Monday Watch

Weekend Headlines
Bloomberg:

• Bond Rating Prognosis Deteriorates With 'Rehab' Recovery: Credit Markets. Ratings firms are lowering their assessments of future U.S. corporate credit quality more often than they are raising them for the first time since the beginning of 2010 in a trend that may foreshadow losses for bondholders enjoying the biggest quarterly rally in a year. Moody’s Investors Service cut its outlook on 120 issuers this quarter, while raising if for 40, according to data compiled by Bloomberg. Standard & Poor’s reduced 76 companies and lifted 51. The reversal comes as reports show the economic recovery is slowing and signals that the 4.6 percent gain in corporate bonds this quarter, the most since they returned 9.58 percent in the third quarter of 2009, may lose steam. Moody’s downgraded its outlook on retailers to “stable” from “positive” on Sept. 22, saying the industry “exhausted the ability” to boost profit through slashing costs and streamlining inventory. “We’re not so much in recovery as rehab,” said John Lonski, the chief economist of Moody’s Capital Markets Group in New York. “There are some very large millstones hanging around the neck of the American consumer.”
• Ireland Prepares to Lay Out Anglo Irish Cost to Calm EU Rescue Speculation. Ireland will disclose the final expenses of bailing out Anglo Irish Bank Corp. this week and try to calm investors’ concern that the government may require emergency funds from the European Union. Finance Minister Brian Lenihan, who said Sept. 22 that the costs will be “manageable,” is scheduled to publish the latest estimates by Oct. 1. While the state has pledged 22 billion euros ($29.6 billion) for Anglo Irish, Standard & Poor’s says the final bill may be 35 billion euros, equal to 20 percent of gross domestic product. The extra yield that investors demand to hold Irish bonds over German bunds surged to a record last week as investors fret about the country’s ability to cap the cost of its bank bailout and cut the budget deficit as the economy shrinks. Anglo Irish may need as much as 7 billion euros of additional capital, said two people with knowledge of the matter who declined to be identified before an official announcement. The yield on Ireland’s 10-year bond has jumped 124 basis points since Aug. 10, when the European Commission allowed the government to pump extra funds into Anglo Irish.
• Chinese Property Bust Is Morphing Into a Slow Leak: Andy Xie. It’s Shanghai hairy-crab season. To cook them, you put them in a container with cold water. They feel like they’re back in a lake and get comfortable. You then cover it with a heavy top and light a fire below. You can hear scratching sounds. They start faintly, then furiously, then faintly again, then nothing. When it’s quiet for a few minutes, you lift the top and see the crabs all golden brown. Dip them in vinegar and ginger for a delicious meal. China’s property speculators are like crabs in cold water already. They feel good, kicking their legs once in a while. They don’t see any danger. Little do they know the heavy top has been lowered over their heads and a fire is lit below. They will be cooked, but they just don’t know it yet. In April, I told readers I would let them know when China’s property bubble was about to burst. The market has now peaked. It will trend down gradually for the rest of the year. When expectations of a yuan revaluation reverse and capital outflows ensue, probably in 2012, the market will deflate faster. China has entered a property bear market that will last for five years. The average prices in larger cities are likely to decline by half or more. Land values will fall by much more. In the biggest and craziest bubble in Zhejiang Province, they may drop 80 percent or more.
• China to Levy Anti-Dumping Duty on U.S. Poultry, Ministry of Commerce Says. China will impose an anti-dumping duty as high as 105.4 percent on U.S. broiler chicken products, effective tomorrow, the Ministry of Commerce said today. China found that the U.S. industry dumped such products on the Chinese market, hurting domestic production, the ministry said. The tax rate will be 50.3 percent to 53.4 percent for those U.S. producers who cooperated with the investigation and 105.4 percent for those who didn’t, it said.
• Chavez Foes Seek Electoral Gains as Venezuela Recession Stirs Discontent. Opposition candidates in Venezuela are seeking to take advantage of voter discontent with rising crime and 30 percent inflation to limit President Hugo Chavez’s power in congressional elections today.
• Stephen Burke to Succeed Jeff Zucker as NBC Chief After Comcast(CMCSA) Buys Stake. Comcast Corp. Chief Operating Officer Stephen Burke will succeed Jeff Zucker as chief executive officer of NBC Universal as the new owner moves to reshape management once the majority purchase is completed.
• Unilever Near Deal to Buy Alberto Culver, May Fetch $4 Billion, WSJ Says. Unilever Plc is near a deal to acquire Alberto Culver Co., maker of Alberto VO5 and TRESemme hair care products, the Wall Street Journal said, citing unidentified people familiar with the matter. Terms of the purchase couldn’t be obtained, the newspaper said. Alberto Culver, based in the Chicago suburb of Melrose Park, has a market value of $3.1 billion, the newspaper said. The company may be valued at as much as $4 billion with a typical take-over premium of 20 percent to 30 percent, the Journal reported.
• Sinochem Is Said to Be Likeliest to Trump BHP's(BHP) $40 Billion Bid for Potash(POT). Sinochem Group, China’s largest fertilizer trader, has emerged as the likeliest bidder to rival BHP Billiton Ltd.’s $40 billion offer for Potash Corp. of Saskatchewan Inc., three people familiar with the matter said.
• China's Asian Charm Offensive in 'Shambles' Over Disputes With Neighbors. China may be undermining its effort to build strong ties with its neighbors and draw them away from the U.S. orbit as it seeks to impose its will in territorial disputes with Japan and Southeast Asian nations. Relations between Asia’s two biggest economies deteriorated to the lowest point in five years during the 17-day detention of a Chinese fishing boat captain before Japanese authorities last week decided to release him. China opposed U.S.-South Korea military exercises aimed at deterring North Korea, and dismissed regional efforts to mediate maritime territorial claims.
• Belgium Yields Rise More Than Ireland in Parliament Paralysis: Euro Credit. Belgium’s borrowing costs relative to those of Germany are rising at the fastest rate in the euro area as a leadership vacuum undermines efforts to cut the region’s third-biggest debt burden. Investors demand a yield premium of 90 basis points to lend to Belgium rather than Germany for 10 years, up 41 percent from 64 basis points on Sept. 3, when Socialist Party leader Elio Di Rupo called off talks to form a government. Spreads on Irish debt widened 21 percent in the same period to 413 basis points.
• Japanese Exports Expand at Slowest Pace This Year as Global Demand Cools.
  

