Monday Watch

Weekend Headlines
Bloomberg:

• EU Rules Out ECB Help in Boosting Fund. European leaders ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund and outlined plans to aid banks, inching toward a revamped strategy to contain the Greece-fueled debt crisis. Europe’s 13th crisis-management summit in 21 months also explored how to strengthen the International Monetary Fund’s role. The leaders excluded a forced restructuring of Greek debt, sticking with the tactic of enticing bondholders to accept losses to help restore the country’s finances. “Work is going well on the banks, and on the fund and the possibilities of using the fund, the options are converging,” French President Nicolas Sarkozy told reporters at the Brussels summit yesterday. “On the question of Greece, things are moving along. We’re not there yet.” Greece’s deteriorating finances have narrowed Europe’s room for maneuver in battling the contagion, which threatens to pitch the country into default, rattle the banking system, infect Spain and Italy and tip the world economy into recession. The complete blueprint won’t come together until a summit in two days. Like yesterday, it will start with all 27 EU leaders before the 17 heads of euro economies gather on their own.
• Greek Bond Swap Accord Hinges on Collateral to Avoid Default: Euro Credit. Europe’s efforts to persuade bondholders to forgo part of their Greek loans without triggering a default hinge on how writedowns are twinned with the provision of top-rated collateral. Collateral is “the sweet spot of the whole deal,” according to Ioannis Sokos, a fixed-income strategist at BNP Paribas SA in London. Giving investors longer-dated AAA bonds and aiding Greece’s burdens by paring interest payments on the renegotiated securities is better than increasing the amount of capital bondholders have to sacrifice, and “should be preferred versus a heavy haircut,” he said. A July agreement envisaged holders giving up 21 percent of the value of their Greek investments by swapping into one of four proposed arrangements. Lawmakers meeting in Brussels during the past three days considered five scenarios to update that accord, people familiar with the deliberations said. They range from sticking with a voluntary swap to a so-called hard restructuring that forces investors to exchange Greek bonds for new ones at 50 percent of their value, the people said. European Union officials are seeking deeper cuts to improve Greece’s finances and to equip the European Financial Stability Facility with enough firepower to halt contagion that drove Italy’s 10-year borrowing cost above 6 percent last week. As politicians try to reduce the cost of a deal to taxpayers, bond prices already suggest bigger losses for money managers. Two- year Greek notes traded at about 40 percent of face value last week, with 30-year securities worth 30 cents on the euro.
• Berlusconi Pressed by EU Leaders on Deficit. Italian Prime Minister Silvio Berlusconi was put on the defensive at a crisis summit over the country’s finances and appointments at the European Central Bank. Before the leaders convened yesterday in Brussels, Berlusconi held face-to-face talks yesterday with European Union President Herman Van Rompuy and European Commission President Jose Barroso and then with German Chancellor Angela Merkel and French President Nicolas Sarkozy. “I never flunked” an exam in my life, Berlusconi told reporters when asked if he was concerned over the push to cut Italy’s debt load, the biggest in the world after the U.S. and Japan. The demand for discipline underscored European leaders’ concern of the vulnerability of Italy, whose debt totals more than $2 trillion, accounting for almost 120 percent of its gross domestic product.
  
