Stocks Surging into Final Hour on Short-Covering, Bargain-Hunting, Less Tech Sector Pessimism, Euro Bounce

Broad Market Tone:

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

Equity Investor Angst:

• VIX 36.74 -13.43%
  
• ISE Sentiment Index 182.0 -19.6%
  
• Total Put/Call .99 -8.33%
  
• NYSE Arms .97 +9.37%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 127.92 +3.63%
  
• European Financial Sector CDS Index 240.64 +7.42%
  
• Western Europe Sovereign Debt CDS Index 296.17 +.34%
  
• Emerging Market CDS Index 305.86 +4.99%
  
• 2-Year Swap Spread 33.0 +1 bp
  
• TED Spread 31.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% +1 bp
  
• Yield Curve 192.0 +3 bps
  
• China Import Iron Ore Spot $177.90/Metric Tonne +.06%
  
• Citi US Economic Surprise Index -76.60 +2.1 points
  
• 10-Year TIPS Spread 1.99% -5 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +112 open in Japan
• DAX Futures: Indicating +97 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is very bullish, as the S&P 500 trades substantially higher despite rising eurozone debt angst, more weak economic data, rising food/energy prices and emerging markets inflation fears. On the positive side, Coal, Alt Energy, Oil Service, Steel, Internet, Software, Disk Drive, Networking, Medical Equipment, Hospital and HMO shares are especially strong, rising more than +4.0% on the day. Small-Caps are outperforming. "Growth" stocks are substantially outperforming "value" shares. Tech sector shares have traded well throughout the day. Gold is dropping -3.2%, Silver is falling -4.5%, Copper is gaining +1.33% and Lumber is rising +1.1%. Weekly retail sales rose +4.4% this week versus a +4.8% gain the prior week. On the negative side, Homebuilding shares are relatively weak, rising less than 1.0%. Cyclicals are underperforming. (XLF) has also lagged throughout the day. Oil is gaining +2.02% and the UBS-Bloomberg Ag Spot Index is rising +.91%. Rice is still near a multi-year high, rising +28.0% in about 8 weeks. The US price for a gallon of gas is unch. today at $3.57/gallon. It is up .43/gallon in about 7 months. The Germany sovereign cds is rising +2.79% to 85.0 bps, the France sovereign cds is rising +3.4% to 162.0 bps, the Greece sovereign cds is rising +5.04% to 2,123.0 bps, the Portugal sovereign cds is gaining +7.92% to 1,014.63 bps, the Italy sovereign cds is rising +1.60% to 377.66 bps, the Spain sovereign cds is gaining +5.26% to 377.38 bps, the Brazil sovereign cds is soaring +11.97% to 163.66 bps, the China sovereign cds is gaining +3.2% to 115.92 bps, the Russia sovereign cds is gaining +4.56% to 206.0 bps, the Japan sovereign cds is climbing +3.38% to 109.31 bps and the UK sovereign cds is rising +2.27% to 84.60 bps. Moreover, the European Investment Grade CDS Index is gaining +3.06% to 145.53 bps. The FRA/OIS Spread made another new multi-year high today and is rising +2.9 bps to 50.25 bps. The 2-Year Swap Spread is still very near its recent high and the TED spread is also near a new multi-year high. The Eurozone Financial Sector CDS Index is surging to another new all-time high today. The China Corporate Blended Spread Index is hitting an new multi-year high today, rising +22.0 bps to 629.0 bps. Spanish and Italian equities could not rally with the rest of Europe and the US today. China's 7-day repo rate is surging another +21 bps today to 5.21%. The UBS-Bloomberg Ag Spot Index made a new record closing high today, which is a huge negative. Despite the large gain in stocks, the 10-year yield rose just +4 bps to 2.15%. Gauges of credit angst in Europe continue to deteriorate rapidly despite today's equity gains, which remains a large negative. Volume is uninspiring on today's equity advance. Growth stock leaders were extremely strong today. I suspect much of today's advance was related to hedge fund short-covering ahead of Bernanke's speech. As well, some global economic datapoints came in better-than-feared. Given how oversold stocks were, further near-term gains are likely, however gauges of European credit angst must begin to improve very soon or equity weakness will likely resume over the coming weeks. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less tech sector pessimism, buyout speculation and a bounce in the euro.

