Stocks Plunging into Final Hour on Rising Eurozone Debt Angst, Global Growth Worries, US Debt/Tax Hike Worries, Margin Selling

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Every Sector Declining
  
• Volume: Heavy
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 44.09 +37.78%
  
• ISE Sentiment Index 92.0 +7.43%
  
• Total Put/Call 1.43 +15.32%
  
• NYSE Arms 1.05 +83.46%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 108.92 +2.97%
  
• European Financial Sector CDS Index 198.82 +12.41%
  
• Western Europe Sovereign Debt CDS Index 291.83 -1.46%
  
• Emerging Market CDS Index 289.76 +16.38%
  
• 2-Year Swap Spread 29.0 +4 bps
  
• TED Spread 25.0 -2 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .02% +2 bps
  
• Yield Curve 210.0 -16 bps
  
• China Import Iron Ore Spot $178.10/Metric Tonne +.06%
  
• Citi US Economic Surprise Index -72.50 +3.6 points
  
• 10-Year TIPS Spread 2.18% -6 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -325 open in Japan
• DAX Futures: Indicating -190 open in Germany

Portfolio:

• Lower: On losses in my Retail, Medical, Biotech and Tech sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short, then covered some of my (IWM)/(QQQ) hedges
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish as the S&P 500 break through more technical support with heavy volume on rising eurozone debt angst, US tax hike/debt downgrade concerns, financial sector pessimism, margin calls, emerging market inflation fears and global growth worries. On the positive side, Computer Service and Semi shares are holding up relatively well, falling less than -4.0%. The UBS-Bloomberg Ag Spot Index is falling -2.38% and oil is plunging -7.4%. The Spain sovereign cds is falling -13.08% to 352.04 bps, the Portugal sovereign cds is falling -5.06% to 8722.40 bps and the Ireland sovereign cds is falling -3.49% to 747.32 bps. On the negative side, Homebuilding, Oil Tanker, Coal, Alt Energy, Energy, Oil Service, Steel, Disk Drive, Networking, Bank, I-Banking, Hospital, Gaming and Construction shares are plunging more than -8.0%. Gold is +3.06%, Lumber is falling another -1.97% and Copper is down -4.7%. Rice is down just -.15% and is still near a multi-year high, soaring about +24.0% in about 6 weeks. The US price for a gallon of gas is falling -.04/gallon today to $3.66/gallon. It is up .52/gallon in about 6 months. The Brazil sovereign cds is rising +6.66% to 138.84 bps, the Hungary sovereign cds is rising another +5.51% to 382.78 bps, the Russia sovereign cds is rising +6.67% to 181.83 bps, the UK sovereign cds is rising +3.74% to 78.85 bps, the France sovereign cds is rising +9.98% to 159.22 bps and the Germany sovereign cds is rising +6.03% to 78.72 bps. The France sovereign cds is making a new record high again today and has risen +68.0 bps in 12 days. The German sovereign cds is hitting another multi-year high and is only 14.0 bps from its Feb. 09 high of 93.0 bps. The Eurozone Financial Sector CDS Index is now only 10.0 bps from its March 09 record high. The 3-Month Euribor-OIS spread is jumping another +8 bps to a multi-year high of 54.0 bps. Asia was down sharply overnight with Singapore, Shanghai and Korea all falling more than -3.0%. The Shanghai Composite is now down -10.01% ytd and India's Sensex is down -17.15% ytd. The China Development Bank, which lends to local governments, cds is breaking out to a multi-year high today, rising +11.0 bps to 188.0 bps. Australia(-16.3% ytd), Taiwan(-15.8% ytd) and Vietnam(-18.2% ytd) shares also continue to lead Asia lower. Turkey plunged another -7.1% today and is down -20.8% ytd. Brazil plunged another -7.56% today and is down -33.0% since Nov. 4th of last year(-29.1% ytd). Germany's DAX has broken down badly over the last 6 days and is now down -14.33% ytd. Gauges of investor angst spiked again today, which is a big positive. However, the surge in many key emerging markets cds remains a big negative. As well, a number of key European cds rose again today as the pressure on the financial sector mounts. As well, the euro currency couldn't rally today despite the US downgrade and the ECB's recent actions. The cds and equity markets are clearly telegraphing the worry among investors over the implications to Germany and France of these actions. In my opinion, it is hard to see France maintaining its AAA rating in light of these developments and the US downgrade. As well, the European model of slashing govt. spending and hiking taxes in an already poor economy will continue to lead to a further deterioration in economic growth in the region and thus more govt tax revenue disappointments. Moreover, considering that stock gains over the last couple of years had been a bright spot, the magnitude of recent losses will likely lead to a negative drag on real economies, which will further exacerbate global debt worries. Stocks are massively oversold around current levels and short-term traders should be ready for a meaningful bounce very soon, however the intermediate-term outlook remains weak. I expect US stocks to trade mixed-to-lower into the close from current levels on rising eurozone debt angst, global growth worries, US debt/tax hike concerns, technical selling, margin selling and financial sector pessimism.