• Soffin Would Book 'Big' Loss on Greek Debt Writedown, FAZ Says. Soffin, Germany’s financial-rescue fund, would book a “very big loss” should investors take writedowns on Greek debt, Frankfurter Allgemeine Zeitung said yesterday, citing an interview with Soffin director Christopher Pleister. Soffin has already written down 4.9 billion euros ($6.8 billion) of investments in Hypo Real Estate Holding AG and 1 billion euros for WestLB AG, the German newspaper cited Pleister as saying. The rescue fund has also set aside 3.9 billion euros for FMS Wertmanagement, the bad bank in charge of winding down assets from Hypo Real Estate, Pleister told FAZ.
• Spain Denies It'll Allow Banks to Build Provision for State Debt. Spain won’t allow any requirement for banks to put aside a provision for its government debt, a Finance Ministry spokesman said, denying a report in El Mundo. The Spanish government is opposed to banks being told to make such a provision, according to the spokesman, who asked not to be named, in line with the department’s policy. Such a move would increase lenders’ need for possible recapitalization. El Mundo cited unidentified people familiar with the matter as saying the government may agree to a provision of about 5 percent of a bank’s face-value holdings in Spanish government bonds. Spain would accept the measure as the European Banking Authority seeks to agree a recapitalization of the region’s lenders that’s credible for investors, the Madrid-based newspaper said. The government debt has been assessed at its nominal value so banks haven’t had to reflect the variations in market prices, El Mundo said.
• UBS, Deutsche Bank Seen Speeding Cuts as Europe Crisis Worsens. Europe’s biggest investment banks, caught between worsening earnings prospects and demands for more capital, may have little choice but to accelerate asset reductions and job cuts. UBS AG, Deutsche Bank AG, Barclays Plc and Credit Suisse Group AG, which all report third-quarter results over the next eight days, may eliminate more jobs, speed disposals and scale down some businesses to slash costs and build up reserves amid the region’s sovereign debt crisis, said JPMorgan Chase & Co. analyst Kian Abouhossein.The four banks have disclosed plans to shrink their combined risk-weighted assets by as much as $415 billion to prepare for stricter capital requirements under Basel III rules. As the euro area’s sovereign debt crisis erodes earnings, the banks may have to speed up reorganization plans at their securities units, which will be most affected by the changes in Basel rules, if they want to avoid selling new shares. “Everybody is trying to reduce risk-weighted assets as soon as possible,” said Abouhossein, who is based in London. “They’ve already all started, but they’ll probably find it harder than expected because the environment is clearly getting tougher.”
• Hedge Funds Bullish Raw-Material Bets Jump Most in Two Months: Commodities. Hedge funds increased bullish bets on commodities by the most since August on mounting optimism the global economy will avoid another recession, boosting prospects for raw-materials demand. Money managers raised combined net-long positions across 18 U.S. futures and options by 12 percent to 737,647 contracts in the week ended Oct. 18, Commodity Futures Trading Commission data show. Wagers increased most in energy and agriculture, led by heating oil, gasoline, coffee and soybeans.
• Chinese See Communist Land Sales Hurting Mao's Poor to Pay Rich. Bulldozers razed Li Liguang’s farmhouse four years ago after officials in the Chinese city of Loudi told him the land was needed for a 30,000-seat stadium. What Li, 28, says they didn’t tell him is that he would be paid a fraction of what his plot was worth and get stuck living in a cinder-block home, looking on as officials do what he never could: Grow rich off his family’s land. It’s a reversal of one of the core principles of the Communist Revolution. Mao Zedong won the hearts of the masses by redistributing land from rich landlords to penniless peasants. Now, powerful local officials are snatching it back, sometimes violently, to make way for luxury apartment blocks, malls and sports complexes in a debt-fueled building binge. City governments rely on land sales for much of their revenue because they have few sources of income such as property taxes. They’re increasingly seeking to cash in on real estate prices that have risen 140 percent since 1998 by appropriating land and flipping it to developers for huge profits. “The high price of land leads to local governments being predatory,” said Andy Xie, an independent economist based in Shanghai who was formerly Morgan Stanley’s chief Asia economist. “China’s land policy is really screwed up.” The evictions are alarming the nation’s leaders, who have taken steps to tackle the problem and are concerned about social stability. Land disputes are the leading cause of surging unrest across China, according to an official study published in June. The number of so-called mass incidents -- protests, riots, strikes and other disturbances -- doubled in five years to almost 500 a day in 2010, according to Sun Liping, a sociology professor at Beijing’s Tsinghua University.
• China Must Control Prices to Curb Inflation: Wen. China must continue efforts to control food and housing prices to ease soaring inflation and maintain economic development and social stability, according to Premier Wen Jiabao. Authorities must help boost output of farm products, control the non-food use of corn and increase land supply to make more residential housing available, Wen said in a statement posted on the central government’s website on Oct. 22. Wen’s government has tightened lending and boosted imports of agricultural reserves to keep inflation from derailing growth in the world’s second-biggest economy. China probably won’t ease monetary policies until inflation slows to less than 5 percent, Yu Yongding, a former central bank adviser, said Oct. 21.
• BYD Brings L.A Fewer Jobs Than Promised. Los Angeles touted landing the North American headquarters of Chinese carmaker BYD Co. as a win that would generate jobs for the second-biggest U.S. city and make it a center for the growing market for electric autos. BYD America opens today about a year behind schedule with fewer workers than first targeted. The company, partly owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), has delayed plans to sell electric cars to retail buyers, citing limited availability of public chargers. Instead, it’s focusing on solar panels, batteries, LED lighting and rechargeable buses.
• U.S. Pullout May Leave Iraq Struggling as Iran Benefits. “This has profound implications,” said Mohsen Milani, chairman of the government and international relations department at the University of South Florida in Tampa, in a telephone interview. “It will intensify the competition for power inside Iraq, leave the Iraqi Shiites more dependent on Iran and the Sunnis on Saudi Arabia and leave the Kurds as orphans who probably will continue to align themselves with the Shiites.” The U.S. pullout is “an unprecedented strategic gift to the Islamic Republic of Iran,” said Milani. Anthony Cordesman, an analyst at Washington’s Center for Strategic and International Studies, said Iraqi forces may not be ready to provide security and violence will likely rise. U.S. diplomats in Iraq face unprecedented demands. Iran, as a result, stands to gain. “The reality is that this is not success,” Cordesman said in a telephone interview. “It certainly isn’t a drastic failure, but we are now facing a major power vacuum in Iraq and dealing with a power vacuum of this magnitude is a very serious matter.” Republican critics such as California Representative Buck McKeon said that leaving now will make it harder for the Iraqis to stabilize their country.

