Monday Watch

Weekend Headlines
Bloomberg:

• Germany Rejects Using ECB to Lift EFSF Rescue-Fund Firepower. Germany’s top two finance officials rejected using the European Central Bank to boost the euro-area rescue fund’s firepower, rebuffing a suggestion by U.S. Treasury Secretary Timothy Geithner. Inviting Geithner to a euro meeting for the first time, European finance chiefs who wrapped up two days of talks in Wroclaw, Poland, today also said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation. The German stance risks leaving the euro area without sufficient means to prevent the crisis from engulfing Spain and Italy. Geithner floated a variation of a 2008 policy he developed while at the New York Federal Reserve that would expand the reach of the 440 billion-euro ($607 billion) European Financial Stability Facility using leverage in a partnership with the ECB, said Irish Finance Minister Michael Noonan. “The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market,” Bundesbank President Jens Weidmann told reporters today. “If it’s done via the central bank it constitutes monetary state financing,” which is forbidden under European Union rules. Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro region finance ministers, said yesterday: “We’re not discussing the increase or the expansion of the EFSF with a non-member of the euro area.” “We don’t think that real economic and social problems can be solved by means of monetary policy,” said German Finance Minister Wolfgang Schaeuble, speaking alongside Weidmann after the meeting of EU finance ministers and central bank governors. “That has never been the European model and it won’t be.” Germany’s credit risk on its contribution to the EFSF may reach 465 billion euros, the Ifo Institute said today. The risk has risen from less than 400 billion euros in April, the Munich- based economic institute said in a statement.
• CSU's Seehofer Sees Greek Euro Exit 'Conceivable,' Spiegel Says. A Greek exit from the euro zone is “conceivable” if rescue efforts fail, Spiegel magazine cited Horst Seehofer, chairman of the CSU party that’s in a governing coalition with Chancellor Angela Merkel’s CDU, as saying in an interview. “If the Greek government and parliament don’t want to or can’t follow this path any longer, we shouldn’t wait until the financial markets force us to face reality,” the magazine quoted Seehofer as saying in an e-mailed preview of the interview. “A Greek exit from the euro zone must then be conceivable.” The “idea of Europe” will live on if the euro zone splits, Spiegel cited him as saying.
• Euro Bulls Capitulating After Trichet Turnaround Leaves Redecker at $1.25. The rebound in the euro and European stocks last week may prove short-lived in the face of increasing pessimism over the region’s debt, if money-market and derivative trading are any indication. While the 17-nation currency strengthened 1 percent against the dollar and the Stoxx Europe 600 Index rose 2.5 percent, U.S. short-term debt funds have reduced lending to European banks and the cost for financial institutions to fund themselves in dollars rose. Goldman Sachs Group Inc. and Morgan Stanley cut forecasts for the currency this month, and bets against the euro rose to the most in more than a year.
• Greek Collateral Discussions Are Ongoing, Katainen Tells Diena. Discussions about whether Greece should post collateral for any loans it gets from other government are taking place “day and night,” Finnish Prime Minister Jyrki Katainen said in an interview with the Latvian newspaper Diena. The kind of collateral hasn’t been worked out, he said, according to the Riga-based newspaper. The euro region will “definitely not collapse,” he said, though it needs a supervisory agency that ensures member states adhere to rules, according to the newspaper.
• China Home Prices Rise, Challenge Curbs. China’s new-home prices rose in August in all 70 cities monitored by the government for the first time this year as developers watch policy directions before cutting prices. Prices in Beijing rose 1.9 percent from a year ago, while those in Shanghai, the nation’s financial center, increased 2.8 percent, the statistics bureau said on its website yesterday. New home prices rose in 67 out of 70 cities in the first half this year and were up in all but two in July. China’s measures to control its property market are at a critical stage and the nation needs to focus efforts on curbing price increases in less affluent cities, Premier Wen Jiabao said on Sept. 1. The government said in July that it will rein in residential prices in smaller cities after it raised down- payment requirements and mortgage rates earlier this year. “There’s still no obvious price falls as developers are reluctant to make big price cuts,” Jinsong Du, a Hong Kong- based property analyst at Credit Suisse Group AG, said in a phone interview. “This is actually the worst scenario because minor price reductions one after another will dampen market confidence.” The central city of Nanchang posted the biggest increase among the 70 cities, climbing 9.1 percent, the statistics bureau’s data for year-on-year showed. Prices in the western city of Urumqi rose 8.8 percent, the second-biggest gain. “Asset prices in China’s second- and third-tier cities are still rising rapidly, as local governments are reluctant to place more strict policies,” said Liu Li-Gang, a Hong Kong- based economist at Australia & New Zealand Banking Group Ltd. in a phone interview. “Especially some western and central cities are facing big pressure to pay out debts, while their main revenue comes from land sales.” Property prices are too high according to 75.6 percent of respondents to a central bank survey on Sept. 15, the highest level since real-estate data was included in the quarterly poll in 2009.
