Monday Watch

Weekend Headlines
Bloomberg:

• Tumbling Markets Make Quarterly Sales Harder for Italy, Spain: Euro Credit. Spain and Italy face a tricky final quarter among the euro-area nations with most bonds left to sell as they try to lure investors amid falling prices. The European Central Bank began purchasing securities of the region’s third- and fourth-largest economies on Aug. 8 after debt-crisis contagion sent borrowing costs up to euro-era records. Still, Italy and Spain may have to trim supply, count on investors to reinvest maturing-bond proceeds and use cash raised from state-asset sales to see them through the final three months of the year, strategists at Barclays Capital and UBS AG said. “The next quarter will be very difficult for Italy and Spain -- every single auction will be scrutinized,” said Nicola Marinelli, a London-based fund manager at Glendevon King Asset Management, which oversees $153 million. “If the market knows you have to refinance in this kind of environment, then it is going to be tough. If there is any hint that the ECB isn't standing behind the bonds, then the auctions will be disasters.” The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds, the region’s benchmark government securities, widened to 418 basis points on Aug. 5, the most since the euro was introduced in 1999. The Italian-German 10-year spread reached a record 416 basis points the same day and the Spanish spread climbed to 374 last week, the most since before the ECB began buying the debt, while Italy’s rose to 413.
  
