Today's Headlines

Bloomberg:
- Citigroup Inc.(C) analyst Prashant Bhatia reiterated his “buy” rating on Merrill Lynch(MER) shares, saying the firm has “ample liquidity” and the stock is worth $40. Bhatia said NY-based Merrill’s stake in BlackRock Inc.(BLK) is worth $9 a share, its wealth-management business has $16 in value and the rest of the third-largest US securities firm is worth $15.
- Micron(MU) Slump Shows Sign of Bottom, End to Chip Glut.
- The cost of protecting bank bonds from default fell for the first day in four on speculation Lehman Brothers Holdings Inc. will be bought by one or more of its Wall Street rivals. Credit-default swaps on the Markit iTraxx Financial index of 25 European banks and insurers dropped 5 basis points to 88, according to JPMorgan Chase & Co. prices at 10:35 a.m. in London.
- Copper and aluminum may decline by as much as 29 percent in 12 months as slower global growth saps demand for metals, according to Ebullio Capital Management LLP, a U.K. money manager that has returned 63 percent this year. ``The markets can go lower than what a lot of people thought,'' said Steffensen, who has traded industrial and precious metals for 22 years including at companies such as Gerald Metals Inc. Slower global economic growth will likely means fewer Chinese exports, which in turn should curb the nation's growth in demand for metals, he said.
- Russia's ruble fell against its dollar-euro basket for a third week as oil and stocks declined. The currency slipped for a third week versus the dollar as oil extended losses from a record high in July and Russian equities slid 8.3 percent in the past five days, their fourth weekly drop. Investors have withdrawn more than $20 billion out of Russia since the start of the five-day war with Georgia Aug. 8, says UniCredit SpA analyst Vladimir Osakovsky. Investor sentiment toward Russia is worsening amid concern economic growth may falter, Credit Suisse equities analysts led by Hugo Swann in London wrote in a research note today. ``Further ruble weakening could amplify concerns of individuals and investors regarding its standing as a currency,'' he wrote in a client note today.
- Oil dropped below $100 a barrel in New York today for the first time since April amid forecasts that a slowing global economy will curtail energy demand. Futures traded as low as $99.99 a barrel and have erased almost a third of their value since reaching a record $147.27 on July 11. Traders have shrugged off forecasts that Hurricane Ike will hit the Texas coast later today, an OPEC call for reduced supplies and a decline in U.S. inventories. Demand for fuels averaged over the past four weeks declined 3.8 percent, the Energy Department report showed Sept. 10. OPEC's call for members to honor production quotas ``may be the most bearish signal to date in the oil market rout,'' said Antoine Halff, head of energy research at Newedge USA LLC in New York. ``The ministers appear genuinely concerned that the bottom is falling out of global demand and that once-depleted stocks are rebounding with a vengeance,'' he said in a Sept. 10 report. ``Their panic is a testament to how soft the market has become. It is likely to grow even softer.''
- World wheat production this year will be higher than expected a month ago as bigger crops in Europe, Russia and Ukraine offset smaller output in Argentina and Australia, according to the US Dept. of Agriculture. Global output will be a record 676.3 million metric tons, up 5.5 million from last month’s estimate and up 11% from last year’s crop of 610 million tons, the USDA said. Unsold supplies at the end of the year will total 139.9 million tons, up 2.7% from the August estimate, and up 18% from last year. Wheat futures on the Chicago Board of Trade have plunged 46% from a record $13.49 a bushel in late February.
- Cemex SAB(CX), the largest cement maker in the Americas, fell the most since listing its shares in New York after reducing its 2008 operating cash-flow forecast for a second time this year amid slumping demand.
- General Electric Co.(GE) fell the most in New York trading since cutting its annual forecast five months ago, dragged down by financial stocks including American International Group Inc. and Lehman Brothers Holdings Inc.