• Oil Demand Will Drop on Weak U.S., European Growth, Shana Says. Global demand for oil will continue to decline because of the “lack of economic growth” in the U.S. and Europe, the Iranian Oil Ministry’s Shana news website said today, citing Mohammad Ali Khatibi, the country’s OPEC governor. China’s demand for oil was at “a desirable level,” the news service said, citing Khatibi. Asia’s developed economies were “in a better economic situation in comparison to European countries but they are also experiencing falling economic growth, except China,” Khatibi was cited as saying by Shana.
• Hedge Funds Lower Bullish Commodity Bets Amid 'Contraction Fear'. Funds cut their bullish bets on raw materials for the first time in five weeks on speculation that demand for food, fuel and metals will decline as the European debt crisis deepens. In the week ended Sept. 13, speculators lowered their net- long positions in 18 commodities by 5.2 percent to 1.21 million futures and options contracts, government data compiled by Bloomberg show. That was the first drop since early August. Funds slashed bullish bets on copper by 91 percent, and became bearish on wheat for the first time in four weeks. Wagers on rallies in gold, corn and gasoline also were reduced. The Standard & Poor’s GSCI Index of 24 commodities has tumbled 14 percent since reaching a two-year high in April as escalating debt woes in Europe and the U.S. raised concern that global growth will stagnate.
• Buffett-Backed BYD Plans Most Bonds as Debt Costs Hit Record. BYD Co., the Chinese automaker part-owned by Warren Buffett’s Berkshire Hathaway Inc., may have to sell a record amount of bonds to pay off maturing debt next year just as the government’s inflation-fighting campaign pushes corporate borrowing costs to a high. Yields on its 1 billion yuan of bonds due 2014 have surged 450 basis points to 8.89 percent since they were sold in April, according to Royal Bank of Scotland Group Plc prices. Average yields on U.S. automakers’ debt were at 2.86 percent on Sept. 15, Bank of America Merrill Lynch indexes show. Vehicle sales at the Shenzhen-based company fell every month in the past year to July as the popularity of its best- selling F3 sedan model waned and General Motors Co. (GM) and Honda Motor Co. released new cars. Credit limits aimed at curbing price growth have raised average yields on five-year corporate bonds rated A+ by 130 basis points to a record 8.65 percent, according to Chinabond, the nation’s biggest clearing house. “It’s a real bad time for BYD to sell bonds when the company is surrounded by uncertainties,” said Charlene Gu, a Hong Kong-based analyst at Yuanta Securities HK Co. “Investors will ask for higher returns on the bond and it will in turn further squeeze the automaker’s profit margin.”
• Oil Drops for a Second Day After Europe Meeting on Signals Growth to Slow. Oil fell for a second day in New York on speculation that fuel demand will falter amid signs of weaker economic growth in Europe and in the U.S., the world’s largest consumer of crude. Crude dropped as much as 1 percent, extending a 1.6 percent decline on Sept. 16 as European finance ministers ruled out stimulus measures to spur their economy after meeting with Treasury Secretary Timothy Geithner. Purchases of previously owned U.S. homes in August probably held close to the weakest level this year and construction dropped to a three-month low, reports this week may show. Oil for October delivery fell as much as 88 cents, or 1 percent, to $87.08 in electronic trading on the New York Mercantile Exchange and was at $87.25 at 6:54 a.m. Singapore time.
• Volcker Rule May Be Extended to Overseas Banks With Operations in the U.S. A rule limiting proprietary trading by U.S. banks may be extended to overseas firms with operations in the country, according to four people familiar with the matter. Regulators next month will issue a proposal to carry out provisions of the so-called Volcker Rule, part of the Dodd-Frank financial-regulation law, that will clarify the types of offshore trading allowed under the rule, the people said.
• United Technologies(UTX) Said to Be in Talks to Buy Goodrich(GR); Goodrich Advances. United Technologies Corp. (UTX) is in talks to buy aerospace equipment maker Goodrich Corp. as it looks to expand through a major acquisition, according to three people with knowledge of the matter. A deal may be announced as soon as next week, said one of the people, who weren’t authorized to speak publicly. Goodrich is the most likely candidate of takeover targets being studied by Hartford, Connecticut-based United Technologies, one person said. Goodrich jumped 23 percent in late trading yesterday, adding to a market value of $11.6 billion.
• Chinese City Halts Solar Plant Operation After Violent Protests. The eastern Chinese city of Haining in the province of Zhejiang halted operation of a facility owned by Zhejiang Jinko Solar Co. after violent protests by villagers because of alleged pollution from the plant, according to a video of a local television report posted to the website of the city’s government. Villagers gathered at the gate of the solar panel producer and overturned eight vehicles and damaged four police cars in protests on Sept. 15 and Sept. 16, according to the report.

