Tuesday Watch

Evening Headlines

Bloomberg:

• Italy Seeks $10 Billion as Contagion Slams Demand: Euro Credit. Italy is auctioning as much as 7 billion euros ($10 billion) of bonds one day after borrowing costs surged at a bill auction, as Greece’s slide toward default roils global markets. The treasury is selling 4 billion euros of a new benchmark five-year bond today, after 10-year yields climbed to a five- week high of 5.571 percent. Investors charged Italy 4.153 percent yesterday in a one-year bill offering, up from 2.959 percent a month ago. “It’s rather unfortunate that the Italian auction is taking place when the market is in a panic mode,” said Fabrizio Fiorini, the head of fixed income at Aletti Gestielle SGR SpA in Milan. “Borrowing costs are likely to remain at elevated levels. The rise in Italian yields is manifestation of a lack of market confidence in European leaders’ ability to tackle the problem.” A debt of 1.9 trillion euros -- more than Spain, Greece, Ireland and Portugal combined -- leaves Italy vulnerable to any advance in borrowing costs as it refinances maturing debt. The sales, which also include as much as 3 billion euros of bonds due in 2018 and 2020, will help fund 14.5 billion euros of debt scheduled for repayment on Sept. 15. Italian officials have held talks with Chinese counterparts about potential investments in the euro region’s third-largest economy, an Italian government official said late yesterday. The purchase of Italian bonds by China wasn't the focus of the talks, which took place in the past few weeks, the official said on condition of anonymity. A spokesman for Italian Finance Minister Giulio Tremonti declined to comment. The Financial Times earlier reported that Italy aims to sell ``significant'' quantities of bonds and stakes in strategic companies to China. The yield on Greece’s two-year note yesterday surged to almost 70 percent, while the cost of insuring Greek, French, Spanish and Italian debt against default all rose to records. The premium investors demand to hold Italian 10-year bonds rather than comparable German bunds rose to 383 basis points, nearing a euro-era record close of 389.5 set on Aug. 4. “The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain, and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a report. While Italy has completed more than 70 percent of its debt financing this year, it still needs to sell about 70 billion euros of bonds by year-end to cover its budget deficit and other redemptions. Italian yields are at their highest since the European Central Bank started buying Italian bonds on Aug. 8.
• Funds' Cuts to French Banks Could Force Asset Sales. U.S. money-market fund managers, led by Vanguard Group Inc. and Legg Mason Group Inc., have cut their lending to French banks at a pace that may force the banks to raise capital by selling assets, according to William Prophet, a desk analyst at Deutsche Bank Securities Inc. Prime money funds in the U.S. reduced their holdings in certificates of deposits issued by French banks by about 40 percent in the three months through Aug. 11, Prophet wrote in a Sept. 9 report, based on a review of seven of the 10 largest funds eligible to purchase corporate debt. The proportion of the remaining holdings maturing in less than a month increased to 56 percent on Aug. 11 from 17 percent on June 11. “What’s happened very recently is simply unsustainable,” Prophet wrote. “While a decent amount of funding is evidently still available to the French banking system, it is all migrating towards the very front end of the money-market curve, and regulators no longer look the other way when this happens.” U.S. funds are cutting their holdings in European banks on concern the financial institutions may face funding problems as the sovereign-debt crisis escalates.
• Energy Future Sues to Block EPA Cross-State Pollution Rules. Energy Future Holdings Corp. units in Texas filed a lawsuit challenging Environmental Protection Agency rules aimed at curbing cross-state pollution, saying the measure would cost it $1.5 billion through 2020 and at least 500 jobs. The Dallas-based power company, which was taken private in 2007 in the largest buyout in history, today asked the U.S. Court of Appeals in Washington to review the rule, which mandates that 27 states reduce emissions of sulfur dioxide and nitrogen oxide. Energy Future said it will ask the court to delay enforcement of the rule, set to begin in January, while the case is being decided. The company said it would be forced to shutter 1,200 megawatts of coal-fired generation to comply with the new standard, and would halt mining operations that provide coal to the idled power plants. “Meeting this unrealistic deadline also forces us to take steps that will idle facilities and result in the loss of jobs,” David Campbell, chief executive officer of Luminant Holding Co., an Energy Future unit, said in a statement.
• Fed's Fisher Sees High Bar to Support Yield Curve 'Jujitsu'. Federal Reserve Bank of Dallas President Richard Fisher said he probably won’t support further monetary easing by the Fed, arguing that steps that would boost the recovery are the responsibility of fiscal authorities. “If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it,” Fisher said today in a speech in Dallas. “But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary.”
• Obama Proposes Limits on Breaks for Muni Bond Investors. President Barack Obama proposed curbing the amount of interest from municipal bonds that top earners can exclude from their taxable income, a step that may diminish demand for state and local-government securities. “We’re very much opposed” to limiting the tax exemption, said Mike Nicholas, chief executive of the Bond Dealers of America, a Washington-based lobbying group for banks that underwrite municipal bonds. “You’re going to end up punishing state and local governments.”
