Tuesday Watch

Evening Headlines
Bloomberg:

• Mortgage Securities Show U.S. Foreclosure Crisis Overblown: Credit Markets. The mortgage-bond market shows investors shrugging off speculation that the U.S. is in the throes of a foreclosure-document crisis. Typical prices for bonds tied to home loans on which borrowers often failed to document their incomes or didn’t plan to live in their properties ended last week up 1 cent from a month earlier at 64 cents on the dollar, according to Barclays Capital. The most-senior securities backed by so-called Alt-A mortgages with a few years of fixed rates, which were unchanged last week, have climbed 31 cents from a record low last March. Federal officials including Treasury Secretary Timothy Geithner say delays in foreclosures, as attorneys general in 50 states investigate allegations of falsified documents, won’t lead to a moratorium on property seizures. Lenders eventually will be able to take back houses in almost all cases because homeowners have missed payments and the records aren’t that seriously flawed, according to TCW Group Inc.’s Bryan Whalen. “Maybe it’s going to take a few extra months to shore up the paperwork, but let’s not take our eyes off the reality of the situation,” said Whalen, co-head of the mortgage-backed bond group at Los Angeles-based TCW, which oversees $115 billion in assets. “These aren’t people, by and large, who deserve to be in their homes.”
• World Bank Cuts East Asia Growth Outlook, Sees Seeds of Asset Price Bubble. The World Bank lowered its outlook for growth next year in China and across East Asia, urging officials in the region to curb inflation and ward off asset bubbles to avoid a repeat of the Asian financial crisis. “Larger inflows combined with ample domestic liquidity and rising confidence have boosted stock markets, real-estate prices and other asset valuations in some countries, precipitating fears of a new bubble,” the report said. “Authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in slightly over a decade.” Across East Asia, expansions will slow “as spare capacity becomes scarce, fiscal and monetary measures are gradually unwound and economic growth in the advanced economies remains relatively flat,” the report said. “Governments will now need to rethink the most appropriate mix of fiscal and monetary policies to curb inflation while supporting the recovery in growth.” While the outlook for the global economy has “brightened” in the past six months, “risks are mostly on the downside this year for growth in advanced economies, especially in the United States,” the bank’s report said. The World Bank said government finances in the euro area remain a concern, and the U.S. economy is still stricken with elevated unemployment, a weak housing market and slow progress restoring the banking industry to full health. “While the probability of a double-dip recession in advanced countries has receded, there remains a high probability that their growth rates will continue to be muted for a few years to come,” the report said. “This presents a difficult medium-term global environment for East Asia.”
• Four New York Men Convicted in Plot to Bomb Synagogues. Four men who plotted to bomb New York City synagogues and fire heat-seeking missiles at military planes were convicted by a federal court jury in Manhattan. The defendants, James Cromitie, 44, David Williams, 29, Onta Williams, 34, and Laguerre Payen, 29, face as long as life in prison when they are sentenced on the charges, which include conspiracy to use weapons of mass destruction within the U.S. and conspiracy to kill U.S. employees.
• Geithner Says China Currency Policy 'Unfair' to Trade Partners. Treasury Secretary Timothy F. Geithner said China’s exchange-rate policy is unfair to trading partners and the yuan is more undervalued than other emerging market currencies. “It’s significantly undervalued, more so than is true of any major significant emerging-market currency,” Geithner said today in a panel discussion in Palo Alto, California. “It’s unfair to all of China’s trading partners, Americans and others, because it just creates a playing field that’s unbalanced” and gives Chinese companies a “huge” short-term advantage, Geithner said.
• Spain's Solar Deals on Edge of Bankruptcy as Subsides Founder. Vilimelis and more than 50,000 other Spanish solar entrepreneurs face financial disaster as the policy makers contemplate cutting the price guarantees that attracted their investment in the first place. “You feel cheated,” he says. “We put our money in on the basis of a law.”
• Brazil Steps Up Action in 'Currency War,' Pleads for Ceasefire. Brazil stepped up efforts to curb gains in the real by raising inflow taxes and said it may be forced to take additional measures as Finance Minister Guido Mantega called for an end to the worldwide “currency war.” “This currency war needs to be deactivated,” Mantega told reporters. “We have to reach some kind of currency agreement.”
• NYSE Breaks Trades of S&P 500 ETF at 9.6% Below Opening Price. A software update at NYSE Euronext’s Arca platform triggered what appeared to be a 9.6 percent plunge in an exchange-traded fund that tracks the Standard & Poor’s 500 Index, a drop that would have erased $7.9 billion from one of the most popular securities in the U.S. Data published by the electronic venue at 4:15 p.m. New York time showed the SPDR S&P 500 ETF Trust at $106.46 compared with its opening price of $117.74. The apparent plunge in price involved 7.2 million shares in the closing auction on NYSE Arca, according to data compiled by Bloomberg at 4:30 p.m. The S&P 500 rose 0.7 percent to close at 1,184.71 today. The glitch in the exchange-traded fund, which has a market value of $83.3 billion, comes as federal regulators are trying to restore confidence to equity markets following the May 6 crash that erased $862 billion of share value in 20 minutes. Data showing the decline appeared just as Apple Inc. and International Business Machines Corp. were releasing quarterly profit statements. “It was a mess and it was alarming that it could happen,” said Andrew Ross, a partner and global equity trader for First New York Securities LLC, who trades ETFs. “People were very focused on after-market trading because of IBM and Apple earnings so it was very confusing when the price discrepancy happened. But people quickly recognized it was a bad print.”

