Weekly Scoreboard*

Indices

• S&P 500 1,155.46 +2.12%
  
• DJIA 11,103.10 +1.74%
  
• NASDAQ 2,479.35 +2.65%
  
• Russell 2000 656.21 +1.87%
  
• Wilshire 5000 11,920.60 +2.09%
  
• Russell 1000 Growth 540.33 +2.46%
  
• Russell 1000 Value 567.38 +1.77%
  
• Morgan Stanley Consumer 695.26 +1.32%
  
• Morgan Stanley Cyclical 798.73 +4.39%
• Morgan Stanley Technology 587.80 +5.48%
  
• Transports 4,359.55 +4.06%
  
• Utilities 431.34 -.47%
  
• MSCI Emerging Markets 36.55 +.71%
  
• Lyxor L/S Equity Long Bias Index 907.10 -3.68%
  
• Lyxor L/S Equity Variable Bias Index 837.32 -1.73%
  
• Lyxor L/S Equity Short Bias Index 659.06 +2.42%
  

Sentiment/Internals

• NYSE Cumulative A/D Line 116,868 +.35%
  
• Bloomberg New Highs-Lows Index -290 +496
  
• Bloomberg Crude Oil % Bulls 27.0 -6.90%
  
• CFTC Oil Net Speculative Position 108,164 -21.44%
  
• CFTC Oil Total Open Interest 1,431,783 +3.71%
  
• Total Put/Call 1.11 -10.48%
  
• OEX Put/Call 1.94 -2.02%
  
• ISE Sentiment 66.0 -25.84%
  
• NYSE Arms 1.64 -57.84%
  
• Volatility(VIX) 36.20 -15.74%
• S&P 500 Implied Correlation 82.32 -8.82%
  
• G7 Currency Volatility (VXY) 13.14 -7.72%
  
• Smart Money Flow Index 10,341.11 +4.86%
  
• Money Mkt Mutual Fund Assets $2.639 Trillion +.20%
  
• AAII % Bulls 35.24 +8.40%
  
• AAII % Bears 45.71 -2.33%

Futures Spot Prices

• CRB Index 303.52 +1.80%
  
• Crude Oil 82.98 +5.37%
  
• Reformulated Gasoline 264.76 +4.26%
  
• Natural Gas 3.48 -4.94%
  
• Heating Oil 285.88 +2.61%
  
• Gold 1,635.80 +.57%
  
• Bloomberg Base Metals 204.58 +.52%
  
• Copper 327.35 +5.21%
  
• US No. 1 Heavy Melt Scrap Steel 418.33 USD/Ton unch.
  
• China Hot Rolled Domestic Steel Sheet 4,616 Yuan/Ton unch.
  
• UBS-Bloomberg Agriculture 1,510.26 -.47%
  

Economy

• ECRI Weekly Leading Economic Index Growth Rate -8.10% -90 basis points
  
• S&P 500 EPS Estimates 1 Year Mean 95.85 -.04%
  
• Citi US Economic Surprise Index -7.50 +22.0 points
  
• Fed Fund Futures imply 31.7% chance of no change, 68.3% chance of 25 basis point cut on 11/02
• US Dollar Index 78.75 -.06%
  
• Yield Curve 179.0 +12 basis points
  
• 10-Year US Treasury Yield 2.08% +16 basis points
  
• Federal Reserve's Balance Sheet $2.843 Trillion +.30%
  
• U.S. Sovereign Debt Credit Default Swap 48.80 -6.59%
  
• Illinois Municipal Debt Credit Default Swap 270.0 +2.38%
  
• Western Europe Sovereign Debt Credit Default Swap Index 340.05 -.52%
• Emerging Markets Sovereign Debt CDS Index 284.50 -1.95%
  
• Saudi Sovereign Debt Credit Default Swap 129.0 +2.92%
• Iraqi 2028 Government Bonds 77.83 -3.24%
• China Blended Corporate Spread Index 896.0 -16 basis points
  
• 10-Year TIPS Spread 1.95% +19 basis points
  
• TED Spread 39.0 +4 basis points
• 3-Month Euribor/OIS Spread 72.0 -9 basis points
  
• N. America Investment Grade Credit Default Swap Index 138.31 -1.85%
  
• Euro Financial Sector Credit Default Swap Index 238.36 -6.27%
  
• Emerging Markets Credit Default Swap Index 346.07 -6.29%
  
• CMBS Super Senior AAA 10-Year Treasury Spread 301.0 unch.
  
• M1 Money Supply $2.137 Trillion +1.48%
  
• Commercial Paper Outstanding 985.4B -2.20%
  
• 4-Week Moving Average of Jobless Claims 414,000 -1.0%
  
• Continuing Claims Unemployment Rate 2.9% -10 basis points
  
• Average 30-Year Mortgage Rate 3.94% -7 basis points
  
• Weekly Mortgage Applications 734.90 -4.30%
  
• Bloomberg Consumer Comfort -50.2 +2.8 points
  
• Weekly Retail Sales +4.40% unch.
  
• Nationwide Gas $3.39/gallon -.06/gallon
  
• U.S. Cooling Demand Next 7 Days 10.0% below normal
• Baltic Dry Index 2,000 +5.32%
  
• Oil Tanker Rate(Arabian Gulf to U.S. Gulf Coast) 32.50 unch.
  
• Rail Freight Carloads 250,864 +.99%
  

Best Performing Style

• Mid-Cap Growth +2.61%

Worst Performing Style

• Small-Cap Value +1.22%

Leading Sectors

• Education +8.30%
  
• Road & Rail +7.36%
• Construction +7.33%
  
• Semis +5.87%
• Disk Drives +5.36%

Lagging Sectors

• Telecom -1.24%
• Airlines -1.35%
  
• Hospitals -1.37%
  
• REITs -1.89%
  
• Oil Tankers -7.17%

Weekly High-Volume Stock Gainers (7)

• PPDI, EBS, MDCO, TNGO, MEAS, TISI and RECN
  

Weekly High-Volume Stock Losers (12)

• OCR, APKT, NU, PMC, IRM, SXC, CNS, CJES, AM, OSG, AMED and KIOR
  

Weekly Charts
ETFs

• High-Volume Gainers
• High-Volume Losers

Stocks

• High-Volume Gainers
• High-Volume Losers
  

*5-Day Change

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, More Financial Sector Pessimism, Technical Selling, More Shorting

Broad Market Tone:

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

Equity Investor Angst:

• VIX 36.87 +1.65%
  
• ISE Sentiment Index 65.0 -26.97%
  
• Total Put/Call 1.13 -5.04%
  
• NYSE Arms 1.20 +238.41%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 138.31 -2.68%
  
• European Financial Sector CDS Index 237.83 -.40%
  
• Western Europe Sovereign Debt CDS Index 340.38 +.19%
  
• Emerging Market CDS Index 346.27 -.55%
  
• 2-Year Swap Spread 40.0 +1 bp
  
• TED Spread 39.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 178.0 +5 bps
  
• China Import Iron Ore Spot $170.0/Metric Tonne unch.
  
• Citi US Economic Surprise Index -7.50 +7.2 points
  
• 10-Year TIPS Spread 1.94 +5 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -10 open in Japan
• DAX Futures: Indicating -21 open in Germany

Portfolio:

• Slightly Higher: On gains in my Retail/Medical sector longs, Emerging Markets shorts and Index hedges
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and added to my (EEM) short
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 reverses lower again near its downward sloping 50-day moving average on rising Eurozone debt angst, more financial sector pessimism and global growth worries. On the positive side, Semi and Retail shares are especially strong, rising more than +.5%. Copper is rising +1.66%, the Bloomberg-UBS Ag Spot Index is declining -.10% and Gold is falling -.62%. The 10-year yield is rising +9 bps to 2.07%. The Japan sovereign cds is falling -7.78% to 126.25 bps, the China sovereign cds is down -4.2% to 172.04 bps and the Brazil sovereign cds is falling -6.73% to 178.37 bps. Major Asian indices surged 1-3% overnight. On the negative side, Coal, Alt Energy, Oil Service, Steel, Wireless, Bank, I-Bank, Biotech, Insurance, REIT and Airline shares are under meaningful pressure, falling more than -1.75%. Small-cap and Cyclical shares are substantially underperforming. Oil is gaining +.56% and Lumber is falling -3.5%. Rice is still close to its multi-year high, rising +24.0% in about 12 weeks. The Germany sovereign cds is rising +1.2% to 98.17 bps, the France sovereign cds is gaining +2.02% to 176.67 bps, the Spain sovereign cds is jumping +7.74% to 368.67 bps and the UK sovereign cds is gaining +3.4% to 92.76 bps. The Libor-OIS Spread is rising +1 bps to 31.0 bps, which is the highest since July 2010. The FRA/OIS Spread is rising 3.42 bps to 54.3 bps, which is also the highest since July 2010. As well, the TED and 2-Year Swap Spreads haven't come in at all, which is also noteworthy considering the recent strong equity advance. The Western Europe Sovereign CDS Index, the European Financial Sector CDS Index and the Asia-Pacific Sovereign CDS Index are still near their records. Ukraine shares fell another -1.2% today, notwithstanding gains in much of Europe, and are now down -47.2% ytd. As well, Brazilian equities fell -2.2% today and are now down -25.8% ytd. Various global credit angst gauges continue to trend higher, despite recent pullbacks, which remains a large negative. The average stock, as measured by the Value Line Geometric Growth Index, fell about -2.0% today. I still believe investors have gotten a bit ahead of themselves with respect to the prospects for a "solution" in Europe. Moreover, even if another "kick the can" solution is imminent, the economies in the region will likely continue to deteriorate as the massive tax hikes and spending cuts intensify, which will further exacerbate their debt issues over the longer-term. I expect US stocks to trade mixed-to-lower into the close from current levels on rising Eurozone debt angst, more financial sector pessimism, global growth worries, technical selling, more shorting and profit taking.

Today's Headlines

Bloomberg:

• Spain, Italy Credit Ratings Cut by Fitch on European Debt Crisis. Italy and Spain had their long-term issuer default ratings cut by Fitch Ratings, which cited factors including their vulnerability to the “Euro zone crisis.”Italy had its foreign and local currency long-term issuer default ratings cut to ‘A+’ from ‘AA-,’ while Spain had the same set of ratings cut to ‘AA-’ from ‘AA+.’ The outlook for both is negative. Fitch also said it was cutting its estimate of Spain’s medium-term growth. The ratings company maintained a rating watch negative on Portugal, indicating the nation may still be cut. Portugal’s foreign and local currency long-term issuer default ratings are ‘BBB-.’ Fitch said it still intends to complete its review in the fourth quarter.
• Moody's Lowers Its Senior Debt, Deposit Ratings for Nine Portuguese Banks. Nine Portuguese banks had their debt ratings cut by Moody’s Investors Service by one or two levels, which cited concern about funding, bad loans and holdings of government debt. Moody’s cut the “standalone” debt ratings of three banks, Banco Espirito Santo SA (BES), Banco Comercial Portugues SA (BCP) and Banco BPI SA (BPI), by two levels, the ratings company said in a statement today. The downgrades for BCP and BPI reflected Greek sovereign- debt holdings, potential lack of access to wholesale debt markets and “increased asset risk” caused by holdings of Portuguese government bonds, Moody’s said. The moves conclude a review begun on July 15, when Portugal’s sovereign rating was cut to Ba2 with a negative outlook from Baa1.
• ATP of Denmark Snubs French, Italian Bonds for Collateral. ATP, Denmark’s biggest pension fund, said it renegotiated contracts to avoid having to accept top- rated French sovereign bonds as collateral for funding. The 711 billion-kroner ($122 billion) fund reworked swap agreements to exclude the use of bonds sold by France, Italy and other southern European governments as collateral against equity derivatives, interest-rate swaps and repurchase agreements, or repos, Chief Executive Officer Lars Rohde said. Hilleroed, Denmark-based ATP holds 173 billion kroner of collateral, according to its 2011 half-year report. “We have changed the contracts,” Rohde said in an interview with Bloomberg’s Risk Newsletter this week. “We put ourselves in a position where we only receive the very highest quality collateral, which is German, Danish and U.S. government bonds.” The cost of insuring against default on French debt almost trebled in the past six months amid concern the nation will lose its top credit rating while having to bail out lenders hurt in the sovereign crisis.
• Payrolls Beat Forecast as Concerns Ease. American employers added more workers in September than forecast and figures for the prior two months were revised higher, easing concern the economy is tipping into another recession. Payrolls rose by 103,000 after a 57,000 gain in August, the Labor Department said today in Washington. The median forecast in a Bloomberg News survey of economists called for an increase of 60,000. The figures reflected the end of a strike at Verizon Communications Inc. (VZ) that brought 45,000 people back to work. The jobless rate held at 9.1 percent. More Americans who would like a full-time job are settling for part-time work instead. They are counted in the underemployment rate, which increased to 16.5 percent, the highest this year, from 16.2 percent. The number of people working part-time for “economic reasons” jumped 444,000 to 9.3 million. Unemployment has exceeded 8 percent since February 2009, the longest stretch of such elevated joblessness since monthly records began in 1948.
• U.S. Regional Mall Vacancies at Decade High. Vacancies at U.S. shopping malls climbed to the highest in at least a decade as feeble employment growth restrained consumer spending, Reis Inc. (REIS) said. Regional and super-regional mall vacancies rose to 9.4 percent in the three months ended Sept. 30 from 8.8 percent a year earlier and 9.3 percent in the second quarter, according to the New York-based property-research company. It was the highest since Reis began publishing the data in 2000. Store owners’ revenue is falling as the U.S. unemployment rate hovers above 9 percent, depressing consumer confidence, and online stores capture more customers.
• China Baby Formula Maker Buying Arsenic Debt Reveals Unsecured Trust Loans. A Chinese baby-formula maker selling imported Australian milk to safety-conscious parents invested in the risky debt of lead, arsenic and cadmium refiners, seeking higher returns for its cash. The uncollateralized investment, sold by a middleman known as a trust, promises to pay Ausnutria Dairy Corp. about double China’s benchmark savings rate. It’s an example of how companies are undermining government efforts to cool lending that has led to soaring property prices and inflation of 6.2 percent, near a three-year high.
• Copper Traders the Most Bullish Since August After Biggest Rout Since '08. Copper traders and analysts are the most bullish since August on speculation prices at a one-year low will spur China, the world’s largest buyer, to build stockpiles. Gold, sugar, corn and soybeans may also climb. Ten of 15 respondents surveyed by Bloomberg expect copper to rise next week and 5 predicted a drop, the most bullish reading in six weeks. It’s the first time in four weeks that the separate surveys forecast gains for all five commodities.

Wall Street Journal:

• AFL-CIO President Visits Wall Street Protesters. The Wall Street protesters have gotten a boost from the leader of a big trade union federation. AFL-CIO President Richard Trumka appeared Friday morning at Manhattan's Zuccotti Park. Trumka said he came to show his support and hear the protesters' perspective. He also brought bagels, water and other supplies. Protesters have been camping out for weeks at the park near Wall Street.
• ECRI Weekly Leading Index Still Drilling Downward. (graph) The Economic Cycle Research Institute, which has declared that a recession is coming — and, like the whacking of Tommy DeVito in Goodfellas, “we couldn’t do nothing about it” — offers up another piece of evidence this morning. Its weekly leading index fell again this week, and its rolling growth rate dropped to -8.1%, the lowest in at least a year.
  

MarketWatch:

• 12 Lessons For Us All From The Life Of Steve Jobs.
• Illumina(ILMN) Woes Shine Light on Industry Trouble. A dire revenue warning from biotech firm Illumina Inc. swept away nearly a third of the company’s market value Friday and caused other players in the sector to tumble as investors feared the worst.

CNBC.com:

• Solyndra Casts Shadow on US Energy Loan Aid. Political furor over the Solyndra bankruptcy has dealt a body blow to the idea that the U.S. government should try to help clean tech start-ups through the costly "valley of death" to commercial viability.

Business Insider:

• Chart of the Day: Jobs.
• JPMorgan Presents: 12 Bullish Charts.
  

Zero Hedge:

• Hedge Fund Pound-O-Rama: Full Performance Update Through Months End.
• PrimeX - The Time For The NExt "Subprime Trade" Has Come. (graphs)
• Did Iran Just Retaliate For Stuxnet? Computer Virus Infects US Predator Drone System.
  

New York Times:

• Hedge Funds' Next Target: Hungary? French and Belgian bank stocks have crashed and the bond yields of Greece, Italy and Portugal may be peaking. Now hedge funds and bond vigilantes have begun to zero in on Hungary as the fashionable European country to bet against.

The Daily Caller:

• White House Changes Tune on Double-Dip Recession. White House officials are using a new set of talking points to sell their stimulus plan: The economy’s possible slide into a second recession. During the summer, officials denied a double-dip recession was on the horizon. But yesterday and today, President Barack Obama and his deputies said the $447 billion jobs-stimulus bill is needed to prevent a “double-dip recession.”

Gallup:

• Obama Job Approval: 53% Disapprove, 38% Approve. (graph)

Politico:

• Michael Bloomberg Tells Occupy Wall Street Protestors to Lay Off Banks. New York Mayor Michael Bloomberg slammed the Occupy Wall Street protesters on Friday, saying their attacks on banks could harm one of the city’s major employers. “Everyone’s got a thing they want to protest, some of which is not realistic,” Bloomberg said during his weekly radio show on Friday, according to The Village Voice. “And if you focus for example on driving the banks out of New York City, you know those are our jobs … You can’t have it both ways: If you want jobs you have to assist companies and give them confidence to go and hire people.”

Reuters:

• Moody's Cuts Credit Ratings on UK Banks RBS and Lloyds. Credit rating agency Moody's downgraded Britain's part-nationalized banks Lloyds and Royal Bank of Scotland on Friday, although Britain's finance minister said UK banks were well-placed to cope with a European debt crisis. The cuts to RBS and Lloyds formed part of a broader downgrade of 12 British financial companies by Moody's, which had already been flagged by the agency earlier in the year. Moody's cut RBS by two notches to A2 from Aa3, and downgraded Lloyds TSB by one notch to A1 from Aa3. It also cut its ratings on Santander UK, the Co-Operative Bank, Nationwide Building Society and seven other smaller British building societies.
• Hedge Funds Slide Deeper Into The Red In September. For hedge funds, September was even worse than August. The average fund lost 3.7 percent last month after dropping 3.4 percent in August, according to data released on Friday by industry consultant Hennessee Group. The third quarter is being called the worst in three years, and the average hedge fund is now down 5.2 percent this year. For many of the industry's most established stars, the news is even worse.
• Brazil Inflation Hits 6-Year High, But Rate Cut Seen.
• Germany, France Split on Bank Aid Before Summit. Germany and France were split ahead of crucial talks on Sunday over how to strengthen shaky European banks and fight financial market contagion to prepare for a possible Greek default. Under strong U.S. and market pressure -- and further downgrades to Italy and Spain late on Friday -- Chancellor Angela Merkel and President Nicolas Sarkozy will try to bridge differences on how to use the euro zone's financial firepower to counter a sovereign debt crisis that threatens the global economic recovery. A German source said Paris wanted to be able to tap the euro zone's 440 billion euro rescue fund to recapitalise its own banks, which have the largest exposure to peripheral euro zone debt, while Berlin insisted the fund should be used only as a last resort when no national funds are available. After meeting Dutch premier Mark Rutte, Merkel confirmed the German position was that the European Financial Stability Facility was a backstop to be used "only if that country is unable to cope on its own". A French Treasury source told Reuters that Paris believed banks unable to raise capital on the open market should be able to tap the fund, but talk of divergences with Berlin was premature since the issue had not yet been debated.
• US Coal Consumption Down 13% Last Week.
  

