Friday Watch

Evening Headlines
Bloomberg:

• Bond Distress Drops to 5-Month Low as Junk Rises Above Par: Credit Markets. The percentage of corporate bonds considered in distress receded to a five-month low as record sales of high-yield debt and declining borrowing costs convince investors that the riskiest companies can pay their lenders. The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds declined to 290, or 12 percent of the total, the lowest share since April and down from 15.9 percent at the end of August, according to Bank of America Merrill Lynch index data. A decline of 3.23 percentage points last month was the most since March. Junk-rated borrowers globally raised a record $98.7 billion last quarter selling bonds as investors plow cash into the market to grab higher relative yields, helping the weakest companies shore up their balance sheets. Defaults by high-yield issuers fell to 4 percent last month from 6.2 percent in June, Moody’s Investors Service said today. “There’s a tremendous yield hunger that isn’t satisfied and that’s pushing up the prices in all the bottom-tier names,” said Margaret Patel, who oversees about $1 billion of assets as a fund manager at Wells Fargo & Co. in Boston.
• Portugal Braces for Its First Joint General Strike in 22 Years Over Cuts. Portuguese Prime Minister Jose Socrates will face the country’s first joint general strike in 22 years as the two biggest labor organizations prepare to protest against the government’s austerity measures. Portugal plans to cut the wages of state workers and raise taxes to convince investors it can narrow the euro region’s fourth-biggest budget gap after Greece’s debt crisis led to a surge in borrowing costs for high-deficit nations. Portugal’s government is seeking to cut the budget gap from 9.3 percent of gross domestic product in 2009, the fourth- highest in the 16-nation euro region after Ireland, Greece and Spain, to 7.3 percent this year and 4.6 percent next year. It aims reach the European Union limit of 3 percent in 2012.
  
