Stocks Slightly Lower into Final Hour on Rising Eurozone Debt Angst, US Tax Hike Worries, Global Growth Concerns, Technical Selling

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 32.06 -2.05%
  
• ISE Sentiment Index 101.0 +62.90%
  
• Total Put/Call 1.11 +12.12%
  
• NYSE Arms .96 -48.76%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 132.65 +3.53%
  
• European Financial Sector CDS Index 271.77 +1.44%
  
• Western Europe Sovereign Debt CDS Index 348.50 +2.36%
  
• Emerging Market CDS Index 312.50 +2.7%
  
• 2-Year Swap Spread 30.0 -2 bps
  
• TED Spread 35.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 178.0 -1 bp
  
• China Import Iron Ore Spot $177.40/Metric Tonne -.06%
  
• Citi US Economic Surprise Index -42.30 -.1 point
  
• 10-Year TIPS Spread 1.92 +3 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -51 open in Japan
• DAX Futures: Indicating -35 open in Germany

Portfolio:

• Slightly Higher: On gains in my Biotech/Medical sector longs and Index hedges
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, added to my EEM short and then covered some of them
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 weakens this afternoon at its downward-sloping 50-day moving average on rising Eurozone debt angst, US tax hike concerns, some more disappointing economic data, emerging markets inflation fears and global growth worries. On the positive side, Drug, Biotech, Medical, Computer Service and Utility shares are especially strong, rising more than +1.0%. Lumber is rising +2.2%. Weekly retail sales rose +4.5% versus a +4.7% gain the prior week. On the negative side, Road & Rail, Education, Homebuilding, Construction, HMO, Hospital, Networking, Disk Drive, Computer, Software, Paper, Steel, Alt Energy and Coal shares are under meaningful pressure, falling more than -1.5%. Cyclicals and small-caps are substantially underperforming again. Oil is rising +.39%, Gold is jumping +1.35% and Copper is falling -1.94%. Rice is still very near its multi-year high, rising +32.5% in about 11 weeks. The average US price for a gallon of gas is -.01/gallon today to $3.58/gallon. It is up .44/gallon in about 7 months. The Germany sovereign cds is gaining +4.6% to 94.33 bps, the China sovereign cds is gaining +2.0% to 172.15 bps, the Japan sovereign cds is rising +4.2% to 127.49 bps, the Saudi sovereign cds is surging +5.86% to 117.50 bps, the UK sovereign cds is gaining +3.16% to 85.17 bps, the France sovereign cds is surging +2.6% to 186.17 bps, the Italy sovereign cds is rising +5.36% to 514.83 bps, the Belgium sovereign cds is gaining +2.1% to 272.17 bps, the Brazil sovereign cds is gaining +2.0% to 172.15 bps and the Spain sovereign cds is jumping +2.7% to 417.83 bps. The Germany sovereign cds surpassed its Feb. 24, 2009 record high today. As well, the Japan sovereign cds also hit an all-time high today. The France and Italy sovereign cds are still very near their record highs. The China sovereign cds is braking to the highest level since April 2009. The Russia sovereign cds is close to breaking out of a multi-year trading range. The Western Europe Sovereign CDS Index and European Financial Sector CDS Index are still near their all-time highs. The 2-Year Euro Swap Spread is very close to a multi-year high. The 3-Month Euro Basis Swap is falling -6.03 bps to -98.06 bps and has given back about half its gains since last week's European liquidity measures. The TED spread is still very near the highest level since July 2010 despite Europe's recent efforts. The China Blended Corporate Spread Index is continuing its parabolic move higher, rising another 15.0 bps to 683.0 bps. Brazilian equities fell -1.25% today and are now down -18.6% ytd. Select growth stock leaders continue to prop up the major averages. Breadth and volume were poor even as the major averages surged this morning. The 10-year yield continues to fall too much. Various credit gauges continue to indicate rising global recession fears. However, it appears to me equity investors continue to expect stagnation, rather than true recession, which is likely the main reason a handful of true growth stocks are seeing huge outperformance and multiple expansion. Gauges of European debt angst must stabilize very soon for equities too build on recent gains. I expect US stocks to trade modestly lower into the close from current levels on profit-taking, rising Eurzone debt angst, global growth worries, emerging markets inflation fears, US tax hike worries and more shorting.

