees to the first budget cut in its history — The EU has agreed a seven-year €960B budget that represents the first spending cut in its history. The bloc also approved plans to invest €6B on tackling youth unemployment and for the European Investment Bank to lend hundreds of billions of euros to small and medium-sized businesses.

The week ahead — Economic data from Econoday.com: