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

Broad Market Tone:

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

Equity Investor Angst:

• VIX 40.46 +17.89%
  
• ISE Sentiment Index 68.0 -37.61%
  
• Total Put/Call 1.47 +32.43%
  
• NYSE Arms 6.18 +289.97%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 130.60 +6.61%
  
• European Financial Sector CDS Index 284.58 +12.68%
  
• Western Europe Sovereign Debt CDS Index 332.33 +3.64%
  
• Emerging Market CDS Index 308.80 +7.19%
  
• 2-Year Swap Spread 35.0 +4 bps
  
• TED Spread 33.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .00% -1 bp
  
• Yield Curve 175.0 -4 bps
  
• China Import Iron Ore Spot $179.50/Metric Tonne -.22%
  
• Citi US Economic Surprise Index -41.80 +.5 point
  
• 10-Year TIPS Spread 1.98% -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -267 open in Japan
• DAX Futures: Indicating -36 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 trades substantially lower, near session lows, on rising Eurozone debt angst, more financial sector pessimism, forced selling, more shorting, terrorism fears, emerging markets inflation fears, technical selling and global growth worries. On the positive side, Semi shares are holding up relatively well, falling less than -1.0%. Oil is falling -1.8%, Gold is declining -1.0% and the UBS-Bloomberg Ag Spot Index is falling -.4%. On the negative side, Alt Energy, Oil Service, Steel, Networking, Medical, Hospital, HMO, Construction, Homebuilding, REIT, Restaurant and Road & Rail shares are under significant pressure, falling more than -4.0%. (XLF) traded poorly throughout the day. Small-caps are also underperforming. Lumber is down -3.58% and Copper is falling -3.46%. Rice is surging +2.8% today and is right back to its multi-year high, rising +38.0% in about 9 weeks. The average US price for a gallon of gas is +.01/gallon today to $3.66/gallon. It is up .52/gallon in about 7 months. The Germany sovereign cds is gaining +6.55% to 84.17 bps, the France sovereign cds is surging +5.96% to 180.83 bps, the Spain sovereign cds is surging +5.42% to 412.50 bps, the Italy sovereign cds is gaining +8.14% to 468.17 bps, the Greece sovereign cds is soaring +22.9% to 3,470.13 bps, the Ireland sovereign cds is gaining +4.4% yo 866.67 bps, the Russian sovereign cds is gaining +8.6% to 213.67 bps, the Brazil sovereign cds is rising +5.8% to 160.68 bps, the Portugal sovereign cds is gaining +6.43% to 1,128.33 bps, the Belgium sovereign cds is gaining +5.95% to 287.17 bps and the UK sovereign cds is rising +5.01% to 80.67 bps. Moreover, the Eurozone Investment Grade CDS Index is surging +9.5% to 173.59 bps, which is the highest since April 2009. The Greece and Italy sovereign cds are hitting all-time highs today. The Portugal, France, Spain, Belgium and Germany sovereign cds are very close to their record highs. The Eurozone Financial Sector and Western European Sovereign CDS Indices are making new all-time highs. The 3-Month Euribor-OIS Spread is surging +8 bps to a new multi-year high at 83.0 bps. The 3-Month Euro Basis Swap is plunging -12.29 bps to a multi-year low of -107.21 bps. The The UBS-Bloomberg Ag Spot Index is still near its recent record high, which is also a large negative. India's Sensex was the worst-performer in Asia overnight, declining -1.74%, and is now down -17.8% ytd. The major European stock indices plunged around -4.0% today and are right back at their lows for the year. Germany's DAX continues to trade horribly and is now down -25.0% ytd. Most gauges of eurozone debt angst remain very elevated and continue to trend higher, which remains a large concern. The euro currency's decline is beginning to become disorderly which is always a stock market negative. As well, the credit markets are beginning to seize up too much. I still think the euro has much further downside longer-term, notwithstanding any near-term oversold technical bounce. It remains a big negative that earnings expectations are still near record levels despite the obviously large deceleration in global growth. Some of today's decline is likely related to terrorism fears over the weekend, however any rally on Monday will likely prove short-lived until the situation in Europe stabilizes. I expect US stocks to trade mixed-to-lower into the close from current levels on rising eurozone debt angst, more financial sector pessimism, more shorting, terrorism fears, emerging markets inflation fears, technical selling, forced selling and global growth worries.