Today's Headlines

Bloomberg:

• Greek Default Would Hit German Banks and Taxpayers. Germany’s bad banks, backed by the state to prevent the collapse of Hypo Real Estate Holding AG and WestLB AG during the credit crisis, would be the hardest hit in the event of a Greek default, leaving taxpayers to shoulder the bill a second time.
• Italy Bonds Fall a 2nd Day on Downgrade, Greek Default Concern. Italian bonds fell for a second day after Standard & Poor’s cut the country’s credit rating and Greece prepared for further talks with its main creditors to avoid a default. Italian debt declined even as the European Central Bank was said to be buying the securities. The Italian 10-year yield rose nine basis points to 5.68 percent at 12:44 p.m. in London. The two-year yield climbed 10 basis points to 4.29 percent. Portugal’s 10-year yield increased 40 basis points to 11.66 percent, the biggest increase since Sept. 5 when it jumped 51 basis points. The extra yield, or spread, that investors demand to hold Italian 10-year bonds instead of similar-maturity German bunds widened nine basis points to 388 basis points.
• German, Italian Credit Swaps Hit Records as Debt Crisis Deepens. The cost of insuring against a default on German and Italian government surged to records as Italy's downgrade signaled Europe's debt crisis is spreading. Credit-default swaps protecting Germany's bonds rose four basis points to a record 94 as of 4 p.m. in London, while contracts tied to Italy jumped 25 basis points to 513, according to CMA. Swaps on France increased five basis points to 186, and Spain was up 12 to 417 basis points. The Markit iTraxx SovX Western Europe Index of credit- default swaps on government debt was at 344 basis points at 14:35 in London, based on the price of latest series of the gauge that started trading today. That compares with 340 basis points on the previous series yesterday. The Markit iTraxx Crossover Index of credit-default swaps on 50 European companies with mostly high-yield credit ratings cost 795 basis points, according to JPMorgan Chase & Co. That compares with 747 basis points on the previous series, linked to 40 companies, at the close of trading yesterday. The Markit iTraxx Europe index of 125 companies with investment-grade ratings cost 185.25 basis points, compared with 186.75 yesterday. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers cost 291 and the subordinated index cost 495 basis points.
• European Banks' Dollar Funding Costs Surge Amid Italy Downgrade. The cost for European banks to fund in dollars surged after Italy’s first ratings downgrade in five years stoked concern lenders will lose money on their euro- region sovereign debt holdings.The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, was 99 basis points below the euro interbank offered rate at 3:15 p.m. in London, from 92 basis points yesterday, according to data compiled by Bloomberg. The cost was 112.5 basis points under Euribor on Sept. 12, when the swap was the most expensive since December 2008. The cost of one-year dollar funding also climbed, with the cross-currency basis swap for that period at 71 basis points less than Euribor, compared with 66 yesterday, Bloomberg data show. The difference widened to as much as 75 basis points a week ago. “It’s all about banks, the critical thing is trying to manage the euro crisis without it crashing the banks,” said Bill Blain, co-head of strategy at broker Newedge Group in London. “We’ve seen before that, when confidence goes in banking, it goes very quickly.” The Euribor-OIS spread, the difference between the three- month euro interbank offered rate and overnight index swaps, was at 79.9 basis points, from 79.7 yesterday, Bloomberg data show. That’s within five basis points of the highest level since March 2009, reached Sept. 12.
• More Banks May Need Recapitalization, EU's Almunia Says. European governments may have to inject funds into more banks if they're unable to get the region's sovereign-debt crisis under control, European Union Competition Commissioner Joaquin Almunia said. “More banks may need to be recapitalized,” Almunia said today at a press conference in Brussels. “That's why it's so important to solve the sovereign-debt crisis without a delay,” or “the bill will only grow bigger,” he said.
• EU Lawmakers, Governments Fail to Reach Deal on Naked CDS Law. European Union governments and lawmakers have failed to reach agreement on an EU law to curb sales of so-called naked credit-default swaps for sovereign debt at a two-hour meeting today. Representatives of Poland, which holds the rotating presidency of the EU, and the European Parliament were unable to reach a deal on how to limit trading in naked CDS, Sharon Bowles, chairwoman of the parliament’s economic and monetary affairs committee, said in a telephone interview.