Wall Street Journal:

• Q&A: Zoellick on the Euro-Zone Crisis and Growth Risks.
  
• Fed Ponders Jobs, Inflation Targets. Federal Reserve officials, worried that a wobbly economy and their fractious debates are confusing the public, are examining whether to adopt more explicit economic targets to clarify their strategy for lowering unemployment without fueling inflation.
  
• Paulson Still a Bull After His Bare Year.
• Voters Want State Government Reform by Douglas Schoen. Polling in 10 states shows that Americans want politicians to cut spending and reduce public employee benefits before they raise taxes.

Marketwatch.com:

• More Warnings on China's Debt. Shadow banking sparks new worries.

CNBC:

• Foreign Credit Growth Risk for Emerging Markets: BIS. The Bank of International Settlements (BIS) said the flow of international credit, fuelled by major central banks' bond purchase operations, could limit emerging market monetary authorities' ability to slow credit growth in their economies. In a report released on Monday, the BIS said authorities need to be vigilant of this credit flow, because it posed significant policy challenges, and the risks posed by low interest rates elsewhere in the globe to their economies. It said such vigilance was necessary as dollar credit had grown rapidly outside the United States, particularly in Asia.

Business Insider:

• Obama to Propose $1.5 Trillion In Tax Increases. President Barack Obama will ask the Super Committee to double its mandate and cut $3 trillion from the federal deficit, according to White House officials, with half of the savings coming from tax increases on corporations the wealthy. Rep. Paul Ryan called the tax increase "class warfare," saying it would hurt small businesses and pledging that GOP lawmakers would rally against it.
• Deep Thoughts From Currency Guru John Taylor On The Massive Risks From The Swiss Intervention.
• Watch: Russian Billionaires Get Into Fist-Fight On Live TV.
• Nomura Presents 5 Possible Outcomes For Europe.
• UBS Rushes to Make Changes After The Trader's $2.3 Billion Loss Shows $10 Billion Wagered on Positions.
• ECRI: "Risk of Recession is Quite High... We Are Skating On Very Thin Ice".
• Troika Reportedly Demands Massive New Spending Cuts In Greece.
• China Warns The U.S. Against Vetoing Palestine's UN Request.
  

