Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Tech Sector Weakness, Global Growth Worries, Emerging Markets Inflation Fears

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Almost Every Sector Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 38.31 +8.11%
  
• ISE Sentiment Index 89.0 -8.25%
  
• Total Put/Call 1.40 +19.66%
  
• NYSE Arms 1.03 +56.34%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 124.0 -2.70%
  
• European Financial Sector CDS Index 238.32 -1.73%
  
• Western Europe Sovereign Debt CDS Index 301.50 +1.50%
  
• Emerging Market CDS Index 299.46 -1.32%
  
• 2-Year Swap Spread 30.0 +1 bp
  
• TED Spread 32.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 202.0 -2 bps
  
• China Import Iron Ore Spot $178.30/Metric Tonne +.11%
  
• Citi US Economic Surprise Index -68.70 +1.0 point
  
• 10-Year TIPS Spread 2.07% +6 bps
  

Overseas Futures:

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

Portfolio:

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

BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 falls meaningfully despite the Buffett/(BAC) deal, rally in (AAPL) shares off the lows, stock gains in Asia overnight and ahead of Bernanke's speech tomorrow. On the positive side, Coal and Homebuilding shares are especially strong, rising over 1.0% on the day. (XLF) has traded very well throughout the day again. Copper is gaining +2.12% and Lumber is rising +.43%. The Japan sovereign cds is falling -3.77% to 108.59 bps and the Belgium sovereign cds is declining -4.9% to 239.83 bps. On the negative side, Energy, Steel, Software, Disk Drive, Networking, Wireless, Biotech, Drug, Hospital, HMO, Restaurant, Gaming, Education, Airline and Tobacco shares are especially weak, falling more than -1.75%. Small-caps are underperforming. Tech shares have lagged throughout the day again. Gold is up +.19%. Oil and food are flat despite stock losses. Rice is still near a multi-year high, rising +26.5% in about 8 weeks. The US price for a gallon of gas is +.01/gallon today to $3.58/gallon. It is up .44/gallon in about 7 months. The Greece sovereign cds is rising +3.50% to 2,302.67 bps, the France sovereign cds is climbing +1.16% to 165.83 bps, the Portugal sovereign cds is gaining +.32% to 1,040.56 bps and the Italy sovereign cds is gaining +.24% to 377.33 bps. The TED spread is at the highest since July 2010. The Eurozone Financial Sector CDS Index is still very near it recent all-time high. The Greece sovereign cds has soared +777 bps since July 22. The Citi Eurozone Economic Surprise Index has plunged -109 points in about 3 weeks to -102.90. Despite gains in most of the rest of Asia overnight, India equities fell another -.85%. They are now down -21.3% ytd and right back to their lows hit 4 days ago. The abrupt plunge in German stocks this morning triggered US equity weakness. Comments out of Germany that the EFSF is currently large enough may have been one of the main catalysts. Germany's DAX is now down -19.2% ytd and continues to trade very poorly. The ongoing rise in key cds remains a large negative. The AAII % Bulls rose to 36.44 this week, while the % Bears rose to 40.96, which is a negative given the current macro backdrop. S&P 500 forward earnings estimates are still at record levels despite the recent sharp deceleration in global economic activity, which could lead to a significant increase in negative earnings pre-announcements over the coming weeks. It is a big negative that the relative strength in (XLF) today has not helped the broad market at all. The fact that the Naz is near its lows(-45) with market leader (AAPL) rallying +17 points off its pre-opening low is also a big negative. I still believe (AAPL) will outperform the market substantially over the intermediate/long-term and would add to my long position again on any extreme market-related weakness in the shares. I expect US stocks to trade modestly lower into the close from current levels on rising eurozone debt angst, tech sector pessimism, global growth worries, more shorting, technical selling and emerging market inflation fears.

Today's Headlines

Bloomberg:

• Stocks Fall After Selling Deluge in Germany. Stocks fell after Germany’s DAX Index (DAX) sank amid concern regulators in the European nation may impose more restrictions on short selling. The dollar, Treasuries and Bank of America Corp.’s shares rallied. The Standard & Poor’s 500 Index dropped 1.6 percent at 12:36 p.m. in New York. The Stoxx Europe 600 Index lost 1.2 percent after rising as much as 1.1 percent. The DAX plunged 4 percent in about 15 minutes before ending the day with a 1.7 percent retreat. Investors bet Germany would ban short selling, said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management Inc. in Chicago. Germany’s Finance Ministry said the speculation was incorrect. After European markets closed, French, Italian and Spanish stock-market regulators decided to extend temporary bans on short selling introduced this month. U.S. equities slumped after American jobless claims increased.
• Jobless Claims in U.S. Rise to 417,000. Claims for U.S. unemployment benefits unexpectedly rose last week, pushed up for a second time by a labor dispute at Verizon Communications Inc. (VZ) Jobless claims climbed by 5,000 to 417,000 in the week ended Aug. 20, Labor Department figures showed today in Washington. Economists surveyed by Bloomberg News projected a drop in claims to 405,000, according to the median forecast. Today’s data showed the four-week moving average, a less- volatile measure than the weekly figures, increased to 407,500 last week from 403,500. The unemployment rate among people eligible for benefits fell to 2.9 percent in the week ended Aug. 13 from 3 percent, today’s report showed.
• Northeast Preps for Biggest Hurricane Threat Since 1985. New York, New Jersey and Delaware officials are preparing for the possibility of mass evacuations as Hurricane Irene threatens to wreak the most havoc in the Northeast since Hurricane Gloria in 1985.
• Volksbanken Won't Pay State Dividend, May Face Nationalization. Oesterreichische Volksbanken AG, the Austrian lender that failed last month's European stress test, may face nationalization after missing a dividend payment on state capital for the third time in as many years. "Due to the difficult economic situation and the implementation of the company strategy for 2015, a payment of dividends" for non-equity participation shares can't be met, Austria's fourth-biggest lender said in a statement today.
  
• CFTC May Adopt Final Speculation Limits as Early as Sept. 22. The U.S. Commodity Futures Trading Commission may vote as early as Sept. 22 to complete Dodd-Frank Act limits on speculative trading in commodities such as oil, natural gas and wheat, CFTC Chairman Gary Gensler said. The so-called position-limits rule and regulations governing derivatives clearinghouses may be voted on by commissioners next month, Gensler told reporters today during a CFTC economic research conference in Washington. The agency has a rulemaking meeting scheduled for Sept. 22. “I don’t know if it will be that meeting or early October,” Gensler said. “I feel very good about the progress staff has made.”
• Crude Oil Futures Advance in New York, Reversing Earlier Decline. Crude oil advanced in New York, rebounding from an earlier decline. Crude for October delivery gained 64 cents, or 0.8 percent, to $85.80 a barrel at 1:10 p.m. on the New York Mercantile Exchange. Brent oil for October settlement rose $1.03, or 0.9 percent, to $111.18 a barrel on the London-based ICE Futures Europe exchange.
• Buffett to Host Obama Fundraiser in New York. Billionaire Warren Buffett plans to hold a Sept. 30 fundraiser in New York City to benefit President Barack Obama’s re-election bid, according to two Democratic officials not authorized to speak publicly about the event.
• Citigroup(C), UBS(UBS) Cut Global Economic Growth Outlook as Jackson Hole Starts. Central bankers began arriving for their annual policy symposium in Jackson Hole as economists from Citigroup Inc. to UBS AG cut forecasts for global growth and predicted interest rates will stay on hold until at least 2013. Citigroup said the world economy will grow 3.8 percent this year and 4 percent in 2012 in purchasing power parity terms, down from 4.2 percent and 4.4 percent. UBS cut its estimate for expansion next year to 3.3 percent from 3.8 percent and Societe Generale SA pared its forecast to 3.9 percent from 4.6 percent.

Wall Street Journal:

• Greek Default Fears Rise. Euro-zone policy makers appeared nowhere near settling a dispute Thursday over Finland's collateral demands in exchange for participating in a €109 billion ($157.1 million) bailout for Greece, raising concerns the Mediterranean nation may default. Markets have grown more worried about the potential for a Greek debt default amid a lack of progress in resolving the collateral issue this week, according to a person familiar with the situation. Finland, meanwhile, shows no sign of backing down. Yields on Greek two-year bonds rocketed to a record of over 43% Thursday, according to Tradeweb, and the cost of insuring Greek government bonds against default also rose sharply. Greek five-year sovereign credit-default swaps were 1.37 percentage points wider at 22.75 percentage points, according to Markit. Euro-zone governments are looking into alternative forms of collateral after a cash deal reached earlier between Greece and Finland was rejected by key member countries, including Germany and the Netherlands. The collateral dispute, if not resolved soon, could derail a second bailout package for Greece agreed by euro-zone leaders on July 21. Without support from all 17 euro-zone countries, no funds can be released, while changes to the European Financial Stability Facility, the currency bloc's bailout fund, can't go forward either. "It seems that a possible outcome is either collateral for all member states or no country will get it," said another person, who remains hopeful a solution can be found by the end of Friday. Finland said Thursday that it continues discussions with Greece and other euro-zone countries to find a solution. Officials refrained from further comment. "The issue has become so politicized that no one here at the Finance Ministry wants to talk about it at the moment," said Anita Sihvola, spokeswoman for the Finnish finance ministry. On Wednesday, Finance Minister Jutta Urpilainen reiterated that Finland won't take part in the Greek bailout unless it obtains collateral.

