Stocks Dropping Substantially into Final Hour on Soaring Eurozone Debt Angst, Global Growth Fears, Rising Financial Sector Pessimism, Profit-Taking

Broad Market Tone:

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

Equity Investor Angst:

• VIX 34.33 +14.59%
  
• ISE Sentiment Index 59.0 -22.37%
  
• Total Put/Call 1.32 +4.76%
  
• NYSE Arms 1.77 -15.73%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 129.15 +8.05%
  
• European Financial Sector CDS Index 243.69 +16.06%
  
• Western Europe Sovereign Debt CDS Index 342.0 +6.38%
  
• Emerging Market CDS Index 297.25 +7.74%
  
• 2-Year Swap Spread 34.0 +3 bps
  
• TED Spread 45.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% +2 bps
  
• Yield Curve 179.0 -13 bps
  
• China Import Iron Ore Spot $119.30/Metric Tonne +.76%
  
• Citi US Economic Surprise Index 14.50 -3.5 points
  
• 10-Year TIPS Spread 2.05 -6 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -105 open in Japan
• DAX Futures: Indicating +28 open in Germany

Portfolio:

• Slightly Lower: On losses in my Tech and Medical sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and added to my (EEM) short
  
• Market Exposure: Moved to 25% Net Long

BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 trades substantially lower with volume on more Eurozone debt angst, profit-taking, rising global growth worries, rising financial sector pessimism, technical selling and more shorting. On the positive side, Retail shares are holding up relatively well. The UBS-Bloomberg Ag Spot Index is down -.84% and oil is down -.76%. Weekly retail sales rose +4.7% versus a +4.5% gain the prior week. On the negative side, Defense, Coal, Alt Energy, Oil Service, Ag, Networking, Bank, I-Banking, Medical, Insurance, Homebuilding and REIT shares are under significant pressure, falling more than -3.0%. Cyclial and small-cap shares are underperforming. (XLF) has traded poorly throughout the day. Gold is flat, lumber is falling -1.66% and copper is dropping -3.03%. The 10-year yield is falling -10 bps to 2.02%. Major European equity indices plunged 3-6% today. Italian shares dropped -6.8% and are now down -26.0% ytd. The Germany sovereign cds is jumping +12.99% to 95.66 bps, the France sovereign cds is surging +9.75% to 193.17 bps, the Spain sovereign cds is climbing +15.7% to 392.33 bps, the Italy sovereign cds is rising +14.25% to 507.67 bps, the China sovereign cds is jumping +12.42% to 141.54 bps, the Belgium sovereign cds is gaining +12.2% to 302.0 bps, the Brazil sovereign cds is jumping +13.82% to 157.67 bps,, the Russia sovereign cds is gaining +11.4% to 221.67 bps, the Japan sovereign cds is gaining +15.07% to 114.09 bps, the Portugal sovereign cds is gaining +11.0% to 1,076.67 bps, the Ireland sovereign cds is surging +10.9% to 768.33 and the UK sovereign cds is gaining +10.9% to 91.17 bps. Moreover, the European Investment Grade CDS Index is gaining +14.08% to 162.25 bps and the Emerging Markets Sovereign CDS Index is jumping +8.4% to 258.67 bps. Rice is still close to its multi-year high, rising +30.0% in about 4 months. The Italian/German 10-year yield spread surged another +35.41 bps today to 442.20 bps, which is a another new all-time high. The TED spread continues to hit new cycle highs and is at the highest since June 2010. The Libor-OIS spread is still very near the widest since July 2010. The 2-Year Euro Swap spread is making a new cycle high today, which is also noteworthy considering the recent strong equity advance. The 3-Month Euro Basis Swap is plunging -16.17 bps to -108.05 bps, which is also a large negative. China Iron Ore Spot has plunged -37.5% since February 16th and -33.8% since Sept. 7th. I continue to believe investor complacency regarding the intermediate-term situation in Europe, and thus the global economy, is still fairly high, notwithstanding the recent pullback. The belief that hedgie performance-chasing, a "kick the can" European debt "solution" and seasonality would continue to boost stocks substantially into year-end has likely left too many funds leaning the wrong way again. If the Greek government does in fact collapse, the odds of global recession next year rise again on the ensuing uncertainty, in my opinion. As well, recent events in Italy are worrisome as the situation continues to deteriorate rapidly. I expect US stocks to trade mixed-to-lower into the close from current levels on rising financial sector pessimism, rising European debt angst, global growth fears, profit-taking, more shorting and technical selling.