Today's Headlines

Bloomberg:

• ECB Dealt Blow as Board Member Stark Resigns. Juergen Stark resigned from the European Central Bank’s Executive Board after protesting the bank’s bond purchases on a conference call earlier this week, said a euro-area central bank official familiar with the meeting. During the Sept. 4 call, Stark, 63, expressed his strong opposition to the program, which was expanded last month when the ECB started buying Italian and Spanish bonds, said the official, who spoke on condition of anonymity because the discussions are confidential. Stark was supported by the central banks of Austria and the Netherlands, the person said. The resignation of Stark, the ECB’s chief economist, is a blow to the bank, the official said, noting he is the second German ECB member after Axel Weber to leave over the bond program. Stark’s resignation, less than two months before President Jean-Claude Trichet’s term ends, suggests policy makers are increasingly split over the best way to fight Europe’s debt crisis. The ECB’s bond purchases have also been opposed by Bundesbank President Jens Weidmann and his predecessor Weber, who earlier this year pulled out of the running to succeed Trichet. “There is quite a severe row going on,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “It seems that it went too far.”
• Bank, Sovereign Bond Risk Surge to Records on Greek Debt Woes. The cost of insuring European financial and sovereign debt rose to records after Juergen Stark said he will resign from the European Central Bank’s Executive Board and Greece’s debt woes deepened. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers increased 26 basis points to 290, according to JPMorgan Chase & Co. at 4:30 p.m. in London. The gauge, which is up from 246 basis points Sept. 2, is heading for the biggest weekly increase since March 2009. Swaps on Greece soared 701 basis points to a record 3,727 basis points, signaling a 94 percent probability of default, according to CMA. “A Greek default could accelerate the bank deleveraging process,” said Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London. “Balance sheet losses and rising risk premia could force banks and investors to sell other assets. In an illiquid market, this could be a fire-sale.” The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 11 basis points to 333.5 basis points. The Euribor-OIS spread, a measure of banks’ willingness to lend to each other, widened to 82.3 basis points in London, the highest since March 2009 and up from 73.95 basis points yesterday. The premium European banks pay to borrow in dollars for one year through the swaps markets increased to the most since December 2008. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, fell 7.1 basis points to 66.3 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback, according to data compiled by Bloomberg. Swaps on Portugal climbed 60 basis points to 1,126, Ireland rose 20 to 856 and Italy was up 24 at 458, CMA prices show. An index of credit-default swaps on banks’ subordinated debt jumped 47 basis points to an all-time high of 520 basis points. Swaps on the senior debt of Italy’s biggest lender UniCredit SpA increased 20 basis points to 260 and Germany’s WestLB AG rose 25 to 375, according to CMA. An increase signals deteriorating perceptions of credit quality. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 54 basis points to 769. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 17 to 191. Swaps on Porsche Automobil Holding SE jumped 50 basis points to 247, CMA prices show.
• Euro Falls to Six-Month Low on Concern Greece Considers Default. The euro declined to a six-month low against the dollar and yen rallied on concern Greece’s deteriorating financial condition may lead to default, deepening the region’s debt crisis. The yen strengthened against the dollar and the euro, erasing earlier losses, as investors sought the Japanese currency as an alternative to the U.S. currency. The 17-nation euro weakened amid speculation the region’s central bank will dilute a proposal to wean distressed banks off its emergency funding, said a euro-area official familiar with the deliberations. The Dollar Index headed for the biggest weekly gain since May 2010. “There is a lot of chatter right now that Greece may default over the weekend,” said Charles St-Arnaud, a foreign- exchange strategist at Nomura Holdings Inc. in New York. “A lot of investors are reducing their exposure and trying to find cover in case something happens over the weekend. The euro depreciated 1.7 percent to $1.3648 at 11:55 a.m. in New York, after dropping to $1.3643, the lowest level since Feb. 22. The currency has slumped 3.9 percent this week, the most since the period ended August 2010.
• Interest-Rate Swap Spreads Climb as Europe Debt Crisis Deepens. Two-year interest-rate swap spreads, a gauge of fear in the debt markets, rose to the highest since July 2010 as the cost to protect European financial and sovereign debt surged. The difference, or spread, between the two-year swap rate and the comparable-maturity Treasury note yield climbed 3.13 basis points to 34.32 basis points as of 12:02 p.m. in New York. The measure has climbed from 23.37 since the end of July as investor concern has mounted that Europe’s fiscal imbalances will spread and harm bank balance sheets. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers increased 18 basis points to 282, according to JPMorgan Chase & Co. at 2:30 p.m. in London. The gauge, which is up from 246 basis points Sept. 2, is heading for the biggest weekly increase since March 2009. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed six basis points to 328.5.
• Greece Must Cut Debt or 'Probably' Exit Euro, Flaherty Says. Greece may have to leave the euro if it fails to press ahead with its budget-cutting plans, Canadian Finance Minister Jim Flaherty said. "It's necessary for the Greek government to stay the course," Flaherty told reporters in Marseille, France, where he is attending a meeting of Group of Seven officials. "The alternative is probably that they leave the euro. I expect the Greek government would want to continue their fiscal consolidation."