MarketWatch:

• Job's Departure No Reason to Ditch Apple(AAPL).

Business Insider:

• Roundup: Here's What Everyone Expects From Bernanke At Jackson Hole.
• Spain, Italy, France, Greece and Belgium Extend Bans On Short Selling.
• China Quietly Admits to $470 Billion In Its Underground Banking System.
• Greece Quietly Activates Emergency Liquidity Measures.
• China Swoops In To Claim Lucrative Libyan Infrastructure Deals.
  

Zero Hedge:

• "A Wolf In Sheep's Clothing". This really bothers me. You have to love that Warren Buffett, the richest man in the world, has deemed himself representative and ambassador for those making $250,000 and more..."People like myself" he says. People that take home $250,000 a year before taxes are somehow in the same category as the richest man in the world?
• Obama's Latest Stimulus: Handing Out Jobless Benefits To Striking Workers.
• Irene Is Now Expected To Pass Right Over Wall Street With 74-95 mph Winds. (pic)
  

NY Post:

• Amazon.com(AMZN) May Sell Low-Cost Tablet Next Month.

TheStreet.com:

• Bank of America(BAC), Buffett Deal Stinks: Bove. Bank of America(BAC_)'s $5 billion preferred equity investment from Warren Buffett's Berkshire Hathaway(BRK.A_) is "a terrible, terrible deal," according to Rochdale Securities analyst Dick Bove.

Seeking Alpha:

• Buffett's Deal With Bank of America(BAC) Is Absolutely Terrible... for Bank of America (BAC) that is. For Warren Buffett, this is easily one of the most ruthless, aggressive, and ultimately profitable deals he's struck on behalf of Berkshire Hathaway (BRK.A, BRK.B) since the financial crisis began. Buffett always laments the difficulty in finding good investment opportunities when you're running a company the size of Berkshire, but as this deal shows, sometimes it pays to be a fat cat that can toss around $5 billion at a moment's notice. To demonstrate just how ridiculously good this deal is for Berkshire, let's compare it to another one of Buffet's famous bailouts that has paid off handsomely for his company: his investment in Goldman Sachs (GS).

Nasdaq:

• Pimco CEO: Bernanke Must Avoid 'QE3' In Friday Speech - FT. The head of bond-fund giant Pimco says Federal Reserve Chairman Ben Bernanke should avoid any suggestion the U.S. central bank intends to pursue new purchases of Treasury Bonds and instead use a much-anticipated Friday speech to press for economic reforms. Mohamed El-Erian, in an opinion essay published Thursday on the Financial Times' website, wrote that Bernanke would likely encounter little political support for extending the Fed's policy of "quantitative easing," dubbed "QE3." Moreover, "expectations are far ahead of what he can reasonably deliver in terms of economic outcomes," El-Erian added. The chief executive of Pacific Investment Management Co. said Bernanke's speech Friday at a Fed event in Wyoming could best be used as a forum from which to launch fresh efforts to fix the struggling U.S. economy." Rather than embark on another policy initiative ('QE3') with questionable net benefits, it would be better for Mr. Bernanke to use his Jackson Hole speech to reframe the national policy debate and, in the process, set the stage for President Barack Obama's key economic announcements on September 5. "The time has come for the American policy narrative to be much more explicit about the structural challenges facing the country and, critically, set the stage for proposing to Congress a comprehensive package of self-reinforcing reforms. Mr. Bernanke can facilitate this by using his Jackson Hole remarks as the warm-up act for Mr. Obama's critical speech on the economy next month. Anything beyond this would run the risk of the Fed building another costly bridge to nowhere."

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 21% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-five percent (45%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -24 (see trends).

Handelsblatt:

• Finland's agreement with Greece on collateral to cover its bailout contribution won't be accepted by other euro region member-states, citing people familiar with the matter. The agreement is "off the table," German Finance Minister Wolfgang Schaeuble said at a meeting of the parliamentary groups of the Christian Democratic Union and its Christian Social Union sister party, according to people who attended.

Confidencial:

• Spain's government plans to reintroduce a wealth tax scrapped in 2008, and increase the minimum threshold at which the levy applies to 1.5 million euros. The Cabinet plans to adopt the measure at its meeting tomorrow.

Le Echos:

• European banks are more vulnerable to the debt crisis than their U.S. counterparts because their capital levels are smaller, citing PIMCO's Mohamed El-Erian. Europe's banks didn't raise capital during the relative calm of 2010, and the region's lenders also carry higher debt and lower deposits in the euro area's "peripheral" countries, he said in an interview. The ECB has been contaminated by increasing amounts of the debt of the region's troubled countries and has now become an inherent part of the euro zone's problems, he said. The solution to Europe's debt crisis may mean choosing between saving the problem countries on the euro zone's periphery and preserving its solid core, he said.

