Today's Headlines

Bloomberg:

• Merkel Signals More Greek Investor Losses. German Chancellor Angela Merkel said that Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of a Greek rescue. Merkel’s comments, her most explicit on banks’ role in fighting the debt crisis since the spillover from Greece began to threaten France and Italy, followed talks with European Commission President Jose Barroso in Brussels today. Financial shares rose amid speculation that euro-area policy makers are working on plans to boost bank capital to contain the crisis. “Time is running out” to establish if recapitalization is necessary, Merkel told reporters. Troubled banks need to first seek capital on their own and national governments will help if that’s not possible, she said. “If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there’s the possibility of using the EFSF,” the European Financial Stability Facility, she said. Using the rescue fund is “always tied to a certain conditionality.” Signals that European politicians may step up efforts to aid banks and push investors to accept bigger losses as part of a Greek bailout reflect international pressure to end the debt crisis and domestic opposition to expanding rescues. Moody’s Investors Service late yesterday followed its three-level downgrade of Italy by warning that euro-area nations rated below the top Aaa level may see their rankings cut.
• Financial Bond Risk Declines in Europe on Bank Support Optimism. The cost of insuring against default on European financial bonds fell on speculation policy makers are planning to shore up the region’s banks to shield them from the sovereign debt crisis. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 11 basis points to 284 and the subordinated gauge was 16 lower at 537, according to JPMorgan Chase & Co. at 11 a.m. in London. A decline signals improved perceptions of credit quality. The cost of insuring sovereign debt fell, with the Markit iTraxx SovX Western Europe Index dropping two basis points to 347.5, according to CMA. Contracts on Belgium fell one basis point from a record closing price to 308 basis points, while France rose 0.5 basis point to 198.5, according to CMA. Swaps on Dexia fell for a fifth day from a record 900 basis points Sept 28, dropping 19 basis points today to 681. Swaps on Germany declined 4.5 basis points to 198.5, Ireland decreased three to 723 and Spain fell one to 390. Italy rose three basis points to 490 and Portugal increased one basis point to 1,168. The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings fell from a three- year high, dropping 6.25 basis points to 202.75, JPMorgan prices show. The Markit iTraxx Crossover Index linked to 50 companies with mostly high-yield credit ratings dropped 18 basis points to 860.5.
• ADP Estimates U.S. Companies Added 91,000 Jobs in September. Companies in the U.S. added 91,000 jobs in September, according to data from ADP Employer Services. The increase followed a revised 89,000 gain the prior month, Roseland, New Jersey-based ADP said today. The median forecast of economists surveyed by Bloomberg News called for an advance of 75,000. Job gains haven’t been sufficient to bring down the unemployment rate, which has held at or above 9 percent for 26 of the past 28 months. A Labor Department report in two days is projected to show businesses added 90,000 jobs in September, according to the median forecast of economists surveyed.
• Announced Job Cuts in U.S. More Than Triple From Year Ago, Challenger Says. Announced firings jumped 212 percent, the largest increase since January 2009, to 115,730 last month from 37,151 in September 2010, according to Chicago-based Challenger, Gray & Christmas Inc.
• U.S. Service Industries Grew at Slower Pace in Sept. U.S. service industries expanded in September at a slower pace than a month earlier, a sign the recovery is struggling to gain speed. The Institute for Supply Management’s non-manufacturing index fell to 53 from 53.3 in August. The median forecast of 75 economists surveyed by Bloomberg News was for a drop to 52.8. A reading of 50 is the dividing line between expansion and contraction in services, which cover about 90 percent of the economy. Orders picked up, the report showed. The ISM survey showed a bleaker outlook for the labor market. The group’s employment gauge declined to 48.7 in September, the first contraction since August 2010, from 51.6 in the prior month, today’s report showed. The measure of new orders increased to a four-month high of 56.5 in September from 52.8. A measure of business activity rose to 57.1 from 55.6. The index of prices paid decreased to 61.9 from 64.2.
• Crude Oil Increases After Unexpected U.S. Inventory Decline. Oil rose for the first time in four days after the U.S. government reported an unexpected stockpile decline in the world’s biggest crude-consuming country. Futures climbed as much as 4.2 percent after the Energy Department said supplies fell 4.68 million barrels to 336.3 million last week. Inventories were forecast to increase 1.5 million barrels, according to a Bloomberg News survey. Crude oil for November delivery rose $2.68, or 3.5 percent, to $78.35 a barrel at 12:21 a.m. on the New York Mercantile Exchange. Oil traded at $77.77 before the release of the inventory report at 10:30 a.m. Brent oil for November settlement advanced $2.03, or 2 percent, to $101.82 a barrel on the London-based ICE Futures Europe exchange. The contract’s close yesterday represented a 21 percent drop since April 8, when prices ended the session at $126.65 a barrel. A 20 percent drop is the common definition of a bear market.

CNBC.com:

• IMF Official Floats Euro Zone Bond-Buying Idea, Backs Away. An International Monetary Fund official said Wednesday, the global lender could buy Spanish or Italian bonds alongside a euro zone bailout fund, but he later appeared to back away from his own suggestion.
• Greek State Workers Take to Streets to Fight Cuts. Police fired tear gas at stone-throwing youths in central Athens on Wednesday, where thousands of striking state sector workers marched against cuts the government says are needed to save the nation from bankruptcy.

Business Insider:

• The 10 Biggest Hedge Funds in America.
• Chart of the Day: Citi's(C) 'Panic-Euphoria Model' Screams BUY, And There's A 97% Chance Of A Double-Digit Return. (graph)
• The Truth About The iPhone 4S: I Cannot WAIT to Buy One by Henry Blodget.
• Robert Reich: Behind Europe's Debt Crisis Lurks Another Giant Bailout of Wall Street.
• The Chinese Underground Banking System: What It Is And Why It Should Scare You.
  