Today's Headlines

Bloomberg:

• European Stocks Sink as Greece's Government Calls Referendum; Banks Tumble. European stocks sank the most in four weeks, as Greece’s government called a referendum on its latest bailout package, spurring concern that the country may default. Credit Suisse Group AG (CSGN) and Danske Bank A/S led a selloff in lenders, both sliding more than 7 percent, after posting earnings that fell short of analysts’ estimates. National Bank of Greece SA (ETE) sank 15 percent in Athens trading. Mining companies tumbled after a gauge of Chinese manufacturing dropped to the lowest level since February 2009. The Stoxx Europe 600 Index slid 3.5 percent to 234.98 at 3:34 p.m. in London, extending yesterday’s 2.2 percent selloff and paring last month’s biggest advance since 2009. The VStoxx Index (V2X), which measures the cost of protecting against a decline in shares on the Euro Stoxx 50 Index, jumped 18 percent to 41.27, its biggest gain since Sept. 9.
• Italy Bonds Slide, Premium to Bunds at Record, on Greece Concern. Italian bonds led declines in the securities issued by Europe’s most indebted nations after a Greek plan to hold a referendum on its international bailout added to concern the region’s financial turmoil will deepen. Italy and France’s 10-year borrowing costs climbed to the highest levels relative to benchmark German bunds since before the creation of the euro in 1999. Bund yields fell the most on record, with the securities outperforming all their euro-area peers, as investors sought the safest assets. Greek two-year yields climbed to a record high 87.28 percent as members of the nation’s ruling party called for Prime Minister George Papandreou to resign. “If we keep seeing yields rise in this way day after day as we now wait for this referendum then I think you really can talk about that market being in meltdown,” Steven Barrow, a London-based economist at Standard Bank Plc, said in an interview with Ken Prewitt on Bloomberg Radio’s “Bloomberg -- The First Word.” “Italy is the main focus.” Italian 10-year yields rose 10 basis points, or 0.1 percentage point, to 6.19 percent at 4:59 p.m. London time, after climbing to as much as 6.34 percent. The 4.75 percent debt maturing September 2021 dropped 0.650, or 6.50 euros per 1,000- euro ($1,370) face amount, to 90.14. The difference in yield, or spread, over similar-maturity German bunds reached a euro-era record 455 basis points.
• Greek Writedown Condemns Italy by Avoiding Default: Euro Credit. Europe's success in reducing Greece's debt burden without triggering default insurance leaves investors with no way of guarding against losses when lending to indebted nations such as Italy. "You've only got to look at peripheral bond yields to see what the market thinks," said John Davies, a fixed-income strategist at WestLB AG in London. "If these other countries are seeing Greek bondholders effectively having a 50 percent haircut thrust upon them, you have to wonder at what point Portugal, Ireland, or even Spain or Italy think to themselves that structure may be a better route for them." The yield on two-year Italian notes climbed 42 basis points to 5.41 percent at 3:23 p.m. in London, the most since 2000. Spain's two-year yield was 11 basis points higher at 4.10 percent.
  
• Greek Gamble on Calling Referendum Stuns Euro Partners, Merkel Allies Say. Greece’s decision to call a referendum on its five-day-old bailout blindsided its European partners and placed another hurdle in the way of efforts to staunch the debt crisis. The announcement came “out of the blue, it’s surprising, very risky,” Norbert Barthle, the ranking member of German Chancellor Angela Merkel’s Christian Democratic Union party on parliament’s budget committee, said in a telephone interview. “There’s an enormous amount at stake. Do we know how the Greek people will treat their government in this referendum? No. We have a new unknown.”
• Bond Risk Surges as Greece Triggers Disorderly Default Concerns. The cost of insuring against default on European sovereign debt surged the most in almost four months on concern a referendum on Greece’s bailout package may push the country into a disorderly default. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 29 basis points to 333 at 1 p.m. in London. The cost of protecting corporate and financial debt rose by the most in percentage terms since May 2010. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high- yield credit ratings increased 88.5 basis points to 726 basis points, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 21 at 183 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 35 basis points to 262 and the subordinated gauge was 66 higher at 493.
• Morgan Stanley(MS) Leads Bank Shares Lower. Morgan Stanley (MS) fell as much as 12 percent in New York trading, leading financial stocks lower on concern a Greek referendum on Europe’s bailout plan will worsen the region’s debt crisis. Morgan Stanley dropped $1.11, or 6.3 percent, to $16.53 at 10:37 a.m., the biggest decline in the 81-company Standard & Poor’s 500 Financials Index, which slid 2.3 percent. Citigroup Inc. (C) fell 4.3 percent and JPMorgan Chase & Co. (JPM) decreased 4.1 percent.
• U.S. Bank Credit Swaps Jump as Greece Calls for Bailout Vote. The cost to protect against defaults by U.S. banks and companies jumped on concern that Greece’s move to call a referendum could derail Europe’s bailout plan. The Markit CDX North America Investment Grade Index, a credit-default swaps index that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 6 basis points to a mid-price of 126.8 at 10:39 a.m. in New York, according to index administrator Markit Group Ltd. Over two days, the measure has jumped the most since Sept. 22. “If the Government loses these votes, the most recent plan would be for naught and Greece would surely head toward an unscripted default and contagion would likely follow,” Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities LLC in New York, wrote in a note to clients and reporters. Swaps on Morgan Stanley climbed 41 basis points to 383 basis points, according to London-based data provider CMA. That’s the biggest jump in almost a month. Contracts on Goldman Sachs rose 28 basis points to 314 basis points, CMA data show. Swaps on Bank of America jumped 25 basis points to 360 basis points, according to broker Phoenix Partners Group. Contracts on Citigroup Inc. increased 13 basis points to 245, Phoenix prices show.
• U.S. Hedge Fund Compensation to Fall 10% This Year, Glocap Says. U.S. hedge-fund compensation will fall an average of 10 percent this year compared with 2010 as performance suffered, according to a report by Glocap Search LLC and Hedge Fund Research Inc. Portfolio managers' pay, which is most closely tied to performance, should see the biggest decline, slumping about 30 percent on average, according to Adam Zoia, chief executive officer of Glocap, a New York-based recruiting firm. Hedge funds have lost 5.4 percent on average this year, according to data compiled by Bloomberg, as the European debt crisis worsened and the U.S. economy threatened to slip back into recession.
• GM(GM), Chrysler and Ford(F) Sales Rise Less Than Estimates. General Motors Co. (GM), Ford Motor Co. (F) and Chrysler Group LLC said U.S. deliveries rose less than analysts’ estimates that called for the best sales month since February.
• ISM Index of U.S. Manufacturing Falls. Manufacturing grew less than forecast in October, depressed by a drop in inventories that may set U.S. factories up for stronger growth heading into 2012. The Institute for Supply Management’s factory index dropped to 50.8 last month from 51.6 in September, the Tempe, Arizona- based group’s data showed today.
• Potash(POT) Rally to Slow as Uralkali Increasing Mining Capacity: Commodities. Potash’s rebound from the biggest plunge in 48 years will slow next year as Mosaic Co. (MOS), Potash Corp. of Saskatchewan Inc. and OAO Uralkali increase mining capacity. Potash Corp., the largest producer by market value, will see its average selling price climb 22 percent in 2012 after an estimated 35 percent gain this year, Don Carson, an analyst at Susquehanna Financial Group in New York, said in an Oct. 28 note. U.S. Midwest prices will fall 5.2 percent in 2012 after rising 32 percent this year, according to RBC Capital Markets.
• IMF May Create Credit Line for Countries Facing Shocks. The International Monetary Fund may create a six-month credit line for countries facing shocks, officials from Group of 20 governments and IMF said, as the European debt crisis rocks global financial markets. The amount would be capped at five times a nation’s contribution to the Washington-based IMF, known as a quota, making the credit line best suited for smaller countries, the people said. It is likely to be endorsed at a meeting of G-20 leaders this week in Cannes, France, where European nations will seek financial support from other members, said the three officials, who declined to be identified because the plan hasn’t been made public. The instrument would be the latest in a set of IMF tools intended to increase liquidity as Europe’s crisis threatens to spread beyond Greece. It could be used as part of a broader international package to aid larger economies such as Spain, with IMF participation serving to reassure other creditors, said Bessma Momani, a political science professor at the University of Waterloo in Canada.