Zero Hedge:

• Frankfurter Allgemeine: "German Banks Need $175 Billion More In Capital".

NY Times:

• Obama's Disapproval Rating Rises to 50%. President Obama’s support is eroding among elements of his base, and a yearlong effort to recapture the political center has failed to attract independent voters, according to the latest New York Times/CBS News poll, leaving him vulnerable at a moment when pessimism over the country’s direction is greater than at any other time since he took office. Despite Mr. Obama’s campaign to sell the plan to Congress and voters, more than half of those questioned said they feared the economy was already in or was headed for a double-dip recession, and nearly three-quarters of Americans think the country is on the wrong track.
• Merkel's Efforts in Euro Crisis Complicated by Berline Vote. Chancellor Angela Merkel’s conservative party held its own in the closely watched Berlin regional election on Sunday. But her junior coalition partner is now in a political free fall, complicating her fight to contain the European debt crisis despite the infighting within her bloc.

Seattle Times:

• Business Loans Shrink at Washington Banks.

Reuters:

• Exclusive - Popular China Company Structure Under Threat. China's securities regulator is asking the government to clamp down on the controversial corporate structure used by companies such as Sina and Baidu to list overseas, and employed in thousands of other investments by foreigners into domestic Chinese companies, four legal sources told Reuters. Lawyers at four different firms in China and Hong Kong said they have seen an internal report, dated August 17, said to come from the China Securities Regulatory Commission (CSRC) which asks China's State Council, or cabinet, to take action against the structures known as Variable Interest Entities (VIEs).
• Analysis: Volatility Stymies Even Smart Money. Volatility in equity markets is burning smart-money players, and even experienced traders are finding it hard to keep up. Some fund managers have been dipping back into stocks to pick up bargains but could end up in a value trap if equities fall into a bear market and the economy falls into recession. Others are taking a wait-and-see approach after getting blindsided by market swings not seen at least since the financial crisis -- and by some measures well before that. Most are unlikely to dive back in given fears over Europe's debt crisis and fears of a second recession in the United States that sent equity markets sliding over the summer. The $2 trillion hedge fund industry -- often seen as the smartest of the smart -- will ultimately play an important role in whether stocks can rise over the long-term. Uncertainty there means more of the same churning action and precipitous falls without that wall of money to act as a back stop. "Gross exposures have come down industrywide and large bets in either direction have also decreased because of the volatility," said Robert Francello, head of equity trading a Apex Capital, a hedge fund in San Francisco.
• No New China Stimulus - Former Deputy Central Banker Says. China should refrain from boosting credit and fiscal spending again as stimulus measures to avoid fueling inflation and pushing up government debt, Wu Xiaoling, a former deputy central bank governor said in remarks published on Monday. "Currently, China's economy faces inflationary pressures as well as pressures on government debt, which means we cannot go down the road of expanding both credit and fiscal spending," the official Finance News quoted Wu as telling a forum. Chinese policymakers should be "extremely wary" about the risk of government debt, said Wu, who is now a senior lawmaker. China faces more economic challenges in the fourth quarter of this year and 2012, Wu said, adding that slower economic growth next year would be highly likely. Weak global demand, government tightening steps to target the property sector and a slowdown in investment for highways and high-speed railways as could weigh on China's growth, she added. Wu said the government should not rush to loosen monetary policy as 3-5 percent inflation could be a "normal phenomena" in the next several years.