Wall Street Journal:

• Iraq Kurds Expect 250,000 B/D Oil Output In 2012 -Kurdish Prime Minister. Iraq's crude oil production from the northern Kurdistan region is expected to be more than double next year due to oil fields development plans, Barham Salih, the Prime Minister for the Kurdistan Regional Government, said Saturday.
• NBC Unable to Shake Slide in Ratings. NBC's downward slide is getting steeper.
• Hedge Funds Face Investor Pruning. After a turbulent 10 months, hedge funds are bracing to hear whether jittery investors will want their money back. As the year comes to a close, some investors say they are reviewing how their managers have performed through the recent volatility and are making decisions about whether to cash out of underperforming funds. Investors who want out before the end of the year in most cases need to give 45 or 60 days' notice of their redemptions, setting up a critical period for managers who have suffered significant losses.
• The Tax Reform Evidence From 1986. Experience implies that the combination of base broadening and rate reduction would raise revenue equal to about 4% of existing tax revenue.

Marketwatch.com:

• Only 23% Trust U.S. Financial System: Poll. Americans are more distrustful of their financial institutions, according to a new poll that shows only 23% of those surveyed said they trust the country's financial systems, down from 25% in June. The figures are from the quarterly Chicago Booth/Kellogg School Financial Trust Index, which measures trust in four areas: banks, the stock market, mutual funds and large corporations. "The findings in this issue reflect what's been reported in the news and demonstrate the fragility of trust many Americans still have in the institutions where they invest their money," said Luigi Zingales, a finance professor at the University of Chicago Booth School of Business and co-author of the index.

CNBC:

• 'Bloodbath' Seen for Wind Turbine Producers on China Slowdown. China, the world’s biggest market for wind power, is bracing for a sharp slowdown in wind turbine installations this year, a move that will spark a “bloodbath” among wind turbine producers, industry executives say.

Business Insider:

• You Won't Believe What Nicolas Sarkozy Said To David Cameron This Weekend. Sarkozy bluntly told Cameron: "You have lost a good opportunity to shut up." He added: "We are sick of you criticizing us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings."
• Obama Tries Again At Housing Fix, Will Announce New Refinancing Rules In Las Vegas.
• The Streets Of Athens Are Piled With Trash, Transportation Is A Nightmare And Everyone's Trying To Flee.
• The Vicious Cycle At The Heart Of Europe's Crisis.
  

Zero Hedge:

• Regulators Knew of Dexia's Problems But Were Silenced. When a bank is allowed to collapse, the lies behind its financial statements come out of the woodwork—and Dexia, the French-Belgian mega-bank that was bailed out in 2008 and collapsed in early October, is no exception: a report by the French banking regulator surfaced. It contains the results of an investigation concluded in the summer of 2010. And it threatened to put the bank "under special supervision." And then? Nothing. The report was buried.
• The Only Way to Save the Economy: Break Up the Giant, Insolvent Banks. The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion:
• Ray Dalio - Complete Charlie Rose Transcript With The Head Of The World's Biggest Hedge Fund.
• Exclusive Interview With Diapason's Sean Corrigan.
• Watch Merkozy Cracking Up Following Question If Italy Can Implement Reforms. (video)
  

NY Times:

• A Little State With a Big Mess. ON the night of Sept. 8, Gina M. Raimondo, a financier by trade, rolled up here with news no one wanted to hear: Rhode Island, she declared, was going broke. Maybe not today, and maybe not tomorrow. But if current trends held, Ms. Raimondo warned, the Ocean State would soon look like Athens on the Narragansett: undersized and overextended. Its economy would wither. Jobs would vanish. The state would be hollowed out.

Insider Monkey:

• These Hedge Fund Managers Love President Obama.

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:

• U.S. Rating Likely to be Downgraded Again - Merrill. The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts. The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday. A second downgrade -- either from Moody's or Fitch -- would follow Standard & Poor's downgrade in August on concerns about the government's budget deficit and rising debt burden. A second loss of the country's top credit rating would be an additional blow to the sluggish U.S. economy, Merrill said. "The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan" to cut the deficit, Merrill's North American economist, Ethan Harris, wrote in the report. "Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes," he added.
• Tunisian Islamists To do Well In First "Arab Spring" Vote. Islamists are expected to do well in Tunisia's first democratic election Sunday, 10 months after the ouster of autocratic leader Zine al-Abidine Ben Ali in a popular uprising that set off protest movements around the Arab world. The Ennahda party will almost certainly win a share of power after the vote, which will set a democratic standard for other Arab countries where uprisings have triggered political change or governments have tried to rush reforms to stave off unrest. Sunday's vote is for an assembly which will draft a new constitution to replace the one Ben Ali manipulated to entrench his power. It will also appoint an interim government and set elections for a new president and parliament.

