Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Global Growth Worries, Financial Sector Pessimism, More Shorting

Broad Market Tone:

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

Equity Investor Angst:

• VIX 33.60 +5.43%
  
• ISE Sentiment Index 90.0 +7.14%
  
• Total Put/Call 1.04 -7.14%
  
• NYSE Arms 1.74 +354.72%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 110.26 -1.17%
  
• European Financial Sector CDS Index 194.23 -2.23%
  
• Western Europe Sovereign Debt CDS Index 291.17 -1.02%
  
• Emerging Market CDS Index 263.85 +2.01%
  
• 2-Year Swap Spread 25.0 unch.
  
• TED Spread 28.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .01% +1 bp
  
• Yield Curve 203.0 -7 bps
  
• China Import Iron Ore Spot $176.0/Metric Tonne +.17%
  
• Citi US Economic Surprise Index -74.10 +5.0 points
  
• 10-Year TIPS Spread 2.16% -5 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -40 open in Japan
• DAX Futures: Indicating -41 open in Germany

Portfolio:

• Slightly Lower: On losses in my Tech sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and added to my EEM short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 pulls back after recent gains on rising Eurozone debt angst, financial sector pessimism, global growth worries, emerging markets inflation fears and technical selling. On the positive side, Drug, Retail, Education and Airlines shares are especially strong, rising more than +.5% on the day. Oil is falling -1.08%. Weekly retail sales rose +4.8% versus a +4.8% gain the prior week. On the negative side, Coal, Alt Energy, Oil Tanker, Oil Service, Steel, Internet, Networking, Bank, Construction and Road & Rail shares are under meaningful pressure, falling more than -2.0%. Cyclicals and small-caps are relatively weak. The Transports have underperformed throughout the day again. (XLF) is also trading poorly. The 10-year yield is falling -8 bps to 2.23%. Gold is rising +1.23%, Lumber is falling -1.27%, Copper is falling -.93% and the UBS-Bloomberg Ag Spot Index is up +.96%. Rice is still near a multi-year high, soaring +28.0% in about 7 weeks. The US price for a gallon of gas is falling -.01/gallon today to $3.59/gallon. It is up .45/gallon in about 7 months. The Spain sovereign cds is jumping +7.22% to 354.16 bps, the Portugal sovereign cds is climbing +2.43% to 856.12 bps, the Ireland sovereign cds is rising +2.48% to 755.26 bps, the China sovereign cds is rising +5.3% to 107.25 bps and the Eurozone Investment Grade CDS Index is rising +1.51% to 122.92 bps. Singapore stocks fell -1.45% last night and are down -11.2% ytd. As well, Israeli stocks remain under severe pressure, falling another -1.3%, and are down -20.6% ytd. Today's broad equity market performance is worse than the major averages would suggest, with many economically-sensitive stocks taking another beating. The market's adverse reaction to today's news from Europe, which had been telegraphed for days, is a bad sign. European leaders are doubling down on the poor slash-and-tax polices that are already taking their toll on the region's economic growth, which will lead to further budget shortfalls as tax revenue disappoints. The Citi Eurozone Economic Surprise Index plunged -17.1 points today to -33.3, which is a technical breakdown and the lowest level since March 4th, 2010. I expect US stocks to trade mixed-to-lower into the close from current levels on financial sector pessimism, rising eurozone debt angst, more shorting, global growth worries, emerging markets inflation fears and technical selling.

Today's Headlines

Bloomberg:

• Merkel, Sarkozy Propose Closer Regional Cooperation, Shunning Euro Bonds. German Chancellor Angela Merkel and French President Nicolas Sarkozy said they’ll press for closer euro-area economic integration with tougher deficit rules and stricter supervision as they strive to stamp out the debt crisis. Merkel and Sarkozy rejected euro bonds and expanding the 440 billion-euro rescue fund and said they would propose a Europe-wide financial transaction tax, which was rejected in 2010. They set out joint proposals to strengthen the euro including plans for all euro-area states to demonstrate a “verifiable commitment” to anchoring debt limits in national law and a “euro council” to be headed by European Union President Herman van Rompuy. “It’s very obvious that in order for this to work we need a stronger convergence in finance and economic policy within the euro zone and Germany and France are at the vanguard of that effort,” Merkel said. The leaders met as investors clamored for indications that they would do more to stamp out the euro area debt crisis as their economies sputter. Joint euro region bond sales may be “imaginable one day,” though can only be the final step in the process of European integration, Sarkozy said. “I don’t think Europe has used its last resource yet and I don’t think we can resolve the problem with a single big-bang policy,” Merkel said.
• Stocks Fall as Europe Floats Financial Tax. U.S. stocks fell for the first time in four days and the euro slid from a three-week high against the dollar after French President Nicolas Sarkozy said his nation and Germany will propose a financial transaction tax. Oil and copper fell. The Standard & Poor’s 500 Index declined 1.9 percent to 1,181.99 as of 1:07 p.m. in New York. NYSE Euronext and Nasdaq OMX Group Inc., two of the biggest exchange operators in Europe, dropped at least 5.8 percent. Caterpillar Inc., Deere & Co and 3M Co. each lost at least 2 percent, pacing declines in companies most-tied to the economy, after Europe’s economic growth trailed estimates. "Europe will continue to be an overhang until they come up with realistic policies," Peter Jankovskis, who helps manage about $2.6 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. "We’ve already got disappointing economic numbers out of Europe earlier today. Then, you have a program which is not really doing anything to address that."
  