Wall Street Journal:

• Danske Bank CEO "Very Concerned" About Economic Growth. Danske Bank A/S (DANSKE.KO) Chief Executive Peter Straarup said Tuesday there is reason to be "very concerned" about economic developments in the Western world.
• WSJ Remains Largst US Newspaper By Weekday Circulation - Audit Bureau. The Wall Street Journal maintained its position as the country's largest newspaper by average weekday circulation during the six months ended in September, with others in the top three spots also keeping their ranks, the Audit Bureau of Circulations said.

MarketWatch:

• Bowles, Simpson Warn of U.S. Downgrade. The heads of President Barack Obama’s fiscal commission warned the congressional supercommittee on Tuesday that failure to reach a deficit-cutting deal later this month could result in another downgrade of U.S. debt.

CNBC.com:

• Why Goldman(GS) Alumni Often Fail Elsewhere.
• Send Citi(C), BofA(BAC) to 'Minor Leagues' for Breakup: Mayo. Big banks that haven't been performing should be broken up before they become a threat to the entire financial system, analyst and author Mike Mayo told CNBC.
• Chain-Store Sales Expected to Rise 4.5%. October sales reports this week will show steady spending by U.S. consumers, according to Thomson Reuters' same-store sales index, as improving finances for many shoppers helped overcome a barrage of scary headlines about the economy.

Business Insider:

• 10 Big Investors In MF Global(MF).
• Wow, Jon Corzine - Way to Fly Your Company Into a Mountain. Well, this one's right up there with the most spectacular CEO disasters ever.
• Lawyer for George Soros Says His 28 Year-Old Ex-Lover Is Trying To 'Extort' Millions.
• CHART OF THE DAY: Italian-German 10-Year Spread.
• The Dark Side Of Chinese Infrastructure: Empty Highways, Unprofitable Ports And Excess Airports And Trains.

Zero Hedge:

• Spiegel's Reaction to G-Pap's Referendum Announcement.
• Liquidity Scramble Begins in MF Commingling Aftermath.
• Are The Clients of MF Global Insured Against Fraud?
• Is A Greek Military Overhaul An Attempt To Prevent Coup?
  

LA Times:

• California Bullet Train Cost Doubles to $98.5 Billion. In a key change, the state has decided to stretch the construction schedule by 13 years, completing the Southern California-to-Bay Area high speed rail in 2033 rather than 2020.

MoneyShow:

• Big Sentiment Shift Shakes FX Market. The most recent COT data shows a sizable sentiment shift among large speculators like hedge funds, as bullish positions on the US dollar have been lightened in favor of other currencies like the yen and aussie. The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that large futures speculators decreased their bullish positions in favor of the US dollar as bets in favor of the Japanese yen soared. Despite last week’s decline, speculative positions have now totaled a bullish dollar bias for a seventh straight week. Non-commercial futures traders, usually hedge funds and large speculators, diminished their total US dollar long positions to $8.92 billion on October 25 from a total long position of $14.86 billion on October 18, according to the CFTC COT data and calculations by Reuters, which calculates the dollar positions against the euro (EUR), British pound (GBP), Japanese yen (JPY), Australian dollar (AUD), Canadian dollar (CAD), and the Swiss franc (CHF).

Rasmussen Reports:

• October Employment Index Shows Less Confidence Among Workers.
• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 21% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -21 (see trends).

