Monday Watch

Weekend Headlines
Bloomberg:

- The armed group that led attacks on Nigerian oil production for more than three years said it started an “indefinite cease fire” and talks to end the conflict. The cease fire, which went into effect at midnight this morning, followed an Oct. 19 meeting between President Umaru Yar’Adua and Henry Okah, leader of the Movement for the Emancipation of the Niger Delta. Okah later conveyed the government’s readiness to talk with group’s negotiators, MEND spokesman Jomo Gbomo said today in an e-mailed statement. The militant group, which surfaced in January 2006 and orchestrated attacks blamed for reducing Nigeria’s oil output by more than 20 percent a year, called off a three-month cease fire on Oct. 16.

- The average price of regular gasoline at U.S. filling stations rose to $2.66 a gallon as futures prices for crude oil and the motor fuel increased. Gasoline gained 17.82 cents in the two weeks ended Oct. 23, according to a survey ending on the same day of 5,000 filling stations nationwide by Trilby Lundberg, an independent gasoline analyst in Camarillo, California. “This is entirely due to higher crude oil prices,” Lundberg said in an interview today. “Profit margins shrank for refiners especially, and for gasoline retailers.” Futures have increased because the U.S. dollar has weakened against the euro, increasing the investment appeal of commodities. Supplies are ample. Stockpiles of gasoline were 3.3 percent above the five-year average in the week ended Oct. 16, according to the Energy Department. Gasoline demand, based on what blenders and refiners supply to the wholesale market, fell 3.3 percent from the prior week to an average 8.95 million barrels a day, the lowest in four weeks.

- American International Group Inc.(AIG), the insurer bailed out by the U.S. government, approved the payment of $2.6 million in previously disclosed retention bonuses to two top executives. Chief Financial Officer David Herzog will receive $1 million and Kristian Moor, the chief executive officer of AIG’s Chartis property casualty division, will get $1.6 million, the New York-based company said in a regulatory filing yesterday. AIG authorized the payments after the Obama administration’s pay master, Kenneth Feinberg, released his review of the insurer’s proposals on executive pay. Feinberg has the power to limit some pay for top managers at AIG after the company took a U.S. rescue valued at $182.3 billion. Feinberg said he determined the pay to Herzog, Moor and another unnamed executive wouldn’t be cut because of “the need to retain the services of these three employees who are deemed to be particularly critical to AIG’s long-term financial success.”

- China may face an economic slowdown in the middle of next year because the nation’s growth model is unsustainable, said Stephen Roach, chairman of Morgan Stanley Asia. Economic growth in China accelerated to 8.9 percent last quarter, fueled by government stimulus spending and more than $1 trillion of new bank lending. That rebound is causing complacency in China, which still faces “tough challenges in years ahead,” Roach said today at a financial forum in Shanghai. “China’s growth model is much more about supply than demand,” Roach said. “It’s not a sustainable model for China. It’s not a sustainable model for any nation.” The “imbalance” created by China’s overdependence on exports for growth was compounded by the government’s efforts to bolster the world’s third-biggest economy as the global recession sapped demand for Chinese-made toys, clothes and electronics, Roach said. China’s stimulus measures have also raised concerns about overcapacity and asset bubbles. “Macro imbalances are particularly acute right now,” Roach said. “China’s economy risks slowdown again around mid- 2010.” China’s exports in September fell 15.2 percent from a year earlier, the smallest decline in nine months. The nation has posted export declines for 11 consecutive months. “While the government is ensuring economic growth, we are also concerned about overcapacity in some industries,” Xiong Bilin, deputy director of the National Development and Reform Commission’s industry department, said Oct. 19. The commission is China’s top economic planning agency.

- Gene Therapy Gives Sight to Blind Children With Rare Disorder.

- Hedgebay Trading Corp., operator of the oldest site for swapping stakes in hedge funds, said September transactions show the fourth monthly drop in prices for funds in the $1.4 trillion industry. Transactions in September took place at an average discount to net asset value of about 17 percent, down from 12 percent in August, according to a secondary market index of prices released by Hedgebay. While prices have recovered from a record discount of 20 percent in March, investors are leery of overpaying for hedge fund investments, Hedgebay said. “The fact that prices declined sharply in September against the backdrop of stable equity markets and the generally strong year-to-date performance of hedge funds is telling,” Hedgebay said in a statement today. “Investors didn’t want to “take the hit.”