• Israel Surrounded as Arab Spring Turns Darker: Jeffrey Goldberg. The Middle East is plunging toward crisis. The early promise of Tahrir Square has been supplanted by dismay that the Egyptian authorities -- such as they are -- allowed mobs to lay siege to the Israeli embassy in Cairo this past weekend. Not long ago, Turkey and Israel were strategic partners. Now, relations between those two key U.S. allies are in ruins. When a recent United Nations report on the deadly confrontation between the Israeli military and a flotilla of Gaza-bound activists that sparked this crisis largely exonerated Israel, Turkey reacted by threatening to send warships to the eastern Mediterranean. And the Jewish state faces a miserable month at the UN, where the Palestinians, who have refused to meet Israel at the negotiating table, are planning to seek recognition as an independent state, with potentially catastrophic consequences for both sides. “As the months of Arab Spring have turned autumnal, Israel has increasingly become a target of public outrage,” the New York Times’ Ethan Bronner wrote this weekend from Jerusalem.
• More Job Cuts Loom for European Banks Locked Into Higher Pay. European banks may resort to more jobs cuts or zero bonuses as they struggle to maintain fixed compensation levels amid deteriorating financial markets. The companies are facing shrinking revenue and higher costs after raising base salaries of investment bankers by as much as 100 percent. That decision, which followed regulations to curb bonuses in the wake of the credit crisis, is irreversible even if conditions worsen, lawyers and consultants said, leaving banks with fewer options in their bid to improve margins. “The absolute last thing banks will want do is cut current salaries unless they have an explicit contractual right to do so,” said Jason Butwick, a London-based employment attorney at law firm Dechert LLP. “The legal, reputational, commercial and logistical risks of going down that route are huge.” European banks including UBS AG, Barclays Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Credit Suisse Group AG have announced more than 70,000 job cuts since midyear, compared with 42,000 by U.S. peers, according to data compiled by Bloomberg.
• Australia's August Business Confidence Slumps to Lowest Since April 2009. Australian business confidence plunged last month to the lowest level since April 2009 as a rout in global equity markets and concern about contagion from Europe’s debt crisis damaged sentiment, a private survey showed. The confidence index slumped to minus 8 in August from 2 in July, according to a National Australia Bank Ltd. (NAB) survey of more than 500 companies from Aug. 24-30 that was released in Sydney today. The business conditions gauge, a measure of hiring, sales and profits, slid to minus 3 from minus 1. Monthly employment growth in Australia averaged 2,800 from January through August this year, less than a 10th of the average of 30,500 job gains in the first eight months of 2010. Australia’s currency and benchmark stock index dropped last month and the MSCI World (MXWO) Index of equities sank 7.3 percent as concern increased that the Greek fiscal crisis would drag down other euro-area economies. The result reflects “heightened global uncertainty, large falls in equity markets and the fear of debt market contagion,” NAB Chief Economist Alan Oster said in a statement.
• China PBOC Statement on Inflation 'Hawkish,' ING Says. China's central bank statement yesterday that inflation is still too high is "hawkish," Tim Condon, head of Asia research at ING Groep NV, said today. He reiterated the bank's call for one more 25 basis-point increase in benchmark interest rates by the end of the year.
• China's Stocks Fall to 14-MOnth Low as Economic Data Fuel Policy Concerns. China’s stocks fell, dragging the benchmark index to a 14-month low, on concern the government may intensify policy tightening after imports jumped to a record and new lending increased. Industrial & Commercial Bank of China (601398) Ltd. and China Construction Bank Corp. (939) declined at least 1.2 percent after the Beijing News reported the central bank sold additional bills to major lenders, a step to drain liquidity from the banking system. Jiangxi Copper Co. and Aluminum Corp. of China Ltd. retreated more than 2 percent among commodity companies. BYD Co., the automaker part-owned by Warren Buffett’s Berkshire Hathaway Inc., tumbled to a record low on a bond-sale plan. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 35.65 points, or 1.4 percent, to 2,462.10 at the 11:30 a.m. local-time break. The gauge, which fell 1.2 percent last week, is headed for its lowest close since July 16, 2010. “Although there’s a small risk of a hard landing for China’s economy, a possible rebound in inflation and the impact of worsening European debt crisis on the global economy still remain the biggest concern to investors,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “There’s also no sign that policies will be loosened in the short term. Stocks might test a new low.”
• Gold's 'Perfect Storm' to Continue on Haven Demand, Morgan Stanley Says. Gold’s “perfect storm” is expected to continue on renewed investor demand for haven assets, potentially driving the metal to its 1980 inflation- adjusted record, according to Morgan Stanley. The firm retains a positive view on gold for its role as portfolio insurance against a “formidable cocktail” of macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates, its analysts including Peter Richardson wrote in a report. The outlook for gold is now in favor of the firm’s “bull case” target of $1,625 an ounce this year and $1,819 an ounce in 2012, they said. Bullion now has an estimated 85 percent probability of trading between $1,819 an ounce and $2,085 an ounce next year, according to Morgan Stanley’s calculations.

