Thursday Watch

Evening Headlines

Bloomberg:

• Europe's Financial Risk Watchdog Urges Fast Action to Combat Crisis. The European Systemic Risk Board urged swift action from policy makers to tackle threats to the financial system that have increased “considerably” as the region’s sovereign debt crisis pressures banks. “Key risks stem from potential further adverse feedback effects between sovereign risks, funding vulnerabilities within the European Union banking sector, and a weakening of growth outlooks both at global and EU levels,” the ESRB, Europe’s risk watchdog, said in a statement late yesterday. “Decisive and swift action is required from all authorities.” Concerns are mounting that European banks may not have sufficient capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Lloyd’s of London has stopped depositing money with some banks in Europe’s peripheral economies, Luke Savage, finance director of the world’s oldest insurance market, said yesterday. The ESRB, which is hosted by the European Central Bank in Frankfurt, issued a confidential warning to European governments in June urging them to ready capital injections for banks that failed or came close to failing stress tests, a European financial official said. The ESRB said yesterday that supervisors should coordinate efforts to strengthen bank capital, “including having recourse to backstop facilities, taking also into account the need for transparent and consistent valuation of sovereign exposures.”
• Greece Accelerates Cuts to Wages, Pensions to Ensure Next Bailout Payment. Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default. Measures announced yesterday following two rounds of talks with the European Union and the International Monetary Fund include: a 20 percent cut in pensions of more than 1,200 euros ($1,650) a month, according to a government statement; pensions paid to those younger than 55 will be shaved by 40 percent for the amount exceeding 1,000 euros and wages will be lowered for 30,000 state employees. The policies were demanded by international lenders to ensure Greece reach deficit-reduction targets in a 110 billion- euro ($151 billion) bailout and receive a payment due next month. “The risk is that the system, the financial sector and the real economy stop functioning” without the infusion, Finance Minister Evangelos Venizelos told Parliament in Athens before Papandreou convened his inner Cabinet yesterday to complete the cuts. European leaders are squabbling over the terms of a July 21 agreement for a second Greek rescue and the prospect that they will be forced to channel more money to keep Greece in the currency union. Greek subway, tram, train, bus and trolley workers and state-school teachers will hold a 24-hour strike in Athens today to oppose government plans to reduce the public sector, according to a spokeswoman at the Greek Transit Workers Union press office. Flights to and from the Athens International Airport will be disrupted as air traffic controllers walk out for three hours. Greek bonds fell yesterday, sending the yield on two-year notes up 232 basis points to 66.5 percent.
• China Manufacturing May Contract a Third Month. China’s manufacturing may contract for a third month in September as measures of export orders and output decline. A preliminary reading of 49.4 for a manufacturing index released by HSBC Holdings Plc and Markit Economics today compares with the final reading of 49.9 for August and 49.3 for July. A reading below 50 indicates a contraction. Today’s data adds to evidence the world’s second-biggest economy is slowing after the central bank raised borrowing costs and curbed lending to cool inflation.
• PBOC Adviser Sees Inflation at 3%-5% for Long Time. China may face “mild” inflation of 3 percent to 5 percent for a “long time,” Li Daokui, an adviser to the People’s Bank of China, said in an interview with internet portal netease.com. The pace of the nation’s economic growth will see a “noticeable” decline in the 2011 to 2015 period compared with the previous 10 years, Li was quoted as saying.
• Default Swaps Hit Record With Bonds at Year Low: Japan Credit. The cost of insuring Japan’s debt against default has risen to a record amid concern that Europe’s debt crisis will spread beyond the region. Credit-default swaps tied to the nation’s bonds for five years surged 12 basis points to 136 basis points as of 10:53 a.m. in Tokyo, according to Citigroup Inc. prices. That’s on course for its highest on record in CMA data going back to October 2004. While Japan’s debt burden is the biggest in the world, its borrowing costs are among the lowest globally. The divergence of prices on default swaps and cash bonds reflects the differing objectives of domestic investors holding 95 percent of Japan’s debt and overseas money managers, according to Toru Suehiro, a market analyst at Mizuho Securities Co. “Banks are continuing to receive yen deposits and have no choice but to buy government bonds in the hope that the debt situation will be resolved somehow,” said Suehiro, whose Tokyo- based company is a unit of Japan’s third-biggest lender by market value. “Overseas investors have no such necessity, and if they think Japan’s debt situation will deteriorate, they can take a position along with that view.”