Xinhua:

• China will continue macro-control policies on the property sector "without changing the direction or loosening the policies," Zhang Ping, head of the National Development and Reform Commission, was cited as saying.
• China's head of the National Development and Reform Commission Zhang Ping said it will be "difficult to keep the consumer price index growth below the government's target this year."
• Inflationary expectations in China may continue to grow and prices are likely to remain high, making price-control targets harder to achieve, citing a government official. "Global liquidity will remain abundant in the short term and imported inflationary pressure has not eased by much," said Zhang Ping, head of the National Development and Reform Commission, China's top economic planner, in a report to the National People's Congress.
  

China News:

• China will strictly control the size of local government debt, citing Chinese Finance Minister Xie Xuren.

Bear Radar

Style Underperformer:

• Mid-Cap Value (-1.60%)

Sector Underperformers:

• 1) Airlines -2.81% 2) Networking -2.51% 3) Insurance -2.31%

Stocks Falling on Unusual Volume:

• AVAV, BP, VOD, RUE, PDCO, CISG, SHPGY, URBN, GOLD, CPLA, CY, MCRS, INFY, NIHD, TWGP, GSM, AGNC, RNOW, MDVN, NAVG, ULTI, GES, CSS, CPK, MTK, EWG, JXI, LFC, HRL, IVR, EXPR, ATLS, SPW and SLH
  

Stocks With Unusual Put Option Activity:

• 1) PSS 2) HON 3) HAL 4) SCHW 5) MOO
  

Stocks With Most Negative News Mentions:

• 1) UTHR 2) LDK 3) CSUN 4) SCHW 5) QLGC
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value (-.91%)

Sector Outperformers:

• 1) Banks +1.38% 2) Gold & Silver +.39% 3) Coal +.29%

Stocks Rising on Unusual Volume:

• C, BCS, NSANY, DEO, ATPG, CHU, NGD, PANL, BECN, CAVM, PSS, SIG and HEI
  

Stocks With Unusual Call Option Activity:

• 1) XHB 2) AONE 3) PSS 4) VMED 5) GOLD
  

Stocks With Most Positive News Mentions:

• 1) FFIV 2) TTC 3) EME 4) MDT 5) BAX
  

Charts:

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

Thursday Watch

Evening Headlines

Bloomberg:

• Steve Jobs Resigns as Apple(AAPL) CEO. Apple Inc. (AAPL) Chief Executive Officer Steve Jobs, who transformed the company he started at age 21 from a personal-computer also-ran into the world’s largest technology company, resigned. Jobs, who will become chairman, was on medical leave since Jan. 17 after combating a rare form of cancer since 2003 and surviving a liver transplant in 2009. He is succeeded by Chief Operating Officer Tim Cook, 50, who has been running day-to-day operations. “I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know,” Jobs, 56, said in a statement yesterday. “Unfortunately, that day has come.” Under Jobs, Apple became the second-most valuable company in the world, after Exxon Mobil Corp. (XOM), by introducing devices that revolutionized the computer, music and mobile phone industries. “He’s always going to be remembered, maybe for the next 100 years, as the greatest technology business leader of our time,” Steve Wozniak, who co-founded Apple with Jobs, said in an interview on “Bloomberg West.” “Company culture doesn’t change overnight. He’s got tens of thousands of employees. The quality of the products reflects how good they are, too.”
  
• Bernanke Signaling No QE Backed by Data. Federal Reserve Chairman Ben S. Bernanke tomorrow may disappoint stock investors betting on a commitment to step up stimulus. He has little choice, given rising consumer prices and a U.S. economy that is still growing. Gasoline costs are 33 percent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago at the annual Fed symposium in Jackson Hole, Wyoming. While the U.S. expansion has slowed, the Chicago Fed’s index of 85 economic indicators improved in July for a third month on gains in production. Policy makers, who said Aug. 9 they’ll use additional tools “as appropriate,” probably don’t expect a recession or rapid disinflation, making a signal of bond buying premature, said Roberto Perli, managing director at International Strategy & Investment Group in Washington. Instead, Bernanke will probably detail options for further stimulus and clarify how much the Fed’s reduction in its outlook this month stems from long-term obstacles to growth, said Keith Hembre, a former Fed researcher. “Conditions are substantially different today” compared with last year, especially inflation, said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $212 billion. “First and foremost, that would be the reason I think that any sort of major asset purchase announcement is unlikely,” he said.
• Derivatives 'Data Gaps' May Hide Threats to Stability of Financial Markets. Regulators said they might not have enough information to assess the threat over-the-counter derivatives pose to the financial system. Shortfalls in available data may undermine attempts to use so-called trade repositories as a tool to improve market oversight, the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions said in a report published today. The lack of details on the value of trades “presents a potential gap in the data that authorities may require to fulfill” their mandates, the organizations said. More data on collateral would allow regulators to “better assess exposures, counterparty risk and ultimately systemic risk,” they said.
• The slide in U.S. gasoline demand to a nine-year low is adding to evidence the faltering economy is keeping motorists off the road as the nation heads toward the Labor Day holiday. The amount of gasoline supplied to the U.S. market by refiners and blenders fell 2% to 9.01 million barrels a day last week, the lowest level for this time of year since 2002, an Energy Department report showed yesterday. American drivers last week bought 4.2% less fuel than a year earlier, MasterCard Inc. said Aug. 23.
  