Reuters:

• Greek Aid Tranche Not Assured But Likely - Troika Source. A team of EU/IMF/ECB inspectors is likely to recommend releasing a vital international aid tranche to Greece but Athens should not take this for granted but first show it will implement reforms, a senior troika official told Reuters on Wednesday. "We are making progress but slow progress. The main reason is they (the government) need more time," the official told Reuters on condition of anonymity. "So far we have not closed any of the chapters."
• Latin American Economies to See 'Modest Worsening' - IMF.
• China Currency Bill Vote Expected Thursday.
• Green Groups Sue to Stop Work on Keystone Oil Pipeline. The Center for Biological Diversity, the Western Nebraska Resources Council and Friends of the Earth sued the U.S. State Department and U.S. Fish and Wildlife Service to stop work they called "illegal construction" on the 1,700 mile (2,740 km) pipeline. Backers of the $7 billion TransCanada Keystone XL pipeline say it will provide jobs and reduce U.S. dependence on oil from countries that are unfriendly to Washington.

Financial Times:

• EU Banks Face New 'Greek' Stress Test. European Union finance ministers have asked the bloc’s leading bank regulator to test the strength of Europe’s banks on the assumption of a big writedown on Greek sovereign debt.

Der Spiegel:

• The Euro Bomb. How A Good Idea Became A Tragedy. The Greek crisis has revealed why the euro is the world's most dangerous currency. The euro was built on a foundation of debt and trickery, where economic principles were sacrificed to romantic political visions. The history of the common currency is the story of a good idea that turned into a tragedy of epic proportions.

Financial Times Deutschland:

• Germany may have to reactivate the Soffin bank-rescue fund to protect lenders, according to Finance Minister Wolfgang Schaeuble.
• German Interior Minister Hans-Peter Friedrich said the country shouldn't cede more power to Europe as a response to the region's fiscal crisis, citing an interview.
  

Expansion:

• Bank of America Merrill Lynch forecasts Spanish savings banks will need another 23 billion euros next year to keep a Tier 1 core capital of 7%, citing a report by Merrill Lynch provided in a London meeting yesterday. The report suggests savings banks have "problematic assets," mainly linked to real estate, valued at 198 billion euros, which may turn into potential losses that will force banks to boost their capital. If core capital for savings banks, known as cajas, is raised to 10%, these lenders would need 47.57 billion euros.

Bear Radar

Style Underperformer:

• Small-Cap Value (+.71%)

Sector Underperformers:

• 1) REITs -2.96% 2) Oil Tankers -1.39% 3) Banks -.59%

Stocks Falling on Unusual Volume:

• SHLD, APKT, LUFK, LBTYK, WBMD, HMIN, TLM and RNE
  

Stocks With Unusual Put Option Activity:

• 1) MBI 2) EP 3) ARUN 4) OVTI 5) APOL
  

Stocks With Most Negative News Mentions:

• 1) POL 2) AMD 3) KMX 4) SKS 5) SO
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth (+1.09%)

Sector Outperformers:

• 1) Education +6.65% 2) Coal +4.69% 3) Computer Hardware +3.11%

Stocks Rising on Unusual Volume:

• RIMM, OVTI, JNPR, TSO, FSLR, IOC, SU, IMO, FCE/A, XRTX, SWKS, APOL, FFIV, SNDK, JKL, GPN, XME, ANR, ROC, ACI, RPM, BTU and SCCO
  

Stocks With Unusual Call Option Activity:

• 1) LVLT 2) GME 3) ARIA 4) OVTI 5) AKAM
  

Stocks With Most Positive News Mentions:

• 1) EW 2) WAG 3) APOL 4) T 5) SPG
  

Charts:

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

Wednesday Watch

Evening Headlines

Bloomberg:

• Moody's Cuts Italy Rating Following S&P. Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades on concern that Prime Minister Silvio Berlusconi’s government will struggle to reduce the region’s second-largest debt amid chronically weak growth. Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement yesterday. The action comes after Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. Italy was last cut by Moody’s in May 1993. Italy gave final approval last month to a 54 billion-euro ($72 billion) austerity plan aimed at balancing the budget in 2013 that convinced the European Central Bank to buy the nation’s bonds. While the purchases initially brought down bond yields by about 100 basis points, Italy’s borrowing costs remain near record highs because of euro-area debt crisis contagion. “The fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy,” Moody’s said in the statement. “Although future policy actions within the euro area could reduce investors’ concerns and stabilize funding markets, the opposite is also increasingly possible.” Moody’s decision “was expected,” Berlusconi’s office said in an e-mail yesterday. “The Italian government is working with the utmost commitment to meet its budget targets.” The yield on Italy’s 10-year notes was at 5.49 percent yesterday, pushing the difference investors to hold Italian bonds instead of benchmark German bunds to 376 basis points. The cost of insuring Italian debt against default has more than double the level at the start of the year. “All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings,” Moody’s said. “Consequently, Moody’s expects fewer countries below Aaa to retain high ratings.” The reasons for the downgrade include “increased funding risks for euro area sovereigns in general, such as Italy, with high levels of public debt,” Alexander Kockerbeck, a Frankfurt- based sovereign debt analyst with Moody’s, said in an interview yesterday. He also cited the risk of slower growth “due to macroeconomic structural weaknesses, and on top of that, a weakening global growth outlook.” The downgrade may aggravate a volatile political situation. Berlusconi, battling to keep his ruling coalition together, faces four trials and calls from Italian employers, his long- time backers, to step down after a decade of virtually no economic growth undermined debt reduction. Italy’s debt of about 120 percent of gross domestic product is second in the region only to Greece.
• Merkel Says Those Demanding Endgame to Europe's Debt Crisis Have 'No Clue'. German Chancellor Angela Merkel stiffened her resistance to joint euro-area bond sales, saying that investors yearning for a single gesture that can end Europe’s sovereign debt crisis now will be disappointed. The euro area has to resolve “that the time of living above our means is over once and for all” and pursue debt reduction that will stretch over “many years,” Merkel said in a speech to members of her Christian Democratic Union late yesterday in Magdeburg, eastern Germany. While stepping up her rejection of a Greek default, she said that issuance of shared debt by euro countries isn’t the solution to the problem spilling from Greece, even though some may long for the “big bang” to end the debt crisis. “Whoever believes that has no clue about the economy,” she said. Merkel stuck to her positions as she prepares for talks in Brussels today with European Commission President Jose Barroso before hosting French President Nicolas Sarkozy in Berlin on Oct. 9. The leaders of Europe’s two biggest economies will get together after the region’s finance ministers failed to quell market jitters that a second aid package for Greece aimed at stemming the crisis might unravel. A Greek default would have unpredictable consequences, lead to speculative attacks on other highly indebted euro countries and risk sending German economic growth into reverse, Merkel said. Letting Greece default would trigger “a gigantic loss of confidence” in euro-area sovereign bonds.
• Greeks Strike Against Job Cuts as Aid Delayed. Hundreds of thousands of Greeks are walking off their jobs at airports, schools, hospitals and even the Acropolis to protest Prime Minister George Papandreou’s 6.6 billion-euro ($8.7 billion) austerity plan, challenging a government seeking European bailout funds to stave off default. Today’s 24-hour strike, the first this year that will shut the Athens International Airport for a full day, takes place after European Union ministers signaled they may renegotiate terms of Greece’s latest rescue, sending the nation’s stocks down the most in 17 months. The country’s largest public-sector union, known as ADEDY and representing at least 400,000 state workers, called the walkout and a march on parliament to protest plans to put 30,000 public workers on reduced pay, raise property taxes and cut pensions and wages. The demonstration defies calls by the government to show unity in the struggle to avert a default. “We are at the worst circumstances under the worst conditions,” Finance Minister Evangelos Venizelos said at a news conference in Athens yesterday. “We are dependent on the aid and loans of our institutional partners. That is the situation of the country. And we must make superhuman efforts to win this wager of history.”
• Dexia Rescue Moves Bank Crisis From Europe's Periphery to Core. Less than three months after Dexia SA (DEXB) got a clean bill of health in European Union stress tests, France and Belgium are considering a second bailout, moving the banking crisis from the continent’s periphery to its heartland. “We’re seeing a practical example of contagion playing out,” said Jean-Pierre Lambert, an analyst at Keefe Bruyette & Woods in London, referring to Dexia’s “material exposure” to the debt of countries on the EU’s rim. “Investors aren’t quite sure what the sovereign debt losses will be, nor where the share price should be. They are concerned about the risks and reduce their funding.” Dexia shares fell 22 percent yesterday, the most of any company in the 46-member Bloomberg Europe 500 Banks and Financial Services Index, even as the French and Belgian governments pledged to support the bank. The two countries, which bailed out Dexia in 2008, will take “all necessary measures” to protect clients and will guarantee all of Dexia’s loans, French Finance Minister Francois Baroin and Belgian Finance Minister Didier Reynders said in a statement yesterday. Yves Leterme, Belgium’s prime minister, said yesterday that a “bad bank” to hold Dexia’s troubled assets will be set up. The board of the Paris- and Brussels-based municipal lender met Oct. 3 to discuss a breakup of the bank after the sovereign debt crisis reduced its ability to obtain funding, said three people with knowledge of the talks.
• BofA's(BAC) Countrywide May Face Fraud Claim After Housing Audit. Bank of America Corp., the biggest U.S. lender by assets, should face fraud claims after the firm’s Countrywide unit submitted incorrect data on borrowers for government-insured loans, a federal watchdog said. Half of 14 loans reviewed had “material underwriting deficiencies” that resulted in more than $720,000 in losses, according to a Sept. 30 report from the Office of the Inspector General for the Department of Housing and Urban Development. A regional inspector general for HUD, Kelly Anderson, recommended that the agency’s lawyers pursue legal remedies against Charlotte, North Carolina-based Bank of America. “Countrywide did not properly verify, analyze, or support borrowers’ employment and income, source of funds to close, liabilities and credit information,” Kelly wrote in the audit. “This noncompliance occurred because Countrywide’s underwriters did not exercise due diligence in underwriting the loans.”
• U.S. Lawmakers Question Overseas Reach of Dodd-Frank Swap Rules. U.S. regulators’ proposed Dodd-Frank Act rules for the $601 trillion swaps market may clash with the intent of Congress because of their reach to foreign subsidiaries of U.S. financial firms, according to the top two Democratic lawmakers on financial issues. “Given the global nature of this market, U.S. regulators should avoid creating opportunities for international regulatory arbitrage that could increase systemic risk and reduce the competitiveness of U.S. firms abroad,” Senator Tim Johnson, chairman of the Senate Banking Committee, and Representative Barney Frank, the top Democrat on the House Financial Services Committee, wrote in a letter today. The letter was sent to the Commodity Futures Trading Commission, Federal Reserve, Securities and Exchange Commission and Federal Deposit Insurance Corp. “We are concerned that the proposed imposition of margin requirements, in addition to provisions related to clearing, trading, registration, and the treatment of foreign subsidiaries of U.S. institutions, all raise questions about consistency with congressional intent,” Johnson, of South Dakota, and Frank, of Massachusetts, said in the letter. Proposed regulations imposing margin requirements to reduce trading risks will “damage the competitiveness” of foreign- based businesses of U.S. banks compared with their overseas rivals, lawyers for six banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley told regulators in a June 29 letter.
• Manhattan Office Leasing Slides 36% From 'Phenomenal' Second Quarter Pace. Manhattan office leasing fell 36 percent in the third quarter from a 12-year high in the previous three months as demand retreated from what had been a “phenomenal” pace, Cushman & Wakefield said.
• Saudi Arabia Vows 'Iron First' Following Attack In Oil Province. Saudi Arabia vowed to use "an iron fist" after 11 members of the security forces were injured by attackers during unrest in a Shiite Muslim town in the east, the official Saudi Press Agency said. The government accused an unnamed "foreign country" of seeking to undermine the stability of the kingdom as a result of the violence in Awwamiya, in which the assailants, some on motorcycles, used machine guns and Molotov cocktails, the Riyadh-based news service reported late yesterday. A man and two women were also injured, the news service said.
• Lawmakers Urge BofA(BAC) Customers to Quit. Congressional Democrats are pushing customers to quit doing business with Bank of America Corp. (BAC) and one lawmaker is aiming to make it easier for them to stop after the biggest U.S. lender announced plans for new debit-card fees. Representative Brad Miller, a member of the Financial Services Committee, introduced a bill today that would bar banks from imposing fees on people who close accounts, calling the proposal a response to the Charlotte, North Carolina-based company’s plan to charge some debit customers an additional $5 a month for using the cards.

