Thursday Watch

Evening Headlines
Bloomberg:

• China's Stricter Capital Rules Will Curb Loans, Goldman Says. China’s plan to impose tougher capital rules on banks will slow loan growth to a pace that more closely matches economic expansion, according to Goldman Sachs Group Inc. A draft proposal by the banking regulator calls for banks to add a capital adequacy ratio buffer of as much as 4 percent to shield against economic swings, a person with knowledge of the matter said yesterday. The new rules would boost the overall minimum capital adequacy ratio for the largest lenders to as high as 15 percent from 11.5 percent now, the person said. “We believe the countercyclical capital buffer, if it is implemented, will have a profound impact on bank lending growth ahead,” Beijing-based Goldman Sachs analysts Ning Ma and Richard Xu wrote in a note today. The capital requirement would cut loan growth to 12 percent to 16 percent, a rate that more closely tracks nominal gross domestic product expansion, from 20 percent now as banks try to avoid triggering the “countercyclical” buffer, Ma and Xu said. China’s banks extended a record $1.4 trillion of new loans in 2009, fueling asset bubbles and concerns about bad debts. Assuming the “big banks” are systemically important and the full 4 percent capital buffer is implemented, Chinese lenders face a capital shortage of 484.2 billion yuan ($72 billion) next year and a deficit of about 2.8 trillion yuan in 2016, Guosen Securities Co. analyst Qiu Zhicheng wrote in a note yesterday. “There will be more capital raising as a result, especially for large banks as their deadline is short,” said Dariusz Kowalczyk, Hong Kong-based chief economist at Credit Agricole CIB. “Their lending capacity will be constrained, which will slow GDP growth and limit upside” for the yuan. The required capital buffer against economic swings could be increased to 5 percent if needed, the person said. China’s rules would be stricter than capital requirements announced Sept. 12 by the Basel Committee on Banking Supervision in response to the global financial crisis, and give lenders less time to comply.
• Fannie Mae Began Buying $1,000-Down Mortgages Without Approval. Fannie Mae agreed to finance loans to homebuyers putting as little as $1,000 down without getting the approval of the U.S. agency in charge of minimizing the costs of the mortgage company’s bailout. While “any significant actions” taken by the Washington- based company and rival Freddie Mac must be “reviewed and approved” by their overseer, the Federal Housing Finance Agency, Fannie Mae began buying the so-called Affordable Advantage mortgages from state housing finance authorities without taking that step, Edward J. DeMarco, the FHFA’s acting director, said today. “This one got away from us,” DeMarco told lawmakers at a House Financial Services subcommittee hearing in Washington. Republican Representatives Spencer Bachus of Alabama and Judy Biggert of Illinois cited the loans in criticizing the government’s oversight of Fannie Mae and Freddie Mac during the hearing, which focused on the U.S.’s need to rework its mortgage-finance system and limit the costs of supporting the companies in the interim. The companies have been sustained by almost $150 billion in government aid since they were placed under U.S. conservatorship in September 2008.
• Zombie Banks Have Us Right Where They Want Us: Jonathan Weil. Two years after the collapse of Lehman Brothers and what rightfully should have been the death of American International Group, U.S. capital markets face a crucial question. How long will it take before we see some semblance of robust free-market capitalism return, where the value of an asset is based on what bona fide market participants will pay for it, the cost to borrow money is based on a company’s fundamental financial strength rather than its ability to access a government safety net, and corporations are free to fail no matter what their size? No one can say. And the longer it remains this way, the more entrenched the status quo becomes.
• China Mobile Challenges Baidu(BIDU) With Plans for Online Search. China Mobile Ltd., the world’s biggest phone carrier by customers, plans to start an Internet- search engine next year, challenging Baidu Inc., as the slowing wireless market leads the company to data services for growth.
• China Says Can Offer 'Complete Package' for California High-Speed Trains. China can offer a “complete package,” including financing, as it competes to build a high-speed railway in California costing more than $40 billion, according to the nation’s railway ministry.

Wall Street Journal:

• White House Taps Consumer Adviser. President Barack Obama this week will appoint Elizabeth Warren to a lead role setting up the new Bureau of Consumer Financial Protection, two Democratic officials said, a move that will allow the White House to avoid a messy Senate fight over her role. Ms. Warren, currently a professor at Harvard Law School, will be named an assistant to the president and special advisor to Treasury Secretary Timothy Geithner in charge of launching the new agency and setting its mission. She was a candidate to be the agency's first director, a position that remains unfilled, but would likely have had trouble securing confirmation because of opposition in the Senate. The White House's decision to seek a middle ground could appease its liberal base, which has loudly championed her candidacy, but will irk Republicans, who oppose her leading the agency and have already charged the administration with making an end-run around the Senate confirmation process.
• U.S. Bill on China Gains Momentum. With U.S.-China tensions rising on Capitol Hill, industry and labor groups are scrambling to shape the one bill aimed at China's currency policy that has a chance of success this election year. The bipartisan bill, which has 143 co-sponsors, would allow the U.S. to impose tariffs and other penalties on countries that undervalue their currency—with China a main target.
• Regulators to Target 'Window Dressing'. Federal regulators are poised to propose new disclosure rules targeting "window dressing," a practice undertaken by some large banks to temporarily lower their debt levels before reporting finances to the public. The Securities and Exchange Commission is scheduled to take up the matter at a meeting Friday and is expected to issue proposals for public comment. The action follows a Wall Street Journal investigation into the practice, which isn't illegal but masks banks' true levels of borrowing and risk-taking. A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.
• SEC May Seek More Authority Over Muni Issuers. The Securities and Exchange Commission may ask Congress for new authority to force cities, states and municipal-debt issuers to improve financial disclosures, SEC Commissioner Elisse Walter said in an interview.
• Man Accused of Moving Cash For Bomb Plot. A New York man was arrested on Wednesday and charged with running an illegal business that helped fund the attempted Times Square bombing earlier this year. Mohammad Younis, 44 years old, was accused of passing on thousands of dollars to Faisal Shahzad, who has pleaded guilty to a failed attempt to bomb Times Square on May 1.
• In China, Foreign Banks Lag Behind. Profit Picture Shows Market Tilted in Favor of Locals; Country's Growth Promise Remains Siren Call. Banks around the world are flocking to China because of its fast-growing economy. But their financial performance there so far isn't pretty.
• Obama's Mystifying Strategy. It's too late for the president to turn John Boehner into the Gingrich of 2010.
• It's the Spending, Stupid. A chronic voter 'concern' has now exploded into a broad public movement.

Bloomberg Businessweek:

• Natural Gas Erodes Coal's Share at Power Plants: Energy Markets. Natural gas’s unprecedented share of U.S. power generation is likely to keep growing as the biggest price slide in a year and the prospect of stricter pollution rules erode the market for coal.

CNBC:

• Man Vs. Machine: The ETF Monster. Since the May 6 Flash Crash there has been growing concern that exchange-traded funds are a monster in the making—certainly something bigger than they were meant to be. Or as Harold Bradley puts it, “What I worry about is the tail wagging the dog.” Bradley, chief investment officer of the Kauffman Foundation’s $1.8 billion investment portfolio, is hardly alone. By some estimates, as much as 68 percent of the bad trades during the Flash Crash involved ETFs. And on a daily basis, there is concern the end-of-the-day rebalancing effect of some ETFs is a key factor in wild swings during the market’s final hour of trading.

Business Insider:

• Property Developer: The ECB Is The Only Thing Stopping Spain From Becoming The Next Dubai.

Zero Hedge:

• Pimco Offloads $40 Billion in Treasurys, As Frontrunning Fed Creates Billions of Profits; Gross Does Not Expect QE2 on Sept. 21; Pimco's "Fed Frontrunning" Tell Exposed.

NY Times:

• China Shifts Away From Low-Cost Factories. Companies here in China’s industrial heartland are toiling to reinvent their businesses, fearing that the low-cost manufacturing that helped propel the nation’s economic ascent is fast becoming obsolete.

CNNMoney.com:

• More Democrats Break With Obama on Tax Cuts. Thirty-one House Democrats, most of whom face tough re-election bids this fall, have signed a letter to House Speaker Nancy Pelosi and House Majority Leader Steny Hoyer urging them to extend expiring tax breaks for all income levels, including the wealthy.

Clean Technica:

• World Bank Appoints Clean Tech Czar.

Mediaite:

• "Draw Mohammed Day" Cartoonist Changes Name, Goes Into Hiding After Fatwa. In a disturbing and matter-of-fact article, Seattle Weekly’s editor in chief Mark D. Fefer explained to readers that there would not be a cartoon by Molly Norris in that week’s paper, nor would there be one in any future issues. No, she wasn’t fired. Norris has followed advice from the FBI, left town, and changed her name after a fatwa was placed on her by Islamic extremists following her cartoon promoting the made up “Draw Mohammed Day.”

Rasmussen Reports:

• Florida Senate: Rubio (R) 41%, Crist (I) 30%, Meek (D) 23%.

Reuters:

• Geithner Steps Up China Yuan Policy Criticism. U.S. Treasury Secretary Timothy Geithner sharpened his criticism of China's exchange rate policies, saying the yuan was strengthening too slowly and that he will look for new ways to get Beijing to move faster. In testimony released on Wednesday and prepared for U.S. lawmakers considering a tough new trade law, Geithner called on China to allow "significant, sustained appreciation over time" and for the yuan to "fully reflect market forces." "We are concerned, as are many of China's trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited," Geithner said in remarks to the U.S. Senate Banking Committee to be delivered on Thursday. "We will take China's actions into account as we prepare the next Foreign Exchange Report, and we are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly."
• Japan Manufacturing Mood Falls For First Time Since 2009. Japanese manufacturing confidence worsened in September from the previous month for the first time in nearly a year as companies struggle with a persistent yen rise that threatens a fragile, export-reliant economic recovery, a Reuters poll showed.
• Brocade(BRCD) Forecasts Lower Margins, Shares Fall. Brocade Communications Systems Inc (BRCD) forecast weaker margins as it cuts prices of its network equipment to better compete against Cisco Systems Inc (CSCO), sending its shares down nearly 4 percent on Wednesday.

