Thursday Watch

Evening Headlines

Bloomberg:

• France, Germany Split on Crisis Solution. A French-German split over Europe’s rescue strategy emerged as finance ministers prepare to meet in Brussels tomorrow under pressure to craft a solution to the region’s debt crisis. With a summit scheduled two days later, a disagreement over the European Central Bank’s role threatens to stymie progress on the banking and economic questions needed to deliver the comprehensive strategy demanded by global policy makers. Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, indicated an impromptu meeting of European leaders in Frankfurt last night failed to resolve differences. “We are still meeting,” he said as he departed. French President Nicolas Sarkozy, whose wife was reportedly giving birth to his first daughter, jetted into Frankfurt to meet with officials as they attended an event to honor outgoing ECB President Jean-Claude Trichet. Sarkozy, German Chancellor Angela Merkel and International Monetary Fund Managing Director Christine Lagarde left the event at the Frankfurt Opera House without commenting. “Many expect to be underwhelmed at the weekend,” David Mackie, chief European economist at JPMorgan Chase & Co. (JPM), said in an interview. “If they haven’t settled the leverage issue, then the sense of being underwhelmed will be overwhelming.”
• Merkel Risks Owns Downfall as Odyssey to Save Greece Nears Climax. German Chancellor Angela Merkel may be risking her 2013 bid for a third term with a bet on expanding the effort to save the euro. Merkel may endorse policies unpopular with her Christian Democratic voters at an Oct. 23 European summit, bowing to world leaders including President Barack Obama to do more to stem the debt crisis that began in Greece and is now rattling core economies such as Italy and France. “Merkel’s next step is to convince voters,” Giles Merritt, head of the Friends of Europe research group in Brussels, said in a telephone interview. “The German media have been hammering away in a tabloid manner on the idle Greeks and this has gone deep into the German psyche.” Failure to make her case to the electorate means Merkel may face the political hara-kiri of her predecessor, Gerhard Schroeder. The Social Democrat alienated core supporters with his “Agenda 2010” package of tax and benefits cuts that subsequently fueled the German economy and still led to his downfall. Germany’s next election will probably be held in September 2013. “This is very much an Agenda 2010 moment for Merkel, but it’s much bigger than what Schroeder faced,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said in an interview. Techau said that while the sluggish economy Schroeder confronted was easier to explain to voters, “it’s far harder for Merkel” to demystify the Greek and European banking crises. “Merkel’s the target of public anger about Greece and the bailouts even though all other major German parties, including the opposition, back her on this,” Techau said.
• Papandreou Faces Austerity Vote Amid Unrest. Greek Prime Minister George Papandreou is set to risk further social unrest over a new round of austerity measures that he needs to convince euro-area leaders that Greece will hold to its bailout program. Papandreou secured the support of all 154 of his lawmakers in the 300-seat parliament in a preliminary vote in Athens late yesterday, setting up a final vote on the bill today that tests his party’s unity for a second time in 24 hours. The package comprises tax rises, cuts to pensions and wages and plans to dismiss 30,000 state workers, plus provisions to break the collective pay-bargaining power of Greek unions.
• Stark Says Italy Default Not ECB Working Assumption, IR Reports. European Central Bank Executive Board member Juergen Stark said the ECB doesn’t expect Italy to default, Latvian magazine Ir reported, citing an interview. “It’s not our working assumption,” Stark was quoted as saying in a transcript of the interview. At the same time, the country should have fixed its budgets “much earlier,” he said. The ECB “will not” and “cannot step in,” Stark said when asked if the central bank would act if the European Financial Stability Facility proves to be too small to put a firewall around Italy. “There is a prohibition of monetary financing” and the ECB can’t replace governments, Stark said, according to the transcript. Stark said he hasn’t recommended the ECB’s government bond purchase program.
• Former Deputy Governor of the Bank of England John Gieve said in an interview on Sky News there is "still some upside risk to inflation, especially if people begin to fear that this pumping money into the economy is going to have a long-term cost."
• European Banks' Lending in Spain, France Rose in Second Quarter, BIS Says. European banks continued to lend to borrowers in Italy, Spain and France, while they were replaced by the public sector in Greece, Portugal and Ireland, according to the Bank for International Settlements. European banks boosted lending to French borrowers 8 percent to $925 billion in the three months ended June 30, according to data released yesterday by the Basel, Switzerland- based BIS. That was driven by a 23 percent increase in loans to the French public sector by British banks and an 11 percent jump in lending there by German counterparts, it said. Lending to Spanish borrowers rose 1 percent to $643 billion. While the data indicates that U.S. banks increased their lending to French, Italian and Spanish banks by a combined 24 percent to $239 billion in the period, the BIS said in a footnote to the numbers that “U.S. data are likely to be significantly revised” later. It didn’t elaborate.
• Slovenia Cut to AA-/A-1+ by S&P on Weak Fiscal Position, Growing Debt Pile. Slovenia had its long- and short- term sovereign credit ratings cut by Standard & Poor’s, which cited the nation’s deteriorating fiscal position. The ratings on the Alpine nation were reduced to AA-/A-1+ from AA/A-1+ and the outlook is stable, S&P said in a statement. The AA- level is the fourth-highest ranking. “The downgrade reflects our view that Slovenia’s fiscal position has deteriorated since the 2008 financial crisis and the government has not thus far presented a credible consolidation strategy,” David T. Beers, a London-based analyst for S&P, said in the statement dated today.
• Oil Trades Near One-Week Low on U.S. Demand, Europe; Brent Premium Widens. Oil traded near a one-week low in as Europe struggled to tame its debt crisis and the Federal Reserve said companies were increasingly pessimistic about the U.S. economy, stoking speculation commodities demand may falter. Brent’s premium to New York prices widened. December futures were little changed after declining 2.5 percent yesterday. U.S. fuel use fell 2.2 percent to the lowest since May last week.
• Bank of America(BAC) Bosses Find Friend in the Fed: Jonathan Weil. One of the reasons so many Americans are ticked off at the Federal Reserve is a lingering sense that it puts big banks’ interests above those of ordinary taxpayers. The news that the Fed is taking Bank of America Corp.’s side in a dispute over where to park some of the company’s holdings only reinforces that impression. Here’s the gist of the story, broken two days ago by Bloomberg News. Bank of America, which got hit with a credit- rating downgrade last month by Moody’s Investors Service, has moved an undisclosed amount of derivative financial instruments from its Merrill Lynch unit to its biggest commercial-banking subsidiary. The latter is loaded with insured deposits and has a higher credit rating than Merrill or the parent company. The Federal Deposit Insurance Corp. is objecting to the transfers. That part is easy to understand: More risk for the retail lender means more risk for FDIC-insured deposits, which ultimately are backstopped by the U.S. government.