Today's Headlines

Bloomberg:

• Euro-Area Services, Manufacturing Grow at Slowest Pace in Almost Two Years. European services and manufacturing growth held steady in August at the slowest pace in almost two years, adding to signs the euro-region recovery is losing momentum as the sovereign debt crisis persists. A composite index based on a survey of euro-area purchasing managers in both industries held at 51.1, the same as July’s reading and the lowest since September 2009, London-based Markit Economics said today. Economists forecast a drop to 50, the median of 15 estimates in a Bloomberg News survey showed.
• Bank Risk Rises to Record in Europe as Investor Confidence Ebbs. The cost of insuring European bank debt against default rose to a record as German investor confidence fell to the lowest in more than 2 1/2 years on concern the region’s debt crisis will curb growth. The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 banks and insurers increased 11.5 basis points to 261.5, according to JPMorgan Chase & Co. at 1 p.m. in London. The Markit iTraxx SovX Western Europe Index linked to 15 governments widened 12 basis points to 308.5. “Investors are worried that during times of quickly deteriorating asset prices, high volatility, and rising risks to the economic recovery, banks could be left with too little capital and a potential lack of support since governments are constrained by high indebtedness,” Christian Weber, a strategist at UniCredit SpA in Munich, wrote in a note. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, dropped to minus 37.6 from minus 15.1 in July. That’s the lowest since December 2008. Credit-default swaps on Portugal rose 93 basis points to 1,028, according to CMA. The cost of insuring Norway’s government bonds increased 3.5 basis points to 46, while Greece climbed 25 basis points to 2,025. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings rose 27.5 basis points to 729.5, the highest since July 2009. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 5.5 basis points to 172 basis points, the highest since April 2009.
• Bank of America(BAC) Credit Swaps Soar to Record, Goldman Sachs(GS) Debt Risk Jumps. The cost to protect debt issued by Bank of America Corp. (BAC) surged to the highest level on record as investor confidence in U.S. bank bonds deteriorated to the worst since May 2009. Credit-default swaps tied to Bank of America, the nation’s largest lender, soared 47 basis points to 427 as of 9:22 a.m. in New York, according to data provider CMA. Contracts on Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, climbed 28 basis points to 283 basis points, the highest level since April 2009. Bank of America credit swaps have more than doubled from 178 basis points at the end of July, CMA data show, as concern mounts that the lender may face larger losses tied to mortgages and will need to raise additional capital. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 2.3 basis points to a mid-price of 129.1 basis points as of 10:21 a.m. in New York, Markit Group Ltd. data show. Contracts on Goldman Sachs debt soared 40 basis points yesterday, after Chief Executive Officer Lloyd Blankfein and others hired attorneys in relation to a U.S. probe of matters raised by the Senate’s Permanent Subcommittee on Investigations. The swaps have increased from 149 basis points since July 29. Credit-default swaps on Citigroup Inc. (C) climbed 29 to 260 and contracts on Morgan Stanley (MS) rose 30 to 335, CMA data show. Investor confidence in high-yield, high-risk debt plunged for a fourth day. The Markit CDX North America High Yield Index, which falls as investor confidence deteriorates, dropped 0.6 percentage point to 91.3 percent of face value, the lowest level since September 2009.
• Lilbyan Rebels Break Into Qaddafi Compound. Libyan rebels stormed Muammar Qaddafi’s compound in Tripoli after battling loyalist forces for control of the capital for a third day. Gunfire and explosions were heard from the presidential headquarters in Bab Al Aziziya after the rebels broke into the heavily fortified compound and raised their flag there, Al Arabiya television reported. NBC News broadcast live reports from inside the compound, in which gunfire could be heard as crowds of young men ran into buildings and around the grounds of the compound. Much of the gunfire was celebratory.
• FDIC 'Problem' Banks Shrink, First Time Since '06. The Federal Deposit Insurance Corp.’s list of “problem” banks fell in the second quarter for the first time since 2006 as the industry’s income improved and costs tied to bad loans eased. The confidential list of banks deemed at greater risk of collapse shrank by 23 firms to 865, the FDIC said today in its Quarterly Banking Profile. The last time that happened was the third quarter of 2006 before the credit crisis began, the agency said. Net income rose 38 percent to $28.8 billion from a year earlier, the eighth consecutive quarterly improvement, boosted by a seventh straight drop in provisions for bad loans.
• Gold Declines From Record Above $1,910. Gold dropped for the first time in seven sessions as some investors sold the metal after signs of slowing growth spurred a rally to a record $1,917.90 an ounce. Gold futures for December delivery fell $33.30, or 1.8 percent, to $1,858.60 at 12:58 p.m. on the Comex in New York. The metal for immediate delivery declined as much as 2.5 percent after touching a record $1,913.50 in London.
• July New-Home Sales Fall to Five-Month Low. Sales of new U.S. homes declined more than projected in July to the lowest level in five months, indicating the industry is struggling to stabilize two years into the economic recovery. Purchases fell 0.7 percent to a 298,000 annual pace after a 300,000 rate in June that was slower than previously estimated, figures from the Commerce Department showed today in Washington. The median projection in a Bloomberg News survey of economists called for a 310,000 rate in July.

