Wednesday Watch

Evening Headlines

Bloomberg:

• Deposit Flight From European Banks Means Risk Piling Up at ECB. European banks are losing deposits as savers and money funds spooked by the region's debt crisis search for safe havens, a trend that could worsen economic and financial conditions. Retail and institutional deposits at Greek banks fell 19 percent in the past year and almost 40 percent at Irish lenders in 18 months. Meanwhile, European Union financial firms are lending less to one another and U.S. money-market funds have reduced their investments in German, French and Spanish banks. While the European Central Bank has picked up some of the slack, providing about 500 billion euros ($685 billion) of temporary financing, banks are cutting lending, which could slow growth in their home countries. They're also paying more to keep and attract deposits -- or, in the case of Italy, selling bonds to retail customers for five times the interest they offer on savings accounts -- which will erode profitability. “All of this is symptomatic of a lot of fear in the European financial sector,” said Kash Mansori, senior economist at Experis Finance in Charlotte, North Carolina, which advises U.S. and European companies. “It shows that even European banks don't trust each other anymore, so they're taking their money out of the EU system. It's similar to the distrust that happened worldwide in 2008.” Deposits by financial institutions in Greek banks, which make up 21 percent of the total, have fallen by one-third since the beginning of 2010, while those by non-financial firms and residents dropped 9 percent, according to Bank of Greece data. In Germany, deposits by financial institutions, which account for one-third the total, declined 12 percent over the same period and 24 percent since the September 2008 collapse of Lehman Brothers Holdings Inc., ECB figures show. In France, where the erosion started last year, the same type of deposits, which make up half the total, are down 6 percent since June 2010. They have fallen 14 percent since May 2010 at Spanish banks, where they account for one-fifth of the total. To make up the deficit, firms are leaning on the ECB for short-term funding. Borrowing by Italian lenders from the central bank more than doubled to 85 billion euros between June and August. Greek and Irish banks each took about 100 billion euros from the ECB in August. Irish lenders also got 56 billion euros from their domestic central bank. Portuguese banks borrowed about 46 billion euros from the ECB, while Spanish banks took 52 billion euros in July. By accepting those countries' bonds as collateral in exchange for funds, the ECB is piling up risk, said Desmond Lachman, a fellow at the American Enterprise Institute in Washington. In the event of a default, the ECB's losses would be borne by the EU's member states. Lending to the region's banks by the ECB and other central banks is about seven times the capital of the Eurosystem, the consolidated balance sheet of all euro zone central banks. “If there are sovereign defaults, the ECB will be left with garbage that has been accepted as collateral,” said Lachman. “It's putting EU taxpayers' money at risk in a very non-transparent way. But there's no alternative. The ECB is the only game in town.”
• Spain Faces Rating Risks on 'Downside' as Regions Lag Targets, Fitch Says. Spain faces risks “on the downside” to its credit rating as growth slows and regional governments fall behind schedule on deficit targets, Fitch Ratings Director Douglas Renwick said. “Risks for the credit rating are clearly on the downside,” London-based Renwick said in a telephone interview yesterday. “The regional deficit performance adds to pressure on the central government to make the needed cuts.” Fitch rates Spain AA+ with a “negative” outlook, and Renwick said weaker growth, failure to meet deficit targets, or larger-than-forecast use of public funds to rescue banks could be “clear triggers for the rating.” Moody’s Investors Service has an Aa2 rating on Spain and Standard & Poor’s rates it AA. Spain’s regional governments are behind schedule to meet deficit targets, according to data released last week that Moody’s said was “credit negative.” The regional governments manage more than a third of public spending, including health and education, and are suffering from a slump in revenues linked to real-estate transactions. The 17 semi-autonomous regions posted a budget deficit of 1.2 percent of gross domestic product in the first half, the Finance Ministry said on Sept. 8, citing data that isn’t directly comparable to the figures used in the final deficit calculations. The regions have a deficit target of 1.3 percent of GDP this year. Renwick said a slowdown in Germany, Europe’s largest economy, would make it more difficult for Spain to meet its 1.3 percent 2011 growth forecast. The government cut the prediction last year to reflect the impact of austerity measures. “For Spain, meeting the official GDP forecast is becoming more and more challenging, especially because the German economy is weakening,” Renwick said.
• Dollar Libor May Rise to .5 Percent by December, Barclays Says. The rate banks say they pay each other for three-month dollar loans may rise to a one-year high if European policy makers fail to stymie investors' concern the region's debt crisis is worsening, according to Barclays Plc. The three-month dollar London interbank offered rate, or Libor, will reach 0.5 percent by the end of the year, Barclays strategist Joseph Abate wrote in a note to clients Sept. 12. Libor was fixed yesterday at 0.347 percent, according to the London-based British Bankers' Association. The rate has risen this year from as low as 0.245 percent on June 15. European efforts to contain the region's debt crisis have failed to quell speculation that Greece may default on its debt and that the crisis may spread. The yield on the Greek two-year note reached a record 77 percent yesterday. Investors question the ability of Greece to implement austerity moves fast enough to get a sixth payment from last year's 110 billion-euro ($151 billion) bailout. "Unless there is some sort of clarity out of Europe and some type of resolution to the sovereign-debt crisis there is really nothing to prevent Libor from going higher," said New York-based Abate in a telephone interview yesterday. "There is stress in the financial system. We've already seen the volume of commercial paper issuance falling, with the amount of daily issuance down by about half, and the term of the paper being issued has shortened up. "
• China Must Avoid Lending to 'Troubled' Nations, Yu Yongding Says. China shouldn't buy bonds issued by individual euro-area countries because their leaders and the European Central Bank are in disarray, said Yu Yongding, a former adviser to China's central bank. "China has to wait until it can see a clearer road map by euro countries for solving sovereign-debt problems," Yu, who is based in Beijing, said today. The nation is not a lender of last resort for "troubled countries," he added. The ECB's own purchases of euro members' sovereign bonds are controversial, Yu said.
  
• ConAgra(CAG) to Cancel $5.18 Billion Ralcorp(RAH) Bid by Sept. 19 Unless Talks Begin. ConAgra Foods Inc. (CAG) said it would withdraw its $5.18 billion offer for cereal-maker Ralcorp Holdings Inc. (RAH) by Sept. 19 if the company doesn’t enter negotiations, ending a pursuit that began in March. ConAgra sent Ralcorp a presentation on the merits of its $94-a-share bid, and Ralcorp has been unwilling to engage in discussions, Omaha, Nebraska-based ConAgra said today in a statement. “Ralcorp’s stock is down pretty dramatically, so clearly the ball is their court,” said Jack Russo, an analyst for Edwards Jones & Co. in St. Louis. “The pressure is on Ralcorp to come up with a better plan for shareholders, and if they don’t they are going to hear a lot of griping from shareholders.”
• Obama Approval Rating Plummets on Doubts Over Jobs Plan. A majority of Americans don’t believe President Barack Obama’s $447 billion jobs plan will help lower the unemployment rate, skepticism he must overcome as he presses Congress for action and positions himself for re- election. The downbeat assessment of the American Jobs Act reflects a growing and broad sense of dissatisfaction with the president. Americans disapprove of his handling of the economy by 62 percent to 33 percent, a Bloomberg National Poll conducted Sept. 9-12 shows. The disapproval number represents a nine point increase from six months ago. The president’s job approval rating also stands at the lowest of his presidency -- 45 percent. That rating is driven down in part by a majority of independents, 53 percent, who disapprove of his performance.
• Solyndra Bankruptcy May Blunt Obama's Renewable Energy Drive. Solyndra LLC’s bankruptcy threatens to curb government incentives championed by the Obama administration to build a renewable energy industry in the U.S. Solyndra, a solar-panel manufacturer that received about $527 million in federal loan guarantees, shut down on Aug. 31, then filed for bankruptcy protection on Sept. 6. The House Energy and Commerce Committee has scheduled a hearing tomorrow on the award and the Federal Bureau of Investigation raided the company’s Fremont, California, offices two days after the bankruptcy court filing. The failure will probably diminish support in Washington for the Energy Department’s loan guarantees and for a renewable- energy grant program run by the Treasury Department said Stephen Munro, an analyst at Bloomberg New Energy Finance in Washington. The guarantee program will end this month and the Treasury grants are to expire at yearend. There’s little interest now in extending them, Munro said in an interview. “Solyndra has become a bit of a poster child for what can go wrong with government funding for renewable energy,” Munro said in an interview. Its troubles could result in a “hiatus in federal support for clean energy.”
• GE(GE) Sets Oct. 17 for $3.3 Billion Buffett Stake Redemption. General Electric Co. set a date of Oct. 17 for a $3.3 billion payment to repurchase preferred stock sold to Warren Buffett's Berkshire Hathaway Inc. as financial markets froze in October 2008. The shares, callable after three years at a 10 percent premium, helped Chief Executive Officer Jeffrey Immelt raise another $12 billion from public markets two weeks after Lehman Brothers Holdings Inc. filed for bankruptcy. GE disclosed the date today in a U.S. regulatory filing.
• Silvercorp Plunges After Muddy Waters Says It's Shorting Stock. Silvercorp Metals Inc., the Chinese silver miner accused of fraud in an anonymous letter last month, plunged 20 percent, the most in seven years, after Carson Block’s Muddy Waters LLC said it’s shorting the stock. Silvercorp shares fell C$1.58 to C$6.20 yesterday on the Toronto Stock Exchange, the biggest decline since Sept. 1, 2004. The shares have dropped 26 percent since the British Columbia Securities Commission announced last week it’s investigating allegations made against the company in the Aug. 29 letter as well as the source of the accusations.
• ADB Says India May Raise Interest Rates, Cuts Growth Forecast. India may raise interest rates further to tame inflation, the Asian Development Bank said as it cut the nation’s economic growth forecast for the current financal year. “Given the RBI’s commitment to battle persistent high inflation, there will be further monetary tightening in the remaining months of FY2011 until there is credible evidence of inflation trending to the RBI’s target range,” the Manila-based lender said in its Asian Development Outlook Update 2011 report. India’s benchmark wholesale-price inflation probably accelerated to 9.64 percent in August from 9.22 percent in July, according to the median of 25 estimates in a Bloomberg News survey. The commerce ministry will release the data today. Inflation in India may remain “elevated” in the first half of the current fiscal year because of higher fuel and transport costs and “evidence of wage-price spiral,” the report showed. The ADB raised its inflation forecast for the year ending March 31 to 8.5 percent from 7.8 percent, according to the report.
  

Wall Street Journal:

• SEC Questions Nasdaq's Reverse-Merger Plan. In the wake of a series of accounting scandals at U.S.-listed Chinese companies, securities regulators raised questions about a reform plan by the Nasdaq Stock Market in an order made public Tuesday, comparing it to a more stringent plan outlined by the New York Stock Exchange.
• Fortress Investment Changes Course, Likes Resurgent Dollar. Mega-hedge fund Fortress Investment Group LLC (FIG) is betting that the dollar will shine for the rest of the year, changing course after being burned on an "optimistic" view of riskier assets.
• BNY Mellon(BK) Forex Trades Cost Pensions. With Bank of New York Mellon Corp. under growing scrutiny by regulators for its trading practices on behalf of pension funds, a Wall Street Journal analysis shows that the bank executed some currency transactions for two large public pension funds in a way that could trigger higher costs.
• The 2013 Tax Cliff. Business had better enjoy the next 16 months. President Obama unveiled part two of his American Jobs Act on Monday, and it turns out to be another permanent increase in taxes to pay for more spending and another temporary tax cut. No surprise there. What might surprise Americans, however, is how the President is setting up the U.S. economy for one of the biggest tax increases in history in 2013.

MarketWatch:

• Nomura Reportedly to Cut 5% of Jobs in Europe.

CNBC:

• Julian Robertson Expecting Greek Default. (video)
• Fed Set to Give Economy Therapy, Not Shock Treatment. The Federal Reserve, facing rising global financial strains and recession fears, is poised to increase downward pressure on longer-term interest rates next week in a bid to accelerate a sputtering U.S. recovery.
• ADB Revises Down Asia's Growth Forecasts. The headwinds in the global economy will be felt in Asia, according to the Asian Development Bank (ADB), as it sees growth in the region moderating from the second half of the year. "Asia is not completely decoupled from the Western world. Our exports go to the advanced economies, so inevitably the countries with the larger export sector will be influenced by the slowdown… there," Rhee Changyong, Chief Economist of ADB told CNBC on Wednesday. Rhee also flagged inflation risks, and says keeping prices in check will continue to be a priority for Asian policy makers in the near term. The ADB revised up its inflation projection for 2011 to 5.8 percent from its previous 5.3 percent projection. "In the first half… inflation was much higher than we expected because (of the) more than 30 percent increase of commodity prices," Rhee said.
• China's Wen Vows to Fight Inflation. China will keep monetary policy tight to keep a lid on inflation but he also signaled caution to avoid hurting the world's second-largest economy, Premier Wen Jiabao said on Wednesday.

Business Insider:

• How U.S. Tax Policy Is Forcing 5 Million Americans Abroad To Reconsider Citizenship.

Zero Hedge:

• Jefferies Describes The Europe Endgame.
  
• Wen Jiabao Says China Willing to Extend Help to Europe... For a Price.
• "High Frequency Minutes": HFT Explained In 6 Short Video Clips.

IBD:

• Diamond Foods(DMND) Adds Pringles To Its Portfolio.

NY Times:

• From Europe, Mounting Pressure Over Greece's Debt. Facing market pressure to resolve the Greek debt crisis once and for all, President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany will hold a video conference call Wednesday evening with the embattled Greek prime minister, George Papandreou, French officials announced on Tuesday. The announcement could portend yet another restructuring of Greek debt to stave off a default. A stopgap bailout plan announced on July 21 has yet to be approved by all 17 nations that share the euro currency, and in recent weeks a renewed sense of crisis has engulfed the euro region. In the latest sign of turmoil, Italy — the euro region’s most indebted member, after Greece — was forced to pay record-high interest rates in order to complete an auction of its five-year bonds on Tuesday, despite continuing purchases by the European Central Bank. Spain, which plans a bond sale on Wednesday, could be subjected to similar investor wariness.
• Banks Brace for a Season of Fall-Offs. The worries of Wall Street banks keep growing. As if the troubles in Europe were not enough, two months of the most turbulent markets in decades are expected to seriously damp trading results for the nation’s largest banks. In a bellwether for other large financial firms, JPMorgan Chase warned that third-quarter trading revenue was likely to fall about 8 percent from a year ago. Investment banking income is also expected to drop by one-third from a year earlier, as corporations get cold feet about acquisitions as well as stock and debt offerings. “I think you can safely expect a decline in our markets revenue,” Jes Staley, the head of JPMorgan’s investment bank, said in remarks at the Barclays financial services conference on Tuesday.

Politico:

• GOP Captures 2 Special House Elections. Democrats suffered a double blow in two special House election losses Tuesday, leaving the party at a political low point as it gears up for 2012. Republicans pulled off an upset in New York’s 9th Congressional District, a strongly Democratic seat that should have been an easy hold. And the GOP cruised as expected to an easy win in Nevada’s Republican-friendly 2nd District. The outcome in New York, where Republican Bob Turner prevailed over Democratic Assemblyman David Weprin in former Rep. Anthony Weiner’s old district, was particularly crushing. And Republicans were pointing to it as a rejection of President Barack Obama even before the race was called. “It was all Obama — not even a thought of anything else,” Turner consultant Steve Goldberg said.

Rasmussen Reports:

• Generic Presidential Ballot. Generic Republican 47%, Obama 42%.

Reuters:

• CME(CME) CFO Visited Several States to Talk Relocation. CME Group Inc, whose roots in Chicago date to 1848, is serious about leaving Illinois to avoid high state taxes on business at its three futures exchanges, its chief financial officer said on Tuesday. "I've visited several states on this particular topic," Jamie Parisi said at a conference hosted by Barclays. "We've being doing what we can to see how we can lower our rate." Parisi joins several other CME executives, including Chief Executive Craig Donohue and Executive Chairman Terrence Duffy, who have recently raised the decibel level on complaints about Illinois taxes, which were increased sharply in January. Parisi did not say which states he visited, but Donohue has said the company was talking to Texas, Florida and Tennessee, among others.
• Geithner Won't Seek Bigger European Bailout Fund. Treasury Secretary won't push European finance ministers to increase the size of their bailout fund when he joins them at a Friday meeting in Poland, a U.S. official said on Tuesday. "Geithner does not plan to advocate for a bigger EFSF," the official said, referring to the 440 billion euro ($601 billion) European Financial Stability Facility they have established to help debt-strapped member countries.
• Ainslie's Maverick Capital Backfires in August. Maverick Capital's Lee Ainslie took a bath last month when his flagship hedge fund racked up a double-digit loss, pushing it solidly into the red for the year, said two people familiar with the results. A smaller more aggressive portfolio performed even worse, losing 23 percent in August, these people said. Ainslie, who oversees about $10 billion, is one of the better-known tech investors in the $2 trillion hedge fund industry. His poor performance in August ranks alongside the downbeat numbers turned in by another hedge fund giant, John Paulson manager of Paulson & Co. Maverick's flagship fund tumbled 11 percent last month, and is now down about 10 percent for the year, the two people familiar with the numbers said.
• BOJ Miyao Warns of Europe Woes, Risks to Japan Recovery.
• Schaeuble Sees Help for Greece Only if Criteria Met. Europe will help Greece reform if it meets criteria set by the "troika" of creditor institutions, but it cannot do more than that, German Finance Minister Wolfgang Schaeuble told a newspaper. "We have great respect for the efforts of the Greek government, but cannot go with aid beyond that which was agreed," he said in comments to be published in Rheinische Post on Wednesday. "It is up to Greece," he added. "If Greece consistently implements the reforms and consolidation steps agreed, it will be able to stand on its own feet," he said.
• Morgan Stanley(MS) Trading, Banking Hurt by Volatility. Market volatility has forced Morgan Stanley to cut back on risk taking in its trading business during the third quarter and led some investment banking clients to delay planned deals, Chief Financial Officer Ruth Porat said on Tuesday. The volatility has also prevented trading clients from taking much risk, Porat said at a conference in New York. Her comments provide further evidence that Wall Street banks are having a difficult quarter and may report disappointing results next month.

Financial Times:

• Richard Sulik, chairman of Freedom and Solidarity, one of Slovakia's four ruling parties, said his party is opposed to the proposal to expand the European Financial Stability Facility because the EFSF "is not the right solution for the debt crisis," citing a telephone interview. "The eurozone is just trying to solve the debt crisis with more debt," Sulik said. The best solution for Greece would be for it to declare bankruptcy, Sulik said.

Telegraph:

• Debt Crisis: Live.
  

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -2.0% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 179.0 +3.0 basis points.
  
• Asia Pacific Sovereign CDS Index 161.75 +2.75 basis points.
• FTSE-100 futures -.81%.
  
• S&P 500 futures -1.04%.
  
• NASDAQ 100 futures -1.0%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PLL)/.85
• (CLC)/.66

Economic Releases
8:30 am EST

• The Producer Price Index for August is estimated unch. versus a +.2% gain in July.
• The PPI Ex Food & Energy for August is estimated to rise +.2% versus a +.4% gain in July.
• Advance Retail Sales for August are estimated to rise +.2% versus a +.5% gain in July.
• Retail Sales Less Autos for August are estimated to rise +.2% versus a +.5% gain in July.
• Retail Sales Ex Auto & Gas for August are estimated to rise +.3% versus a +.3% gain in July.
  