Financial Times:

• The Mystery of US Banks' European Exposure. This might just be the most important piece of paper in US banking right now:
• Russia Urged to Monitor Banks. The International Monetary Fund has called for greater oversight of Russia’s banks, warning that the $14bn Bank of Moscow bail-out this summer raised serious concerns about the industry’s practices and transparency. Antonio Borges, the IMF’s Europe director, said the central bank’s discovery of a massive hole on Bank of Moscow’s balance sheet following its acquisition by state lender VTB caused a loss of confidence in the Russian banking sector.

Telegraph:

• Debt Crisis: Live.

Frankfurter Allgemeine Zeitung:

• European Union banks may need as much as $53.7 billion in fresh capital should they write down the value of debt issued by some European countries, citing calculations by JPMorgan.
• The European Commission proposed cutting countries' access to structural aid funds if they repeatedly breach the region's Stability and Growth Pact, citing a presentation by European Regional Affairs Commissioner Johannes Hahn.
  

Bild:

• Germany should seek a collateral deal modeled on the Finnish agreement in exchange for aid to debt-strapped Greece, junior lawmakers from Chancellor Angela Merkel's coalition parties said. If Greece doesn't sell government property, pledging it as collateral for guarantees should be considered, Oliver Luksic, a member of parliament for Merkel's Free Democratic Party coalition partner, was quoted as saying. The government should "definitely" check whether it is possible to demand collateral from Greece, Christian Hirte, a lawmaker from Merkel's Christian Democratic Union, said.
• Peter Gauweiler, a federal lawmaker from the Bavarian sister party of Chancellor Angela Merkel's Christian Democrats, has urged German President Christian Wulff to veto enhancements to the euro rescue fund that were passed in parliament last week. The last to strengthen the EFSF is violating the German constitution, Gauweiler wrote in a letter to Wulff, Bild said.
  

Xinhua:

• China Shipbuilders' Deliveries Dropped 9% Year-Over-Year in August. Total deliveries were 4.7 million DWTs, citing the National Development and Reform Commission. The industry had 175.8m DWTs of orders on hand Aug. 31, down 9.4% y/y and 10% from end-2010. Eight-month orders fell 37% to 28.1 DWTs. August new orders plunged 60% to 4.49m DWTs. 40% of dockyards have had no new orders in 2011.

Bear Radar

Style Underperformer:

• Small-Cap Value (-2.10%)

Sector Underperformers:

• 1) Banks -3.71% 2) Alt Energy -3.70% 3) I-Banks -3.07%

Stocks Falling on Unusual Volume:

• FSLR, RMBS, UBS, CHL, ILMN, FIBK, LIFE, LMNX, HWCC, WYNN, QGEN, ANEN, SNDA, COLM, ISCA, SIAL, SINA, HAIN, HELE, NIHD, FNSR, FLDM, PKI, WAT, TMO, BRKR, ITC, MWE, RGP and LMNX
  

Stocks With Unusual Put Option Activity:

• 1) ILMN 2) SWY 3) GNW 4) ACN 5) A
  

Stocks With Most Negative News Mentions:

• 1) ILMN 2) ICE 3) LM 4) KEY 5) BAC
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value (-.10%)

Sector Outperformers:

• 1) Retail +.69% 2) Drugs +.67% 3) Telecom +.65%

Stocks Rising on Unusual Volume:

• IPGP, PSMT, SIMO, E, GEOY, MBT, SGEN, SREV and CAR
  

Stocks With Unusual Call Option Activity:

• 1) BSX 2) CTXS 3) SLM 4) SGEN 5) EMC
  

Stocks With Most Positive News Mentions:

• 1) WYNN 2) FNSR 3) DLTR 4) AVB 5) LUV
  

Charts:

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

Friday Watch

Evening Headlines

Bloomberg:

• Merkel-Sarkozy Divided on Default Threat to Banks: Euro Credit. Angela Merkel and Nicolas Sarkozy are running out of road. Whether to allow Greece to default and how to manage the fallout, questions they have tried to avoid for more than a year, may finally require answers as European officials turn to fortifying banks and consider ways to ease Greece’s debt load. It costs $6 million plus $100,000 a year to insure $10 million of Greek securities for five years, with credit-insurance prices pointing to a 91 percent chance of default. As the German chancellor and French president prepare to meet in two days for their eighth one-on-one summit in 20 months, Merkel has cited the need to prepare for the default that investors see as a sure thing. Sarkozy, whose banks have the most to lose, is unwilling to gamble on letting Greece go. “The whole German debate about a default of Greece is a German debate, not a European debate,” said Stefan Collignon, a former German Finance Ministry official and political economist at the Sant’Anna School of Advanced Studies in Pisa, Italy. “The commitment everywhere else, including in France, is very much to avoid that by all possible means.” The heads of Europe’s two biggest economies meet in Berlin on Oct. 9 with the euro near a nine-month low against the dollar. French 10-year bonds yield 81 basis points more than their German equivalents, near the euro-era record set Aug. 8. Investors are demanding a premium of 21.4 percentage points to hold Greek 10-year bonds over benchmark German bunds of similar maturity. The leaders’ contrasting approaches on Greece may reflect the relative vulnerability of their top credit ratings and economies. France’s AAA rating and its banks are on the front line of potential damage, while German exposure to Greek debt is smaller. Already the biggest contributor to bailouts for Greece, Ireland and Portugal, Merkel may not offer much in return when she hosts Sarkozy at the Chancellery. She’s been stressing the limits of joint action, saying Oct. 5 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 in a Greek rescue. Germany is also resisting discussion of leveraging the 440 billion-euro ($586 billion) fund to boost its firepower. Sarkozy, whose popularity is near a record low as he decides whether to seek a second term next year, has reasons for concern. At the end of March, French financial firms had $672 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements. That’s the biggest exposure to the euro-area’s troubled countries and almost a third more than German lenders.
• Summer of Banking Delusion Brings Crisis to Europe's Core: View. Once upon a time, like this summer, Dexia SA, the French-Belgian bank, was stable. By the measures global regulators deem important, its capital ratio stood at 11.4 percent of risk-weighted assets, according to data compiled by Bloomberg. That’s well above the 10 percent regulators plan to require of the world’s largest banks under new international rules. What a difference a summer makes. The Belgian and French governments now have a complicated mess on their hands. Dexia, which had received a government bailout in 2008, saw its shares plummet after Moody’s Investors Service put its main units on review for a downgrade on Oct. 3. Within days, Belgium and France said that they would stand behind the bank’s deposits and suggested a “bad bank” structure could be used to wind down its toxic assets. How this will be resolved is unclear. But Dexia crystallizes the need for smarter capital rules, credible stress tests and an aggressive plan to recapitalize Europe’s banks quickly should financial calamity strike.
• Gasoline Cargoes to U.S. to Slide 35% on European Refinery Maintenance. Gasoline shipments to the U.S. from Europe will decline over the next two weeks as refineries on both sides of the Atlantic Ocean enter a maintenance period to prepare for accelerated winter fuel production. Twenty tankers were booked or due to be chartered for loading in the two-week period, according to the median estimate in a Bloomberg News survey of three shipbrokers, one owner and one trader yesterday. That’s the lowest since the end of August and down 35 percent from 31 tankers last week. Refiners in Europe have cut production to conduct plant maintenance and in response to declining processing profits.
• Energy Department Says Loan Director Silver to Step Down. Jonathan Silver, executive director of the U.S. program under scrutiny for awarding Solyndra LLC a $535 million federal guarantee, has resigned, the Energy Department said. While Silver joined the department after the solar panel maker received its loan, Representative Cliff Stearns, a Florida Republican and chairman of the House panel investigating the award, has said he should be fired for his handling of the guarantee since arriving.
• Euro-Indebted Emerging Currencies Have Further to Fall on Growth. The worst declines since at least 2008 for emerging market currencies may have further to go as the debt and banking crisis in Europe buffets economies once resistant to the global slowdown. European lending of $3.4 trillion to developing counterparts is almost triple that from U.S. and Japanese institutions combined, according to Bank for International Settlements data through March 2011. This leaves developing countries more vulnerable to Europe’s sovereign debt crisis than they were to the global credit meltdown in 2008, according to Royal Bank of Canada. The International Monetary Fund reduced growth projections for emerging countries last month, as the deepening European crisis stifles liquidity and threatens to drive the global economy into recession. Option traders are increasingly bearish on currencies including the Brazilian real and South African rand, according to data compiled by Bloomberg. “The problems are centered in Western Europe and the U.S. so those asset prices moved first and it’s now trickling down to emerging markets,” Nick Chamie, the global head of emerging market research at Royal Bank of Canada’s RBC Capital Markets unit in Toronto, said by telephone Sept. 27. “Until conditions stabilize in a long-lasting way in Europe and the U.S. in terms of the economic outlook, emerging market assets will continue to come under selling pressure.” Investors pulled $3.2 billion out of emerging-market debt funds in the week ended Sept. 28, the biggest outflow since 2005, according a report by ING Groep NV on Sept. 29, citing data compiled by EPFR Global Data. The withdrawal accounted for 2.3 percent of total assets.
• Anti-Wall Street Protests Ignore Legitimate Gripe: Caroline Baum. Talk about haves and have-nots. The debt burden that the younger generation is staring at almost guarantees it will have a reduced standard of living.