Reuters:

• Spain Electricity Demand Slumps 3.7% in October. Demand for electricity in major gas importer Spain fell by 3.7 percent in October year-on-year after a fall of 1.3 percent in September, national grid manager REE said on Tuesday. The data echoed a report by Spain's central bank on Monday that domestic demand had slumped, which has led some economists to predict the economy may enter a recession in the final thee months of the year.
• Iran Says Oil Over $100 a Barrel is Good.
• Copper Drops on China, Euro Zone Woes.
  

Financial Times:

• EU Leaders Battle To Save Greece Deal. European political leaders held emergency talks on Tuesday as the Greek political crisis threatened to sink a deal agreed last week in Brussels to bail out the debt-burdened eurozone nation.

Telegraph:

• Revenge of the Sovereign Nation. Greece’s astonishing decision to call a referendum – "a supreme act of democracy and of patriotism", in the words of premier George Papandreou – has more or less killed last week’s EU summit deal. The markets cannot wait three months to find out the result, and nor is China going to lend much money to the EFSF bail-out fund until this is cleared up. The whole edifice is already at risk of crumbling.
• Debt Crisis: Live.
  

Bear Radar

Style Underperformer:

• Small-Cap Growth (-2.52%)

Sector Underperformers:

• 1) I-Banks -4.01% 2) Oil Service -3.51% 3) Homebuilders -3.48%

Stocks Falling on Unusual Volume:

• BCS, C, HES, SU, VRNT, GEOY, MSTR, ITT, BRLI, NXPI, MKTG, IPGP, STMP, DNKN, SHOO, HSIC, CEVA, ALGN, ASML, IART, VOLC, LINE, CTCT, SHPGY, ABMD, CAVM, RSP, TGT, SPN, BHI, TGI, JEF, SM, KRA, CRK, DGI, BGC and AMED
  

Stocks With Unusual Put Option Activity:

• 1) HCA 2) BCS 3) XRT 4) JEF 5) XHB
  

Stocks With Most Negative News Mentions:

• 1) NVDA 2) CCO 3) AVB 4) BAC 5) RF
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value (-2.21%)

Sector Outperformers:

• 1) Restaurants -1.03% 2) Drugs -1.13% 3) Utilities -1.26%

Stocks Rising on Unusual Volume:

• USMO, AMT, EMR, LNG, SHOO, VRUS, BPI and SHOO
  

Stocks With Unusual Call Option Activity:

• 1) SYMC 2) VMED 3) SSRI 4) SPN 5) NWL
  

Stocks With Most Positive News Mentions:

• 1) PCLN 2) LDK 3) GM 4) JEC 5) QCOM
  

Charts:

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

Tuesday Watch

Evening Headlines

Bloomberg:

• MF Global(MF) Told SEC, CFTC of Potential 'Deficiencies' in Customer Accounts. MF Global Holdings Ltd. (MF) told U.S. regulators this morning there were potential “deficiencies” in some customer accounts, according to a joint statement from the Securities and Exchange Commission and the Commodity Futures Trading Commission. Federal regulators have found that hundreds of millions of dollars have recently gone missing from MF Global, prompting an investigation, the New York Times reported today on its website, citing several unidentified people briefed on the matter. The discovery of the missing funds, now numbering less than $700 million, scuttled MF Global's effort to sell a part of the firm to another brokerage, the Times reported. The regulators are probing whether MF Global diverted some customer money to support the firm's trades, the paper said. “For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global Inc., a jointly registered futures commission merchant and broker- dealer, in anticipation of a transaction that would include the transfer of customer accounts to another firm,” the regulators said in the e-mailed statement. “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.” The regulators said they determined that a bankruptcy proceeding “would be the safest and most prudent course of action to protect customer accounts.” Diana DeSocio, an MF Global spokeswoman in New York, didn't immediately reply to a phone call and an e-mail from Bloomberg News requesting comment. MF Global Holdings, the holding company for the broker- dealer run by ex-Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy protection today as it seeks to reorganize after making bets on European sovereign debt. Its broker-dealer unit, MF Global Inc., faces liquidation.
  