• Investors have more than tripled the amount of insurance on Australian government debt through credit-default swaps, amid a drop in property prices and concern China will slow purchases of iron ore and coal. Net notional Australian government debt covered by credit-default swaps surged in the past year, outpacing increases for contracts on U.S., French and German notes, according to the Depository Trust & Clearing Corp. 5-year default swap contracts on the Australian sovereign climbed 20 basis points this quarter to 77 basis points as of Sept. 19, and last month reached the most expensive relative to U.S. government bond protection since May 2009, CMA data show.
• Gold Rises on European-Debt Concerns, Bets Fed Will Add to U.S. Stimulus. Gold futures rose as European debt concerns and prospects for more steps by the Federal Reserve to bolster the U.S. economy spurred demand for the precious metal as an alternative investment. Gold futures for December delivery gained $23.60, or 1.3 percent, to $1,802.50 an ounce at 10:13 a.m. on the Comex in New York. Before today, gold gained 25 percent this year, outperforming global equities and Treasuries. The metal reached a record $1,923.70 on Sept. 6.
• $16 Muffins Found at U.S. Meetings. U.S. Justice Department agencies spent too much for food at conferences, in one case serving $16 muffins and in another dishing out beef Wellington appetizers that cost $7.32 per serving, an audit found. “Some conferences featured costly meals, refreshments, and themed breaks that we believe were indicative of wasteful or extravagant spending,” the Justice Department’s inspector general wrote in a report released today.
• IMF Cuts Global Growth Estimate. The International Monetary Fund cut its forecast for global growth and predicted “severe” repercussions if Europe fails to contain its debt crisis or U.S. policy makers deadlock over a fiscal plan. The world economy will expand 4 percent this year and next, the IMF said today, compared with June forecasts of 4.3 percent in 2011 and of 4.5 percent in 2012. The U.S. growth projection for 2011 was lowered to 1.5 percent from 2.5 percent in June. “Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said in its World Economic Outlook report today.
• Obama $8 Billion Solar Betamax Bet Unwinds. The U.S. government’s $8 billion bet on solar energy that would pave the deserts with mirrors risks following the Betamax into the technological wilderness because of Chinese backing for a cheaper system. The Department of Energy guaranteed loans to six plants that will reflect sunlight to boil water for making electricity, aiming to kick-start commercial projects. Four of those, and a third of $26 billion pipeline encouraged by U.S. aid, may switch to standard photovoltaic panels that generate a charge directly from the sun, said Brett Prior, a solar analyst at GTM Research. The cost of generating power with panels plunged about 37 percent in the past year as Chinese factories cut prices, pushing three U.S. makers including Solyndra LLC into bankruptcy protection in the past quarter. Solar Millennium AG (S2M) walked away from a $2.1 billion U.S. loan guarantee last month and ditched thermal devices for a cheaper photovoltaic system. “If Solar Millennium, a major developer that has the technology, can’t do it with a loan guarantee, then it’s not clear who could,” Prior said in a phone interview from Boston. While the developers of some of the U.S. guaranteed projects said they are sticking with mirror-based devices, a switch by others will drain momentum for the technology and shift engineering jobs President Barack Obama aims to create in the southwestern U.S. to the panel plants of eastern China.
• China's Policies Fueling 'Growing Frustrations," Locke Says. U.S. Ambassador to China Gary Locke said the Asian country’s business climate is leading to “growing frustrations” among business and government leaders abroad, planting “seeds of doubt” in the minds of investors. “There is a gap between the goals China identified in its five-year plan and the steps it is taking to achieve them,” Locke told U.S. business executives in Beijing.
• Brazil Inflation Quickens More Than Expected After Rate Cut. Brazilian consumer prices jumped more than economists expected this month, limiting the central bank’s space to further cut interest rates to shore up growth in Latin America’s biggest economy. Yields on interest-rate futures rose. Consumer prices, as measured by the IPCA-15 index, rose 0.53 percent in the month through mid-September, the national statistics agency said today. That’s the fastest pace since May and steeper than 40 of 41 economists expected in a Bloomberg survey whose median forecast was for a 0.49 percent price rise. “Inflation has quite a lot of pressure and there’s no sign that the global slowdown is affecting the domestic scenario,” said Luciano Rostagno, chief strategist at CM Capital Markets in Sao Paulo. “The chances of inflation cooling down this month as the bank has been saying is less and less likely.” Inflation doubled this month from the 0.27 percent reading in mid-August, led by a 1 percent jump in clothing prices and 0.72 percent increase in the cost of food and beverages, the statistics agency said. Prices rose 7.33 percent from a year ago, the fastest pace in six years. Inflation first breached the 6.5 percent upper limit of the government’s target range in May.