Wall Street Journal:

• Pain Mounts for Europe Banks. Fears About Greece Persist Despite Efforts to Quell Worry. Europe's banks, burdened by concerns about exposure to ailing Greece, took a perilous turn Monday despite efforts by the biggest of them to calm panicked investors. France's financial system was especially hard hit, with shares in its three largest banks all falling more than 10%, as concerns about Greek default continued to cascade across Europe. European banks are cutting back on dollar-denominated loans, a troublesome sign of credit contraction at a time when American and European economies can least afford it.
• GOP Balks at Taxes to Finance Jobs Plan. The prospects for President Barack Obama's $447 billion jobs plan grew dimmer Monday as he unveiled the fine print of how it would be paid for—primarily through tax increases that Republicans said would destroy jobs, not create them.
• China's New Lenders of Last Resort.
• Perry's the Man in the Middle. Fellow Republican Presidential Candidates Take Aim at Front-Runner in Debate.
• Dark Side of Brazil's Rise. Brazil is booming amid a tectonic shift in global investing toward the developing world that has lifted its stock market, strengthened its currency and provided financing for new ports and World Cup soccer stadiums. But while foreign investment is mostly a good thing, there are downsides. The abundance of cash has helped fund riskier bank loans and fueled a potential real-estate bubble. By some measures, the Brazilian real is now the world's most overvalued currency, and many local factories aren't competitive in global markets.
• Britain's Tories Press to Weaken Ties to EU, Exposing Ruling-Party Divide. Lawmakers in U.K. Prime Minister David Cameron's Conservative Party are angling to use the financial crisis to weaken British ties to the European Union, a move that threatens to expose fault lines in the ruling coalition and previews the political wrangling that could accompany any efforts to reshape EU finances. Late Monday, more than 100 "euro-skeptic" members of the Conservative Party met for the inaugural session of a group dedicated to rethinking Britain's links with the EU. The discussion included ways to bring powers back to London, according to one attendee.
• The Trouble With French Banks. 'We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore." He's not the only one worried.