Bear Radar

Style Underperformer:

• Small-Cap Growth (-6.32%)

Sector Underperformers:

• 1) Oil Tankers -10.21% 2) Homebuilders -9.10% 3) Banks -8.55%

Stocks Falling on Unusual Volume:

• BEXP, C, GDP, TDS, TXT, BCS, GLBC, PBR, LUK, HES, THO, CDE, ZOLL, DGIT, KAMN, CPNO, AIMC, CAR, FIRE, LINE, GPRE, DNDN, WWWW, ARMH, JRCC, JBHT, LOOP, FOSL, NWS, TEVA, VPHM, PWB, PEJ, PSJ, PMR, PEZ, CYD, APU, IOO, GRR, TYN, TEI, PWV, GHI, JKD, APL and EVN
  

Stocks With Unusual Put Option Activity:

• 1) ATVI 2) FMCN 3) COST 4) IRE 5) TBT
  

Stocks With Most Negative News Mentions:

• 1) BRK/A 2) CSX 3) 4) OMX 5) FFIV
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Bull Radar

Style Outperformer:

• Large-Cap Growth (-3.19%)

Sector Outperformers:

• 1) Gold +2.16% 2) Semis -1.89% 3) Computer Services -1.99%

Stocks Rising on Unusual Volume:

• GOLD, EGO, NGD, JCOM, BSFT, GLRE, RGLD, NEOG, RES, TRH and NEM
  

Stocks With Unusual Call Option Activity:

• 1) VMED 2) XLB 3) XOP 4) STI 5) GNW
  

Stocks With Most Positive News Mentions:

• 1) MCD 2) PG 3) AAPL 4) WTW 5) GPN
  

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume
  

Monday Watch

Weekend Headlines
Bloomberg:

• Asia, Europe to 'Stick It Out' With Treasuries. For all the angst, policy makers across Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion of the debt and is the largest individual foreign holder. Japan’s efforts to weaken the yen boost that country’s demand, and Vice Finance Minister Fumihiko Igarashi said today that the government is ready to intervene again after selling the currency on Aug. 4. “They won’t be happy about it, but Asian central banks will just have to hold on and stick it out,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney. “There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets.”
  