Wall Street Journal:

• Credit Unions Bailed Out. U.S. Backs $30 Billion in Bonds to Stabilize Key Institutions. Two years after the peak of the financial crisis, the federal government swooped in to stabilize a crucial part of the credit-union sector battered by losses on subprime mortgages. Regulators announced Friday a rescue and revamping of the nation's wholesale credit union system, underpinned by a federal guarantee valued at $30 billion or more.
• iPhone Demand Outstrips Supply in China. China Unicom (Hong Kong) Ltd. said its supply of Apple Inc.'s(AAPL) iPhone 4 handsets is insufficient to meet user demand but that it will increase its supply as quickly as possible. Sales of the model started at a much faster pace than when older versions of the iPhone went on sale in China last year.
• Sizable Paycheck for Citi's Prize Hire. Citigroup Inc.'s newest prized banker has won quite a prize of his own: a pay package that could hit as much as $30 million over three years, according to people familiar with the matter. The deal with Stephen Trauber, an energy banker who defected this month to Citigroup from UBS AG, comes months after U.S. Treasury Department "pay czar" Kenneth Feinberg ended his oversight of Citigroup's pay practices. The pay-czar's job was created to oversee compensation at banks like Citigroup that received significant government aid during the financial crisis after Wall Street pay drew ire from Congress and shareholders.
• The Regulation Tax Keeps Growing. Blame Washington, not China, for the decline of American manufacturing. The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income. This cost is in addition to the federal tax burden of 21%, for a combined cost of 35% of national income. One out of every three dollars earned in the U.S. goes to pay for or comply with federal laws and regulations, and new policies enacted in 2010 for health care and financial services will increase this burden.

Bloomberg Businessweek:

• Obama's Stimulus Plan Made Crisis Worse, Taleb Says. U.S. President Barack Obama and his administration weakened the country’s economy by seeking to foster growth instead of paying down the federal debt, said Nassim Nicholas Taleb, author of “The Black Swan.” “Obama did exactly the opposite of what should have been done,” Taleb said yesterday in Montreal in a speech as part of Canada’s Salon Speakers series. “He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.” Today, Taleb said, “total debt is higher than it was in 2008 and unemployment is worse.”

Marketwatch.com:

• Dagong Raps SEC Denial, Considers Legal Action. Chinese rating agency Dagong Global Credit Rating Co. called the Securities and Exchange Commission's recent denial of its application as an officially recognized bond rater in the U.S. discriminatory and said it considers taking legal action against the agency.

