Friday Watch

Evening Headlines

Bloomberg:

• Europe Prepares Next Crisis Steps After Merkel Rescue-Fund Parliament Win. European leaders are turning their focus to the next steps to stem the region’s debt crisis after German lawmakers approved an expansion of the euro-area rescue fund’s firepower. With the European Commission now expecting the overhauled 440 billion-euro ($599 billion) European Financial Stability Facility in place by mid-October, euro finance chiefs will next week discuss accelerating enactment of a permanent rescue fund that provides more capital and a tool for managing defaults. “I’m not convinced that this bailout package is going to be remotely enough for the euro zone itself,” Wilbur Ross, the billionaire chairman of private-equity firm WL Ross & Co., said yesterday in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “I think it should start with a ‘T,’ not a ‘B,’” he said, referring to trillions instead of billions. European officials are also studying measures that include leveraging the EFSF, said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. There may be ‘‘an orderly Greek default later this year, with a haircut on Greek debt, an immediate recapitalization of Greek banks, European guarantees for restructured Greek debt and conditional fiscal support’’ for Greece, he said. With concern growing that Greece will be unable to avoid default, Greek Prime Minister George Papandreou will meet French President Nicolas Sarkozy today in Paris after seeing European Union President Herman Van Rompuy in Warsaw.
• Bond Issuance Plunges on 'Armageddon' Scenarios: Credit Markets. Corporate bond offerings worldwide plunged in the third quarter to the lowest level since Lehman Brothers Holdings Inc.'s 2008 failure as Europe's sovereign debt crisis caused investors to shun all but the safest securities. Hewlett-Packard Co., the world's largest maker of personal computers, and Santa Clara, California-based chipmaker Intel Corp. led borrowers issuing $543.2 billion of bonds in the past three months, according to data compiled by Bloomberg. Issuance fell 41 percent from the second quarter and 38 percent from a year ago as offerings by financial firms and junk-rated companies largely evaporated.
• New Zealand Loses AAA Ratings, Yields Jump. New Zealand lost its AAA grades on local-currency debt at Fitch Ratings and Standard & Poor’s, which both cited concerns about the nation’s fiscal burden. Benchmark government yields rose the most this year. The outlook is stable after the long-term local-currency rating was reduced one level to AA+ and the foreign-currency rating was cut to AA from AA+, S&P said in a statement, matching actions announced yesterday by Fitch. New Zealand joins the U.S. to Italy among nations whose sovereign credit ratings have been cut this year, as governments’ struggles to cope with their debt burdens roil financial markets. Fitch’s downgrade may raise funding costs, adding to the case for Reserve Bank Governor Alan Bollard to keep interest rates at a record 2.5 percent low. Bond yields rose amid concern some overseas investors will sell their New Zealand holdings after the downgrades. “If funding pressures do intensify, this is one key factor, through a further tightening in financial conditions, that would delay any interest-rate hikes from the RBNZ,” Philip Borkin, an economist at Goldman Sachs & Partners New Zealand Ltd., said in a note to clients after the downgrade.
• China Stocks Fall in U.S. Trading on Probe Comments from SEC's Khuzami. Chinese Internet stocks tumbled in New York trading after a top U.S. securities regulator said the Department of Justice is reviewing allegations of accounting fraud at firms operating out of the Asian nation. Sina Corp., owner of the Twitter-like Weibo service in China, fell 9.7 percent and Baidu Inc., operator of China’s most popular online search engine, dropped 9.2 percent after Securities and Exchange Commission Enforcement Director Robert Khuzami made the comments in an interview with Reuters that was published today. “There are parts of the Justice Department that are actively engaged in this area,” Khuzami told Reuters in comments about allegations of possible fraud that were confirmed by John Nester, a spokesman for the SEC. Laura Sweeney, a Justice Department spokeswoman, declined to comment on whether criminal authorities are involved.
• Copper Rout Outpaces Analysts Focused on Production Shortages: Commodities. The biggest rout in copper since the global recession drove analysts to cut their price forecasts by 16 percent in a week as mounting concern about growth eroded expectations for supply shortages. The metal may drop as much as 10 percent to $6,500 a metric ton by Dec. 31, according to the median in a Bloomberg survey of 16 analysts and traders. Their estimate was $7,773 a week ago. Speculators in U.S. futures are making the biggest wager on declining prices in more than two years, U.S. government data show. Barclays Capital cut its forecast for the shortfall in global supplies four times since April and Deutsche Bank AG is anticipating a surplus as early as next year. Commodities tumbled into a bear market this month, dropping 21 percent since April, on concern that slowing growth will curb demand for raw materials.
• FBI Probing Solyndra for Possible Fraud. The FBI is investigating Solyndra LLC for possible accounting fraud and the accuracy of financial representations made to the government, according to an agency official. The FBI is examining possible misrepresentations in financial statements, according to the FBI official, who requested anonymity because the investigation is continuing. Solyndra, which made cylindrical-shaped solar panels, filed for bankruptcy protection on Sept. 6 and fired about 1,100 workers with little notice, about two years after winning a $535 million U.S. loan guarantee from the Energy Department.
• Micron(MU) Falls After Reporting Loss as PC Slump Cut Prices. Micron Technology Inc., the largest U.S. maker of computer-memory chips, fell in extended trading after reporting a fiscal fourth-quarter loss on weak demand for personal computers. The net loss was $135 million, or 14 cents a share, compared with a profit of $342 million, or 32 cents, a year earlier, the Boise, Idaho-based company said in a statement today. Revenue in the period ended Sept. 1 fell 14 percent to $2.14 billion. Analysts surveyed by Bloomberg on average estimated profit of 2 cents on sales of $2.11 billion. The price of dynamic random access memory, or DRAM, which provides the main memory in PCs, dropped as supply increased and demand from makers of laptops and desktop PCs remained sluggish. “It looks pretty bad,” said Daniel Berenbaum, an analyst at MKM Partners LLC. “It used to be if you got supply right, you were fine. Now there seems to be something wrong with demand.” Micron shares declined as much as 4.9 percent in extended trading after slipping 4 percent to close at $5.87 on the Nasdaq Stock Market.
• IBM(IBM) Exceeds Microsoft(MSFT) in Market Capitalization for First Time Since 1996.
  