Financial Times:

• Spanish Lenders to Be Seized by Madrid. Spain’s official bank rescue fund, Frob, is preparing to nationalise three more groups of savings banks at the end of the month at a cost of nearly €5bn ($6.9bn), but could allow two others extra time to find investors to help boost their capital, according to people familiar with the discussions. NovaCaixaGalicia (NCG), Caixa Catalunya and Unnim are expected to be recapitalised by Frob after failing to present adequate plans to secure new investors by a September 10 deadline

Telegraph:

• China 'Faces Subprime Credit Bubble Crisis'. Monetary tightening in China threatens to pop the $1.7 trillion (£1.07 trillion) credit bubble in local government finance and expose the country's simmering "subprime" crisis, according to the Communist Party's economic guru. Cheng Siwei, head of Beijing's International Finance Forum and a former deputy speaker of the People's Congress, said interest rate rises and credit curbs to cool overheating were inflicting real pain on thousands of companies used by local party bosses to fund the construction boom. "The tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults," he told a meeting at the World Economic Forum in Dalian. "Our version of subprime in the US is lending to local authorities and the government is taking this very seriously." "Everybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare." "Those who are not highly indebted are forced to help those who are," he said, echoing the debate over moral hazard that has divided opinion in the West since the banking rescues.
• Can China Escape as World's Debt Crisis Reaches Act III? Even after Lehman and AIG collapsed a year later -- and Europe's economy crashed into slump -- it remained an article of faith in Berlin, Paris, and Rome that this was just fall-out from the Anglo-Saxon casino. Few understood that the `China Effect' had engendered credit bubbles everywhere, and that Europe's variant was even more pernicious because euro-banks were more leveraged, with much greater liabilities, and the structure of EMU concentrated the damage on weaker states with no policy defence against sovereign collapse.

Frankfurter Allgemeine Sonntagszeitung:

• Germany's main opposition Social Democratic Party wouldn't form a government with Chancellor Angel Merkel's Christian Democrats without elections if the chancellor's coalition disintegrates amid debate over the euro crisis, SPD leader Sigmar Gabriel said in an interview. A new ruling mandate is only possible through a parliamentary election, Gabriel said.
  

Bild am Sonntag:

• German Finance Minister Wolfgang Schaeuble said a financial transaction tax should be introduced in the euro area this year.
• German Finance Minister Wolfgang Schaeuble said Greece must demonstrate it will fulfill its responsibilities and ultimately "get a grip" on its debt problems for aid to continue. The troika of the European Commission, European Central Bank and IMF must see confirmation that Greece is fulfilling its commitments for the next tranche of aid to be paid, Schaeuble said.
  

Folha de S. Paulo:

• HSBC Global Asset Management favors Brazil inflation bonds for investors seeking protection against inflation, citing Philip Poole, HSBC global head of investment strategy. The risks of higher inflation have increases in Brazil and there is concern over how the nation's central bank may react, citing Poole.

Hong Kong Economic Times:

• Growth in new bank loans is "still too fast," with lending increasing at an annualized rate of more than 18% in June and July, citing the Hong Kong Monetary Authority's Deputy Chief Executive Arthur Yuen. The city's de facto central bank may adopt measures on mortgages if needed, citing Yuen.

Kyodo News:

• Fukushima prefectural government will examine the thyroid glands of 360,000 children starting in October.

People's Daily:

• A U.S. arms sale to Taiwan will "greatly damage" ties with China, Wang Xinjun, a researcher with the Academy of Military Sciences under China's People's Liberation Army, wrote in a front-page commentary.

Financial News:

• The construction of large scale affordable housing may not resolve the problem that property prices exceed households' purchasing ability, citing Li Jiange, chairman of China International Capital Corp. Social housing construction involves a large amount of debt and may induce corruption when homes are given out, he said.

Weekend Recommendations
Barron's:

• Made negative comments on (MFW).
  

Night Trading

• Asian indices are -2.0% to -.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 170.50 +6.5 basis points.
• Asia Pacific Sovereign CDS Index 154.25 +3.0 basis points.
• FTSE-100 futures n/a.
  
• S&P 500 futures -1.65%.
• NASDAQ 100 futures -1.45%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LEN)/.11

Economic Releases
10:00 am EST

• The NAHB Housing Market Index for September is estimated at 15 versus a reading of 15 in August.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The UBS Life Sciences Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by financial and industrial shares in the region. I expect US stocks to open lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.