Monday Watch

Weekend Headlines
Bloomberg:

• Merkel, Sarkozy Pledge Bank Recapitalization. Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance. “By the end of the month, we will have responded to the crisis issue and to the vision issue,” the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office. Under rising pressure to defuse turmoil that’s raged for 18 months, and facing growing concern Greece is headed to a default, Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit. “Maybe they’re still running one step behind, but they are at least discussing the right things,” Carsten Brzeski, an economist at ING Group in Brussels, said in a phone interview.
• Belgium to Buy Dexia's Consumer Unit for $5.4 Billion. Belgium agreed to buy the local consumer-lending unit of Dexia SA (DEXB), ending a 15-year cross-border experiment with France after the European debt crisis deepened. The Belgian federal government will pay 4 billion euros ($5.4 billion) for the division and guarantee 60 percent of a so-called bad bank to be set up for Dexia’s troubled assets, Finance Minister Didier Reynders said at a press conference today in Brussels. The dismantling of Dexia, once the world’s leading lender to municipalities, became inevitable after concern over European sovereign debt holdings caused its short-term funding to evaporate. Dexia’s breakup, three months after it got a clean bill of health in European Union stress tests, brought the region’s banking crisis from the continent’s periphery to its center. “Dexia is not an isolated problem,” said Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International who rates Dexia “reduce.” “The question for all investors in Europe is how politicians are going to handle this, and what they want to see is a coordinated and professional solution. That would be a good opportunity to restore calm.”
• Slovak SaS Party Won't Back EFSF After Compromise Rejected. Slovakia’s ruling Freedom and Solidarity party won’t back the overhaul of the European bailout mechanism after Prime Minister Iveta Radicova rejected the party’s conditions for approval, a lawmaker said. The party, known as SaS, insists its three coalition partners agree to two conditions before it will back the enhancement of the euro region’s bailout fund, the European Financial Stability Facility, in a parliamentary vote Oct. 11, said Jozef Kollar, head of SaS’s parliamentary caucus. “If the solutions we have put forward aren’t accepted then we will not vote for the EFSF,” Kollar said in a debate on state Slovak Radio today. Slovakia and Malta are the only countries that haven’t yet ratified the key element in the European Union’s plan to prevent the region’s debt crisis from spreading. The Slovak row risks sinking the EU plan, which needs the unanimous consent of all 17 euro members to come into force. SaS is calling for the creation of an inter-party committee that would have a right to veto individual EFSF disbursements. It is also demanding that Slovakia doesn’t participate in the European Stability Mechanism, a permanent rescue vehicle set to come into force in 2013. SaS will negotiate “until the last minute” with its coalition partners, according to a statement posted on the party’s web site today. Smer, the largest opposition party, has said it won’t support the EFSF overhaul unless the government steps down.
  
• Short Selling Rise Most Since '06 as Stocks Erase $11 Trillion. Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities. Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006, according to information compiled for Bloomberg by Data Explorers, a London-based research firm. Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show. Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market.
• Paulson Main Fund Said to Lose 47% This Year Through September. John Paulson, the billionaire who is betting on an economic recovery by the end of 2012, has lost 47 percent this year in his largest hedge fund, according to two people familiar with the matter. Paulson’s Advantage Plus Fund, which seeks to profit from corporate events such as takeovers and bankruptcies, uses leverage to amplify returns. The fund’s gold share class declined 32 percent this year through the end of September, said the people, who asked not to be identified because the fund is private. Paulson, 55, would have to return about 89 percent in the remainder of the year to break even in the Advantage Plus Fund. Paulson & Co., which is based in New York and manages $30 billion, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp.
• AT&T(T) Says Pre-Orders for Apple(AAPL) iPhone 4S Broke The Company's Sales Records. AT&T Inc. (T) received more than 200,000 preorders for the iPhone 4S in 12 hours, marking the company’s most successful debut yet for the Apple Inc. (AAPL) device. There has been “extraordinary demand” for the new iPhone, the Dallas-based carrier said today in a statement. AT&T, along with Verizon Wireless and Sprint Nextel Corp. (S), provide service for the phone. The rush of orders signals that there’s pent-up demand for the new model, which followed the previous version by 16 months -- longer than usual.
• China Companies Evading Rule With U.S. Listings Stump Regulators. A common corporate structure that has allowed dozens of Chinese companies to get listed on U.S. exchanges is drawing increased scrutiny from American audit regulators. Chinese Internet companies such as Sina Corp. and Baidu Inc. have used so-called variable interest entities, or VIEs, to work around Chinese restrictions and seek foreign investors since 2000. Now, the Securities and Exchange Commission is also asking questions about the structure, said Paul Boltz, a Hong Kong-based partner at Ropes & Gray LLP, who cited comment letters the agency sent to six companies since December. Judith Burns, an SEC spokeswoman, declined to comment. The heightened attention may add to investors’ caution regarding Chinese stocks trading in North America.
• Too Big to Fail Not Fixed, Despite Dodd-Frank: Simon Johnson. Here we go again. Major shocks potentially threaten the solvency of some of the world’s largest financial institutions. Concerns grow over the ability of European leaders to shore up their banks, which are reeling from a sovereign-debt crisis. In the U.S., the shares of some large banks are trading at less than book value, while creditor confidence crumbles.
• Green Europe Imperiled as Debt Crisis Triggers 46% Carbon Market Collapse. The European sovereign debt crisis that’s spread from Greece to Italy and is roiling the region’s banks now has another potential victim: energy policy. European emissions permits, needed by polluters from utilities to cement makers for each ton of the carbon dioxide they put in the atmosphere, slumped to their lowest in 2 1/2 years on Oct 4. An auction of permits by Greece, trying to avoid the euro area’s first default, worsened a glut of permits, UBS AG analyst Per Lekander said last week. Lower carbon prices discourage European utilities including EON AG and GDF Suez SA from investing in wind farms and solar plants that don’t need permits.