Wall Street Journal:

• Swiss Franc Tumbles as Market Eyes Possible SNB Moves. Widespread market speculation that Switzerland may adopt new measures to prevent its currency from inflicting further damage on its export sector sent the franc sharply lower Tuesday, with the move momentarily distracting traders from Europe's ongoing sovereign-debt problems.

CNBC.com:

• Emerging Market Debt Is No Safe Haven: Fund Manager. Those who see emerging market debt as a safe haven should think again, according to Mike Riddell, a fund manager at M&G Investments in London. In a research note on Tuesday, Riddell said he became concerned a couple of months ago when the "implied risk premium on emerging market debt suggested that the market was treating (emerging market) debt as a safe haven." Bluntly, Riddell warned the "market was therefore smoking crack."
• Worry About a New Wave of Layoffs.
• Every Greek Family Has One Public Servant in Its Ranks'. (video)
  

Business Insider:

• Red Alert On Copper?
• Exclusive Pictures From The North Korean Side of the Demilitarized Zone.
• Food Inflation Reaches "Quite Concerning" Levels in Houston. (graph)
  

Zero Hedge:

• Global Systemic Risk Near Record Highs Prompts ESRB Warning. (graphs)
• Slovenian Government Collapses After Confidence Vote Loss; EFSF Ratification to be Delayed Until 2012.
  

Reuters:

• India raised interest rates last week as it expects inflation close to 10% until November, citing an interview with central bank Deputy Governor Subir Gokarn.
• German Finance Minister Warns of Italy's Problems - Sources. German Finance Minister Wolfgang Schaeuble said on Tuesday Italy had not just considerable financial but also political problems, according to sources within his conservatives.
• Google+(GOOG) Opens Up, Takes Fight to Facebook.
  

Telegraph:

• Rio Tinto(RTP) Warns of Slowing Markets. Worries about the health of the world’s developed economies mean commodities markets have deteriorated since the start of the year, Rio Tinto, the world’s second biggest mining group, warned.

Guardian:

• Greece Must Default and Quit the Euro. The real debate is how. A Greek default and exit must be taken in the people's interests – not entrusting the process to the EU, IMF and banks.

China Finance:

• China can't force the economy to grow rapidly as it will result in problems including large debt, asset bubbles and inflation, Xiong Lu, a researcher with the central bank's financial research center, wrote in a commentary.

Bear Radar

Style Underperformer:

• Small-Cap Growth (+.39%)

Sector Underperformers:

• 1) Coal -2.41% 2) Alt Energy -1.51% 3) Steel -.91%

Stocks Falling on Unusual Volume:

• HME, HLS, TNH, SLXP, MNTA, FSYS, IBA, NFLX, PRAA, MLNX, SINA, OMCL, CSTR, PLXS, OPEN, TEVA, XLNX, SOHU, ILMN, JOBS, AFAM, HITK, SYNA and RIMM
  

Stocks With Unusual Put Option Activity:

• 1) EP 2) AMR 3) FMCN 4) SOHU 5) CCL
  

Stocks With Most Negative News Mentions:

• 1) MCP 2) XLNX 3) FINL 4) MRVL 5) TZOO
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth (+1.21%)

Sector Outperformers:

• 1) Gold & Silver +3.01% 2) Gaming +2.21% 3) Medical Equipment +2.19%

Stocks Rising on Unusual Volume:

• AAPL, NGD, NBL, REXX, JAZZ, THRX, OPTR, CELG, GLNG, WPRT, DXCM, ARMH, PCLN, IPXL, CBST, TKF, CUK, JEF, CCL, FDS, WPI, RCL, MTN, NEM, TBI, UAN and TJX
  

Stocks With Unusual Call Option Activity:

• 1) BBBY 2) GR 3) V 4) CCL 5) AMR
  

Stocks With Most Positive News Mentions:

• 1) MGM 2) PHM 3) JEC 4) RL 5) RDC
  

Charts:

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

Tuesday Watch

Evening Headlines

Bloomberg:

• Italy Debt Rating Lowered by S&P on Weaker Growth Outlook. Italy's credit rating was cut by Standard & Poor's on concern that weakening economic growth and a "fragile" government mean the nation won't be able to reduce the euro-region's second-largest debt burden. The rating was lowered to A from A+, with a negative outlook, S&P said in a statement. S&P said Italy's net general government debt is the highest among A-rated sovereigns, and the company now expects it to peak later and at a higher level than it previously anticipated. The decision sent the euro sliding for a third day against the dollar as investor concern rises that European policy makers will fail to contain the debt crisis. Greece's government plans another call with its main creditors today as it seeks to stave off default, while U.S. Treasury Timothy F. Geithner urged the region to adopt additional tools. "It's a reminder that we've had the market in control but policy makers have been slow to think in any forward-looking context," said Adrian Foster, head of financial-market research for Asia at Rabobank Groep NV in Hong Kong. "Policy makers across the euro-zone have been well and truly asleep at the wheel for quite a while now and are only taking measures when the market pushes them to it." S&P said it lowered its outlook for Italy's growth to a 0.7 percent annual average for 2011 to 2014, from a prior projection of 1.3 percent. "We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," it said. "We expect that Italy's fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges," S&P said. Italy's downgrade may aggravate a volatile political situation -- Berlusconi faces four trials -- after a decade with virtually no economic growth that has undermined debt reduction. Its government debt was 119 percent of gross domestic product last year, more than any euro country after Greece. With austerity in the pipeline, "we now expect the economy to contract in 2012 and 2013," Ben May, an economist at Capital Economics Ltd. in London, said in a Sept. 9 note. Berlusconi pushed through two packages of deficit cuts since mid-July totaling about 100 billion euros. Measures included raising the value-added tax by one percentage point to 21 percent and a levy on incomes of more than 300,000 euros to balance the budget by 2013. The yield on 10-year notes was at 5.6 percent yesterday, pushing the difference investors demand to hold Italian bonds instead of benchmark German bunds to 379 basis points. The cost of insuring Italian debt against default was 488 basis points compared with 240 on Dec. 31, 2010.
  
• The cost of protecting Malaysian and Thailand bonds from default shows that traders consider debt of those countries safer investments than AAA-rated France, whose banks are most exposed to a potential default by Greece. Credit default swaps for Malaysia and Thailand are priced at 133 basis points and 157 basis points, respectively, compared with France's 165.
• Euro Declines for Third Day Versus Dollar After S&P Lowers Italy's Ratings. The euro fell for a third day against the dollar after Standard & Poor’s cut Italy’s credit rating, adding to concern Europe’s worsening debt crisis will raise borrowing costs for countries in the region. The 17-nation euro extended declines versus the yen into a third day before Greece resumes discussions with its creditors over the next installment of rescue funds. The dollar gained versus most major peers before the Federal Reserve’s policy meeting today. Australia’s dollar held losses even after the Reserve Bank said it was “well placed” to respond to economic risks. South Korea’s won dropped to its weakest this year as a slump in Asian stocks curbed demand for emerging-market assets. “We’re going to see the euro continue to come under pressure,” said Chris Weston, an institutional trader at IG Markets in Melbourne. “One of the big things we’re very concerned with is what’s going to happen with Italian borrowing costs and this could see some further selling of bonds.”
• OPEC's $1 Trillion Cash Quiets Poor On Longest Ever $100 Oil. Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity. Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.
• Electric Vehicles Fail to Connect Consumers. Klaus Doerrzapf, who has solar panels on his home, has no plans for an emission-free car in his garage. He’s one of the reasons why automakers like Nissan Motor Co. won’t recoup investments in electric vehicles anytime soon. “It’s too early,” the 50-year-old manager at an electrics company said at the International Motor Show in Frankfurt. “Range and price are a problem. Battery life and charging times are also concerns,” Doerrzapf said, while looking at an electric-powered Focus from Ford Motor Co. (F)
• Obama Courts Wealthy New York Donors After Tax Boost Pitch. President Barack Obama met with wealthy New York donors, including investment bankers, at a campaign fundraiser tonight, hours after calling for new taxes on top earners to help narrow the budget deficit. Speaking to about 60 contributors at a $35,800-per-ticket event at the New York home of Ralph Schlosstein and Jane Hartley, Obama defended his economic record and appealed for help to win “the hearts and minds of America.”
• Short-Term Stimulus Won't Help U.S. in Long Run: Glenn Hubbard. Joblessness and sluggish growth are hampering the economic recovery and Barack Obama’s political standing. Raising taxes on the rich, as the president called for yesterday, isn’t going to turn things around. To get a sense of how severe the situation is, consider this: Bringing the unemployment rate back to pre-financial- crisis levels by end of the president’s second term (or his opponent’s first term) would require real Gross Domestic Product growth of 4 percent a year over that period -- a rate we have not reached in more than a decade. What sort of fiscal policy can turn things around?
• Strong Countries, Not Greece, Should Ditch the Euro: Ramesh Ponnuru. Europeans can’t say they weren’t warned. For a decade before the euro was launched, critics -- and many economists -- argued that one currency wouldn’t fit all, or even most, of the nations of the European Union. The unfolding euro-area crisis is proof that the critics were right. Now it’s up to the strongest member countries to put an end to this failed experiment.
• Food Inflation to Remain a Concern for Governments, FAO Says. Food-price inflation will remain a concern for governments even as wheat prices stay below their peak this year and rice declines, the United Nations said. It will take another year of bumper harvests for wheat and rice and a surplus in corn to bring stockpiles to “healthy” levels and ease inflation concerns, Abdolreza Abbassian, senior economist at the UN Food & Agriculture Organization, said in an interview in Singapore today.
• 8 Offshore Banks Under Investigation: U.S. Eight offshore banks are under federal grand jury investigation for facilitating tax evasion by U.S. citizens as part of a probe the Justice Department said has dealt “fabled Swiss bank secrecy a devastating blow.”