10:00 am EST

• Business Inventories for July are estimated to rise +.5% versus a +.3% gain in June.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -3,000,000 barrels versus a -3,963,000 barrel decline the prior week. Distillate supplies are estimated to rise by +700,000 barrels versus a +709,000 barrel gain the prior week. Gasoline inventories are estimated to fall by -500,000 barrels versus a +199,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.85% versus a -.2% decline the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly MBA mortgage applications report, 30-Year T-Bond Auction, ThinkEquity Growth Conference, Deutsche Bank Tech Conference, Morgan Keegan Industrial/Transportation Conference, Morgan Stanley Global Healthcare Conference, BMO Media/Telecom Conference, CSFB Chemical/Ag Science Conference, Deutsche Bank Transport/Aviation Conference and the (MSFT) financial analyst meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by financial and technology shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Rising into Final Hour on Euro Bounce, Short-Covering, Tech Sector Strength, Technical Buying

Broad Market Tone:

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

Equity Investor Angst:

• VIX 37.28 -3.39%
  
• ISE Sentiment Index 126.0 +56.79%
  
• Total Put/Call 1.32 +5.60%
  
• NYSE Arms .88 +36.59%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 134.68 -1.18%
  
• European Financial Sector CDS Index 285.55 -1.48%
  
• Western Europe Sovereign Debt CDS Index 352.18 +.28%
  
• Emerging Market CDS Index 306.14 -2.41%
  
• 2-Year Swap Spread 33.0 -1 bp
  
• TED Spread 34.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 178.0 +6 bps
  
• China Import Iron Ore Spot $179.40/Metric Tonne -.06%
  
• Citi US Economic Surprise Index -38.50 +1.0 point
  
• 10-Year TIPS Spread 1.95% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating -11 open in Japan
• DAX Futures: Indicating +29 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 builds on yesterday's reversal higher despite rising Eurozone debt angst, rising energy prices, US tax hike worries, emerging markets inflation fears and global growth worries. On the positive side, Airline, Road & Rail, HMO, I-Bank, Networking, Disk Drive, Paper, Oil Tanker and Alt Energy shares are especially strong, rising more than +2.0%. Small-Cap and Cyclical shares are outperforming. Copper is rising +.47% and the UBS-Bloomberg Ag Spot Index is down -1.2%. Weekly retail sales rose +4.7% versus a +4.9% gain the prior week. The Spain sovereign cds is falling -5.9% to 401.5 bps. On the negative side, Homebuilding, Insurance and REIT shares are lower on the day. Lumber is down -.89%, Oil is rising +1.5% and Gold is gaining +1.4%. Rice is still very near its multi-year high, rising +37.0% in about 10 weeks. The average US price for a gallon of gas is -.01/gallon today to $3.64/gallon. It is up .50/gallon in about 7 months. The France sovereign cds is rising +1.77% to 191.83 bps, the Greece sovereign cds is surging +13.17% to 4,074.24 bps and the UK sovereign cds is gaining +4.0% to 85.97 bps. The Greece, France and Italy sovereign cds are hitting all-time highs again today. The Germany sovereign cds is still very close to its record high. The Eurozone Financial Sector CDS Index is still near its record high and the Western European Sovereign CDS Index is making another all-time high. The The UBS-Bloomberg Ag Spot Index is still near its recent record high, which is also a large negative. The Shanghai Composite fell another -1.1% overnight and is back near its recent lows, declining -12.0% ytd. Brazilian shares did not participate in today's global stock rally and are now down -19.8% ytd. Most gauges of eurozone debt angst remain very elevated and continue to trend higher, which remains a large negative. The euro currency remains oversold near-term, but still has substantial downside risk longer-term. I continue to believe that until the fundamentals stabilize in the eurozone and credit angst subsides, any stock rallies will likely remain short-term in nature. Today's volume is lackluster and some key groups aren't participating. I expect US stocks to trade modestly lower into the close from current levels on rising eurozone debt angst, global growth worries, emerging markets inflation fears, more shorting, rising energy prices and profit-taking.

Today's Headlines

Bloomberg:

• Italian Borrowing Costs Jump at $8.8B Auction. Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations. The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14. Demand was 1.28 times the amount offered, down from 1.93 times at the last sale. The Treasury, which fell short of its maximum target of 7 billion euros, also sold 2.6 billion euros of bonds maturing in 2018 and 2020. Investors have dumped Italian debt as divisions among European governments over how best to fight the region’s debt crisis sparked concern the contagion would spread to the bloc’s third-biggest economy. Bonds have dropped even after the government passed a 54 billion-euro austerity plan that failed to ease concerns that weak growth would lead to a credit rating downgrade and hurt efforts to cut Europe’s second-biggest debt. Amid “talks about a Greece default” and “a possible downgrade of the Italian debt in the next couple of months, today’s auction results are not too bad,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in an e- mailed note to investors. As the country’s bonds slumped, officials met in the past month with delegates from the China Investment Corp. to discus investments in Italy, according to an Italian government official familiar with the situation. Government bonds were not the focus of the talks. The yield on Italy’s benchmark 10-year bond rose 16 basis points to a five-week high of 5.731 percent. The difference over similar-maturity German bunds increased 16 basis points to 398 basis points after today’s sale, the most since before the European Central Bank started buying Italy’s debt on Aug. 8.
• Merkel Rejects Greek Default, Defends Euro-Area. German Chancellor Angela Merkel said Greece is taking the right steps to get its next bailout payment, warning against allowing a Greek default because of the risk of contagion for other euro-area countries. Merkel, in a German radio interview broadcast today, said that an “uncontrolled insolvency” would further roil markets spooked by the prospect of a Greek default. The euro region currently has no system for “orderly” insolvency until the permanent rescue fund is established in 2013, she said. “The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of other countries, is very big,” Merkel told Berlin-based broadcaster Inforadio. “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.” Merkel’s comments are a rebuff to calls by members of her ruling coalition to consider allowing Greece’s insolvency and exit from the currency union as it struggles to satisfy the terms of its aid package. They also belie government plans to support German banks in the event that Greece goes into default.
• Sovereign, Bank Bond Risk Reach Records on Greek Debt Concerns. The cost of insuring against default on European sovereign and bank debt rose to records on mounting concern a default by Greece will trigger losses for banks holding the government’s bonds. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed six basis points to 359 basis points, an all-time high based on closing prices. The Markit iTraxx Financial Index of swaps on 25 banks and insurers rose 12 basis points to 326, while the subordinated index was up 19 basis points at 569, according to JPMorgan Chase & Co. at 9:30 a.m. in London. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high- yield credit ratings increased 13.5 basis points to 811. An increase signals deterioration in perceptions of credit quality. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 5.5 basis points to 204.
• Europe Close to Banking Crisis, El-Erian Says: Tom Keene. Pacific Investment Management Co.’s Mohamed A. El-Erian said organizations such as the International Monetary Fund need to act with European banks at risk of being engulfed in the region’s sovereign-debt crisis. “We’re getting close to a full-blown banking crisis in Europe,” El-Erian, Pimco’s chief executive officer and co-chief investment officer, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We are in a synchronized global slowdown. There’s very little confidence in economic policy making both in Europe and the U.S.”
• Apple(AAPL) Dividend or Buyback 'More Likely': Morgan Stanley. Apple Inc. (AAPL), the world’s most valuable company, is “more likely than ever” to return money to shareholders in the form of a stock buyback or dividend, according to Morgan Stanley. Apple is able to finance a $25 billion share repurchase program or a 2.4 percent dividend using its available cash, said Katy Huberty, an analyst for Morgan Stanley in New York. Apple has $76 billion in cash and investment holdings, equivalent to about $81 a share, which could be used to fund the effort. “We believe Apple is more likely than ever to return cash to shareholders,” Huberty said in a note to clients.
• U.S. Poverty Climbed to 17-Year High in 2010. Data released by the Census Bureau today showed the proportion of people living in poverty climbed to 15.1 percent last year from 14.3 percent in 2009, and median household income declined 2.3 percent. The number of Americans living in poverty was the highest in the 52 years since the U.S. Census Bureau began gathering that statistic. Those figures may have worsened in recent months as the economy weakened. “Families are struggling to put food on the table, and they don’t have the purchasing power to help the economy recover,” said Isabel Sawhill, a senior fellow at the Brookings Institution in Washington.
• Best Buy(BBY) Profit Trails Analysts' Estimates as Television Sales Decline. Best Buy Co., the world’s largest consumer electronics retailer, reported second-quarter profit that trailed analysts’ estimates and cut its full-year earnings forecast as sales of televisions and mobile phones declined. Net income in the quarter ended Aug. 27 fell 30 percent to $177 million, or 47 cents a share, from $254 million, or 60 cents, a year earlier, the Richfield, Minnesota-based company said today in a statement. Analysts projected 53 cents, the average of 21 estimates.
• Russia Sees Stalling Economy, Ruble Plunge at $60 Oil. Oil at $60 a barrel may halt Russia’s two-year economic expansion next year, triggering a “substantial” devaluation of the ruble, the Economy Ministry said, according to a document obtained by Bloomberg. Gross domestic product may shrink as much as 1.4 percent next year under a negative scenario that projects a “world recession” cutting the average price of Urals crude by almost a half from the current level, according to the report, submitted to the government for approval last week. The price of Urals, the nation’s chief export oil blend, has averaged $109.35 this year and was at $114.23 yesterday. A reliance on raw materials, which President Dmitry Medvedev called “humiliating” and “primitive,” has left the economy vulnerable to dropping global demand for its commodity exports.