Wall Street Journal:

• Apple's(AAPL) Deep Bench. Mr. Jobs provided a charismatic persona and sharp instinct for knowing what consumers want. But his bench is considered a strong management team that has largely stayed out of the limelight until now.
• German Unease May Add to Europe's Woes. With conditions becoming dimmer for Europe's biggest economy, consumers may hunker down more, an added burden for a euro bloc struggling to contain a debt crisis.
• A Rush Out of 'Junk'. The market for "junk" bonds is enduring its worst rout since the depths of the financial crisis. Demand for high-yield bonds sold by the riskiest U.S. companies has nearly dried up, an ominous sign for low-rated companies hoping to tap the bond markets and private-equity firms trying to finance leveraged buyouts. New junk-bond offerings in August were at their lowest level since December 2008. Retail investors have been withdrawing record amounts from high-yield mutual funds, forcing those funds to dump bonds in order to raise cash, driving prices even lower. Returns on junk bonds—those rated below investment grade, which offer a high yield due to a high risk of default—dropped to negative 5.1% in August, the worst monthly performance since November 2008, according to the Barclays Capital U.S. High Yield Index.
• Greek Banks Set to Lose €5 Billion in Bonds Swap. Greek banks are expected to face combined losses totalling about €5 billion under a proposed bond-swap program, a Greek government official said Wednesday, adding that the program is now slated to conclude in October. Speaking to Dow Jones Newswires, the official added that the banks are expected to reflect the impact of those losses when they announce their quarterly earnings next week. "The amount of the losses is yet to be determined, but estimates are for roughly €5 billion. They may be reflected in the banks' second-quarter results due by Aug. 31," the official said.
• Europe Banks Lean More on Emergency Funding. New signs of stress are piling up in the ailing European banking system. Commercial banks boosted their reliance on the European Central Bank, borrowing €2.82 billion ($4.07 billion) from an emergency lending facility on Tuesday, while other banks continue to park unusually large amounts with the central bank, according to data released Wednesday. While the amount of borrowing is tiny relative to the multitrillion-euro European banking system, it, and the increase from €555 million a day earlier, nonetheless suggest that some lenders are struggling to borrow from traditional funding sources, such as the capital markets or other banks. The ECB charges a punitive 2.25% interest rate to borrow from its facility, well above what a healthy bank typically would pay to borrow via other channels and Tuesday's total is well above normal. Adding to the jitters, executives at Rabobank Groep NV said the Dutch lender is growing increasingly cautious about lending money to rival banks. Echoing past comments from other European bank executives, the Rabobank officials noted they have seen a pullback among the U.S. funds that traditionally have been important sources of liquidity for European lenders. All told, the evidence points to an environment when even strong European banks are finding it harder to obtain affordable long-term funding.
• John Paulson's Advantage Plus Fund Down -38.7% This Year. John Paulson, the hedge-fund billionaire who runs $35 billion Paulson & Co., has suffered further losses in one of his core funds, as his losing streak continues. Paulson’s Advantage Plus fund has lost 38.7% so far this year, through the end of Friday’s trading, according to someone briefed on the figures. The fund has lost 21.7% for the month, through Friday, underscoring how rough this month has been for the well-known investor. Another fund, Paulson Partners, lost 14.4% in August, through Friday, according to an investor, and is down 11.8% for the year. This is a merger-arbitrage fund that in the past often has not had the same volatility as other funds. Though Paulson slashed holdings of Bank of America by more than half last quarter, his firm still holds shares of the beleaguered bank, as well as shares of other stocks that have fallen lately including Citigroup and Hewlett-Packard. Stocks have rallied this week, potentially helping Paulson’s holdings. But his vast gold investments likely tumbled in value amid the sell-off in gold this week.
• Pensions Check Quality Rules After S&P Rating Cut. Some public and private pension funds are working to revise their investment guidelines after they were thrown into question when Standard & Poor's Ratings Services downgraded U.S. debt, financial consulting firms said. A principal area of concern for these funds is the overall minimum quality rating for a fixed-income portfolio—in the form of a letter grade—and what the guidelines call for when that rating is breached. The downgrading of a single security wouldn't significantly affect such a rating, but a blanket downgrade of U.S. government securities is a different matter. "The way many investment guidelines are written did not really assume that U.S.-backed debt would ever be downgraded," said Steve Center, vice president at consulting firm Callan Associates. He said he has been working for the past two weeks with several investors, including pension funds, to clarify their guidelines.
• SEC Bears Down on Fracking. The Securities and Exchange Commission is asking oil and gas companies to provide it with detailed information—including chemicals used and efforts to minimize environmental impact—about their use of a controversial drilling process used to crack open natural gas trapped in rocks. The federal government's investor-and-markets watchdog is stepping into the heated environmental debate surrounding hydraulic fracturing, or "fracking," according to government and industry officials, even as state and federal environmental officials have begun to bring greater pressure on the industry.
• SEC Officials Are Focus of Inquiry. The Securities and Exchange Commission's internal watchdog is investigating whether enforcement officials misled the government's archives agency last year by saying the SEC was "not aware" of the destruction of certain probe-related records, according to people familiar with the matter. The matter is part of a broader, continuing investigation by the SEC's Inspector General office into whether the Wall Street regulator improperly destroyed thousands of records connected to "matters under inquiry," or MUIs. MUIs are the enforcement division's preliminary looks into potential violations of securities law at hedge funds, Wall Street banks and other firms.
• New Ways to Track Your Kids Online. Web programs and apps alert parents to sexting, bullying and other problems.
• Euro-Zone Data Show Rough Path Lies Ahead. A slump in German business confidence and an unexpected fall in euro-zone factory orders marked the latest in a string of forward-looking data to suggest the bloc's economy is losing momentum.
• Obama and the 'Competency Crisis' by Mortimer Zuckerman. Like many Americans who supported him, I long for a triple-A president to run a triple-A country. Mr. Obama seems unable to get a firm grip on the toughest issue facing his presidency and the country—the economy. He now asserts he is going to "pivot" to jobs. Now we pivot to jobs? When there are already 25 million Americans who are either unemployed or cannot find full-time work? Does this president not appreciate what is going on?