• Britain's Economy May Struggle to Grow as BOE Faces Threat of Recession. Britain’s economic recovery will continue to falter in the current quarter after it struggled to build momentum in the previous three months, economists said. Gross domestic product rose 0.3 percent in third quarter compared with a 0.1 percent increase in the second quarter, according to the median of 36 forecasts in a Bloomberg News survey. The Office for National Statistics will publish the data at 9:30 a.m. in London. Manufacturing probably stagnated in October and services growth slowed, according to separate surveys of economists before reports this week.
• Iron-Ire Collapse Seen Ending Most Profitable Shipping in a Year: Freight. Steelmaker demand for iron ore, the biggest source of cargoes for commodity carriers, is weakening, threatening to end the most profitable shipping rates in almost a year. Ore stockpiles at ports in China, the largest user, already expanded to within 3.6 percent of a record, according to Antaike Information Development, a Beijing-based researcher. Chinese steelmaking is near the least profitable in almost three years, data compiled by Bloomberg Industries show. Iron-ore swaps, traded by brokers and used to bet on future costs, show no price rebound until at least 2013, according to Clarkson Securities Ltd., a unit of the world’s biggest shipbroker. ArcelorMittal, the world’s biggest steelmaker, and Angang Steel Co. are among producers that idled furnaces as slowing global growth drove benchmark prices for the metal down 15 percent since March. For capesizes, vessels hauling about 80 percent of seaborne iron ore, that means a 40 percent drop in rates in the next quarter, according to Pareto Securities AS. “The decline we have seen in both iron-ore and steel prices is a sign of slower demand in China,” said Martin Korsvold, an analyst at Pareto Securities in Oslo, whose recommendations on shipping companies have returned 13 percent in the past year. “It’s a very stark indicator of what’s going to happen for capesizes.” Benchmark iron-ore prices at the Chinese port of Tianjin fell 35 percent to $118.40 a metric ton since Sept. 7, according to The Steel Index Ltd., which publishes data on the cost of steel, ore and scrap metal.
• U.S. Raises Borrowing Estimates on Spending, Lower Revenue. The U.S. Treasury Department raised its estimate for fourth-quarter government borrowing by $21 billion to $305 billion, reflecting in part lower revenue and higher spending. The estimates set the stage for the Treasury’s quarterly refunding announcement later this week. Officials on Nov. 2 will reveal their plans for sales of longer-term notes and bonds during the current quarter. “The increase in borrowing relates to lower receipts, higher outlays and changes in the cash balance assumptions partially offset by higher net issuances of state and local government series securities,” the Treasury said in a statement today in Washington, revising upward the fourth-quarter projection of about $285 billion made three months ago. U.S. Treasury officials also project borrowing of $541 billion from January through March of next year. That projection is the highest since the October-to-December 2008 period.
• Selling More Insurance on Europe Debt Raises Risk for U.S. Banks. U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults. Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show. The payout risks are higher than what JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc., the leading CDS underwriters in the U.S., report. The banks say their net positions are smaller because they purchase swaps to offset ones they're selling to other companies. With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren't being reduced, said Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc. “Risk isn't going to evaporate through these trades,” Cannon said. “The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who's ultimately going to pay for the losses?”

Wall Street Journal:

• Price of Foreclosure Settlement Climbs Higher. The price tag to settle the state and federal investigation of bank foreclosure practices has increased by at least $5 billion in recent weeks, people familiar with the negotiations say. The proposal on the table now puts a $25 billion value on a settlement by the nation's five largest mortgage servicing companies—Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. In exchange for picking up a bigger tab, banks would be released from certain legal claims tied to mortgage originations. Representatives of the five banks declined to comment.
• A Slow-Growth America Can't Lead the World by John B. Taylor.
  

MarketWatch:

• Australia's RBA Cuts Key Cash Rate to 4.5%.
• South Korea Inflation Set to Accelerate.
  

Business Insider:

• Inside Groupon: The Truth About The World's Most Controversial Company.

