Friday Watch

Evening Headlines
Bloomberg:

• Junk Bonds Reach Par For First Time Since '07 on Upgrades: Credit Markets. Investors in U.S. junk bonds are wagering they’ll be fully repaid for the first time since before the credit market seizure, dismissing concern the economy will go back into recession and trigger a rise in corporate defaults. Average prices on high-yield debt rose above 100 cents on the dollar today for the first time since June 2007 after falling as low as 55 cents in December 2008, Bank of America Merrill Lynch index data show.
• Consumers Resist Smart Meters After $3.4 Billion Stimulus Push. PG&E Corp., Cisco Systems Inc. and General Electric Co. are all betting that energy-monitoring devices will catch on in homes. Convincing consumers that they’re a good thing is turning out to be a tough sell. Power companies have traditionally relied on workers walking house to house to monitor electricity use. Smart meters are designed to give utilities a real-time picture of electricity consumption, eventually allowing them to create pricing plans that will encourage conservation during peak hours. About 43 percent of U.S. homes will have the new meters by 2014, up from 14 percent at the end of last year, according to Dallas-based market researcher Parks Associates. Even with $3.4 billion in U.S. stimulus funds behind it, the race to install smart meters is starting to lose momentum, Bloomberg Businessweek reports in its Sept. 20 issue. “The meters don’t benefit the consumer; they cost a lot of money, and we can’t opt out,” says Joshua Hart, the California- based director of Scotts Valley Neighbors Against Smart Meters.
• Hewlett-Packard(HPQ) Said to Be Near Decision on Hurd's Successor.
  

Wall Street Journal:

• Aide to Re Ackerman Leaves Capitol Hill to Lobby for ISE. The International Securities Exchange has hired one of Rep. Gary Ackerman's (D., N.Y.) aides as its lobbyist in an effort to raise the exchange's profile on the Hill and shine more attention on issues affecting the options industry.
• IMF Would Consider Extending Greece More Aid. The International Monetary Fund hasn't ruled out putting together more aid for Greece to help the country stave off an unlikely default, if ever needed, a person familiar with the matter said.
• Moody's Downgrades Billions More of Alt-A RMBS. Moody's Investors Service downgraded most of $10.7 billion of securities backed by Alt-A residential mortgages as the loans continue to sour.
• EU's Derivatives Proposal Carries Risks of Its Own.
• A Risky-Loan Market Is Back in Gear. One of the markets at the heart of the credit bubble has surged back with surprising speed as investors chasing yield are increasingly willing to finance riskier companies.
• Sarkozy Blasts EU as Flap Over Gypsies Grows. French President, at Brussels Summit, Denounces European Official's Comparison of His Deportation Plan to Nazi Horrors.
• Warren's Role, Powers Could Be Loosely Defined. Elizabeth Warren's job as assistant to the President and a special adviser to Treasury Secretary Timothy Geithner will allow her to play a central role in building the Bureau of Consumer Financial Protection. But the job description appears loosely defined and open to interpretation.
• BlackBerry Gets Squeezed by Rivals. BlackBerry maker Research In Motion Ltd. posted a surge in quarterly profit and revenue, though it added fewer new subscribers than it had expected amid intensifying competition in the U.S.

Bloomberg Businessweek:

• China Is Set to Lose 2% of GDP Cleaning Up Decades of Pollution. China, the world’s worst polluter, needs to spend at least 2 percent of gross domestic product a year -- 680 billion yuan at 2009 figures -- to clean up 30 years of industrial waste, said He Ping, chairman of the Washington-based International Fund for China’s Environment. Mun Sing Ho, a senior economist at Dale W. Jorgenson Associates and a visiting scholar at Harvard University in Cambridge, Massachusetts, put the range at 2 percent to 4 percent of GDP. Failure to spend that much -- equivalent to the annual GDP of Vietnam -- may cost the Chinese economy half as much again in blighted crops, health costs and pollution-related expenses, He said: “The cleanup can’t catch up with the speed of pollution” if spending is less.
• Noda Defends Intervention Step Amid U.S., European Criticism. Japanese Finance Minister Yoshihiko Noda defended his decision to intervene in currency markets for the first time since 2004 after the move spurred criticism from policy makers in the U.S. and Europe. “I’m aware of the various comments, but with deflation, our economy is in a severe situation and it’s undesirable that the strong yen be prolonged,” Noda told reporters in Tokyo today.