• Greece Says No Plan to Publish Debt-Swap Numbers Either Today or Next Week. Greece has no plans to publish details of anticipated participation in its debt-swap program this week or next, said Petros Christodoulou, head of the country’s debt management office. The response so far has been “very positive,” he said in a telephone interview. “There will not be a number coming out of Athens today or next week. At this moment, more than half of the Europeans have not even responded. It is too early.” Credit-default swaps insuring Greek government bonds jumped 701 basis points to a record 3,727 basis points, according to CMA. The five-year contracts signal there’s a 94 percent probability the country won’t meet its debt commitments.
• Treasury 10-Year Yield Falls to Record on Greece Default Concern. Treasuries rallied, pushing 10-year note yields to a record low, as concern Greece may default this weekend stoked demand for a refuge from Europe’s deepening sovereign-debt crisis. Benchmark 10-year government securities headed for a second weekly gain as German Chancellor Angela Merkel’s government prepared plans to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt. “Fear is driving everything right now,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “People are nervous about Greece defaulting this weekend. That’s why you’re getting this kind of jump in the market.” Yields on 10-year notes dropped six basis points, or 0.06 percentage point, to 1.92 percent at 12:21 p.m. in New York, according to Bloomberg Bond Trader prices.
• Crude Oil Declines Most in Three Weeks as Dollar Rises on Greek Debt Woes. Oil dropped the most in three weeks in New York as the euro tumbled against the dollar on concern that Greece’s deteriorating debt crisis will lead to a default.Oil fell as much as 3.8 percent after Europe’s single currency declined to a six-month low and European bank and sovereign credit risk surged to all-time highs. A plan for jobs growth announced yesterday by President Barack Obama failed to boost confidence in the U.S., the world’s largest economy. “The concerns out of Europe and the positive relationship between oil prices and the euro are the catalyst,” said Stephen Schork, president of the Schork Group Inc., an energy advisory company in Villanova, Pennsylvania. “The euro is getting crushed and putting pressure on all our markets right now.” Crude for October delivery dropped $2.35, or 2.6 percent, to $86.70 a barrel at 1:18 p.m. on the New York Mercantile Exchange. The decline was the largest since Aug. 18. Prices are up 0.3 percent this week and down 5.2 percent this year.
• Copper Tumbles Most in a Month as Obama, Bernanke Fail to Boost Confidence. Copper tumbled the most in a month as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke failed to boost investor confidence in the economy. Global equities dropped as Bernanke stopped short of detailing new plans to boost growth in the world’s largest economy in a speech yesterday, making no reference to further asset purchases by the central bank. Obama called on Congress to pass a plan that would inject $447 billion into the economy. The U.S. is the world’s biggest copper consumer after China. “Obama’s plan is just not convincing enough,” Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “Bernanke also disappointed investors. A lot of risk assets are lower. We will have more downside in the copper market.” Copper futures for December delivery declined 14.1 cents, or 3.4 percent, to close at $4.0025 a pound at 1 p.m. on the Comex in New York, the biggest loss since Aug. 8. The metal slumped 3 percent for the week, the first decline in three weeks.
• Shanghai Stocks Fall as Slowing Output Growth Deepens Concerns on Economy. China’s stocks fell, dragging the benchmark index to a second weekly decline, as slowing industrial output growth overshadowed a report showing inflation eased from a three-year high. Anhui Conch Cement Co., the biggest cement producer, slid to the lowest since January after industrial output rose 13.5 percent in August, compared with economists’ estimate of 13.7 percent. Citic Securities Co. led gains for brokerages on speculation they will benefit from a plan allowing yuan funds in Hong Kong to invest in mainland stocks. “The inflation controls have curbed industrial growth,” said Richard Chen, a strategist at Jianghai Securities Co. in Shanghai. “This will hurt the outlook for companies’ earnings as tightening measures won’t ease in the near term. Investors are selling into rallies as concerns over the economic slowdown may drag the index lower.” The Shanghai Composite Index lost 1.2 point, or 0.1 percent, to 2,497.75 at the 3 p.m. close, extending a weekly loss to 1.2 percent. The Shanghai gauge has slumped 11 percent this year as the central bank raised interest rates five times and ordered lenders to set aside more cash as deposit reserves 12 times since the start of 2010 to tame inflation.
• NYC Police Search Trucks on 9/11 Threat. New York police increased security, including vehicle checkpoints in midtown Manhattan and armed guards in front of the Office of Emergency Management, after receiving credible information that terrorists may be plotting an attack in the city around the Sept. 11 anniversary.
• Banks May Fight Banks as Mortgage Securities Investors Try for Class Suits. Banks including JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) may pay more to resolve claims over their alleged roles in the collapse of a $2.3 trillion mortgage- backed securities market if sophisticated investors are allowed to sue as a group along with less savvy ones.
• McDonald's(MCD) August Same-Store Sales Gain 3.5%, Trailing Analysts' Estimates. McDonald’s Corp. (MCD), the world’s largest restaurant chain, reported August same-store sales that trailed analysts’ estimates as U.S. consumers restrained spending and Hurricane Irene hurt traffic on the East Coast. Sales at stores open at least 13 months rose 3.5 percent, the Oak Brook, Illinois-based company said today in a statement. Analysts projected a gain of 5 percent, the average of seven estimates compiled by Bloomberg. U.S. sales advanced 3.9 percent, missing analysts’ estimates for a 4.5 percent gain.

