Wednesday Watch

Evening Headlines
Bloomberg:

• RBS Leads Bank Offerings With Yields Lowest in Five Years: Credit Markets. Royal Bank of Scotland Group Plc, issuer of the second best-performing financial bonds this month, led lenders selling $7.5 billion of debt today after bank borrowing costs fell to the lowest in more than five years. RBS’s $3.6 billion bond offering came after average bank yields fell yesterday to 3.815 percent, the lowest since June 2005, Bank of America Merrill Lynch index data show. HSBC Holdings Plc, ING Groep NV, Westpac Banking Corp. and Bank of America Corp. also sold debt in the busiest day for bank issuance in dollars since July 21, according to data compiled by Bloomberg. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, dropped 3.4 basis points to a mid-price of 107.2 basis points as of 7 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of credit-default swaps linked to 125 companies with investment-grade ratings, fell 4.02 to 110.94, Markit prices show.
• California City With $800,000 Manager Has Ratings Lowered to Junk by Fitch. Bell, the Los Angeles suburb that paid its city manager almost $800,000 a year, had its credit cut to junk grade by Fitch Ratings on concern the city may default on debt and had improperly raises taxes to pay off bonds. Fitch said it lowered the rating on $50 million of general obligation bonds seven steps to BB, or junk, from A+, and to BB- from A+ on $7.5 million of pension bonds sold in 2005. Standard & Poor’s took similar actions Aug. 10. The actions follow Los Angeles Times reports that Robert Rizzo, Bell’s manager, got almost $800,000 a year and that part- time city councilors took home almost $100,000 annually, mostly by serving on municipal boards and commissions.
• Investors are paying the most in 22 months to borrow aluminum for a day in London and the highest fees in more than six months for tin, adding to signs of scarce supply for both metals. Aluminum's so-called tom-next spread rose today as high as $8 daily for each metric ton, the highest level since Oct. 15, 2008, London Metal Exchange figures show. The equivalent fee for tin touched $10, the highest level since Feb. 5.
• Ukraine to Limit Exports of Wheat, Barley Through Dec. 31; Corn is Exempt. Ukraine, the world’s biggest barley exporter, plans to limit overseas sales of the grain and wheat through the end of the year to shore up domestic food supply, Agriculture Minister Mykola Prysyazhnyuk said. Export quotas will be probably 1 million metric tons for barley and 1.5 million tons for wheat from Sept. 1 through Dec. 31, the minister said today. Corn is likely to be exempt from the curbs, and 1 million tons of grain already at ports for export will be allowed to go before the quotas start, Prysyazhnyuk said.
• BHP(BHP) Said to Weigh Hostile Bid for Potash(POT) After Offer Rejected. BHP Billiton Ltd. may go directly to shareholders as early as this week with its $39 billion unsolicited takeover offer for Potash Corp. of Saskatchewan Inc., said two people with direct knowledge of the matter. BHP, the world’s largest mining company, is unlikely to raise the bid before talks with investors, though a final decision hasn’t been made, said the people, who declined to be identified because the plan isn’t public. Potash Corp., the world’s largest fertilizer producer, rejected BHP’s $130-a-share offer yesterday, calling it “grossly inadequate,” and adopted a shareholder rights plan as a defense. “Potash is in play now,” said Prasad Patkar, who helps manage about $1.6 billion at Platypus Asset Management Pty in Sydney, including BHP shares. “Price action overnight on Potash tells you that a higher bid is coming. You can’t rule out BHP going hostile.”
• Frank Seeks Meeting With Obama to Push Warren as Chief of Consumer Agency. U.S. Representative Barney Frank, who helped write the law that creates the Bureau of Consumer Financial Protection, requested a meeting with President Barack Obama as part of his push to have Harvard law professor Elizabeth Warren named head of the new agency. Frank, the Massachusetts Democrat who leads the House Financial Services Committee, joined 41 other lawmakers in urging “no further delay” on nominating Warren, 61, as the bureau’s first leader in a letter to Obama dated yesterday.
• Copper Gains as Stockpiles Plunge to 9-Month Low, Boosting Demand Outlook. Copper climbed to the highest in more than a week as inventories slumped a nine-month low, raising speculation that demand is improving. Stockpiles tallied by the London Metal Exchange dropped for a third day to 405,025 tons yesterday, the lowest level since Nov. 13. Canceled warrants, or inventories earmarked for withdrawal, rose for a second day, by 11.5 percent.