• BofA(BAC), Citigroup(C) Credit Swaps Jump After Moody's Cuts Debt Grades. The cost to protect debt from Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. rose after Moody’s Investors Service cut credit ratings at the banks today, saying U.S. support is less likely in an emergency. Credit-default swaps tied to Bank of America added about 40 basis points from yesterday to 375 basis points as of 3:41 p.m. in New York, according to broker Phoenix Partners Group. The swaps were at 340 prior to the announcement. Swaps on Wells Fargo jumped to the highest since July 2009, climbing 17 basis points to 143 basis points, Phoenix prices show. Contracts on Citigroup rose 19 to 250, according to data provider CMA. Contracts on Morgan Stanley rose 28 basis points to 346. Goldman Sachs Group Inc. swaps increased 19 to 254, Citigroup Inc. climbed 19 to 250 and JPMorgan Chase & Co. rose 9 to 141, CMA data show.
• Copper Slumps Into Bear Market as Fed Assessment Hurts Outlook. Copper tumbled into a so-called bear market, slumping for a fifth day after the Federal Reserve said that the U.S. economy faces “significant downside risks,” eroding prospects for industrial-metals demand. The three-month contract on the London Metal Exchange fell as much as 3.1 percent to $8,039.75 per metric ton to the lowest price since Nov. 17. That’s 21 percent below the record $10,190 per ton set on Feb. 15, more than the 20 percent drop that’s regarded by some investors as signaling a bear market.
• Gold Surge Fuels Inflation, Vexes Asia Officials. The surging price of gold is fueling inflation from India to Indonesia and forcing statisticians to decide whether jewelry made of the metal still belongs in consumer-price indexes. In South Korea, gold rings will be dropped from the inflation basket for the first time since 1975 as part of a scheduled reweighting in December, Bang Tae Kyoung, deputy director of the statistics agency, said in an phone interview from Daejeon. “People are now buying gold mostly for investment purposes, and so it should be classified as an asset, rather than spending,” Bang said. Gold has climbed 27 percent this year as turbulence in equities and currencies, money printing by central banks, and a decade-long bull market in the metal lure investors to an alternative store of value.
• Fed Sees 'Significant' Risks to Economy. Federal Reserve policy makers indicated they are willing to do more to keep the economy from sliding into another recession as they made their second move in as many months to reduce borrowing costs. The central bank will extend the average maturities of the Treasuries in its portfolio by purchasing $400 billion of long- term debt while selling an equal amount of shorter-term securities, the Federal Open Market Committee said in Washington after ending a two-day meeting yesterday. “There are significant downside risks to the economic outlook, including strains in global financial markets,” the FOMC said. “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”
• Oil Drops a Second Day as Fed Sees Economic Risk; U.S. Crude Output Surges. Oil fell for a second day in New York as investors speculated that fuel demand will falter after the U.S. Federal Reserve said there are “significant downside risks” to the economic outlook of the world’s biggest crude- consuming nation. Futures slipped as much as 2.1 percent after dropping 1.2 percent yesterday. Crude for November delivery dropped as much as $1.77 to $84.15 a barrel in electronic trading on the New York Mercantile Exchange and was at $84.51 at 12:29 p.m. Sydney time. The contract yesterday fell $1 to $85.92. Prices are 13 percent higher the past year. Brent oil for November settlement fell $1.46, or 1.3 percent, to $108.90 a barrel on the London-based ICE Futures Europe Exchange. U.S. oil output rose 13 percent to 5.75 million barrels a day last week, the highest since August 2003, the Energy Department said. Supply has climbed as drillers take advantage of technology developed for gas production, particularly from shale-rock formations, to pump crude and liquids from previously impenetrable sites.
• Former Goldman Sachs(GS) ETF Trader Accused of Insider Trading. A former Goldman Sachs Group Inc. trader and his father were accused by U.S. regulators of making illegal trades based on confidential information related to the Wall Street firm's exchange-traded fund investments.
• SEC Considering Curbs After Quote Surge in U.S. Stock Market. The Securities and Exchange Commission may ask stock markets to impose fees on trading firms that submit a high number of quotations in relation to executed transactions, an executive at the regulator said. The SEC is considering whether to urge exchanges to impose a fee for exceeding a certain order-to-execution ratio or for sending messages, which include quotes, updates, cancellations and executions, said David Shillman, associate director at the regulator’s division of trading and markets.
• Hong Kong-Listed China Developers Plunge in Early City Trading. Hong Kong-listed Chinese real- estate developers declined in early trading on the city;s stock exchange after Credit Suisse Group AG said China appears to be limiting funding for property companies. KWG Property Holdings Ltd. fell 13 percent as of 10:15 a.m., Renhe Commercial Holdings Co. 12 percent, Country Garden Holdings Co. 13 percent, Agile Property Holdings Ltd. 13 percent, Greentown China Holdings Ltd. 10 percent and Shimao Property Holdings Ltd. 10 percent. A Reuters report that the China Banking Regulatory Commission ordered trust companies to inform the regulator of their dealings with Greentown may be a sign that China is trying to restrict financing sources for developers, Credit Suisse analyst Jinsong Du wrote in a report today.