IBD:

• Data Manager Sees Big Opportunity in Health Care. Informatica (INFA) is happy to focus on one thing: data.

Business Insider:

• Thank Heavens For All Those Foreigners Who Keep Lending Us Money. (graph) International holdings of Treasury bonds have nearly doubled since the start of the financial crisis, Asha Bangalore at Northern Trust notes--from $2.2 trillion to $4.1 trillion. On behalf of the debtor-nation US, we thank you, world. That's another $2 trillion we owe you. On top of the original $2 trillion.
• The West Is Losing Its Grip On A Key Middle East Lynchpin. The west may be losing its appeal to a key Middle East ally, if the new Transatlantic Trends is correct. The report suggest Turkey is moving away from its traditional pro-Europe, pro-U.S. stance, in favor of a renewed focus in its own backyard.

NY Times:

• Hedge Fund Managers Set Up for Next Acts.

CNNMoney.com:

• What's Hot for the Holiday's? Google(GOOG) Knows.

The Detroit News:

• On Obamacare, Wilson Was Rude But Right. The president, who told Congress and the American people his bill would, "slow the growth of health care costs for our families, our businesses, and our government," now admits this isn't true. "As a consequence of us getting 30 million additional people health care, at the margins that's going to increase our costs -- we knew that," Obama said last week. Of course he knew, but he wasn't saying so as he lobbied for the bill's passage. In his 2009 speech, Obama assured Americans the expense of extending coverage to the uninsured would be covered through cost cutting reforms.

Daily Finance:

• CNBC's Dennis Kneale Set to Exit, Say Sources.

LA Times:

• Home Sales in California Fall a Second Straight Month. Purchases were down 2.7% in August from July and 14% from a year earlier. The median price last month was $260,000, down 3% from July but up 4.4% from August 2009. California home sales stumbled for a second consecutive month in August and home prices slipped from July, according to data released Thursday. The housing market's softening reflects the expiration of a popular federal tax credit and consumer concern that the economy is weakening, experts said. "The magnitude of the sales slowdown suggests that, among other things, many would-be buyers are holding off for further price cuts," said John Walsh, president of MDA DataQuick, the San Diego research firm that released the data.

The Daily Beast:

• Why The Gulf Misses BP(BP). Locals thought it was hard getting money out of the oil giant—until they had to deal with the government. Rick Outzen on the Gulf’s cash flow crisis—and anger with the federal “claims czar.”

Rasmussen Reports:

• Only 25% Say Current Government Policies Have Country on Right Course.

Politico:

• Dem Hopeful Asks Pelosi to Step Down. Tennessee congressional candidate Brett Carter is taking what has become a move typical of Democrats this election season – distancing oneself from party leaders – and taking it a step further by calling on House Speaker Nancy Pelosi to step down. In an interview with POLITICO Thursday evening, Carter slammed Pelosi as a polarizing figure whose leadership of the Democratic caucus imperiled the party’s House majority, and said it was time for someone else to take her place.

USA Today:

• USA's Poverty Rate Reaches Highest Level in 51 Years.