Wall Street Journal:

- The White House disclosed the other day that the fiscal 2009 budget deficit clocked in at $1.4 trillion, amid the usual promises to do something about it. Yet even as budget director Peter Orszag was speaking, House Democrats were moving on a dozen spending bills for fiscal 2010 that total 12.1% in more domestic discretionary increases. Yes, 12.1%. Remember, inflation is running close to zero, or 0.8%. The good news, if we can call it that, is that Senate Democrats only want to increase nondefense appropriations by 8% for 2010. Because these funding increases become part of the permanent baseline for future appropriations, the 2010 House budget bills would permanently raise annual outlays for discretionary programs by about $75 billion a year from now until, well, forever. These spending hikes do not include the so-called mandatory spending programs like Medicare and Medicaid, which exploded by 9.8% and 24.7%, respectively, in the just-ended 2009 fiscal year. All of this largesse is also on top of the stimulus funding that agencies received in 2009. The budget for the Environmental Protection Agency rose 126%, the Department of Education budget 209% and energy programs 146%. House Republicans on the Budget Committee added up the 2009 appropriations, the stimulus funding and 2010 budgets and found that federal agencies will, on average, receive a 57% increase in appropriated funds from 2008-2010. By contrast, real family incomes fell by 3.6% last year. There's no recession in Washington. More broadly, the White House and the 111th Congress have already enacted or proposed $3.4 trillion of new spending through 2019 for things like the health-care plan, cap and tax, and the children's health bill passed earlier this year. Very little of this has been financed with offsetting spending cuts elsewhere in the budget.

- Six Steps to Revitalize the Financial System by Sanford I. Weill and Judah S. Kraushaar.

- As the Federal Reserve's next meeting approaches in early November, an internal debate is brewing about how and when to signal the possibility of interest-rate increases. The Fed has said since March that it will keep rates very low for an "extended period." Long before it raises rates, however, it will need to change that public signal to financial markets. Because the recovery is so young and is expected to be so weak, many central bank officials are comfortable, for now, keeping rates very low. But they are beginning to strategize about how to walk away from the "extended period" language. Such questions of communications strategy are likely to be among the issues on the table when officials gather for the next meeting of the central bank's Federal Open Market Committee, which sets interest-rate policy, on Nov. 3 and 4.

- While many venture firms have dialed back their investments amid a punishing economy, Sequoia Capital has made about 20 seed or Series A investments in the past 12 months, more than in the prior two years.

- Two powerful suicide car bombs near high-profile government offices rocked the capital on Sunday in the deadliest attack here in more than two years, killing at least 147 people and raising fresh worry about the capabilities of Iraq's security services ahead of national elections scheduled for January.

- The pain of millions of people across America losing their homes hardly inspires confidence in the future. But in a brutal way, it could be restoring the financial health of the U.S. consumer faster than many recognize. One of the biggest clouds on the economic horizon is the vast amount of debt U.S. households took on during the boom years. The Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income, a burden that many economists believe will take several years to pare down to what they see as a more sustainable level of 100%. During that "deleveraging" process, the logic goes, U.S. consumers -- whose spending makes up more than two-thirds of the U.S. economy and about one-fifth of the global economy -- won't be able to play a leading role in any recovery. The gloomy forecasts, though, miss an important point: Debts have value only to the extent that they are being paid, and a rapidly rising number of U.S. households aren't doing so. Those defaults are leading to losses at banks, a wave of foreclosures, trouble for neighborhoods and strife for families. But they are also providing an immediate, albeit radical, form of debt relief.

- When President Barack Obama swings into Miami Beach Monday night to raise money for Democratic congressional candidates, it will be the 26th fund-raiser of his maiden year in office, compared with the six appearances by his predecessor, George W. Bush, in his first year of office. Just last week, the president raised millions of dollars for the Democrat running for an open Republican House seat in New York, the Democratic National Committee, Massachusetts Gov. Deval Patrick and Connecticut Sen. Chris Dodd. Beyond fund raising, he rallied Democratic faithful for New Jersey Gov. Jon Corzine Wednesday and will do the same on Tuesday for Creigh Deeds, the Democrat facing an uphill fight for the Virginia governor's seat. Amber Wilkerson Marchand, a spokeswoman for the National Republican Senatorial Campaign, said Mr. Obama is risking his reputation as an agent of change by devoting so much time to fund raising, especially for longtime Washington fixtures such as Mr. Dodd, chairman of the Senate Banking Committee, and Senate Majority Leader Harry Reid of Nevada.