• Greater EU Integration Requires Referendum, Judge Tells FAS. The chief justice of Germany’s top court said the country’s constitution bars further steps toward European Union integration unless they are approved in a referendum, Frankfurt Allgemeine Sonntagszeitung reported. The Federal Constitutional Court’s decision on the euro- rescue earlier this month indicates that joint euro bonds might be unconstitutional depending on how they are structured, the newspaper cited court President Andreas Vosskuhle as saying in an interview. The ruling means that under the existing constitution Germany may not join a permanent mechanism that would require it paying the bill for decisions made by other governments, Vosskuhle told FAS.
• Euro Slumps Amid Debt Concerns Before Report on German Business Confidence. The euro slumped versus most of its major peers before a German report that may show business confidence in Europe’s biggest economy fell to a 15-month low, adding to signs the region’s economy is deteriorating. The 17-nation currency was 0.4 percent from a decade low against the yen as Greece awaits a decision on its next round of rescue funding. The dollar and yen strengthened versus most of their counterparts as Belgium prepares to sell bonds today amid concern the euro area’s debt woes will drive up funding costs. New Zealand’s currency dropped for a sixth day after the country posted a wider-than-estimated trade deficit. “It’s certain that the debt crisis is causing an economic slowdown in Europe and that’s the main reason for selling the euro,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s third-biggest bank by market value. “We can’t buy the euro because its economy is the weakest among the U.S., Europe and Japan.” The euro slid to 102.65 yen as of 11:45 a.m. in Tokyo from 103.40 yen in New York on Sept. 23, the day after it touched 102.22 yen, a level unseen since June 2001. The common currency sank to $1.3437 from $1.35. The dollar was at 76.41 yen from 76.61 yen.
• BDB Sees Greek Rescue Cost rising for German Banks. Germany’s BDB banking association expects the nation’s lenders will have to shoulder additional burdens to deal with the Greek debt crisis, Reuters reported. German banks are likely to have to finance a higher share of the rescue efforts, the newswire cited BDB president Andreas Schmitz as saying in an interview.
• Deutsche Bank CEO Says Euro-Fund 'Crucially Important'. Deutsche Bank AG Chief Executive Officer Josef Ackermann said it was “crucially important” for euro-area governments to implement a July 21 agreement to beef up the rescue fund for their common currency. Ackermann, speaking as chairman of the Institute of International Finance at the group’s annual meeting in Washington today, called upon euro-area governments to quickly approve the 440 billion-euro ($593 billion) European Financial Stability Facility and measures to enhance greater economic policies discipline, according to an e-mailed statement from the IIF, a global association of financial institutions. “The euro is an essential and stable pillar of the international monetary system and has brought stability and growth to its members,” Ackermann said. “Its central role in the global monetary system makes it all the more important that any doubt about the workability of its institutional foundations be removed.” German lawmakers are scheduled to vote on approval of their country’s share in the fund later this week.
• ECB's Stark Says Monetary Policy Cannot Solve Current Crisis. European Central Bank Executive Board member Juergen Stark warned that central bank emergency measures are the wrong tool to rely on to solve the current crisis. “It is a fallacy to think that loose monetary policy can solve the large structural problems we are facing,” Stark said, according to the text of a speech delivered in Washington today. “The crisis has demonstrated that a monetary policy aimed at fine-tuning short-term objectives carries serious risk.”
• Schaeuble Says Major Economies Must Cut Debt to Help Confidence. The world’s major economies must reverse an “unsustainable” build-up of public and private debt to restore confidence and bolster global growth, German Finance Minister Wolfgang Schaeuble said today in Washington. “Reducing the debt overhang is a fundamental prerequisite for growth,” Schaeuble said in a speech prepared for delivery at the International Monetary and Financial Committee. “We must concentrate on firmly implementing agreed policy strategies, in particular the implementation of medium-term fiscal consolidation,” strengthening financial sectors and enhancing growth potentials. Group of 20 countries must stick to their commitment to cut their public deficits in half by 2013 and stabilize their debts by 2016, as agreed at a meeting of their leaders in Toronto last year, Schaeuble said.
• France Has No Plans to Recapitalize Banks, Budget Minister Says. French Budget Minister Valerie Pecresse said that the government has no plans for a recapitalization of French banks and that the lenders are “solid” and don’t need more funds. The government is “working hand in hand with the banks” and meets with the banks’ chiefs often, Pecresse said. The minister declined to confirm whether a meeting took place on Sept. 11 between the government and the heads of France’s five biggest banks regarding an investment plan, as reported today by Journal du Dimanche.
• Banks Splinter on Europe Debt Crisis. Wall Street leaders, urging coordinated action from world governments to solve the European sovereign-debt crisis, struggled themselves during four days of meetings in Washington to agree on what’s needed to end it. The chiefs of firms including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK) and Societe Generale (GLE) SA met for three hours at the National Archives on Sept. 23. They differed on which government and private solutions may restore confidence in European debt and banks, and on some elements of regulation, said two participants who spoke on condition of anonymity because the meeting wasn’t public. “It was a big group there, they’re going to differ about stuff; there’s a lot of tension in the air because of the world we live in,” Morgan Stanley (MS) Chief Executive Officer James Gorman, 53, said as he left the event, which coincided with weekend meetings of the International Monetary Fund and Institute of International Finance. “There’s no one solution. It’s going to be 25 different things.”
• China's Stock Futures Decline After PBOC Governor Calls Inflation Priority. China’s stock-index futures fell, signaling declines for the benchmark index, after the central bank governor said inflation remains the nation’s “top concern.” China Vanke Co. and Poly Real Estate Group Co. may decline among developers after China Business News said the city of Chongqing will start imposing a property tax on existing villas. “Policymakers are unlikely to relax tightening policies in the short term so the market is still in the process of seeking its bottom,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “The market is facing lots of uncertainty and the biggest risk comes from overseas, such as the sovereign-debt problems and slowing growth in advanced economies.” The MSCI All-Country World Index of 45 nations entered a bear market last week for the first time in more than two years, as the European debt crisis and threat of a U.S. recession raised concerns over global economic growth. The MSCI index sank 7.6 percent last week and has dropped 23 percent from its peak this year on May 2. The People’s Bank of China has no “immediate” ways to control inflation because it takes time for monetary policy to affect prices, Governor Zhou Xiaochuan told reporters at the International Monetary Fund in Washington over the weekend. It’s “too early” to determine how emerging economies can further help the euro area overcome its sovereign debt crisis because reforms are still under way, he said. The southwestern city of Chongqing will start imposing a property tax on owners of existing villas from Oct. 1, becoming the first Chinese city to tax existing homes, China Business News reports today, citing an unidentified local tax bureau official. Some Chinese developers, likely small and medium-sized ones with an over-extended balance sheet, face bankruptcy in coming months as the government tightens control on loans obtained from trust companies and as sales slow, UBS AG said in a Sept. 23 report.
• Copper has the most significant "fundamental" risk of declining out of the industrial metals because prices are well above the marginal cost of production, Macquarie Group Ltd. said.
• Emerging-Market Stocks Plunge, Posting Biggest Weekly Decline Since 2008. Emerging-market stocks dropped, with the benchmark index posting its biggest weekly loss since 2008, as concern deepened that the global economic slowdown will overwhelm government efforts to support growth. The MSCI Emerging Markets Index fell 2.2 percent to 861.53 at 5:11 p.m. in New York, extending this week’s retreat to 12 percent. The MSCI emerging stock gauge has tumbled 29 percent from this year’s high on May 2 as European leaders failed to find a solution for the region’s sovereign debt woes and the U.S. economic recovery stalled.