Wall Street Journal:
- Carlyle Group L.P. continues to have big ambitions for its financial services group, despite the departures of four members of the team in the past few months, including two former co-heads. The Washington-based firm told investors at its annual meeting on Monday and Tuesday that it plans to raise $3 billion to $5 billion for its first financial services fund, according to three prospective investors.

American Banker:
- JPMorgan Chase(JPM) is in “advanced talks” to buy Washington Mutual(WM), the biggest US Negotiations are being conducted “at the highest levels of both companies” and include JPMorgan CEO Dimon and WaMu CEO Fishman, citing sources. The government isn’t involved. savings and loan.

Reuters:
- Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday.

Financial Times:
- Bank of America (BAC) , JC Flowers & Co, the financial investor, and China Investment Co., the Chinese sovereign wealth fund, are considering a possible joint bid for Lehman Brothers (LEH) , the embattled Wall Street bank.

Bear Radar

Style Underperformer:

Large-cap Value (-.29%)

Sector Underperformers:

Retail irlind (-2.82%), Insurance (-2.50%) and Restaurants (-2.21%)

Stocks Falling on Unusual Volume:

AIG, GE, PDGI, DIOD, PNRA and POWI

Stocks With Unusual Put Option Activity:

1) GE 2) CMG 3) AMAG 4) FTO 5) DOW

Producer Prices Fall, Retail Sales Fall on Declining Gas Station Receipts, Consumer Expectations Jump Most in Over 17 Years

- The Producer Price Index for August fell -.9% versus estimates of a -.5% decline and a 1.2% increase in July.

- The PPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .7% increase in July.

- Advance Retail Sales for August fell -.3% versus estimates of a .2% gain and a downwardly revised -.5% decline in July.

- Retail Sales Less Autos for August fell -.7% versus estimates of a -.2% decline and a .3% increase in July.

- Preliminary Univ. of Mich. Consumer Confidence for September jumped to 73.1 versus estimates of 64.0 and a reading of 63.0 in August.

BOTTOM LINE: Prices paid to US producers fell in August, as lower energy prices eased inflation pressures, Bloomberg said. Import costs fell in August by the most in almost 20 years, Labor figures showed yesterday. Energy prices paid by producers fell 4.6%, the largest decline in almost 2 years. Prices for raw materials, or so-called crude goods, plunged 11.9% during August versus a 4.2% rise the prior month. Passenger car prices fell .3% and the cost of light trucks fell 1.9%, the most since October 2006. Consumer goods prices fell 1.2%. According to the median forecast in Bloomberg’s monthly survey of economists, the Fed will keep the benchmark interest rate unchanged at 2% through the first three months of 2009. The 10-year TIPS spread, a good gauge of inflation expectations, is 1.95%, the lowest in over 5 years. As I said a few months ago, I still believe inflation fears have peaked as the commodity bubble continues to burst and the secular trend of disinflation reasserts itself.

Sales at US retailers unexpectedly dropped in August, Bloomberg reported. Filling station sales fell 2.5% in August versus a .2% gain the prior month. The average price of a gallon of gas fell to $3.76/gallon last month versus $4.06/gallon in July. Excluding gasoline, retail sales were unch. versus a .6% decline in July. Sales at car dealers and parts stores increased 1.9%, the first gain since January and the biggest in a year. Weekly retail sales rose +1.8% this week, which was the third consecutive week showing improvement. As well, weekly retail sales are well above the +.5% gain seen during the first week of March. I expect retail sales to improve into year-end on pent-up demand, falling energy/food prices, decelerating inflation, low interest rates, rising stock prices, better consumer sentiment and diminishing housing fears.