- Argentina’s Kirchner Targets the Press. As the state-run economy hits the skids, the government responds with a crackdown on the fee press.

MarketWatch.com:

- General Electric Capital Corp. plans to sell up to $1 billion of Islamic bonds, or sukuk, as early as next week, a banker aware of the deal said Sunday. GE Capital will meet investors in London following a roasdshow in Dubai today and in Asia last week, the banker told Zawya Dow Jones. Citigroup and Goldman Sachs were mandated as lead arrangers of the bond, he said.

IBD:
- Security and anti-money-laundering checks bogged employees down, slowing what should have been a simple transaction. So in 2007, the Atlanta company brought in Pegasystems (PEGA) — and its business process management software — to streamline things.

NY Times:

- The Obama administration and Congress have vowed to regulate derivatives, the complex and often highly speculative financial instruments that were at the heart of the meltdown. Two House committees have approved legislation, but — after heavy lobbying from the banking industry and corporate America— both versions are weak and unlikely to prevent another fiasco. Right now, many derivative deals are executed as private one-on-one contracts, outside the view of the public or regulators. This lack of transparency — about participants, prices and volumes — proved disastrous. In the bailout of American International Group, tens of billions of taxpayer dollars went to pay the world’s biggest banks for derivative bets gone spectacularly wrong.

- A senior administration official said on Sunday that after extensive consultations with Treasury Department officials, Representative Barney Frank, the chairman of the House Financial Services Committee, would introduce legislation as early as this week. The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution. The official said the Treasury secretary, Timothy F. Geithner, was planning to endorse the changes in testimony before the House Financial Services Committee on Thursday.

The Business Insider:
- Quick quiz: What do these enterprises have in common? Farm and construction machinery, Tupperware, the railroads, Hershey sweets, Yum food brands and Yahoo? Answer: They're all more profitable than the health insurance industry. In the health care debate, Democrats and their allies have gone after insurance companies as rapacious profiteers making "immoral" and "obscene" returns while "the bodies pile up." Ledgers tell a different reality. Health insurance profit margins typically run about 6 percent, give or take a point or two. That's anemic compared with other forms of insurance and a broad array of industries, even some beleaguered ones. Profits barely exceeded 2 percent of revenues in the latest annual measure. This partly explains why the credit ratings of some of the largest insurers were downgraded to negative from stable heading into this year, as investors were warned of a stagnant if not shrinking market for private plans.

- The real secretary of education, the joke goes, is Bill Gates. The Bill & Melinda Gates Foundation has been the biggest player by far in the school reform movement, spending around $200 million a year on grants to elementary and secondary education. Now the foundation is taking unprecedented steps to influence education policy, spending millions to influence how the federal government distributes $5 billion in grants to overhaul public schools. The federal dollars are unprecedented, too.

- As more social gamers appear on the web, the market for virtual goods will expand vastly.

NY Post:

- Frankly, I'm scared. In 1998 the world reached its peak temperatures, according to Intergovernmental Panel on Climate Change, and ever since its been downhill. The world is going through a Global Cooling period. According to NASA, the snow-ice cover of Antarctica has actually been increasing over the past several decades. It's worth noting that Nashville, the hometown of Nobel Prize winner Al Gore, last year had its lowest temperatures on record since 1877 -- and Manhattan just had its coolest summer since 1958. Does this mean that all the efforts to prevent Global Warming have actually worked? Are carbon emissions down? Not at all -- in fact, carbon emissions are up about 6 percent since 1998. There doesn't appear to be any provable link between carbon emissions and global temperatures. Among the possible theories is that the Earth has natural cycles and that we go back and forth between warming periods and cooling periods. Another theory is that the climate cycles of the Earth are dependent on sun-spot activity, which has been at its lowest level in decades and scientists estimate will continue to decline over the next century. What does this mean for investors? First, panicked attempts to find alternative energies that require government subsidies to make them succeed are long-term losers.

CNNMoney.com:

- How Apple(AAPL) is gaining on Microsoft(MSFT).

Business Week:
- Inside the App Economy. Beyond the goofy games is a world of useful programs that's making fortunes and changing the rules of business.