• Trichet Draws ECB 'Bazooka' to Stem Contagion. European Central Bank President Jean- Claude Trichet signaled he’s ready to start buying Italian and Spanish bonds in his riskiest attempt yet to tame the sovereign debt crisis. In a statement issued in the name of the ECB president after an emergency Governing Council conference call last night, the Frankfurt-based central bank welcomed the two nations’ efforts to reduce their budget deficits and said it will “actively implement” its bond-purchase program. It also called on all euro-area governments to follow through on the steps they agreed to July 21, including allowing the European Financial Stability Facility to purchase bonds on the secondary market. With governments failing to act swiftly enough to stop contagion, it has fallen to the ECB to battle a crisis that’s threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro zone’s founding treaty. Germany’s Bundesbank opposes the move. “The ECB is once again intervening as the last line of defense,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The intervention will put a halt to the bond-market crash that some member states faced. It will in our view bring an immediate tightening in Spanish and Italian bond spreads of the order of 100 to 150 basis points.”
• Bank Bonds Hurt as Sovereign Crisis Threatens More Writedowns: Euro Credit. Bank bonds in Europe are the riskiest ever as soaring yields on Spanish and Italian government debt prompt renewed European Central Bank buying and signal more pain for lenders already nursing Greek writedowns. “Banks that were perceived to have heavy exposure to Greece were penalized,” said John Stopford, the London-based head of fixed income at Investec Asset Management Ltd., which manages more than $90 billion. “Now, maybe people will be more worried about exposure to other parts of Europe.” A benchmark index of credit-default swaps on European banks and insurers climbed as much as 23 percent last week to a record 218.5 basis points on Aug. 5, according to JPMorgan Chase & Co. Bondholders are assigning a higher perceived risk to bank debt on concern that last month’s second Greek bailout won’t prevent the sovereign crisis from engulfing Spain and Italy, deepening lenders’ losses on government securities.
• France's AAA Rating May Be Vulnerable. The decision by Standard & Poor’s to downgrade the U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say. France is more expensive to insure against default than lower-rated governments including Malaysia, Thailand, Japan, Mexico, Czech Republic, the State of Texas and the U.S. “France is not, in my view, a AAA country,” said Paul Donovan, London-based deputy head of global economics at UBS AG. “France can’t print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets.” While all three major credit-rating companies have confirmed France’s top level in recent months, market measures indicate increasing investor skittishness over the country’s vulnerability to the European debt crisis. Euro-region central bank governors will hold emergency talks today over how to protect Spain and Italy and limit fallout from the U.S. cut. “If Italy and Spain have difficulties, are we sure that, for instance, France can still be considered a ‘core’ country?” said Marco Valli, chief euro-area economist at UniCredit Global ‘Core’ is becoming a narrower group of countries.” While France’s debt of 84.7 percent of gross domestic product is less than Italy’s 120.3 percent, as a percentage of economic output it has risen twice as fast as Italy’s since 2007. French government debt totaled 1.59 trillion euros ($2.3 trillion) at the end of 2010, according to the European Union; Italy's was about 1.8 trillion euros. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France. France is the most costly AAA country to protect against default. Credit default swaps on France trade at 143.8 basis points, almost triple the U.S.