Wall Street Journal:

• Earthquake Shakes U.S. East Coast.
  
• Greek Tourism Workers Stage Strike, Protest Over Cutbacks. Greek tourism workers walked off the job Tuesday in a 24-hour strike over government pension cuts, as dozens demonstrated outside three luxury hotels in the Greek capital to protest the cutbacks.
• Beijing Communist Party Chief Issues Veiled Warning to Weibo. Beijing's Communist Party chief issued a veiled warning to Chinese Internet portal Sina over its Weibo microblogging service after a visit to the company's headquarters, a sign of the government's growing anxiety over Weibo's explosive growth and spreading influence that threatens the government's media controls. Internet companies should "step up the application and management of new technology, and absolutely put an end to the fake and misleading information," Liu Qi, secretary of the Beijing Municipal Party Committee and a member of the Party's powerful Politburo, told company executives during Monday's visit according to state media.

Business Insider:

• Greenspan: "The Euro Is Breaking Down". Some dramatic comments from former Federal Reserve Chairman Alan Greenspan. "The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” Greenspan said today, according to Bloomberg.
• 5.9 Magnitude Earthquake Shakes The East Coast, Centered Near DC.
• PETA Takes Its Sex-Crazed Marketing To The Next Level By Launching Porn Site.
• National Debt Has Increased Under Obama Faster Than Any Other President in History. An analysis by CBS News shows that the national debt has skyrocketed under President Barack Obama — increasing more than $4 trillion during his presidency. On average, the national debt increased $4.247 billion during each day Obama has been in office.
  

Zero Hedge:

• 7 Charts Showing The Lock Out Of European Capital Markets and The Surge In Counterparty Risk.
• Pershing Square Loses -6.7% In First 2 Weeks of August, Down -11% For The Year.
  

AppleInsider:

• Apple(AAPL) Struggles to Meet 13-Inch MacBook Air Demand Trigger Price Gouging.

Institutional Investor:

• Many Hedge Funds Weathered S&P Downgrade Storm. The first broad report of how hedge funds fared during the recent market decline is beginning to emerge. And so far it looks like a number of high-profile managers did a pretty good job of protecting their investors. This is especially true among the largest macro, multi-strategy and systematic traders.

Gallup:

• Obama Job Approval: 38% Approve, 54% Disapprove. (graph)

Reuters:

• Exclusive - Apple(AAPL) Suppliers Building Cheaper, 8GB iPhone 4 - Sources. Asian suppliers to Apple Inc have begun manufacturing a lower-priced version of its hot-selling iPhone 4 with a smaller 8 gigabyte flash drive, according to two people with knowledge of the matter.

Der Spiegel:

• Merkel Seeks to Forestall a Conservative Revolt. Chancellor Angela Merkel will meet conservative parliamentarians on Tuesday evening to try to allay their concerns about her management of the euro crisis. Many are unhappy about the EU deal to increase the scope of the bailout fund -- and are dissatisfied with Merkel's leadership style.

Handelsblatt:

• The German DIHK chamber of industry and commerce is against joint euro bonds as a solution for the current crisis in Europe, citing an interview with the DIHK head Hans Heinrich Driftmann. He considers euro bonds to be "absolutely counterproductive" at this point in time, the newspaper reported. Common euro-area bonds would be the equivalent of inviting countries to continue doing as before, Driftmann said. Countries need incentives "to regain their footing by their own efforts," he said.

Bear Radar

Style Underperformer:

• Large-Cap Value (+1.29%)

Sector Underperformers:

• 1) Gold & Silver -3.10% 2) Homebuilders -1.10% 3) Oil Tankers +.19%

Stocks Falling on Unusual Volume:

• BAC, GFI, GOLD, RP, LBTYA, MSG, SSRI, TZOO, TIN, GS, WSM, LFC, GTU, HIG and GORO
  

Stocks With Unusual Put Option Activity:

• 1) UUP 2) KBH 3) BCS 4) XLK 5) XCO
  

Stocks With Most Negative News Mentions:

• 1) STP 2) PEG 3) LNCR 4) ROK 5) CAVM
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Growth (+1.59%)

Sector Outperformers:

• 1) Hospitals +3.59% 2) Internet +2.38% 3) Computer Services +1.89%

Stocks Rising on Unusual Volume:

• SNP, GSK, PANL, PWRD, FMCN, ARMH, MPEL, SNPS, ACOM, FOSL, OCR, TSL, ANR, PMC, ECL, COH and MDT
  

Stocks With Unusual Call Option Activity:

• 1) TOL 2) PANL 3) AUY 4) ARMH 5) GLL
  

Stocks With Most Positive News Mentions:

• 1) LMT 2) NVDA 3) XEL 4) COF 5) WSM
  

Charts:

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

Tuesday Watch

Evening Headlines

Bloomberg:

• European Failure to Solve Region's Banking Crisis Returns to Haunt Markets. Four years to the month since the global credit crisis began, European lenders remain dependent on central bank aid, plaguing markets and economies worldwide. Emergency steps such as unlimited loans from the European Central Bank are keeping many banks in Greece, Portugal, Italy and Spain solvent and greasing the lending of others, while low interest rates and debt-buying are containing borrowing costs. Such aid is needed as concerns about slowing economic growth and sovereign debt prompt banks to curb lending, stockpile dollars and hoard cash in safe havens. “I’m not sleeping at night,” said Charles Wyplosz, director of the Geneva-based International Center for Money and Banking Studies. “We have moved into a new phase of crisis.” The signs of distress are widespread and mounting: Banks deposited 105.9 billion euros ($152 billion) with the ECB overnight on Aug. 19, almost three times this year’s average, rather than lending the money to other lenders. The premium European banks pay to borrow in dollars through the swaps market increased yesterday for a fourth straight day. European bank stocks have sunk 22 percent this month, led by Royal Bank of Scotland Group Plc (RBS) and Societe Generale (GLE) SA. Edinburgh-based RBS, Britain’s biggest government-controlled lender, has tumbled 45 percent, and Paris-based Societe Generale, France’s second-largest bank, dropped 39 percent. The extra yield investors demand to buy bank bonds instead of benchmark government debt surged to 298 basis points on Aug. 19, or 2.98 percentage points, the highest since July 2009, data compiled by Bank of America Merrill Lynch show. The cost of insuring that debt against default surged to a record yesterday. The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers rose to 250 basis points, compared with 149 when Lehman collapsed. “The debt has been transferred from the banks to the sovereign, but it hasn’t actually been eradicated,” said Gary Greenwood, a banking analyst at Shore Capital in Liverpool. “Until the sovereigns get their balance sheets in order, then these concerns are going to remain.” Funding markets have seized up as investors speculate that sovereign debt writedowns are inevitable. Banks in the region hold 98.2 billion euros of Greek sovereign debt, 317 billion euros of Italian government debt and about 280 billion euros of Spanish bonds, according to European Banking Authority data. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, was at 0.67 percentage point on Aug. 22, within 3 basis points of the widest spread since May 2009. “The central bank is the only clearer left to settle funds between banks,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG (CBK) in Frankfurt. “There is a mistrust between banks in general, between regions and with dollar providers overall.”
  