Financial Times:

• Greece Rules Out Possibility of Default. Greece’s finance minister has strongly rejected the idea that Athens will be forced to restructure its debts, saying that a default would break the eurozone. On a two-day visit to London, Paris and Frankfurt to convince investors that Athens has turned a corner in its year-long economic crisis, George Papaconstantinou told the Financial Times that a Greek default would spark selling in other so-called peripheral bond markets of Portugal and Ireland. “Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt,” he said. “People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.” Others warned that Greece still had a long way to go to convince markets that it would not be forced to restructure its bonds. Marco Annunziata, chief economist at UniCredit, said: “Many investors are not convinced that Greece will be able to avoid default. Athens has to cut costs and many consider the only way to do that is to restructure loans.” This would mean big losses, or haircuts, for bond holders, which include French and German banks and the ECB, which is estimated to be holding up to €40bn in Greek bonds as part of its government debt purchase programme.
• Bond Strategy Led to Big Win After Lehman. The collapse of Lehman Brothers and central banks’ unorthodox monetary policies distorted markets to create some of the biggest pricing anomalies ever documented in bond trading, according to research from leading US academics. A paper from the US National Bureau of Economic Research claims to have identified by academic research in fixed income markets the “largest arbitrage ever”. The paper details how prices for US Treasury inflation-linked securities – government bonds that provide protection against rising prices – and regular Treasury bonds were thrown out of sync by as much as 23 cents on the dollar following the collapse of Lehman Brothers two years ago this week. “The arbitrages reported are stunning in magnitude,” the researchers said. “What makes these findings even more dramatic is that the Tips [Treasury inflation-protected securities] and Treasury markets are two of the most liquid and largest financial markets in the world ... The sheer magnitude of this mispricing presents a serious challenge to conventional asset pricing theory.” The NBER said the arbitrage had narrowed during 2009 to more normal levels. However, for a small group of savvy traders the pricing discrepancies at their widest led to one of the most successful hedge fund trades in recent memory.

The Standard:

• Japan Fury Boils. Anti-Japan anger in China rose close to boiling yesterday, just days ahead of the 79th anniversary of the Japanese invasion of Manchuria, with protests expected in Beijing and possibly other cities. Reports claim Beijing has given the nod for massive protests in different parts of the capital on Saturday, with demonstrators using the internet to call on others to march to Japan's embassy. The new tensions come on top of anger over the arrest and continued detention of a Chinese trawler skipper held by Japan after his boat hit two Japanese coast guard vessels off the disputed Diaoyu Islands. Reports say Beijing is on full alert, while Tokyo has beefed up security at its facilities across the mainland. Other Japanese buildings are reported to have been damaged following an attack on a Japanese international school in Tianjin. The Japanese embassy has cautioned its nationals to be careful in their encounters with Chinese and not to make their nationality too obvious.
  

China Securities Journal:

• China may require domestic securities companies to charge trading commissions that are no less than their business costs, citing a personal familiar with the matter. The change may take effect Dec. 1. At present brokerages don't have lower limits on commissions.

People's Daily:

• The global economy is "very likely" to experience a double dip next year, Wang Jian, secretary general of the China Society of Macroeconomics, said. The world's economy may enter a long-term recession in 2011, Wang said.

Evening Recommendations
Citigroup:

• Reiterated Buy on (OPEN), target $70.
• Reiterated Buy on (SPN), boosted target to $35.
• Reiterated Buy on (DO), lowered estimates, target $74.
• Reiterated Buy on (KFT), target $36.
  

Night Trading

• Asian equity indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 116.5 -2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 113.25 unch.
  
• S&P 500 futures -.30%.
  
• NASDAQ 100 futures -.30%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FDX)/1.21
• (PIR)/.11
• (ORCL)/.37
  
• (MLHR)/.26

Economic Releases
8:30 am EST

• The Producer Price Index for August is estimated to rise +.3% versus a +.2% gain in July.
• The PPI Ex Food & Energy for August is estimated to rise +.1% versus a +.3% gain in July.
• Initial Jobless Claims for last week are estimated to rise to 459K versus 451K the prior week.
• Continuing Claims are estimated to fall to 4464K versus 4478K prior.
• The 2Q Current Account Balance is estimated at -$125.0 Billion versus -$109.0 Billion in 1Q.

9:00 am EST

• Net Long-term TIC Flows for July are estimated at $47.5 Billion versus $44.4 Billion in June.
  

10:00 am EST

• Philly Fed for September is estimated to rise to .5 versus a reading of -7.7 in August.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly EIA natural gas inventory report, (MT) Investor Day, Chicago Fed Mortgage Hearing, Fed's Tarullo speaking, Geithner's China testimony, Barclays Energy Conference, ThinkEquity's Growth Conference, BMO Capital's Education Conference, BofA Merrill's Media/Communications/Entertainment Conference and Deutsche Bank's Tech Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 100% net long heading into the day.