• Adobe Shares(ADBE) Surge on Report of Microsoft's(MSFT) Interest in Merger. Adobe Systems Inc. shares surged as much as 17 percent after the New York Times reported that Microsoft Corp. Chief Executive Officer Steve Ballmer recently met with Adobe CEO Shantanu Narayen. The executives recently had a meeting at Adobe’s offices in San Francisco, according to two people familiar with the matter, who asked not to be identified because the meeting was private.
• Chamber's Donohue Says Obama 'Suffocating' U.S. Business Spirit. President Barack Obama’s administration is imposing regulations that are “suffocating the entrepreneurial spirit,” the head of the U.S. Chamber of Commerce said. Tom Donohue, president of the largest U.S. business group, said the Chamber is starting a new political campaign today against rules on health care, finance, the environment and labor. The Chamber has said it will spend $75 million backing pro-business candidates in the November elections and has led growing business criticism of Obama in recent months. “The regulatory impact on the business community is pervasive, insidious, and needs to be exposed,” Donohue said in prepared remarks for a speech in Des Moines, Iowa. “It is suffocating the entrepreneurial spirit.”
• IBM(IBM) Hits Record as Palmisano Focuses on Software, Services. International Business Machines Corp. rose to the highest level since it went public in 1915 as investors show support for Chief Executive Officer Sam Palmisano’s strategy of remaking the 99-year-old company. IBM gained 88 cents to $138.72 at 4:01 p.m. in New York Stock Exchange composite trading, topping the previous record of $137.88, adjusting for stock splits, reached in July 1999.
• Inflation Bonds Show No Trichet Accord Amid Double-Dip Threat: Euro Credit. Bonds that signal investor inflation expectations show that traders disagree with European Central Bank President Jean-Claude Trichet’s declaration that another recession isn’t “in the cards.” The gauge of how the market perceives consumer-price growth over five years beginning in five years’ time, a yardstick Trichet says is used by the ECB, slid this week to the lowest level in at least six years. In France, the yield difference between 10-year notes and inflation-linked debt fell to 182 basis points from this year’s high of 229 basis points in April. While Trichet said yesterday risks to the inflation outlook are “slightly tilted to the upside” after policy makers kept their main interest rate at an all-time low of 1 percent, JPMorgan Chase & Co. estimates investors have bought a record $20 billion worth of derivatives that protect against the risk of deflation this year. Consumer-price gains won’t exceed 2 percent next year in Germany, the region’s biggest economy, amid austerity programs enacted in nations from Ireland to Portugal to Greece, analyst surveys compiled by Bloomberg show. “Demand is huge, indicating some in the market have a very pessimistic view on inflation and growth,” said Jasper Falk, the London-based head of inflation trading at JPMorgan. “In the past, the possibility of having 10 years of cumulative deflation in the euro region was seen as remote and the cost of protection against that was very low. No one thought it was cheap. They thought it was irrelevant.”
• McDonald's(MCD) Offers Taste of Obama Sausage-Making: Caroline Baum. “We have to pass the bill so that you can find out what is in it.” -- House Speaker Nancy Pelosi, March 9, 2010. She wasn’t kidding. The public got to peek under the hood last week when the Wall Street Journal reported that McDonald’s Corp. wanted out: out of a requirement in the new health-care law that compels employers to spend 80 to 85 percent of premiums on medical benefits. Who knew? For McDonald’s mini-med health-care plan, a low-cost, limited plan covering about 30,000 hourly fast-food workers, the minimum medical loss ratio was economically unfeasible. The company asked for a waiver, according to memos provided to the Journal. It turns out lots of other companies are seeking waivers for limited benefit plans -- along with some states, like Maine, with a small number of insurers, according to Joseph Antos, a health-care scholar at the American Enterprise Institute, a conservative think tank. Another group is lining up to apply for exclusions from the minimum annual cap on benefits that is part of the law. No wonder the Department of Health and Human Services had to put out a memo on waiver guidance.
• Greenspan Says U.S. Fiscal Deficit Is 'Scary' as Debt Increases. Former Federal Reserve Chairman Alan Greenspan said the fiscal deficit in the U.S. is “scary” and the government needs to reduce entitlement programs. “We’re involved in a dangerous game,” Greenspan said today at a foreign-exchange conference in New York sponsored by Bloomberg LP, the parent of Bloomberg News. “We’re increasing the debt held by the public at a pace that is closing” the gap between our debt and “any measure of borrowing capacity,” Greenspan said. “That cushion is growing very narrow.” U.S. companies may be holding back on investment because of the rising federal deficit, which causes uncertainty about future tax policies, Greenspan said in an opinion article for the Financial Times this week. Weak investment by businesses in capital equipment and fixed assets has helped to crimp the U.S. economic recovery, he said. “You need” austerity, said Greenspan, a paid speaker at the event. “We’re going to have to start to cut” from government entitlement programs, he said, adding that reducing the budget is better than raising taxes in closing the U.S. budget deficit. Greenspan said that if the Fed decides to expand its balance sheet through purchases of bonds, a process known as quantitative easing, it may not be enough to get “money moving” and spur growth in the U.S. economy. Should the Fed increase “excess reserves and they just sit there on the asset side of commercial banks’ balance sheets not being relent, you’ve merely gone through an interesting bookkeeping exercise,” Greenspan said. “You’ve got to break that psychology that prevents that current trillion” in reserves from being relent, he said.

Wall Street Journal:

• Genzyme(GENZ) Will Explore 'White Knight'. Genzyme Corp. will evaluate alternatives for the biotechnology firm, including reaching out to other companies, as part of its defense against an $18.5 billion hostile bid from Sanofi-Aventis SA, the company said Thursday.
• U.K. Treasury Chief Credit Coalition's Spending Cuts. British Treasury chief George Osborne said the austerity program pursued by the U.K.'s new coalition government has taken the country "out of the financial danger zone" and removed doubts in markets about "whether Britain can pay its way in the world."
• US Lawmakers Push for Halt to Foreclosure Proceedings. A growing number of U.S. congressional leaders are pushing mortgage lenders to halt foreclosure proceedings in the wake of a scandal surrounding poor documentation practices.
• MGM's Creditors Voting on Debt Plan. Movie studio Metro-Goldwyn-Mayer Inc. is in the final stages of preparing a bankruptcy-protection filing, a move that will pare the debt of the iconic studio and place it under the management of the two founders of rival Spyglass Entertainment.
• New Rules on Bank Breakups. Federal regulators are expected to outline as early as Friday rules for seizing and dismantling a large financial firm that could allow some creditors to get a better deal than others in limited cases.

CNBC:

• Fed Hawks Still Skeptical About More Easing.
• Alcoa(AA) Earnings, Revenue Both Easily Top Estimates. The company also raised its growth forecast for global aluminum demand this year to 13 percent from 12 percent. Alcoa shares popped almost 3 percent higher after briefly being halted in extended trading Thursday.
• Japan Says to Continue Forex Intervention if Necessary.
  