Wall Street Journal:

• Banks Plan New Fees for Using Debit Cards. The nation's beleaguered banking industry, which has been raising fees and doing away with free services, has a new target: debit-card users. Bank of America Corp. is laying plans to charge millions of customers a $5 monthly fee to use their debit cards, and other big banks are expected to follow suit. The industry says it needs the fees to recoup revenue it will lose because of new government regulations that cap what they can charge merchants for debit-card transactions.
• Friendly's Preparing Bankruptcy Filing. The Friendly's restaurant chain is preparing for a possible Chapter 11 bankruptcy filing and potential sale, said people familiar with the matter. Friendly Ice Cream Corp., which employs roughly 10,000 people and operates more than 500 restaurants known for sundaes and hamburgers, could seek protection from creditors as soon as next week, the people said. The Wilbraham, Mass.-based company would then try to sell itself through a bankruptcy auction, the people said.
• Index Deal Would Bring S&P and DJIA Together. McGraw-Hill Cos.(MHP) is in advanced talks to combine its S&P Indices business with CME Group Inc.'s(CME) Dow Jones Indexes to create a joint venture that would house globally recognized stock-market indicators such as the Standard & Poor's 500-stock index and the Dow Jones Industrial Average, people familiar with the matter said.
• Kabul to Drop Peace Effort With Pakistan and U.S. Afghanistan plans to suspend an effort to work with Pakistan and the U.S. to bring the Taliban to the negotiating table, Afghan officials said, taking a tougher line with Pakistan after last week's assassination of Kabul's top peace negotiator. Senior U.S., Pakistani and Afghan officials had been set to meet in Kabul on Oct. 8 to discuss ways to get insurgents into peace talks and end the 10-year-old conflict. Afghanistan has now decided to cancel the meeting, deputy national-security adviser Shaida Mohammad Abdali said on Thursday.
• At SEC, Strategy Changes Course. Securities and Exchange Commission officials are trying to make it easier on themselves to hold more individuals responsible for wrongdoing during the financial crisis. In a major shift from the agency's traditional enforcement strategy, the SEC could file more civil cases in which defendants are accused of negligence only, rather than harder-to-prove charges of intentional wrongdoing or recklessness, according to SEC officials.
• Flat Is the New Fair by Stephen Moore. Is President Obama paving the way for GOP tax reform?

Dow Jones:

• NY Fed: Dollar Swap Line Borrowings Total $500 Million In 9/28 Week. Outstanding borrowings at the Federal Reserve foreign exchange swap facility totalled $500 million in the latest week. The Federal Reserve Bank of New York reported Thursday that in the week ended on Wednesday, the borrowing had been done by the European Central Bank, for a term of one week at a rate of 1.07%. The ECB had borrowed $575 million last week. The Federal Reserve operates swap arrangements with the Bank of Canada, Bank of England, Bank of Japan, the European Central Bank and the Swiss National Bank to ensure ample levels of dollar liquidity in the global financial system. Since the swap arrangements were relaunched in May 2010, they have been little-used by participating banks, compared to the heavy usage of the facility during the worst days of the financial crisis. In the current climate of intense worry about the state of global finance, investors have turned a wary eye toward the Fed's currency swap facility, fearing a spike in usage could be a sign of growing financial troubles.