Wall Street Journal:

• Italian Bond Auction Spells Trouble. Troubles increased for Italy after its closely watched auction of government bonds met with tepid demand and the country had to fork out higher yields to lure buyers, fueling concerns that a Spanish bond sale on Thursday may also prove to be a tough sell. Markets scrutinized the auction because Italy's funding costs have recently surged again and stabilized above 5% in the 10-year segment, despite steady buying by the European Central Bank, widely seen as the only major buyer of Italian bonds at present.

CNBC.com:

• Europe's 'Liquidity Jolt' to Asia Highly Underestimated: Strategist. Investors in Asia appear to be downplaying the risks posed by Europe’s debt crisis, and the potential outflow of funds from the region should major European banks collapse, warns Emil Wolter, Head of Regional Strategy, Asian Equities at RBS Global Banking & Markets. “The number one risk, which is still underestimated by the Asian investors that I speak to, is the potential for Europe to deliver a liquidity jolt to financial markets,” Wolter told CNBC on Tuesday. “(The) potential for one or more major financial institutions in Europe to basically put their hand up for emergency funding is going to be a real danger to fund flows to the region,” he said. “You’re talking about an event on the scale of Lehman, but possibly times several different institutions,” he added.
• U.S. Small Business Optimism Weakens Again in August. Small businesses in the U.S. became less confident in the economy's future for the sixth straight month in August, a survey showed on Tuesday. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 1.8 points to 88.1. The decline was largely due to weaker expectations for real sales gains and reduced hope for an improvement in business conditions in the next six months. "With such a dim outlook, owners are not going to do a lot of hiring or expanding," said William Dunkelberg, chief economist at the NFIB.
• Huge Surge in Bank of America(BAC) Foreclosures. Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months, well over 200 percent more month-to-month.

Business Insider:

• Yet Another Top Hedge Fund Manager Bruce Kovner Is Retiring. The commodity fund Caxton's chairman and founder is retiring, according to Bloomberg. He's passing the reigns to the firm's CIO, Andrew Law.
• Obama Has No Intention of Getting His Jobs Plan Passed.
  

Zero Hedge:

• Import Prices Decline Less Than Expected, Export Prices Increase.
• Europe Facts, Not Fiction: Usage of ECB Deposit Facility Goes Parabolic, Sov CDS Wider Across The Board. (graph)
• Morgan Stanley Slashes EURUSD Target to 1.30, Says EUR Attraction as an Alternative Reserve Currency Ending.
  

Reuters:

• New al Qaeda Head Hails Arab Spring, Says U.S. Losing. New al Qaeda leader Ayman al-Zawahri voiced support in an Internet video for popular revolts shaking the Middle East, saying Arabs no longer feared the United States 10 years after the country was targeted by the militant network. Zawahri, an Egyptian who took up the reins of al Qaeda after the killing of Osama bin Laden in May, hailed popular uprisings that have toppled leaders in Egypt, Tunisia and Libya this year, and urged other Muslims to overthrow their rulers too. "The Arab people have been freed from the chains of fear and terror, so who is the winner and who is the loser?"
• International Alarm Over Euro Zone Crisis Grows. International alarm over Europe's debt crisis reached new heights on Tuesday, with U.S. President Barack Obama pressing the bloc's big countries to show leadership as talk of a Greek default escalated and markets heaped pressure on Italy. German Chancellor Angela Merkel sought to quash talk of an imminent Greek default or exit from the euro zone, but confusion over whether she would issue a joint statement on Greece with French President Sarkozy sent markets gyrating up and then down. Confidence in the 17-nation currency area was further dented when Italy was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds. "I think there is a possibility, if the wrong steps are taken, that the system goes off the rails," Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro's survival was at risk.

Telegraph:

• Debt Crisis: Live.

Der Spiegel:

• Loose Talk on Greek Default Could 'Cost Billions'. Members of Angela Merkel's government have been openly discussing the possibility of a Greek bankruptcy, a debate the chancellor sought to quash on Tuesday. The statements made by her junior coalition partners have unsettled markets and could "cost billions," German commentators warn.

Focus-Money:

• Banks may face writedowns because of defaults on European commercial mortgage-backed securities. A S&P study showed that on average only one in three maturing commercial mortgage-backed securities in Europe has been paid back since January. 11% of the $14.6 billion in CMBS due since the beginning of the year has defaulted.