Wall Street Journal:

• The Case Against Commodities. They've been hot in recent years, but history suggests they're a losing bet over time. For much of the past decade, investing in raw materials has looked like a slam-dunk, as rising prices held out the prospect of big gains and the proliferation of exchange-traded funds made placing bets easier. The trend of rising commodity prices in recent years helped fuel a belief that is now common among financial advisers and pension managers: that ordinary investors should have some slice of their long-term money parked in commodities. But there's a case against commodities, too: the human tendency to feed our appetites ever more efficiently, which periodically undercuts commodity prices and in extreme cases has even wiped out entire markets. That's a danger for long-term investors, particularly those inclined to sock commodity investments away untouched in retirement accounts for years, as many do with stock funds.
• Hedge Funds Hit Resistance on European-Bank Trades. In another sign of market participants exercising caution amid fragile market conditions, a number of hedge funds late last month tried to reduce their exposure to European banks with Credit Suisse Group using derivatives, but the Swiss dealer declined to take some of their trades, according to a person familiar with the matter. Market making in derivatives and other financial instruments is one of a dealer bank's primary functions. But in volatile markets, dealers' risk-management controls may make them reluctant to assume too much exposure on one side of a trade.
• Canada Concerned Over EU Measures To "Stigmatize" Oil Sands. Canadian Resources Minister Joe Oliver said Tuesday he's concerned about moves by the European Union to "stigmatize" the Alberta oil sands, adding the Conservative government would move to defend the country's energy interests.
• "Occupy Wall Street" Protests Coming to NJ. The "Occupy Wall Street" movement is coming to Wall Street West. Demonstrators are planning to gather Thursday afternoon in front of the Goldman Sachs offices in Jersey City, in the heart of the city's financial district.
• Real Estate Executives Turn More Bearish. Real estate executives have downgraded their outlooks through mid-2012 as volatile global financial markets, sluggish job growth and political gridlock conspire to limit recovery, according to a survey released on Tuesday. Seven out of 10 executives polled by DLA Piper, which calls itself the world’s largest real estate law firm, in September described themselves as “bearish” for the next 12 months, up from 60% in 2010, the report said. The 291 executives surveyed said that political turmoil around the world and the potential for another financial crisis are key reasons for their shift, beyond the lack of job growth, the survey said. They also pointed at disarray in the financial markets and condition of the banking sector that is key for their funding.
• EPA to Ease Rule on Power Plants. The Environmental Protection Agency, under pressure from some states, industry and Congress, is expected to ease an air quality rule that would require power plants in 27 states to slash emissions, said people familiar with the matter.
• Russia, China Veto U.N.'s Syria Move. Russia and China vetoed a U.N. Security Council resolution on Tuesday that would have condemned Syria's bloody crackdown of an uprising seeking to overthrow the regime in Damascus. The Western-backed resolution received nine votes in favor and four abstentions, from South Africa, India, Brazil and Lebanon. The European draft was watered down from targeted financial sanctions against President Bashar al-Assad and an arms embargo on Syria first proposed in August. The latest European draft merely called for the council to "consider" unspecified "measures" after a 30-day period. But it wasn't enough to persuade Russia and China to support it. "This is a not a matter of wording, it is a political veto," said French Ambasador Gérard Araud. "It is disdain for the Syrian people," he said, "who have fought since March against the Assad regime."
• Acme Packet(APKT) Projects Weak 3Q After Client Delay. Acme Packet Inc. (APKT) forecast a weak third quarter after an unidentified client delayed a major expected order. Shares of the networking company, which also affirmed its full-year guidance, sank 15% to $36.45 after hours. The stock was off 19% this year through the close of regular trading Tuesday.
• At S&P, a Crusader for Tough Ratings. Mark Adelson is known in the financial world as the rating industry's bad cop. In the past three years, the chief credit officer of Standard & Poor's has helped revamp the firm's grading process after the industry's giants were lambasted for assigning overly optimistic ratings to securities that cratered, exacerbating the 2008 financial crisis. Under Mr. Adelson's guidance, S&P has made it more difficult for many issuers to receive Triple-A ratings, its coveted highest score. The top rating should be "sacrosanct," Mr. Adelson has told colleagues, adding it should be tested as rigorously "as jet engines on an airplane."

Business Insider:

• Here's Everything Apple(AAPL) Announced At Its Huge iPhone Event Today.

Zero Hedge:

• Zero Hedge Kindly Requests The Immediate Resignation of Mary Schapiro For Gross Breach Of Professional Responsibilities.
• US Starts New Fiscal Year With $14.837 Trillion In Debt, $142 Billion Increase In Two Days.
  