Business Insider:

• A Day Before Big Jobs Report, New Survey Predicts Huge Unemployment Spike in September. Gallup's latest poll on the unemployment crisis sees the rate jump from 9.4% in August, to 10.1% in September.
• IMF Calls For a New Round of Huge Bank Bailouts.
  

Zero Hedge:

• $100 Oil Could Sink The Fed's QE2. As the U.S. prepares to embark on a new round of Federal Reserve quantitative easing, there are plenty of reasons to doubt that it is the right course for the economy and job creation. Here’s another: The voyage might have to be aborted — or at least diverted — soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane. Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged. Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. (Oil prices did retreat on Thursday.) The risk for the Fed is that such price increases will be felt in the economy long before any modest positive impact from lower interest rates. To some extent, unconventional Fed monetary policy actions may be arcane enough to make them an unlikely target of populist politicians and grass-roots activists. Still, just last year, the Fed came under blistering criticism for its close-to-the-vest dealings. Legislation to audit the Fed, spearheaded by Tea Party favorite Ron Paul in the House and self-styled socialist Bernie Sanders in the Senate, was largely incorporated in the Dodd-Frank financial regulatory reform bill. If there’s one thing that may turn Fed policy from yawn-inducer to rallying cry, it’s oil prices rising above $100 a barrel, which would hit Americans in their wallets on a frequent basis.

Washington Post:

• North Korea Pressing Forward on Nuclear Program, Report Says. North Korea appears to be moving forward with a program to enrich uranium for nuclear weapons, a development that would enhance its ability to produce bombs and sell its nuclear weapons technology abroad, according to a report to be released Friday. The report, "Taking Stock: North Korea's Uranium Enrichment Program" by the Institute for Science and International Security, comes as a senior South Korean official warned that North Korea's nuclear program is "evolving even now at a very fast pace."

Politico:

• Ghailani Case Ruling Could Hurt Terror Trials. A federal judge’s ruling Wednesday that voided key testimony in a case against a former Guantanamo inmate gave critics new arguments against President Barack Obama’s intent to try terrorist suspects in civilian courts “whenever feasible.”
• Stimulus Funds Went to Dead People. Approximately $18 million worth of stimulus funds went to Americans who are dead, according to report released by the Social Security Administration's inspector general released Thursday. More than 89,000 payments worth $250 each, taken from the $787 billion stimulus package, were doled out to either dead people or prison inmates. Seventeen thousand incarcerated Americans received an aggregate $4.3 million from the economic relief package.

Reuters:

• PIMCO's El-Erian - Fed's Policy Near 'Becoming Ineffective'. The Federal Reserve's loose monetary policy is in danger of "becoming ineffective," Mohamed El-Erian, the co-chief investment officer at bond fund PIMCO, said on Thursday. "We're getting to the point where monetary policy is becoming ineffective," El-Erian said at an event sponsored by the Financial Times. El-Erian helps oversee more than $1.1 trillion in assets, mostly in fixed-income instruments. "We have a Fed that seems to be unwilling to stay on the sidelines," he said.El-Erian said the biggest story in the last 18 months is that fiscal and monetary responses have fallen short of policy expectations. He also said he sees a 55 percent probability on the U.S. economy having sluggish growth, a 30 percent chance of a double-dip recession and a 15 percent chance that the economy will perform surprisingly well.
• India Wants Bold IMF Quota Changes - Mukherjee. Restoring the International Monetary Fund's credibility after the global financial crisis requires a bold shift of power to developing economies from the rich nations which have long controlled the IMF, India's Finance Minister Pranab Mukherjee said on Thursday. "These changes can enhance the fund's credibility, only if, bold and forward-looking quota and governance changes are implemented, which will restore the fund's legitimacy," he said in statement to the IMF. "The burden of the quota shift to dynamic emerging markets and developing countries has to be borne primarily by advanced economies and I reiterate my call for a shift of 5 to 6 per cent in quota share from advanced countries to developing countries," Mukherjee said.

Financial Times:

• Seoul Finds New Way to Finance Iran Trade. South Korea has appointed two state-run banks to finance commerce with Iran and revive business ties damaged by sanctions in an effort to protect $10bn in annual trade with Tehran. Woori Bank and the Industrial Bank of Korea will from this month be allowed to finance legitimate trade with Iran in sectors unaffected by sanctions, channelled through Iran’s central bank.

Telegraph:

• 'Demonise' the Algos - It's in Our Interest.
• IMF Chief Dominique Strauss-Kahn Warns Global Economic Co-Operation is Falling Apart.
  