Le Echos:

• Societe Generale SA CEO Frederic Oudea said that nationalizing the bank is out of the question. "It seems totally premature and aside from the subject today to evoke such a hypothesis," French Industry Minister Eric Besson said

Style Underperformer:

• Large-Cap Value (+.48%)

Sector Underperformers:

• 1) Homebuilders -.41% 2) Insurance -.13% 3) REITs -.09%

Stocks Falling on Unusual Volume:

• QLIK, SWI, BBY, ACOM, ITMN, EXLS, RPXC, JVA, ULTA, STMP, SHPGY, HRBN, TLEO, GIII and PPDI
  

Stocks With Unusual Put Option Activity:

• 1) LRCX 2) BBY 3) DB 4) STX 5) LCC
  

Stocks With Most Negative News Mentions:

• 1) HCA 2) SWI 3) BRCM 4) BBY 5) CVX
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Value (+.29%)

Sector Outperformers:

• 1) Airlines +3.09% 2) Road & Rail +2.17% 3) Alt Energy +1.29%

Stocks Rising on Unusual Volume:

• WPRT, PANL, CIEN, CMI, KSU, CNW, CMA and OPTR
  

Stocks With Unusual Call Option Activity:

• 1) ADBE 2) NETL 3) DLTR 4) MJN 5) WDC
  

Stocks With Most Positive News Mentions:

• 1) MGM 2) HMA 3) MGP 4) SPWRA 5) KEX
  

Charts:

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

Tuesday Watch

Evening Headlines

Bloomberg:

• Italy Seeks $10 Billion as Contagion Slams Demand: Euro Credit. Italy is auctioning as much as 7 billion euros ($10 billion) of bonds one day after borrowing costs surged at a bill auction, as Greece’s slide toward default roils global markets. The treasury is selling 4 billion euros of a new benchmark five-year bond today, after 10-year yields climbed to a five- week high of 5.571 percent. Investors charged Italy 4.153 percent yesterday in a one-year bill offering, up from 2.959 percent a month ago. “It’s rather unfortunate that the Italian auction is taking place when the market is in a panic mode,” said Fabrizio Fiorini, the head of fixed income at Aletti Gestielle SGR SpA in Milan. “Borrowing costs are likely to remain at elevated levels. The rise in Italian yields is manifestation of a lack of market confidence in European leaders’ ability to tackle the problem.” A debt of 1.9 trillion euros -- more than Spain, Greece, Ireland and Portugal combined -- leaves Italy vulnerable to any advance in borrowing costs as it refinances maturing debt. The sales, which also include as much as 3 billion euros of bonds due in 2018 and 2020, will help fund 14.5 billion euros of debt scheduled for repayment on Sept. 15. Italian officials have held talks with Chinese counterparts about potential investments in the euro region’s third-largest economy, an Italian government official said late yesterday. The purchase of Italian bonds by China wasn't the focus of the talks, which took place in the past few weeks, the official said on condition of anonymity. A spokesman for Italian Finance Minister Giulio Tremonti declined to comment. The Financial Times earlier reported that Italy aims to sell ``significant'' quantities of bonds and stakes in strategic companies to China. The yield on Greece’s two-year note yesterday surged to almost 70 percent, while the cost of insuring Greek, French, Spanish and Italian debt against default all rose to records. The premium investors demand to hold Italian 10-year bonds rather than comparable German bunds rose to 383 basis points, nearing a euro-era record close of 389.5 set on Aug. 4. “The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain, and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a report. While Italy has completed more than 70 percent of its debt financing this year, it still needs to sell about 70 billion euros of bonds by year-end to cover its budget deficit and other redemptions. Italian yields are at their highest since the European Central Bank started buying Italian bonds on Aug. 8.
• Funds' Cuts to French Banks Could Force Asset Sales. U.S. money-market fund managers, led by Vanguard Group Inc. and Legg Mason Group Inc., have cut their lending to French banks at a pace that may force the banks to raise capital by selling assets, according to William Prophet, a desk analyst at Deutsche Bank Securities Inc. Prime money funds in the U.S. reduced their holdings in certificates of deposits issued by French banks by about 40 percent in the three months through Aug. 11, Prophet wrote in a Sept. 9 report, based on a review of seven of the 10 largest funds eligible to purchase corporate debt. The proportion of the remaining holdings maturing in less than a month increased to 56 percent on Aug. 11 from 17 percent on June 11. “What’s happened very recently is simply unsustainable,” Prophet wrote. “While a decent amount of funding is evidently still available to the French banking system, it is all migrating towards the very front end of the money-market curve, and regulators no longer look the other way when this happens.” U.S. funds are cutting their holdings in European banks on concern the financial institutions may face funding problems as the sovereign-debt crisis escalates.
• Energy Future Sues to Block EPA Cross-State Pollution Rules. Energy Future Holdings Corp. units in Texas filed a lawsuit challenging Environmental Protection Agency rules aimed at curbing cross-state pollution, saying the measure would cost it $1.5 billion through 2020 and at least 500 jobs. The Dallas-based power company, which was taken private in 2007 in the largest buyout in history, today asked the U.S. Court of Appeals in Washington to review the rule, which mandates that 27 states reduce emissions of sulfur dioxide and nitrogen oxide. Energy Future said it will ask the court to delay enforcement of the rule, set to begin in January, while the case is being decided. The company said it would be forced to shutter 1,200 megawatts of coal-fired generation to comply with the new standard, and would halt mining operations that provide coal to the idled power plants. “Meeting this unrealistic deadline also forces us to take steps that will idle facilities and result in the loss of jobs,” David Campbell, chief executive officer of Luminant Holding Co., an Energy Future unit, said in a statement.
• Fed's Fisher Sees High Bar to Support Yield Curve 'Jujitsu'. Federal Reserve Bank of Dallas President Richard Fisher said he probably won’t support further monetary easing by the Fed, arguing that steps that would boost the recovery are the responsibility of fiscal authorities. “If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it,” Fisher said today in a speech in Dallas. “But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary.”
• Obama Proposes Limits on Breaks for Muni Bond Investors. President Barack Obama proposed curbing the amount of interest from municipal bonds that top earners can exclude from their taxable income, a step that may diminish demand for state and local-government securities. “We’re very much opposed” to limiting the tax exemption, said Mike Nicholas, chief executive of the Bond Dealers of America, a Washington-based lobbying group for banks that underwrite municipal bonds. “You’re going to end up punishing state and local governments.”
• Israel Surrounded as Arab Spring Turns Darker: Jeffrey Goldberg. The Middle East is plunging toward crisis. The early promise of Tahrir Square has been supplanted by dismay that the Egyptian authorities -- such as they are -- allowed mobs to lay siege to the Israeli embassy in Cairo this past weekend. Not long ago, Turkey and Israel were strategic partners. Now, relations between those two key U.S. allies are in ruins. When a recent United Nations report on the deadly confrontation between the Israeli military and a flotilla of Gaza-bound activists that sparked this crisis largely exonerated Israel, Turkey reacted by threatening to send warships to the eastern Mediterranean. And the Jewish state faces a miserable month at the UN, where the Palestinians, who have refused to meet Israel at the negotiating table, are planning to seek recognition as an independent state, with potentially catastrophic consequences for both sides. “As the months of Arab Spring have turned autumnal, Israel has increasingly become a target of public outrage,” the New York Times’ Ethan Bronner wrote this weekend from Jerusalem.
• More Job Cuts Loom for European Banks Locked Into Higher Pay. European banks may resort to more jobs cuts or zero bonuses as they struggle to maintain fixed compensation levels amid deteriorating financial markets. The companies are facing shrinking revenue and higher costs after raising base salaries of investment bankers by as much as 100 percent. That decision, which followed regulations to curb bonuses in the wake of the credit crisis, is irreversible even if conditions worsen, lawyers and consultants said, leaving banks with fewer options in their bid to improve margins. “The absolute last thing banks will want do is cut current salaries unless they have an explicit contractual right to do so,” said Jason Butwick, a London-based employment attorney at law firm Dechert LLP. “The legal, reputational, commercial and logistical risks of going down that route are huge.” European banks including UBS AG, Barclays Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Credit Suisse Group AG have announced more than 70,000 job cuts since midyear, compared with 42,000 by U.S. peers, according to data compiled by Bloomberg.
• Australia's August Business Confidence Slumps to Lowest Since April 2009. Australian business confidence plunged last month to the lowest level since April 2009 as a rout in global equity markets and concern about contagion from Europe’s debt crisis damaged sentiment, a private survey showed. The confidence index slumped to minus 8 in August from 2 in July, according to a National Australia Bank Ltd. (NAB) survey of more than 500 companies from Aug. 24-30 that was released in Sydney today. The business conditions gauge, a measure of hiring, sales and profits, slid to minus 3 from minus 1. Monthly employment growth in Australia averaged 2,800 from January through August this year, less than a 10th of the average of 30,500 job gains in the first eight months of 2010. Australia’s currency and benchmark stock index dropped last month and the MSCI World (MXWO) Index of equities sank 7.3 percent as concern increased that the Greek fiscal crisis would drag down other euro-area economies. The result reflects “heightened global uncertainty, large falls in equity markets and the fear of debt market contagion,” NAB Chief Economist Alan Oster said in a statement.
• China PBOC Statement on Inflation 'Hawkish,' ING Says. China's central bank statement yesterday that inflation is still too high is "hawkish," Tim Condon, head of Asia research at ING Groep NV, said today. He reiterated the bank's call for one more 25 basis-point increase in benchmark interest rates by the end of the year.
• China's Stocks Fall to 14-MOnth Low as Economic Data Fuel Policy Concerns. China’s stocks fell, dragging the benchmark index to a 14-month low, on concern the government may intensify policy tightening after imports jumped to a record and new lending increased. Industrial & Commercial Bank of China (601398) Ltd. and China Construction Bank Corp. (939) declined at least 1.2 percent after the Beijing News reported the central bank sold additional bills to major lenders, a step to drain liquidity from the banking system. Jiangxi Copper Co. and Aluminum Corp. of China Ltd. retreated more than 2 percent among commodity companies. BYD Co., the automaker part-owned by Warren Buffett’s Berkshire Hathaway Inc., tumbled to a record low on a bond-sale plan. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 35.65 points, or 1.4 percent, to 2,462.10 at the 11:30 a.m. local-time break. The gauge, which fell 1.2 percent last week, is headed for its lowest close since July 16, 2010. “Although there’s a small risk of a hard landing for China’s economy, a possible rebound in inflation and the impact of worsening European debt crisis on the global economy still remain the biggest concern to investors,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “There’s also no sign that policies will be loosened in the short term. Stocks might test a new low.”
• Gold's 'Perfect Storm' to Continue on Haven Demand, Morgan Stanley Says. Gold’s “perfect storm” is expected to continue on renewed investor demand for haven assets, potentially driving the metal to its 1980 inflation- adjusted record, according to Morgan Stanley. The firm retains a positive view on gold for its role as portfolio insurance against a “formidable cocktail” of macro challenges including financial systemic risk, concern of a double dip recession and sustained low interest rates, its analysts including Peter Richardson wrote in a report. The outlook for gold is now in favor of the firm’s “bull case” target of $1,625 an ounce this year and $1,819 an ounce in 2012, they said. Bullion now has an estimated 85 percent probability of trading between $1,819 an ounce and $2,085 an ounce next year, according to Morgan Stanley’s calculations.