• Corporate, Sovereign Bond Risk Rises in Europe as Growth Slows. The cost of insuring sovereign and corporate debt rose in Europe after reports showed the region’s economic growth slowed more than forecast in the second quarter as Germany’s recovery almost ground to a halt. The Markit iTraxx Crossover Index of credit-default swaps linked to 40 companies with mostly high-yield credit ratings increased 22 basis points to 619.5, according to JPMorgan Chase & Co. at 1 p.m. in London. Contracts on the Markit iTraxx SovX Western Europe Index tied to the debt of 15 governments rose 7 basis points 282, snapping three days of declines. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 5 basis points to 147 basis points. Credit-default swaps on Spain increased 10 basis points to 356, according to CMA. The cost of insuring Italian government bonds climbed 2 basis points to 343. France was little changed at 148 and Ireland was 22 higher at 758.
• European Economy Slows More Than Forecast as Debt Crisis Saps German Might. European economic growth slowed more than economists forecast in the second quarter as Germany’s recovery almost ground to a halt amid the worsening sovereign- debt crisis. Gross domestic product in the 17-nation euro area rose 0.2 percent from the first quarter, when it increased 0.8 percent, the European Union’s statistics office in Luxembourg said in a statement today. That’s the worst performance since the euro region emerged from a recession in late 2009. Economists had forecast the economy to expand 0.3 percent, according to the median of 34 estimates in a Bloomberg News survey. Europe’s economy may struggle to gather strength as governments from Italy to Spain step up budget cuts to fight the debt crisis. In Germany, Europe’s largest economy, growth almost stalled in the second quarter. “Growth may virtually stagnate in the second half and there’s a threat of a renewed recession,” said Martin van Vliet, senior economist at ING Groep NV in Amsterdam. “It’s up to Merkel and Sarkozy to prevent further contagion to the economy; the longer the turbulences persist, the higher the risk of a recession.” Euro-area exports dropped a seasonally adjusted 4.7 percent in June from the previous month, when they rose 1.5 percent, the statistics office said in a separate report today. Imports slumped 4.1 percent and the trade deficit widened to 1.6 billion euros ($2.3 billion) from 800 million euros. German GDP rose 0.1 percent in the second quarter after increasing 1.3 percent in the previous three months. That’s the worst performance since a contraction in the first quarter of 2009. The French economy unexpectedly stalled in the April-June period, while Italy’s GDP increased 0.3 percent. “With Germany’s economy faltering, the euro region didn’t have any significant growth impulses,” said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf, Germany. “The second half will only show a modest expansion overall.” Adding to signs of slowdown, European manufacturing growth eased in July and economic confidence slumped to the lowest in almost a year. German investors were the most pessimistic in 2 1/2 years last month and executive confidence also weakened. Industrial output unexpectedly dropped in June.
• Roesler Tells Radio Germany Won't Bend in Rejecting Euro Bonds. German Economy Minister Philipp Roesler said his government won’t bend in its opposition to common euro bonds to help solve Europe’s debt crisis, the Free Democrat said in a Deutschlandfunk Radio interview. Germany backs creating a “stability union” that focuses on the sustainability of euro-region finances, Roesler said. That includes all states adopting “debt brakes” in their constitutions, automatic sanctions for infringements and boosting the economic competitiveness of the states, he said. “You’ll see that we unequivocally back this stability union. That’s the position of the German government and -- as made clear in statements -- we view euro bonds as the wrong way,” Roesler said.
• Fannie Mae and Freddie Mac Would Survive in New Form Under Obama Proposal. The Obama Administration is working on a proposal to maintain a large government role in mortgage finance, effectively preserving most of the functions of Fannie Mae and Freddie Mac, according to a person with direct knowledge of the effort.
• Gold Gains for a Second Day as Slowing Economies Stoke Investment Demand. Gold futures gained for the second straight day as the sagging European economy spurred demand for the precious metal as an investment haven. Gold futures for December delivery rose $29.30, or 1.7 percent, to $1,787.30 an ounce at 10:45 a.m. on the Comex in New York. Yesterday, the price climbed 0.9 percent. Before today, the metal jumped 45 percent in the past year, reaching a record $1,817.60 on Aug. 11.