Wall Street Journal:

• Greenspan: To Stay Viable, Euro May Need Political Union - FT. A full-fledged political union might be needed for the euro zone to sustain its common currency and overcome divisions that sometimes reward less-responsible members, former U.S. Federal Reserve chairman Alan Greenspan said. In an opinion essay published online by the Financial Times late Thursday, Greenspan took aim at the "failed" Stability and Growth Pact -- a mechanism by which euro states are supposed to balance risk by ensuring no one member's debt grows too large. To constrain "aberrant behavior" by some in the 17-member zone, he added, a stronger bond might be need. "It may be that nothing short of a politically united euro zone, or Europe, will, in the end, be seen as the only way to embrace the valued single currency," wrote Greenspan, who left the Fed in 2006. "The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all euro zone nations to follow suit" by achieving higher rates of personal saving and lower inflation. He also warned "less collegial and less prudent" euro states could use currency-pooling -- meant to equalize members' risk from fluctuating exchange rates -- to their advantage ("as Greece so brazenly did recently") because these arrangements tend to "disproportionately" distribute value in favor of such members.
• Cables Says Syria, Iran Illegally Moved Cash to North Korea. As it sought to stop North Korea from spreading its nuclear technology, the U.S. uncovered signs in 2007 that the country was channeling funds through a major Middle Eastern bank based in Jordan, one of its closest regional allies, according to diplomatic cables posted online by document leaking website WikiLeaks. In the cables, viewed by The Wall Street Journal, U.S. officials warned their counterparts in Jordan that North Korea was using Amman-based Arab Bank PLC to receive money from Syria and Iran, circumventing international sanctions.
• The Multibillion - Dollar Leak. Bankers, lobbyists and lawmakers from Wall Street to Washington scrambled to dissect, analyze and react to a leaked proposal for one of the most controversial elements of the Dodd-Frank financial-overhaul law: the "Volcker rule."

Dow Jones:

• ECB Taps Swap Lines Again For $500 Million At Higher Rate. The European Central Bank accessed the Federal Reserve's foreign exchange swap facility for $500 million this week at a modestly higher interest rate, the New York Fed reported Thursday, underscoring a persistent scarcity of dollars among banks as Europe's debt crisis rages on. For the third consecutive week ended Wednesday, the ECB has been forced to tap the swap line to slake a thirst for greenbacks among euro-zone institutions. By all indications, the price for doing so is growing more expensive: terms for a seven day loan crept up to 1.09%, from 1.07% in the period ending Sept. 28. At that time, the ECB borrowed $500 million, on the heels of a $575 million loan in the week ended Sept. 21.

Business Insider:

• Basically, Any Hedge Fund Strategy Exposed To Fixed-Income And Equity Got Creamed In September.
• IMF Advisor: Could See Eurozone 'Meltdown' in 2 Or 3 Weeks. In an interview on the BBC (via ZeroHedge), IMF advisor Robert Shapiro said some incredibly alarmist things.

CNBC:

• Emerging Markets Money Braced for China Shock. For all the confidence in China's resilience to global economic shocks over the past decade, some investors are now starting to worry about a hard landing for the high-flying economic giant. Fears of a Chinese growth shock are compounding a broader sell-off bedevilling emerging markets, prompting many to raise cash levels and reposition portfolios to cope with an end to the China-driven commodities boom and a resurgent dollar. Beyond the obvious impact on Asian markets, commodity-exporters South Africa and Brazil are seen as vulnerable while India and Turkey have been identified as relative beneficiaries should long-gestating fears over China be realised. "I've rarely seen such a quick shift in market sentiment as I am seeing towards China. There was a near-total faith in the ability of the command economy to deal with the challenges," said Deutsche Bank strategist John-Paul Smith, who has been a long-term sceptic on the China investment story. "But suddenly people are thinking that the government may have lost control over the economy." A collapse in Chinese growth is at the top of global geopolitical and macroeconomic risks identified by advisory firm Oxford Analytica, which warns that annualised economic expansion there of less than 5 percent would be a massive shock to the global economy. On top of growth worries, the protracted instability in the euro zone and the threat of global recession have fanned concern that China's drive to choke off credit to an overheated property market could hit its banks, whose deteriorating asset quality has prompted a ratings warning from Fitch.Already, the cost of insuring Chinese sovereign debt against default has soared to 2-1/2 year highs as investors scramble to hedge exposure to Chinese corporate borrowers while offshore dollar/yuan forwards have jumped on expectations that currency appreciation will stall in the coming months to help the country cope with stuttering export growth.
• Jack Welch: How I'd Fix The Economy.
  

NY Times:

• 200 Chinese Subsides Violate Rules, U.S. Says. Under pressure from Congress to do more to confront China on economic issues, the Obama administration has notified the World Trade Organization of nearly 200 Chinese subsidy programs, saying many of them may violate free trade rules.
• Some Unemployed Find Fault in Extension of Jobless Benefits. As President Obama urges Congress to act on renewing an extension to unemployment benefits, some are arguing that it’s a hindrance to the economy and discourages workers.

NY Post:

• Hard-Hit Hedgies Running for Cover. Hedge-fund guru Daniel Arbess’s once perfect investment score card is taking a hit this year with losses approaching 19 percent, The Post has learned. Arbess, a Harvard-educated lawyer who runs the $2.8 billion Xerion Fund for boutique investment bank Perella Weinberg, lost roughly 10 percent last month on soured equity trades, according to sources familiar with the fund. That has pushed Xerion down nearly 19 percent this year.