Wall Street Journal:

• Pain Mounts for Europe Banks. Fears About Greece Persist Despite Efforts to Quell Worry. Europe's banks, burdened by concerns about exposure to ailing Greece, took a perilous turn Monday despite efforts by the biggest of them to calm panicked investors. France's financial system was especially hard hit, with shares in its three largest banks all falling more than 10%, as concerns about Greek default continued to cascade across Europe. European banks are cutting back on dollar-denominated loans, a troublesome sign of credit contraction at a time when American and European economies can least afford it.
• GOP Balks at Taxes to Finance Jobs Plan. The prospects for President Barack Obama's $447 billion jobs plan grew dimmer Monday as he unveiled the fine print of how it would be paid for—primarily through tax increases that Republicans said would destroy jobs, not create them.
• China's New Lenders of Last Resort.
• Perry's the Man in the Middle. Fellow Republican Presidential Candidates Take Aim at Front-Runner in Debate.
• Dark Side of Brazil's Rise. Brazil is booming amid a tectonic shift in global investing toward the developing world that has lifted its stock market, strengthened its currency and provided financing for new ports and World Cup soccer stadiums. But while foreign investment is mostly a good thing, there are downsides. The abundance of cash has helped fund riskier bank loans and fueled a potential real-estate bubble. By some measures, the Brazilian real is now the world's most overvalued currency, and many local factories aren't competitive in global markets.
• Britain's Tories Press to Weaken Ties to EU, Exposing Ruling-Party Divide. Lawmakers in U.K. Prime Minister David Cameron's Conservative Party are angling to use the financial crisis to weaken British ties to the European Union, a move that threatens to expose fault lines in the ruling coalition and previews the political wrangling that could accompany any efforts to reshape EU finances. Late Monday, more than 100 "euro-skeptic" members of the Conservative Party met for the inaugural session of a group dedicated to rethinking Britain's links with the EU. The discussion included ways to bring powers back to London, according to one attendee.
• The Trouble With French Banks. 'We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore." He's not the only one worried.

CNBC:

• Obama's Jobs Plan May Force US to Raise Debt Limit Again. President Obama's goal of winning a big enough increase in the U.S. debt limit to get him through the November 2012 election could be thwarted by his own job-creation proposal, budget experts said Monday. The 447 billion in new spending Obama wants to juice up a weak U.S. economy would have to be spent quickly if it is to be effective. That would immediately pile onto annual budget deficits of over $1 trillion, even though the president has promised to pay for his program in full. The problem is that he proposes paying for it over a much longer period.
• Fed Inflation Hawks Downplay Need for Easing. Two regional Federal Reserve presidents on Monday cast doubt on the notion, widely prevalent in financial markets, that the central bank will ease monetary policy further at its Sept. 20-21 meeting.