Consumer Confidence rose the most in more than 4 years as a decline in gasoline prices boosted Americans’ spirits, Bloomberg reported. Americans expect inflation to subside, according to the report. Consumers thought prices will rise 3.6% in the coming 12 months versus expectations of a 4.8% increase a month ago. The Consumer Expectations component of the index surged to 70.9 from 57.9 the prior month. This was the largest monthly gain in Consumer Expectations since March 1991, which was the month after the end of the Gulf War. The Current Conditions component, which measures Americans’ perceptions of whether it is a good time to buy cars and other big-ticket items, climbed to 76.5 from 71.0 in August. I believe the rise in food/energy prices has had a much larger negative impact on consumer sentiment than generally perceived. I expect sentiment to improve modestly next month and substantially by year-end.

Bull Radar

Style Outperformer:

Mid-cap Value (+.13%)

Sector Outperformers:

Steel irlind (+4.87%), Construction (+3.15%) and Oil Service (+3.04%)

Stocks Rising on Unusual Volume:

RES, SQM, RTP, PBR, FWLT, LULU, AAUK, GOOG, FFIV, JRCC, ENER, FLI and WNS

Stocks With Unusual Call Option Activity:

1) HOLX 2) CMG 3) NIHD 4) NT 5) GT

Links of Interest

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Friday Watch

Late-Night Headlines
Bloomberg:
- The euro traded near a one-year low against the dollar on speculation that a government report will show today industrial production in Europe shrank, backing the case for the region's central bank to cut interest rates. The currency is headed for a third weekly loss as traders increased bets that the European Central Bank will lower borrowing costs to support economic growth.
- Lehman Brothers Holdings Inc.(LEH) entered into talks with potential buyers of the securities firm after Moody's Investors Service said the company must find a ``stronger financial partner'' and the shares plummeted. The U.S. Treasury and the Federal Reserve have been working with Lehman on a sale, and a deal may be announced before Asian markets open Sept. 15., a person with knowledge of the matter said. The government isn't likely to contribute money, the person said. Bankers from other firms were reviewing Lehman's books today, according to people with knowledge of the situation, who declined to identify potential acquirers.
- Washington Mutual Inc.(WM), the savings and loan that lost a third of its value this week, said that it is ``well capitalized'' and forecast a third-quarter loan-loss provision of $4.5 billion. Net charge-offs may increase by less than 20 percent in the third quarter, compared with 60 percent in the previous period, the Seattle-based lender said today in a statement. WaMu said it has $50 billion in liquidity. The company ``continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability,'' according to the statement.
- Highways in Texas were jammed as coastal residents fled Hurricane Ike, which tripled in size in the central Gulf of Mexico and threatened the 5.6 million people of the Houston area.
- The cost to protect corporate bonds in Australia and Japan from default fell for the first time in four days after Lehman Brothers Holdings Inc.(LEH) entered into talks with potential buyers. The Markit iTraxx Australia Series 9 credit-default swap index decreased 8.5 basis points to 152 at 9:22 a.m. in Sydney, according to Citigroup Inc. prices. Japan's index was quoted 7 basis points lower at 131, Morgan Stanley prices show, which indicates improved perceptions of credit quality. Five-year credit-default swaps on New York-based Lehman, the fourth biggest U.S. securities firm, fell 150 basis points to 500 after the Wall Street Journal report, according to broker Phoenix Partners Group. That's down from a record 790 basis points earlier today as concern rose that Lehman faces ratings downgrades if it can't shore up its balance sheet.
- China's industrial production grew at the slowest pace in six years on weaker export demand, power shortages and factory shutdowns during the Olympic Games. Rising raw-material and labor costs have added to pressure on exporters of shoes, toys and clothes. As many as 67,000 medium-sized and small companies posted losses in the five months through May, according to the National Development and Reform Commission. In Guangdong province, an export hub, the number of toymakers fell more than 70 percent in the first seven months from a year earlier, as more than 3,600 shut down, the official Xinhua News Agency reported.
- China's property market could be headed for a ``meltdown'' as home prices and sales decline, and bank earnings will be affected, according to Morgan Stanley. ``Property prices are already cracking in China in major cities,'' wrote Morgan Stanley analysts led by Jerry Lou in a note today. ``We believe the likelihood of a property sector meltdown is high. The impact on banks' earnings may be substantial.'' Morgan Stanley has an ``underweight'' on financials, which include banks and properties.
- Japan's economy contracted more than the government initially estimated last quarter after figures showed businesses cut spending. Gross domestic product shrank an annualized 3 percent in the three months ended June 30, the Cabinet Office said today.
- Andy Lipow, president of Lipow Oil Associates LLC, says oil may fall below $100 a barrel on Hurricane Ike. (video)
- Corn fell for a third straight session and soybeans declined on speculation that a slumping worldwide economy will erode demand for commodities. ``There is definitely an economic slowdown under way and that has led to liquidation in the grain markets,'' said Mark Kessler, the president of Harvest Equity Partners Inc. in Okoboji, Iowa. ``I don't see grain-export demand improving anytime soon. With the global economic slowdown gaining steam, buyers will wait for lower prices.'' The Standard & Poor's GSCI index of 24 raw materials has dropped 29 percent from a record on July 3.
- Gold fell below $750 an ounce, marking the longest slump in eight years, as the US dollar's surge reduced demand for the precious metal as an alternative investment. Silver dropped to the lowest since June 2006. Gold has tumbled 28 percent from a record in March as the dollar climbed 15 percent against the euro from an all-time low in July. ``This is indiscriminate slaughter across all commodities,'' said Ralph Preston, a futures analyst at Heritage West Futures Inc. in San Diego. ``It's indisputable that the funds rushed in to pump up prices, and now they're rushing out. This is a phenomenal run for the dollar. We're shorting the metals.'' Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, has fallen 4.3 percent this week to 614.4 metric tons. The fund reached a record 705.9 tons on July 11. ``The safe haven of choice is the dollar, not the metals,'' Preston of Heritage West said.
- Philippine consumer prices may rise 12.6% or 12.7% this month because of typhoons that damaged crops, boosting food prices, citing central bank Deputy Governor Diwa Guinigundo. Consumer prices rose 12.5% in August, the fastest pace in 16 years.