MarketWatch:

• Hurricane Scenarios Run From Bad to Worse. Right now we have a rapidly strengthening, Category 3 hurricane heading for the eastern seaboard. We still don’t know exactly where or when it will strike land, but we do know that the potential impact could — emphasis on could — be catastrophic.

CNBC:

• CME Raises Margin Requirements for Trading Gold Futures. The CME Group on Wednesday raised maintenance margins for trading COMEX 100-ounce gold futures by 27 percent, effective after the close of business on Aug 25.
• Is High-Speed Computer Trading Killing Investing? High speed computer trading by funds with holding periods of sometimes just milliseconds are to blame for rising volatility, the disappearance of diversification and the death of individual stock picking, and the problem is going to get worse, say an number of traders and market strategists.
• Applied Materials(AMAT) Beats Street; Outlook Dismal. Applied Materials posted quarterly results that beat market estimates, but the chip-gear maker forecast dismal fourth-quarter results on weak macro-economic conditions and a glut in the solar cell market.

Business Insider:

• Incredible Time-Lapse Of Construction At The 9/11 Memorial.
• Mossberg: "Extremely Well Informed Sources" Say Steve Jobs Will Still Work On Major Products And Strategy.
• Actually, Apple(AAPL) Will Be Fine Without Steve Jobs.
• 18 Amazing Facts About Small Businesses In America.
• Chart of the Day: S&P 500 Correlations Hit Record as Stocks Move En Masse.
  

IBD:

• RightNow(RNOW) Tech Helps Companies Keep Customers Happy.

NY Times:

• Behind the Glittery Web Start-Ups, Investors See Other Gold. While the spotlight of the latest technology boom has been trained on a cluster of popular consumer applications like Facebook, Groupon and Zynga, investors are increasingly taking a shine to the start-ups building the infrastructure for those Internet powerhouses.

CNN:

• Another Summer Chill for Youth Unemployment. The U.S. job market sure has been rough, but for young Americans this summer it was downright dismal. A Bureau of Labor Statistics report released Wednesday said 745,000 more job seekers between 16 and 24 years old were unemployed from April to July. That compares with an increase of 571,000 among the same age group last summer. In July, the share of young people who were employed was 48.8%, marking a record low for the second straight year. July is traditionally the peak month for summertime employment. "This has been another summer of lost opportunities for our nation's young people," said Michael Saltsman, research fellow at the Employment Policies Institute. While the job market for all Americans has been sluggish, the weak economy has hit young job seekers particularly hard. The youth unemployment rate in July was 18.1%, compared with 9.1% overall.