• European Banks Must Pay Up to Borrow $100 Billion Amid Crisis: Euro Credit. European banks with more than $100 billion of cash to raise by year-end will have to pay up because investors perceive them as the worst credits they’ve ever been. The cost of insuring the senior and junior bonds of 25 banks and insurers doubled since April, according to the Markit iTraxx Financial indexes of credit-default swaps. The Euribor- OIS spread, a gauge of banks’ reluctance to lend to each other, reached the widest since April 2009 this month, while the cost for European banks to fund in dollars matched a 2 1/2-year high. “This return of generalized banking risk marks a new phase in the unfolding European drama,” said Lisa Hintz, an analyst in New York at Capital Markets Research Group, a unit of ratings firm Moody’s Investors Service. “Investors have heightened concerns about sovereign and financial institution risk.” Morgan Stanley’s estimate of the 80 billion euros ($115 billion) banks need until year-end doesn’t include the extra capital that regulators have ordered many to raise to protect against a re-run of the 2007 global financial meltdown. With the bond market shut to all but the strongest banks, weaker lenders, particularly those from the euro region’s so-called peripheral nations, are relying on the European Central Bank for its unlimited six-month loans. “The banks seem to prefer to deposit cash with the ECB rather than lend it out to others that need it,” said John Raymond, an analyst at the financial-research firm in London. “In itself, that’s a sign of stress in the interbank market” and means companies must also pay more to borrow, he said. The extra yield investors demand to hold bank bonds rather than benchmark government debt surged to 298 basis points, or 2.98 percentage points, according to Bank of America Merrill Lynch index data. That’s the widest spread since July 2009 and up from 220 at the end of last month. Average yields jumped to an almost two-year high of 4.46 percent on Aug. 12, before dropping back to 4.38 percent, the data show.
• Merkel Never Holding Hands With Sarkozy Betrays European Leadership Crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy have never held hands like Helmut Kohl and Francois Mitterrand once did at a World War I battlefield. Merkel worries they don’t even talk enough. After no fewer than seven one-on-one meetings the past 18 months -- in addition to parleys at summits -- the leaders of the biggest European economies have yet to hit on an effective solution to the crisis stalking the euro, Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in an interview. “Poor relations between Merkel and Sarkozy are one of the big problems of dealing with the debt crisis because it’s up to European Union leaders to handle this,” Erixon said. “It’s not a personal relationship that can deliver grand things because the trust isn’t there.”
• Qaddafi Is a Hunted Man as Rebels Claim Tripoli. Libyan rebels hunted for Muammar Qaddafi and declared his regime over as the dictator’s forces kept up their fight in parts of Tripoli, the capital now mostly in rebel hands. Even as gunfire continued in some areas, particularly around Qaddafi’s former home, rebel and western leaders looked ahead to forming an interim government after the dictator’s 42- year rule. “The era of Qaddafi is over,” Mustafa Abdel Jalil, the head of the rebel National Transitional Council, said yesterday at a news conference in the eastern city of Benghazi. He called on rebel fighters to avoid reprisals, respect human rights and treat prisoners of war humanely. Qaddafi, who in a Aug. 21 audio broadcast vowed “never to give up,” remained at large.
• Goldman(GS) Debt Swaps Jump as U.S. Company Credit Risk Rises to 14-Month High. Investor confidence in U.S. corporate credit deteriorated to the worst level since June 2010 and the cost to protect Goldman Sachs Group Inc. (GS) debt jumped following a report that Chief Executive Officer Lloyd Blankfein hired a defense attorney. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 4 basis points to a mid-price of 126.8 basis points as of 5:35 p.m. in New York, according to index administrator Markit Group Ltd. Credit- default swaps on Goldman Sachs jumped 40 basis points to 255.4 basis points, the highest level since April 2009, according to data provider CMA. Contracts linked to the debt of Bank of America, based in Charlotte, North Carolina, added 38.6 basis points to 380.6, the data show. Investor confidence in high-yield, high-risk debt plunged for a third day to the lowest level in almost two years. The Markit CDX North America High Yield Index, which falls as investor confidence deteriorates, dropped 0.6 percentage point to 91.8 percent of face value, the lowest level since Sept. 10, 2009.
• Gold Tops $1,900 for First Time. Gold extended its rally to a record above $1,900 as mounting concern that the global economy is faltering spurred demand for bullion as a protection of wealth. Goldman Sachs Group Inc. lowered its forecast for U.S. growth in 2011 on signs that the recovery in the largest economy lost momentum. German Chancellor Angela Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis, saying she won’t let financial markets dictate policy. Gold futures for December delivery gained as much as 1.4 percent to $1,917.90 an ounce and traded at $1,911 at 6:34 a.m. Singapore time on the Comex in New York.
• Cerberus Kills Innkeepers Deal in Sign of Strain for Buyouts. Cerberus Capital Management LP and Chatham Lodging Trust terminated their $1.1 billion agreement to buy 64 hotels from Innkeepers USA Trust, a sign that the weakening economy is straining the private-equity market. Prices on leveraged loans, the backbone of the buyout business, have been falling. The move indicates deals may be more expensive to finance. The S&P/LSTA U.S. Leveraged Loan 100 Index rose to 88.59 cents on the dollar on Aug. 19 from 88.2 on Aug. 11, a 13-month low. The debt has lost 3.74 percent this year. Cerberus has abandoned deals before. The firm walked away from its $4 billion agreement to buy Greenwich, Connecticut- based United Rentals Inc. in 2007.
• More Regulations Is The Last Thing Economy Needs: Ramesh Ponnuru. At least one sector of the economy is booming, and President Barack Obama can legitimately take credit for it. Since he took office, employment has surged 13 percent at federal regulatory agencies. The regulators’ budgets are up 16 percent. (These numbers are derived from a May report published by Washington University and George Washington University.) And that’s before some of the major regulatory initiatives of the administration -- the financial-reform bill and the health-care overhaul -- are fully implemented. Obama understands that a reputation for regulatory hyperactivity in the midst of a weak economy wouldn’t help his re-election prospects. In January, he promised “a government- wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.” That review led to some modest improvements: The Environmental Protection Agency pulled back a rule that would have treated dairy spills on farms as though they were oil spills. Overall, though, the regulatory burden on the economy is still growing.
• Korea Investment Adds $78 Million to Bank of America(BAC) Stake Amid Stock Rout. Korea Investment Corp., the country’s sovereign wealth fund, said it added $78 million worth of Bank of America Corp. (BAC) shares to its existing stake this year as the U.S. bank shed more than half its market value. The fund added shares from January via seven separate purchases using a $145 million dividend it earlier received from Bank of America and called the Charlotte, North Carolina-based bank’s shares “undervalued,” in an e-mailed statement late yesterday.
• Crisis Too Big for Developed World: Ex-IMF Head. The crisis threatening the global financial system exceeds the capabilities of developed nations and requires a new International Monetary Fund “debt facility,” former IMF head H. Johannes Witteveen said. “Unusual problems require unconventional solutions,” Witteveen wrote in an opinion piece in the Financial Times today. “The world’s financial system is threatened by a new crisis that could be even worse than that of 2008.” He was IMF managing director from 1973 to 1978.