CNBC:

• Anonymous Threatens to 'Erase' the NYSE. (video) Anonymous has declared "war" on the New York Stock Exchange. In a video posted to TheAnonPress YouTube account October 3rd, Anonymous said it would "erase" the NYSE from the Internet on October 10th. "On Oct. 10, NYSE shall be erased from the Internet. On October 10, expect a day that will never, ever be forgotten," the creepy digital voice says. It's not clear if this would just be an attack on the NYSE website or on the electronic communications of the exchange itself.
• Euro to Fall to 1.25 vs USD Says Morgan Stanley(MS). (video)
• Yum(YUM) Hits Earnings Target but China Worries Persist. Closely watched sales at Yum's established restaurants in China jumped 19 percent in the third quarter. That increase came as higher wage and commodity costs caused the company's China restaurant margins to fall by 3.9 basis points to 21.3 percent. Yum said on Tuesday it raised menu prices after the quarter ended to help offset higher costs.
• New York Sues BNY Mellon(BK) Over Forex Claims. Over a 10-year period, Bank of New York Mellon defrauded thousands of clients in foreign currency exchange transactions, earning it $2 billion, according to a lawsuit filed Tuesday by New York Attorney General Eric Schneiderman.
• Japan's Economic Outlook Very Severe: BOJ. Bank of Japan Governor Masaaki Shirakawa on Wednesday offered a bleak assessment on the country's economic outlook but said the central bank was already taking bold steps to support growth.
• Bernanke Attacks China Over Currency Policy. The chairman of the US Federal Reserve has accused China of damaging prospects for a global economic recovery through its deliberate intervention in the currency market to hold down the value of the renminbi.

NY Times:

• In Europe, Signs of 2nd Recession With Wide Reach. The European debt problems that have roiled global financial markets for the last 18 months are showing signs of turning into a far deeper challenge: Europe’s second recession in three years.
• Banks in Europe Face Huge Losses From Greece. Europe’s biggest banks may finally be forced to own up to their losses. While bank executives and government leaders have been reluctant to acknowledge that the hundreds of billions of euros of Greek debt held by financial institutions is worth far less than its face value, they are slowly accepting the grim reality, as investors, clients and lenders grow increasingly wary.

Politico:

• Reid Considers Surtax on Millionaires. Senate Majority Leader Harry Reid is eyeing a tax on the nation’s highest earners as a way to defray some of the $447 billion price tag for the White House-written jobs package-a move that would shift attention away from its underlying policies and more towards party politics. Sources on and off Capitol Hill said Reid wants to swap out the bill’s current rack of “pay-fors,” and replace them with a package including a surtax, perhaps as high as 5 percent, on millionaires.

Rasmussen Reports:

• Election 2012: Generic Republican 47%, Obama 41%.

Reuters:

• U.S. Says Mulling Further Taiwan Arms Sales. The Obama administration is weighing fresh arms sales to Taiwan as part of a sweeping effort to deter any Chinese attack on the self-ruled island that Beijing claims as its own, administration officials told Congress on Tuesday. Such supplies would be on top of plans sent to Congress on Sept. 21 to sell Taiwan $5.85 billion in new hardware and defense services, including upgrades for Taiwan's 145 F-16 A/B fighter aircraft. Beijing deems Taiwan arms sales a grave interference in its domestic affairs and the biggest obstacle to improved relations between the world's two largest economies.

Financial Times:

• Brazilian Economy Set For A Slowdown. Brazil’s economy is set for a slowdown, with industrial production contracting in August as domestic manufacturers struggle with rising interest rates, a strong currency and a weakening global economy.
• Private Lending Loses Lustre for China's Rich. In the words of the People’s Daily, the usually sober newspaper of the Communist party, it is a “Chinese-style subprime crisis”. Businesses in once-booming coastal cities have shut up shop, leaving a trail of bad loans in their wake. The twist in the tale is that those holding the uncollectable debts are not banks but entrepreneurs themselves, wealthy people who had tried to put their money to work by lending it at high rates to businesses.

Nong Thon Ngay Nay:

• About 49,000 Vietnamese companies ceased operation in the January to September period due to a shortage of funds, citing Minister of Planning & Investment Bui Quang Vinh. The number of companies that have stopped operations or have dissolved rose 22% compared to a year earlier, the report said. Vietnamese companies have been hurt by high borrowing costs exceeding 20% this year, Nong Thon said.

Evening Recommendations
Oppenheimer:

• Rated (FLDM) Outperform, target $19.

Night Trading

• Asian equity indices are -1.75% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 274.0 +9.0 basis points.
  
• Asia Pacific Sovereign CDS Index 173.50 +1.0 basis point.
• FTSE-100 futures +1.44%.
  
• S&P 500 futures -.04%.
  
• NASDAQ 100 futures +.06%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (COST)/1.09
• (MON)/-.27
• (AYI)/.79
• (MAR)/.27
• (RT)/.05
• (CBK)/-.36

Economic Releases
8:15 am EST

• The ADP Employment change for September is estimated to fall to 73K versus 91K in August.

10:00 am EST

• ISM Non-Manufacturing for September is estimated to fall to 52.8 versus a reading of 53.3 in August.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,500,000 barrels versus a +1,915,000 barrel gain the prior week. Distillate supplies are estimated to fall by -300,000 barrels versus a +72,000 barrel gain the prior week. Gasoline inventories are estimated to rise by +1,500,000 barrels versus a +791,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.5% versus a -.5% decline the prior week

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Challenger Job Cuts report for September, weekly MBA mortgage applications report, (CBOE) investor day, (BXP) investor conference and the MBI/BAC Court ruling could also impact trading today.
  

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

Stocks Reversing Higher into Final Hour on Euro Bounce, Short-Covering, Bargain-Hunting, Less Financial/Tech Sector Pessimism

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Heavy
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 44.28 -2.57%
  
• ISE Sentiment Index 80.0 +1.1%
  
• Total Put/Call 1.18 -5.60%
  
• NYSE Arms 1.03 -69.09%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 151.79 +4.48%
  
• European Financial Sector CDS Index 276.76 +4.45%
  
• Western Europe Sovereign Debt CDS Index 355.83 +2.89%
  
• Emerging Market CDS Index 396.44 +1.80%
  
• 2-Year Swap Spread 39.0 +3 bps
  
• TED Spread 39.0 +2 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% -1 bp
  
• Yield Curve 154.0 -1 bp
  
• China Import Iron Ore Spot $171.30/Metric Tonne unch.
  