Wall Street Journal:

• Blagojevich Guilty of Lying to Federal Agents; No Verdict on Other Counts. A federal jury found former Illinois Gov. Rod Blagojevich guilty Tuesday of one count of making false statements to the Federal Bureau of Investigation but failed to reach a verdict on 23 other corruption counts. Prosecutors said they would seek a retrial on the remaining counts, but Mr. Blagojevich claimed a victory moments after the verdict was read. "This jury shows you that the government threw everything but the kitchen sink at me," Mr. Blagojevich said. "They could not prove I did anything wrong—except for one nebulous charge from five years ago." A juror speaking Tuesday evening to the Associated Press said the jury was split 11-1 in favor of convicting Mr. Blagojevich on the charge of selling the Senate seat vacated by President Barack Obama. Juror Erik Sarnello, 21 years old, of Itasca, Ill., said a female holdout "just didn't see what we all saw." Mr. Sarnello said the counts involving the Senate seat were "the most obvious." Mr. Blagojevich is the fourth Illinois governor in recent years to be tried for corruption. The political implications of the trial have taken center stage as campaigning for November's midterm elections has heated up this summer. The case was expected to stretch into the autumn and include a slate of high-profile Democrats. But the government rested its case earlier than expected and Mr. Blagojevich did not present a defense. The prospect of a retrial after 14 days of deliberation raised the possibility that many boldfaced names in political circles could still be called to testify, including Democratic U.S. Rep Jesse Jackson Jr. and White House Chief of Staff Rahm Emanuel.
  
• Chicago Could Have to Pay Up in Order to Sell $160 Million Muni Deal. The city of Chicago could have to pay up to find a home for nearly $160 million in debt it's looking to sell in the municipal bond market this week, offering higher yields to entice investors following two recent ratings downgrades.
• Brokers, Critics Spar Over 'Fiduciary' Rule. Every day, brokers call their customers with stock tips, and the brokers can say pretty much what they like so long as the investment they're pitching is "suitable" for the customer. Now the rules underlying those conversations are due for a big change. The new financial law allows the Securities and Exchange Commission to set a tougher standard for brokers' advice, and a battle is already flaring over how strict the SEC should be. The Dodd-Frank law, which took effect last month, says the SEC can hold brokers to a higher "fiduciary duty" standard, compelling them to put the interests of clients before their own. Investment advisers are already held to that standard. That could mean brokers would have to disclose more conflicts of interest to clients, such as the commissions they get for selling certain high-fee mutual funds. Otherwise they could be accused of failing to put the customer first. All that depends, though, on how the SEC makes the rules. The agency is set to complete a study by January, with proposed rules to follow shortly after. Some in the industry paint a picture of brokers paralyzed by red tape, unable to say anything about a stock or mutual fund without risking punishment for failing to uphold fiduciary duty—particularly if the stock tanks later. As a result, they say, average investors might end up online, where they can't get any help at all.
• France Prepares to Deport Foreign Gypsies. France is preparing to deport hundreds of foreign Gypsies as part of a drive to clamp down on lawbreaking by Roma, Interior Minister Brice Hortefeux said Tuesday. The deportations, scheduled to start Thursday, follow the dismantling of 51 illegal camps—set up by Roma of eastern origin and by other Gypsies, including French citizens—over the past three weeks. Around 700 of the people expelled from their camps who were staying in France illegally will be flown home to Central and Eastern Europe, he said.
• 'Vultures' Save Troubled Homeowners.
• The Avastin Mugging. The FDA rigs the verdict against a good cancer drug. If there's an American precedent for the medical central planning of ObamaCare, it's the Food and Drug Administration. Witness a looming FDA ruling that may deplete the drug arsenal for terminally ill cancer patients. Last month, an FDA advisory board recommended withdrawing government approval of Avastin as a treatment for advanced breast cancer. The decision betrays a bias that puts costs above treatment, and unless the FDA leadership overrules its own experts, the 40,000 women killed by breast cancer each year will be denied an important clinical option.

CNBC:

• Can M&A Activity Get the Market the Lift if Needs?
• General Motors Delays Filing for IPO: Sources.
  

Business Insider:

• Just When You Thought The Economy Was Headed Back Into The Tank...Banks Start Lending Again. (graph) This is a shocker, but the three-year-long decline in bank lending may be at an end. As Northern Trust economists Paul Kasriel and Asha Bangalore observe, bank lending actually increased in July, for only the second time in the past 21 months.
• OUTRAGE OF THE DAY: Now the FHA Is Subsidizing Sales Of $3 Million New York Apartments. Government support for the U.S. housing market hit a new high (low?) recently, when the Federal Housing Authority--an agency created to help low-income people buy homes--began subsidizing multi-million dollar condo apartments in New York City.