Wall Street Journal:

• Europe's Banks Turn to Asia for Cash. European banks are fanning out across Asia, seeking to borrow money from wealthy individuals and cash-rich companies in a race to replace funding sources that are becoming harder and more expensive to tap. Rather than make loans and do deals, bankers from France, Italy and other countries are under orders to find sources of funding. While they are having some success, people with knowledge of their efforts say, they aren't raising enough to make a difference, leaving the banks still struggling to fund their assets. "The mandate from Europe right now is to go and find cash, and as much as possible," said one Hong Kong-based senior banker at an Italian bank. He had some success selling commercial paper to a Japanese financial institution but was struggling to place more. Bankers who can raise funding in Asia are being lauded within the organization, he said. At Société Générale SA, bankers said they have been raising deposits from long-time corporate clients in the region, particularly energy and other resources firms. "While we're already attracting corporate deposits, we've been making renewed efforts to attract more," said Ashley Wilkins, deputy chief executive officer of corporate and investment banking in the Asia-Pacific region. Other executives at SocGen have said in recent weeks the bank is looking for alternative funding sources, though it isn't having trouble raising the funds it needs. European banks have long been short on deposits relative to their assets and have made up the difference by short-term borrowing, largely by selling short-term notes to U.S. money-market funds. These funds, under pressure from investors worried about Europe's sovereign-debt crisis, have reduced their holdings of European bank debt by roughly 20% since the spring.
• Brazil Won't Sell Reverse Swaps To Rollover. Brazil's central bank aims to avoid contributing to the weakening of the real with its decision not to roll over foreign-exchange-linked debt swaps ahead of an Oct. 1 maturity, a government official familiar with the bank's policy told Dow Jones Newswires.
• United Technologies(UTX) to Buy Goodrich(GR) for $16.4 Billion. United Technologies Corp. agreed to buy aircraft components maker Goodrich Corp. for $16.4 billion in cash, a person familiar with the matter said, the company's biggest acquisition in over a decade and a signature deal for Chief Executive Louis Chênevert.
• Red Hat's(RHT) 2Q Profit Jumps 69%; Year View Raised. Red Hat Inc. reported a 69% surge in its fiscal second-quarter profit and raised its current-year financial projections as it benefits from a push by companies to modernize their data centers.
• H-P(HPQ) CEO Apotheker Could Walk Away With $35 Million. How does $35 million for 11 months of work sound? That’s what Hewlett-Packard Co. Chief Executive Leo Apotheker could walk away with, if he is forced out by directors of the Palo Alto, Calif., tech giant, according to calculations by The Wall Street Journal.
• White House Opposes House Bill to Delay EPA Rules. The White House Wednesday said it strongly opposes a House bill that would delay several Environmental Protection Agency rules on air pollution, setting up another showdown over Republican-led efforts to postpone the agency's agenda. Though it stopped short of an explicit veto threat, the White House said in a statement that the president's advisors would recommend a veto of the bill, which the House is expected to debate later this week.
• Europe's Forced Retirees Not Going to Go Gently.
• The Spend Now, Tax Later Jobs Bill. The president says we can lower the corporate tax rate if we get rid of 'special deals.' But his plan doesn't include a lower rate.

Business Insider:

• George Soros: The Double Dip Is Already Here. (video)
• House Fails to Pass Bill to Fund Federal Government, As Shutdown Looms. The House of Representatives rejected a measure to fund the government into the next fiscal year, setting the stage for a government to shut down on October 1 if lawmakers do not act. The continuing resolution failed by a vote of 195-230, as most Democrats — and many conservative Republicans — opposed the six-week funding measure. Lawmakers are set to take a week-long vacation beginning on Friday, complicating prospects for a last minute compromise.
  
• Conde Nast-Owned Site Reddit Returns to Underage Porn for Page Views.
• Conservative Moms Are Now Calling For A Boycott of Ben & Jerry's Ice Cream. "Ben & Jerry's announced their newest ice cream flavor which sounds anything but appealing. Schweddy Balls is the best they could come up with. The vulgar new flavor has turned something as innocent as ice cream into something repulsive. Not exactly what you want a child asking for at the supermarket."
  