CNBC:

• Computer Attacks Linked to Wealthy Group or Nation. A powerful computer code attacking industrial facilities around the world, but mainly in Iran, probably was created by experts working for a country or a well-funded private group, according to an analysis by a leading computer security company.

IBD:

• Marketer Of Health Products Finds New Way To Attract Customers. Herbalife (HLF), a direct seller of weight control shakes and nutritional products, seems to have found a formula that works in a broad range of geographies.

NY Times:

• Voters Moving to Oust Judges Over Decisions. After the State Supreme Court here stunned the nation by making this the first state in the heartland to allow same-sex marriage, Iowa braced for its sleepy judicial elections to turn into referendums on gay marriage. The three Supreme Court justices on the ballot this year are indeed the targets of a well-financed campaign to oust them. But the effort has less to do with undoing same-sex marriage — which will remain even if the judges do not — than sending a broader message far beyond this state’s borders: voters can remove judges whose opinions they dislike.
• In This War, Movie Studios Are Siding With Your Couch. SOMETIME in the next few months, there is likely to be an explosion in the movie business. The question is which studio will detonate the bomb.

CNNMoney:

• Bank Fee Whac-a-Mole: New Charges Hit Accounts. Bank fees: They're like a game of Whac-a-Mole. The minute one set is banned, a whole new set pops up. In August, the Card Act banned a variety of fees -- including certain overdraft and excessive late charges. But one month later, banks are increasing existing fees and finding creative new ways to charge customers more for credit cards, so-called "free" checking accounts and banking services.
• Flat-Screen TV Prices to Plunge for Holiday Season.
  

Business Insider:

• You Can't Read About The Race To Save The Euro, And Not Think The Euro Is Doomed. The WSJ has a follow-up to its Friday bombshell about the secret EU committee -- formed during the financial crisis -- to protect against a default by one of the country's members. This time it's tick-tock of what happened earlier this year in the days and hours leading up to the establishment of EuroTARP. You should read the article for the all the details, but it's hard to read it and feel any confidence that the Euro is in good shape.
• Tens Of Thousands Of Job Losses Coming In A Few Weeks, As Key Stimulus Program Ends.
  

Zero Hedge:

• Three Wholesale Credit Unions Nationalized As US Securitizes $50 Billion In Legacy Toxic Assets; Failure "Sweep Under The Rug" Friday Just Got Real.
• China: Proudly Demolishing Buildings Before Completed In Pursuit Of The Great Housing Bubble Perpetual Engine. Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat. After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La.

Washington Post:

• Walking Away With Less. A new wave of distressed home sales is rippling, more quietly this time, through American cities and suburbs.

Boston Globe:

• John Kerry: Democrats' Woes Stem From Uninformed Voters. It's the electorate, stupid! A testy U.S. Sen. John F. Kerry yesterday blamed clueless voters with short attention spans for the uphill battle beleaguered Democrats are facing against Republicans across the nation. “We have an electorate that doesn’t always pay that much attention to what’s going on so people are influenced by a simple slogan rather than the facts or the truth or what’s happening,” Kerry told reporters after touring the Boston Medical Center yesterday. Conservative political blogger William Jacobson, who writes Legal Insurrection, immediately pounced on Kerry’s comments, saying that attitude is why voters are looking to shake up Capitol Hill by electing upstart candidates such as U.S. Sen. Scott Brown. “It just continues the Democrats’ theme that the reason people are upset is because they don’t understand. They’re not smart enough. That sort of rhetoric just gets people even more upset,” said Jacobson. John Feehery, a Washington D.C.-based Republican consultant, said Kerry’s comments mark yet another embarrassing stumble for the gaffe-prone senior senator. In 2006, the former presidential candidate had to apologize for a statement he made at a California college that U.S. students who did not study hard and stay in school would end up “stuck in Iraq.” “I think that arrogance sums up why John Kerry didn’t get elected president,” Feehery said. “He’s out of touch.”
• The Lenders Clamp Down. What good are ultralow mortgage rates if you can’t plow through the blizzard of paperwork required to get a loan?

Politico:

• Democrats Fear Midwestern Meltdown. Two years after President Barack Obama swept the Midwest, Democratic fortunes in the region are sagging, with the GOP poised to make big gains by scooping up disaffected independent voters in a wide swath of states hit by job losses, budget woes and political scandal. From Ohio to Iowa, there’s a yawning stretch of heartland states whose citizens voted for Obama and congressional Democrats in 2008, but who have lost patience waiting for an as-yet undelivered economic revival that was first promised in 2006, and then two years later. Now, they look set to stampede toward the out-of-power party.
  