CNBC:

• Obama's Jobs Plan May Force US to Raise Debt Limit Again. President Obama's goal of winning a big enough increase in the U.S. debt limit to get him through the November 2012 election could be thwarted by his own job-creation proposal, budget experts said Monday. The 447 billion in new spending Obama wants to juice up a weak U.S. economy would have to be spent quickly if it is to be effective. That would immediately pile onto annual budget deficits of over $1 trillion, even though the president has promised to pay for his program in full. The problem is that he proposes paying for it over a much longer period.
• Fed Inflation Hawks Downplay Need for Easing. Two regional Federal Reserve presidents on Monday cast doubt on the notion, widely prevalent in financial markets, that the central bank will ease monetary policy further at its Sept. 20-21 meeting.

Business Insider:

• 'Culturomics' Predicted The Arab Revolutions - And Now It Predicts Global Unrest.
• Russia Wants to Sell Hundreds Of Its T-50 Stealth Fighters To Syria and Iran.
  

Zero Hedge:

• The Cost of Obama's Stimulus Plan: $312,500 Per Job Created or Saved.

NY Times:

• Fears Rattle Big Banks in France. French banks moved toward the center of the European debt storm Monday as investor concern about their ability to handle a potential Greek default raised the possibility that France’s government might need to shore up the banks’ financial positions. Even as French officials proclaimed that the country’s banks were sound, shares in BNP Paribas and Société Générale, two globally connected French banks considered “too big to fail” by their home government, slid as much as 12 percent. And their cost of short-term borrowing continued to soar, making it more expensive for them to finance day-to-day operations. The looming question is whether the French government will have to step in to support its banks, much as the American government did during the financial crisis in September 2008. Then, as now, a retreat by nervous investors threatened the banks’ liquidity.
• Wary Investors Start to Shun European Banks. When a $225 million loan to BNP Paribas comes due Thursday at Legg Mason’s Western Asset management unit, managers at its money market funds will be exercising caution. Instead of renewing the loan as they would have as recently as two months ago, they are looking to park investors’ money elsewhere, avoiding BNP and other Continental banks in favor of institutions in Scandinavia, Canada and Britain. Even as European investors race to abandon shares in French banks, on this side of the Atlantic, banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments.
• German Leader Faces Key Choices on Rescuing Euro. As Europe struggles to reverse a plunge in financial confidence, the world waits for Germany’s chancellor, Angela Merkel, to make a fundamental choice. She, more than any other European politician, will have to either summon the leadership to rescue the euro or concede that the political will is not there. Mrs. Merkel, 57, faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and, more immediately, whether to allow Greece to default or even to leave the currency union. American officials fear that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic. Fears of a worsening debt crisis slammed European stocks on Monday, especially shares of French banks, forcing the French government to declare its support for its three largest financial institutions. The turmoil added to worries that the Greek crisis would prove difficult to contain without more robust action from Germany and, ultimately, its taxpayers.

Politico:

• Feinstein: 'Wiped Out' by Scandal. Sen. Dianne Feinstein (D-Calif.) said she was “wiped out” by Kinde Durkee, a well-connected California Democratic political operative who served as treasurer for hundreds of state, local and federal campaign committees. Durkee was arrested by the FBI on Sept. 2 on allegations of fraud surrounding the diversion of more than $670,000 from the reelection committee for a California state assemblyman, and a growing list of California Democrats, including Feinstein and Reps. Susan Davis and Loretta Sanchez, now appear to victims as well.