Wall Street Journal:
- Benefiting from rip-roaring economic growth and solid loan demand, China's banks have been the envy of their peers the world over. Now that economic growth has moderated, their outsize performance will be hard to sustain. China's economic growth rate is slipping, taking corporate performance with it. Overall profit growth for 1,619 mainland-listed companies rose 16% in the first half, compared with a 49% rise in 2007, according to JPMorgan figures. Evidence of a slowdown in the property sector has some worried. Real estate sales were down 20% on the year in July, for example. As growth slows, the banks' outlook will depend largely on how disciplined they've been about managing credit risk. This hasn't been tested since the government's 2003 bad-loan bailout. Loan growth since then -- of more than 13% in each of the last two years -- has given Chinese banks among the most unseasoned collective loan books in Asia.

NY Times:
- Hedge Fund Glory Days Fading Fast. Several big funds have faltered in recent weeks, some of them spectacularly so. While many funds are still flying high, the average hedge fund has lost more than 4 percent this year, according to Hedge Fund Research, putting the industry on course for its worst year on record. The dimming fortunes of the industry have implications far beyond the rarefied world of hedge funds. Over the past decade, the size of this industry grew five-fold, as public pension funds, corporate pension funds and university endowments poured billions of dollars into these vehicles, in hopes of landing market-beating returns. A prolonged downturn might prompt some investors to rethink these investments or demand lower fees from managers, who typically collect annual management fees of 2 percent and then take a 20 percent cut of any profits. Trouble at hedge funds also might draw government scrutiny, given the amount of pension money sitting within these unregulated firms. It is now 5 to 10 percent more expensive for hedge funds to borrow from banks than it was a year ago, and banks are increasingly hesitant to lend to hedge funds for long periods. Some head-hunters are keeping watch lists of troubled hedge funds. Heidrick & Struggle, a hiring firm, has 100 hedge funds on its watch list and expects 50 to 80 to fail in the coming months, said Tim Holt, the partner who oversees the firm’s Wall Street recruiting. Most large pension funds and institutional investors have put the brakes on their hedge fund investments this year. New money invested in hedge funds in the first half of this year was just under $30 billion, a far cry from the $118 billion raised in the first half of 2007, according to Hedge Fund Research.
- Some of the world’s biggest corporations are facing intense pressure from China to allow the state-approved union to form in their Chinese plants and offices. But many companies fear admitting the unions will give their Chinese employees the power to slow or disrupt their operations and will significantly increase the cost of doing business there.