Wall Street Journal:

• SEC Cop to Back Claim. The U.S. Securities and Exchange Commission's internal watchdog will back a whistleblower's claim that the regulator for years destroyed enforcement records it should have kept, according to people familiar with a report on the findings of a months-long probe. The report by David Kotz, the SEC's inspector general, also criticizes the regulator for misleading another federal agency, the National Archives and Records Administration, the people said.
• Hong Kong's CEO: Govt Made Mistakes In Housing, Land-Supply Policy. Hong Kong's Chief Executive Donald Tsang said Saturday that his administration had made mistakes in housing and land-supply policies, which have helped propel home prices to levels beyond the reach of many local households. Tsang said the government might have overreacted in the few years following 2003, when the city was hit by the SARS outbreak and property prices plummeted more than 60% from their peak in 1997. "We made some mistakes, honestly. We stopped doing a series of things after the property bubble burst. This included the fact that we didn't put enough effort into building up adequate land reserves," Tsang said in an interview with Commercial Radio Hong Kong.
• Discord Riddles Libyan Factions. Six weeks after the fall of Tripoli, the palmy days of rebel unity have begun to disintegrate into a spiral of infighting, political jockeying and even the occasional violent flare-up threatening to derail Libya's post-Gadhafi transition.
• California Governor Signs Dream Act. California Governor Jerry Brown on Saturday finished signing the California Dream Act, under which California students who are undocumented immigrants will qualify for state-funded financial aid for college.
• GOP Lawmaker Questions Loan Guarantees to 3 Firms. A top Republican lawmaker is questioning whether the Energy Department rushed approval for $4.75 billion in loan guarantees to three companies just hours before much of the funding for the loan guarantee program was set to expire. Rep. Darrell Issa of California, chairman of the House oversight committee, sent a letter Friday to Energy Secretary Steven Chu seeking information about loans provided to First Solar Inc., SunPower Corp. and ProLogis Inc.
• Secret Orders Target Email. The U.S. government has obtained a controversial type of secret court order to force Google Inc.(GOOG) and small Internet provider Sonic.net Inc. to turn over information from the email accounts of WikiLeaks volunteer Jacob Appelbaum, according to documents reviewed by The Wall Street Journal. Sonic said it fought the government's order and lost, and was forced to turn over information. Challenging the order was "rather expensive, but we felt it was the right thing to do," said Sonic's chief executive, Dane Jasper. The government's request included the email addresses of people Mr. Appelbaum corresponded with the past two years.
• The Solyndra Economy.
  

CNBC:

• Hedge Funds Suffer Worst Quarter Since 2008. The average hedge fund suffered a 2.8 percent fall in the value of its assets in September, which took total average losses for the quarter to 5.5 percent, according to Hedge Fund Research. Equity-focused hedge funds, meanwhile, did no better than the broader market. In a blow to highly paid stock-pickers, funds that buy shares and use short sales to hedge their positions have delivered the same returns as the S&P 500 index, including dividends, in the first nine months of the year, a loss of 8.7 percent.
• Dow(DOW), Saudi Oil Company Sign Accord for $20B Plant. Dow Chemical Co. and the Saudi Arabian Oil Co. said Saturday that they signed an agreement that advances their plan to build one of the world's biggest chemical plants in Saudi Arabia. The $20 billion complex is expected to begin production in 2015.
• Deficit 'Supercommittee' Struggles as Clock Ticks. After weeks of secret meetings, the 12-member deficit-cutting panel established under last summer's budget and debt deal appears no closer to a breakthrough than when talks began last month. While the panel members themselves aren't doing much talking, other lawmakers, aides and lobbyists closely tracking the so-called "supercommittee" are increasingly skeptical, even pessimistic, that the panel will be able to meet its assigned goal of at least $1.2 trillion in deficit savings over the next 10 years.