Reuters:

• Euro Firm After Round of Short-Covering; Downtrend Intact. The euro held firm on Tuesday after a choppy session overnight saw a wave of short-covering lift it by more than two cents on hopes that China will bolster Italy by buying its bonds, but traders found few reasons to stay upbeat about the currency.
• Spanish Treasury's Morales: No Chance of Euro Breakup. There is no chance of the euro zone breaking up, the Spanish Treasury's public debt manager said on Tuesday. "I don't see the euro breaking up at all," Ignacio Fernandez-Palomero Morales said at a seminar in Tokyo. "The problem is not decisions, the problem is the way decisions are made," he said, noting markets are not good at pricing in political uncertainty. "Everything is going in the right direction," he added. Debt crisis fears in Europe have escalated as Greece's fiscal repair efforts appear to be faltering and as Italy and Spain continue to be sucked deeper into trouble.
• Bank Analysts Slash Goldman(GS) Estimates Hardest. Analysts have been slashing earnings estimates for big Wall Street banks recently, particularly for Goldman Sachs, as unpredictable trading markets and weak merger and underwriting volumes hurt the sector's profit potential. Third quarter average profit estimates for Goldman Sachs Group Inc (GS.N) have fallen 18 percent over the last month to $2.28 per share, according to Thomson Reuters I/B/E/S.
• Steel Dynamics(STLD) Q3 Profit Outlook Lags Street View. They fell 3 percent after the bell.
• PIMCO's Gross Boosts Treasuries to 16% in Flagship Fund. Bill Gross, the manager of the world's largest bond fund, increased exposure to Treasuries dramatically in August, reflecting his view of the rising risks of recession in the United States. According to PIMCO's website on Monday, Gross' $245 billion Total Return Fund (PTTRX.O) held 16 percent in U.S. Treasuries and Treasury-related securities as of the end of Aug. 31, up from 10 percent as of the end of July.

Passauer Neue Presse:

• Wolfgang Gerke, the president of the Bavarian Center of Finance in Munich, called for a Greek sovereign default and said the country should be expelled from the euro area. "Insolvency would be a sensible step," Gerke said. A sovereign-debt write-off and a return to the drachma are "necessary" for Greece to become competitive again, he said. He said the German government had too long presented a Greek rescue as the only alternative.

Financial Times Deutschland:

• The Basel Committee on Banking Supervision plans to step up its examination of how U.S. and European banks assess their credit risk in an effort to increase the harmony of the global banking system. The group's general secretary, Stefan Walter, told the newspaper that the committee will intensify efforts to see how banks were analyzing their own balance sheets.

Beijing News:

• China Central Bank Orders Some Lenders Buy Bills. China's central bank sold more than 20 billion yuan of additional bills to Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and some other lenders after they were judged to have lent excessively.

Evening Recommendations
Janney Montgomery:

• Rated (SODA) Buy, target $60.

Night Trading

• Asian equity indices are -2.0% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 176.0 +1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 159.0 +2.0 basis points.
• FTSE-100 futures +1.34%.
  
• S&P 500 futures +.28%.
  
• NASDAQ 100 futures +.30%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CBRL)/.99
• (BBY)/.53

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for August is estimated to fall to 88.0 versus a reading of 89.9 in July.

8:30 am EST

• The Import Price Index for August is estimated to fall -.8% versus a +.3% gain in July.

2:00 pm EST

• The Monthly Budget Deficit for August is estimated to widen to -$132.0B versus -$90.5B in July.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bullard speaking, weekly retail sales reports, IBD/TIPP Economic Optimism Index for September, 10-Year T-Note Auction, (HTZ) Investor Meeting, (STN) Investor Day, ThinkEquity Growth Conference, Deutsche Bank Tech Conference, Morgan Keegan Industrial/Transportation Conference, Morgan Stanley Helathcare Conference, BMO Media/Telecom Conference, CSFB Chemical/Ag Science Conference and the Deutsche Bank Transports/Aviation Conference could also impact trading today.
  

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