• S&P-Induced U.S. Bonds Selloff May Be Short-Lived, Dealers Say. Any selloff in Treasuries and the dollar following Standard & Poor’s first ever downgrade of the U.S. from AAA is likely to be short-lived amid slowing economic growth and Europe’s debt crisis, according to Wall Street banks.
• Muni Market Prepares for Lost AAA Ratings. The $2.9 trillion municipal bond market is preparing for “hundreds and hundreds” of downgrades after Standard & Poor’s lowered the U.S. one level to AA+, the first-ever reduction for the country. S&P is likely to cut its ratings on municipal debt secured by the federal government, such as pre-refunded bonds, tax- exempts backed by U.S. agencies, and credits that are most dependent on federal spending, Peter DeGroot, head of municipal research at JPMorgan Chase & Co. (JPM), wrote in an Aug. 5 report distributed after the federal downgrade. The New York-based ratings company said it would release a statement on state and local issuers today. “There will be hundreds and hundreds of municipal downgrades, which will not do well to bolster investor confidence,” Matt Fabian, a managing director of Concord, Massachusetts-based Municipal Market Advisors, said in a telephone interview. “Treasuries may be able to shake off a real impact from the downgrade. Munis I’m less sure about.” Municipal issuance has fallen amid the U.S. debt-ceiling impasse. The slump and signs of a slowing economy helped drive tax-exempt yields to the lowest this year. Scheduled debt sales total about $2.8 billion this week, the slowest August week since 2003, according to data compiled by Bloomberg.
• NATO Helicopter Shot Down in Afghanistan, Killing 30 U.S. Special Forces. A North Atlantic Treaty Organization CH-47 Chinook helicopter was shot down in an eastern province of Afghanistan, killing 30 U.S. special operations forces, seven Afghan commandos and a civilian interpreter. Twenty-two of the Americans killed were members of the U.S. Navy SEAL commando force, some from the elite unit once known as SEAL Team Six that carried out the May raid that killed al-Qaeda leader Osama bin Laden in Abbottabad, Pakistan, said two U.S. officials today on condition of anonymity. None of those killed were from the specific SEAL Team Six squadron involved in the raid, they said. The SEAL team today is formally known as the Naval Special Warfare Development Group. The loss marks the most U.S. troops killed at one time since the 2001 start of the war to oust the Taliban, who harbored al-Qaeda before the Sept. 11 terrorist attacks in the U.S.
• China Stocks Tumble, Dragging Shanghai Index Down 20% From High. China’s stocks fell, dragging the benchmark index down as much as 20 percent from a November high, as the loss of America’s top credit rating fueled concern global economic growth will slow. Jiangxi Copper Co. and PetroChina Co., the nation’s biggest producers of copper and oil, dropped at least 2.4 percent after metals and crude prices slumped. China Cosco Holdings Co. fell to a record low, pacing losses by shipping lines, on concern trade will falter. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slumped 96.5 points, or 3.7 percent, to 2,529.88 at the 11:30 a.m. break, set for the biggest drop since Nov. 16 and the lowest level since July 20, 2010. A decline of 20 percent or more signals a so-called bear market to some investors. The CSI 300 Index fell 3.5 percent to 2,795.64.
• Investors Reduce Bullish Commodity Bets. Funds trimmed bets on rising commodity prices for the first time in four weeks amid mounting concern that the global economy is faltering. Speculators cut their net-long positions in 18 commodities by 3.6 percent to 1.23 million futures and options contracts in the week ended Aug. 2, government data compiled by Bloomberg show. Bullish gold holdings climbed to the highest since at least June 2006 amid surging demand for an investment haven. Last week, investors dumped equities and most raw materials for the perceived safety of Treasuries, the Swiss franc and gold amid escalating debt concerns in the U.S. and Europe. The Standard & Poor’s GSCI Spot Index of 24 raw materials dropped 5.9 percent, the most since May.
  