Wall Street Journal:

• Fighting Flares in Tense Tripoli.
• Live Blog: The Battle for Tripoli.
  
• H-P(HPQ) Needed to Evolve, CEO Says. Apotheker Says PC Spin Off, Software Buy Sets 'Transformation' in Motion.
• Germany Expects Growth to Slow. Germany faces an "obvious slowdown" that may last the rest of the year, its finance ministry warned on Monday, days after Europe's largest economy reported an unexpected pause in what had until recently been a strong recovery. Despite weaker growth, Germany's budget deficit should shrink to just 1.5% of its gross domestic product this year, a small fraction of the deficits expected in the U.S., Japan and much of the rest of Europe. Germany's recovery "in early summer 2011 remained below expectations," the finance ministry said, citing a sharper-than-expected slowdown in the U.S. German consumption may continue to stall due to uncertainties surrounding the euro zone's continuing debt crisis. "In the coming third quarter, the current turbulence in the financial markets could lead to further slowdown" in domestic consumption, the ministry said.

CNBC:

• China HSBC Flash PMI Rises to 49.8 in August. HSBC's China Flash PMI showed the Chinese factory sector may have slowed slightly in August from July as new orders and new export orders eased on languid overseas demand. The flash Purchasing Managers' Index (PMI), designed to preview China's factory output before official data, edged up to 49.8 in August, from July's final reading of 49.3. That leaves the index a touch under the 50-point mark that demarcates expansion from contraction in activity. HSBC publishes its final China PMI index for August on Sept 1. The listless outcome attests to China's gently slowing economy, and does little to dispel market worries that global demand is faltering on Europe's persistent debt problems and sluggish U.S. growth.
• Buffett-Backed BYD Shares Fall After Profit Warnings. Shares in BYD, a Chinese auto and battery maker backed by U.S. billionaire Warren Buffett, tumbled more than 5 percent on Tuesday after the company warned it could face a loss in the third quarter due to soft sales. "A weak result was expected but it(Q3) seems to be much worse than expected," said Patrick Yiu, a director at CASH Asset Management. "It may see heavy sell off because of the results."

Business Insider:

• S&P President Steps Down Weeks After US Downgrade.
• Iran Has Started Moving Centrifuges To Boost Uranium Enrichment.
• Bank of America(BAC) May Need to Raise $40-$50 Billion of New Capital - Analyst.
  

Zero Hedge:

• Japanese PM Naoto Kan Is Out August 30.

Forbes:

• Taxpayers Should Be Leery Of Warren Buffett's Faux Noblesse Oblige.

NY Times:

• Members of Merkel's Party Emphasize Opposition to Euro Bonds. Chancellor Angela Merkel of Germany has faced harsh criticism for being too passive in the face of Europe’s debt crisis. But on Monday, members of her own party and the Bundesbank made it clear just how hard it would be for her to pursue any solution that asked German taxpayers to sacrifice for the sake of European unity. With many economists calling for Europe to expand the euro zone’s bailout fund or start issuing bonds guaranteed by all 17 of the countries that share governance of the common currency, German politicians at home struck back. “Euro bonds would push up German interest rates,” Philipp Missfelder, the foreign affairs spokesman for Mrs. Merkel’s Christian Democratic Union, said Monday after a meeting of the center-right party’s board. “The cost of servicing the debt would be enormous.” Meanwhile, the Bundesbank, representing the views of Germany’s monetary authorities within the European Central Bank, complained Monday that liabilities acquired by weaker countries were being offloaded onto the stronger ones. “A major step is being taken toward common assumption of risks from weak national finances and economic missteps,” the Bundesbank said in its monthly bulletin. “This weakens the foundation of fiscal responsibility and self-discipline.”