Wall Street Journal:

• Norges Bank's Olsen: Norway Hit by Stalling Global, European Growth. Stalling global growth and financial market turbulence are getting the better of the Norwegian economy, the head of Norges Bank said Saturday, as he anticipated the bank's plans to slash its economic growth forecast in new projections to be released at its October meeting. "The growth forecast downgrade won't be negligible compared to the June figures," Norges Bank Gov. Oystein Olsen said in an interview here. "We're starting to see some trends in terms of slower growth in our statistics. All the signs we see now are pointing to the same direction." He added that at its Oct. 19 rate-setting meeting, the bank will also present a new interest-rate path. The change since the spring has been dramatic. Back then, Olsen said, the outlook was still bright.
• YouTube Prepares to Launch Scheduled Channels. Will consumers put down the remote and tune into YouTube? The Google(GOOG)-owned site is getting closer to finding out. The video giant is finalizing contracts for its first of more than a dozen "channels" featuring regularly scheduled content on big broad themes such as fashion and sports, according to people familiar with the matter.
• Market Mayhem Turns Longstanding Forex Bets Into Losers. It has been one of Wall Street's few winning bets this year. Ask an investor trading currencies or bonds and you'll get similar advice: Sell the U.S. dollar and buy currencies of nations in the developing world with stronger economic growth and smaller debts. Now a string of weak economic reports around the globe is raising the specter of another recession and forcing some big investment institutions like pension funds and insurance companies--which typically take slower, longer-term-focused decisions--to suddenly dump risky foreign currencies and return to the safety of the U.S. dollar, traders say.
• Congress Forced to Stay as a Shutdown Looms. Congress was scheduled to be off this week, but lawmakers must stay in Washington because they made no progress over the weekend in settling a dispute over spending that threatens a possible government shutdown. Despite promises to work together following a public backlash against the bickering that consumed much of the summer, Republicans and Democrats face the reality that disaster aid could run out Tuesday and the government could partially shut down beginning this weekend unless they strike a deal quickly.
• The Economy Needs a Regulation Time-Out. Why send jobs overseas by creating more rules for American business?