• Crude Oil Tumbles in New York and London After S&P Downgrade. Oil plunged in New York, extending its biggest weekly decline since May, after Standard & Poor’s lowered the U.S. credit rating by one level, the first-ever reduction for the world’s biggest crude consuming nation. Crude for September delivery fell as much as $3.04 to $83.84 a barrel in electronic trading on the New York Mercantile Exchange and was at $84.05 at 8:26 a.m. Sydney time. Prices dropped 9.2 percent last week and are up 3 percent the past year.
  
• Syrian Troops Attack Towns as Arab States Condemn Violence. Syrian forces launched raids on the eastern city of Deir al-Zour and the central town of Houla, killing at least 50 people, as Gulf states and the head of the Arab League condemned the violence. Arab League Secretary-General Nabil El-Arabi urged Syrian authorities to immediately end their crackdown to spare the lives of civilians and military personnel, Egypt’s state-run Middle East News Agency reported today. He also called on President Bashar al-Assad to meet his people’s demands for political change, and said the government should set up a judicial committee to investigate reports of human rights abuses, MENA reported.
• Gold Futures Surge to Record on Haven Demand. Gold futures surged to a record $1,697.70 an ounce on demand for an investment haven as the dollar slumped following Standard & Poor’s downgrade of the U.S. long-term credit rating from AAA. Gold futures for December delivery rose $36, or 2.2 percent, to $1,687.80 an ounce at 7:40 a.m. Tokyo time in electronic trading on the Comex in New York after reaching the all-time high. “Gold will most likely be a sharp recipient of safe- haven flows” following the U.S. rating cut, Edel Tully, a London- based analyst at UBS AG, said in a report. “Our previous one- month forecast of $1,725 is likely to be easily met in the short term.”‬
• Japan Revives Rice-Futures Trading as Radiation may Threaten Harvests. When the Tokyo Grain Exchange, the operator of Japan’s largest agricultural bourse, bet its future on rice trading, it didn’t expect radiation fallout would be part of investor decisions and volatility. The exchange will list rice contracts today for the first time since the start of World War II to boost flagging volumes and profit. The resumption comes amid concern that fallout from the stricken Fukushima Dai-Ichi power plant may spread to crops after it was found cattle had been fed cesium-tainted rice straw. “The nuclear disaster adds to factors that could influence prices,” said Takaki Shigemoto, a commodity analyst at research company JSC Corp. in Tokyo. “Rice futures may attract speculative money.”
• Greek Bailout May Be Costly for German Taxpayer, WiWo Reports. Greece’s new rescue package forged by euro region leaders last month could be costly for German taxpayers even if the Greek government repays all the aid, Wirtschaftswoche business weekly reported, citing a study. German taxpayers faced a 38.6 billion-euro ($55.1 billion) bill if Greece returned all aid by 2020, said the magazine in a pre-released report citing the Berlin-based DIW economic institute. If Greece pays off just a third of the aid the bill would rise to 65.5 billion euros ($93.5 billion), the magazine said. The DIW based its findings mainly on potential costs linked to European Financial Stability Facility and potential losses on Greek debt held by the European Central Bank.
• Geithner Tells Obama He'll Remain at Treasury. Treasury Secretary Timothy F. Geithner, a central figure in the U.S. government’s bailouts of Wall Street banks and efforts to raise the debt limit, told President Barack Obama that he intends to remain in his job. Geithner, 49, will stay on at least through the 2012 election, according to an administration official who was not authorized to comment publicly.
• Germany's Social Democrats, the country's main opposition party, called on euro-region leaders to adopt euro bonds to steam the debt crisis. Joachim Poss, the SPD's parliamentary finance spokesman and deputy caucus chairman, said the securities should be sold "soon" and backed by restraints on budget spending and better ec0onomic cooperation in the region.
• London Police Work to Restore Calm After Riot. Police in London are in the process of “restoring calm” to an area of the U.K. capital after rioting led to 26 officers being injured and 48 arrests. Metropolitan Police officers faced “extreme violence” during the disturbances in Tottenham, in the north of the city, late yesterday in which vehicles and buildings were set on fire, Commander Adrian Hanstock said in a televised press conference today. London Fire Brigade said it received 264 emergency calls from the area during the riots.
• Greenspan Sees Stocks Falling After S&P Cut. Former Federal Reserve Chairman Alan Greenspan said he expects stocks to continue their decline after Standard & Poor's downgraded the nation’s credit rating, even as an S&P official predicted little market impact. “Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan said on NBC’s “Meet the Press” program. “So the initial reaction in my judgment is going to be negative.”
• Israeli Stock Index Tumbles Most Since 2000. Israel’s benchmark stock index plunged the most in almost 11 years after Standard & Poor’s lowered the U.S. credit rating and amid concern the widening sovereign debt crisis in Europe will stall global growth. Israel Discount Bank Ltd. (DSCT), the country’s third-largest lender, skidded 10 percent. Nice Systems Ltd. (NICE) slumped the most since November 2008. All 25 shares in the TA-25 Index tumbled, pushing the gauge down 7 percent, the biggest decline since October 2000, to 1,074.27 at the 4:30 p.m. close in Tel Aviv. The index is near the so-called bear-market territory after retreating 19.9 percent from a record high of 1,341.89 on April 21.
• Record Cash Shows S&P 500 Finances Beat U.S. to PNCE as AAA Lost. The combination of the past two weeks’ $1.94 trillion equity wipeout, record cash levels and rising dividends means the Standard & Poor’s 500 Index is offering comparable values to Treasuries. The plunge since July 22 has erased 11 percent from the benchmark gauge for American equities as Congress and President Barack Obama battled over the deficit and borrowing limits that prompted S&P to downgrade the U.S. government’s AAA credit rating for the first time. At the same time, 10-year Treasuries have returned 3.6 percent as investors sought the refuge of government bonds, pushing yields down 40 basis points to 2.56 percent, according to data compiled by Bloomberg. While the U.S. government is running record deficits, chief executive officers have more money than ever after boosting cash for 10 straight quarters to $963.3 billion, 58 percent more than in December 2007 near the start of the credit crisis, S&P data show.

Wall Street Journal:

• Markets Brace for Downgrade's Toll. Stocks Slip in Early Asian Trading; White House Reaches Out to Investors as S&P Defends Its Move Against Criticism.
• Obama and S&P Vie for Credibility. The Obama administration and ratings firm Standard & Poor's have embarked on a battle for credibility that could shape the ultimate impact of the U.S. debt downgrade—as well as their own reputations. Within minutes of Friday's bombshell announcement, both sides launched public fusillades against the other, which continued through the weekend.
• OPEC Members Need About $100 Oil To Balance Budget - Gulf Source. Members of the Organization of Petroleum Exporting Countries need international oil prices at about $100 a barrel to balance their budgets, a Gulf oil official said Saturday. With U.K. Brent prices still averaging $110 a barrel annually, the breakeven number suggests the group still has room to maneuver before it would be forced to act.
• Some Life Insurers Likely to See Downgrade. A handful of elite life insurers sporting triple-A credit ratings are expected to suffer a downgrade from Standard & Poor's in line with the rater's downgrade of the U.S. government Friday. More broadly, the rating firm's move means insurers that hold Treasurys in their investment portfolios may well end up required to set aside capital to back up those holdings.
• Subpoenas Go Out to High-Speed Trade Firms. U.S. regulators, intensifying their probe of last year's "flash crash" and other market swings, have sent subpoenas to firms that do high-frequency trading, according to people familiar with the matter. High-frequency traders use computer models to identify price discrepancies and directions of securities trading, aiming to profit through rapid-fire trades often measured in milliseconds. Regulators' interest in these traders has ramped up in recent years, as their influence on markets has expanded amid advances and investments in trading technology.
• Senators Press Obama on Iran's Central Bank. More than 90 U.S. senators signed a letter to President Barack Obama pressing him to sanction Iran's central bank, with some threatening legislation to force the move, an outcome that would represent a stark escalation in tensions between the two countries. Such a measure, if effectively implemented, could potentially freeze Iran out of the global financial system and make it nearly impossible for Tehran to clear billions of dollars in oil sales every month, said current and former U.S. officials.
• Unions Walk Out at Verizon(VZ). A strike Sunday by some 45,000 workers at Verizon Communications Inc. marked a surprise move from diminished unions in a shrinking industry. "This may be the last big strike we see in the land-line business," said Paul Secunda, a Marquette University associate law professor who advised Verizon during its previous strike, in 2000. "It's a contracting business, and the membership has to realize that they're fighting for the life of the union." Verizon's union membership has dropped nearly in half since the 2000 walkout.
• The Fed's Uninspiring Options. QE3. "Operation Twist." Lowering the IOER. These may sound like a type of code, but they actually are some of the last-ditch steps the Federal Reserve could take to try to inject further life into the economy, or counter any market upheaval caused by the late-Friday downgrade of the U.S.'s top-notch credit rating. Trouble is, there's little evidence they would do any good.
• America Gets Downgraded. A spend and tax policy mix always leads to economic decline.

Fox Business:

• China's Debt Problem Worse Than Portugal. Government officials in China, the largest foreign holder of U.S. debt, have been chastising the U.S. over Standard & Poor’s downgrade to AA+. Guan Jianzhong, chairman of Dagong Global Credit Rating, has said the U.S. dollar is “gradually [being] discarded by the world,” and the “process will be irreversible.” But China’s debt-to-GDP ratio is worse than the United States’ ratio. It is worse than insolvent Portugal, which is now relying heavily on the European Central Bank for help, and had to go to the International Monetary Fund to get a financial bailout. The U.S.’s new AA+ rating from Standard & Poor’s is still higher than the one assigned to the Middle Kingdom. S&P has China’s debt rating stuck at AA-, the fourth highest level, due to its “sizable” contingent liabilities in its banking system. China’s own system is jammed with rotten debt held in off-balance sheet state enterprises. Its countryside is littered with eerie, empty ghost towns. And Moody’s Investors Service says last month that China’s local debt was understated by hundreds of billions of dollars. Despite that, the People's Daily said S&P’s downgrade of the U.S.'s credit rating "sounded the alarm bell for the dollar-denominated global monetary system.” China owns an estimated $1.16 trillion in U.S. debt. China prints yuan to hold down its value so as to keep its exports dirt-cheap. It then uses that extra printed currency to buy U.S. debt.

CNBC:

• Federal Probes of Mortgage Lenders Fizzle: Report. Federal criminal investigations into failed mortgage lenders IndyMac Bancorp and New Century Financial Corp have stalled, the Wall Street Journal reported on Saturday. A third probe, into Washington Mutual Inc (WaMu), has ended with no charges being filed, the Department of Justice said.
• G7: Committed to Ensure Liquidity, Support Markets. The Group of Seven nations is committed to taking coordinated action to ensure liquidity and to support financial market functioning, financial stability and economic growth, G7 finance ministers and central bank governors said in a statement.
• Europe needs to boost its bailout fund in order to reassure markets, U.S. Treasury Secretary Timothy Geithner said.
  

Business Insider:

• A Thorough Look At The Downgrade, And What It Means For Markets And The Economy. Naufal Sanaullah at Shadow Capitalism has put together a great presentation on how it came about, and what impact it's likely to have on the economy and financial markets. It's very thorough, and a very useful read before markets open Monday.
  