Seeking Alpha:

• CDS Market To Euro Banks - This Is Worse Than 2008. (graph)

Vanity Fair:

• It's the Economy, Dummkopf! by Michael Lewis. With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies—like the fact that bankers from Düsseldorf were the ultimate patsies in Wall Street’s con game—pile up quickly as Michael Lewis investigates German attitudes toward money, excrement, and the country’s Nazi past, all of which help explain its peculiar new status.

The Blaze:

• Egyptian Protestors Outside Israeli Embassy Bear Signs With Swastikas: 'The Gas Chambers Are Ready'.

Politico:

• Health Care Law Will Deepen Deficit. The White House sold "Obamacare" as an instrument for lowering health insurance premiums and reducing federal budget deficits. “Altogether,” President Barack Obama said, “our cost-cutting measures would reduce most people’s premiums, and bring down our deficit by more than $1 trillion over the next two decades.” Studies, however, reveal a far different picture.
• AFL-CIO to Form Super PAC. The AFL-CIO is getting ready to pump even more money into elections by forming a super PAC and targeting developments in the states, the Associated Press reported Monday.
  

Reuters:

• Goldman Sachs(GS) CEO Hires High-Profile Defense Attorney. Goldman Sachs Chief Executive Lloyd Blankfein has hired Reid Weingarten, a high-profile Washington defense attorney whose past clients include a former Enron accounting officer, according to a government source familiar with the matter. Blankfein, 56, is in his sixth year at the helm of the largest U.S. investment bank, which has spent two years fending off accusations of conflicts of interest and fraud. The move to retain Weingarten comes as investigations of Goldman and its role in the 2007-2009 financial crisis continue.
• US: Deutsche Bank(DB) Knew Mortgage Co It Bought Lied. Deutsche Bank AG knew in 2006 that a mortgage company it was preparing to buy lied to the U.S. government about its mortgages, yet went ahead with the purchase and should be held financially responsible, the Justice Department said on Monday. According to the department's amended $1 billion complaint filed Monday evening with the U.S. District Court in Manhattan, Deutsche Bank was "on notice of and expressly assumed responsibility" for wrongdoing at MortgageIT Inc, which it bought in 2007.
• Bernanke's No 'Tooth Fairy,' Fed's Fisher Says - FBN. U.S. Federal Reserve Chairman Ben Bernanke is "not the tooth fairy," a top Fed official told Fox Business Network on Monday, suggesting the Fed chief won't use a speech later this week to extend new monetary stimulus. "His job is not to leave presents under the pillow of people who have desires that may not be easily fulfilled," Dallas Federal Reserve Bank President Richard Fisher said, according to a partial transcript provided by the network. "Our job is to put things right in the long term." Asked what Bernanke will say at a highly-anticipated speech on Friday at an annual central bank conference in Jackson Hole, Wyoming, Fisher said "You'll learn when you hear him speak. Ben Bernanke's not the tooth fairy."
• S&P Upgrades Google(GOOG) Stock Days After "Sell" View.

Telegraph:

• Bank Shares Dive on Funding Fears. Bank shares dived on Monday despite a widespread rally across Europe's major stock markets as questions were raised about their ability to fund themselves.

MailOnline:

• Banks Plug Pensions Holes With Toxic Assets From Financial Crisis. Britain's banks are using toxic assets left over from the financial crisis to plug huge holes in their pension funds. HSBC and Lloyds have both injected assets they have found difficult to sell into their pension schemes, with the effect of reducing their pension deficits, while shifting problem assets off their balance sheets. Banks also gain from capital and tax relief on the transfers. Ros Altmann, director-general of Saga, said the move was a ‘wheeze’ that was ‘deeply worrying’ for bank workers and the taxpayer.
  

Globe and Mail:

• Teachers, Hedge Fund Target S&P Parent. Ontario Teachers’ Pension Plan, the investment manager that handles the retirement savings of nearly 300,000 teachers in the province, is one of McGraw-Hill’s(MHP) largest shareholders. It is also working with New York hedge fund, Jana Partners LLC, to push for a radical overhaul that would spell the end of the New York-based information giant as investors currently know it. And the pension fund’s chief complaint has to do with, of all things, the company’s education unit.

Nikkei:

• 70% of senior Japanese corporate executives surveyed by the Nikkei newspaper said the current yen-dollar rate hurts their companies' earnings.

China Securities Journal:

• China may as early as the end of this month release a list of additional cities that will impose limits on home purchases, citing an informed person. About 30 second- and third-tier cities may be on the list. Cities that have already imposed limits on the price of homes are also likely to be included on this list for limits on purchases, according to the report.