Zero Hedge:

• Two Norwegians Face Up To 6 Years of Prison Time for Doing What High-Frequency Trading Algos Do In The US Every Single Day.
• Gulf States Endorse "Military Option" Against Iran. The latest development in the neverending saga of Iran, comes via the Middle East Media Research Institute (MEMRI) which states that according to the Gulf states, the military option may be the best option to deal with the Iranian nuclear program, as the contra-Iran (no pun intended) axis is now complete. The article also reflected "the Gulf states' growing tension and concern regarding Iran's nuclear program, and mentioned their proximity to the Bushehr reactor." What is scary is that the straw man of military intervention is pretty much presented as a fait accompli, and alternatives to military intervention are not even considered as an option.

CNN:

• Critics Say Obama's Message Becoming 'Incoherent'.

Women's Wear Daily:

• Execs S0und Off on Sourcing Woes at Footwear News Platform. Top footwear executives said this morning that sourcing challenges in China are likely to get even worse over the next year, translating into sizeable price increases across the supply chain.

The Huffington Post:

• Will Anyone Be Punished For Citibank's(C) $40 Billion Subprime Lie? Finally, some good news on Wall Street accountability. A federal judge is holding up the SEC's effort to let Citigroup's top executives off the hook for misleading their own shareholders about $40 billion in subprime debt.

unicef:

• In Flood-Devastated Pakistan, 3.5 Million Children Are at Risk of Disease. More than 3 million children are at high risk of deadly water-borne diseases in Pakistan, making them the most vulnerable victims of one of the worst natural disasters in history.

UNHCR:

• UNHCR Says Vast Scale of Emergency in Pakistan Still Not Being Grasped. Pakistan's emergency continues to worsen as bloated rivers head southwards, flooding new areas and triggering massive further displacement. Urgent needs continue to overwhelm the capacity of agencies and authorities to respond. Overall, we see a risk that the full scale of the emergency is still not being grasped by the world community.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-five percent (45%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19 (see trends).

Reuters:

• Analog Devices(ADI) Q3 Profit Beats Street, Outlook Strong. Microchip maker Analog Devices Inc. posted a third-quarter profit that topped market estimates, helped by strong growth at its industrial segment, and gave a better-than-expected fourth-quarter outlook. The company, which makes chips for cars, video game consoles and defense equipment, said revenue from its key industrial segment rose 69 percent. Third-quarter net income rose to $199.5 million, or 65 cents a share, from $65.5 million, or 22 cents a share, a year ago. Revenue rose 46 percent to $720.3 million. Analysts were expecting earnings of 60 cents per share, on revenue of $706.5 million, according to Thomson Reuters I/B/E/S. For the fourth quarter, the company forecast earnings of $0.68-$0.72 per share, on revenue of $740-$770 million. Analysts are projecting earnings of 61 cents per share, on revenue of $715.5 million. The Norwood, Massachusetts-based company's shares, which have gained 4 percent in the last 52 weeks, were up 2 percent at $29.27 after the bell.
• Connecticut May Have Just a Week's Worth of Cash. Connecticut this autumn probably would have just a little more cash than it needs to pay a week's expenses unless it issues $520 million of debt, according to the state comptroller.
• Democrat Says Abolish Freddie, Fannie. Fannie Mae and Freddie Mac should be abolished rather than reformed as part of the Obama administration's planned overhaul of the government's role in housing finance, Rep. Barney Frank, chairman of the House Financial Services committee, said on Tuesday. "They should be abolished," Frank said in an interview on Fox Business, when asked whether the mortgage giants should be elements in housing market reform. "They only question is what do you put in their place," Frank said.
• US Says Bankruptcies Reach 5-Year High. U.S. bankruptcy filings have reached the highest level since 2005, government data released on Tuesday show, as the economy slows and the unemployment rate hovers just below double digits. There were 422,061 bankruptcy filings between April and June, according to the Administrative Office of the U.S. Courts, up 9 percent from 388,148 in the prior three-month period, and up 11 percent from 381,073 a year earlier. For the year ended June 30, there were 1.57 million bankruptcies, up 20 percent from 1.31 million a year earlier. Consumer bankruptcies rose 21 percent to 1.51 million, and business bankruptcies rose 9 percent to 59,608.