• Citi US Economic Surprise Index -21.90 +1.4 points
  
• 10-Year TIPS Spread 1.76 +2 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating +50 open in Japan
• DAX Futures: Indicating +60 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 reverses higher off significant technical support with volume despite rising global debt angst and global growth worries. On the positive side, Coal, Alt Energy, Semi, Disk Drive, Networking, Construction, Gaming, Road & Rail and Airline shares are especially strong, rising more than +3.0%. The UBS-Bloomberg Ag Spot Index is dropping -.91%, lumber is rising +1.88%, gold is dropping -2.69% and oil is falling -1.0%. Small-caps and cyclicals are outperforming. Tech shares have also traded well throughout the day. Weekly retail sales rose +4.4% versus a +4.4% gain the prior week. On the negative side, Food, HMO, Hospital, Telecom, Paper, Steel, Ag and Utility shares are under pressure, falling more than -1.0%. Copper is dropping -2.4%. Rice is still close to its multi-year high, rising +25.0% in about 12 weeks. The Germany sovereign cds is gaining +1.1% to 119.17 bps, the France sovereign cds is rising +4.6% to 200.33 bps, the Portugal sovereign cds is gaining +4.3% to 1,156.0 bps, the Ireland sovereign cds is rising +4.9% to 727.33 bps, the Japan sovereign cds is rising +4.1% to 154.25 bps, the Russia sovereign cds is jumping +5.7% to 336.83 bps, the Belgium sovereign cds is soaring +12.58% to 307.17 bps, the UK sovereign cds is gaining +5.93% to 103.17 bps and the Brazil sovereign cds is rising +8.8% to 225.75 bps. The Eurozone Investment Grade CDS Index is jumping +2.5% to 202.01 bps, which is a new record high. The Western Europe Sovereign CDS Index and the European Financial Sector CDS Index are still near their records. The Asia-Pacific Sovereign CDS Index is rising another +3.16% today to a new record 198.68 bps. The China sovereign cds is still very near the highest level since March 2009. The China Development Bank Corp cds is soaring +11.4% to 379.10 bps, which is the highest since March 2009. As well, the China Blended Corporate Spread Index, which has been moving higher in a parabolic fashion, is making another new multi-year high, rising +57.0 bps to 1,035.0 bps. The Hang Seng, which continues to trade very poorly, plunged another -3.4% overnight, leaving it down -29.5% ytd at the lowest level since May 2009. Major European stock indices fell another 2-3% today. German equities are now down -24.6% ytd. As well, Ukraine shares plunged another -4.2% and are now down -45.2% ytd. Various global credit gauges continue to deteriorate rapidly, telegraphing intense global recession fears, notwithstanding today's sharp equity reversal higher. Stocks were technically very oversold again and today's late surge higher has likely left many funds again leaning the wrong way, which could lead to further stock gains in the short-term. However, I still believe that until Europe/Asia stabilize, investors are likely to increasingly anticipate another downturn in US economic activity over the intermediate-term. I expect US stocks to trade modestly higher into the close from current levels on a bounce in the euro, short-covering, bargain-hunting, technical buying and less financial/tech sector pessimism.

Today's Headlines

Bloomberg:

• European Stocks Slide for Third Day; Dexia, Air France Tumble. European stocks dropped for a third day, the longest losing streak in four weeks, as policy makers signaled they may renegotiate terms of Greece’s bailout, deepening concern about the impact of the debt crisis. Dexia SA (DEXB) tumbled to a record low as the board asked Belgium’s biggest bank by assets to solve its “structural problems.” Deutsche Bank AG (DBK) slid 4.3 percent after abandoning its 2011 earnings forecast. National Bank of Greece SA (ETE) sank to the lowest since 1996. Air France-KLM (AF) Group retreated to a 20- year low after the head of the IATA industry association said profit projections may be unsustainable. The benchmark Stoxx Europe 600 Index fell 2.8 percent to 217.46 at the 4:30 p.m. close in London.
• Bank Default Swaps Surge as Bigger Losses on Greek Debt Loom. Credit-default swaps insuring bank debt surged after European lawmakers signaled lenders may have to take bigger losses on holdings of Greek debt. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers jumped 16.5 basis points to 305.5 and the subordinated index climbed 25 to a record 567, according to JPMorgan Chase & Co. at 1:30 p.m. in London. Credit-default swaps on Germany rose four basis points to an all-time high of 122 and France increased nine to 199, approaching the record closing price of 202.5 on Sept. 22, according to CMA. Deutsche Bank AG swaps jumped 19 basis points to 210 after saying the planned operating pretax profit target of 10 billion euros from its core businesses for 2011 is no longer achievable. Swaps on France's three biggest banks also rose, with Societe Generale SA up 26 basis points at 378, Credit Agricole SA 19 higher at 282 and BNP Paribas SA up 18 to 281, according to CMA. “Currently the tensions are such that we could see forced sellers, with some banks needing to de-risk sharply,” said Alberto Gallo, head of European credit strategy at Royal Bank of Scotland Group Plc in London. Swaps on Belgium jumped 22 basis points to 293.5, Italy rose nine to 480 and Portugal climbed 24 to 1,134, while Spain was seven higher at 387, all nearing records set last month. Ireland rose 21 basis points to 717, CMA prices show. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 11 basis points to 353. The cost of insuring corporate debt also increased. The Markit iTraxx Europe Index of 125 companies with investment- grade ratings jumping as much as nine basis points to 215.5, surpassing the December 2008 record closing price of 215, before trading at 215, JPMorgan prices show. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 34.5 basis points to 892.5, the highest since April 2009.
• Deutsche Bank Scraps Profit Goal, Will Cut 500 Jobs on 'Unabated' Slowdown. Deutsche Bank AG (DBK) scrapped its profit forecast and announced 500 job cuts and further writedowns of Greek bond holdings amid a “significant and unabated slowdown in client activity” in the wake of Europe’s debt crisis. The bank also said “costs relating to an indirect tax position” weighed on third-quarter results. Deutsche Bank, which had targeted 10 billion euros ($13.2 billion) in operating pretax earnings this year, still expects a profit for the quarter ended Sept. 30 and “robust” earnings for the full year, according to a statement today. Deutsche Bank shares slid as much as 9.1 percent, the most since July 2009. The stock was down 7.4 percent to 23.85 euros at 4 p.m. in Frankfurt, where the bank is based.
• Goldman, Morgan Stanley(MS) Lead Rise in U.S. Bank Default Swaps. Goldman Sachs Group Inc. and Morgan Stanley led gains in the cost to protect the debt of the biggest U.S. banks as concern intensified that Europe’s sovereign financial crisis will infect lender balance sheets. Credit-default swaps on Goldman Sachs Group Inc. increased 48.9 basis points to 444.5 basis points at 9:50 a.m. in New York, according to data provider CMA. Contracts on Morgan Stanley, the New York-based owner of the world’s largest retail brokerage, climbed 40.7 to 623.4 and those on Citigroup Inc. added 30.6 to 382, the data show. “When you get stuff blowing out a couple of hundred basis points in the span of two days, it causes a lot of people to seize up,” said Michael Donelan, who oversees $4 billion of bonds at Ryan Labs Inc. “If you see equities continue to be under pressure, it just leads to a further contagion-type spreading to credit spreads, credit-default spreads, cash bonds you name it everything’s interlinked.” The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or speculate on creditworthiness, added 1.4 basis points to a mid-price of 151.5 basis points as of 11:18 a.m. in New York, according to Markit Group Ltd. Five-year credit-default swaps tied to Charlotte, North Carolina-based Bank of America Corp.’s senior debt climbed 27.9 basis points to 484.5, according to CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market. Contracts on New York-based JPMorgan Chase & Co. added 18.8 to 198.6, and those on Wells Fargo & Co. increased 19 to 195, the data show. Swaps on American International Group Inc. climbed to 598.4, the highest since May 2010. “What you’ve got right now is bear raiders making a bet that in the event of a sovereign crisis in Europe coming to a head, what you’re going to have is a freezing in the debt markets,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said on Bloomberg Television’s “InsideTrack.” That “will lead to funding problems and all the capital markets firms will be hurt,” he said.
• Commodities Drop to 10-Month Low as Debt Crisis May Limit Demand. Commodities declined to the lowest level in 10 months as European policy makers were still to reach an agreement on the region’s rescue fund, deepening concern that slower economic growth may curb demand for raw materials. The Standard & Poor’s GSCI Spot Index fell as much as 2.2 percent to 572.92, the lowest level since Nov. 26, and was at 578.59 at 3:42 p.m. in London. Goldman Sachs Group Inc. cut its global growth forecasts and predicted recessions in Germany and France. “We are seeing continuing pressure across the commodities complex from these concerns about the global growth prospects,” said Michael McCarthy, a chief market strategist at CMC Markets Asia Pacific Pty Ltd. in Sydney. “The markets are universally bearish.” The S&P GSCI Index has shed 24 percent since reaching an almost three-year high in April, meeting the common definition of a bear market, as investors cut holdings of commodities amid slower economic expansion.
• Copper Substitution May Reduce Usage by 500,000 Tons, CRU Says. Replacement of copper with other materials may reduce demand for the metal by about 500,000 metric tons this year, according to researcher CRU. Use of plastic for tube production, aluminum for high- voltage energy cables and fiber optics for communications cabling is driving substitution, Paul Robinson, non-ferrous metals group manager at London-based CRU, said by e-mail yesterday.
• China Says U.S. Risks Trade War With Bill. China said the U.S. risks triggering a trade war through legislation before the Senate that would punish the Asian nation for what lawmakers say is the undervaluation of its currency, the yuan. The People’s Bank of China said it “regrets” the Senate vote yesterday to consider the bill, and the Foreign Ministry said the measure would violate World Trade Organization rules, in statements today on their websites. The bill is aimed at letting American businesses seek duties on Chinese imports to make up for the weak currency.
• Apple(AAPL) Debuts iPhone 4S With Faster Chip. Apple Inc. (AAPL), in its first product unveiling since Steve Jobs resigned as chief executive officer, introduced an iPhone with a speedier processor and a higher- resolution camera to help it vie with Google Inc. (GOOG)’s Android. The A5 chip in the iPhone 4S will be seven times faster than the processor in the old model, Apple said today at a press conference at its headquarters in Cupertino, California.

Wall Street Journal:

• Germany Debating Rules for Sovereign Default. Germany's Deputy Economics Minister Stefan Kapferer has called for creating guidelines to regulate an orderly insolvency of a euro-zone member, in a letter to Joerg Asmussen, his counterpart at the Finance Ministry. The letter highlights how the debate over resolving the euro-zone debt crisis is increasingly moving towards establishing a proper framework for sovereign default, despite being short on detail about the specific rules that may be needed.
  

Business Insider:

• Hacker Group 'Anonymous' Doing Securities Analysis, Attempting to Blow Up Chinese Frauds. Hacktivist group Anonymous's new securities research branch, dubbed Anon Analytics, recently published a damning report about Chaoda Modern Agriculture, a Chinese vegetable and fruit supplier.
• Some Anecdotes About Chinese Real Estate, As Told By Deutsche Bank.
• Bernanke on US Banks: No More Bailouts... Technically.
• T2 Partners Plummets 9% in September, Whitney Tilson Says Big Losers Will Be Big Gainers.
  