Marketwatch.com:

• Portugal Downgrades 2012 Economic Outlook. Portugal's prime minister on Saturday said the country's economic contraction would be worse than expected in 2012 as a result of a slowdown in the global economy. Pedro Passos Coelho, who became prime minister in June, also expressed concern about the prospect of a Greek default. "I do not wish a default, organized or disorganized, for Greece," he said in an interview. "But if it happens, Portugal and Ireland are both on the front line," with Spain and Italy "on the second line." Passos Coelho said that if a Greek default were in the cards, he would prefer it happen a year from now rather than in the near term, giving Portugal time to strengthen its economy and put in place the measures required under its bailout. Passos Coelho said a slowdown in the global economy would hit Portugal's gross domestic product in 2012, prompting a revised forecast of a 2.3% contraction, worse than the previous outlook of a 1.8% contraction. Asked about the prospect of fiscal integration of the 17 euro-zone countries, including jointly issued bonds, the prime minister said it was desirable but would take years to achieve and quicker measures were needed to fix the current crisis. "A euro bond isn't a solution for the present problem," he said, adding that more political integration was needed in Europe before such a bond could be issued.

CNBC:

• Cain Upsets Perry in Florida Republican Straw Poll.

Business Insider:

• Hugh Hendry Just Took Part In The Critical Debate About The Eurzone Crisis. Hedge fund manager Hugh Hendry, whose prediction of the crisis in the Eurozone was spot on, says we're at a rare moment in economic history. "The problem is greater than the ability of the politicians to respond," he says in a radio debate on BBC's Bottom Line. "There is no policy prescription that they can offer that will redeem the situation. The redemption will come through the citizens of Greece and elsewhere throwing the politicians out and rejecting the European ideal."
• What You Need To Know About The Rumored Bazooka To Save The Eurozone—And Why It May Have Already Failed.

Zero Hedge:

• S&P Reminds Europe Of Its Toxic Catch 22, Warns EFSF Expansion Will Lead to More Sovereign Downgrades, Rendering EFSF Itself Useless.
• Here Comes FIATtackWatch: Ben "Big Brother" Bernanke Goes Watergate, Prepares To Eavesdrop On Everything Mentioning The Fed.

NY Times:

• Netflix(NFLX) Secures Streaming Deal With DreamWorks(DWA). DreamWorks Animation, the company behind successful movie franchises like “Madagascar” and “Shrek,” said it had completed a deal to pump its films and television specials through Netflix, replacing a less lucrative pact with HBO.
• Is the Chinese Economy in Trouble Too? As the American economy appears to teeter on the edge of another recession, Europe struggles with a financial crisis and emerging markets like Brazil and India show new weaknesses, China may appear to be in better shape than most countries, economists say. But “better” is relative.

OregonLive.com:

• Solyndra's Meltdown a Cautionary Tale for Oregon and SoloPower, Its Latest Solar Bet. The high-profile bankruptcy of Solyndra, a heavily subsidized solar panel manufacturer in California, raises questions about taxpayer support for untested startups in an increasingly cutthroat global market. It's an issue with particular resonance in Oregon, which has become one of the country's top solar manufacturing centers by dangling big subsidies in front of corporate giants and, increasingly, industry fledglings. Even as Solyndra executives invoked their Fifth Amendment right in Congress Friday to avoid self-incrimination in a growing political scandal, the feds, the state of Oregon and the city of Portland are preparing to put more than $250 million behind another California startup. SoloPower plans to begin manufacturing in North Portland by spring. Like Solyndra, SoloPower's product is based on a growing but still nascent technology known as thin film, which offers advantages in terms of cost, weight and flexibility. But neither company has a track record of successful mass production or sales. And they are competing in a market where prices are dropping like a knife.

BNO News:

• Egyptian Human Rights Group Notes 'Sharp Decline' in Freedom of Expression. A human rights group on Sunday noted a 'sharp decline' in freedom of opinion and expression in Egypt following the ouster of President Hosni Mubarak during a revolution earlier this year. The Cairo-based Arabic Network for Human Rights Information (ANHRI) condemned recent measures taken by the Supreme Council of the Armed Forces (SCAF) which was handed the power to govern Egypt after the revolution resulted in the ouster of Mubarak in February.