Zero Hedge:

• China Manufacturing PMI Drops to 32-Month Low. (graph)

CNBC:

• No Inflation? Fed Calls Food, Energy Gains 'Temporary' Despite 24-Year Rise.
• Deficit Super Committee a 'Charade': Ken Langone.
  

Reuters:

• MF Global(MF) Slow to Turn Over Data to Regulators - Source. U.S. regulators are unhappy with the failure of MF Global Holdings Ltd to provide them with the required data and records, a source close to one regulator told Reuters on Monday. "So far they've been very disappointed with the cooperation in the fulsomeness of records and data from MF," the source said, noting regulators have been working with the firm since late last week. "They were supposed to be able to show us their books and they're supposed to be able to tell us what's what and where their customer funds are and how they've been segregated and protected and to date we don't have the information that we should have," the individual told Reuters.

Telegraph:

• Italy, Europe, and Red Brigade Terror. Those of us in Anglo-Saxon cultures may find it remarkable that Italy still has laws that make it extremely hard for companies to lay off workers when needed. It is clearly a reason why the country has struggled to adapt to the challenge of China, rising Asia, and Eastern Europe. But that is not the point. Are such changes to be decided by Italy’s elected parliament by proper process, or be pushed through by foreign dictate when the country is on its knees? “Political ownership” is of critical importance. The EU is crossing lines everywhere, forgetting that it remains no more than a treaty organization of sovereign states. Democratic accountability is breaking down. This is dangerous. It is only a question of time before the EU itself becomes the target of terrorist attacks in a string of countries, and then what? Will the Project start to demand coercive powers? Will it acquire them? Eurosceptics have been vindicated. They warned from the start that EMU was a dysfunctional under-taking and that in order to stop it leading to calamitous failure, there would have to be ever deeper intrusions into the affairs of each state and society. This is now happening at a galloping pace. We really will end up an authoritarian supra-national octopus if this goes on much longer.
• Greece to Hold Referendum on EU Debt Deal. Greece is to hold a referendum on whether to accept the rescue package from the European Commission, European Central Bank and International Monetary Fund troika.
• Italy's Crisis Deepens on Eurozone Slump, Bail-Out Doubts. Italy's borrowing costs have once again surged to danger levels amid growing doubts over the viability of Europe's bail-out machinery, dashing hopes that last week's summit deal would at last contain the crisis.

Financial Times Deutschland:

• G-20 countries plan to bring so-called shadow-banking activities by hedge funds under the supervision of a financial regulator, citing people close to the German government.

South China Morning Post:

• Chinese Shipyards Receive Lowest Orders Since 2006. September new orders 940K deadweight metric tons, least since June 2006, citing the National Development and Reform Commission. As of Sept. 30, 30% of the nation's yards hadn't received orders. 9M orders drop 43% on year to 29M dwt. Sept. ship completions jump 67% m/m to 7.86m dwt.

21st Century Business Herald:

• Chinese provinces including Henan, Hainan, Guangxi and Sichuan have reduced the number of affordable housing units that they'll build next year because of a cash shortage.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.25% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 183.0 +12.0 basis points.
  
• Asia Pacific Sovereign CDS Index 149.50 +3.5 basis points.
• FTSE-100 futures -1.31%.
  
• S&P 500 futures -.68%.
  
• NASDAQ 100 futures -.50%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FSS)/.08
• (VSH)/.34
• (MLM)/1.09
• (RDC)/.38
• (OSG)/-2.37
• (DTG)/1.99
• (CKP)/.29
• (IT)/.29
• (MRO)/.84
• (COCO)/-.02
• (HCA)/.43
• (AMT)/.25
• (ABC)/.56
• (BHI)/1.22
• (EMR)/.96
• (CME)/4.69
• (OSK)/.32
• (PFE)/.55
• (ADM)/.66
• (JDSU)/.13
• (WMB)/.42
• (VLO)/1.95
• (CF)/4.93
• (HTZ)/.50
• (PBI)/.53
• (OPEN)/.30
• (DISCA)/.55
• (IPGP)/.64
• (ED)/1.33
  

Economic Releases
10:00 am EST

• Construction Spending for September is estimated to rise +.3% versus a +1.4% gain in August.
• ISM Manufacturing for October is estimated to rise to 52.0 versus a reading of 51.6 in September.
• ISM Prices Paid for October is estimated to fall to 55.0 versus 56.0 in September.
  