Reuters:

• China Must Confront Risks of Yuan Rise - China Economist. China risks "negative shocks" if its yuan currency appreciates, threatening a "hollowing out" of export-driven industry, a Chinese economist said in an official newspaper on Friday, following rising pressure from Washington.The warning about an abrupt rise in the yuan appeared in the overseas edition of the People's Daily, a day after U.S. Treasury Secretary Timothy Geithner told Congress he would press Beijing to let the yuan strengthen faster. In a commentary for the Chinese paper, Sun Lijian, a professor of economics at Fudan University in Shanghai, said Beijing should ready for a yuan appreciation by accelerating domestic reforms and considering curtailing stimulus spending. Sun said that moving too fast on the yuan could be a shock to Chinese manufacturers. "The negative shock from an appreciation of the renminbi exchange rate following an increase in its elasticity is something the Chinese government and central bank must consider," Sun said in the paper, which serves as the chief mouthpiece of China's ruling Communist Party.
• Oracle(ORCL) Profit Beats Street Forecasts, Stock Jumps. Oracle Corp (ORCL) posted a 25 percent surge in software sales that sharply beat forecasts and a pickup in its new hardware business, underscoring robust tech spending by corporations and boosting its shares more than 4 percent.
• North America August Chip-Gear Orders Fall 1.1% vs. July. North American semiconductor equipment makers posted $1.82 billion in average worldwide bookings in August, down 1.1 percent from July, its first fall since October 2009.
• TI(TXN) Plans $7.5 Billion Buyback, Raises Dividend. Shares in Texas Instruments (TXN) rose 3.5 percent after the company said on Thursday that it had authorized a buyback of $7.5 billion worth of its stock and was increasing its dividend by 8 percent.

Financial Times:

• Hedge Funds Hit by Yen Intervention. Japan’s surprise intervention in currency markets has caught some of the world’s largest hedge funds by surprise, with big names suffering sharp reversals as the yen tumbled. London-based hedge funds such as AHL, the $21bn fund run by the FTSE 100-listed Man Group, the $5bn Winton Capital Futures fund and the $1bn Aspect Diversified fund all suffered on their bullish yen positions, according to people familiar with the funds’ performances. All three funds use computer models to automatically spot and ride market trends, making them vulnerable to unexpected events including surprise action by governments and central banks. Other funds understood to have been hit by the intervention include several large global macro hedge funds and currency trading specialists.
• US Banks Braced for Further Bad News. Big US banks are nearing the end of another disappointing quarter for their trading businesses that has deepened fears over job losses on Wall Street. The first two weeks of September failed to deliver a meaningful pick-up in trading activity on markets, hitting bank profits at a time when they are already under pressure from a sluggish economy. Analysts’ expectations have started to reflect the more difficult conditions. The average earnings estimate for Goldman and Morgan Stanley have each slipped 2 cents a share in the past month, according to data compiled by Bloomberg. “The third quarter is shaping up to be another very slow period for client activity across most markets,” Richard Staite, an analyst with Atlantic Equities, wrote in a client note this month as he slashed his earnings estimates on Goldman and Morgan Stanley. “July and August were particularly weak and September is unlikely to make up for the shortfall.” A surge in bond market volume, as measured by Finra’s Trace data, has not materialised. Daily trading on the New York Stock Exchange has slowed since late August. In a presentation to investors this week, Jamie Dimon, JPMorgan chief executive, said trading “has been fairly stable for us”, and “not that dissimilar” to the second quarter, when the bank reported a drop in revenue from a year earlier. Senior bankers said the third-quarter showing, coming after poor trading results in the previous three months, underlined how the boom of a year ago was unlikely to be repeated. At the time, banks capitalised on pent-up investor demand following the crisis and higher prices due to less competition.
• Impact of Bank Rules Likely to be 30% Tougher. The full impact of the new global bank capital rules announced at the weekend is likely to be 30 per cent tougher than the headline ratio suggests, according to regulators and industry participants who have studied private banking data. The data submitted to the committee suggest the real impact of the change could be equivalent to raising the minimum capital requirement from 2 per cent to 10 per cent for many banks. The deductions are likely to cut many banks’ equity totals by between 30 per cent and 40 per cent, according to people who have seen the data. That compares with estimates of 10-15 per cent projected by many banking analysts based on publicly available data. The difference lies in the fact that many banks do not break out some statistics critical for calculating the full impact of the deductions. Most big international banks can meet the 8 per cent standard with relative ease, but an effective 10 per cent ratio is much more of a stretch for some institutions. “The deductions are definitely the iceberg here. The impact is going to vary colossally from country to country and bank to bank,” said Bob Penn, attorney at Allen & Overy, who has not seen the data.