Wall Street Journal:

• Banks Restart Foreclosures. BofA and GMAC Lift Their Freeze in a Counterattack Against Allegations of Fraud. Bank of America Corp. reopened more than 100,000 foreclosure actions, declaring that it had found no significant problems in its procedures for seizing homes. GMAC Mortgage, a lender and loan servicer, said that it also is pushing ahead with an unspecified number of foreclosures that came under intense pressure. Monday's moves are part of a growing counterattack by lenders scrambling to stem a financial and political threat over allegations that certain employees signed hundreds of documents a day without carefully reviewing their contents when foreclosing on homes.
• Massey's(MEE) Directors Mull Sale, Options. Massey Energy Co.,the nation's sixth-largest coal miner, is exploring strategic alternatives, including a possible sale, according to people familiar with the matter. Massey's board of directors last week formed a committee to assess the future of the Richmond, Va., company, said one person familiar with the situation. By mid-November, it could "be in detailed due diligence with one of the multiple options," that person predicted.
• Long-Term Care Premiums Soar. People with long-term-care insurance polices are getting hit with a new round of steep premium increases.
• How the Fed is Holding Back Recovery by David Malpass. By promising to print more money, it's giving Congress an excuse to avoid critical tax and spending cuts. Congress will face a runaway train on taxes and spending when it reconvenes after the elections. The solution is to restrain both—especially to stop the $6 trillion tax increase scheduled to take place on Jan. 1—in order to restore business confidence and help job growth. Instead, Congress is more likely to do nothing and count on the central bank to flood the economy with more money.
• Washington State's Union Tax. Bill Gates Sr. supports a state income tax on wealthy Washingtonians, but public unions are the real muscle behind the initiative.

CNBC:

• Apple(AAPL) Profit Beats Forecasts, But iPad Sales Light. Apple surpassed quarterly earnings expectations again with the help of strong sales of its iPhone, but iPad sales and margins disappointed, and its shares sank. The company said it earned $4.31 billion, or $4.64 a share, in its fiscal fourth quarter, against $1.82 a share last year. Revenue for the quarter was reported at $20.34 billion, versus $9.87 billion last year. Equity analysts who follow Apple expected the company to turn in a profit of $4.08 a share on sales of $18.90 billion, according to Thomson Reuters. Apple shares dropped 7 percent in late trading after initially being halted. Sales of Apple's popular iPhone jumped 91 percent to 14.1 million units in the quarter. The company sold 3.89 million Macs, an increase of 27 percent. Apple sold 9.05 million iPods, marking a decline of 11 percent year over year. The company sold 4.19 million iPads in the quarter. "Iphones continue to steal the show. Well over a million units of upside relative to whisper," said Gleacher & Co. analyst Brian Marshall. "Ipad, a little bit disappointing there. Street was expecting closer to 5 million units," he said. "The problem is supply, they can't make enough of them. iPad will shine in the December quarter. I believe it will be the holiday gift of choice." Gross margins in the fiscal fourth quarter came to 36.9 percent, a tad below Wall Street's average forecast of 38.2 percent. "It's an incredible phenomenon—not only did they beat our heightened expectations but they've blown past forecasts, and it's primarily driven by the iPhone," said BGC's Colin Gillis.
• IBM(IBM) Profit Grows, Tops Wall Street Expectations. IBM reported a higher-than-expected profit and raised its outlook for the full year, helped by sales of new hardware products, but its shares retreated on sluggish sales of technology services. The technology giant said it earned $2.82 a share in the third quarter, against $2.40 a share in the same period last year. Revenue for the quarter was reported at $24.27 billion, versus $23.56 billion last year. Equity analysts who follow IBM expected the company to turn in a profit of $2.75 a share on sales of $24.13 billion, according to Thomson Reuters. The company said it expects earnings of "at least $11.40 per share" for the full year, up from its previous forecast of "at least $11.25." Shares of IBM fell more than 3 percent in extended trading Monday.

