Friday Watch

Evening Headlines
Bloomberg:

• Fed Wants to Hoodwink Public, Only Fools Itself: Caroline Baum. If I were a central banker, I would be afraid. If I were a central banker getting ready to embark on another round of quantitative easing, I would be very afraid. Here’s why. Central bankers in the U.S. are being bombarded with market-based signals suggesting their fears of deflation, or falling economy-wide prices, may be misplaced. Gold prices continue to set new highs. The U.S. dollar, the global reserve currency, keeps sinking amid expectations the Federal Reserve will dilute the existing stock starting at its Nov. 2 to 3 meeting. Commodity prices, both industrial and agricultural, are on a tear. The CRB Spot Raw Industrial Price Index, which includes scrap metals, cotton and rubber -- but not oil -- hit an all- time high this week. Junk bond issuance already set a record for the year, with demand for high-yield debt narrowing spreads to Treasuries. Investors are pouring money into emerging markets debt issued in local currencies by countries that used to be considered banana republics. Mexico sold $1 billion of 100-year bonds last week, double the announced issue size, at a yield of 6.1 percent. Just ask yourself: Would you lend money to Mexico for 100 years? Exactly. If the Fed’s goal was to make investors move out the risk curve, it succeeded. An alternate interpretation: Zero-percent interest rates are causing a misallocation of capital, a nice way of saying, “asset bubbles.” The markets aren’t validating the Federal Reserve’s preoccupation with a deflationary spiral. In fact, the message is just the opposite. Maybe the Fed can fool some of the people some of the time, but it can’t fool all of the people all of the time. In the process, policy makers may end up fooling themselves that they can create expectations of a little more inflation without delivering a lot of the real thing.
• Bank of America(BAC) Downgraded by Bonds on Loans: Credit Markets. Bondholders are penalizing Bank of America Corp. the most of any of the largest U.S. financial firms as the investigation into the foreclosure crisis expands. Credit-default swaps on the country’s largest bank by assets are above those of its peers by a record margin, according to data provider CMA. The contracts, which imply Bank of America has lost its investment-grade rating, exceed Citigroup Inc.’s by the most ever and surpassed Morgan Stanley’s this week for the first time in a year.
• Seagate(STX) is Said to Be in Talks With TPG, Partner About Buyout. Seagate Technology Plc, the world’s largest maker of disk drives, is in talks to be purchased by former owner TPG Capital and another buyout firm, according to two people familiar with the matter. The stock rose 22 percent.
• Big Banks May Escape Capital Surcharge as Global Talks Founder. Leaders of the world’s largest economies, divided over how to curb risk-taking by their biggest banks, will likely fail to agree on a capital surcharge. Instead, the Financial Stability Board, which is weighing measures to prevent such institutions from causing another economic crisis, will recommend a range of options without setting a level of extra capital to be imposed globally, said members of the group who declined to be identified because the discussions are private. The FSB will meet in Seoul next week.
• Obama Spending Rules for UnitedHealth, WellPoint Draw Exemption Requests. Health insurers may abandon some markets unless the Obama administration waives a rule set to take effect next year on how much companies must spend on patient care, state insurance commissioners said. The rule, part of the new health law, mandates that UnitedHealth Group Inc., WellPoint Inc. and rivals spend at least 80 percent of customer premiums on medical care, or return the difference in rebates. Insurers that sell to the 14 million people who buy their own coverage may be hurt because those policies cost more to administer, the commissioners said in a letter to U.S. health secretary Kathleen Sebelius. The correspondence urges delaying the rule in some markets until as late as 2014, when provisions take effect that may cut insurer costs. The waiver request is the latest adjustment sought in the overhaul as President Barack Obama’s allies in Congress face midterm elections next month. The administration last month waived rules affecting 1 million part-time workers who won’t be eligible for subsidized coverage for four years. The premium rule “could threaten the solvency of insurers or significantly reduce competition in some insurance markets,” an effect that may “limit consumer choices,” according to the letter, from the National Association of Insurance Commissioners.
• Harvard Stem Cell Scientists Retract paper on Aging in Periodical 'Nature'. Scientists at the Harvard Stem Cell Institute retracted a paper published Jan. 28 in the journal Nature after the lead author, Amy Wagers, became aware of information she said “undermined” her confidence in the data. The Nature paper, examining the role of blood stem cells in the aging process, was retracted by Wagers, a researcher at the Harvard-affiliated Joslin Diabetes Center in Boston, and two of her co-authors. The research appeared to uncover an “aging mechanism” that “could be reversed” by rejuvenating the blood stem cell population of old mice, according to a Joslin center press release issued at the time of the paper’s publication.
• UBS Says It's in Talks With Dozens of Prop Traders Considering Hedge Funds. UBS AG, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders worldwide who are considering setting up hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk. “A lot of it is just talk and chatter, but there are very advanced discussions as well,” Stuart Hendel, UBS’s global head of prime brokerage, said in an interview in Singapore yesterday. “In the next 12 months, there is going to be much more of a startup phase than there has been in the last couple of years.”

