Thursday Watch

Evening Headlines
Bloomberg:

• China's Stricter Capital Rules Will Curb Loans, Goldman Says. China’s plan to impose tougher capital rules on banks will slow loan growth to a pace that more closely matches economic expansion, according to Goldman Sachs Group Inc. A draft proposal by the banking regulator calls for banks to add a capital adequacy ratio buffer of as much as 4 percent to shield against economic swings, a person with knowledge of the matter said yesterday. The new rules would boost the overall minimum capital adequacy ratio for the largest lenders to as high as 15 percent from 11.5 percent now, the person said. “We believe the countercyclical capital buffer, if it is implemented, will have a profound impact on bank lending growth ahead,” Beijing-based Goldman Sachs analysts Ning Ma and Richard Xu wrote in a note today. The capital requirement would cut loan growth to 12 percent to 16 percent, a rate that more closely tracks nominal gross domestic product expansion, from 20 percent now as banks try to avoid triggering the “countercyclical” buffer, Ma and Xu said. China’s banks extended a record $1.4 trillion of new loans in 2009, fueling asset bubbles and concerns about bad debts. Assuming the “big banks” are systemically important and the full 4 percent capital buffer is implemented, Chinese lenders face a capital shortage of 484.2 billion yuan ($72 billion) next year and a deficit of about 2.8 trillion yuan in 2016, Guosen Securities Co. analyst Qiu Zhicheng wrote in a note yesterday. “There will be more capital raising as a result, especially for large banks as their deadline is short,” said Dariusz Kowalczyk, Hong Kong-based chief economist at Credit Agricole CIB. “Their lending capacity will be constrained, which will slow GDP growth and limit upside” for the yuan. The required capital buffer against economic swings could be increased to 5 percent if needed, the person said. China’s rules would be stricter than capital requirements announced Sept. 12 by the Basel Committee on Banking Supervision in response to the global financial crisis, and give lenders less time to comply.
• Fannie Mae Began Buying $1,000-Down Mortgages Without Approval. Fannie Mae agreed to finance loans to homebuyers putting as little as $1,000 down without getting the approval of the U.S. agency in charge of minimizing the costs of the mortgage company’s bailout. While “any significant actions” taken by the Washington- based company and rival Freddie Mac must be “reviewed and approved” by their overseer, the Federal Housing Finance Agency, Fannie Mae began buying the so-called Affordable Advantage mortgages from state housing finance authorities without taking that step, Edward J. DeMarco, the FHFA’s acting director, said today. “This one got away from us,” DeMarco told lawmakers at a House Financial Services subcommittee hearing in Washington. Republican Representatives Spencer Bachus of Alabama and Judy Biggert of Illinois cited the loans in criticizing the government’s oversight of Fannie Mae and Freddie Mac during the hearing, which focused on the U.S.’s need to rework its mortgage-finance system and limit the costs of supporting the companies in the interim. The companies have been sustained by almost $150 billion in government aid since they were placed under U.S. conservatorship in September 2008.
• Zombie Banks Have Us Right Where They Want Us: Jonathan Weil. Two years after the collapse of Lehman Brothers and what rightfully should have been the death of American International Group, U.S. capital markets face a crucial question. How long will it take before we see some semblance of robust free-market capitalism return, where the value of an asset is based on what bona fide market participants will pay for it, the cost to borrow money is based on a company’s fundamental financial strength rather than its ability to access a government safety net, and corporations are free to fail no matter what their size? No one can say. And the longer it remains this way, the more entrenched the status quo becomes.
• China Mobile Challenges Baidu(BIDU) With Plans for Online Search. China Mobile Ltd., the world’s biggest phone carrier by customers, plans to start an Internet- search engine next year, challenging Baidu Inc., as the slowing wireless market leads the company to data services for growth.
• China Says Can Offer 'Complete Package' for California High-Speed Trains. China can offer a “complete package,” including financing, as it competes to build a high-speed railway in California costing more than $40 billion, according to the nation’s railway ministry.

Wall Street Journal:

• White House Taps Consumer Adviser. President Barack Obama this week will appoint Elizabeth Warren to a lead role setting up the new Bureau of Consumer Financial Protection, two Democratic officials said, a move that will allow the White House to avoid a messy Senate fight over her role. Ms. Warren, currently a professor at Harvard Law School, will be named an assistant to the president and special advisor to Treasury Secretary Timothy Geithner in charge of launching the new agency and setting its mission. She was a candidate to be the agency's first director, a position that remains unfilled, but would likely have had trouble securing confirmation because of opposition in the Senate. The White House's decision to seek a middle ground could appease its liberal base, which has loudly championed her candidacy, but will irk Republicans, who oppose her leading the agency and have already charged the administration with making an end-run around the Senate confirmation process.
• U.S. Bill on China Gains Momentum. With U.S.-China tensions rising on Capitol Hill, industry and labor groups are scrambling to shape the one bill aimed at China's currency policy that has a chance of success this election year. The bipartisan bill, which has 143 co-sponsors, would allow the U.S. to impose tariffs and other penalties on countries that undervalue their currency—with China a main target.
• Regulators to Target 'Window Dressing'. Federal regulators are poised to propose new disclosure rules targeting "window dressing," a practice undertaken by some large banks to temporarily lower their debt levels before reporting finances to the public. The Securities and Exchange Commission is scheduled to take up the matter at a meeting Friday and is expected to issue proposals for public comment. The action follows a Wall Street Journal investigation into the practice, which isn't illegal but masks banks' true levels of borrowing and risk-taking. A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.
• SEC May Seek More Authority Over Muni Issuers. The Securities and Exchange Commission may ask Congress for new authority to force cities, states and municipal-debt issuers to improve financial disclosures, SEC Commissioner Elisse Walter said in an interview.
• Man Accused of Moving Cash For Bomb Plot. A New York man was arrested on Wednesday and charged with running an illegal business that helped fund the attempted Times Square bombing earlier this year. Mohammad Younis, 44 years old, was accused of passing on thousands of dollars to Faisal Shahzad, who has pleaded guilty to a failed attempt to bomb Times Square on May 1.
• In China, Foreign Banks Lag Behind. Profit Picture Shows Market Tilted in Favor of Locals; Country's Growth Promise Remains Siren Call. Banks around the world are flocking to China because of its fast-growing economy. But their financial performance there so far isn't pretty.
• Obama's Mystifying Strategy. It's too late for the president to turn John Boehner into the Gingrich of 2010.
• It's the Spending, Stupid. A chronic voter 'concern' has now exploded into a broad public movement.