Wall Street Journal:

• Doubts Grow on Euro Fund. More Than 100,000 Protest in Greece as European Officials Debate Rescue Plans. Doubts grew about the effectiveness of a key proposal for stemming Europe's deepening debt crisis as it emerged that officials have ruled out a plan for the euro-zone's bailout fund to directly guarantee bond issues. Instead, European officials are discussing a scenario in which governments issuing bonds would borrow from the bailout fund to guarantee a portion of the bond issues—a move that would increase debts for already troubled economies. Pressure is rising ahead of a weekend summit of European leaders billed as critical to stemming the region's deepening debt crisis.
• Moody's Spanish Downgrade Lowers Ratings On Five Banks. Moody's Investors Service on Wednesday cut the ratings of five Spanish banks and several regional governments, saying its two-notch downgrade of Spain lessens the potential level of support their national government could provide. The actions come after Moody's on Tuesday downgraded Spain's government-bond rating because of market stress, deteriorating growth prospects and fading likelihood of reaching growth targets, and it kept the door open for another downgrade. Moody's and other ratings firms have been lowering their ratings and outlooks on several European countries recently because of a continuing credit crisis there. Moody's has also taken negative actions on Italy and Belgium recently, based on the credit concerns. On Wednesday, Moody's extended downgrades to Banco Santander SA (STD, SAN.MC), Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC), CaixaBank (CABK.MC), La Caixa and Confederacion Espanola de Cajas de Ahorros. All banks' debt ratings carry a negative outlook along with the Spanish government. Moody's said the banks' standalone financial strength ratings were not affected by their country's downgrade, but reflected the high likelihood of an erosion of systemic support from the Spanish government. The credit rater also downgraded four banks' senior subordinated debt, all of the banks' government-backed debt issuances and the long-term debt of Instituto de Credito Oficial, whose status is based on the irrevocable guarantee of the Spanish government. Moody's said it will still assess the banks' assets over the next few weeks, however, after new economic projections for the Spanish economy signaled the banking sector could face yet more pressure.
• Hong Kong's Tsang Sees 'High Likelihood' of World Recession. Hong Kong Chief Executive Donald Tsang said Wednesday he sees "high likelihood" of a global recession and says the financial turmoil will likely slow the pace of appreciation in the Chinese currency. "I'm afraid all the ingredients for another slowdown in the global economy are coming," Mr. Tsang said in an interview. "The lack of investor confidence and the slowdown of consumption both in Europe and America are not good signs."
• Deal Makers Examine Yahoo(YHOO). Private-equity firm Silver Lake Partners is working with one of its investors, the Canada Pension Plan Investment Board, and Microsoft Corp. to put together a proposal to buy Yahoo Inc., people familiar with the matter said.
• A Call to Pull Reins on Rapid-Fire Trade. Pioneer of Computer Trading Assails Newer Technologies. Thomas Peterffy, chief executive of Interactive Brokers Group Inc., says computer-driven high-speed trading firms have made the market less efficient—and less safe. While a number of Wall Street traders would agree, this argument may seem surprising coming from the 67-year-old Mr. Petterfy: He is widely considered the father of computer trading, a position that has made him a billionaire several times over. "He's the guy who brought automation to the industry," said Richard Repetto, an analyst with Sandler O'Neill who tracks Interactive Brokers, a Greenwich, Conn., electronic broker-dealer. "Now he's railing against the high-speed traders."
• SAC Capital Faces Second Deal Probe. U.S. securities regulators are examining whether SAC Capital Advisors LP improperly profited from trades made before a health-care takeover was announced, the second such deal drawing scrutiny to the hedge fund, according to people familiar with the matter. The Securities and Exchange Commission is trying to determine whether SAC used inside information to profit from Johnson & Johnson's 2009 takeover of Cougar Biotechnology Inc., the people said. The civil inquiry also encompasses whether an "expert network" business that is part of an investment bank leaked nonpublic information to traders, the people said.
• Foreigners' Sweetener: Buy House, Get a Visa. The reeling housing market has come to this: To shore it up, two Senators are preparing to introduce a bipartisan bill Thursday that would give residence visas to foreigners who spend at least $500,000 to buy houses in the U.S. The provision is part of a larger package of immigration measures, co-authored by Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah), designed to spur more foreign investment in the U.S.