Wall Street Journal:

• Foreclosure Crisis Slams Into Banks. After Days of Shrugging Off the Debacle, Financial Markets Start to Penalize U.S. Banks. The mortgage-foreclosure crisis spilled into the financial markets on Thursday, driving down bank stocks and weighing on mortgage bonds as investors took a grim view of the potential costs.
• In Cities That Battle Wal-Mart(WMT), Target(TGT) Gets a Welcome.
• Mozilo, SEC Talk Settlement in Countrywide Case.
• Public Unions Step Up Spending. Public-sector unions have remained a bulwark for Democrats this fall while other left-leaning donors have kept their wallets shut, according to a Wall Street Journal analysis of Federal Election Commission data. Unions have long bankrolled Democratic campaigns, but some of the biggest public unions are spending more this fall than they did during the prior midterm-campaign cycle in 2006.
• U-Turn in the U.K.: Big Spending Cuts.
• Stop Bashing Business, Mr. President by Ken Langone. If we tried to start The Home Depot today, it's a stone cold certainty that it would never have gotten off the ground.

Bloomberg Businessweek:

• OPEC Members Seek $100 a Barrel Oil to Counter US Dollar Weakness. The 13 percent decline in the dollar index since June has led some OPEC members to call for oil to rise to $100 a barrel. The U.S. currency’s weakness means the “real price” of oil is about $20 less than current levels, Venezuelan Energy and Oil Minister Rafael Ramirez said after yesterday’s meeting of the Organization of Petroleum Exporting Countries in Vienna.
• China September Property Prices Rise, Sales Jump, Defying Curbs. China’s property prices rose and transactions jumped in September from the previous month, underscoring the need for further government curbs to discourage speculation and prevent asset bubbles in the fastest-growing major economy.

CNBC:

• Google(GOOG) Earnings Handily Beat Wall Street Expectations. Google shares leaped in extended trading Thursday as the company reported an adjusted profit that blew past what analysts expected, despite rising expenses. The online search and advertising giant said it earned $7.64 a share excluding one-time items in the third quarter, against $5.89 a share last year. Net revenue excluding traffic-acquisition costs for the most recent period rose to $5.5 billion, from $4.385 billion a year ago. Traffic-acquisition costs (TAC) include money that Web sites pay to advertisers and that they spend to draw traffic. Google's TAC for the quarter totaled $1.81 billion. Equity analysts who follow Google expected the company to turn in a profit of $6.69 a share on sales of $5.27 billion, according to Thomson Reuters.Google stock jumped almost 5 percent in late trading.
• 'Muted' Effect if Fed Buys More Bonds: Kocherlakota. The U.S. Federal Reserve Bank may get little bang for its buck if it tries to help boost the modest economic recovery with a renewed round of Treasury debt purchases, Minneapolis Fed President Narayana Kocherlakota said on Thursday.

Business Insider:

• How the Actions of the Fed are Creating Tranche Warfare in Commercial Real Estate.
• The Real Story Behind the U.S. - Mexico Border Murder of David Hartley by Stratfor.
  
  The Sept. 30 shooting death of an American tourist on Falcon Lake, which straddles the U.S.-Mexico border in southern Texas, has grabbed international headlines in the past two weeks.
• Government Approval Hits Lowest Point Since Watergate. Almost three-quarters of Americans — 72 percent — have a negative view of the federal government, according to a USA Today/Gallup poll released Wednesday. It is the highest level of dissatisfaction since the Watergate scandal that led to President Richard Nixon’s resignation in 1974.
• Warren Buffett Has Not Generated Any Alpha in 10 Years.
  

Seeking Alpha:

• Sovereign Debt Default Risk. Below we highlight the 5-year credit default swap prices for the debt of 39 countries and four high-risk US states. We also highlight how default risk has changed since equity markets bottomed at the start of July. As shown in the left column below, default risk has fallen the most for Japan, China, Australia, Chile, and South Korea since July 2nd. It has risen for just four countries -- Egypt, Portugal, Ireland, and the US. Yep, the US has seen default risk rise 15.7% since the start of July, even as the equity market has performed well. Germany has the lowest default risk of all the countries shown. Of the four high-risk states highlighted, Illinois currently has the highest default risk at 275 bps, followed closely by California at 269 bps. New York and New Jersey are both just above 200 bps.