• Oil Drops in New York as Slowing German Economy Signals Demand May Falter. Crude oil fell after Germany’s economy almost stalled in the second quarter, bolstering concern that fuel consumption will diminish. “The disappointing German GDP number is responsible for the bulk of the sell-off we’ve seen today,” said Phil Flynn, vice president of research at PFGBest in Chicago. “Germany was expected to carry the entire euro-zone and now its economy appears to be faltering.” Crude oil for September delivery declined $1.15, or 1.3 percent, to $86.73 a barrel at 12:51 p.m. on the New York Mercantile Exchange. Yesterday, the contract climbed 2.9 percent to $87.88, the highest settlement since Aug. 3. Prices have risen 15 percent in the past year.
• Commodities May Be Poised to Decline 9.7%: Technical Analysis. The S&P GSCI Total Return Index of commodities may fall 9.7% after dropping below its 55-week moving average last week, Commerzbank AG said.
• King Says 'Severe' Market Stress Could Threaten U.K.'s Economic Recovery. Bank of England Governor Mervyn King said that turmoil in the euro region and in world stock markets poses a risk to the U.K. and could push inflation too far below the 2 percent target. “Recent developments in world stock markets and in the euro area are of particular concern,” King said in a letter to Chancellor of the Exchequer George Osborne after inflation kept above the central bank’s 3 percent ceiling in data released today. There is a risk of “severe stress and dislocation in financial markets and, were this risk to crystallize, it would have a significant impact on the U.K. economy.” Inflation accelerated more than economists forecast in July to 4.4 percent, led by the cost of clothes and footwear, housing maintenance and rent. While King predicted that inflation will reach 5 percent in coming months, he said that it might be below 2 percent without the impact of temporary factors such as energy costs and will probably slow through 2012.
• Import Prices in U.S. Rise .3%, Led by Gains in Costs of Fuel, Clothing. Prices of goods imported into the U.S. rose in July, led by gains in costs of fuel, industrial supplies and clothing. The 0.3 percent gain in the import-price index followed a revised 0.6 percent drop in June, Labor Department figures showed today in Washington. Economists projected a 0.1 percent decrease for July, according to the median estimate in a Bloomberg News survey. Prices excluding petroleum rose 0.2 percent. Compared with a year earlier, import prices rose 14 percent, today’s report showed. That was the largest 12-month increase since the 18.1 percent gain in the period from August 2007 to August 2008. The cost of imported petroleum rose 0.6 percent from the prior month and was up 49 percent from a year earlier. Excluding all fuels, import prices increased 0.2 percent from the prior month and were up 5.5 percent from July 2010. Imported food was 0.5 percent more expensive last month. Costs of imported automobiles, parts and engines fell 0.3 percent, the first decline since December 2010. They were up 3.9 percent over the past 12 months. Consumer goods excluding vehicles showed a 0.4 percent advance after increasing 0.2 percent in June.
• Asia Inflation Risk May Climb With Yingluck Plan to Boost Thai Rice Prices. Yingluck Shinawatra became Thailand’s first female prime minister by pledging to lift rural incomes through higher rice prices. The rest of Asia may now have to pay for her campaign promise. Yingluck has said the government will buy unmilled grain from farmers at 15,000 baht ($502) a ton at harvest in November, above current market rates of 9,900 baht. With Thailand the world’s biggest exporter, that may raise rice prices across a region that accounts for 87 percent of global consumption. The leader presented her economic policies to Cabinet yesterday and is scheduled to announce them publicly by Aug. 24. “High rice prices will translate into higher inflation pressures in Asia, at a time when most inflation readings are flirting near the higher end of central-bank target or forecast ranges,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. “Once the global backdrop stabilizes, inflation could come back strongly.”
• Wal-Mart(WMT), Home Depot(HD) Raise Forecasts. Wal-Mart Stores Inc. (WMT) and Home Depot Inc. (HD) raised their full-year forecasts after second-quarter profits beat analysts’ estimates, helped by U.S. consumers shopping for discount items and tools to repair their homes. Profit in the year ending in January will rise to $4.41 to $4.51 a share, up from a previous projection of $4.35 to $4.50, Bentonville, Arkansas-based Wal-Mart, the world’s largest retailer, said today in a statement. Home Depot boosted its annual earnings-per-share forecast by 4.5 percent.
• HTC Asks ITC to Block iPad, iPhone Imports. HTC Corp. (2498), Asia’s second-biggest maker of smartphones, filed a trade complaint at the U.S. International Trade Commission that seeks to block imports of Apple Inc.’s iPhone, iPad and Mac computers. The complaint filed today in Washington claims Apple is infringing three patents related to wireless technology and follows a case lodged last year at the ITC that made similar claims.