NHK World:

• Japan to Help Develop Rare Earth-Like Materials. The Japanese government plans to earmark funds worth 1.2 billion dollars in this year's supplementary budget to secure the stable supply of rare earth minerals. The plan is part of the government's efforts to reduce the country's heavy reliance on imports from China of rare earth materials, which are vital for producing high-tech products. China is the world's largest producer of rare earth materials. It announced in July that it would largely cut its exports of the metals. It then suspended shipments to Japan following a collision between a Chinese fishing boat and 2 Japanese Coast Guard ships near the Senkaku Islands in the East China Sea. The government plans to use the funds to help with the development of substitutes for rare earth minerals. The government says it will also try to find other countries which can provide Japan with rare earth metals. It will provide subsidies for manufacturers which make plant investments in Japan to safeguard rare earth-related technologies.

Securities News:

• A Chinese taxation official said the government should levy a tax on property. The government will levy a tax on some property as a trial in select cities before expanding the measures nationwide, citing the official.

Evening Recommendations
RBC Capital:

• Rated (ILMN) Outperform, target $59.
• Rated (TSL) Outperform, target $38.
• Rated (WAT) Outperform, target $81.
• Rated (LIFE) Outperform, target $54.
• Rated (YGE) Outperform, target $17.
  

Night Trading

• Asian equity indices are -.50% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 106.0 -3.0 basis points.
  
• Asia Pacific Sovereign CDS Index 97.25 -1.75 basis points.
  
• S&P 500 futures +.16%.
  
• NASDAQ 100 futures +.20%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• The Change in Non-farm Payrolls for September is estimated at -5K versus -54K in August.
• The Change in Private Payrolls for September is estimated at 75K versus 67K in August.
• The Unemployment Rate for September is estimated to rise to 9.7% versus 9.6% in August.
• Average Hourly Earnings for September are estimated to rise +.2% versus a +.3% gain in August.
  

10:00 am EST

• Wholesale inventories for August are estimated to rise +.5% versus a +1.3% gain in July.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Tarullo speaking, ECB's Trichet speaking, World Bank/IMF meeting and the (CVS) analyst meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and industrial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Slightly Lower into Final Hour on Profit-Taking, Diminishing QE-2 Expectations, More Shorting

Broad Market Tone:

• Advance/Decline Line: About Even
  
• Sector Performance: Mixed
  
• Volume: Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 21.73 +1.12%
  
• ISE Sentiment Index 100.0 -22.48%
  
• Total Put/Call 1.14 +35.71%
  
• NYSE Arms 1.28 +24.60%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 99.16 bps +1.23%
  
• European Financial Sector CDS Index 113.40 bps -.03%
  
• Western Europe Sovereign Debt CDS Index 149.83 bps -1.43%
  
• Emerging Market CDS Index 202.02 bps -1.21%
  
• 2-Year Swap Spread 17.0 unch.
  
• TED Spread 17.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .11% unch.
  
• Yield Curve 203.0 +1 bp
  
• China Import Iron Ore Spot $144.10/Metric Tonne +.07%
  
• Citi US Economic Surprise Index .80 +1.3 points.
  
• 10-Year TIPS Spread 1.92% -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -29 open in Japan
• DAX Futures: Indicating +6 open in Germany

Portfolio:

• Slightly Higher: On gains in my Tech and Biotech long positions
  
• Disclosed Trades: Added to my (SXCI) long, took profits in another long
  
• Market Exposure: 100% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower despite better economic data and better action in the tech sector. On the positive side, HMO, Disk Drive, Computer, Software and Alt Energy shares are especially strong, rising 1.0%+. Small-caps are outperforming. (IYR) has traded relatively well throughout the day. The S&P GSCI Ag Spot index is surging, rising +1.96%. Gold put in a reversal today and is down -.8%. The Spain sovereign cds is falling -1.05% to 227.96 bps and the Portugal cds is declining -1.07% to 401.42 bps. On the negative side, Education, Paper, Steel and Gold shares are under meaningful pressure, falling more than 1.5%. Copper is declining -2.22% and the 10-year yield is flat despite the drop in jobless claims. The Greece sovereign cds is rising +1.23% to 768.90 bps. Investor angst is fairly elevated today given the mixed performance in the major averages, which is a big positive ahead of tomorrow's jobs report. (ADBE) is soaring +7.66% on (MSFT) buyout speculation, which is also a broad market positive. The bears were once again unable to gain traction on a significant morning reversal lower in stocks. I would characterize today's overall action as another healthy consolidation day after recent gains. A poor jobs report tomorrow would likely initially result in equity weakness, however QE-2 odds would jump again, which could boost stocks later in the day. A positive report may have the same result as QE-2 odds would fall substantially, which could initially hurt stocks. However, by day's end a positive number would likely be viewed favorably by investors. I continue to believe that, while investors seem to cheer rising QE-2 expectations short-term, any substantial QE-2 would be a huge long-term negative for stocks and the economy. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, less economic fear, falling sovereign debt angst, technical buying, buyout speculation and tax policy/election optimism.