Institutional Investor:

• How Badly Will The Gold Dive Hurt John Paulson? Is gold a bubble that is finally bursting? This is the big question on Wall Street after the metal dropped $104, or 5.6 percent, on Wednesday. It is down more than 7 percent after hitting an all-time high on Monday. If gold is truly a bubble that is now bursting — like energy prices did in mid-2008 after a stunning run-up in the first half of that year — a number of high-profile hedge funds stand to lose a lot. No one is poised to implode harder than John Paulson, who has staked virtually his entire fortune on gold and related investments. And he can ill afford another big loser in his portfolio: Through August 12 his Advantage Plus fund was already down 33.5 percent year-to-date. For one thing, most of Paulson’s personal money is in the gold share classes of his various hedge funds or his gold fund. In addition, his funds are heavily exposed to gold. For example, at the end of the second quarter, his firm, Paulson & Co, owned nearly $6 billion worth of the SPDR Gold Trust ETF. Paulson had an additional $1.76 billion in AngloGold Ashanti, a major global gold producer based in South Africa. These two positions made up 30 percent of Paulson & Co.’s equity assets alone. The hedge fund manager also had an additional $400 million invested in Gold Fields, another South African gold miner.

Rasmussen Reports:

• 14% Say U.S. Heading In Right Direction.

Reuters:

• US Green Groups Write Obama to Oppose Oil Pipeline. Ten U.S. environmental groups came out in support of hundreds of protesters arrested at the White House since Saturday for opposing a proposed $7 billion pipeline that would greatly expand imports of crude extracted from Canadian oil sands. The pipeline and processing of the oil, they claim, can potentially spill oil over a vast source of underground water, release large amounts of greenhouse gases, and damage Canadian forests. "We want to let you know that there is not an inch of daylight between our policy position on the Keystone Pipeline and those of the very civil protesters being arrested daily outside the White House," the head of the groups said in a letter sent to President Barack Obama. The groups include the Environmental Defense Fund, the Sierra Club, and the Natural Resources Defense Council. Backers of the project say it would create thousands of well-needed jobs and reduce U.S. dependence on oil from countries that are unfriendly to Washington. TransCanada believes the line will be approved and in service by 2013. The letter said Obama would "trigger a surge of enthusiasm from the green base that supported you so strongly in the last election," should he block the project. "Democrats have to be worried about the youth vote," said Kert Davies, a researcher at Greenpeace, one of the groups that signed the letter. Obama has done some things that environmentalists like, such as raising fuel efficiency standards for vehicles. But support from such voters could wane if Obama decides to approve the Keystone line. "Like it or not greens helped get Obama elected in 2008, but right now many are uninspired," said Davies.

Financial Times:

• Australia: Derailment Danger. The China-fuelled resources boom is at risk.

Die Welt:

• The European Union has begun proceedings against Germany, accusing the government of violating the EU treaty regarding the free movement of people.

Tokyo Shimbun:

• The crippled Fukushima Dai-Ichi nuclear plant emitted about 169 times the amount of radioactive cesium-137 released by the atomic bombing of Hiroshima, citing a Japanese government estimate submitted to a parliamentary committee. The Tokyo Electric Power Co. plant emitted 15,000 terabecquerels of cesium-137, the report said.

Asia Economy Daily:

• General Motors Co.'s(GM) South Korean unit plans to raise output by 20% next year, citing industry officials.

China Securities Journal:

• China should guard against large economic fluctuations, the China Securities Journal said in a front-page editorial today. Third-quarter economic growth should slow from the second quarter and export growth may have an obvious decline in the next several months. The inflation situation is also complicated because a "turning point" in August when consumer prices will probably grow at a slower pace than July's 6.5% gain won't mean inflation is entering a continuous downtrend. The frequency of monetary tightening may slow in the next several months although further tightening is possible.

China Business News:

• China should consolidate management of local government debt so as to have "complete" control, Ba Shusong, a researcher with the Development Research Center of the State Council, wrote in a commentary. China's prohibition on local government's use of new debt to repay old debt will increase the liquidity risk for local governments and their financing vehicles, Ba writes.
  

China Daily:

• Li Jianguo, vice chairman of the Standing Committee of China's National People's Congress, said the nation's "rapidly" aging population is a "serious" challenge to the introduction of an affordable and comprehensive pension system. Social security funds in some regions have had deficits because the population of retirees is larger than that of workers, citing Li.

National Business Daily:

• China's inflation rate in August may be equal to or even higher than July levels as pork prices jumped. China's August pork prices may climb about 50% from a year earlier, lifting consumer prices. Pork prices are unlikely to decline "significantly" in the short term because tight supply of live hogs hasn't eased, citing Li Guoxiang, a researcher at the Chinese Academy of Social Sciences.
  

Evening Recommendations
KeyBanc:

• Rated (VMI) Buy, target $110.
  

Night Trading

• Asian equity indices are -.50% to +1.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 165.0 +4.25 basis points.
  
• Asia Pacific Sovereign CDS Index 157.0 +6.0 basis points.
• FTSE-100 futures +.49%.
  