Wall Street Journal:

• Stark's Sudden Departure Hits ECB Hard. To lose one central banker may be a misfortune. To lose two looks like carelessness. The resignation of Juergen Stark from the executive board of the European Central Bank marks more clearly than ever the loss of German faith in the ECB’s actions to stem the debt crisis.
• Germany, France Press EU on Transaction Tax. France and Germany on Friday urged the European Commission to present its proposals on a financial-transactions tax as soon as possible and to leave for later the politically sensitive question of how to use the revenue generated by the tax. In a joint letter to Tax Commissioner Algirdas Semeta, German Finance Minister Wolfgang Schäuble and his French counterpart, François Baroin, said the tax should be broadly based and "technically simple," covering transactions in bonds, equities, foreign exchange and derivatives.

Fox Business:

• BofA(BAC) CEO Still on Thin Ice. Bank of America (BAC) Chief Executive Brian Moynihan may be solidifying his power by firing top executives and streamlining operations, but he still has some skeptics on his board of directors--several of whom continue to question his ability to lead the big bank out of its current financial problems, sources tell the FOX Business Network.

CNBC.com:

• Dood-Frank is a Big Job Creator - For Lawyers.

Business Insider:

• A Look at Some Ugly Commodity Hedge Fund Returns.
• Here's What Hedge Funds Have to Say About Your Little Swiss Intervention.
• Here's Why Everyone's Thinking That Greece Might Default This Weekend.
• Meet The F-16 Pilot Who Went On A Kamikaze Mission To Bring Down The Fourth Hijacked Plane.
• Barry Eichengreen: Europe's On The Verge Of A Political Breakdown.
  

Zero Hedge:

• As Greece Denies, Germany Begins Greek Default Preparations.
• Things in Europe Go From Bad To Worse as Germany's FDP Party Seeks Referendum Over EFSF.
• European Liquidity at Worst Level in Years. (graphs)
  

ABC News:

• Energy Department Officials Sat in On Solyndra Meetings. Federal agents have expanded their examination of the now-bankrupt California solar power company Solyndra, searching the homes of the company's CEO and two of its executives, examining computer files and documents, iWatch News and ABC News have learned.

Financial News:

• Huge Equities Exposures Sting Hedge Funds. US hedge funds entered August with their highest exposure to equities since 2007, according to figures that shed light on the story behind the biggest one-month loss for equities hedge funds in almost three years.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 19% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -24 (see trends).

Reuters:

• Rabobank Accused of Libor Manipulation by U.S. Investors. Dutch cooperatively-owned Rabobank has been accused by some U.S. investors along with 15 other banks, of manipulating Libor interest rates in the past, bank spokesman Hendrik Jan Eijpe said on Friday.
• Economic Growth Gauge Ticks Up, Annualized Rate Falls: ECRI. A measure of future U.S. economic growth ticked higher in the latest week, but the annualized growth rate fell to its lowest level in nearly a year, a research group said on Friday. The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 123.0 in the week ended Sept 2 from 122.4 the previous week. That was originally reported as 122.5. It was a three-week high for the leading index. But the index's annualized growth rate tumbled to its lowest level since late October 2010, falling to minus 6.2 percent from minus 4.4 percent a week earlier.
• Fed's Bullard Says Hard to Coordinate Central Bank Policy. Closer coordination of monetary policy among the world's major economies is unlikely, even in times of crisis, St. Louis Fed President James Bullard said in an interview with Canadian television on Friday.

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 debt levels and stave off another recession.

Handelsblatt:

• The German government needs to take action against the European Central Bank after the resignation of executive board member Juergen Stark, the financial affairs spokesman for the coalition free Democrats, Frank Schaeffler, said. "After the exit of Axel Weber, this is another heavy blow for the ECB and the euro," Schaeffler said, adding that Germany must finally take action against continued violations at the ECB regarding its controversial bond buyback program.

Xinhua:

• The global debt crisis may affect China through several channels including finance, trade and investment, citing Huang Libin, an official from China's Ministry of Industry and Information Technology.

Bear Radar

Style Underperformer:

• Small-Cap Growth (-3.09%)

Sector Underperformers:

• 1) Restaurants -4.51% 2) Homebuilders -4.43% 3) Networking -4.01%

Stocks Falling on Unusual Volume:

• DB, TI, PHG, SI, CLMT, VRSN, LULU, SYNT, JCOM, TITN, GIII, CVV, REGN, DLLR, ASCA, MIND, NDSN, OPEN, TSRA, FSLR, UNFI, INSU, KELYA, ADSK, WPRT, PUK, TEF, KFY, FEU, KR, ABM, EZU, MCD, NC, VPL, RPM, LAZ, AUQ, FAS, TSRA and TBI
  

Stocks With Unusual Put Option Activity:

• 1) HST 2) STX 3) BCS 4) FXF 5) NTES
  

Stocks With Most Negative News Mentions:

• 1) RIMM 2) GLW 3) TSO 4) TXN 5) BHI
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth (-2.21%)