CNNMoney.com:
- The next bubble: pessimism. Yes, the banking sector is a mess. But with so many short sellers targeting the entire financial sector, this is starting to look like a bubble in reverse. Tulips. Internet stocks. Real estate. Commodities. What do all of these have in common? If you said that they were all bubbles, congratulations. So what's the next bubble? It may just be in short-selling. That may seem like an odd concept since bubbles are usually associated with assets inflating in value (before they go pop and the values sink fast). But this may be a "negative bubble." Instead of a state of booming activity ending in a sudden collapse, we may eventually have a state of collapsing activity ending in a sudden boom. Kim Hillyer, spokesperson with online brokerage TD Ameritrade (AMTD), said that short selling activity at the firm's approximately 7 million accounts has increased 16% in the past week. "What I hear and see is that people are making money by simply picking out individual financial firms and shorting them. There is a negative bubble in attitudes." said David Kelly, chief market strategist with JPMorgan Funds. "But if enough people say bad things at the same time they can make it reality." It's the exact opposite of the late 1990s when most investors thought tech stocks could go up and up forever and anyone who suggested otherwise was thought to be nothing more than a disgruntled bear ticked off about all the money they didn't make buying Amazon.com. Now pessimism is breeding more pessimism. People are starting to think that it will never get better and can only get worse and those brave few who try to rationally point out that it's not the end of the world get branded as foolish optimists who are probably angry about the money they've lost by buying bank stocks. the skepticism about the financial sector, markets and economy is now so extreme that you can't help think it is a bubble. "In twenty years, I've never seen a time where so many people are dismissive of economic numbers," Kelly said. The conventional wisdom now is that the sky is falling, just as it was a few years ago that home prices would keep skyrocketing ad infinitum.

IBD:
- American Public Education(APEI): Online University Taps Into An Active-Duty Military Student Body.

USA Today.com:
- Rates on 30-year mortgages dropped sharply this week, falling to the lowest level in five months, as the government's dramatic takeover of mortgage giants Fannie Mae and Freddie Mac lowered mortgage rates.Freddie Mac reported Thursday that its nationwide survey found that the average 30-year, fixed-rate mortgage dipped to 5.93% this week, from 6.35% last week.
- Spooked by fears of spreading global economic weakness, investors are pulling funds from once red-hot emerging markets. That's led to steep stock price declines from Kiev (down 61% this year) to Karachi (off 47%). So far this year, net foreign selling in seven Asian stock markets tracked by Bloomberg totaled more than $52 billion. That's driven Morgan Stanley's emerging markets index down more than 31%.

US News:
- Tainted infant formula from China may be on sale at ethnic groceries in this country, even though it is not approved for importation, federal officials warned on Thursday.

BusinessWeek.com:
- HP’s ‘End Run’ Around Windows. As Hewlett-Packard(HPQ) steps up efforts to make Microsoft’s operating system easier to use, some want to devise a rival version with Linux.