Business Insider:

• It's Not Just Paulson: Look At All The Other Big Names Getting Crushed In 2011.
• Unemployment Rate/Stimulus Plan. (Chart)
• WOW: A Shocking 90% Of Families In This Chinese City Are Involved In Underground Banking.
  

Zero Hedge:

• Key Market Events In The Coming Week.

NY Times:

• Clamping Down on Rapid Trades in Stock Market. Regulators in the United States and overseas are cracking down on computerized high-speed trading that crowds today’s stock exchanges, worried that as it spreads around the globe it is making market swings worse. The cost of these high-frequency traders, critics say, is the confidence of ordinary investors in the markets, and ultimately their belief in the fairness of the financial system. “There is something unholy about them,” said Guy P. Wyser-Pratte, a prominent longtime Wall Street trader and investor. “That is what caused this tremendous volatility. They make a fortune whereas the public gets so whipsawed by this trading.” Regulators are playing catch-up.

LA Times:

• Few Places to Hide as Bear Growls. Funds that own small stocks and emerging-market issues take the biggest hits. China-region stock funds took the biggest dive of any equity sector in the third quarter, losing 25.6% on average, according to fund tracker Lipper Inc. Chinese investors and foreigners alike have soured on the country's equities as inflation has surged and the government has tightened credit in response. The fear is that China could be headed for a "hard" economic landing. What's more, new trade tensions with the U.S. are weighing on investor sentiment. A U.S. Senate bill would make it easier to boost tariffs on Chinese exports unless Beijing allows its currency to rise faster against the dollar.
• Fast and Furious Weapons Were Found in Mexico Cartel Enforcer's Home. Guns illegally purchased under the ATF operation were found in April hidden in violence-plagued Ciudad Juarez, Mexico, court records show. High-powered assault weapons illegally purchased under the ATF's Fast and Furious program in Phoenix ended up in a home belonging to the purported top Sinaloa cartel enforcer in Ciudad Juarez, Mexico, whose organization was terrorizing that city with the worst violence in the Mexican drug wars. In all, 100 assault weapons acquired under Fast and Furious were transported 350 miles from Phoenix to El Paso, making that West Texas city a central hub for gun traffickers. Forty of the weapons made it across the border and into the arsenal of Jose Antonio Torres Marrufo, a feared cartel leader in Ciudad Juarez, according to federal court records and trace documents from the Bureau of Alcohol, Tobacco, Firearms and Explosives.
• Obama Fundraiser Took Active Interest In Solyndra Loan, Emails Show. Steven Spinner, an Energy Department advisor whose wife worked for a law firm representing Solyndra, may have done more than simply monitor the progress of the $535-million loan guarantee to the now-bankrupt company, White House emails indicate.
  

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).

AP:

• 19 Dead in Worst Cairo Riots Since Mubarak Ouster. Massive clashes raged Sunday in downtown Cairo, drawing Christians angry over a recent church attack, hard-line Muslims and Egyptian security forces. At least 19 people were killed and more than 150 injured in the worst sectarian violence since the uprising that ousted Hosni Mubarak in February. The violence lasted late into the night, bringing out a deployment of more than 1,000 security forces and armored vehicles to defend the state television building along the Nile, where the trouble began. The clashes spread to nearby Tahrir Square, drawing thousands of people to the vast plaza that served as the epicenter of the protests that ousted Mubarak. On Sunday night, they battled each other with rocks and firebombs, some tearing up pavement for ammunition and others collecting stones in boxes. At one point, an armored security van sped into the crowd, striking a half-dozen protesters and throwing some into the air. Christians blame Egypt's ruling military council for being too lenient on those behind a spate of anti-Christian attacks since the ouster of Mubarak. The Coptic Christian minority makes up about 10 percent of the country of more than 80 million people. As Egypt undergoes a chaotic power transition and security vacuum in the wake of this year's uprising, Christians are particularly worried about the increasing show of force by the ultraconservative Islamists. The Christian protesters said their demonstration began as a peaceful attempt to sit in at the television building. But then, they said, they came under attack by thugs in plainclothes who rained stones down on them and fired pellets. "The protest was peaceful. We wanted to hold a sit-in, as usual," said Essam Khalili, a protester wearing a white shirt with a cross drawn on it. "Thugs attacked us and a military vehicle jumped over a sidewalk and ran over at least 10 people. I saw them." Wael Roufail, another protester, corroborated the account. "I saw the vehicle running over the protesters. Then they opened fired at us," he said. Later in the evening, a crowd of ultraconservative Muslims known as Salafis turned up to challenge the Christian crowds, shouting, "Speak up! An Islamic state until death!" In the past weeks, riots have broken out at two churches in southern Egypt, prompted by Muslim crowds angry over church construction. One riot broke out near the city of Aswan, even after church officials agreed to a demand by local Salafi Muslims that a cross and bells be removed from the building. Aswan's governor, Gen. Mustafa Kamel al-Sayyed, further raised tensions by suggesting to the media that the church construction was illegal. Protesters said the Copts are demanding the ouster of the governor, reconstruction of the church, compensation for people whose houses were set on fire and prosecution of those behind the riots and attacks on the church.