- $100 Oil? Don’t Bet on It.

- Can Windows 7 ‘Reset’ Microsoft(MSFT) Shares Higher?

stockpickr:

- Barron’s 10 Tech Takeover Targets.

LA Times:

- Siebert, the first woman to join the NYSE and chief executive of her own brokerage, says hedge funds are at the heart of the financial industry's problems. She contends that regulation is desperately needed to reduce market manipulation, restore investor confidence and eliminate systemic risks that have become so great that they threaten the entire economy. Siebert believes that soaring oil prices that sent the markets into a tailspin this year were the result of manipulation by speculators, who wanted to profit by artificially boosting demand. That, she said, should not be allowed, mainly because such speculation has a real effect on the companies that buy commodities to operate. It also hurts consumers, who pay more for goods and services when these markets are manipulated. And it spooks investors, who lose faith in the entire system when market prices become inexplicably volatile. Siebert would like to see a two-tier schedule in the commodities markets, where those who are using the commodities for production would be able to buy as they do now. But those who use the markets for speculation should be on a tighter leash, allowed to borrow only a fraction as much. Investors also need to know what these companies are doing, she said. That could help average investors understand whether rising oil prices are a sign of runaway inflation or simply a temporary glitch caused by a momentary (and possibly manipulated) hike in demand.

Politico:

- A series of upsets and close calls in big-city elections is producing the first group of politicians to fall victim to voters' economic frustrations: America's mayors. While political observers are focused on the outcome of the Nov. 3 gubernatorial elections in Virginia and New Jersey for early insights into the 2010 midterms, it's in City Hall where the most ominous trend is emerging. Some incumbent mayors have already lost their races. Others have held on to win—or are likely to win next week—with greatly diminished margins from their previous re-election bids. Either way, local incumbents are bleeding badly after being buffeted by the pressures of high unemployment, low tax revenues and a volatile, impatient electorate.

- Senate Democrats are close to obtaining the 60 votes they need to pass a sweeping health care overhaul package, a key Democrat said Sunday. "I think we're close to getting the 60 votes we need to move forward," said New York Sen. Chuck Schumer. Speaking on NBC’s “Meet the Press,” Schumer said that Senate Majority Leader Harry Reid – whom he called a “wizard” at counting votes - was rallying support around a bill that would allow states to opt-out of a government-run public-insurance option. Schumer’s comments came as the health care debate enters its final stretch. Democratic leaders are now in intensified talks about what form of a government insurance option will reach the Senate and House floors. Aside from the opt-out track, Democratic leaders are also pondering whether to include a “trigger” mechanism for a public option. Ben Nelson (D-Nb.), though, said Sunday that he's not committed to vote to kill a GOP filibuster. "I have made no promise," Nelson said on CNN's "State of the Union." I can't decide about the procedural vote until I see the underlying bill. It would be, I think, reckless to say I'll support the procedure without knowing what the underlying bill consists of.

Rasmussen Reports:

- The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 30% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty percent (40%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -10 (see trends).

- Forty-nine percent (49%) of voters nationwide say that passing no health care reform bill this year would be better than passing the plan currently working its way through Congress. A new Rasmussen Reports national telephone survey finds that 39% disagree and say the current effort is better than doing nothing.

PalmBeachPost.com:

- Madoff colleague Picower found dead at Palm Beach home. Palm Beach billionaire Jeffry Picower, who was found at the bottom of his South Ocean Boulevard pool Sunday afternoon, has died, according to a spokeswoman at Good Samaritan Medical Center and Palm Beach police. Picower could not be revived by paramedics, who worked unsuccessfully for 20 minutes at the scene to get a pulse.

Reuters:

- Many of the world's wealthiest investors remain traumatized by the losses they sustained during the financial crisis and are clutching on to safe, low-yielding assets rather than taking any risks. Wealth managers say that even after a 75 percent rise in world stocks since March, a lot of clients' money has yet to move. Investors have, in the words of one strategist, become "structurally risk averse." That is prompting investment managers to seek creative ways to unleash funds held in safe cash positions, and may be the key to sustaining this year's rally in stocks and riskier assets. Managers are enticing clients with guarantees of investment capital or by offering other rewards to make losses less likely. It is a phenomenon similar to that seen in 2002-03 when investors were reeling from the bursting of the internet stocks bubble. So some may even have been twice burned. How much is tied up is difficult to ascertain. Fund tracker EPFR Global reckons that some 94 percent of the net flows to U.S. money market funds it tracked in 2008 has already exited. But going further back, it says U.S. money funds that report weekly took in a net $191 billion in 2007 as a whole. That suggests that the cash unwinding of the past two years is at most only two thirds through. "There is a lot of juice," said Michael Dicks, head of research and investment strategy at Barclays Wealth. "Even if they went half way from where they are now to where they were pre-crisis, that would produce a significant amount of momentum."