Reuters:
- A steep sell-off in shares of struggling investment bank Lehman Brothers Holdings Inc has revived questions about whether the U.S. Securities and Exchange Commission is doing enough to fight short-selling abuses. During late July and early August, Lehman was under the protection of an emergency SEC rule to curb abusive short-selling. The SEC also said in July it was boosting efforts to stop the spread of false rumors that threaten financial institutions. But the emergency rule expired August 12 with a promised permanent rule still to come. "It is no coincidence that the bottom of the market in July was the exact day that the SEC announced the rule to restrict naked short selling, and the top of the rally was the day when the SEC announced they would end the rule," said Dylan Wetherill, president of short interest tracking service ShortSqueeze.com. "If the SEC has an interest in helping to save the market from the powerful short sellers, it will reinstate (the rule to curb illegal shorting,)" Wetherill said. "There's strong political pressure to curb short selling and there is little support for naked short selling," said John Coffee, a professor at Columbia University Law School."They should follow up fairly promptly. Before the end of the summer... is appropriate for them to come up with proposed rules."

Financial Times:
- Democratic jitters about the US presidential race have spread to Capitol Hill, where some members of Congress are worried that Barack Obama's faltering campaign could hurt their chances of re-election. A Democratic fundraiser for Congressional candidates said some planned to distance themselves from Mr Obama and not attack Mr McCain. “If people are voting for McCain it could help Republicans all the way down the ticket, even in a year when the Democrats should be sweeping all before us," said the fundraiser, a former Hillary Clinton supporter. "There is a growing sense of doom among Democrats I have spoken to . . . People are going crazy, telling the campaign 'you've got to do something'."
- New steps to curb speculation in commodity markets have been launched by US regulators in response to growing pressure from Washington lawmakers. The Commodity Futures Trading Commission, the main regulator of commodity markets, told the US Congress on Thursday it was imposing "enhanced control" on dealing by Wall Street banks and forcing them to publish new data on their positions. The CFTC's measures will focus on swaps - private contracts between investment banks and clients such as hedge funds or airlines that provide an exposure to commodity prices without investing directly in futures. The CFTC said that of the 550 clients of swap dealer it has identified through an unprecedented special survey, at least 18 were above the exchange limits thanks to the use of on-exchange and swap trading.

China Daily:
- The environmental cost of China's economic growth in 2005 outweighed the gains, the author of a report from the Chinese Academy of Sciences told China Daily yesterday. Shi Mingjun, a professor at the academy's Research Center on Fictitious Economy & Data Science, said the cost of such things as the exploitation of natural resources, ecological degradation and environmental pollution was 2.75 trillion yuan ($401.7 billion) in 2005, or 13.9 percent of the total output for the year. The growth in GDP for the year was 2.24 trillion yuan. "If we calculate the real cost to the environment and natural resources, the losses are greater than the gains," he said. "And as the nation's growth pattern has changed little over the past two years, the conclusions are likely to be the same for 2006 and 2007," he said. The results validate the view that China's economic growth has relied mainly on the input of natural resources and is causing enormous environmental losses, Shi said. "Such a growth model is unsustainable."

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CSCO), target $27.
- Rated (RIG) Buy, added to Top Picks Live list, target $159.
- Reiterated Buy on (GME), target $66.
- Reiterated Buy on (POT), target $264.

Night Trading
Asian Indices are -.50% to +1.25% on average.
S&P 500 futures -.25%.
NASDAQ 100 futures -.28%.

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Earnings of Note
Company/EPS Estimate
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for August is estimated to fall -.5% versus a 1.2% gain in July.
- The PPI Ex Food & Energy for August is estimated to rise .2% versus a .7% gain in July.
- Advance Retail Sales for August are estimated to rise .2% versus a -.1% decline in July.
- Retail Sales Less Autos for August are estimated to fall -.2% versus a .4% gain in July.

10:00 am EST
- Preliminary Univ. of Mich. Consumer Confidence for September is estimated to rise to 64.0 versus 63.0 in August.
- Business Inventories for July are estimated to rise .5% versus a .7% gain in June.

Upcoming Splits
- None of note

Other Potential Market Movers
- The (AGP) investor day, (CYMI) analyst day, Kaufman Brothers Investor Conference, Morgan Keegan Equity Conference and Thomas Weisel Healthcare Conference could also impact trading today.

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