Wall Street Journal:

• Europe Moves to Heal Crisis. The leaders of France and Germany said Tuesday they would propose electing a permanent head of the euro zone to shore up governance of the monetary union, but stopped short of more fundamental steps toward refashioning the area into a federal entity with its own debt agency. "We want to state our absolute will to defend the euro," said French President Nicolas Sarkozy after a meeting in Paris with German Chancellor Angela Merkel.

Business Insider:

• The Americas Are the Next OPEC. Foreign Policy magazine is out with one of its "big trends" issues and ordinarily we avoid these things like the plague. However.
  

Zero Hedge:

• 2pm Financial Sector CDS Update.
• Another Chinese Fraud? Alfred Little Believes Sinotech Energy(CTE) is Worth Between $.00 and $.63.
• Morgan Stanley's Credit Team Joins the Bearish Call, Looks to Reduce Risk in Counter-Trend Rallies.
  

NY Post:

• Goldman(GS), JPMorgan(JPM) Lose $20M in Spat. Goldman Sachs and JPMorgan have killed their Motorola golden goose, The Post has learned. Motorola Mobility is putting them in the penalty box by not including them as advisers in its $12.5 billion sale to Google because, sources close to the matter said, the two Wall Street giants fought during an earlier Motorola deal.
• More Wall Street Job Cuts Ahead. Wall Street firms, having already trimmed payrolls by as much as 15 percent since 2008, are sharpening the layoff ax again, The Post has learned. The second round of job cuts could start as soon as September, sources said, and could trim head counts by 5 percent to 10 percent. This could amount to the loss of thousands of jobs in one of the city’s best-paid sectors.
  

Gallup:

• Obama Job Approval: Approve 39%, Disapprove 53%. (graph)

Financial Times:

• Fitch Maintains US's Triple A Rating. The US still deserves a triple A credit rating with a stable outlook, Fitch Ratings said on Tuesday, highlighting the different tacks that leading agencies have taken on US creditworthiness.
• France and Germany Plan Joint Taxation. France and Germany are to adopt a common corporate tax system by 2013, in an effort to signal greater co-ordination of economic policy after confidence in the euro was buffeted by the sovereign debt crisis.

Telegraph:

• Debt Crisis: Live. Rolling coverage of the rollercoaster in financial markets as the eurozone and US come under increasing pressure to deal with high levels of debt and stave off another recession.

Passauer Neue Presse:

• European leaders have no more than "a few weeks left" to solve the region's debt crisis which could bring about a widespread collapse of banks, citing Anton Boerner, president of Germany's BGA lobby of exporters and wholesalers.

Caixin:

• China's consumer price increases may be above 5% till the first quarter next year, citing Zhang Ping, a deputy director at the Chinese Academy of Social Science's economics institute.

Bear Radar

Style Underperformer:

• Small-Cap Growth (-1.91%)

Sector Underperformers:

• 1) Oil Service -2.71% 2) Steel -2.50% 3) Road & Rail -2.41%

Stocks Falling on Unusual Volume:

• DDS, YOKU, SINA, HNR, DB, URBN, SODA, IDCC, HTHT, NDAQ, ERIC, CPLA, CAR, PERY, BIDU, GOOG, DTLK, EPAY, FCFS, GIVN, CTXS, FOSL, PCLN, JBHT, JRCC, FEZ, EWK, DKS, SHI, KCE, IAI, CHS, ALB, IDCC, WAT and URBN
  

Stocks With Unusual Put Option Activity:

• 1) EWT 2) NYX 3) SPLS 4) TYC 5) SVU
  

Stocks With Most Negative News Mentions:

• 1) ALB 2) PRI 3) AMAT 4) ABX 5) ANN
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth (-.91%)

Sector Outperformers:

• 1) Education +1.69% 2) Retail +.99% 3) Airlines +.39%

Stocks Rising on Unusual Volume:

• HD, WMT, ESI, DNDN, CISG, GILD, VCI, RGS and DG
  

Stocks With Unusual Call Option Activity:

• 1) XRA 2) BKS 3) A 4) KMB 5) URBN
  

Stocks With Most Positive News Mentions:

• 1) A 2) AAPL 3) GOOG 4) LMT 5) KAR
  

Charts:

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

Tuesday Watch

Evening Headlines

Bloomberg:

• Berlusconi Competes With Banks Wooing Italians to Record Debt: Euro Credit. Italian retail investors are spoiled for choice as the country’s banks prepare to refinance a third of their debt at a time when the government is offering yields at euro-era records on its securities. The country’s lenders, including UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), have more than 100 billion euros ($145 billion) of bonds to repay by the end of 2012. The government, which has paid more for its money than financial firms for the past four months, will sell quadruple that amount in the same period. “The maturities of the Italian public debt create a sort of competition with the issues of the banking sector,” Paola Sabbione, an analyst at Deutsche Bank AG, wrote in a report “Families, thus the banks’ clients, are important holders of Italian public debt.” The yield on Italian 10-year bonds reached a decade-high 6.3 percent on Aug. 5, slamming the shares of the banks, the biggest holders of government bonds. The plunge in UniCredit and Intesa shares, both down more than 30 percent since the start of July, threaten to deter Italian savers, who traditionally buy the bulk of their debt. “This isn’t a good news for banks,” said Vanni Lucchelli a partner of Compagnia Fiduciaria Lombarda SpA, a Milan-based trustee company. “An increase in the capital gains tax to 20 percent excluding government bonds may force banks to offer customers higher rates to give them a compelling net yield compared with treasury bills and bonds.” UniCredit, Italy’s biggest bank, needs to roll over about 32 billion euros in 2012, while Intesa Sanpaolo, the second largest lender, has about 22 billion-euros of bonds expiring next year.
  
• Euro Is Near Three-Week High Before Sarkozy, Merkel Meet About Debt Crisis. The euro traded 0.2 percent from a three-week high on prospects a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel will result in action to contain the region’s debt crisis. The dollar was 0.7 percent from its lowest in two weeks against the yen before a report that economists said will show U.S. housing starts dropped last month. The Australian dollar declined for the first time in four sessions after minutes today of the Reserve Bank’s meeting on Aug. 2 showed policy makers kept interest rates unchanged on concern that turmoil in financial markets could slow global economic growth. “The euro is supported by the expectation that something will be decided at tonight’s meeting between France and Germany’s leaders on the pan-European bond issue,” said Imre Speizer, an Auckland-based strategist at Westpac Banking Corp., Australia’s second-largest lender.
• Texas College Fund Expands Hedges Against Euro-Debt Crisis. Texas’s public university endowment, the second-largest U.S. college fund, is expanding derivative use to hedge against a euro-region debt default or a collapse in the dollar, while raising limits on commodity investments. About $70 million a year is used for hedges to protect endowments including the Permanent University Fund from market risks, Bruce Zimmerman, president of University of Texas Investment Management Co., said today. The $20.3 billion permanent fund has about 5 percent of its assets gold, he said. Bullion provides a store of value should the dollar decline. Overseers of the fund approved changes today to let endowment managers at UTIMCO, as Zimmerman’s company is known, spend as much as 0.75 percent of assets on hedging risks, up from 0.25 percent. Only Harvard University has a bigger endowment, valued at $27.6 billion. “We are in a very uncertain investment environment,” he said at the University of Texas System Board of Regents meeting today. “The lack of clarity of the direction is as opaque as many of us have ever seen.” The fund may lose a fifth of its value from a euro-region default or a crisis in the dollar, according to a study from the management company. That prompted calls from board members for more aggressive hedging.
• Soros, Mindich Cut SPDR Gold Holdings in Quarter as Paulson Maintains Bet. George Soros, Eric Mindich and Scout Capital Management LLC cut their holdings in SPDR Gold Trust as prices rallied to a record during the second quarter, while Steven A. Cohen’s SAC Capital Advisors LP bought options on the exchange-traded fund, government records show. Soros Fund Management LLC held 42,800 shares of SPDR Gold Trust as of June 30, compared with 49,400 at the end of the first quarter, a filing yesterday with the U.S. Securities and Exchange Commission showed. Mindich’s Eton Park Capital Management LP reduced its stake to 813,000 shares from 2.328 million, a separate filing showed. SAC Capital purchased call options linked to the SPDR Gold Trust valued at $627.7 million. Gold prices have surged 45 percent in the past year, touching a record $1,817.60 an ounce in New York last week, as Europe’s debt crisis and the prospect of a global economic slowdown boosted demand for the metal as a haven. Some investors may have sold the metal amid the financial turmoil, according to James Dailey of TEAM Financial Management LLC. “Funds were confused about the behavior of the market, and they probably thought it would be better to sit on cash rather than lose money,” Dailey, who manages $185 million at TEAM Financial, said in a telephone interview from Harrisburg, Pennsylvania.
• Japanese banks' credit ratings and share prices may decline as global regulators consider measures that seek to avoid the use of public funds to rescue failing lenders, Mitsubishi UFJ Morgan Stanley Securities Co. said. "The prices of some of Japan's major bank stocks could fall by over 20% once expectations of capital injections and other forms of government support disappear," Junsuke Senoguchi, a senior anlalyst at MUFJ Morgan Stanley, wrote. The absence of a public backstop would lower banks' credit ratings and drive funding costs higher, eroding profitability, he said.
• China Home Sales Skirt Policies With Fake Divorces. Frank He said he faked a divorce from his wife of 10 years to skirt China’s ban on third mortgages and obtain a bank loan for a third property, a 12 million yuan ($1.9 million) suburban villa.“My wife and I love each other, but as long as we can get the mortgage from the bank for the deal, we’ll take it,” said He, a 40-year-old manager at a chemical company. The forged document, which cost the Shanghai couple 20,000 yuan, helped them get a loan amounting to 60 percent of the purchase price, he said. Chinese homebuyers and developers are finding loopholes as they come under pressure from government policies to curb gains in residential prices, such as limits on the number of properties owned. Builders are refraining from cutting prices, offering free parking lots and attics instead, as they face higher borrowing costs after Standard & Poor’s downgraded their outlook in June. Their actions may hamper the government’s efforts to prevent a bubble in the housing market.
• China Slowing 'Significantly': Conference Board. Growth in China, the world’s second- biggest economy, is slowing “significantly,” according to The Conference Board, a New York-based research organization. “The economy is significantly moderating right now and also over the next couple of months,” Bart van Ark, the organization’s chief economist, told Bloomberg Television from New York today.