Bear Radar

Style Underperformer:

• Large-Cap Growth (-.50%)

Sector Underperformers:

• 1) Gold -3.50% 2) Steel -2.0% 3) Homebuilders -1.91%

Stocks Falling on Unusual Volume:

• RT, ARO, JDAS, IGTE, GPS, HMY, SSRI, PBR, VQ, BCS, SU, STI, BLUD, MEDQ, REGN, ARUN, RVBD, QLIK, DECK, PAAS, JOBS, TRGT, OPLK, SAIA, ACGY, FMCN, SYNA, BEAV, GOLD, MTB, WBD, RUK and PEP
  

Stocks With Unusual Put Option Activity:

• 1) EWH 2) EWJ 3) RCL 4) BMC 5) TGT
  

Stocks With Most Negative News Mentions:

• 1) WFC 2) GPS 3) BEBE 4) BLUD 5) TIF
  

Bull Radar

Style Outperformer:

• Small-Cap Value (+.01%)

Sector Outperformers:

• 1) Disk Drives +2.02% 2) HMOs +1.30% 3) Computer +.83%

Stocks Rising on Unusual Volume:

• BMC, ITMN, NSANY, GSK, PFE, EQIX, TRIT, TTES, FFIV, ZUMZ, WBSN, BONT, ROST, TXRH, GYMB, CLMS, ISLN, SHOO, CMTL, CROX, FSLR, CAKE, RBN and ANF
  

Stocks With Unusual Call Option Activity:

• 1) BMC 2) CASY 3) MTB 4) ANF 5) LCC
  

Stocks With Most Positive News Mentions:

• 1) PEP 2) VZ 3) AAPL 4) BA 5) AEO

Thursday Watch

Evening Headlines
Bloomberg:

• JPMorgan(JPM) Leads CMBS Sale as Offerings Revive: Credit Markets. JPMorgan Chase & Co. is poised to sell the largest offering of commercial mortgage-backed securities this year as Wall Street seeks to chip away at property debt financed before values plummeted on shopping centers, hotels and offices. The top-ranked 10-year portion of the offering may yield 155 basis points, or 1.55 percentage points, more than the benchmark swaps rate, according to a person familiar with the transaction. That compares with a spread of about 305 basis points on comparable bonds issued prior to 2008, when underwriting standards were more lenient, JPMorgan data show.
  