• U.S. Sends CIA Operatives to Mexico to Escalate War Against Drug Cartels. The U.S. is sending new CIA operatives and retired military personnel to Mexico as part of a push to expand it's role in fighting the country's powerful drug trafficking organizations, according to a New York Times report published today.

Zero Hedge:

• Complete Slide Deck From Ongoing Citi "US Downgrade" Conference Call.
• Why The ECB's Monetization Is Doomed In One Simple Chart.
  

IBD:

• Accretive Health(AH) Helps Doctors Cut Costs.

NY Times:

• China Tells U.S. It Must 'Cure Its Addiction to Debt'. China, the largest foreign holder of United States debt, said Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt. The harshly worded commentary, released by China’s official Xinhua news agency, was Beijing’s latest effort to express its displeasure with Washington. Beijing’s reaction to the downgrade was the harshest among foreign leaders. “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers. Beijing, which did not release any other official statement on the downgrade, called on Washington to make substantial cuts to its “gigantic military expenditure” and its “bloated social welfare” programs. The commentary serves as a sharp illustration of how the United States’ standing in the world is sliding and how China now views itself as ascendant.
• A.I.G.(AIG) to Sue Bank of America(BAC) Over Mortgage Bonds. The American International Group is planning to sue Bank of America over hundreds of mortgage-backed securities, adding to the surge of investors seeking compensation for the troubled mortgages that led to the financial crisis. The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor.

The Blaze:

• 'Brave Warrior': Hear A Heartbroken Grandmother Tell CNN Why Her Fallen Navy Seal Did Not Fear Death. (video)
  

Hot Air:

• Was the US Debt Downgrade a Rejection of Obamacare?

Gallup:

• Obama Job Approval: Approve 42%, Disapprove 50%. (graph)

Rasmussen Reports:

• New Low: 17% Say U.S. Government Has Consent of the Governed.

AP:

• Dramatic Anti-Police Riot Casts Pall Over London. (video)

Market News International:

• China has to continue purchases of U.S. Treasury bonds, citing a Chinese central bank adviser.

Reuters:

• 1 in 3 Chance of Further U.S. Downgrade: S&P's Chambers. Standard & Poor's managing director John Chambers said on Sunday there is a one in three chance of a further U.S. credit rating downgrade over the next six months to two years. "We have a negative outlook ... from six months to 24 months," he said on ABC's "This Week." "And if the fiscal position of the United States deteriorates further or if the political gridlock becomes more entrenched, then that could lead to a downgrade. The outlook indicates at least a one in three chance of a downgrade over that period." Chambers said that it would take some time for the United States to recover its AAA rating. "It would take a stabilization of the debt as a share of the economy and eventual decline. And it would take, I think, more ability to reach consensus in Washington than what we're observing now," he said.

Financial Times:

• Greek Rescue Plan Worries Hedge Funds. Hedge fund managers are seeking legal advice about the worth of their credit default swap contracts amid plans for a voluntary exchange of Greek government bonds as part of the country’s rescue plan, advisers say. David Geen, general counsel for the International Swaps and Derivatives Association, declared last month that the proposed programme for a voluntary exchange of Greek debt would not trigger a credit event. As a result hedge funds and other big holders of CDSs, which are often bought as insurance to guard against a bond default, are worried about doomsday prospects, according to industry advisers.
• Fears Rise That Financial Reform is Harming US Business.

Telegraph:

• Debt Crisis: Is This the End for the Euro? Europe's leaders, policymakers and bond vigilantes are engaged in a fatal three-way game of brinkmanship. The showdown will see either careers bite the dust or the end of the euro. Somehow, though, the ultimate price will be paid.
• Merkel Faces a Hobson's Choice on Eurozone.
• EU Debt Crisis: We Must Give These Continental Emperors Underwear, At Least. With the euro revealed as a failure, it is time to reassert sanity in the banking system, writes Bruce Anderson.

Vedomosti:

• Russia plans to borrow more than $2 trillion rubles a year from 2012 through 2014 to help cover its budget deficit, citing government documents. Russian sovereign debt may triple to 12 trillion rubles by 2014 under a plan that will be discussed at a government meeting on Aug. 11.