Business Insider:

• Steve Jobs Steals The Show On Apple's(AAPL) Earnings Call. Apple crushed revenue and earnings estimates, as expected, and the company's guidance looks strong for its holiday quarter. But the iPad business posted a huge miss: 4.19 million shipments versus the Street's consensus at 4.7 million and many estimates above 5 million. On the earnings call, Apple hinted that this was at least in part a supply issue, noting that supply and demand weren't balanced until September, the last month of the quarter.
• Violent French Protests Show Why A New Debt Crisis is Inevitable.
• Chris Christie Made the Right Call Halting New Jersey's Incredibly Expensive New Tunnel.
  

New York Post:

• Killing Marcus Welby. How ObamaCare Stifles Private Practices. If ObamaCare really called for the creation of "death panels," the first victim of these in vented tribunals would have been Marcus Welby MD, the character in the hit 1960s television show that followed the daily dramas of a small-town family doctor. The health legislation doesn't call on government tribunals to euthanize seniors, as some fanciful critics claim, but the bill does kill off private-practice medicine. ObamaCare envisions that doctors will fold their private offices to become salaried hospital employees, making it easier for the federal government to regulate them and centrally manage the costly medical services they prescribe. To get this control, ObamaCare creates "Accountable Care Organizations," which are basically hospitals coupled with local doctor networks that the hospital owns.

NY Times:

• A Hedge Fund Soared, Controlled by Women, or So It Claimed. Jane Buchan is a rarity in the big-money boys’ club of hedge funds. Amid the testosterone-fueled trading floors of Wall Street, Ms. Buchan has not only built a hugely successful hedge fund investment firm but also one that is, on paper, owned and run by women. But questions have surfaced about whether her firm, Pacific Alternative Asset Management Company, is now — or ever was — controlled by women at all.

CNNMoney.com:

• Sources: U.S. Finalizing Aid Package to Help Pakistan Fight Extremists. The United States is putting the final touches on a security assistance package totaling as much as $2 billion to help Pakistan fight extremists on its border with Afghanistan, senior U.S. officials and diplomatic sources tell CNN.
• Credit Still Tight on Main Street - New York Fed Report. Small businesses are not getting access to the credit they need, and as a result, they are struggling to generate the jobs needed to lead the nation toward recovery. "Small firms employ nearly half of all Americans, account for about 60 percent of gross job creation, and historically have created more jobs than larger firms at the start of economic recoveries," according to a report from the Federal Reserve Bank of New York released Monday. "Yet recent contractions in business borrowing may be limiting the capacity of small businesses to play this critical role." More than three-quarters of small businesses that applied for a loan during the first half of 2010 received only "some" or "none" of the credit they desired, the report finds. Of the 426 small business owners polled by the New York central bank between June and July of 2010, 59% applied for credit during the period. This suggests that there is still demand for credit among Main Street businesses -- despite many banks' claims that lending to small businesses is down because they haven't been asking for loans. $40 billion in lending disappears: Since the start of the recession, loans to small businesses dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, according to bank financial reports submitted to the government.

Rasmussen Reports:

• Voters Trust Republicans More on 8 of 10 Key Issues. With two weeks to go until Election Day, voters trust Republicans more than Democrats on eight out of 10 important issues regularly tracked by Rasmussen Reports including the economy and health care.

Reuters:

• VMware(VMW) Cash Flow Disappoints; Shares Fall. VMware Inc's sluggish software sales growth and disappointing quarterly cash flow pummeled shares, casting a shadow on one of the technology sector's most richly valued stocks.
• Institutional Investors Step Into US Weekly Options. Short-term options known as Weeklys on Monday accounted for an usually large amount of daily option volume in several stocks and exchange-traded funds during the busiest week of the earnings reporting season. The product is quickly gaining favor among institutional investors who populated many equity positions in the options expiring on Oct. 22, according to figures from Web information site optionMonster.
• CFTC - SEC 'Flash Crash' Study Draws Another Skeptic. A single trader alone could not have caused the "flash crash," a report by Instinet said on Monday, adding its voice to those casting doubt on a landmark regulator report that sought to explain the May market plunge. Instinet, a brokerage and alternative trading venue operator owned by Nomura Holdings Inc, said the big sell order "could not be the singular cause" of the crash."However, the interconnection among markets, the order and the method with which it was executed likely served as a catalyst for the reduction in liquidity and the 'erroneous' stock trades experienced seconds later," it said."Based on our research, we do not find pinning the only cause of the 'flash crash' to a single order satisfying."