Reuters:

• War Drones Keep Flying Despite Computer Virus. The U.S. government's unmanned Predator and Reaper drones are continuing to fly remote missions overseas despite a computer virus that has infected the plane's U.S.-based cockpits, according to one source familiar with the infection.
• Special Report: China's Debt Pileup Raises Risk of Hard Landing. When China announced a nearly $600 billion package to ward off the 2008 global financial crisis, city planners across the country happily embarked on a frenzy of infrastructure projects, some of them of arguable need. Chengdu, the capital of southwestern Sichuan province, answered the call for stimulus action with a bold plan for a railway hub modeled after Waterloo railway station in London. Except London's Waterloo was not ambitious enough. "I was shocked when I finally got to visit Waterloo. It was so small," said Chen Jun, a director at Chengdu Communications Investment Group, which built the new Chinese terminal. "I realized we would probably need a station a few times bigger to meet the demands of our city." In a manner typical of many infrastructure projects in China, Chengdu more than doubled the size of its planned transport hub, borrowed 3 billion yuan ($473 million) from a state bank to finance it, then set out on a blistering construction timeline that saw the finishing touches put on the project two years later. But instead of getting the accolades they expected for helping to stimulate the economy, Chengdu Communications and many of China's 10,000 local government financing vehicles (LGFV) have now come under a harsh spotlight for the grim side-effects of the construction binge. China's local governments have piled up a mountain of bad debt, some of it to finance bridges to nowhere and other white elephant projects, which now threatens to constrict growth at a time when the global economy is sputtering. It is adding to other systemic risks in China, including a sharp downturn in the property market and a rapid rise in problematic loans. Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid -- or about $1.2 trillion to $1.4 trillion. In other words, the potential debt defaults could be even larger than the $700 billion U.S. bail-out programme during the 2008 crisis.

Financial Times:

• Steel prices in Europe are at "a disastrous level" for some grades as buyers "stay out of the market" and delay orders in anticipation of the prices going down "even more," citing Bruno Bolfo, chairman of Duferco. The turmoil in the market will continue into 2012, which is likely to see "short-term economic and financial issues impacting long-term economic sustainability," citing Sajjan Jindal, CEO of JSW.

Telegraph:

• Global Crisis Heralds Loss for Goldman Sachs(GS). The losses – estimated to run into several hundred millions of dollars – are expected to spark a $1.45bn (£930m) cost-cutting programme at the bank. A number of highly paid bankers are expected to lose their jobs and be replaced by graduates. The bank wants to maintain headcount but cut some of the costly employees.

Deutsche Presse-Agentur:

• Euro-Area finance ministers are discussing scenarios for a Greek haircut of as much as 60%, citing people in the finance industry and people familiar with the negotiations. Such a debt restructuring would affect both banks and tax payers, DPA said. People close to the German government said it's too early for a definitive assessment before the so-called troika delivers its report on whether the Greek government is meeting the conditions of its rescue.

Wirtschaftswoche:

• World Bank President Robert Zoellick said Europe won't solve its debt crisis by ensuring banks have access to cash, citing an interview. "Thus far, the Europeans have tried to solve the problem through liquidity assistance," he was quoted as saying. "That won't solve the problem. It only gains time."