Wall Street Journal:

• A Wild Ride to Profits. High-Frequency Traders Score Big on Stock Volatility; 'Feeding off the Volume'.
• Murky Science Clouded Japan Nuclear Response. After a third explosion rocked Japan's Fukushima Daiichi nuclear complex on March 15, the weather took a worrisome turn. A wind that had been blowing steadily out to sea shifted to the northwest, carrying plumes of radiation up a river known locally as the "corridor of wind." That evening, a late-winter snow began falling on this mountain village. Residents awakened the next day to a blanket of white over their homes, roads, cow pastures and pine forests. They stepped outside and began shoveling.
• Rick Perry Touting a Downhome Resume. Rick Perry became an Eagle Scout and Air Force pilot after growing up as the son of a cotton farmer "from a little place called Paint Creek, Texas," whose house had no indoor plumbing. As Texas's longest-serving governor, he says he cut taxes and red tape and helped boost job growth.
• Soros Fund Cuts Stakes in Citi(C), Wells Fargo(WFC), Monsanto(MON). Billionaire investor George Soros‘s hedge fund reported lower stakes in big banks Citigroup and Wells Fargo, and slashed its ownership in Monsanto, a former top holding, according to a regulatory filing late Monday.
• Urban Outfitters(URBN) 2Q Net Drops 21% On Increased Markdowns.
  
• Lesson From Europe (Take 2). No, social democracy doesn't 'work.' 'The real lesson from Europe," wrote Paul Krugman in January 2010, "is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works." Here are some postcards from the social democracy that works.
• Ruby Red Tape. A case study in the costs of regulation, from Opal to Oregon. The abstraction known as "regulation" is often invoked as a reason businesses aren't growing or hiring fast enough, and with good reason. Anyone wondering what that means in practice should consult the epic saga of the Ruby pipeline.

CNBC:

• Asia Funds Lose $77 Billion in Stocks Plunge, Led by Korea. Asian equity mutual funds suffered a $77 billion hit in the first 11 days of August with those betting on South Korea and the Greater China region leading the declines amid a global selloff on concerns over U.S. growth and a European debt crisis.

Business Insider:

• 13F Watch: David Einhorn Buys More Microsoft(MSFT) and Apple(AAPL).
• GUTS: Bruce Berkowitz Loads Up The Boat On Financials. While other fund managers are mostly running away from financials, struggling fund manager Bruce Berkowitz of the Fairholme Funds is going the other way. His new 13-F is out, and he's loading up the boat on financials, particularly the real dogs.

IBD:

• Rue21(RUE) Leads Teen Pack With Value, Hip Look.

NY Times:

• Debt in Europe Fules a Bond Debate. The Germans want to bury it. The French say it is a nonstarter. But the idea that the only way to contain the sovereign debt crisis is for Europe to issue bonds backed by all the nations of the euro zone will not go away. Markets perceive “a great reluctance on the part of the E.C.B. to engage in large-scale purchases of financially troubled governments’ bonds,” Mr. Mayer of Deutsche Bank, and Daniel Gros, director of the Center for European Policy Studies in Brussels, wrote in a note. They reject euro bonds, saying they would “turn into a poison pill” for European monetary union. “Political resistance against E.M.U. would rise in the stronger countries, eventually leading to a probable breakup of E.M.U.,” they wrote.
• Hedge Funds Disclose Second-Quarter Positions.

Forbes:

• Can ObamaCare Survive an Unconstitutional Mandate?

LA Times:

• California Advocacy Groups Urge Boycott of Amazon(AMZN). Think Before You Click asks consumers to cancel their Amazon.com accounts until the company stops refusing to collect state taxes. California could collect about $1 billion a year on Internet sales.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -22 (see trends).