Financial Times:

• Companies in Appeal for US Tax Amnesty. US multinational companies are clamouring for a tax holiday to repatriate billions of dollars “trapped” overseas but are being rebuffed by Barack Obama’s administration. JPMorgan research estimates that 30-40 per cent of the almost $1,000bn in cash held by non-financial S&P 500 companies is in foreign jurisdictions. The treatment of “cash on the sidelines” is becoming an increasingly pointed political and economic issue in the sluggish recovery, with Republicans blaming uncertainty created by Democratic healthcare and financial reforms for companies’ reluctance to invest and create jobs. JPMorgan estimated that for some companies, so-called trapped cash amounts to more than 75 per cent of cash balances. To use the cash domestically, they would have to pay tax, typically of 25-35 per cent. “We do have overseas cash and we would be very supportive of a repatriation holiday,” said Keith Sherin, chief financial officer of General Electric. “If you think about it, there is a lot of cash trapped overseas. If companies could bring that back at more competitive tax rates, I think it would be good for the US economy.”
• Geithner Denies US Bid to Weaken Dollar. Finance ministers have tried to calm tensions in foreign exchange markets, with the US Treasury secretary denying that Washington is deliberately weakening the dollar and Brazil increasing blocks on inflows of capital. The interventions come amid concerns among policymakers that disputes over exchange rate policy could escalate into a full-blown currency war.

China Daily:

• China to Reduce Rare Earth Export Quotas. China will further reduce quotas for rare earth exports by 30 percent at most next year to protect the precious metals from over-exploitation, said an official from the Ministry of Commerce. He added that the country is now facing the possibility that reserves of medium and heavy rare earths might run dry within 15 to 20 years if the current rate of production is maintained. Export quotas will continue to be axed in the first half of next year, said the source who declined to be named.
• China should "tolerate" slower economic growth as the country needs to adjust the structure of its economy after 30 years of high growth, Zhu Baoliang, chief economist for the State Information Center, wrote. China's economy may slow next year and in the second half of this year, Zhu wrote.
  

Shanghai Securities:

• China aims to reduce energy use per unit of gross domestic product by 17.3% from 2011 to 2015 and by 16.6% from 2016 to 2020, citing Huang Li, an official at the National Energy Administration.

Evening Recommendations
Citigroup:

• Reiterated Buy on (NKE), target $91.

CSFB:

• Rated (H) Outperform, target $50.
• Rated (HOT) Outperform, target $67.
• Rated (IGT) Outperform, target $19.
• Rated (MAR) Outperform, target $47.
• Rated (BYD) Outperform, target $11.
• Rated (BYI) Outperform, target $45.
• Rated (WMS) Outperform, target $52.
• Rated (PENN) Outperform, target $42.
• Rated (MHGC) Outperform, target $10.
  

Barclays:

• Rated (VECO) Overweight, target $50.

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 105.5 +.5 basis point.
  
• Asia Pacific Sovereign CDS Index 99.0 +3.25 basis points.
  
• S&P 500 futures -.54%.
  
• NASDAQ 100 futures -1.37%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (HOG)/.36
• (UNH)/.85
• (JNJ)/1.15
• (OXY)/1.36
• (FRX)/.93
• (AEP)/1.04
• (PH)/1.06
• (BTU)/.91
• (LMT)/1.54
• (STT)/.83
• (EMC)/.30
• (KO)/.89
• (OMC)/.58
• (BK)/.54
• (BAC)/.14
• (ITW)/.82
• (GS)/2.25
• (SYK)/.77
• (CREE)/.58
• (GILD)/.87
• (ALTR)/.65
• (YHOO)/.15
• (JNPR)/.32
• (WDC)/.81
• (BSX)/.06
• (ISRG)/2.10
• (DPZ)/.25
  

Economic Releases
8:30 am EST

• Housing Starts for September are estimated to fall to 580K versus 598K in August.
• Building Permits for September are estimated to rise to 575K versus 569K in August.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke speaking, Fed's Duke speaking, Fed's Kocherlakota speaking, Fed's Fisher speaking, Fed's Lockhart speaking, Fed's Dudley speaking, Fed's Evans speaking, weekly retail sales reports and the weekly ABC Consumer Confidence reading could also impact trading today.
  

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