Philly.com:

• Solar-Panel Maker's Plan Ends Quietly. Two years ago, Gov. Rendell announced that a Greek company would build a $500 million plant at Philadelphia's Navy Yard to make solar cells. The factory would employ 400 people when it began operations in late 2011. Despite a promise of $49 million in state inducements, HelioSphera US Inc. never broke ground. Economic development officials quietly wrote off the project earlier this year. "The project proponents were unable to raise capital and decided not to proceed," said John Grady, senior vice president of Philadelphia Industrial Development Corp., which had pledged to donate a 40-acre Navy Yard site to the solar-panel producer. The demise of HelioSphera's American venture is a sensitive topic these days amid a solar market in upheaval. Three American solar companies sought bankruptcy protection in August, including Solyndra L.L.C., a Silicon Valley firm whose acceptance of $528 million in federal loans has renewed a Washington debate over the Obama administration's support for renewable energy.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -23 (see trends).

Reuters:

• Pakistan Army Shelling Afghan Border. Pakistan's military has fired hundreds of mortars and rockets into border provinces in neighbouring Afghanistan, killing at least one civilian, destroying homes and forcing scores of villagers to flee, Afghan officials said on Sunday. About 500 rockets and shells have been fired since Wednesday into eastern Kunar from a base in Pakistan territory, destroying six homes, two mosques and displacing more than 100 people in the province's Dangam district, provincial governor Fazlullah Wahidi said. "I strongly condemn this senseless act by the Pakistan army and it must immediately be stopped," Wahidi told Reuters. He said at least 30 shells had landed in neighbouring Nuristan province.

Telegraph:

• Christine Lagarde: IMF May Need Billions in Extra Funding. The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states. In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: "The fund's credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-casescenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders. The suggestion came after European officials revealed they were working on a radical plan to boost their own bail-out fund, the European Financial Stability Facility (EFSF), from €440bn (£384bn) to around €3 trillion.

Sky News:

• Darling: Action on Euro Crisis 'Imperative'. Alistair Darling has warned that the global economy faces a worse crisis than it did three years ago amid growing fears that Greece will default on its loans. He was speaking after Sky sources revealed that members of the G20 group of nations have had behind-the-scenes meetings in Washington DC to prepare for Greece defaulting on its £350bn debt.

Wirtschaftswoche:

• German Finance Minister Wolfgang Schaeuble said Greece is likely to need ten years to recover from its economic crisis, citing an interview. The Euro group risks a breakup if Greece isn't rescued and the European Union would lose political trust and power, he also said.
  

Frankfurter Allgemeine Sonntagszeitung:

• Deutsche Bank AG says its risk from the sovereign debt crisis is less than that of many other lenders, citing an interview with CFO Stefan Krause. While the debt crisis is a burden for Deutsche Bank's investment banking, other units are developing well, Krause said. Krause rejected claims by analysts that Deutsche Bank faces danger because the bank is strongly involved in the interbank market.

Deutschlandradio:

• Allianz SE chief economist Michael Heise opposes a Greek debt cut now that would cause "tremendous problems" for Greece and a crisis that might spread to other countries. While European banks, including those from France, would survive a Greek insolvency, a writedown must be avoided by all means, citing Heise.

Deutsche Presseagentur:

• German Chancellor Angela Merkel said Greece's exit from the euro zone or a debt cut would cause a domino effect of contagion for other euro-area countries. Any such step would put an enormous amount of pressure on other countries, Merkel said at a regional party meeting where she defended her euro crisis policy against critics from her own bloc.