Financial Times:

• $60 Billion Saudi Arms Deal Poised for Smooth US Passage. One of the largest arms deals in US history, involving the sale of weaponry worth some $60bn to Saudi Arabia, is likely to go through Congress without significant objections, according to people on Capitol Hill. The deal would include 84 Boeing F-15 fighter aircraft along with Blackhawk and Apache helicopters.
• US Law to Squeeze 'Conflict Minerals'. The links between electronic devices such as smartphones and the bloody conflict in the Congo may to date have been largely invisible to most consumers. But a combination of increasing public pressure and a far-reaching new regulation in the US could well change this. A fresh law, buried in section 1,502 of the Wall Street reforms passed last month, will force many manufacturers to overhaul checks on their supply chain in an attempt to identify any “conflict minerals” that can be traced back to the Democratic Republic of the Congo or adjoining countries. Thousands of companies will be affected by the law. The Congo region is a widely used source of important industrial metals and minerals such as tantalum, copper, germanium, gold, manganese and cobalt. Tantalum, for example, is used in very small amounts in crucial electronic components such as capacitors, which find their way into everything from cars, to personal computers and mobile phones. The existing practice of many manufacturers on relying on undertakings from their supply chain is unlikely to satisfy the law, due to be codified by the regulator, the Securities and Exchange Commission, before April. “It’s not good enough for companies to just say their suppliers have told them that they don’t use conflict minerals,” Darren Fenwick, senior manager of government affairs at anti-genocide campaign group the Enough Project, said. “They need to undertake proper due diligence.” That task of due diligence is not an easy one, given that the minerals pass through several stages – including a smelter process – between the mines and the assembly plant. Industry groups warn that too onerous an audit requirement could deter companies from using the Democratic Republic of the Congo entirely, cutting off a financial lifeline to the region. The American action is also likely to have a wider international effect. The disclosure requirement will affect companies listed in the US, even if their headquarters are elsewhere, drawing a number of Chinese, European and Latin American manufacturers within its scope.
• Accounting Change Set to Burden Companies. Retailers, airlines and ship operators can expect to assume billions of dollars more liabilities on their balance sheets as the result of a radical overhaul of lease accounting proposed by US and international standard setters. The new rules have been drawn up in spite of fierce opposition from multinationals, which worry that the shake-up will make their corporate accounts more volatile and vastly increase their liabilities. Some companies fear they may breach bank loan covenants as a result. Under the rules, the liabilities of many companies would increase as they are forced to move rented assets such as aircraft, ships, shops and even photocopiers on to their balance sheets. On average, the changes will increase a company’s reported debt load by 58 per cent, according to PwC and Erasmus University. Senior accountants say few companies and investors are prepared for the volatility the new rules will bring to corporate reporting. The rare joint proposals from the International Accounting Standards Board and the US Financial Accounting Standards Board have also been criticised for failing to reduce complexity. Veronica Poole, a senior partner at Deloitte, the accountancy firm, believes the financial impact of the proposed standard could go so far as to cause some companies to breach loan covenants. “A lot of companies, particularly in the current turbulent times, are very much on the edge of their covenant compliance,” she said.

International Finance News:

• China's National Development and Reform Commission recommended stabilizing the country's real estate prices after new property prices rose recently in some second and third tier cities, citing the economic planner.

Financial News:

• Chinese central bank adviser Xia Bin said China shouldn't make any short-term changes to its property market measures. The nation shouldn't rush when dealing with the property market and should take two years to "solve" real estate issues.
  

Beijing Evening News:

• Beijing may prohibit real estate developers from directly taking advance payments from purchases of houses and condominiums, citing developers. Homebuyers must make payments to a designated account at a bank under new rules that may be implemented this year.
  

Evening Recommendations
Citigroup:

• Reiterated Buy on (HD), target $38.

Night Trading

• Asian equity indices are -.25% to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 118.0 -8.0 basis points.
  
• Asia Pacific Sovereign CDS Index 116.0 -4.0 basis points.
  
• S&P 500 futures -.07%.
  
• NASDAQ 100 futures -.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CHS)/.16
• (TGT)/.92
• (DE)/1.22
• (BJ)/.73
• (EV)/.38
• (NTAP)/.46
• (PETM)/.36
• (AMAT)/.18
• (GYMB)/.42
• (SNPS)/.37
• (LTD)/.36

Economic Releases
10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory drawdown of -1,000,000 barrels versus a -2,988,000 barrel decline the prior week. Gasoline supplies are expected to fall by -375,000 barrels versus a +409,000 barrel increase the prior week. Distillate inventories are estimated to rise by +1,500,000 barrels versus a +3,456,000 barrel gain the prior week. Finally, Refinery Utilization is expected to fall by -.63% versus a -3.1% decline the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly MBA mortgage applications report could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and automaker shares 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 day.