Telegraph:

• US-China Clash Over Yuan Escalates, Risking Superpower Stand-Off. US Treasury Secretary Tim Geithner has issued his harshest attack to date on China’s currency policy, the latest move in an escalating superpower clash across the gamut of commercial and strategic relations.

Yonhap News Agency:

• U.S. Not to Accept North Korea as Nuke Weapons Power: Campbell. The United States Thursday reiterated it will not accept North Korea as a nuclear weapons state, urging the North to cease provocations and abide by its denuclearization pledge.
  

The Standard:

• Weak Tone to Grip Hong Kong Exports. The SAR's export growth momentum is slowing, the Hong Kong Trade Development Council said after the export index for the third quarter fell for the first time in 1 year. The index - which reflects the city's confidence in export prospects - dropped to 56.2 in the third quarter, from 59.1 in the previous quarter. "The decline in export confidence was mainly due to rising labor costs in the mainland and weak spending in the United States and Japan," said Edward Leung, TDC chief economist. He warned export growth in the fourth quarter is likely to be the slowest this year. A TDC survey last month found that 79 percent of 500 traders polled raised wages in the previous three months - nearly half of them by more than 10 percent. To offset cost hikes, 64 percent of local manufacturers boosted their average selling price, while 54 percent rejected orders.

Securities Daily:

• People's Bank of China may raise interest rates after consumer prices rise more than 3 for at least three months, citing a person familiar with the situation.

Edaily:

• Samsung Electronics Co. Chairman Lee Kun Hee said he's concerned about possible weakness in the chip and liquid-crystal display industry next year, he said.

Evening Recommendations
Citigroup:

• Reiterated Buy on (STZ), target $21.
• Reiterated Buy on (M), target $33.

Piper Jaffray:

• Rated (PWR) Overweight, target $24.

Night Trading

• Asian equity indices are unch. to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 117.5 +1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 113.25 unch.
  
• S&P 500 futures +.37%.
  
• NASDAQ 100 futures +.51%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• The Consumer Price Index for August is estimated to rise +.3% versus a +.3% gain in July.
• The CPI Ex Food & Energy for August is estimated to rise +.1% versus a +.1% gain in July.

9:55 am EST

• Preliminary Univ. of Mich. Consumer Confidence is estimated to rise to 70.0 versus a reading of 68.9 in August.
  

Upcoming Splits

• (SXCI) 2-for-1
  

Other Potential Market Movers

• The (AGP) Analyst Meeting and the Stifel Nicolaus Healthcare Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and automaker shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Slightly Higher into Final Hour on Tech Sector Optimism, Short-Covering, Technical Buying

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 22.24 +.63%
  
• ISE Sentiment Index 134.0 -11.84%
  
• Total Put/Call .81 -11.96%
  
• NYSE Arms .86 -5.53%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 104.51 bps -.26%
  
• European Financial Sector CDS Index 111.83 bps +1.40%
  
• Western Europe Sovereign Debt CDS Index 153.47 bps -.55%
  
• Emerging Market CDS Index 237.14 bps -1.86%
  
• 2-Year Swap Spread 19.0 unch.
  
• TED Spread 14.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .15% unch.
  
• Yield Curve 229.0 +6 bps
  
• China Import Iron Ore Spot $139.50/Metric Tonne -.43%
  
• Citi US Economic Surprise Index -7.90 +2.3 points
  
• 10-Year TIPS Spread 1.81% +2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +36 open in Japan
• DAX Futures: Indicating +10 open in Germany

Portfolio:

• Higher: On gains in my Tech, Retail and Ag long positions
  
• Disclosed Trades: Added (IWM)/(QQQQ) hedges, added to (EEM) short
  
• Market Exposure: Moved to 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades near session highs and remains slightly above its 200-day moving average despite mounting headwinds. On the positive side, Education, Semi, Gold and Coal shares are especially strong, rising .75%+. Most tech shares have traded well throughout the day. The 10-year yield is +4 bps higher despite mixed economic data. Copper is rising +.76%. The Spain sovereign cds is falling -1.34% to 230.12 bps and the Japan sovereign cds is declining -2.62% to 65.26 bps. On the negative side, REIT, Homebuilding, HMO, Hospital, Disk Drive and Oil Service shares are lower on the day. Small-caps are under pressure. (XLF), (XHB) and (IYR) are underperforming, as well. Oil is continuing its recent divergence from equities and lumber is falling -3.17% today. Moreover, the Shanghai Composite fell another -1.89% overnight and broke down below its 50-day moving average for the first time since April. The AAII % Bulls surged to 50.89% this week, while the % Bears fell to 24.26, which is a large negative. One of my longs, (AAPL), continues to trade very well and is helping to lift the entire market off its lows today. The stock still has substantial upside over the intermediate-to-longer term, in my opinion. Another one of my longs, (MOS), is also having a good day and is poised for further intermediate-term gains. The market is ignoring quite a bit of negative news again today, which remains a big positive. However, breadth and volume are poor. The S&P 500 remains near a critical technical level as headwinds mount. I expect US stocks to trade mixed-to-lower into the close from current levels on profit taking, China trade tensions, mounting US housing concerns and China bubble worries.

Today's Headlines

Bloomberg:

• Small Business Can't Get Loans From Bailed-Out Banks in U.S. Chip Besse figured he could hire a dozen people once he got a $1.1 million small-business loan. Wells Fargo & Co. turned him down. U.S. taxpayers helped the San Francisco-based bank weather the 2008 financial crisis with a $25 billion loan and $9.5 billion of debt guarantees. By July 2009, when Besse wanted to buy and expand a Colorado snowmobile-rental business, Wells Fargo wasn’t sharing the wealth, he said.
• U.S. Home Seizures Reach Record for Third Time in Five Months. U.S. home seizures reached a record for the third time in five months in August as lenders completed the foreclosure process for thousands of delinquent owners, according to RealtyTrac Inc. Bank repossessions climbed 25 percent from a year earlier to 95,364, the most since the Irvine, California-based data provider began keeping records in 2005. Foreclosure filings, including default and auction notices, fell 5 percent to 338,836. One out of every 381 U.S. households received a filing, RealtyTrac said today in a statement. “We’re on track for a record year for homes in foreclosure and repossessions,” Rick Sharga, RealtyTrac’s senior vice president, said in a telephone interview. “There is no improvement in the underlying economic conditions.” Foreclosures are contributing to a growing housing supply that may add as many as 12 million homes to the U.S. market. Demand is crumbling amid high unemployment and following the expiration of a federal homebuyer tax credit in April.
• FedEx(FDX) Forecast Trails Estimates; 1,700 Jobs to Be Cut. FedEx Corp., the second-largest U.S. package-shipping company, forecast earnings for the current quarter that fell short of analysts’ estimates, and said it will eliminate 1,700 jobs. Net income for the three months ending in November will be $1.15 to $1.35 a share, the Memphis, Tennessee-based company said today in a statement. Analysts projected $1.37 a share, the average of 19 forecasts compiled by Bloomberg. FedEx fell as much as 3.7 percent in New York trading as results indicate an uneven global recovery, with U.S. shipments trailing growth in more-profitable international express packages.
• Portugal Slips Behind Spain, Ireland on Deficit, JPMorgan Says. Portugal may be slipping behind Spain and Ireland in the dash to cut budget deficits, and credit conditions in the economy are the tightest since the height of the global financial crisis in 2008, JPMorgan Chase & Co. said. While Greece has shown “some slippage,” in Portugal “the situation looks more worrisome, with the lack of budgetary progress reflecting faster expenditure growth than would be consistent with the fiscal objective.” Portugal, Spain and Ireland are trying to convince investors they can avoid the fate of Greece, which was forced to ask for a European Union-led bailout this year after its budget deficit spiraled out of control. The extra yield that investors demand to hold Portuguese 10-year bonds over German counterparts jumped to a euro-era high of 372 basis points on Sept. 8 and was at 348 basis points today. The Irish spread is at 353 points, the Spanish spread is at 173 points and Greece’s spread is 906 points. Portuguese government spending, excluding interest payments, rose 5.7 percent in the first seven months of the year, while total income increased 3.6 percent, the Finance Ministry said last month. Portugal posted a deficit of 9.3 percent of gross domestic product in 2009, the fourth-highest in the 16-country euro region. Some euro-region economies may be threatened by more restrictive lending practices as financial institutions’ reliance on European Central Bank funding shortens the time horizon of the loans they are prepared to make, Mackie said. Credit conditions in Portugal are the tightest in two years, Mackie said. In Ireland, they could worsen if its banks “significantly” increased ECB borrowing, he said. In Spain, tightening has been “very modest.”
• CFTC's Gensler Says More Than 200 Financial Firms May Get Swap Dealer Tag. More than 200 global financial firms may qualify as swap dealers under new over-the-counter derivatives regulations being crafted by the Commodity Futures Trading Commission, according to Chairman Gary Gensler. The designation would impose prescribed capital requirements to back trades, mandate the use of clearinghouses for most transactions and require a higher level of oversight than other market users.
• OPEC will reduce shipments by 1.2% this month as the global economy slows and refiners in the U.S. and Europe finish maintenance, Oil Movements said, the ninth weekly decline reported by the tanker-tracker.
• Wheat Extends Slide as U.S. Says Export Sales Declined to a Nine-Week Low. Wheat fell for a third straight day, touching the lowest price in a week, after a government report showed a slump in export sales from the U.S., the world’s largest shipper. U.S. exporters sold 319,599 metric tons in the week ended Sept. 9, the lowest total since July 8, the U.S. Department of Agriculture said today in a report.
• Crude Oil Declines as Enbridge Says Midwest Pipeline Will Restart Tomorrow. Oil fell the most this month in New York as Enbridge Energy Partners LP prepared to start a pipeline that supplies Canadian crude to refineries in the U.S. Midwest. Futures dropped as much as 2.5 percent after Enbridge said it plans to send oil through the pipeline early tomorrow after repairing a leak in Romeoville, Illinois, that was discovered last week.
• Gold Rises to Record on Increased Demand for Wealth Protection. Gold rose to a record in New York and London as investors sought protection against turmoil in the global economy and financial markets. Silver rose to the highest price since March 2008. Bullion futures climbed as high as $1,279.50 an ounce.
• Global Economy Is Poised to Skirt Second Recession, Fidelity's Bolton Says.
• Manufacturing in Philadelphia Area Shrank This Month. Manufacturing in the Philadelphia region unexpectedly contracted in September for a second month as orders and sales declined. The Federal Reserve Bank of Philadelphia’s general economic index rose to minus 0.7 this month from minus 7.7 in August. The number of Americans filing unemployment insurance claims dropped to 450,000 last week, the lowest level in two months, data from the Labor Department showed. The agency also reported that wholesale costs climbed 0.4 percent, the second consecutive gain. The Philadelphia Fed bank’s shipments gauge fell to minus 7.1 from minus 4.5 in August. The new orders measure decreased to minus 8.1, the third straight contraction and the lowest level since June 2009. The employment index climbed to 1.8 from minus 2.7. The Philadelphia Fed’s index of prices paid fell to 9.8 from 11.8 while the gauge of prices received dropped to minus 13.9 from minus 12.5.
• China Stocks Drop Most in Three Weeks Amid Bank Loan Restriction Concerns. The Shanghai Composite Index slid 50.04, or 1.9 percent, to close at 2,602.47. That’s the biggest loss since Aug. 25. The gauge fell 1.3 percent yesterday amid concern government curbs on the property market and energy consumption will slow growth in the economy and earnings.