• S&P 500 futures -.23%.
  
• NASDAQ 100 futures -.88%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PDCO)/.44
• (HRL)/.35
• (BIG)/.45
• (FRED)/.13
• (MCRS)/.49
• (SAFM)/-.91
• (CPWM)/-.40
• (KKD)/.06
• (OVTI)/.71

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to fall to 405K versus 408K the prior week.
• Continuing Claims are estimated to fall to 3700K versus 3702K prior.
  

Upcoming Splits

• (CLW) 2-for-1
  

Other Potential Market Movers

• The 7-Year Treasury Note Auction, weekly EIA natural gas inventory report, Fed's weekly Balance Sheet/M1, M2 reports and the weekly Bloomberg Consumer Comfort Index could also impact trading today.
  

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

Stocks Rising into Final Hour on Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting, Falling Commodity Prices

Broad Market Tone:

• Advance/Decline Line: Higher
  
• Sector Performance: Mixed
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 36.65 +1.05%
  
• ISE Sentiment Index 100.0 -45.0%
  
• Total Put/Call 1.128 +24.27%
  
• NYSE Arms .70 -7.79%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 127.44 -.38%
  
• European Financial Sector CDS Index 244.47 +3.55%
  
• Western Europe Sovereign Debt CDS Index 297.17 +.34%
  
• Emerging Market CDS Index 304.99 -.05%
  
• 2-Year Swap Spread 29.0 -4 bps
  
• TED Spread 31.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 204.0 +12 bps
  
• China Import Iron Ore Spot $178.30/Metric Tonne +1.83%
  
• Citi US Economic Surprise Index -69.70 +6.9 points
  
• 10-Year TIPS Spread 2.01% +2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +110 open in Japan
• DAX Futures: Indicating +12 open in Germany

Portfolio:

• Higher: On gains in my Tech, Medical and Retail sector longs
  
• Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short
  
• Market Exposure: Moved to 100% Net Long

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 builds on yesterday's sharp gains despite rising eurozone debt angst, mixed economic data and emerging markets inflation fears. On the positive side, Education, Gaming, Construction, HMO, I-Banking, Bank, Paper, Coal, Utility and Defense shares are especially strong, rising more than +1.5% on the day. Cyclicals are strongly outperforming. (XLF) has traded very well throughout the day. Gold is plunging another -5.5%, Silver is falling -6.05%, Copper is gaining +.24%, the UBS-Bloomberg Ag Spot Index is down -.72%, oil is falling -1.0% and Lumber is surging +4.5%. The 10-year yield is jumping +14 bps to 2.29%. The FRA/OIS spread is dropping -5.68 bps to 44.2 bps, which is also a big positive. On the negative side, Networking and Semi shares are relatively weak, falling more than -.5%. Tech shares have lagged throughout the day. Rice is still near a multi-year high, rising +27.0% 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 +.74% to 85.44 bps, the Greece sovereign cds is rising +5.14% to 2,230.36 bps, the Portugal sovereign cds is gaining +2.15% to 1,036.67 bps, the Brazil sovereign cds is rising another +.67% to 164.76 bps, the China sovereign cds is gaining +3.33% to 119.37 bps, the Russia sovereign cds is gaining +2.68% to 212.0 bps, the Japan sovereign cds is climbing +3.23% to 112.84 bps and the Israel sovereign cds is gaining +3.76% to 167.25 bps. Moreover, the European Investment Grade CDS Index is gaining +4.48% to 151.95 bps. The TED spread is still near a multi-year high. The Eurozone Financial Sector CDS Index is surging to another new all-time high today. The European Investment Grade CDS Index is now at the highest level since April 2009. The Greece sovereign cds has soared +698 bps since July 22. The China Corporate Blended Spread Index is hitting an new multi-year high today, rising +7.0 bps to 636.0 bps. The China sovereign cds is right at a multi-year high. The China Development Bank Corp. cds has gone parabolic, rising +106 bps since Aug. 2nd to 259.0 bps. Asian equities traded poorly overnight. Hong Kong shares fell -2.06% and India equities fell -1.3%. They are now down -15.5% and -20.6%, respectively, ytd. The ongoing rise in key cds remains a large negative. As well, volume continues at an uninspiring pace during this recent equity advance. With several recent reports suggesting hedge funds are poorly positioned to take advantage of any rally, much of the stock bounce off the lows is likely related to hedge fund short-covering ahead of Bernanke's speech. However, the Total Put/Call 10-Day Moving Average remains extremely elevated. I still believe further near-term gains are likely, however key gauges of European credit angst must begin to improve very soon or equity weakness will likely resume over the coming weeks. As well, the rise in Asian cds is becoming a concern. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less financial sector pessimism, buyout speculation, the decline in bonds/precious metals and lower food/energy prices.