MarketWatch:

• China Hard-Landing Fears Hit High-End Retailers. Shares of several high-end retail goods companies slumped Thursday in the U.S. and Europe on worries a worsening global economic climate could weaken Chinese appetite for premium branded products. The tumble came amid growing fears of a hard economic landing in China, which has emerged as a key driver of the world’s economy in the wake of the global financial crisis. “Fears of a hard landing in China have once again intensified. While our base case remains a soft landing led mainly by an investment slowdown, we see increasing downside risk from the situation in Europe and at home,” Barclays Capital economists led by Yiping Huang wrote in a report earlier this week.

Business Insider:

• Here's The Company That Reuters Should REALLY Be Freaking Out About... BLOOMBERG.
• Morgan Stanley: Resurgent Greenback To Keep Rallying Into Next Year.
  

Zero Hedge:

• The "Muddle Through" Has Failed: Boston Consulting Group Says "There May Be Only Painful Ways Out Of The Crisis".

CNBC:

• DOE Pushing On With $5 Billion In Solar Energy Loans. The U.S. Department of Energy said it plans to push ahead with as much as $5.3 billion in potential additional alternative energy loans by Friday, despite Republican complaints the money is going out too quickly to untested firms.
• Brazil's $12 Billion iPad Deal Is In Trouble. A much-hyped $12 billion plan for Taiwanese manufacturer Foxconn to produce iPads in Brazil is "in doubt" due to stagnant negotiations over tax breaks and Brazil's own deep structural problems such as a lack of skilled labor, government sources tell Reuters.

NY Times:

• Even if Europe Averts Crisis, Growth May Lag for Years. It has happened time and again in recent months as Europe’s debt crisis has played out. Stocks stage a strong comeback on expectations that a solution has been found. Then they quickly resume their decline as hopes dissipate, leaving investors puzzled and frazzled. What is going on? The problem, say close watchers of both the subprime financial crisis in 2008 and the European government debt crisis today, is that many investors think there is a quick and easy fix, if only government officials can agree and act decisively. In reality, one might not exist.

LA Times:

• Kamala Harris Pressured to Reject Bank Foreclosure Settlement. A group of California union leaders, politicians and activists are urging the state attorney general to reject any deal that lacks significant principal reduction for distressed homeowners.

Boston Herald:

• Cursive Handwriting No Longer a Focus in Many Elementary Schools. Vicki Zurkowski wonders if today’s cursive handwriting will be tomorrow’s hieroglyphics — an ancient form of writing decipherable by only a few experts in a specialized field. The Elmhurst, Ill., mother was disturbed to learn that her children’s school district will spend less time teaching the flowing loops of cursive in order to squeeze more 21st-century lessons, such as keyboarding, into the classroom day. "We are losing an art," said Zurkowski, who wonders how her two youngest children will develop a unique signature or read notes written on greeting cards. "Maybe it’s something I will have to teach my kids myself."

StreetInsider:

• Hedge Fund Blow-Up Rumors Focus On This Momentum Fund. With the massive downdraft in momentum stocks today there has been speculation of a hedge fund blow-up. Those rumors now appear to be centered on John Thaler's JAT Capital. While we cannot verity if these rumors are true, the fund owns many of today's worst performers.
  

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 22% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -20 (see trends).

Reuters:

• U.S. Senate Banking Panel to Vote on CFPB Nominee. The Senate Banking Committee is expected to vote next week on the nomination of Richard Cordray to head the new Consumer Financial Protection Bureau, according to a Democratic aide. The vote will likely occur on Oct. 6, but the plan has yet to be finalized.
• China Property Tax Could Go Nationwide - Chongqing Mayor. A pilot programme to levy property taxes, the first of its kind in China, is helping cool price rises in Chongqing and will eventually be extended to the rest of the country, the mayor of the country's biggest municipality told Reuters. "I'm sure that property taxes play a long-term role in controlling property prices," said Huang Qifan in an interview at his offices in Chongqing late on Wednesday, adding that the city's own tax, launched in a trial earlier this year, has already delivered results. "We're trying it out in this first year, and I'm sure that next year or the year after it will be expanded within our country," Huang said. China launched a property tax on large, expensive homes in Chongqing and Shanghai in January on a trial basis as part of efforts to rein in speculation and housing inflation. Policy makers in the world's second-biggest economy have been struggling to pull down stubbornly high inflation rates without damaging the fast-growing economy. Containing rising home prices is a key part of that effort. Already, Chongqing has expanded its pilot property tax programme, which originally applied only to property transactions completed after its launch in January, local media reported earlier this week.
• US Equity Funds Post $5.9 Billion in Outflows.
• Japan Sept. Manufacturing PMI Shrinks, First in 5 Months. Japanese manufacturing activity contracted in September for the first time in five months as a strong yen hurt exports and domestic orders shrank due to weak domestic demand, a survey showed on Friday. The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 49.3 in September from 51.9 in August. The index fell below the 50 threshold that separates contraction from expansion for the first time since April, which was one month after a devastating earthquake in March.
• US Watchdog Finds TARP Paid Questionable Legal Fees. The U.S. government's bank bailout program paid more than $9 million in legal fees to law firms that submitted questionable bills with little or no details on services provided, the agency's watchdog said in a report released on Thursday. The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) said auditors questioned $8.1 million of a sampling of $9.1 million in bills from four law firms paid by Treasury's Office of Financial Stability (OFS).