Wall Street Journal:

• Money Funds Try Risk Again. Two years after a big money-market mutual fund "broke the buck," some funds are making new bets on risky securities—raising the chances for problems despite a raft of new rules designed to make the market safer.
• Louisiana Files Suit Against Transocean(RIG). The state of Louisiana filed a lawsuit against Transocean Ltd., asking a New Orleans federal judge to rule that it was broadly liable for damages from the Gulf oil spill.
• Brazil's Petrobras(PBR): Tupi Oil Field Pilot to Start in October. Brazilian oil and gas firm Petroleo Brasileiro SA (PBR), or Petrobras, aims to start pilot production from its mammoth Tupi oil find in October, a company official said Thursday.
• China's Yuan Gesture Could Backfire. The sudden rise in the Chinese yuan—which on Thursday hit a new high against the dollar for the fifth straight trading session—has fueled widespread speculation that China's government is trying to head off a political backlash in the U.S. But China's approach to managing its exchange rate risks aggravating anger in Washington instead.

CNBC:

• Estate Taxes Deter Hiring: Economist. Reinstating federal estate taxes at the 65 percent rate will result in some 1.6 million jobs lost, Douglas Holtz-Eakin, president of the think tank the American Action Forum, told CNBC Thursday. “Congress and the administration ought to be focusing on growth consequences of every policy, and that would include estate taxes,” added Holtz-Eakin.

Business Insider:

• Meet The 16 California City Managers Who Earn Over $300,000.
• Chanos, Roubini, And Scaramucci All Told Stone To Change Wall Street 2's Villain to Goldman Sachs(GS).
• Don't Look Now, But Greece is Sounding More and More Lehman-Like.
• Small Business Spending Plans Spell Doom in the Next Year(graph).
  

Zero Hedge:

• Calpers Prepares to LBO California, Or At Least Create the Scariest Too Big To Fail Monster Ever Conceived.

Washington Post:

• An American Innovation in Light Bulbs, But Will Manufacturing Stay in the U.S.?

LA Times:

• Losses From Fannie Mae, Freddie Mac Seizures May Near $400 Billion. Federal Housing Finance Agency is seeking billions in repayment from banks that sold bad loans to the mortgage giants to help offset taxpayer losses, but some financial institutions are balking.

Forbes:

• Best Buy CEO: iPad Is Cannibalizing Laptop Sales By A Shocking 50%. The CEO of Best Buy(BBY) just said the iPad is cannibalizing 50% of the company’s laptop sales, the Wall Street Journal reports. When consumers walk into Best Buy now, they don’t look at or want laptops, instead they’re drawn to the iPad. “People are willing to disproportionately spend for these devices because they are becoming so important to their lives,” says CEO Brian Dun. Bad news for Dell, HP, Acer, and Microsoft.
• Bullish Sentiment Soars. Bullish sentiment, expectations that stock prices will rise over the next six months, rose 7.0 percentage points to 50.9% in the latest AAII Sentiment Survey. This is the highest level of optimism since August 13, 2009. The historical average is 39%. Bearish sentiment, expectations that stock prices will fall over the next six months, fell 7.4 percentage points to 24.3%. This is the lowest level of pessimism since December 31, 2009.

CBS News:

• Record Gains for U.S. Poverty as Elections Loom. Ranks of Working-Age Poor Approaching 1960s Levels; Increase Would Be Blow to Democrats Trying to Sway Voters. The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama's watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty. It's unfortunate timing for Obama and his party just seven weeks before important elections when control of Congress is at stake. The anticipated poverty rate increase - from 13.2 percent to about 15 percent - would be another blow to Democrats struggling to persuade voters to keep them in power.
  

DavisPolk Client Newsletter:

• Impact of the Dodd-Frank Act on Private Equity Funds, Hedge Funds and Their Investment Advisers.