Financial Times:

• Europe's central banks sold 6.2 metric tons of gold in the year ended yesterday, down 96% from the previous year, citing data from the Central Bank Gold Agreement. The sales are the lowest since the CBGA was signed by euro region central banks plus Sweden and Switzerland in 1999. While Central banks in the 1990s and 2000s were willing to exchange non-yielding bullion for sovereign debt, providing a steady annual return, they now prefer the security of gold.
• US Treasury Stumbles Selling Citi(C) Shares. The US government is in danger of missing its deadline of divesting all of its Citigroup shares by the year-end after a fall in stock market trading volumes prompted authorities to slow down sales in July and August. The lull could prompt the US Treasury, which has a stake of about 17 per cent in Citi, to consider a share offering instead of selling the stock in small quantities in the market, according to bankers and analysts.
• Germany Backs Tough EU Deficit Rules. The German finance minister has thrown his weight behind a European Union proposal for tough new rules and fines against member countries that fail to get their fiscal houses in order, setting up a showdown on Monday at a high-level meeting of his counterparts in Brussels. In a letter to all 27 EU finance ministers, Wolfgang Schäuble said he “chiefly supports” the stringent proposals to be unveiled Wednesday by José Manuel Barroso, European Commission president, which include millions of euros in fines for countries that fail to cut sovereign debt levels. But the letter and a position paper, obtained by the Financial Times, also goes further, suggesting EU development and agricultural funding should be suspended for repeated violators. It also proposes that voting rights in the powerful Council of Ministers be suspended for countries that fail to meet fiscal benchmarks.
• Basel Threat to Small Business. Tough rules that require investment banks to hold additional capital against risky assets will hit lending to smaller companies by making it more expensive to securitise loans, bankers and analysts have warned.

Irish Independent:

• Wall Street Titans Bet Against Ireland. WALL Street hedge funds are thought to be leading the campaign to "short sell" Irish government bonds, making vast profits in the process. US hedge funds Groveland Capital and Corrientes Advisors are thought to have taken major positions against Irish debt. Giant €60bn asset-manager Pictet also revealed that it had earlier bet against Irish government bonds. JP Morgan is also thought to have taken a bearish position on Irish debt. The International Monetary Fund estimated that up to €3bn of Ireland's debt was being targeted by speculators through the uses of derivatives. This practice is likely to have increased in recent weeks over growing fears that Ireland may default on some of the Anglo debts.

Wirtschaftswoche:

• European Central Bank Governing Council member Ewald Nowotny said "it's not a good idea" to create a permanent European Union safety net to assist debt-stricken member countries, citing an interview. An extension of the current three-year solution could be discussed if countries proceed successfully with their reforms, Nowotny said, adding that he sees no immediate need to do so. Current EU deficit criteria are also too narrow, Nowotny said.
  

Jiji Press:

• Japan rejected a Chinese demand that it apologize and pay compensation for the detention of a fishing boat captain, citing a foreign ministry official.

Economic Observer:

• China may start a trial of property tax in some cities in 2011, citing officials at the Beijing tax bureau. The program may be announced at the end of this year.

China Business:

• Wang Jian, secretary general of the China Society of Macroeconomics, said the nation will have a "difficult" time achieving its target of 3% inflation this year, with the country's consumer price index possibly growing about 5% in October.

Weekend Recommendations
Barron's:

• Made positive comments on (BBY), (JBLU) and (DGI).

Citigroup:

• Reiterated Buy on (GOOG), target $620, Top Picks Live list.
• Reiterated Buy on (EW), raised target to $79.
  

Night Trading

• Asian indices are +.50% to +1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 118.0 -8.0 basis points.
• Asia Pacific Sovereign CDS Index 115.50 +3.0 basis points.
• S&P 500 futures +.19%.
• NASDAQ 100 futures +.20%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CALM)/-.10
• (JBL)/.48
• (PAYX)/.34

Economic Releases
8:30 am EST

• The Chicago Fed National Activity Index for August is estimated to fall to -.5 versus a reading of 0.0 in July.

10:30 am EST

• The Dallas Fed Manufacturing Activity Index for September is estimated to rise to -7.0 versus a reading of -13.5 in August.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The (ITC) Analyst Day, 2-Year Treasury Notes Auction and the JMP Securities Healthcare Conference could also impact trading today.
  

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