Bloomberg Businessweek:

• Natural Gas Erodes Coal's Share at Power Plants: Energy Markets. Natural gas’s unprecedented share of U.S. power generation is likely to keep growing as the biggest price slide in a year and the prospect of stricter pollution rules erode the market for coal.

CNBC:

• Man Vs. Machine: The ETF Monster. Since the May 6 Flash Crash there has been growing concern that exchange-traded funds are a monster in the making—certainly something bigger than they were meant to be. Or as Harold Bradley puts it, “What I worry about is the tail wagging the dog.” Bradley, chief investment officer of the Kauffman Foundation’s $1.8 billion investment portfolio, is hardly alone. By some estimates, as much as 68 percent of the bad trades during the Flash Crash involved ETFs. And on a daily basis, there is concern the end-of-the-day rebalancing effect of some ETFs is a key factor in wild swings during the market’s final hour of trading.

Business Insider:

• Property Developer: The ECB Is The Only Thing Stopping Spain From Becoming The Next Dubai.

Zero Hedge:

• Pimco Offloads $40 Billion in Treasurys, As Frontrunning Fed Creates Billions of Profits; Gross Does Not Expect QE2 on Sept. 21; Pimco's "Fed Frontrunning" Tell Exposed.

NY Times:

• China Shifts Away From Low-Cost Factories. Companies here in China’s industrial heartland are toiling to reinvent their businesses, fearing that the low-cost manufacturing that helped propel the nation’s economic ascent is fast becoming obsolete.

CNNMoney.com:

• More Democrats Break With Obama on Tax Cuts. Thirty-one House Democrats, most of whom face tough re-election bids this fall, have signed a letter to House Speaker Nancy Pelosi and House Majority Leader Steny Hoyer urging them to extend expiring tax breaks for all income levels, including the wealthy.

Clean Technica:

• World Bank Appoints Clean Tech Czar.

Mediaite:

• "Draw Mohammed Day" Cartoonist Changes Name, Goes Into Hiding After Fatwa. In a disturbing and matter-of-fact article, Seattle Weekly’s editor in chief Mark D. Fefer explained to readers that there would not be a cartoon by Molly Norris in that week’s paper, nor would there be one in any future issues. No, she wasn’t fired. Norris has followed advice from the FBI, left town, and changed her name after a fatwa was placed on her by Islamic extremists following her cartoon promoting the made up “Draw Mohammed Day.”

Rasmussen Reports:

• Florida Senate: Rubio (R) 41%, Crist (I) 30%, Meek (D) 23%.

Reuters:

• Geithner Steps Up China Yuan Policy Criticism. U.S. Treasury Secretary Timothy Geithner sharpened his criticism of China's exchange rate policies, saying the yuan was strengthening too slowly and that he will look for new ways to get Beijing to move faster. In testimony released on Wednesday and prepared for U.S. lawmakers considering a tough new trade law, Geithner called on China to allow "significant, sustained appreciation over time" and for the yuan to "fully reflect market forces." "We are concerned, as are many of China's trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited," Geithner said in remarks to the U.S. Senate Banking Committee to be delivered on Thursday. "We will take China's actions into account as we prepare the next Foreign Exchange Report, and we are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly."
• Japan Manufacturing Mood Falls For First Time Since 2009. Japanese manufacturing confidence worsened in September from the previous month for the first time in nearly a year as companies struggle with a persistent yen rise that threatens a fragile, export-reliant economic recovery, a Reuters poll showed.
• Brocade(BRCD) Forecasts Lower Margins, Shares Fall. Brocade Communications Systems Inc (BRCD) forecast weaker margins as it cuts prices of its network equipment to better compete against Cisco Systems Inc (CSCO), sending its shares down nearly 4 percent on Wednesday.

Financial Times:

• Greece Rules Out Possibility of Default. Greece’s finance minister has strongly rejected the idea that Athens will be forced to restructure its debts, saying that a default would break the eurozone. On a two-day visit to London, Paris and Frankfurt to convince investors that Athens has turned a corner in its year-long economic crisis, George Papaconstantinou told the Financial Times that a Greek default would spark selling in other so-called peripheral bond markets of Portugal and Ireland. “Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt,” he said. “People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.” Others warned that Greece still had a long way to go to convince markets that it would not be forced to restructure its bonds. Marco Annunziata, chief economist at UniCredit, said: “Many investors are not convinced that Greece will be able to avoid default. Athens has to cut costs and many consider the only way to do that is to restructure loans.” This would mean big losses, or haircuts, for bond holders, which include French and German banks and the ECB, which is estimated to be holding up to €40bn in Greek bonds as part of its government debt purchase programme.
• Bond Strategy Led to Big Win After Lehman. The collapse of Lehman Brothers and central banks’ unorthodox monetary policies distorted markets to create some of the biggest pricing anomalies ever documented in bond trading, according to research from leading US academics. A paper from the US National Bureau of Economic Research claims to have identified by academic research in fixed income markets the “largest arbitrage ever”. The paper details how prices for US Treasury inflation-linked securities – government bonds that provide protection against rising prices – and regular Treasury bonds were thrown out of sync by as much as 23 cents on the dollar following the collapse of Lehman Brothers two years ago this week. “The arbitrages reported are stunning in magnitude,” the researchers said. “What makes these findings even more dramatic is that the Tips [Treasury inflation-protected securities] and Treasury markets are two of the most liquid and largest financial markets in the world ... The sheer magnitude of this mispricing presents a serious challenge to conventional asset pricing theory.” The NBER said the arbitrage had narrowed during 2009 to more normal levels. However, for a small group of savvy traders the pricing discrepancies at their widest led to one of the most successful hedge fund trades in recent memory.

The Standard:

• Japan Fury Boils. Anti-Japan anger in China rose close to boiling yesterday, just days ahead of the 79th anniversary of the Japanese invasion of Manchuria, with protests expected in Beijing and possibly other cities. Reports claim Beijing has given the nod for massive protests in different parts of the capital on Saturday, with demonstrators using the internet to call on others to march to Japan's embassy. The new tensions come on top of anger over the arrest and continued detention of a Chinese trawler skipper held by Japan after his boat hit two Japanese coast guard vessels off the disputed Diaoyu Islands. Reports say Beijing is on full alert, while Tokyo has beefed up security at its facilities across the mainland. Other Japanese buildings are reported to have been damaged following an attack on a Japanese international school in Tianjin. The Japanese embassy has cautioned its nationals to be careful in their encounters with Chinese and not to make their nationality too obvious.
  

China Securities Journal:

• China may require domestic securities companies to charge trading commissions that are no less than their business costs, citing a personal familiar with the matter. The change may take effect Dec. 1. At present brokerages don't have lower limits on commissions.

People's Daily:

• The global economy is "very likely" to experience a double dip next year, Wang Jian, secretary general of the China Society of Macroeconomics, said. The world's economy may enter a long-term recession in 2011, Wang said.

Evening Recommendations
Citigroup:

• Reiterated Buy on (OPEN), target $70.
• Reiterated Buy on (SPN), boosted target to $35.
• Reiterated Buy on (DO), lowered estimates, target $74.
• Reiterated Buy on (KFT), target $36.
  

Night Trading

• Asian equity indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 116.5 -2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 113.25 unch.
  
• S&P 500 futures -.30%.
  
• NASDAQ 100 futures -.30%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FDX)/1.21
• (PIR)/.11
• (ORCL)/.37
  
• (MLHR)/.26

Economic Releases
8:30 am EST

• The Producer Price Index for August is estimated to rise +.3% versus a +.2% gain in July.
• The PPI Ex Food & Energy for August is estimated to rise +.1% versus a +.3% gain in July.
• Initial Jobless Claims for last week are estimated to rise to 459K versus 451K the prior week.
• Continuing Claims are estimated to fall to 4464K versus 4478K prior.
• The 2Q Current Account Balance is estimated at -$125.0 Billion versus -$109.0 Billion in 1Q.

9:00 am EST

• Net Long-term TIC Flows for July are estimated at $47.5 Billion versus $44.4 Billion in June.
  

10:00 am EST

• Philly Fed for September is estimated to rise to .5 versus a reading of -7.7 in August.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly EIA natural gas inventory report, (MT) Investor Day, Chicago Fed Mortgage Hearing, Fed's Tarullo speaking, Geithner's China testimony, Barclays Energy Conference, ThinkEquity's Growth Conference, BMO Capital's Education Conference, BofA Merrill's Media/Communications/Entertainment Conference and Deutsche Bank's Tech Conference could also impact trading today.
  

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

Stocks Higher into Final Hour on Tech Sector Optimism, Short-Covering, Investor Performance Angst

Broad Market Tone:

• Advance/Decline Line: Slightly Higher
  
• Sector Performance: Most Sectors Rising
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 22.76 +5.52%
  
• ISE Sentiment Index 177.0 +30.15%
  
• Total Put/Call .91 +1.11%
  
• NYSE Arms .98 -9.59%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 104.78 bps +1.54%
  
• European Financial Sector CDS Index 110.83 bps +1.95%
  
• Western Europe Sovereign Debt CDS Index 154.56 bps +1.51%
  
• Emerging Market CDS Index 241.14 bps -.95%
  
• 2-Year Swap Spread 19.0 +1 bp
  
• TED Spread 14.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .15% +1 bp
  
• Yield Curve 223.0 +6 bps
  
• China Import Iron Ore Spot $139.50/Metric Tonne +.22%
  
• Citi US Economic Surprise Index -10.20 -.6 point
  
• 10-Year TIPS Spread 1.79% +1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +89 open in Japan
• DAX Futures: Indicating +2 open in Germany

Portfolio:

• Higher: On gains in my Tech, Retail and Medical long positions
  
• Disclosed Trades: None
  
• Market Exposure: 100% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 builds modestly on recent gains and remains slightly above its 200-day moving average despite mounting headwinds. On the positive side, Hospital, Medical, Disk Drive, Computer, Oil Tanker and Education shares are especially strong, rising 1.0%+. (IYR) has traded well throughout the day. The 10-year yield is +3 bps higher despite mixed economic data. On the negative side, Homebuilding, Steel, Ag, Gold, Oil Service, Energy, Coal, Alt Energy, Defense and Utility shares are lower on the day. Cyclicals are underperforming today. Oil has diverged from equities over the last few days. The Shanghai Composite fell -1.34% overnight and continues to run into serious resistance around 2,700. Shanghai copper inventories are up +13.45% today and have risen +21.96% over the last 5 days. The Portugal sovereign cds is rising another 2.67% to 341.09 bps, the Greece sovereign cds is rising +2.34% to 931.94 bps and the Ireland sovereign cds is gaining +1.76% to 384.59 bps, which are major negatives. The Ireland cds continues its recent parabolic move higher and is testing its record set 5 days ago. Moreover, the Portugal and Greece cds are very close to technical breakouts again. The market is ignoring quite a bit of negative news today, which is a big positive and likely related to triple-witching on Friday and investor performance angst. Breadth and volume remain underwhelming. The S&P 500 remains near a critical technical level. I am still closely monitoring my technical gauges for any signs of developing weakness, given the trading range we have be trapped in for some time and mounting headwinds. I expect US stocks to trade mixed-to-lower into the close from current levels on profit taking, rising sovereign debt angst, mounting US housing concerns and China bubble worries.

Today's Headlines

Bloomberg:

• Portugal's Borrowing Costs Rise, Demand Declines at Sale of 12-Month Bills. Portugal’s borrowing costs increased at an auction of 750 million euros ($974 million) of 12-month bills, the country’s debt agency said. The securities due Sept. 23, 2011, were issued at an average yield of 3.369 percent, the IGCP said. That compares with 2.756 percent at a previous auction of the bills on Sept. 1. Investors bid for 1.6 times the amount offered, compared with a bid-to-cover ratio of 2.1 in the Sept. 1 sale.
• Manufacturing in New York Expanded at Slower Pace. Manufacturing in the New York region expanded at a slower pace than forecast in September, signaling that factory managers remain concerned about a slowdown in U.S. economic growth. The Federal Reserve Bank of New York’s general economic index fell to 4.1 this month, the lowest reading since July 2009, from 7.1 in August. The factory executives’ future outlook dimmed to the lowest level since July 2009. The gauge measuring the outlook six months from now fell to 31.3 from 35.7.
• Production in U.S. Cooled in August as Automakers Scaled Back. Production in the U.S. cooled in August as automakers scaled back following a surge in output the prior month. Industrial production increased 0.2 percent last month after rising 0.6 percent in July, figures from the Federal Reserve showed today. Factory output climbed 0.5 percent excluding autos, the most since May.
• Sovereign Swaps Trades Rise on Bets EU to Compromise on Rules. Credit-default swap investors are building positions on sovereign debt as European Union regulators resist calls by lawmakers to ban some trades. The amount of swaps bought and sold on 15 nations from Greece to Germany rose to $134.5 billion Sept. 10, according to the Depository Trust & Clearing Corp., from $124.6 billion on June 4. The amount of outstanding contracts on Germany has climbed 14 percent since May to $15.3 billion, while contracts on Italy have jumped 11 percent to $26 billion, DTCC data show. The $134.5 billion of protection bought on the 15 nations includes contracts on the Markit iTraxx SovX Western Europe Index. Investors bought or sold swaps contracts covering a net $7.04 billion of Greek sovereign debt as of Sept. 10, according to DTCC, which runs a central registry that captures most trades. That figure, which is the maximum amount on the line if Greece defaults, compares with at least $321 billion of the country’s outstanding debt, Bloomberg data show.
• Crude Oil Futures Drop as U.S. Says Enbridge Line to Be Allowed to Restart. Crude oil fell for a second day after a federal official said Enbridge Energy Partners LP will be allowed to restart a pipeline supplying Canadian crude to the U.S. Midwest. “With the pipeline coming back on line by the end of the week there’s no reason to worry about supply,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The Japanese yen intervention is also pushing oil lower because the oil market has been tied to the dollar.” Crude oil for October delivery fell $1.50, or 2 percent, to $75.30 a barrel at 11:21 a.m. on the New York Mercantile Exchange. Prices are down 5.1 percent this year. Total fuel demand fell 1 percent to 19.5 million barrels in the week ended Sept. 10. Gasoline consumption tumbled 2.6 percent to 9.02 million barrels a day, the lowest level since March.
• 'Death Spiral' Awaits State-Worker Pensions as Illinois Leads Underfunding. U.S. state pensions such as Illinois, Kansas and New Jersey are in a “death spiral,” with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains. Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Bloomberg Cities and Debt Briefing in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.
• U.S. Home Prices Face 3-Year Drop as Inventory Surge Looms. The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners. “Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.”
• Congress Seeks Fannie, Freddie Exit as Banks Eat Sour Loans. U.S. lawmakers will grapple today with how to end the bailout of Fannie Mae and Freddie Mac after two years and almost $150 billion, and who pays the bill for bad loans made during the housing boom. Regulators who seized control of the two mortgage lenders in 2008 are under pressure to stem losses for taxpayers and recoup money from banks that sold faulty loans to Fannie Mae and Freddie Mac -- all without hindering the housing market’s recovery.
• China said to Consider 15% Capital Ratio for Biggest Lenders. China’s banking regulator may require the nation’s biggest lenders to boost their capital adequacy ratios to as high as 15 percent by the end of 2012, a person with knowledge of the matter said. The regulator is drafting a plan that would call for Tier 1 capital of 8 percent, with the overall ratio set at 10 percent, the person said. The plan would add a buffer of up to 4 percent to protect against economic fluctuations, plus a further 1 percent for “systemically important” banks, the person said.
• French, Germans See Euro as 'Bad Thing' Amid Crisis, Poll Shows. Majorities across Europe view the euro as a “bad thing” in the wake of the sovereign debt crisis that rattled the continent, a survey showed. Fifty-five percent of Europeans voiced negative sentiments about the currency, led by a 60 percent disapproval rate in France and 53 percent in Germany, according to a poll released today by the German Marshall Fund of the United States and the Italian foundation Compagnia di San Paolo.
• Greece May Miss Revenue Target, Sell Diaspora Bond, Papaconstantinou Says. Greece will likely miss its target for increasing government revenue this year and plans to sell debt to Greeks living outside the country, as it tries to cut the European Union’s second-biggest budget deficit, Finance Minister George Papaconstantinou said.
• Goldman(GS) Sued Over Alleged Gender Bias as Claimants Seek Class-Action Case. Goldman Sachs Group Inc. was sued by three former female employees who claim they faced discrimination in pay and fewer opportunities for promotion than men at the firm. “The violations of its female employees’ rights are systemic, are based upon companywide policies and practices, and are the result of unchecked gender bias that pervades Goldman Sachs’s corporate culture,” the women said today in a complaint in federal court in Manhattan.