Wall Street Journal:

• Partner in Merkel Bloc Sticks by Euro Criticism. Germany's Free Democratic Party, junior partner in Chancellor Angela Merkel's government, vowed to maintain its recently adopted euro-skeptic tone, despite a weekend drubbing in regional elections in Berlin. The pro-business FDP made clear Monday that it will continue to express many ordinary Germans' growing doubts about the bailout of Greece, in defiance of Chancellor Merkel's attempts to keep her coalition partner in line. The FDP's loss of popularity since Germany's last elections in 2009 is making Ms. Merkel's task of governing harder, since her struggling coalition partner is becoming less obedient—particularly on the chancellor's handling of the euro-zone debt crisis.
  
• Greek Crisis Exacts the Cruelest Toll. Two years into Greece's debt crisis, its citizens are reeling from austerity measures imposed to prevent a government debt default that could cause havoc throughout Europe. The economic pain is the price Greece and Europe are paying to defend the euro, the centerpiece of 60 years of efforts to unite the Continent. But as Greece's economy shrinks, its society is fraying, raising questions about how long Greeks will be able to take the strain. Gross domestic product in the second quarter was down more than 7% from a year before, amid government spending cuts and tax increases that, combined, will add up to about 20% of GDP. Unemployment is over 16%. Crime, homelessness, emigration and personal bankruptcies are on the rise. The most dramatic sign of Greece's pain, however, is a surge in suicides. Recorded suicides have roughly doubled since before the crisis to about six per 100,000 residents annually, according to the Greek health ministry and a charitable organization called Klimaka. About 40% more Greeks killed themselves in the first five months of this year than in the same period last year, the health ministry says.
• U.S. Probes Rating-Cut Trades. Securities regulators have sent subpoenas to hedge funds, specialized trading shops and other firms as they probe possible insider trading before the U.S. government's long-term credit rating was cut last month, people familiar with the matter said.
  
• Seagate(STX) CFO Sees 'Drastic' Changes Coming To Its Customer Base. Seagate Technology Inc. (STX) expects its customer base to "change in a drastic, drastic manner" over the next five years as the maker of hard-disk drives deals with the decline of computers--its core market--and the rise of more competition.

CNBC:

• New Fees in Obama Plan Won't Just Hit Millionaires. It's not just millionaires who'd pay more under President Barack Obama's latest plan to combat the deficit. Air travelers, federal workers, military retirees, wealthier Medicare beneficiaries and people taking out new mortgages are among those who would pay more than $130 billion in new government revenues raised through new or increased fees. These fees are advertised as "savings" in administration budget documents. Airline passengers, for instance, would see their federal security fees double from $5 to $10 for a nonstop round-trip and triple to $15 by 2017, raising $25 billion over the coming decade. Federal employees would contribute $21 billion more to their pensions over the same period. Military retirees would pay a $200 fee upon turning 65 to have the government pay their out-of-pocket Medicare expenses. They'd also pay more for non-generic prescription drugs. And it'll cost corporate jet owners a new $100 fee for each flight.
• China Bank Stops Some FX Trades With European Banks. A big market-making state bank in China's onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday. The European banks include French lenders Societe Generale, Credit Agricole and BNP Paribas. "Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters. The Chinese state bank, a primary player in China's onshore foreign exchange market, has also stopped trading with UBS in the wake of that bank's $2.3 billion loss from a rogue trading scandal.
• US to Announce Major China Trade Enforcement Action. U.S. trade officials will announce a major trade enforcement action against China on Tuesday, according to an advisory from the U.S. Trade Representative's office. The advisory, which was obtained from a business group, said U.S. Trade Representative Ron Kirk "will hold a press conference to announce a major trade enforcement action against China." It gave no other details. One possible action could target China's export restrictions on rare earths, which are crucial for global electronics production and the defense and renewable energy industries. They are also used in a wide range of consumer products from iPhones to electric car motors.