• Drinks Are Free as Bartenders Fill Punchbowl: William Pesek. It has been 13 years since the Bank of Japan was freed from the clutches of politicians. What has it done since? Cut interest rates to zero and left them there. If that’s your definition of “independence” then it’s different from mine. Sure, the BOJ managed to boost rates here and there -- even getting them as high as 0.5 percent. It has since relented. This week, it bowed anew to politicians’ demands to lower its 0.1 percent benchmark toward zero. Japan doesn’t cut rates. It shaves them. This predicament puts Japan at the center of a dangerous trend: the death of central-bank independence. The ramifications for credit markets will be huge.
• House Republicans Wary of Fed Asset Purchase Plan, Garrett Says. New Jersey Representative Scott Garrett said House Republicans are concerned that another round of large-scale bond purchases by the Federal Reserve could fan an asset bubble or validate more deficit spending by Congress. “I have concerns,” said Garrett, a Republican member of the House Financial Services Committee, which oversees the Fed. “A substantial number of my Republican colleagues would have concerns with the Fed taking this action.” U.S. central bankers have kept their benchmark lending rate near zero for almost two years, and may be preparing for another round of bond purchases to boost growth. In March, they finished $1.7 trillion in purchases of Treasuries, mortgage-backed securities, and housing agency bonds. Chicago Fed President Charles Evans told the Wall Street Journal yesterday that “much more accommodation” is needed to get the economy back to full employment and stable prices. “We could just be seeing the Fed just repeating its process of creating another bubble,” Garrett said in a telephone interview today. “Economists would indicate that they are already potentially starting out there in certain commodities.” Commodities rose to the highest in almost two years on speculation central banks around the world will provide additional monetary stimulus. Nobel Prize-winning economist Joseph Stiglitz also said the Federal Reserve’s policy of cutting interest rates to a record low has had repercussions worldwide, including currency misalignments and the risk of asset price bubbles. “Fed policy was supposed to reignite the American economy, but it’s not doing that,” Stiglitz, a professor at Columbia University in New York, said in a Bloomberg Television interview today. “The flood of liquidity is going abroad and causing problems all over the world.” Garrett said Republicans are also concerned that additional Fed action would provide a backstop for deficit spending. “You don’t have to get spending under control if you know that the Fed is always there to buy up every Treasury,” Garrett said. “This just facilitates the reckless behavior that the Congress has been on for the last several years.”
• Trichet Exit Path Blocked as Banks Stay Hooked on ECB Funds: Euro Credit. European Central Bank President Jean- Claude Trichet staked his reputation on propping up banks with cheap cash during the financial crisis. Now credit markets won’t let him take away that support. Near-record borrowing costs for nations across the euro region’s periphery are making it harder for the ECB to wean commercial banks off the lifeline it introduced two years. The extra yield that investors demand to hold Irish and Portuguese debt over Germany’s rose last week to 454 basis points and 441 basis points respectively. Spain’s spread hit a two-month high. The risk for the ECB is that it gets pulled deeper into helping the banking systems of the most indebted nations in the 16-member euro bloc. Governing Council member Ewald Nowotny said Sept. 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.” Complicating the ECB’s task is that interbank lending rates have risen, tightening credit conditions and making access to market funding more expensive for banks. “The ECB is trapped and the exit door is blocked,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The state of credit markets is going to force them to stay in crisis mode for longer than some of them would like.”
• AIG's Real Numbers Still Shrouded in Secrecy: Jonathan Weil. American International Group Inc., the bailed-out insurance company, says it’s poised to emerge as a “financially strong, independent company” once it repays the U.S. government. That claim might be more credible if AIG started showing a truer picture of its financial condition.
• Murdoch Says Public School 'Failure Factories' Imperil U.S. Middle Class. News Corp. Chairman and Chief Executive Officer Rupert Murdoch called for an overhaul of the U.S. education system to preserve the middle class and prevent the country from slipping further behind the rest of the world. “The failure rates of our public schools represent a tragic waste of human capital that is making America less competitive,” Murdoch said today at a Media Institute awards dinner in Washington, according to the prepared text of his remarks. “Upward mobility in America is in jeopardy unless we fix our public schools.” Murdoch, an Australian native who became a U.S. citizen in 1985, said it’s imperative the U.S. measure its performance against the world and provide parents with more data about teacher performance to give them choice among schools. “Our middle-class way of life may disappear” if another generation goes through the current education system, he said. “In plain English, we trap the children who need an education most in failure factories,” said Murdoch, 79. Students who do graduate often do so with “worthless” degrees and others never learn the basic skills needed to provide for themselves, he said.

Wall Street Journal:

• Pakistan Urges On Taliban. Members of Pakistan's spy agency are pressing Taliban field commanders to fight the U.S. and its allies in Afghanistan, some U.S. officials and Afghan militants say, a development that undercuts a key element of the Pentagon's strategy for ending the war. The explosive accusation is the strongest yet in a series of U.S. criticisms of Pakistan, and shows a deteriorating relationship with an essential ally in the Afghan campaign. The U.S. has provided billions of dollars in military and development aid to Pakistan for its support.
• The Mutual Fund in the 'Flash Crash'. Waddell & Reed's $27 Billion Asset Strategy Portfolio, Part of a New Breed, Acts Like a Hedge Fund. In the quest to find the culprit in the May 6 "flash crash," regulators have pointed the finger at a little-known mutual fund based in a nondescript office park outside Kansas City. But the fund in question—the $27 billion Asset Strategy Fund—is no average mutual fund. Run by Waddell & Reed Financial Inc., the fund is bigger than most hedge funds and, by some measures, acts like one. It is part of a rapidly growing breed of U.S. mutual funds that can trade in almost anything they want, including hedging during times of trouble.
• Fed Officials Mull Inflation as a Fix. The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target. The rationale is that getting inflation up even temporarily would push "real" interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more. Both inside and outside the Fed, though, such an approach is controversial. It could undermine the anti-inflation credibility the Fed won three decades ago by raising interest rates to double-digits to beat back late-1970s price surges. "It's a big mistake," said Allan Meltzer of Carnegie Mellon University, a central bank historian. "Higher inflation is not going to solve our problem. Any gain from that experience would be temporary," adding that the economy would suffer later. Others warn that pushing inflation higher than the target could create public confusion and risk fueling financial bubbles and market instability. They say Fed policy already is weakening the dollar and as a result prompting a gold and commodity boom. "The Fed is treading upon a mine-laden path that has never been tip-toed through in this country," said Andrew Busch, a currency strategist at BMO Capital Markets.
• ObamaCare and the Election. American politics is turning right because Democratic leaders tried to govern from the hard ideological left, even over the objections of their own rank and file and the larger public. The question for Republicans is whether they will have the political fortitude to clean up the mess they may soon inherit. Nowhere is this task more urgent than in the health markets. The costs of ObamaCare are already coming due, but these are merely teasers compared to the damage to come to the dynamism of U.S. medicine, the competitiveness of U.S. enterprise and the federal fisc. Republicans have staunchly and rightly opposed this agenda, but on the whole they aren't exploiting the issue as well as they could in this election year.

Fox News:

• North Korea Nuclear Threat Reaches 'Extremely Dangerous Level,' South Says.

CNBC:

• Warning Signs: Some Gold Bulls Brace for Correction.

Business Insider:

• Parker-Spitzer's Disappointing Launch Already Has at Least One Industry Exec Predicting That CNN Will Kill It.
• David Goldman Explains Why Quantitative Easing Is Backfiring Badly.
• Tim Geithner Says There's An Old IMF Rule He Can Invoke to Punish China Over the Yuan.
  

Zero Hedge:

• A Q&A Roadmap to European Austerity. SocGen's Daniel Fermon as penned a must read presentation titled "All you ever wanted to know about European austerity plans... but were afraid to ask" which answers pretty much all open questions about the European plan to streamline its economy, and strengthen its currency.

NY Times:

• Canceling Dubai Property Deals Nearly Impossible. “It’s really a disaster, the situation in Dubai,” said Silvia Turrin, a real estate agent who bought into the property, 29 Boulevard, and has been unable to get her money out. “It’s not like in Western countries — it’s very difficult to exit here if there’s a problem. And we’ll never get our money back, but now we’re stuck dealing with this hole.”

CNNMoney.com:

• Internet Explorer Usage Falls Below 50%. For more than a decade, Microsoft's Internet Explorer has been the predominant tool the world uses to connect to the Web, but that's no longer true, according to a Web analytics firm. StatCounter, which tracks Internet data, said that IE's share of the browser market fell to 49.9% in September. More people still use IE than any other single browser, but the combined market share of non-Microsoft browsers now outpaces IE.
• Ohio Accuses Ally of 'Fraudulent' Foreclosures. Ally Financial and its subsidiary GMAC Mortgage are being sued by the Ohio Attorney General for allegedly submitting fraudulent documents in hundreds of foreclosure cases across the state.

The Hill:

• POLL: Dislike of Healthcare Law Crosses Party Lines, 1 in 4 Dems Want Repeal. Healthcare reform is hurting the reelection chances of freshman Democrats in the House, according to The Hill/ANGA poll. A majority of voters in key battleground districts favor repeal of the legislative overhaul Congress passed this year. President Obama predicted in the spring that the new law would become popular as people learned more about it. But the poll shows Republicans strongly oppose it, independents are wary of it and a surprising number of Democrats also want it overturned. Republicans have vowed to repeal the law if they take control of Congress, and the findings of Mark Penn, who led Penn Schoen Berland’s polling team, show that healthcare is a major issue for voters this year. When asked if they wanted the legislation repealed, 56 percent of voters in the surveyed districts said yes. “Only Democrats were opposed to repeal (23 percent to 64 percent),” Penn said. “Undecided voters wanted the healthcare law repealed by 49 percent to 27 percent.” In each district, a majority of those surveyed said they want the controversial law gone.

Politico:

• Hillary Clinton's World Eyes 2016, Not Vice President. The new round of speculation that Hillary Clinton could replace Joe Biden as President Barack Obama’s running mate in 2012 misses the point. Clinton doesn’t want to be vice president. But, her old advisers say, she may still want to be president.