Wall Street Journal:

• Obstacle to Deficit Cutting: A Nation on Entitlements. Efforts to tame America's ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history. At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

CNBC:

• Turmoil Facing Trillion Dollar Commercial Paper Market. Two years after the fall of Lehman Brothers shook the world’s markets, the once-popular commercial paper market remains a shadow of its former self. The amount of outstanding commercial paper, a particularly cheap form of short-term funding, stands at $1 trillion today, according to Federal Reserve data—down from its $2.2 trillion peak in August of 2007.
• Retirement on Hold: American Workers $6 Trillion Short. A new study obtained by CNBC says Americans are $6.6 trillion short of what they need to retire.

Business Insider:

• Watch French Socialists Freak Out As Sarkozy Raises The Retirement Age. France plunged into austerity today, raising the retirement age from 60 to 62.
• Robert Shiller: Public Anger Over Unemployment Is Growing And It Is Hitting Confidence.
  

New York Times:

• Credit Suisse to Take Stake in York Capital. Credit Suisse agreed Tuesday to buy a minority stake in the hedge fund York Capital Management for $425 million. The bank, Switzerland’s second largest after UBS, will acquire a one-third stake in York, which manages about $14 billion in assets, according to people with direct knowledge of the deal who were not authorized to speak publicly.

Reason.com:

• Rogue States. The Revolt Against ObamaCare.

LA Times:

• Rizzo Obscured True Salary. Former Bell City Manager Robert Rizzo went to considerable lengths to keep his huge salary secret, including actions that could invalidate his contracts and potentially require him to repay money he received, some experts believe. According to records and interviews, the city of Bell and Rizzo himself represented his salary as being significantly lower than it was. When one councilman asked Rizzo about his salary last year, the city manager gave him a sum that was less than half the approximately $700,000 Rizzo was actually earning at the time.
• Attorney General Jerry Brown Sues Eight Top Bell Officials. State Atty. Gen. Jerry Brown on Wednesday sued eight top Bell officials and council members, alleging fraud, civil conspiracy and waste of public funds in the first legal action related to the city's salary scandal. Brown demanded that the officials return hundreds of thousands of dollars in unwarranted salaries. He also said he would expand his probe into public salaries in general and called for specific legislative action to reform salary and pension action. He also announced that he would serve subpoenas on the city of Vernon, which has also come under scrutiny for giving city officials excessive salaries.

Miami Herald:

• Miami Home Sellers Cut Prices By $123.8 Million in August. Nearly one in five home sellers in the city of Miami reduced prices in August, according to a report released Wednesday by real estate search firm Trulia.com. The average reduction was 10 percent, according to the report, which tracked the nation's 50 largest cities. Miami recorded a total of $123.8 million in home price reductions in August, the report found. Nationally, price reductions have increased for three months in a row, totaling 26 percent of all properties for sale. Home sellers have slashed prices by more than $29 billion since July, Trulia found. The average reduction nationally was 10 percent, or $33,892, in August.

HedgeFundBlogger:

• Hedge Fund Leverage Increases. The Bank of America Merrill Lynch (BAML) fund managers’ survey has found that hedge funds have increased the amount of leverage used. At the same time, managers responded to the survey with a low appetite for risk despite a full year of great returns and a mixed year in 2010. The September edition of the survey found hedge funds had raised their gearing levels from 1.16 in August to 1.39, the highest level since March 2008. However average cash balances rose marginally to 4% from 3.8% in August and more respondents were overweight cash in September compared to the previous month as risk aversion increased. Hedge funds also raised their weighted net long exposure during the moth, from 22% to 26%.

Reuters:

• Europe Cools Towards Obama: Poll. President Barack Obama's popularity remains high in Europe but has fallen in the past year as doubts emerge about some of his foreign policies, an opinion poll published on Wednesday showed. The annual Transatlantic Trends survey, conducted during June in 11 European Union countries, Turkey and the United States, found that while Obama remained more popular than his predecessor George W. Bush, there were concerns about the line he had taken on issues such as Iran and its nuclear program. Most of the Europeans surveyed said they wanted the United States to exert strong leadership in world affairs, but fewer than half approved of how he was managing relations with Iran or how he was going about stabilizing Afghanistan.
• USTR Files 2 New WTO Complaints Versus China. The U.S. Trade Representative's office said on Wednesday it has filed two new cases against China at the World Trade Organization for alleged violations of global trade rules.