Business Insider:

• The Completely Outrageous Cost of Living in Brazil.
• A Little Bit of Math on the "Buffett Tax". Unfortunately, $410 billion is "only" about 7% of the deficit we expect to incur over the next ten years. That is not an inconsequential portion but considering the debate surrounding hiking tax rates by any amount, let alone generating an increase sufficient see a seven percentage point increase in taxes paid, as well as the negative consequences such a sharp adjustment would engender, this hardly seems to be the “only” place to go to achieve debt reduction.
• Meet The Hardcore Porn Star Getting A $53,000 Per Annum Pension From The Italian Senate.
  

Zero Hedge:

• UBS's Andy Lees Kills The Argument of Endless Debt-Funded Stimulus.
• Why Was Congress Forced to Subpoena to Head of Obama's Budget Office to Get Info On Solyndra?
  

IBD:

• CVR Partners(UAN) Enjoy High Prices For Its Fertilizers.

NY Times:

• ConAgra(CAG) Withdraws $5.2 Billion bid for Ralcorp(RAH). ConAgra Foods said on Monday that it was dropping its $94-a-share cash offer for Ralcorp Holdings. “This follows Ralcorp’s failure to enter into a constructive dialogue with ConAgra Foods,” the company said in a statement. Earlier on Monday, Ralcorp said that it still considered ConAgra’s $5.2 billion takeover offer insufficient. That all but ensured that the offer will expire without deal talks beginning.
• Greece Nears the Precipice, Raising Fear. Slower economic growth throughout Europe, and probably in the United States. Huge losses by major European banks. Declining stock markets worldwide. A tightening of credit, making it harder for many borrowers to get loans. As concerns grow that Greece may default on its government debt, economists are starting to map out possible outcomes. While no one knows for certain what will happen, it’s a given that financial crises always have unexpected consequences, and many predict there will be collateral damage.

The Blaze:

• U.S. In 'Damage Control' Mode as Palestinian Leader Says Nothing Can Stop Statehood Bid. (video)

Politico:

• Obama Deficit Reduction Plan Embraces The Left. President Barack Obama finally gave his liberal critics exactly what they wanted. His tough opening bid on deficit reduction and his feisty, defiant speech from the White House Monday were greeted with almost incredulous joy by progressives who have urged Obama to take this kind of hard line with Republicans since the day he was elected.

Reuters:

• CDS Collateral Quality Might Pose Hidden Risk. (video) CDS exposure to euro zone peripheral countries should be safely collateralized, but collateral quality might still represent an issue, says Reuters Fixed Income analyst Vincenzo Albano.
• FACTBOX - What's on Obama's Tax List, With "Buffett Rule"?
  

Financial Times:

• Siemens shelters up to €6bn at ECB. Siemens AG withdrew more than $684 million in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, citing a person with direct knowledge of the matter. In total, Siemens has deposited between 4 billion euros and 6 billion euros, mostly through one-week deposits, with the ECB, citing the person. It isn't clear from which bank Siemens withdrew its deposits.

Kathimerini:

• Greece May Hold Referendum on Euro Zone Membership. Greek Prime Minister George Papandreou is considering holding a referendum on whether his nation should remain or exit from the euro common currency. Papandreou hopes to use the vote to give his government a mandate for austerity measures asked for by international lenders. A bill to set up a referendum on the euro may be submitted to parliament and discussed in coming days.

Commercial Times:

• TSMC to Cut Capex by 19% in 2012. Taiwan Semiconductor Manufacturing Co. plans lower capital spending by 19% to $6 billion in 2010, from $7.4 billion budgeted this year.

21st Century Business Herald:

• China's non-performing loans to local government financial vehicles may exceed 1 trillion yuan in two years, citing a report from China Orient Asset Management. The non-performing loan ratio for financing vehicles may reach as high as 15%. The ratio for high-speed rail construction is "very likely" to hit 11.65%. Bad loan risk at banks will mainly come from local financing vehicles, high-speed rail construction, renewable energy and steel industries, according to 72.54% of respondents of the China Orient Asset Management Survey.

Evening Recommendations
Citigroup:

• Reiterated Buy on (APEI), target $55.

Night Trading

• Asian equity indices are -2.0% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 205.0 (new series).
  
• Asia Pacific Sovereign CDS Index 154.50 +.5 basis point.
• FTSE-100 futures n/a.
  
• S&P 500 futures -.70%.
  