Frankfurter Allgemeine Sonntagszeitung:

• German Finance Minister Wolfgang Schaeuble said the extent of the debt reduction Greece needs to make may have been underestimated, citing an interview. There's a high risk that the debt crisis will intensify and spread, Schaeuble said. He said euro-area governments must ensure that banks have enough capital to withstand any losses they incur in the event of a Greek debt restructuring. Schaeuble also rejected the suggestion that the EFSF could be given a bank license so that it could borrow from the ECB, saying that would amount to the monetization of government debt.

FAZ:

• France's five largest banks are prepared to accept a capital injection of as much as 15 billion euros from the government, citing people in the finance industry. France is however insisting that Germany's Deutsche Bank AG also increase its capital base.

Bild-Zeitung:

• Germany Economy Minister Philipp Roesler opposes the idea of letting the European Financial Stability Facility support banks directly, citing an interview. The bailout fund can prevent contagion in the banking sector of it's used as a last resort to make loans to nations seeking to recapitalize banks, he said.

Welt am Sonntag:

• Greece must undertake deeper reforms for its bailout to work, citing representatives of the so-called troika that is assessing whether the government is meeting the conditions of its rescue. "Greece is standing at a crossroads," Poul Mathias Thomsen, head of the International Monetary Fund's delegation in Thomsen, head of the IMF's delegation in Athens, was quoted as saying. "It's obvious that the program won't work if authorities don't take the path that requires much tougher structural reforms than those we've seen so far." The European Commission's representative on the troika, Matthias Mors, criticized the Greek government for taking too long to implement planned reforms, according to the German newspaper.
  

Boersen-Zeitung:

• Deutsche Postbank AG CFO Marc Hess expects lenders to take additional writedowns on their holdings of Greek government bonds, citing an interview. Hess estimated that the 21% writedown that his company took on its holdings in August won't be enough, according to the report.

Automotive News Europe:

• Fiat SpA CEO Sergio Marchionne said mismanagement of Europe's sovereign debt crisis may cause a regional slump worse than a regular recession, citing an interview.

Handelsblatt:

• The German Free Democratic Party's finance spokesman, Frank Schaeffler, said the state shouldn't help to recapitalize struggling banks, citing an interview. Failing banks should be managed in an orderly insolvency procedure, Schaeffler said. The FDP is the coalition partner of Chancellor Angela Merkel's Christian Democrats.

Le Figaro:

• European banks must favor private funding if they need to raise capital, including to reassure investors, citing a person close to French Finance Minister Francois Baroin. Injecting public capital must be a last-resort solution, the person said.

Imerisia:

• Greece's financing needs until 2020 will be bigger due to a deeper than expected recession and the outcome of private-sector participation on debt swaps, citing the country's representative to the IMF. The gap must be covered by an increase in the 109 billion-euro bailout loan agreed to by European leaders, bigger losses for private creditors or a longer repayment period for Greece's debt, citing Panagiotis Roumeliotis.

Nikkei:

• Japanese Executives Grow More Pessimistic, Nikkei Survey Says. One-third of executives at 139 companies that respond to the survey said the global economy is worsening or in a downturn, up from 6.5% in a similar survey in July.

Beijing Post:

• Chinese central bank adviser Zhou Qiren said the country should keep prudent monetary policy because small companies will have a better development environment only if inflation is thoroughly curbed. China shouldn't loosen money supply, Zhou says.

Securities News:

• China should keep its monetary policy tight as long as there are not great changes to the economic situation, citing Li Yang, a former adviser to the country's central bank. Economic growth in the first half of 2012 will slow more "obviously" compared with slowing growth in the second half of this year, Li says. Li is currently a vice president of the Chinese Academy of Social Sciences.
• Stabilizing Prices Remains China's Top Priority. China's central bank has reiterated stabilizing overall prices levels remains the top priority of macro-economic policy, citing information from People's Bank of China's meeting of its monetary policy committee. Prudent monetary policy will continue. Inflationary pressures have eased slightly, but still remain high.
  

China Finance:

• China would keep interest rates at "reasonable" and "appropriate" levels to stabilize prices and manage inflation, three officials from the People's Bank of China jointly write in a commentary. The officials are Wu Ge, Zhang Wen and Ming Ming from the central bank's monetary policy departments.

Weekend Recommendations
Barron's:

• Made positive comments on (MCHP) and (HOT).

Night Trading

• Asian indices are -.50% to -50% on average.
• Asia Ex-Japan Investment Grade CDS Index 229.50 -9.5 basis points.
• Asia Pacific Sovereign CDS Index 170.0 +3.5 basis points.
• FTSE-100 futures +.69%.
  
• S&P 500 futures +1.22%.
• NASDAQ 100 futures +1.31%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note

Economic Releases

• None of note

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The China CPI and (KRC) Investor Day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and industrial shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the week.