Sector Outperformers:

• 1) Semis -.21% 2) Education -.91% 3) Telecom -1.21%

Stocks Rising on Unusual Volume:

• STMP, ULTA, TZOO, DNDN and MRVL
  

Stocks With Unusual Call Option Activity:

• 1) ANF 2) VRSN 3) RSH 4) UUP 5) HCA
  

Stocks With Most Positive News Mentions:

• 1) BIIB 2) MCD 3) L 4) LULU 5) AUXL
  

Charts:

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

Friday Watch

Evening Headlines

Bloomberg:

• Ghost of Lehman Haunts G-7 Amid European Debt-Crisis Paralysis. Europe's finance chiefs will face international calls today to accelerate efforts to contain their debt crisis as mounting bets on a Greek default highlight the biggest threat to the global economy. As central bankers and finance ministers from the Group of Seven nations convene in Marseille, France, for their first face-to-face talks since they promised "coordinated action" Aug. 8 to calm financial markets, Europe's failure to stamp out investor worries over sovereign debts are set to be the focus. Any global recession "will have Europe's fingerprints on it," said Constance Hunter, who helps manage about $12 billion as chief economist at Aladdin Capital Management LLP in Stamford, Connecticut. "Europe is the real risk." It's not the only risk as policy makers race to head off a recurrence of the contraction, the worst since the Great Depression, that followed the collapse of Lehman Brothers Holdings Inc. three years ago this month. The Organization for Economic Cooperation and Development yesterday said the G-7 will barely expand in the final quarter as the euro region shrinks.
• Bond Investors Consider Greek Debt Exchange as Budget Concerns Escalate. Questions over Greece’s ability to meet the terms of its first rescue package are dogging the indebted nation as bondholders weigh whether to participate in a debt exchange that’s crucial to a second bailout. Greece is seeking preliminary responses today from bond investors to the proposed debt swap, part of a 159 billion-euro ($220 billion) European Union rescue plan agreed upon in July. The government is still trying to show it can reach budget- cutting targets required for the next 8 billion-euro payment from a bailout engineered in 2010. “There are a lot of optics to get exactly right, or European bond investors are going to start trying to get out of more than just their Greek bond holdings,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. “This is about creating confidence in the markets that the euro -- the currency and union -- is not going to fall apart at the seams.” The cost of insuring Greek government debt soared 240 basis points to a record 3,045 basis points yesterday, according to CMA prices for credit-default swaps.
• Food-Price Gains Defy Policy Makers' Bid to Ease Inflation, Panelists Say. Rising food prices may be an exception to easing inflation worldwide, posing dilemmas for policy makers, particularly in emerging markets including China, panelists at a forum said today. Central banks “should be concerned” about food-price inflation, said Roberto Rigobon, a Massachusetts Institute of Technology professor, while James Rickards, senior managing director of Tangent Capital Partners, said China risks harming employment if the country tries too hard to contain inflation. Their comments compare with signals today from the Federal Reserve and European Central Bank that the inflation outlook is benign enough to allow further easing. China is “between a rock and a hard place, because they’re very concerned about inflation,” Rickards said during a panel discussion. At the same time, raising interest rates too much may hurt export-related jobs important to the country’s economy. “Inflation and unemployment are both highly destabilizing” for China, he said. Inflation remains a major concern of central bankers in Asia’s emerging markets, while policy makers in developed nations are focused on a slowdown in growth. Chinese inflation accelerated to a three-year high of 6.5 percent in July, prompting Premier Wen Jiabao to say Aug. 31 that his top economic priority is stabilizing prices.
• 'Specific Credible' Terror Threat Received by U.S. Officials. The U.S. Department of Homeland Security has “specific, credible but unconfirmed threat information” as the 10th anniversary of the Sept. 11 terrorist attacks nears, agency spokesman Matt Chandler said in a statement. The threat concerns a possible al-Qaeda-sponsored attack targeting New York or Washington on or near the anniversary of the attack, said a different U.S. official, who wasn’t authorized to discuss the matter publicly. The official said the intelligence concerns a possible vehicle-borne attack, perhaps on a transportation hub or bottleneck, and cautioned that the options may be broader than a car or truck bombing. Another intelligence official, who also spoke on condition of anonymity, said the information hasn’t been fully vetted.
• Power Failure Affects Southern California, Arizona. More than 1 million customers lost power in Southern California and Arizona when a transmission line failed. Utility officials said power might not be fully restored until tomorrow. Sempra Energy (SRE)’s San Diego Gas & Electric’s entire service territory was affected, with 1.4 million customers without power, said Jennifer Ramp, a spokeswoman for the utility.