Economic Observer:

• China is requiring 22 more cities to obtain approval from the State Council for the usage of land for construction projects, citing a notice from the Ministry of Land and Resources. The government had previously required 84 cities to seek State Council approval for the use of land. Among the newly added 22 cities are Foshan, Jiaxing, Maanshan, Shaoxing, Sanya and Zhuhai, according to the report.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.50% to +1.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 159.0 +5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 146.50 +1.5 basis points.
• FTSE-100 futures +.49%.
  
• S&P 500 futures +.70%.
  
• NASDAQ 100 futures +.72%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (HAIN)/.33
• (COCO)/.12
• (WSM)//.36
• (MDT)/.79
• (HNZ)/.76

Economic Releases
10:00 am EST

• New Home Sales for July are estimated to fall to 310K versus 312K in June.

Upcoming Splits

• (RYN) 3-for-2
  

Other Potential Market Movers

• The German/French Finance Ministers Meeting, Richmond Fed Manufacturing Index for August, Former Fed Chair Alan Greenspan speaking, 2-year Treasury Notes Auction and the weekly retail sales reports could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Slightly Higher into Final Hour on Eurozone Stock Gains, Short-Covering, Tech Sector Strength, Bargain-Hunting

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Mixed
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 42.19 -2.0%
  
• ISE Sentiment Index 102.0 +45.71%
  
• Total Put/Call 1.06 -19.08%
  
• NYSE Arms .86 -50.92%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 123.44 +3.99%
  
• European Financial Sector CDS Index 237.08 +11.41%
  
• Western Europe Sovereign Debt CDS Index 295.17 -.34%
  
• Emerging Market CDS Index 287.25 +4.18%
  
• 2-Year Swap Spread 32.0 +3 bps
  
• TED Spread 32.0 +2 bps
  

Economic Gauges:

• 3-Month T-Bill Yield -.01% -1 bp
  
• Yield Curve 189.0 +2 bps
  
• China Import Iron Ore Spot $177.80/Metric Tonne +.28%
  
• Citi US Economic Surprise Index -76.60 +5.9 points
  
• 10-Year TIPS Spread 2.04% +2 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +72 open in Japan
• DAX Futures: Indicating -18 open in Germany

Portfolio:

• Slightly Higher: On gains in my Tech, Medical and Retail sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish, as the S&P 500 trades just slightly higher despite recent sharp losses, tech sector strength and strong gains in European equities. On the positive side, Defense, Computer, Computer Service and Telecom shares are especially strong, rising more than +1.0% on the day. Tech sector shares have trades well throughout the day. On the negative side, Gaming, Hospital and Coal shares are under pressure, dropping more than -1.0%. Cyclicals and small-caps are underperforming again. (XLF) has traded poorly throughout the day. Gold is rising +2.27%, the UBS-Bloomberg Ag Spot Index is rising +.71%, Copper is falling -1.04% and Oil is rising +2.37%. Rice is still near a multi-year high, rising +28.0% in about 8 weeks. The US price for a gallon of gas is -.02/gallon today to $3.57/gallon. It is up .43/gallon in about 7 months. The Germany sovereign cds is rising +2.34% to 82.66 bps, the France sovereign cds is rising +5.16% to 157.83 bps, the Greece sovereign cds is rising +2.17% to 2,021.44 bps, the Portugal sovereign cds is gaining +4.37% to 940.02 bps, the Italy sovereign cds is rising +4.24% to 371.50 bps and the UK sovereign cds is rising +2.1% to 82.64 bps. Moreover, the European Investment Grade CDS Index is gaining +4.39% to 140.68 bps. The FRA/OIS Spread made a new multi-year high today and is rising +4.65 bps to 47.25 bps. The 3-Month Euro Basis Swap is falling -2.78 bps to -87.40 bps, which is back to its recent low. The 2-Year Swap Spread is very near its recent high and the TED spread is making a new multi-year high. The Eurozone Financial Sector CDS Index is surging to another new all-time high today. The Nikkei fell -1.04% last night and is approaching its tsunami lows in March. Korean shares fell another -1.96% last night and are down -16.59% ytd. Germany's DAX could not rally with the rest of Europe today and continues to trade horribly, falling -20.8% ytd. China's 7-day repo rate is surging +83 bps today to 5.0%. The UBS-Bloomberg Ag Spot Index is very close to its record high, which is a huge negative. The market remains very oversold. However, I still believe too many investors appear to be depending on the Fed to make some large announcement, which is a mistake, in my opinion, given recent inflation readings and the surge in food prices. As well, gauges of credit angst in Europe continue to deteriorate rapidly despite today's eurozone equity gains, which remains a large negative. I expect US stocks to trade mixed-to-lower into the close from current levels on financial sector pessimism, rising eurozone debt angst, tax hike fears, more shorting, global growth worries, emerging markets inflation fears and rising food/energy prices.