• NASDAQ 100 futures -.47%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FDS)/.95
• (AZO)/6.98
• (CAG)/.31
• (JEF)/.20
• (CCL)/1.63
• (ADBE)/.54
• (CPRT)/.59
• (ALOG)/.62
• (ORCL)/.47

Economic Releases
8:30 am EST

• Housing Starts for August are estimated to fall to 590K versus 604K in July.
• Building Permits for August are estimated to fall to 590K versus 597K in July.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports, RBC Industrials Conference, BofA Merrill Power Conference, Goldman Sachs Communicopia Conference and the JPMorgan Investment Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and industrial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, US Tax Hike Fears, Financial Sector Pessimism, Global Growth Worries

Broad Market Tone:

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

Equity Investor Angst:

• VIX 34.02 +9.88%
  
• ISE Sentiment Index 55.0 -11.29%
  
• Total Put/Call .91 -5.83%
  
• NYSE Arms 1.94 +144.67%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 128.13 +2.38%
  
• European Financial Sector CDS Index 270.17 +10.85%
  
• Western Europe Sovereign Debt CDS Index 340.60 +5.12%
  
• Emerging Market CDS Index 304.88 +4.84%
  
• 2-Year Swap Spread 32.0 unch.
  
• TED Spread 35.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 179.0 -11 bps
  
• China Import Iron Ore Spot $177.50/Metric Tonne -.22%
  
• Citi US Economic Surprise Index -42.20 +.9 point
  
• 10-Year TIPS Spread 1.89 -8 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -185 open in Japan
• DAX Futures: Indicating +28 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 is rolling over at its downward-sloping 50-day moving average on rising Eurozone debt angst, increasing financial sector pessimism, US tax hike concerns, some more disappointing economic data, emerging markets inflation fears and global growth worries. On the positive side, Restaurant shares are higher on the day. Oil is falling -2.76%, Gold is down -1.85% and the UBS-Bloomberg Ag Spot Index is down -.6%. On the negative side, Road & Rail, Education, Construction, Insurance, I-Banking, Bank, Oil Service and Coal shares are under significant pressure, falling more than -3.0%. Cyclicals and small-caps are substantially underperforming. Copper is falling -3.72%. Rice is still very near its multi-year high, rising +33.5% in about 11 weeks. The average US price for a gallon of gas is -.02/gallon today to $3.59/gallon. It is up .45/gallon in about 7 months. The Germany sovereign cds is gaining +8.3% to 90.17 bps, France sovereign cds is surging +8.05% to 181.50 bps, the Italy sovereign cds is rising +6.2% to 472.50 bps, the Russia sovereign cds is gaining +6.1% to 229.33 bps, the Belgium sovereign cds is gaining +6.9% to 266.50 bps, , the Brazil sovereign cds is gaining +6.1% to 168.79 bps, the Portugal sovereign cds is rising +5.62% to 1,114.67 bps and the Spain sovereign cds is jumping +9.6% to 406.83 bps. The Germany sovereign cds is now only about 3 basis points away from its record high reached on Feb. 24, 2009. The France and Italy sovereign cds are still near their record highs. The Russia sovereign cds is close to breaking out of a multi-year trading range. The Western Europe Sovereign CDS Index and European Financial Sector CDS Index are still near their all-time highs. The 2-Year Euro Swap Spread is very close to a multi-year high, rising +4.07 bps to 98.81 bps. The 3-Month Euro Basis Swap is falling -4.90 bps to -92.03 bps. The TED spread is still at the highest level since July 2010 despite Europe's recent efforts. The Emerging Markets Currency VIX is surging 8.2% to 14.6, which is the highest since June 2010. Hong Kong stocks fell -2.8% overnight, and are now down -17.9% ytd, which places them back near their recent lows. The major European stock indices fell around -3% today and continue to trade poorly. Select growth stock leaders, such as (AAPL), remain on fire, which is masking broad-based weakness. The Naz is flat on the day, however breadth is -1,363. Volume is also lackluster on today's surge off the lows. The 10-year yield is falling too much again, declining -10 bps to 1.95%. Various credit gauges are indicating rising global recession fears. However, it appears to me equity investors expect stagnant growth, rather than true recession, which is likely the main reason a handful of true growth stocks are seeing huge outperformance and multiple expansion. I expect US stocks to trade mixed to lower into the close from current levels on profit-taking, rising Eurzone debt angst, increasing financial sector pessimism, global growth worries, emerging markets inflation fears, US tax hike worries and more shorting.