• New Libyan Leaders Face 'Difficult' Unity Fight. Libya’s transitional prime minister, Mahmoud Jibril, called for national reconciliation and unity, saying they may be “more difficult” to achieve than the fight that toppled Muammar Qaddafi’s regime. “There are two battles,” Jibril said after arriving in Tripoli two and a half weeks after opposition fighters entered the capital. Achieving unity will be “our biggest challenge,” he said.
• Brazil Cut to Keep Inflation High, Macquarie's Welch Says. Brazil’s interest-rate reduction last week will prop up domestic demand and prevent inflation from slowing from a six-year high, said John Welch, chief emerging-markets strategist at Macquarie Capital Inc. Welch, speaking at the Bloomberg Global Inflation Conference in New York, said the 50 basis-point rate cut to 12 percent on Aug. 31 shows Brazilian policy makers are “betting” inflation will slow before year-end. Annual inflation surged last month to 7.2 percent, the fastest rate since 2005, in Latin America’s biggest economy. “I don’t see any reason for inflation dropping,” Welch said. “At the margin, it’s accelerating again.” Brazil’s rate cut, which followed five consecutive increases, surprised all 62 analysts surveyed by Bloomberg, who expected rates to be left unchanged. The central bank signaled it may reduce borrowing costs further on expectations the global economic slowdown will help inflation slow in line with its 4.5 percent target next year, according to the minutes of the meeting released today. “They will rethink it,” said Welch, the former chief Latin America economist at Lehman Brothers Holding Inc.
• SEC Files Action Against Deloitte Shanghai Unit. The U.S. Securities and Exchange Commission filed an enforcement action against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. for failing to produce documents related to an investigation of its former auditing client Longtop Financial Technologies Limited. D&T Shanghai hasn’t provided any documents to the SEC, which issued subpoenas to the firm on May 27, the agency said in a statement today, citing a filing in U.S. District Court in Washington. As a result, the SEC has been unable to access “critical” information in its probe of possible fraud at Longtop, the statement said. Longtop, based in Hong Kong, said in May that D&T Shanghai quit because of errors in the company’s financial records. The SEC also began an investigation.
• Texas Instruments(TXN) Lowers Third-Quarter Revenue Forecast as Orders Recede. Texas Instruments Inc. (TXN), the largest maker of analog chips, said third-quarter sales may fall short of earlier forecasts, citing a slump in orders for electronics components from customers across its product lines. Profit will be 56 cents to 60 cents a share on revenue of $3.23 billion to $3.37 billion, the Dallas-based company said in a statement today. Analysts on average had estimated profit of 60 cents on sales of $3.5 billion, according to Bloomberg data. Texas Instruments gets most of its revenue from analog chips, semiconductors that are key components in everything from medical devices to e-book readers. The company’s customers and distributors are holding off on orders, concerned that a slowing economy will crimp demand for electronics, said Tore Svanberg, an analyst at Stifel Nicolaus & Co. “The weakness is fairly broad-based,” said Svanberg, who recommends buying Texas Instruments shares because of the company’s long-term growth prospects. “I don’t think there’s a place to hide right now.” Texas Instruments stock, down 21 percent this year, fell 1.2 percent to $25.48 in extended trading following the announcement.
• Glenn Beck Debuts Web TV Network to Leverage His Fame After Fox.
• Japan's Economy Contracts More Than Initial Estimate as Yen Hurts Recovery. Japan’s economy contracted more than the government initially estimated in the second quarter as capital spending decreased, adding to concern the stronger yen may derail the nation’s recovery from the March earthquake. Gross domestic product shrank at an annualized 2.1 percent rate in the three months ended June 30, more than the 1.3 percent contraction reported last month, the Cabinet Office said today in Tokyo. The reading was in line with the median forecast of 21 economists surveyed by Bloomberg News.
• Deutsche Bank(DB) Risk Seen Rising as Puts Appreciate Most in Europe: Options. The price of options to protect against losses in Deutsche Bank AG (DBK) shares is rising more than any other European lender as Germany leads the rescue of nations in the region’s shared currency. Three-month options that pay owners should Frankfurt-based Deutsche Bank drop 10 percent cost 1.3 times the price of contracts betting on 10 percent gains, according to data compiled by Bloomberg. That’s up from 1.14 at the end of July, the biggest increase among financial firms in the Stoxx Europe 600 Index, data using five-day averages show. Stocks subject to bans on short selling were excluded.