Tagesspiegel:

• Euro-region countries should sell common bonds as a tool to expand the European Financial Stability Facility, said Peter Bofinger, an economic adviser to Chancellor Angela Merkel. Even after the revamp proposals from last month's European summit, the EFSF is too small to contain the European debt crisis, citing Bofinger. "The fund doesn't have the volume to contain a crisis of confidence in Italy or Spain," the University of Wuerzburg economist said. "Common European bonds are the only means to stabilize the situation."
  

El Pais:

• Protesters against Spanish government policies returned to Madrid's Puerta del Sol square hours after it was reopened to traffic following a police operation to clear it. As many as 5,000 people gathered in Puerta del Sol, citing its own estimate.

The Financial Express:

• Hedge Fund Managers Bruised by Losses. A week of turmoil has left the hedge fund industry bruised by losses as markets reacted to fears for the state of the global economy and concerns that the European debt crisis had reached Italy, the third-largest economy in the eurozone. Monthly performance numbers for the industry, tracked by Hedge Fund Research, due to be released on Friday afternoon, were expected to confirm the average hedge fund manager was down 2 per cent for the year at the start of the week - a number that had stretched to 3 per cent for the year so far.

Apple Daily:

• Taiwan may tighten the daily stock decline limit to 3.5% from the current 7%, to help stem a slide in the domestic stock market.

Xinhua:

• The U.S. should avoid letting the dollar weaken or taking fresh monetary steps that may worsen the currency's depreciation.

Shanghai Securities News:

• Local governments in China may sell some of their holdings of yuan-denominated A-shares to raise money to pay debt, citing Shenyin & Wanguo Securities Co. analyst Liu Ying. This would have a limited impact on the nation's stock markets.

Ming Pao Daily News:

• Hong Kong's used-home prices may fall as much as 10% in the near term, quoting Louis Chan, a managing director at Centaline Property Agency Ltd. Chan expects the number of used-home transactions this month to decline 20% from July, the report said. Secondary property sales in the city are suffering from the global stock market rout, the report said.

Haaretz:

• Lieberman Calls on Israeli Government to Cut Off Ties With Palestinian Authority as 'Bloody' September Approaches. Foreign Minister Avigdor Lieberman said he plans to demand that the government sever all ties with the Palestinian Authority in light of what he termed the PA's growing anti-Israel activity in various international forums. At a briefing for journalists in the Knesset, he also accused the Palestinians of preparing for "bloodshed the likes of which we've never seen before" after September's expected United Nations vote to declare a Palestinian state. "The PA is stepping up its efforts to try to indict senior Israeli officers at the international court in The Hague," Lieberman said. "I will demand that the prime minister and the Octet [forum of eight senior ministers] sever all ties. Not treasury officials, not the Water Authority, not Foreign Ministry officials. It's impossible both to accept security coordination and to indict Israel Defense Forces soldiers in The Hague." Moreover, he charged, while senior PA officials say the protests they plan in September will be nonviolent, they are in fact preparing for violence. The PA has been preparing detailed plans for demonstrations likely to spark conflict with Israeli soldiers, he said, down to the number of buses needed to transport demonstrators to army roadblocks in the West Bank - where friction with soldiers would be almost inevitable. "The PA is planning bloodshed the likes of which we've never seen before," he said.

Weekend Recommendations
Citigroup:

• Reiterated Buy on (BAC), target $14.

Night Trading

• Asian indices are -4.50% to -2.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 136.0 +.5 basis point.
• Asia Pacific Sovereign CDS Index 130.50 +1.5 basis points.
  
• S&P 500 futures -2.20%.
• NASDAQ 100 futures -2.117%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SMG)/2.19
• (DYN)/-.57
• (KWK)/.05
• (DTG)/1.33
• (MGM)/-.13
• (TSN)/.40
  

Economic Releases

• None of note
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The 3 & 6-Month T-Bill Auctions, (GXP) Analyst Day, Jefferies Industrial/Aerospace/Defense Conference, Morgan Keegan Security/Defense Conference and the Morgan Keegan Tech Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are sharply lower, weighed down by industrial and commodity shares in the region. I expect US stocks to open sharply lower and to rally into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as US debt/tax hike worries, financial sector pessimism, eurozone debt angst, global growth concerns and emerging market inflation fears offset short-covering, bargain-hunting, buyout/buyback speculation and falling food/energy prices. My intermediate-term trading indicators are giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 1,292.28 -7.19%*



The Weekly Wrap by Briefing.com.

*5-Day Change