Financial Times:

• The Autorite des Marches Financiers, France's financial-markets regulator, sent letters to the nation's banks advising them to take larger losses on their Greek sovereign debt holdings, citing the AMF.

Telegraph:

• Europe's Leaders Threaten Greek Default If Banks Won't Take Haircut and Accept Losses of £120bn. Europe's leaders are threatening to trigger a formal default on Greek debt and risk a “credit event” if banks refuse to accept losses of up to €140bn (£120bn) on their holdings. Hardline eurozone members, backed by the International Monetary Fund (IMF), delivered the ultimatum this weekend after an official report found that in a worst-case scenario Greece could need a second bail-out of €450bn – twice the current package and more than the entire €440bn in the eurozone’s rescue fund.
• Europe's Leaders Need To Do More Than Patch Up A Creaking Structure.
  

Welt am Sonntag:

• Hans-Werner Sinn, president of the Munich-based Ifo Institute, said the cost of leveraging the European Financial Stability Facility is high because it increases the probability of losing the money, citing an interview with the manager. The increased risk contradicts what was promised to the German people, Sinn said.

Frankfurter Allgemeine Sonntagszeitung:

• Germany Economy Minister Philipp Roesler said leveraging the EFSF European rescue fund only makes sense when a country threatened with insolvency poses dangers for the whole euro zone, citing an interview with the minister. Roesler rejects giving the EFSF a bank license as it would impair the independence of the European Central Bank, he said. The current agreement on the participation of Greece's private creditors doesn't go far enough, the minister said.

Bild am Sonntag:

• Bundesbank President Jens Weidmann said giving the EFSF European rescue fund a bank license would "finance states by printing money and is for that reason fatal," citing an interview with the banker. The crisis won't be solved through a continual expansion of the rescue fund, Weidmann said in an interview.

Sueddeutsche Zeitung:

• European countries want to supervise Greece more closely on the execution of promised reforms, citing German government officials. The current procedure of sending a team of inspectors to Athens every three months leads to delays. The situation in Greece needs to be monitored continuously to enable a quick reaction to undesirable developments, they said.

Le Figaro:

• Nobel Prize-winning economist Joseph Stiglitz said while Europe has the means to find a solution for the problem of Greece, "austerity policies risk making things worse," citing an interview. Barack Obama's inability to tackle American finance is one of his major failures, citing Stiglitz.

NTB:

• Swedish Finance Minister Anders Borg said a "substantial" writedown of Greece's debt was required and that banks shouldn't expect European tax payers to provide additional capital to protect the banking sector, citing the minister.

Xinhua:

• China will start assessing energy consumption in local provinces and implement controls on consumption, citing Jiang Bing, head of the National Energy Administration's planning and development department.

Financial News:

• China should lower its target for economic growth, increase fiscal spending, and focus more on using price tools rather than quantitative methods to cope with possible "moderate," double-dip recession in the global economy, citing Ba Shusong at the State Council's Development Research Center.
• China won't relax its monetary policy for now, citing Zhu Baoliang, chief economist at the economic forecasting department of the State Information Center. The major aim of the monetary policy is the prices, which may still rebound and the overall liquidity is still adequate, citing Zhu.
  

Economic Observer:

• China may raise the reserve-requirement ratio for banks once in the fourth quarter and keep a "tight bias" in its monetary policy, citing Long Guoqiang, a researcher at the State Council Development Research Center.

Weekend Recommendations
Barron's:

• Made positive comments on (AAPL) and (ABT).

Night Trading

• Asian indices are +1.0% to +2.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 202.0 -6.0 basis points.
• Asia Pacific Sovereign CDS Index 151.0 -4.0 basis points.
• FTSE-100 futures +.89%.
  
• S&P 500 futures +.22%.
• NASDAQ 100 futures +.27%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ETN)/1.08
• (VFC)/2.57
• (CAT)/1.57
• (KMB)/1.26
• (NFLX)/.95
• (TXN)/.57
• (PCL)/.30
• (ADVS)/.12
• (AMGN)/1.29
• (VECO)/1.11

Economic Releases
8:30 am EST

• The Chicago Fed National Activity Index for September is estimated to rise to -.21 versus -.43 in August.

Upcoming Splits

• (QSII) 2-for-1
  

Other Potential Market Movers

• The Fed's Fisher speaking could also impact trading today.
  

BOTTOM LINE: Asian indices are higher, boosted by industrial and technology 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 week.