MarketWatch:

• Australia Pricing in Higher Bank-Default Risk. A sharp jump in the cost of insuring against an Australian bank default has raised eyebrows recently and appears at odds with both funding markets and a relatively upbeat performance for bank-sector shares. Credit default swap premiums for Australian lenders haven’t climbed as sharply as for some French banks, but since August they have risen to levels above that of some U.S., German and Canadian banks, according to Reserve Bank of Australia data out Wednesday.
• WTO to Alert G-20 on Trade-Finance Worries: Report. Trade finance is under pressure from a shortage of dollar-denominated lending and banking regulations that could prompt some lenders to quit the world's least-developed markets, trade finance sources said on Tuesday, as reported by Reuters. Their comments followed a meeting hosted by World Trade Organization chief Pascal Lamy. Lamy said the situation was "clearly deteriorating," especially in the Middle East, southern and eastern Europe, and Africa, one of the sources told Reuters, on condition of anonymity.

Business Insider:

• Here's How The Market Would Price EFSF-Backed Bonds.

Zero Hedge:

• America Will Surpass 100% Debt To GDP On Halloween. (graph)
• Steve Wynn Epic Rant Part II - Full Audio and Transcript.
  

CNBC:

• Brazil Cuts Rates Again Despite Inflation Concerns. Brazil's central bank cut its key interest rate on Wednesday to 11.50 percent, in line with market expectations, as a deteriorating global economy and a sharp slowdown at home outweigh worries about high inflation. In a unanimous vote, the central bank's monetary policy committee, known as Copom, trimmed the benchmark Selic rate by 50 basis points. That follows a similarly-sized Aug. 31 cut that many economists worried would stoke inflation in an economy with a turbulent history of runaway prices. Central bank chief Alexandre Tombini is seen walking a tightrope, trying to keep consumer demand alive while betting that an economic slowdown at home and abroad will ease annual inflation running at a six-year high. The statement accompanying the rate decision pointed to the global turmoil, saying that to mitigate the effects of the crisis, a "moderate adjustment" to interest rates is consistent with bringing inflation back to target in 2012. Annual inflation in Brazil, Latin America's largest economy, is currently running at 7.31 percent, well above the 6.5 percent ceiling of the official target range.
• As Wall St Readies Cuts, Fears Grow in Luxury Market. New York luxury store owners and real estate agents are wondering whether they have to brace for some of Wall Street's pain.
  

IBD:

• CommVault Systems(CVLT) Sticks To Itself.

Forbes:

• Chinese Solar Stocks Plunge After U.S. Industry Group Alleges Dumping.