CNN:

• China Isn't The Only Currency 'Manipulator' A newsflash to the legislators in Washington who suddenly want to act tough against China for currency manipulation: Have you looked in the mirror lately? How can anyone with a straight face declare that China needs to be punished for keeping the yuan artificially low when the United States is also aggressively trying to devalue the dollar with its monetary and fiscal policies?

Credit Writedowns:

• Europe's Bank Problem. Another informative chart from the IMF showing the fundamental problem in Europe’s banking system - excessive leverage and dependence on wholesale funding. Add to that overexposure to highly indebted sovereigns with deteriorating credit fundamentals. It also illustrates why the German DAX and French CAC stock indices have been hammered over the summer and are two of the worst performing markets this year.
  

Rasmussen Reports:

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

AP:

• Feds Target Pot Dispensaries For Closure. Federal prosecutors have launched a crackdown on some pot dispensaries in California, warning the stores that they must shut down in 45 days or face criminal charges and confiscation of their property even if they are operating legally under the state's 15-year-old medical marijuana law. In an escalation of the ongoing conflict between the U.S. government and the nation's burgeoning medical marijuana industry, at least 16 pot shops or their landlords received letters this week stating they are violating federal drug laws, even though medical marijuana is legal in California. The state's four U.S. attorneys are scheduled to announce a broader coordinated crackdown at a Friday news conference.

Reuters:

• Samsung Estimates Q3 Profit Down 14%; Beats Forecasts. Samsung Electronics , the world's top maker of memory chips and televisions, estimated on Friday a July-September operating profit that exceeded the most bullish analyst forecasts , helped by strong profit recovery in its handset business. Earnings at the world's biggest technology firm by revenue are set to decrease further in the fourth quarter on persistent declines in memory chip prices and as flat screens fail to show a strong rebound.
• Stock, Bond Fund Outflows in Week Ended Oct. 5 - Lipper.
  
• Illumina(ILMN) Sees Q3 Revenue Below Street View; Shares Fall. Illumina Inc forecast third-quarter revenue below market view, mainly on continued uncertainty related to levels of research funding in the United States and Europe. Shares of the company, which also suspended its prior full-year outlook, were down 22 percent at $32 in after-market trade.

Financial Times:

• China Labour Costs Push Jobs Back to US. Rising Chinese labour costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020, according to a study being released on Friday. The Boston Consulting Group analysis says the new jobs will be generated by a “re-shoring” of manufacturing activity lost to China over the past decade. “While Chinese labour costs are rising, US competitiveness has been improving,” says Mei Xu, the Chinese-born co-owner of Chesapeake Bay Candle, which makes candles and other home fragrance products. “We can invest in automation to make our candles in a factory near Baltimore for a similar cost to doing the same job in China.”
• China Scholar Says U.S. War on Yuan May Backfire. Democratic Senator Charles Schumer's proposed legislation to impose tariffs on China because of the low value of its currency will not boost U.S. exports, Yao Yang, director of the China Center for Economic Research at Peking University, wrote. If the tariffs were imposed, China could place charges on goods imported from the U.S., Yao wrote.
• Royal Bank of Scotland could need further U.K. aid to ensure it has sufficient capital to comply with new European moves to recapitalize the continent's banking industry, citing an unnamed official.
• China's Disappearing Bank Deposits. Although the mystery remains unsolved for the moment, solving the mystery is important for investors who want a sense of where the economy is heading. If large sums are indeed disappearing into the shadow banking system, then a rapidly rising share of the financial system is beyond the direct control of the government. If large sums are indeed flowing out of China, we may have the beginning of major, sustained outflows from China.

Handelsblatt:

• Germany, France Split on EFSF Bond Purchases. Germany and France are at odds over whether the European Financial Stability Facility should have limits on government bond purchases, citing a high-ranking European Union diplomat. France doesn't want to restrict the EFSF on how much of its funds it can use for such purchases, the newspaper said. Germany wants to limit the amount EFSF can spend for bonds per country and is also considering whether there should be a time limit for bond purchases.

EuroWeek:

• EFSF Levels Deteriorate as Hedge Funds Hit Easy Target. The European Financial Stability Fund — the cornerstone of the rescue plan for the eurozone crisis — came under pressure again in the secondary market this week with its spreads widening by the day as ambiguity about its role and eventual issuance volume undermine its credibility.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +1.0% to +3.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 239.0 -16.0 basis points.
  
• Asia Pacific Sovereign CDS Index 166.50 -20.25 basis points.
• FTSE-100 futures +.89%.
  
• S&P 500 futures +.09%.
  
• NASDAQ 100 futures +.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LRN)/.00

Economic Releases
8:30 am EST

• The Change in Non-Farm Payrolls for September is estimated at 55K versus 0K in August.
• The Unemployment Rate for September is estimated at 9.1% versus 9.1% in August.
• Average Hourly Earnings for September are estimated to rise +1.9% versus a +1.9% gain in August.

10:00 am EST

• Wholesale Inventories for August is estimated to rise +.6% versus a .8% gain in July.

3:00 pm EST

• Consumer Credit for August is estimated to fall to $8.0B versus $11.96B in July.

Upcoming Splits

• None of note
  

Other Potential Market Movers

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

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