Business Insider:

• 'Culturomics' Predicted The Arab Revolutions - And Now It Predicts Global Unrest.
• Russia Wants to Sell Hundreds Of Its T-50 Stealth Fighters To Syria and Iran.
  

Zero Hedge:

• The Cost of Obama's Stimulus Plan: $312,500 Per Job Created or Saved.

NY Times:

• Fears Rattle Big Banks in France. French banks moved toward the center of the European debt storm Monday as investor concern about their ability to handle a potential Greek default raised the possibility that France’s government might need to shore up the banks’ financial positions. Even as French officials proclaimed that the country’s banks were sound, shares in BNP Paribas and Société Générale, two globally connected French banks considered “too big to fail” by their home government, slid as much as 12 percent. And their cost of short-term borrowing continued to soar, making it more expensive for them to finance day-to-day operations. The looming question is whether the French government will have to step in to support its banks, much as the American government did during the financial crisis in September 2008. Then, as now, a retreat by nervous investors threatened the banks’ liquidity.
• Wary Investors Start to Shun European Banks. When a $225 million loan to BNP Paribas comes due Thursday at Legg Mason’s Western Asset management unit, managers at its money market funds will be exercising caution. Instead of renewing the loan as they would have as recently as two months ago, they are looking to park investors’ money elsewhere, avoiding BNP and other Continental banks in favor of institutions in Scandinavia, Canada and Britain. Even as European investors race to abandon shares in French banks, on this side of the Atlantic, banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments.
• German Leader Faces Key Choices on Rescuing Euro. As Europe struggles to reverse a plunge in financial confidence, the world waits for Germany’s chancellor, Angela Merkel, to make a fundamental choice. She, more than any other European politician, will have to either summon the leadership to rescue the euro or concede that the political will is not there. Mrs. Merkel, 57, faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and, more immediately, whether to allow Greece to default or even to leave the currency union. American officials fear that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic. Fears of a worsening debt crisis slammed European stocks on Monday, especially shares of French banks, forcing the French government to declare its support for its three largest financial institutions. The turmoil added to worries that the Greek crisis would prove difficult to contain without more robust action from Germany and, ultimately, its taxpayers.

Politico:

• Feinstein: 'Wiped Out' by Scandal. Sen. Dianne Feinstein (D-Calif.) said she was “wiped out” by Kinde Durkee, a well-connected California Democratic political operative who served as treasurer for hundreds of state, local and federal campaign committees. Durkee was arrested by the FBI on Sept. 2 on allegations of fraud surrounding the diversion of more than $670,000 from the reelection committee for a California state assemblyman, and a growing list of California Democrats, including Feinstein and Reps. Susan Davis and Loretta Sanchez, now appear to victims as well.

Reuters:

• Euro Firm After Round of Short-Covering; Downtrend Intact. The euro held firm on Tuesday after a choppy session overnight saw a wave of short-covering lift it by more than two cents on hopes that China will bolster Italy by buying its bonds, but traders found few reasons to stay upbeat about the currency.
• Spanish Treasury's Morales: No Chance of Euro Breakup. There is no chance of the euro zone breaking up, the Spanish Treasury's public debt manager said on Tuesday. "I don't see the euro breaking up at all," Ignacio Fernandez-Palomero Morales said at a seminar in Tokyo. "The problem is not decisions, the problem is the way decisions are made," he said, noting markets are not good at pricing in political uncertainty. "Everything is going in the right direction," he added. Debt crisis fears in Europe have escalated as Greece's fiscal repair efforts appear to be faltering and as Italy and Spain continue to be sucked deeper into trouble.
• Bank Analysts Slash Goldman(GS) Estimates Hardest. Analysts have been slashing earnings estimates for big Wall Street banks recently, particularly for Goldman Sachs, as unpredictable trading markets and weak merger and underwriting volumes hurt the sector's profit potential. Third quarter average profit estimates for Goldman Sachs Group Inc (GS.N) have fallen 18 percent over the last month to $2.28 per share, according to Thomson Reuters I/B/E/S.
• Steel Dynamics(STLD) Q3 Profit Outlook Lags Street View. They fell 3 percent after the bell.
• PIMCO's Gross Boosts Treasuries to 16% in Flagship Fund. Bill Gross, the manager of the world's largest bond fund, increased exposure to Treasuries dramatically in August, reflecting his view of the rising risks of recession in the United States. According to PIMCO's website on Monday, Gross' $245 billion Total Return Fund (PTTRX.O) held 16 percent in U.S. Treasuries and Treasury-related securities as of the end of Aug. 31, up from 10 percent as of the end of July.

Passauer Neue Presse:

• Wolfgang Gerke, the president of the Bavarian Center of Finance in Munich, called for a Greek sovereign default and said the country should be expelled from the euro area. "Insolvency would be a sensible step," Gerke said. A sovereign-debt write-off and a return to the drachma are "necessary" for Greece to become competitive again, he said. He said the German government had too long presented a Greek rescue as the only alternative.

Financial Times Deutschland:

• The Basel Committee on Banking Supervision plans to step up its examination of how U.S. and European banks assess their credit risk in an effort to increase the harmony of the global banking system. The group's general secretary, Stefan Walter, told the newspaper that the committee will intensify efforts to see how banks were analyzing their own balance sheets.

Beijing News:

• China Central Bank Orders Some Lenders Buy Bills. China's central bank sold more than 20 billion yuan of additional bills to Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and some other lenders after they were judged to have lent excessively.

Evening Recommendations
Janney Montgomery:

• Rated (SODA) Buy, target $60.

Night Trading

• Asian equity indices are -2.0% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 176.0 +1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 159.0 +2.0 basis points.
• FTSE-100 futures +1.34%.
  
• S&P 500 futures +.28%.
  
• NASDAQ 100 futures +.30%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CBRL)/.99
• (BBY)/.53

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for August is estimated to fall to 88.0 versus a reading of 89.9 in July.

8:30 am EST

• The Import Price Index for August is estimated to fall -.8% versus a +.3% gain in July.

2:00 pm EST

• The Monthly Budget Deficit for August is estimated to widen to -$132.0B versus -$90.5B in July.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bullard speaking, weekly retail sales reports, IBD/TIPP Economic Optimism Index for September, 10-Year T-Note Auction, (HTZ) Investor Meeting, (STN) Investor Day, ThinkEquity Growth Conference, Deutsche Bank Tech Conference, Morgan Keegan Industrial/Transportation Conference, Morgan Stanley Helathcare Conference, BMO Media/Telecom Conference, CSFB Chemical/Ag Science Conference and the Deutsche Bank Transports/Aviation Conference could also impact trading today.
  

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