The Hill:

• Tough For-Profit Education Loan Rules Cause Democratic Party Rift. The White House’s push to rein in student loan defaults at for-profit schools has divided Democrats and generated a new roster of clients for some of Washington’s top lobbying firms. Breaking with a number of their Democratic colleagues, critics of the effort — including an odd mix of liberals, Blue Dogs, Congressional Black Caucus members and committee chairmen — are urging the Obama administration to delay the changes pending further study. They say the reforms would cripple college enrollment among lower-income students, who disproportionately attend for-profit schools.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).

Politico:

• Democrats Spend on Anti-Health-Reform Ads. Democratic candidates are spending three times more advertising against the health reform law than they are in support of it. Since the beginning of Congress’s August recess, Democratic candidates have poured $930,000 into ads deriding the health overhaul but just $300,000 in pro-reform spots, according to Evan Tracey at Kantar Media.

AP:

• Iraq Approves Settlement for Saddam's US Victims. The Iraqi Cabinet unanimously approved a $400 million settlement for Americans who say they were abused by Saddam Hussein's regime, the government spokesman said Thursday. The agreement represents a significant step forward for Iraq and could bring an end to years of legal battles by Americans who claim to have been tortured or traumatized under Saddam's regime dating back to the 1990 Iraqi invasion of Kuwait.

Reuters:

• Extending SoFFin Would Be Wrong Signal - Ministerial Source. Extending the lifespan of Germany's national bank rescue fund, SoFFin, beyond its planned expiry at the end of this year would send the wrong signal to markets, a ministerial source said on Thursday. The comments followed coalition sources saying the ruling coalition was considering an extension. The fund, which offers 400 billion euros in guarantees and 80 billion in various forms of equity injection, has been used to bail out Hypo Real Estate and to shore up Commerzbank, Germany's second-biggest lender.
• Q+A What is Causing Tension Between U.S. and China?
  

Caijing:

• China may not raise interest rates at present because they are concerned about the effect it would have on local government's outstanding loans, Liu Yuhui, a researcher with the Chinese Academy of Social Sciences, wrote. Local governments' outstanding debt may top 10 trillion yuan this year, Liu said.

Xinhua:

• China's state-owned banks should be empowered to supervise microfinance companies, to which they lend, citing Liu Kegu, a consultant to the China Development Bank. China had more than 1,300 microfinance companies at the end of 2009. They are proving difficult for the government to supervise.

KUNA:

• Iraq lacks the infrastructure and technical capability to produce 11 million barrels a day of crude oil, citing OPEC Secretary-General Abdalla El-Badri. "Iraqi plans to reach an oil production capacity of 11 million barrels are unrealistic" given the country's exceptional circumstances, El-Badri said. Iraq is capable of increasing production by "reasonable amounts" and it's unlikely it "will soon join the quota system applied" to other members of OPEC, he said. Iraq currently pumps 2.345 million barrels a day.

Bear Radar

Style Underperformer:

• Small-Cap Value (-1.19%)

Sector Underperformers:

• 1) Homebuilders -2.78% 2) Hospitals -1.85% 3) Disk Drives -1.50%

Stocks Falling on Unusual Volume:

• CMCSK, TWC, DB, SU, CLW, PFCB, EVR, TSLA, ATVI, INT, AKO/A, FDX, NJ and WF
  

Stocks With Unusual Put Option Activity:

• 1) AEO 2) MT 3) CY 4) ECA 5) FDX
  

Stocks With Most Negative News Mentions:

• 1) EEP 2) FDX 3) SO 4) KWK 5) CXO
  

Bull Radar

Style Outperformer:

• Large-Cap Growth (-.11%)

Sector Outperformers:

• 1) Coal +2.31% 2) Education +1.25% 3) Gold +1.16%

Stocks Rising on Unusual Volume:

• F, KGC, AUY, MOS and GME
  

Stocks With Unusual Call Option Activity:

• 1) XRX 2) YGE 3) BCSI 4) AONE 5) NZ
  

Stocks With Most Positive News Mentions:

• 1) BA 2) AAPL 3) MOT 4) GOOG 5) GME

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.