Wall Street Journal:

• Greek CDS Spreads Go Stratospheric. The cost of insuring Greece’s debt against default shot to a new high on Thursday, as investors increasingly see the country in a risk class of its own, even compared with other troubled euro-zone economies. Greece’s five-year credit default swaps rose to 3008 basis points, up 288 basis points from Wednesday, according to data provider Markit. The Greek government said Thursday the economy contracted in the second quarter even more than was originally thought, by 7.3% instead of 6.9%. Officials conceded the government will fail to cut its budget shortfall as planned this year. The rest of Europe is losing patience with Greece. Germany has hinted Greece will not get its next bailout check unless it gets its act together, and Finland reiterated its insistence on collateral for more Greek aid, a controversial condition that has Europe divided and threatens to delay new agreements. “The euro zone has spent a year trying to bail out an overindebted country by loaning it more money,” LeBas said. “That’s not going to work in the long run. Some form of Greek default is a largely foregone conclusion.” The Italian government has come up with an austerity plan that includes spending cuts and tax increases to the tune of EUR50 billion, which will be put to vote in parliament next week. Spain is also attempting budgetary controls to shore up investor confidence. Meanwhile, there are murmurs about Greece being asked to leave the 17-country euro-bloc. While there are denials from all sides that such a proposal is in the offing, the rumors add fuel to the theory that this may be an option, said Otis Casey, credit analyst at Markit.
• Obama's Bid to Spur Growth. President Asks Congress for $447 Billion In Cuts, Spending; Tepid GOP Response. President Barack Obama called on Congress Thursday to pass a $447 billion package of spending initiatives and tax cuts to boost economic growth, in what might be the White House's last chance to revive its political fortunes before the 2012 campaign kicks into high gear.
• White House, Regulator Considering Refinance Program Revamp. The White House is pushing to revamp an existing federal program to allow more Americans with government-backed loans to refinance, and a federal regulator is weighing changes to accommodate that effort, according to people familiar with the matter.
• BofA(BAC) Job Cuts May Total 40,000. Bank of America Corp. officials have discussed eliminating roughly 40,000 positions during the first wave of a restructuring that Chief Executive Brian Moynihan is expected to discuss Monday, said people familiar with the plans.
• Cities Deep in Red Turn to Green Deals. Financing Strategy Skirts Laws on Using Bonds for Deficits. Cities and states have been firing workers and raising taxes to balance the books. But for some of the shakiest cities, those moves aren't enough. Enter Class Green Capital Partners, a New York financial adviser to municipalities. Class Green has been helping cities to essentially take out mortgages on their public buildings and use many of the proceeds to plug their budget shortfalls. Here is the twist: A portion of the bond proceeds go to improve energy efficiency in the buildings, which are meant to generate savings for the city.
• The Latest Jobs Plan. More temporary and targeted tax cuts and spending increases. If President Obama's economic policies have had a signature flaw, it is the conceit that by pulling this or that policy lever, by spending more on this program or cutting that tax for a year, Washington can manipulate the $15 trillion U.S. economy to grow. With his speech last night to Congress, the President is giving that strategy one more government try.
• We'll Never Get Over It, Nor Should We. Ten years later, remembering a day of horror and heroism.
  

CNBC:

• China August Inflation Pulls Back Slightly From 3-Year High. China's inflation eased slightly to 6.2 percent in August from July's three-year high, raising expectations that the central bank will hold off on further policy tightening amid worries about a global economic slowdown. The People's Bank of China needs to keep policy tight as inflation is likely to stay elevated in the coming months and will almost certainly overshoot the government's full-year inflation target of 4 percent, analysts say. The figure was in line with market forecasts of 6.2 percent, and compares with 6.5 percent in July.
• Underfunded Pensions Pressured to Make Riskier Bets. After a tumultuous August, pension funds for companies, governments and unions are falling further under water, raising pressure on boards to take on more risk at a time when the economic and policy outlook has never been more uncertain.
• Weaker Euro Could Be in Store as Officials Struggle With Debt Crisis.
  

Business Insider:

• ... And Now John Paulson's Credit Fund is Getting Smashed. An investor in the fund tells us...John Paulson's "Credit Opportunities" fund tanked 10.10% last month, and is now down 6.77% for the year. Obviously, Paulson's flagship Advantage fund is getting slaughtered, but the credit fund has been touted as a successful product even as Advantage has stumbled. No more.
• Greece: Here's The Latest, And Here's What's Next.
  

Zero Hedge:

• Senate Attempt to Block Debt Ceiling Increase Fails: Debt Target Is Now $15.2 Trillion, Or Over 100% of GDP.

NY Times:

• Settlement Said to Be Near for Fannie and Freddie. Regulators are nearing a settlement with Fannie Mae and Freddie Mac over whether the mortgage finance giants adequately disclosed their exposure to risky subprime loans, bringing to a close a three-year investigation.The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case.
• Judge Widens Antitrust Suit Against Private Equity Firms. A federal judge has greatly expanded the scope of an antitrust lawsuit against the world’s largest private equity firms, broadening the case to include some of the largest leveraged buyouts in history. The four-year-old suit accuses 11 firms, including Blackstone Group and Kohlberg Kravis Roberts, of a huge, overarching conspiracy to rig the market for multibillion-dollar takeovers.

Forbes:

• Customers Complain HP's(HPQ) $99 TouchPad Developing Cracks. Scores of users are complaining on Internet forums about cracks on forming on HP TouchPad tablet computer near the device’s speakers and headphone jacks.
• U.S. Video Game Sales Fall 23% In August Vs. Year Ago.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday 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).

Telegraph:

• Germany Pushes Greece in Dangerous Brinkmanship. Germany and Holland have threatened to block rescue payments to Greece unless the country complies to the letter with bail-out terms, raising the spectre of default and a chain-reaction through southern Europe.