Reuters:

• Samsung Faces Weak Outlook on Flat Screens, TVs. Samsung Electronics Co (005930.KS), the world's largest memory chip maker, disappointed markets with weak earnings guidance, halting its second straight quarter of record results, due to plunging prices of flat screens and TVs. The South Korean electronics powerhouse is braced for a tough outlook as a sputtering world economy has hit demand for TVs and computers and exacerbated steep price falls of components such as chips and flat screens.

Financial Times:

• The Rise and Rise of Correlation. From New York to Hong Kong, investors, dealers, analysts and academics are puzzled. For months, they have been struggling to explain an investment phenomenon that has defined this year’s sharp swings in financial markets. Now they may have an answer. Like fish swimming in shoals, shares in the world’s largest companies have see-sawn in lockstep as investors have bought heavily only to head for the exits later. This indiscriminate buying and selling, also called “risk-on, risk-off” trading, has characterised the sharp swings in equity markets during the summer sell-off and later rally that has this week sent Wall Street to near five-month highs. The implications could be important for investors. “It isn’t just a problem for traders looking to make rhyme or reason out of market moves,” says Nicholas Colas, ConvergEx Group chief market strategist. “Rather it is a deeply corrosive issue that diminishes the value of investing altogether.” Some commentators and so-called “value” investors, who seek out undervalued stocks, have gone as far as to declare stock-picking dead. As one US fund manager says: “We spend all this time picking stocks and then everything rises and falls at the same time. It is a nightmare.” Most active fund managers add so-called “alpha”, or risk-adjusted returns, by focusing on earnings fundamentals and relative valuations. But rising correlation means that their work has gone unrewarded – stock moves have tended to be driven by sentiment about the direction of the global economy and little else. “Correlation is a massive problem at the moment,” says Keith Skeoch, chief executive of Standard Life Investments “The markets are telling you ‘we are still swinging between two very fat tails of long-run returns: either going down like a stone or up like a rocket’.” Now a paper published by the National Bureau of Economic Research in the US has shed light on the phenomenon. In the paper, Jeffrey Wurgler, finance professor at New York University, reveals how the impact of the simple inclusion of stocks in indices markedly affects their performance so that they move in tandem with other index members irrespective of differences in their earnings or relative valuations. Mr Wurgler’s findings support theories that the growing popularity of index-linked investing, measured in the trillions of dollars, and the growth of “high-frequency trading”, which allows traders to buy and sell shares and derivatives in fractions of a second, may in part be responsible for increased correlation. Increasingly, analysts have pointed to the potential influence of indexation and popularity of index-based products, in particular futures and exchange-traded funds, ETFs, as a cause of increased correlation in recent years.
• Sunbelt Workers See No Sign of Recovery. The US recovery began more than a year ago but it has brought little comfort to workers in California and Florida. They are losing jobs as fast as they did at the height of the recession.
• Wen Warns Against Renminbi Pressure. Forcing Beijing to revalue its currency would lead to a “disaster for the world”, Wen Jiabao, China’s premier, has warned amid increasing tensions over efforts by governments and central banks to hold down their exchange rates. Speaking in Brussels, Mr Wen hit back at international criticism of China’s currency policy, saying that acceding to demands for a faster rise in the renminbi could cause social unrest in China. “Do not work to pressurise us on the renminbi rate,” Mr Wen said, departing from prepared remarks. He said Chinese export companies had very small profit margins, which could be wiped out by actions such as the currency import tariffs the US Congress is threatening to impose. “Many of our exporting companies would have to close down, migrant workers would have to return to their villages,” Mr Wen said. “If China saw social and economic turbulence, then it would be a disaster for the world.”

Evening Recommendations

• None of Note

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 109.0 +1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 99.0 -6.5 basis points.
  
• S&P 500 futures unch.
  
• NASDAQ 100 futures +.04%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PEP)/1.22
• (ISCA)/.26
• (AA)/.05
• (MU)/.40

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to rise to 455K versus 453K the prior week.
• Continuing Claims are estimated to fall to 4450K versus 4457K prior.

10:30 am EST

• ICSC Chain Store Sales for September are estimated to rise +2.9% versus a +3.2% gain in August.

3:00 pm EST

• Consumer Credit for August is estimated at -$3.5 Billion versus -$3.6 Billion in July.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Fisher speaking, Fed's Hoenig speaking, weekly EIA natural gas inventory report and the (QLGC) analyst meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and financial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.