Afternoon

• Total Vehicle Sales for October are estimated to rise to 13.2M versus 13.04M in September.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports and the Needham Communications Conference could also impact trading today.
  

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

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Global Growth Fears, Rising Financial Sector Pessimism, Technical Selling

Broad Market Tone:

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

Equity Investor Angst:

• VIX 27.11 +10.52%
  
• ISE Sentiment Index 65.0 -22.62%
  
• Total Put/Call 1.24 +26.53%
  
• NYSE Arms 2.14 +149.64%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 119.53 +4.36%
  
• European Financial Sector CDS Index 209.98 +10.52%
  
• Western Europe Sovereign Debt CDS Index 320.0 +2.14%
  
• Emerging Market CDS Index 271.55 +3.78%
  
• 2-Year Swap Spread 31.0 unch.
  
• TED Spread 44.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield -.02% -2 bps
  
• Yield Curve 192.0 -10 bps
  
• China Import Iron Ore Spot $118.40/Metric Tonne +1.28%
  
• Citi US Economic Surprise Index 18.0 +.2 point
  
• 10-Year TIPS Spread 2.11 -4 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -93 open in Japan
• DAX Futures: Indicating +214 open in Germany

Portfolio:

• Slightly Lower: On losses in my Biotech, Tech and Medical sector longs
  
• 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 trades back below its 200-day moving-average on more Eurozone debt angst, profit-taking, rising global growth worries, rising financial sector pessimism, technical selling and more shorting. On the positive side, Utility, HMO and Restaurant shares are higher on the day. Lumber is up +.71%, the UBS-Bloomberg Ag Spot Index is down -1.45% and Gold is falling -1.09%. On the negative side, Coal, Alt Energy, Oil Tanker, Oil Service, Ag, Steel, I-Bank, Homebuilding and Energy shares are under sigificant pressure, falling more than -3.0%. Cyclial shares are relatively weak. (XLF) has underperformed throughout the day. Oil is flat and copper is dropping 2.06%. The 10-year yield is falling -14 bps to 2.17%. Major European equity indices fell 3-4% today. The Germany sovereign cds is jumping +10.81% to 84.67 bps, the France sovereign cds is surging +10.3% to 176.0 bps, the Spain sovereign cds is climbing +7.97% to 339.17 bps, the Italy sovereign cds is rising +12.5% to 444.33 bps, the China sovereign cds is jumping +6.65% to 125.41 bps, the Belgium sovereign cds is gaining +8.74% to 269.17 bps and the UK sovereign cds is gaining +13.12% to 83.0 bps. Moreover, the European Investment Grade CDS Index is gaining +5.11% to 142.19 bps. Rice is still close to its multi-year high, rising +31.0% in about 4 months. The Italian/German 10-year yield spread surged another +22.21 bps today to 406.79 bps, which is a new all-time high. The TED spread continues to hit new cycle highs and is at the highest since June 2010. The Libor-OIS spread is still very near the widest since July 2010. The 2-Year Euro Swap spread is still very close to its recent highs, which is also noteworthy considering the recent strong equity advance. China Iron Ore Spot has plunged -38.3% since February 16th and -34.6% since Sept. 7th. Given the amount of negative news over the weekend and recent sharp equity gains, US stocks are holding up pretty well so far. I continue to believe investor complacency regarding the intermediate-term situation in Europe, and thus the global economy, is still fairly high. The vast majority of investors appear to believe that hedgie performance-chasing, a "kick the can" European debt "solution" and seasonality will continue to boost stocks substantially into year-end. While I can see one more surge in stocks over the coming weeks, I suspect the rally may falter before year-end as large outperforming funds reposition for 1Q and more global economic uncertainty. I expect US stocks to trade mixed-to-lower into the close from current levels on rising financial sector pessimism, rising European debt angst, global growth fears, profit-taking, more shorting and technical selling.