Sueddeutsche Zeitung:

• Germany has no funds for new road and rail projects and no new projects are therefore likely to be started in the coming few years.

Caixin:

• China's northeastern province of Liaoning defaulted on about 85% of its debt servicing payments in 2010, citing a government audit report. 120 of the province's 184 financing platform companies were operating at a loss. Local government platform companies engaged in fraudulent practices to secure and use loans, the report found.

China National Radio:

• Ba Shusong, a researcher at China's State Council's development research center, said that the effects of U.S. President Barack Obama's plan to spur jobs are "doubtful". Even so, the plan addresses U.S. internal problems as compared with using quantitative easing measures which transfers the cost of crisis to other nations, he said.

Evening Recommendations
Wedbush:

• Rated (PCLN) Outperform, target $675.
• Rated (EXPE) Outperform, target $38.
• Rated (ALLT) Outperform, target $16.

Night Trading

• Asian equity indices are -1.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 159.0 +5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 147.0 unch.
• FTSE-100 futures -.41%.
  
• S&P 500 futures +.23%.
  
• NASDAQ 100 futures +.11%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KR)/.43
• (LULU)/.22
• (PNY)/-.13

Economic Releases
10:00 am EST

• Wholesale Inventories for July are estimated to rise +.7% versus a +.6% gain in June.
  

Upcoming Splits

• (PII) 2-for-1
  

Other Potential Market Movers

• The Fed's Williams speaking could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down 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 50% net long heading into the day.

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, More Financial Sector Pessimism, Global Growth Worries, Emerging Markets Inflation Fears

Broad Market Tone:

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

Equity Investor Angst:

• VIX 34.44 +3.18%
  
• ISE Sentiment Index 116.0 -2.52%
  
• Total Put/Call 1.10 +23.60%
  
• NYSE Arms 1.41 +229.60%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 122.50 -.53%
  
• European Financial Sector CDS Index 246.33 +2.32%
  
• Western Europe Sovereign Debt CDS Index 315.17 unch.
  
• Emerging Market CDS Index 286.99 +2.54%
  
• 2-Year Swap Spread 31.0 -1 bp
  
• TED Spread 33.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .01% -1 bp
  
• Yield Curve 179.0 -5 bps
  
• China Import Iron Ore Spot $179.90/Metric Tonne -.61%
  
• Citi US Economic Surprise Index -42.30 +12.4 points
  
• 10-Year TIPS Spread 2.01% +3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -81 open in Japan
• DAX Futures: Indicating -62 open in Germany

Portfolio:

• Slightly Lower: On losses in my Tech and Medical sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and 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 trades near session lows on rising Eurozone debt angst, more financial sector pessimism, more shorting, emerging markets inflation fears and global growth worries. On the positive side, Utility and Food shares are rising on the day. Lumber is rising +3.42%, Oil is falling -.7% and the UBS-Bloomberg Ag Spot Index is falling -.5%. On the negative side, Airline, Education, Insurance, HMO, Hospital, Medical, I-Bank, Bank, Oil Tanker, Alt Energy and Coal shares are under pressure, falling more than -2.0%. (XLF) has traded poorly throughout the day. Cyclical and small-cap stocks are substantially underperforming. Copper is falling -.17% and Gold is surging +3.0%. Rice is still near a multi-year high and has risen +35.0% in about 9 weeks. The average US price for a gallon of gas is -.01/gallon today to $3.65/gallon. It is up .51/gallon in about 7 months. The Portugal sovereign cds is gaining +1.9% to 1,056.67 bps, the China sovereign cds is rising +1.7% to 117.38 bps, the Belgium sovereign cds is gaining +1.03% to 274.17 bps and the UK sovereign cds is rising +1.22% to 76.93 bps. The Greece sovereign cds is rising +5.4% to 2,811.72 bps, which is another all-time high. The Portugal sovereign cds is now getting uncomfortably close to its record high. The Eurozone Financial Sector and Western European Sovereign CDS Indices are still near all-time highs. The UBS-Bloomberg Ag Spot Index is still near its recent record high, which is also a large negative. The Shanghai Composite fell another -.68% last night and is down -11.0% ytd. I continue to believe most emerging markets have a larger inflation problem than is generally perceived. If China takes the breaks off too soon, which many suggest it might, it would likely prove a huge policy error intermediate-term. The AAII % Bulls fell to 30.2% this week, while the % Bears rose to 40.3, which is still slightly too much bullishness given the backdrop. Most gauges of eurozone debt angst remain very elevated and continue to trend higher, which remains a large concern. The euro currency is breaking down through meaningful technical support today. I still think the euro has much further downside longer-term, notwithstanding any near-term oversold technical bounce. Investors seemed to cheer the passage of further tax hikes/spending cuts yesterday in Italy and Spain, however these same measures are likely to worsen those economies and thus their debt problems as we have seen with Greece. I expect US stocks to trade mixed-to-lower into the close from current levels on rising eurozone debt angst, more financial sector pessimism, more shorting, emerging markets inflation fears and global growth worries.