USA Today:

• PACs Gave Nearly $65M to Deficit 'Supercommittee' Members. The "supercommittee" of Congress tasked with finding at least $1.2 trillion to reduce the deficit has received millions of dollars from a wide range of special interests in the past decade, according to a new independent analysis. Political action committees have given nearly $65 million to the six Republicans and six Democrats on the Joint Special Committee on Deficit Reduction from 2001-2010, according to the analysis by MapLight.org, which tracks money in politics. Lawyers and law firms were the top donors by industry, contributing more than $31.5 million to the "supercommittee" members, the analysis shows. That amount is more than the $11.2 million donated by people in the securities and investment industry, the analysis shows. Democratic/liberal interests, health professionals and the real estate industry round out the top five industry donors.

Reuters:

• Allstate(ALL) Sues Goldman(GS) Over Mortgage Debt Losses.

Telegraph:

• Germany's Angela Merkel Faces Eurobond Mutiny. German Chancellor Angela Merkel's coalition partners are threatening a withdrawal from government if she agrees to eurobonds or any form of fiscal union to prop up southern Europe. The simmering revolt in the Bundestag makes it almost impossible for Mrs Merkel to offer real concessions at Tuesday's emergency summit with French president Nicolas Sarkozy. "We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schäffler, the finance spokesman for the Free Democrats (FDP). Oliver Luksic, the FDP's Saarland chief, told Bild Zeitung the survival of Germany's coalition was now rests on the handling of this issue. "Eurobonds are a sweet poison that leads to more debt, rather than less. Should the government endorse a common European bond and with it take the final step towards a long-term debt union, the FDP should seriously ask whether the coalition has any future." Alexander Dobrindt, general-secretary of Bavaria's Social Christians (CSU) and a key Merkel ally, said his party has issued a "crystal clear 'No' to eurobonds". Chancellor Merkel also faces mutinous grumbling among her own Christian Democrats (CDU), though the party's policy elite is willing to consider partial eurobonds up to the Maastricht limit of 60pc of GDP but only under stringent conditions. It is clear the German public is in no mood for any such formula. A YouGov poll shows 59pc of Germans oppose all further bail-outs. The majority want to see Greece expelled from the euro and 44pc want Germany to withdraw from EMU. "Given the rising euroscepticism in the population, it is too politically dangerous to toy with the explosive subject of eurobonds," said Hamburger Abendblatt. Otmar Issing, the European Central Bank's former chief economist, told German TV a move to eurobonds would impoverish Germany and subvert the Bundestag. "That would be catastrophic. I cannot understand how any German politician agree to this," he said. Germany's constitutional court has yet to rule on the legality of EMU's bail-out machinery and is likely to pay close attention to his warnings that the drift of EU policy is to concentrate budgetary powers in the hands of EU officials outside democratic control. Professor Wilhelm Hankel from Frankfurt University said a eurobond is camouflage for fiscal union. "That is forbidden under EU law and the German constitution. Everybody in parliament realises we are very near to the Rubicon and that if they say yes to eurobonds they cannot stop the march to a transfer union." Mrs Merkel's spokesman played down hopes of a breakthrough at Tuesday's meeting, denying reports that eurobonds are on the agenda. The meeting will focus on tougher rules for delinquents. Marcel Alexandrivich from Jefferies said the moment of danger will come when the ECB is seen to hit its limits. "The ECB can act as a buyer-of-last resort for a while but if it has to purchase bonds at €20bn to €30bn a week there will come a point it will say enough is enough, we can't take this on our books any longer." It is unclear where that point lies. The ECB intends to hand the baton to the EFSF once its new powers are ratified by all parliaments, but EFSF's remaining firepower will be less €300bn. Carl Weinberg from High Frequency Economics said this constraint will force the ECB to desist sooner rather than later. "If so, yields on Italian and Spanish bonds will jump in a heartbeat," he told Bloomberg.

Les Echos:

• France is likely to cut its growth forecasts after the economy stagnated in the second quarter versus the first, citing a person close to President Sarkozy. The government currently forecasts the economy will growth 2% this year and 2.25% in 2012.
  

Sydney Morning Herald:

• Has Paulson Lost His Touch? Billionaire's Fund Down 30%. Billionaire investor John Paulson, whose flagship funds are down some 30 per cent for the year to date, has cut back on one of his biggest holdings but largely kept the other major holdings unchanged. Weeks after telling investors in July that he had been overly aggressive with some of his calls, Mr Paulson showed the world that he began scaling back and diversifying within the financial sector during the second quarter. At the end of June Mr Paulson owned 60.4 million shares in Bank of America, down from 124 million at the end of the first quarter.

China Securities Journal:

• China's inflation may rise to about 6.2% in the third quarter from 5.7% in the second quarter, citing the State Information Center.