Politico:

• Judge Disses Dems' 'Alice in Wonderland' Health Defense. A federal judge in Florida on Thursday said he will allow some of the lawsuit challenging the constitutionality of the health care law to proceed — and criticized Democrats for making an “Alice in Wonderland” argument to defend the law. U.S. District Judge Roger Vinson allowed two major counts to proceed: the states’ challenge to the controversial requirement that nearly all Americans buy insurance and a required expansion of the Medicaid program.
• Barack Obama: Economy Stokes 'Tribal Attitude'. President Barack Obama thinks that the recession has caused a temporary increase in racial tension by stoking “tribal attitude” among people in economic distress. During an hour-long town hall with young people simulcast on MTV, BET and CMT Thursday afternoon, Kishor Nagula, a graduate student at Johns Hopkins University, asked Obama about race relations, saying he was disappointed the president hadn’t ushered in a post-racial era, as some of his supporters had once suggested he would.

Reuters:

• China Tells U.S. Not to Make Yuan a Scapegoat.
• BOJ's Shirakawa: to take appropriate policy action. Bank of Japan Governor Masaaki Shirakawa reiterated on Friday that the central bank will take appropriate policy action as it carefully examines economic and price moves.
• Japan's Noda: Will Act on FX to Curb Excess Moves. Japanese Finance Minister Yoshihiko Noda said on Friday that Japan will continue to take decisive steps on currencies if necessary to curb excessive moves in the foreign exchange market.
• AMD(AMD) Eyes Stronger PC Demand, Holds Off on Tablets. Consumers will likely buy more PCs in the fourth quarter but manufacturers will continue to use up components they had over-accumulated in recent months, chipmaker Advanced Micro Devices Inc (AMD) said on Thursday.
• U.S. Video Game Sales Fall 8% in September - NPD.
  

Financial Times:

• Dollar Fall Sparks Stability Warnings. The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports. Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro. A senior European policy-maker, who asked not to be named, said a further aggressive round of monetary easing by the US Federal Reserve would be “irresponsible” as it made US exports more competitive at the expense of its rivals.

Yomiuri:

• Japan will downgrade its economic assessment this month for the first time since February 2009 as the yen continues to strengthen.

South China Morning Post:

• American International Group(AIG) is likely to gain "tens of millions of dollars" from the initial public offering of a Chinese automaker that does business with Iran. AIG, through a unit, owns 13.5% in Chongqing-based Lifan Industry Group Co., which exports motorcycles to Iran and where a local factory has a licensing agreement to assemble Lifan's cars from imported kits, citing Mark Herr, AIG's NY-based vp of media relations.
• Container Volumes Suffer as Trade Slows. Lower trade growth caused by high unemployment in the United States and difficult economic conditions in Europe has hit container shipping lines, which have seen a steady fall in average container shipping rates over the past two months.

People's Daily:

• The global currency war maybecome a trade war as countries may limit imports though more direct measures other than letting their currencies depreciate, Zhang Ming, a researcher with the Chinese Academy of Social Sciences, wrote in a commentary.

Evening Recommendations
Citigroup:

• Reiterated Buy on (GOOG), raised estimates, boosted target to $725.
• Reiterated Buy on (INFN), boosted estimates, added to Top Picks Live list, target raised to $16.50.
• Reiterated Buy on (CIEN), target $24.
  

Wells Fargo:

• Rated (ICE) Outperform.

BMO Capital Markets:

• Rated (VIT) Outperform, target $40.
• Rated (LFT) Outperform, target $50.
• Rated (CRM) Outperform, target $130.
• Rated (SFSF) Outperform, target $30.
  

Night Trading

• Asian equity indices are -.50% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 103.0 +5.5 basis points.
  
• Asia Pacific Sovereign CDS Index 94.0 +.5 basis point.
  
• S&P 500 futures +.08%.
  
• NASDAQ 100 futures +.40%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SCHW)/.09
• (GE)/.27
• (INFY)/.61
• (GPC)/.76
• (GCI)/.50
• (WDFC)/.38
• (MAT)/.76

Economic Releases
8:30 am EST

• The Consumer Price Index for September is estimated to rise +.2% versus a +.3% gain in August.
• The CPI Ex Food & Energy for September is estimated to rise +.1% versus unch. in August.
• Advance Retail Sales for September are estimated to rise +.4% versus a +.4% gain in August.
• Retail Sales Less Autos for September are estimated to rise +.3% versus a +.6% gain in August.
• Retail Sales Ex Auto & Gas for September are estimated to rise +.3% versus a +.5% gain in August.
• Empire Manufacturing for October is estimated to rise to 6.0 versus a reading of 4.1 in September.
  

9:55 am EST

• Preliminary Univ. of Mich. Consumer Confidence for October is estimated to rise to 68.9 versus a reading of 68.2 in September.

10:00 am EST

• Business Inventories for August are estimated to rise +.5% versus a +1.0% gain in July.

2:00 pm EST

• The Monthly Budget deficit for September is estimated at -$32.0 Billion versus -$46.6 Billion in August.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke speaking, Fed's Lockhart speaking and Former Fed Vice Chairman Kohn speaking could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and financial 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.