- Federal prosecutors in the Galleon Group case have sent a subpoena to a former employee of SAC Capital Advisors, a sign that the scope of the probe into the largest hedge fund insider trading case in history is expanding, the Wall Street Journal reported, citing people familiar with the matter. The subpoena seeks trading records from Richard Grodin, a former SAC hedge fund manager who employed a cooperating witness in the insider trading case announced last week, the Journal said.

- Investors should swap their shares of Yahoo Inc (YHOO) for those of Google Inc (GOOG) because Yahoo's advertising revenues are on the decline while Google's are rising, Barron's reported in its October 26 edition.Google's cost to acquire new subscribers is also falling and its marketshare for Web search grew in September while Yahoo's did not, Barron's wrote.

Financial Times:

- Johnson & Johnson(JNJ), the US healthcare group, will in future take more long-term minority stakes and forge alliances with rival pharmaceuticals companies in an effort to share the rising costs and risks of drug development. William Weldon, chief executive, told the Financial Times: “The cost of developing compounds has become so high and become so risky that we are looking to share the risks and opportunities and find more and more partnerships.” His remarks reflect a trend even by large, cash-generative pharmaceuticals companies to find new ways to share the potential costs as well as the profits in proving the safety and efficacy of new drugs to regulators and winning agreement by healthcare systems to reimburse them. Mr Weldon stressed that he had no deals under consideration, but that US healthcare reform had added even more uncertainty to the environment for drug development.

Economist.com:

- A special report on China and America. America and China need each other, but they are a long way from trusting each other, says James Miles.

El Pais:

- The recession in Spain will have its worst year in 2010 as bad loans continue to rise, albeit at a slower rate, and companies run out of energy to cope with the downturn, citing an interview with Banco Pastor SA Chairman Jose Maria Arias.

Il Sole 24 Ore:
- European Union Monetary Affairs Commissioner Joaquin Almunia said the biggest risk for4 the region is the combination of a weak economy and a still fragile banking system.

China Daily:

- The US military will give a tour of several sensitive military sites, including the strategic command headquarters in charge of nuclear weapons and cyber war, to a top Chinese military leader who will begin his visit there on Saturday, a senior Chinese military officer said. Chinese military experts said the move by the Pentagon is a small but significant step to show sincerity to the Chinese military, which has been observed and questioned by the US military for years. During the 11-day visit, vice-chairman of the People's Liberation Army's top command Xu Caihou will visit the Pacific Command, Strategic Command, several army and naval bases and a naval academy, said the director of the Defense Ministry's Foreign Affairs Office Qian Lihua in an interview on Friday with China Daily.

Weekend Recommendations
Barron's:
- Made positive comments on (GOOG), (UNH), (WLP), (SGP), (TXT), (TDC), (NVTL), (TJX) and (CI).

Citigroup:

- Reiterated Buy on (URBN), target $38.

- Reiterated Buy on (IR), target $40.

- Reiterated (BUY) on (SLB), target $80.

Night Trading
Asian indices are unch. to +1.0% on avg.

Asia Ex-Japan Inv Grade CDS Index 97.0 -2.0 basis points.
S&P 500 futures +.11%.
NASDAQ 100 futures +.19%.

Morning Preview
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Earnings of Note
Company/Estimate
- (GLW)/.39

- (MHP)/1.05

- (VZ)/.59

- (VFC)/1.93

- (CF)/1.02

- (WMS)/.36

- (SLG)/.98

Upcoming Splits

- None of note

Economic Releases

10:30 am EST

- Dallas Fed Manufacturing Activity for October is estimated to fall -.5% versus a -6.4% decline in September.

Other Potential Market Movers
- The Chicago Fed National Activity Index and the Treasury’s 5-year TIPS auction could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and automaker stocks in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.