Shanghai Securities News:

• China's banking regulator may require the nation's systemically important banks to have a minimum capital adequacy ratio of 11.5% by the end of 2013, citing draft rules from the China Banking Regulatory Commission. Non-systemically important banks' capital adequacy ratio may be set at 10.5%.

People's Daily:

• China's Xinjiang province started a crackdown on terrorism in the region on Aug. 11, citing the provincial security department. The campaign will last until Oct. 15, the report said.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 140.0 -7.0 basis points.
  
• Asia Pacific Sovereign CDS Index 139.0 -9.0 basis points.
• FTSE-100 futures +.23%.
  
• S&P 500 futures -.38%.
  
• NASDAQ 100 futures -.39%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (HD)/.82
• (WMT)/1.08
• (ADI).73
• (TJX)/.89
• (SKS)/-.08
• (DKS)/.50
• (JKHY)/.40
• (DELL)/.49

Economic Releases
8:30 am EST

• The Import Price Index for July is estimated to fall -.1% versus a -.5% gain in June.
• Housing Starts for July are estimated to fall to 600K versus 629K in June.
• Building Permits for July are estimated to fall to 605K versus 624K in June.
  

9:15 am EST

• Industrial Production for July is estimated to rise +.5% versus a +.2% gain in June.
• Capacity Utilization for July is estimated rise to 77.0% versus 76.7% in June.
  

Upcoming Splits

• (HMSY) 3-for-1
• (OZRK) 2-for-1
• (EDU) 4-for-1
  

Other Potential Market Movers

• The weekly retail sales report and the Wedbush PAC Grow Life Sciences Conference could also impact trading today.
  

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

Stocks Surging into Final Hour on Diminishing Eurozone Debt Angst, Less Financial Sector Pessimism, Buyout Speculation, Short-Covering

Broad Market Tone:

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

Equity Investor Angst:

• VIX 32.11 -11.69%
  
• ISE Sentiment Index 89.0 -7.29%
  
• Total Put/Call 1.17 +7.34%
  
• NYSE Arms .41 -64.52%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 111.56 -2.61%
  
• European Financial Sector CDS Index 198.30 -5.11%
  
• Western Europe Sovereign Debt CDS Index 294.17 -.34%
  
• Emerging Market CDS Index 258.95 -5.66%
  
• 2-Year Swap Spread 25.0 -1 bp
  
• TED Spread 29.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% -1 bp
  
• Yield Curve 210.0 +5 bps
  
• China Import Iron Ore Spot $175.70/Metric Tonne -.11%
  
• Citi US Economic Surprise Index -79.10 -.2 point
  
• 10-Year TIPS Spread 2.21% -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +59 open in Japan
• DAX Futures: Indicating +36 open in Germany

Portfolio:

• Higher: On gains in my Biotech, Medical, Retail and Tech sector longs
  
• Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short and then added them back
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 builds on last week's reversal higher on less Eurozone debt angst, buyout speculation, short-covering, less financial sector pessimism and bargain-hunting. On the positive side, Airline, REIT, Homebuilding, Hospital, Bank, Wireless, Oil Service, Energy, Alt Energy, Coal and Utilities shares are especially strong, rising more than +3.0% on the day. Small-caps are outperforming. (XLF)/(IYR) have traded well throughout the day. Copper is rising +.52% and Lumber is gaining +3.28%. The France sovereign cds is down -4.2% to 146.83 bps, the Italy sovereign cds is down -3.76% to 344.450 bps, the Germany sovereign cds is dropping -3.67% to 76.58 bps, the UK sovereign cds is dropping -4.62% to 76.48 bps and the Spain sovereign cds is down -6.84% to 330.35 bps. Moreover, the European Investment Grade CDS Index is down -6.01% to 121.22 bps. On the negative side, Steel, Internet, Medical Equipment, Retail, Restaurant, Education and Road & Rail shares are underperforming, rising less than 1.0%. The Transports have underperformed throughout the day. The 10-year yield is only +3 bps higher to 2.29%, despite today's equity rally. Oil is jumping +3.0%, Gold is rising +1.08% and the UBS-Bloomberg Ag Spot Index is up +.7%. Rice is still near a multi-year high, soaring +28.0% in about 7 weeks. The US price for a gallon of gas is falling -.01/gallon today to $3.60/gallon. It is up .46/gallon in about 7 months. The TED spread is rising to the highest level since August 2010 today, despite the euro bounce and equity rally. European equities meaningfully underperformed the rest of the world today. However, the large drop in a number of key Eurozone cds remains a big positive. It is still hard to gauge how much of the recent equity rally is mainly related to short-covering. This year's worst-performers are leading today and volume is subdued. Some key German and French officials continue to throw cold water on the idea of a meaningful increase in the EFSF or the idea of eurobonds, yet the market seems to be anticipating these. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, diminishing eurozone debt angst, buyout speculation, short-covering and bargain-hunting.