NY Times:

• Moody's Downgrades Credit Ratings of Three Large Banks. “Now, having moved beyond the depths of the crisis, Moody’s believes there is an increased possibility that the government might allow a large financial institution to fail, taking the view that the contagion could be limited,” the firm said in a statement. Even so, Moody’s said it doubted whether a global financial institution could be liquidated “without a disruption of the marketplace and the broader economy.”

CNN:

• Regulation Nightmares. Regulation nightmares are keeping many small business owners up at night. Red tape is either adding more costs or gumming up the hiring process. Here's what seven entrepreneurs had to say about it.

Rasmussen Reports:

• Daily Presidential Tracking Poll.The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 21% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-one percent (41%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -20 (see trends).

Reuters:

• Greece Could Trigger Global Banking Crisis - Canada. A global banking crisis will erupt unless Europe properly deals with Greece's debt problems, Canadian Finance Minister Jim Flaherty said on Wednesday. "Europe has to pick a lane here. They've got to deal with that issue respecting Greece. Otherwise the markets will get ahead, we will have some sort of a crisis, it will become a banking crisis, it will affect banks all around the world," he told the Canadian Broadcasting Corp.
• NYTimes(NYT) Sees Sharper Ad Sales Drop in Third Quarter. New York Times Co warned its third-quarter advertising revenue would drop by a larger-than-expected 8 percent, hurt by a pullback in real estate, help wanted and national auto ads.
• Bed Bath(BBBY) Q2 Profit Beats Street View. Bed Bath & Beyond Inc posted a quarterly profit that beat Wall Street expectations, as more shoppers showed an interest in decorating their homes.

Financial Times:

• BNP Paribas in Mideast Push for Funding. Senior BNP Paribas executives are to tour the Middle East in coming days in an attempt to raise fresh capital and shore up confidence in France’s biggest bank. According to people close to the group, Baudoin Prot, chief executive, is adamant that he has sufficient reserves of both capital and liquidity. But he recognises that market jitters could worsen if nothing is done.
• Arrowgrass Capital Partners, a $4 billion hedge fund manager spun out of Deutsche Bank in 2008, is considering closing its equity fund following investor redemptions that have led its assets to dwindle.
• Brazil Will Fight Back Against the Currency Manipulators. Economies that issue reserve currencies are managing international liquidity without a sense of the collective good. They are resorting to undervalued exchange rates to ensure their share of global markets. This wave of unilateral, competitive devaluations creates a vicious cycle that leads to trade and exchange rate protectionism. This has devastating effects for all but especially for developing countries.

Telegraph:

• Debt Crisis: Live.

The Standard:

• China Should Keep Out of Europe, Warns Top Economist. China should refrain from buying European government bonds and cut dollar holdings in its foreign exchange reserves, Yu Yongding, a former adviser to China's central bank, said yesterday. "We should not buy European bonds and there should be conditions for us to buy," Yu, an influential economist in the Chinese Academy of Social Sciences, said in a lecture at the top think-tank. With about a quarter of its US$3.2 trillion (HK$24.9 trillion) foreign exchange reserves in the euro, China has repeatedly voiced confidence in the euro zone, but Beijing has been reluctant to reveal, or even to confirm, concrete steps it would take to support Europe.

Xinhua:

• China's defense ministry issued a "solemn protest" against the U.S.'s arms sale to Taiwan and is summoning the Beijing-based U.S. embassy defense attache for a meeting with Guan Youfei, a deputy director of the Chinese defense ministry's foreign affairs office.

Evening Recommendations
Citigroup:

• Upgraded (LEN) to Buy, target $22.
• Reiterated Buy on (AMZN), target $280.

Night Trading

• Asian equity indices are -4.0% to -1.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 223.50 +26.0 basis points.
  
• Asia Pacific Sovereign CDS Index 160.50 +14.0 basis points.
• FTSE-100 futures -2.31%.
  
• S&P 500 futures -.71%.
  
• NASDAQ 100 futures -.63%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DFS)/.96
• (KMX)/.51
• (FDX)/1.45
• (NKE)/1.21
• (CTAS)/.47
• (TIBX)/.21
• (FINL)/.38

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to fall to 420K versus 428K the prior week.
• Continuing Claims are estimated to fall to 3722K versus 3726K prior.

10:00 am EST

• Leading Indicators for August are estimated to rise +.1% versus a +.5% gain in July.
• The Housing Price Index for July are estimated to rise +.1% versus a +.9% gain in June.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, Bloomberg Economic Expectations Index for September, (RYN) investor day, (CMP) investor day and the (TDY) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are sharply lower, weighed down by real estate 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 day.