Financial Times:

• Debt Crisis Efforts Carry Boom-Era Echoes. Whisper it softly, but there’s a touch of boom-era financial wizardry in the debate over how to resolve the eurozone debt crisis. Some market participants liken the monetary union’s €440bn bail-out fund, the European financial stability facility, to a collateralised debt obligation, a form of bundled and structured debt made famous by its toxic connotations during the subprime crisis. Where mortgage risk used to be packaged and repackaged to form esoteric, triple A-rated products, the EFSF relies on guarantees from euro-area members, some heavily indebted, to issue its own highly rated bonds. One idea, based on a suggestion from Tim Geithner, US Treasury secretary, to leverage the rescue fund also carries echoes of the pre-crisis techniques used by banks to magnify the effect of their assets.
• ICAP Prepared to Quit London Over Tax. Icap, the world’s biggest interdealer broker by trade volumes, would move its main operations away from London “extremely rapidly” if faced with a European financial transactions tax, its chief executive has warned. Michael Spencer told an analysts’ conference call on Thursday that “the wholesale financial market will evaporate from Europe” if the levy were introduced.

Telegraph:

• UK Faces Defeat to EU on Key Derivatives Regulation. The UK is facing defeat over a critical piece of EU financial regulation, forcing it to cede control over the shape of key markets in the City, home to more than three-quarters of Europe’s derivatives trading.
• Germany's Vote Simply Kicks the Euro Can Down the Road to Cannes. Unfortunately for the Bundestag members who voted in large numbers in favour of the greater bail-out powers for the EFSF on Thursday, the world has moved on since July 21. If they thought it was difficult to get this far, all they've done is ratify a solution to a problem that has changed materially in the intervening period.
• China Ruffles Europe's Feathers.
• German Bailout Vote Is 'Too Little, Too Late'. Germany's Bundestag has voted overwhelmingly to boost the scope of the EU's rescue fund but implicitly capped its firepower at €440bn, leaving it no clearer whether Europe has the means to halt debt contagion to Italy and Spain.

Rheinische Post:

• Germany's Federal Labor Agency's IAB research unit has cut its German 2012 gross domestic product forecast to 1% from 1.8%.

Securities Times:

• A rising yuan won't solve U.S problems, Zhang Monan, a researcher with the State Information Center, wrote in a commentary today. Yuan appreciation over the short-term has put China's economy in a difficult predicament, he said.

South China Morning Post:

• Chinese Firm Banned for Fraud by World Bank. A subsidiary of China Metallurgical Group Corporation (MCC), a state-owned construction, resources and property conglomerate, has been banned by the World Bank from participating in its projects for three years for "fraudulent misconduct" relating to an urban transport project in Bangladesh.

Evening Recommendations
Piper Jaffray:

• Rated (LRCX) Overweight, target $46.
• Rated (MU) Overweight, target $8.
• Rated (KLAC) Overweight, target $50
  

Night Trading

• Asian equity indices are -1.0% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 235.0 -4.0 basis points.
  
• Asia Pacific Sovereign CDS Index 166.0 +8.5 basis points.
• FTSE-100 futures -.26%.
  
• S&P 500 futures -.43%.
  
• NASDAQ 100 futures -.18%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• Personal Income for August is estimated to rise +.1% versus a +3% gain in July.
• Personal Spending for August is estimated to rise +.2% versus a +.8% gain in July.
• The PCE Core for August is estimated to rise +.2% versus a +.2% gain in July.
  

9:45 am EST

• Chicago Purchasing Manager for September is estimated to fall to 55.0 versus 56.5 in August.

9:55 am EST

• Final Univ. of Mich. Consumer Confidence for September is estimated at 57.8 versus a prior estimate of 57.8.
  

Upcoming Splits

• (EMN) 2-for-1
  

Other Potential Market Movers

• The Fed's Bullard speaking, China PMI and the NAPM-Milwaukee for September could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.