Telegraph:

• Bank of England Governor Mervyn King Warns Unions Accept Cuts or 'Fail Your Children'. Mervyn King, the Governor of the Bank of England, has urged the unions to accept public sector reforms and jobs cuts by warning that anything short of tackling the UK's record Budget deficit would “fail the next generation”.

Kathimerini:

• IMF officials assisting Greece with tax collection methods are struggling to make headway. The team of officials have detected problems such as inefficiencies in tax collection as well as in implementing changes in tax administration and management of spending. Progress halts when the team departs from Greece.

Spiegel:

• Germany's former Finance Minister Peer Steinbrueck said Greece "won't get back on its feet again" unless the government agrees to restructure the country's debt. "It would be a big mistake to keep delaying the inevitable in deference to some banks at the expense of taxpayers," Steinbrueck said.

Valor Economico:

• Brazil may use its sovereign fund to buy dollars and stem the appreciation of the real. The central bank is also considering selling reverse currency swaps as another way to curb the real's gain.
  

China Business News:

• The adjustment on China's property market will last two to three years, citing Ma Jiantang, the head of the National Bureau of Statistics.

Caixin Online:

• China's banking regulator is considering imposing a bad loan coverage ratio of 250%, compared with 150% currently, citing an executive at China Construction Bank Corp.

International Business Times:

• The Jobs Crisis: Did Stimulus Fail to Create 'Effective Demand'? Unemployment fears have refused to go away despite huge global efforts to prop up growth through policy measures, says the discussion paper presented at the Oslo conference this week. The brainstorming session held jointly by the ILO and the IMF raises questions about the efficacy of the expansionary policies in generating jobs, and points out that time is ripe to consider policies focused on labor markets and income distribution to supplement fiscal and monetary policies. According to ILO figures, over 210 million people across the globe are estimated to be unemployed at the moment, an increase of more than 30 million since 2007. Joblessness poses the gravest threat in the advanced economies. And among the advanced countries it's the United States, the epicenter of the Great Recession, which has been hit the hardest. The U.S. now has the highest increase in the number of unemployed: an increase of 7.5 million unemployed people since 2007. Long-term unemployment in the U.S. is nearing levels not seen since the Great Depression and nearly one out of every six workers is either unemployed or underemployed. The unemployment rate has increased by 3 percentage points in advanced countries since 2007 while it was considerably less - 0.25 percentage points - in emerging markets.

Bear Radar

Style Underperformer:

• Large-Cap Value (+.02%)

Sector Underperformers:

• 1) Coal -1.0% 2) Homebuilding -.74% 3) Energy -.50%

Stocks Falling on Unusual Volume:

• TTM, TWC, UIL, CREE, RDWR, MDAS, PWER, BOKF, LOGM, ASMI, LUFK, CTSH, AVGO, GOLD, TROW, TRLG, AU, IRM and BSI
  

Stocks With Unusual Put Option Activity:

• 1) YHOO 2) ABK 3) DYN 4) FDO 5) PFE
  

Stocks With Most Negative News Mentions:

• 1) JPM 2) SCHW 3) EEP 4) VLO 5) KCG
  

Bull Radar

Style Outperformer:

• Large-Cap Growth (+.09%)

Sector Outperformers:

• 1) Oil Tankers +1.25% 2) Hospitals +1.07% 3) Medical Equipment +.81%

Stocks Rising on Unusual Volume:

• MCK, CVD, ABC, SVNT, SINA, TNDM, DISCA, RVBD, DGIT, ARG, PLL, MA, GNI and AMN
  

Stocks With Unusual Call Option Activity:

• 1) MDT 2) UA 3) AU 4) VMED 5) EOG
  

Stocks With Most Positive News Mentions:

• 1) KFT 2) MA 3) AAPL 4) CSCO 5) INTC

Wednesday Watch

Evening Headlines
Bloomberg:

• Japan Intervenes First Time Since 2004 to Rein in Yen. Japan intervened in the foreign- exchange market for the first time since 2004 after a surge in the yen to the strongest against the dollar in 15 years threatened to stunt the nation’s economic recovery. Finance Minister Yoshihiko Noda confirmed the intervention, speaking to reporters today in Tokyo. Noda said that Japan had contacted other nations about the step, without specifically saying that today’s measure was taken unilaterally.
• Feinberg May Ease Test for BP(BP) Spill Claims Distant From Coast. Kenneth Feinberg, responsible for compensating victims of the BP Plc’s Gulf of Mexico oil spill, is encouraging restaurants and hotel owners to apply, even if their businesses aren’t within a few miles of the coast. “I would propose that those who believe they have a valid claim, who have been harmed as a result of the spill, wherever they are located without regard to proximity, fill out a claim,” Feinberg said today at a meeting of the Florida Restaurant and Lodging Association in Orlando.
• IMF Meeetings Should Target Double-Dip Risk: Mohamed A. El-Erian. Many topics are being teed up for next month’s annual meetings of the International Monetary Fund and World Bank in Washington, a gathering that will draw about 190 country representatives. There is a substantial risk of disappointment, one that would be detrimental to the welfare of billions around the world over time. This risk can and should be minimized. To do so, the natural inclination for complexity must urgently be replaced by focused simplicity. This can be achieved by placing just one question on the agenda: Why are economic policies in industrial countries proving so frustratingly ineffective? Already, there are too many examples of policy outcomes that have fallen well short of expectations. In the U.S. alone, just look at the high unemployment rate that persists in the face of unprecedented fiscal stimulus and the extended use of unconventional monetary policy. Witness the de-risking of household investment portfolios as individuals sell equities in favor of cash and bonds. Consider the massive cash balances being hoarded by large companies and banks. Normally, cash burns a hole in the pockets of Americans, especially when the Federal Reserve is aggressively using low interest rates to push us all to assume more risk. Not today.
• Oil Falls For Second Day as Inventories Rise, Enbridge Begins Pipe Repairs. Oil fell for a second day after an industry report showed U.S. crude stockpiles rose and as Enbridge Energy Partners LP said it expected to finish welding a replacement section into a pipeline that was shut last week. Futures dropped after the American Petroleum Institute said inventories increased by 3.33 million barrels last week. Crews worked to attach a section on Enbridge’s Line 6A, which transports 670,000 barrels a day from Canada to U.S. refineries. The October contract lost as much as 60 cents, or 0.8 percent, to $76.20 a barrel in electronic trading on the New York Mercantile Exchange, and was at $76.46 at 11:03 a.m. Sydney time.
• Gold Futures Surge to a Record on Haven Demand as Stocks, Bonds Languish. Gold futures rose to a record $1,276.50 an ounce on demand for a haven against turmoil in the global economy and financial markets. The precious metal, heading for the 10th straight annual gain, has offered a hedge against gyrations in the dollar and the euro amid sovereign-debt woes.
• MasterCard's(MA) Board of Directors Approves $1 Billion Share-Buyback Program.
• Gasoline Shipments to U.S. Slide as Profit Margin Vanishes: Energy Markets. Bookings of tankers to ship European gasoline across the Atlantic fell in August as profit margin from the trade dropped to the lowest level in a year. Traders and oil companies chartered 21 vessels to transport the auto fuel to the U.S. Atlantic Coast from Europe last month, down from 24 in July and 30 in June, according to data compiled by Bloomberg and Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker. The decrease occurred as U.S. gasoline inventories were 15 percent above the five-year average in the week ending Sept. 3, Energy Department data show.
• OPEC Won't Change Output Quotas Even as Demand Recovers, Pastor Says. The Organization of Petroleum Exporting Countries doesn’t plan to change output quotas at its next meeting amid the recovery of world oil demand after the recession, OPEC President Wilson Pastor said. The group is scheduled to meet next on Oct. 14 in Vienna. OPEC may meet again in Quito in December, said Pastor, who is also Ecuador’s Minister of Non-Renewable Natural Resources. Prices will likely remain stable in 2011, he said, without giving additional details.
• Morgan Stanely(MS) Sued by China Development Industrial Bank Over CDO Losses. Morgan Stanley was sued by Taipei- based China Development Industrial Bank for fraud to recover losses from an investment tied to residential mortgage-backed securities. The Taiwanese bank claims Morgan Stanley made an investment linked to U.S. subprime mortgage bonds in mid-2006 and, after learning of problems with it, “dumped those losses” on CDIB in April 2007. The complaint, filed in New York state Supreme Court on July 15, was made public yesterday by CDIB’s lawyers.

Wall Street Journal:

• Boeing(BA) Likely To Lose Ruling. Trade panel expected to find U.S. company received illegal subsidies.
• US Health Insurers Say Getting Tough in Hospital Talks. Some of the nation's largest health insurers say they're getting tougher in price negotiations with hospitals and are using their clients as leverage, as health plans and employers try to restrain medical costs. Employers are warming to the idea of narrow provider networks as a way to save money, which is helping in contract talks with hospitals, health insurers say. In some cases, managed-care clients want to become directly involved in hospital negotiations.
• Richmond Fed's Lacker Wants High Threshold for More Fed Action. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, sees modest growth in 2011, little change in inflation and little to spur the Fed to take new actions to support the economy. “The economy is facing very real impediments to growth and there is little monetary policy can do about that,” Mr. Lacker said in an interview with The Wall Street Journal late last week. “So I think our expectations for real growth and for the rate at which unemployment comes down ought to be very modest right now.”
• Retailers Turn to Gadgets. Best Buy(BBY), Others Stock Up on Handhelds for Holidays as TVs, PCs Lose Luster.
• Christine O'Donnell Wins Delaware Primary. Her Victory Marks Big Win for Tea-Party Movement.
• Union Power and the Christie Effect. After decades of expanding political clout, organized labor is finding voters increasingly unreceptive to its high-tax message.
• Glenn Beck, Progressives and Me. The TV host has a point when he says a limitless view of state power is un-American.

CNBC:

• Charlie Munger on US Economy: Pain Not Over.
• Man Vs. Machine: How the Crash of '87 Gave Birth to High-Frequency Trading.
  

IBD:

• More Dinner Reservations Made Online - It's An Idea With Legs. If there's one thing OpenTable (OPEN) has going for it, it's legs — and plenty of them.

Business Insider:

• Jamie Dimon: "JPMorgan Will Keep Hedge Fund Highbridge"JPMorgan knows how to skirt the Volcker rule: keep Highbridge. Dimon announced today that JPMorgan will be keeping Highbridge Capital, the bank's hedge fund. The bank plans to deal with the new Volcker Rule by moving its best prop traders to the asset management division, says Dimon.
• Bernanke Loses Control Over The Fed, As Internal Divide Now On Full Display For The Public.
  

CNNMoney.com:

• Ivy League Education: No Longer Worth It?

TechCrunch:

• Inline Pictures and Video Are a Part of What Twitter is Announcing Tonight.

LA Times:

• Southern California Home Sales Slide in August. Sales volume falls 2.1% and the median sale price drops 2.4% from July. Fading government stimulus and waning buyer enthusiasm caused Southern California's housing market to soften in August — but not as badly as earlier in the summer.