Zero Hedge:

• Bank of America(BAC) Charts The Four "Crash Landing" Systemic Endgames For China.
• S&P Warns "Prospect Of European Double Dip Looking More Likely".
  

NY Post:

• BofA(BAC) Loses Leverage. Could take $150M hit in PE misadventures. Bank of America, the biggest player in the leveraged-loan market, is pulling back from the business after getting pinched in the credit squeeze, The Post has learned. BofA has retreated in the pitched battle for leveraged loans -- a source of funding for private-equity acquisitions -- until it can unload its loan backlog, according to two private-equity managers at different firms. “They’ve unequivocally become more conservative than others,” a PE manager said. BofA is in a jam after taking the lead in underwriting several leveraged financing deals in July and August, at levels that have proved hard to resell in the tightening credit market.

Detroit News:

• Treasury Will Be 'Patient' Before Selling GM(GM) Stake. The Treasury Department, holding onto a 26.5 percent stake in General Motors Co., plans to be "patient" before selling its remaining 500 million shares in the Detroit automaker. The Treasury's declaration came Monday as GM fell to another all-time low: $19.65 a share, a decline of 2.63 percent. GM is down 40 percent since its initial public offering last year. Monday was the first time GM has closed below $20 a share since going public in November. "We have to balance the goal of divesting these stakes — because the government should not be in the business of owning stakes in private companies — with the goal of maximizing taxpayer returns," Assistant Secretary for Financial Stability Tim Massad told CNBC in an interview Monday. That's a shift from the government's previous statements that it would sell its shares as soon as "practicable." It's an acknowledgement that the sharp fall in GM's stock price has made it impossible to sell its shares. The government has had the ability to sell additional shares in GM since a lock-up period expired in May, but has declined to do so.

Institutional Investor:

• Ken Griffin's Citadel Made Money in September. Ken Griffin’s Kensington and Wellington hedge funds were able to make a little money in September when most of the global markets extended their slide to five straight months. The Citadel founder’s main hedge funds were up 0.25 percent in September, putting them up by about 15.10 percent for the year, according to sources, making them among the best performers this year.

Reuters:

• No Dexia Capital Injection in Works - French Source. Tuesday's pledge of state support for troubled Franco-Belgian bank Dexia does not mean a capital injection or capital increase is in the works, a French source close to the matter told Reuters on Tuesday. The source said that Dexia debt currently guaranteed by the French and Belgian governments would mature in the months ahead, although any of that debt that is refinanced would also be backed up by the governments.
• EU to Object to D. Boerse/NYSE Deal: Sources. EU regulators will formally object this week to the planned merger of Deutsche Boerse and NYSE Euronext (NYX.N), two sources with knowledge of the case said, which may force the companies to offer concessions to ease competition concerns. The Commission opened an in-depth investigation into the $9 billion deal on August 4, citing concerns about the deal's impact on derivatives and equities. It has set a December 13 deadline to decide whether to clear or block the merger, which would create the world's largest stock operator. "The European Commission is expected to send a statement of objections to the parties this week," one of the sources said on Tuesday, declining to provide more details because of the sensitivity of the subject.
• Hedge Funds Suffer Through Worst Quarter Since '08. Hedge funds posted their worst returns in three years in the third quarter, and the fourth quarter appears to be off to an equally rocky start. For hedge funds around the world, the average loss was 5.02 percent in the three months ended Sept. 28, according to Hedge Fund Monitor, a report compiled by analysts with Bank of America. Not since the third quarter of 2008, when the global financial system ground to a halt and hedge funds posted an average decline of 9.48 percent, has the $2 trillion industry performed so poorly. Many savvy money managers were badly bruised by August's vicious market sell-off, and September brought no reprieve. The report said the average hedge fund loss was 2.31 percent last month as concern mounted about the European debt crisis and commodities from gold to corn nose-dived. The selling in the stock markets has continued into October, something that could bode poorly for many fund managers heading into the end of the year. Last month, managers who specialize in going long and short on stocks were hit particularly hard, with those hedge funds registering an average decline of 4.76 percent. John Paulson, manager of the $32.8 billion Paulson & Co, who earned billions with prescient bets on the sub-prime mortgage crisis and gold, miscalculated the timing of a U.S economic recovery and has paid dearly for it. His flagship Advantage fund has lost about 35 percent this year, investors say.

Financial Times:

• The propinquity of U.S. and French presidential elections and a Chinese leadership change next year, with a German election due in 2013, threatens to complicate economic policy-making at a crucial time, said Kenneth Rogoff, a professor of economics at Harvard. While circumstances that shut down the political business cycle might sometimes be seen as positive for long-term stability and growth, that's far from the case when political paralysis threatens to cause a euro crash, Rogoff said.
• CDS Numbers Count Against Banking System. The iTraxx credit defaults swaps index, which measures the risk of default for eurozone banks, has leapt above levels seen around the time of the collapse of Lehman Brothers in 2008. This highlights worries that many banks are struggling to fund themselves as Europe’s debt crisis deepens. But it has also reopened a debate over whether CDS, a form of insurance against bond defaults, is in effect the “tail wagging the dog” as its ability to often move faster than most other securities allows it to influence the much bigger and slower equity and bond markets, say analysts.

Bild:

• Opposition among Germany's coalition parties against Greece's second aid package is rising. If observers from the European Commission, the European Central Bank and the IMF questioned the feasibility of a second bailout plan, the same would hold true for Germany's lower house of parliament, Michael Fuchs, the Christian Democratic Union's deputy leader in the Bundestag, was quoted as saying.

Handelsblatt:

• The European Central Bank should cut interest rates immediately to counter growing economic risks, citing a majority of members of the so-called shadow ECB council.

De Tijd:

• The Belgian government may consider a full nationalization of Dexia Bank Belgium NV pending a sale of the retail bank. Dexia may need tens of billion euros of debt guarantees, according to De Tijd.

National Post:

• Mike Brock: The Hidden Canadian Housing Bubble.