LA Times:

• California Reportedly Subpoenas BofA(BAC) Over Toxic Securities. California is trying to determine whether BofA and its Countrywide Financial subsidiary sold investments backed by risky mortgages to investors in California under false pretenses, a source says.

Boston Globe:

• Soros Among Hosts of New York Fundraiser for Elizabeth Warren. Liberal billionaire George Soros and New York Attorney General Eric Schneiderman are among those hosting a $1,000 a plate dinner tonight in New York for Elizabeth Warren’s Democratic Senate campaign at the home of Karen and Dennis Mehiel, a former candidate for lieutenant governor of New York. The list of hosts also includes actress and political fundraiser Patricia Duff.

Gallup:

• Obama Job Approval: Disapprove 53%, Approve 39%. (graph)

Politico:

• Barney Frank Supports Protesters, Raises Wall St. Cash. Rep. Barney Frank might sympathize with the Occupy Wall Street protesters, but he’s still got friends in the financial world. The Massachusetts Democrat is heading to New York hoping to raise tens of thousands of dollars Thursday at a fundraiser at the home of Charles Myers, a senior investment banking advisor at Evercore Partners. Myers is one of several Wall Street execs listed on the invite soliciting up to $2,500 from attendees for Frank’s reelection committee, according to a copy obtained by POLITICO.

Reuters:

• American Express(AXP) Posts Higher Q3 Net Income. American Express Co posted higher-than-expected quarterly net earnings as cardholders spent more, but expenses grew faster than revenue.
• Wynn(WYNN) Profit Misses Wall St Estimates, Shares Fall. Casino operator Wynn Resorts Ltd swung to a quarterly profit as revenue at its Wynn Macau unit soared 42 percent, but it won less money than usual in Las Vegas, and its shares fell more than 5 percent.
• EBay(EBAY) Profit Meets Street; Shares Dip On Cautious View. EBay Inc reported profit that matched Wall Street estimates and gave a restrained outlook for the rest of the year because of economic uncertainty, sending its shares lower.

Financial Times Deutschland:

• Michel Barnier, European Union Financial Services Commissioner, wants to give the European Securities and Markets Authority the power to temporarily prohibit credit-rating companies from publishing ratings about ailing countries. Such a ban could prevent ratings from being published at "inappropriate moments" that could have negative effects on the financial stability of nations as well as on the global economy, the proposal states.

Business Standard:

• India Banks Face 560 Billion Rupees of Risky Power Debt.

21st Century Business Herald:

• China's central bank will start a second round of investigations into the nation's private lending and may introduce a monitoring system in the future, citing a person close to the People's Bank of China.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.75% to -.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 206.0 +5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 153.0 +1.0 basis point.
• FTSE-100 futures -1.01%.
  
• S&P 500 futures -.19%.
  
• NASDAQ 100 futures -.18%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (TNB)/.92
• (ESI)/2.30
• (BBT)/.50
• (SNA)/1.01
• (ALXN)/.29
• (LLY)/1.12
• (FITB)/.33
• (LH)/1.60
• (BAX)/1.08
• (DO)/1.47
• (PM)/1.23
• (BSX)/.09
• (MHP)/1.23
• (AN)/.47
• (LUV)/.14
• (ADS)/1.91
• (NBL)/1.01
• (CY)/.34
• (T)/.61
• (UNP)/1.81
• (PPG)/1.92
• (KEY)/.21
• (NUE)/.52
• (CMG)/1.85
• (MXIM)/.42
• (CB)/.77
• (COF)/1.68
• (SNDK)/1.06
• (MSFT)/.68
• (ALTR)/.59
• (CYMI)/.36
• (APKT)/.22
• (ALK)/3.32
• (SCHN)/1.21
• (PCX)/-.66

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to fall to 400K versus 404K the prior week.
• Continuing Claims are estimated to fall to 3690K versus n/a prior.
  

10:00 am EST

• Leading Indicators for September are estimated to rise +.2% versus a +.3% gain in August.
• Philly Fed for October is estimated to rise to -9.6 versus -17.5 in September.
• Existing Home Sales for September are estimated to fall to 4.91M versus 5.03M in August.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Kocherlakota speaking, Fed's Tarullo speaking, Fed's Pianalto speaking, Fed's Lockhart speaking, Treasury's Brainard Testifying to Senate Committee, Spain/Greece T-Bill Auctions, Bloomberg Economic Expectations Index for October, weekly Bloomberg Consumer Comfort Index and the weekly EIA natural gas inventory report could also impact trading today.
  

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