Rasmussen Reports:

• Nevada Senate: Reid(D) 48%, Angle (R) 48%.

Politico:

• Health Care Challenge Moves Forward. A federal judge said Tuesday he is likely to let 20 states proceed with at least a portion of their lawsuit challenging the heart of the Democrats’ health care overhaul. U.S. District Judge Roger Vinson scheduled oral arguments to begin Dec. 16 in Pensacola, Fla., but did not say which parts of the lawsuit he will approve. Vinson said he plans to issue a complete ruling by Oct. 14.
• Henry Waxman: Democrats Would Push Climate Legislation in 2011. The campaign to pass climate legislation will continue on Capitol Hill in 2011 – if Democrats are still in charge, that is. That’s the word Tuesday from a top House Democrat who led the charge over the last two years to pass a major cap-and-trade bill.

Reuters:

• Broker Watchdog Warns on Too Much Market Info. A top watchdog over broker dealers warned on Tuesday against too much transparency in the opaque, $615 trillion swaps market and said "more is not always better." "You have to be careful on what you put out there," said Steve Joachim, an executive vice president with the Financial Industry Regulatory Authority, or FINRA. "We have to think very carefully about what we are doing. Too much information can be a negative also," he said.
• China Hits Back at U.S. Over Steel Pipe Duties. U.S. sanctions against imports of seamless steel pipe from China are unacceptable and will hurt bilateral trade relations, the Commerce Ministry said on Wednesday.
• Greek Budget Cuts on Track But Risks Remain.
• Transocean(RIG) Rig Leaving Gulf of Mexico for Egypt.
• Steel Dynamics(STLD) Sees Weak Q3 Profit on Lower Margins. Steel Dynamics Inc (STLD), the fifth-largest U.S. steelmaker, forecast third-quarter profit below market estimates, hurt by reduced margins due to lower sales prices. The company expects its third-quarter net income to be in the range of 5-10 cents a share. Analysts on average expect quarterly earnings of 20 cents a share, according to Thomson Reuters I/B/E/S.

Financial Times:

• Swaps Rules Leave Insurers in Limbo. Insurers are facing uncertainty created by sweeping definitions in the Wall Street reform act, which leave open the possibility that their products will be covered by the new swaps regime. The Commodity Futures Trading Commission has the power to use the ambiguity of wording in the Dodd-Frank financial reform act to extend its reach to financial products that share some of the characteristics of derivatives, lawyers have said. Gregory Mocek, former director of enforcement at the CFTC, said the very wide definition of swaps – derivatives in which two counterparties exchange benefits – in the legislation left it “unclear as to how insurance will be covered”.

Telegraph:

• Chinese Think Tank Warns US It Will Emerge as Lose in Trade War. A State Council think-tank in China has warned Washington that the US will come off worst in a trade war if it imposes sanctions against Beijing over the two nations' currency spat.

The Guardian:

• Real IRA Says It Will Target UK Bankers. Banks and bankers are now potential targets for the Real IRA, leaders of the dissident republican terror group have warned in an exclusive interview with the Guardian. Despite having only 100 activists they also said that targets in England remained a high priority.

The Globe and Mail:

• Sovereign Debt Bears Prowl Hedge Fund Summit. Sovereign debt fears were daily front page news a few months ago, but have faded into the general background noise of worry. Not so at the World Alternative Investment Summit Canada, the annual Niagara Falls gathering of the hedge fund industry. Here, some high profile people with a lot of experience in the debt world are warning investors in the audience to keep their focus on sovereign debt because the problems of countries not being able to pay their debts are not going away.

Jidosha Japanese:

• Toyota expects 66% drop in October-December car sales.

Evening Recommendations
Citigroup:

• Rated (IR) Sell, target $33.
• Rated (CBE) Buy, target $53.
• Rated (TYC) Buy, target $46.
• Rated (CR) Sell, target $35.
• Rated (CSL) Sell, target $29.
• Rated (DHR) Buy, target $47.
• Rated (WCC) Buy, target $41.
  
• Rated (GE) Buy, target $19.
• Rated (ITW) Buy, target $52.
  

Night Trading

• Asian equity indices are -.25% to +1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 119.0 +5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 113.25 +3.25 basis points.
  
• S&P 500 futures +.11%.
  
• NASDAQ 100 futures +.20%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DBRN)/.49
• (AIR)/.30

Economic Releases
8:30 am EST

• The Import Price Index for August is estimated to rise +.3% versus a +.2% gain in July.
• Empire Manufacturing for September is estimated to rise to 8.0 versus a reading of 7.1 in August.
  

9:15 am EST

• Industrial Production for August is estimated to rise +.2% versus a +1.0% gain in July.
• Capacity Utilization for August is estimated to rise to 75.0% versus 74.8% in July.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,500,000 barrels versus a -1,853,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -625,000 barrels versus a -243,000 barrel decline the prior week. Distillate inventories are expected to rise by +650,000 barrels versus a -388,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.55% versus a +1.20% gain the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Chicago Fed Mortgage Hearing, weekly MBA Mortgage Applications report, (KFT) Analyst Day, (MA) Investment Community Meeting, Wedbush Clean Tech Conference, Barclays Energy/Power Conference, CSFB Chemicals Conference, Goldman Sachs Retail Conference, ThinkEquity's Growth Conference, Stifel Nicolaus Healthcare Conference, Morgan Keegan Industrial/Transport Conference, Deutsche Bank Tech Conference, BofA Merrill Media/Communications/Entertainment Conference, Keybanc Basic Materials Conference and the (BRCD) Analyst Meeting could also impact trading today.
  

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