Yonhap News Agency:

• South Korea's Sovereign Debt Index Deteriorates Further. The cost of insuring South Korea's sovereign debt against default surpassed that of France, data showed Sunday, reflecting growing concerns over the local financial market's volatility. The spread on credit default swaps (CDS) for South Korea reached 202 basis points as of Friday, compared with 197 basis points for France, according to industry data. Market watchers said the rise mirrors waning confidence in South Korean government bond credit, given the fact that the country's CDS spread has on average stayed 20 to 30 basis points lower than that of France. The fact that the figure soared higher than France's even after the eurozone country underwent credit rating cuts of two major lenders, Credit Agricole SA and Societe Generale SA, highlights the rapid rise in South Korea's default risk, they said. The Korean won closed at 1,116 won against the U.S. dollar on Friday, up 99.2 won from 1,066.8 won as of end-August, marking an eight-fold increase compared with the monthly rise posted last month. The increase is even bigger than a 60-won rise posted in the same period in 2008 when now-defunct U.S. financial giant Lehman Brothers filed for bankruptcy.

Xinhua:

• China will encourage investments in shale-gas exploration and development, citing Che Changbo, deputy director of the Minister of Land and Resources's oi and gas strategy center.

The Epoch Times:

• Private Lending at High Rates Growing in China. Zhou Bingqing, a prominent Internet intellectual property lawyer, told The Epoch Times that the turn to private lending is inevitable considering today's banking system in China. The Internet has helped popularize such lending, according to Zhou, as the Net serves as a platform for gathering lenders and borrowers. Zhou noted that state-run banks, with their low deposit interest rates that have not adjusted to the soaring inflation, naturally have driven many bank customers to move their cash to private lending institutes, which offer higher interest rates. Pursuit of profits is the nature of capital; likewise, that is the nature of individual cash, said Zhou. Some small- and medium-sized companies, on the other hand, have been finding it difficult to borrow enough funds from state-owned banks. The government's new regulations tend to favor lending money to local governments, real estate investments, and state-run companies, but they, too, seem to pump the money directly into the private lending market. "Companies, especially state-run companies, that are able to obtain cash from banks, usually have low production efficiency nowadays," he said. "Since they are unable to put their easily obtained capital to good use, they find it easier to just earn profits from the borrowing and lending rates." Zhou said while individual lenders need to be careful of bad debt, the amount of bad debt in state-run banks is much higher than that of individual lenders. "It's the Chinese state-owned media that is trying to cook things up," Zhou said. "It is just that the banks are always able to write off their bad debts with government subsidies or taxpayers' money. Civilians will never know how much bad debt the banks have."

China Business News:

• China central bank Governor Zhou Xiaochuan said the general tone of the country's fiscal and monetary policies won't be changed as the overall trend in the economy hasn't had any big changes, citing an interview with Zhou. China should stay alert for any unexpected issues in the world economy or problems that are more severe than expectations, Zhou said.

People's Daily:

• China's trade growth is expected to slow in the fourth quarter amid weakening growth in demand from developed countries, Li Jian, a researcher with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, wrote in a commentary. China's trade may see a sharp decline in 4Q if the economies of developed nations enter recession, he said.

Caijing Magazine:

• Zhu Min, IMF Deputy Managing Director, said that the buying of European bonds by emerging nations can't solve structural problems faced by Europe. The U.S. dollar currently remain irreplaceable in the global currency system, Zhu said.

Weekend Recommendations

• None of note

Night Trading

• Asian indices are -4.0% to -1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 223.0 +5.0 basis points.
• Asia Pacific Sovereign CDS Index 164.50 +7.75 basis points.
• FTSE-100 futures -.25%.
  
• S&P 500 futures +.06%.
• NASDAQ 100 futures -.18%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CALM)/.19

Economic Releases
8:30 am EST

• The Chicago Fed National Activity Index for August is estimated to fall to -.40 versus -.06 in July.

10:00 am EST

• New Home Sales for August are estimated to fall to 294K versus 298K in July.

10:30 am EST

• Dallas Fed Manufacturing Activity for September is estimated to rise to -8.0 versus -11.4 in August.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Raskin speaking, Fed's Bullard speaking, Fed's Kocherlakota speaking, Oppenheimer Industrials Conference, JMP Securities Healthcare Conference and the JMP Securities Financial Services/Real Estate Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are sharply 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 50% net long heading into the week.