Tuesday Watch

Evening Headlines
Bloomberg:

• China’s Stocks Drop Most This Month on Concerns About Economy. China’s stocks fell, dragging down the benchmark index by the most this month, on concern the economic slowdown is deepening after auto sales missed analysts’ estimates and Macquarie Group Ltd. (MQG) cut its growth estimates. Anhui Conch Cement Co. (600585) and Sany Heavy Industry Co. led declines for infrastructure-related companies on speculation the shares are overvalued after both companies rallied 16 percent in three days. FAW Car Co., which makes passenger cars in China with Volkswagen AG, sank 2.2 percent after passenger-vehicle sales trailed analysts’ estimates for a second month in August and the government increased gasoline and diesel prices for the second time in about a month. The Shanghai Composite Index (SHCOMP) dropped 0.9 percent to 2,115.39 at the 11:30 a.m. local-time break, heading for the biggest decline since Aug. 29.
• Euro Weakens From 3-Month High as Crisis Optimism Wanes. “We had a fairly sizable rally in the euro late last week,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said in a telephone interview. “There’s still significant event risk this week, and markets are understandably in a more cautious mode.”
• Billionaire Arnault’s Belgian Kerfuffle Boosts Hollande Tax Plan. The decision by France’s richest man, Bernard Arnault, to seek Belgian citizenship has created a media frenzy over tax exiles, giving the increasingly unpopular Socialist President Francois Hollande a chance to grandstand. Arnault, the chief executive officer of LVMH Moet Hennessy Louis Vuitton SA (MC), the world’s biggest luxury-goods company, said his “personal action” is not aimed at sending a political message or escaping Hollande’s 75 percent tax on earnings of more than 1 million euros ($1.28 million). Still, Liberation newspaper yesterday ran a front-page headline that said “Get lost, rich bastard,” and Hollande in a televised interview on Sept. 9 said it’s patriotic to pay taxes.
• Big Banks Hide Risk Changing Collateral for Traders. JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) are helping clients find an extra $2.6 trillion to back derivatives trades amid signs that a shortage of quality collateral will erode efforts to safeguard the financial system. Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market. The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead. “The dealers look after their own interests, and they won’t necessarily look after the systemic risks that are associated with this,” said Darrell Duffie, a finance professor at Stanford University who has studied the derivatives and securities-lending markets. “Regulators are probably going to become aware of it once the practice gets big enough.”
• Consumer Credit in U.S. Unexpectedly Falls $3.28 Billion. Consumer borrowing in the U.S. unexpectedly decreased in July for the first time in almost a year, restrained by a second straight decline in credit-card debt. The $3.28 billion drop followed a revised $9.8 billion jump the previous month that was bigger than first estimated, the Federal Reserve said today in Washington. Economists projected a $9.2 billion rise, according to the median forecast in a Bloomberg survey. Revolving credit, which includes credit card spending, decreased $4.82 billion, the most since April 2011. The drop in credit-card borrowing coincides with a slowdown in hiring this year and a rise in consumer pessimism that indicate households are wary of taking on debt. Employers added fewer workers to payrolls than forecast in August, while a gain in average hourly earnings from a year earlier matched the smallest increase since records began in 2007. “Households are definitely still in deleveraging mode, they’re hesitant to take on new debt,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York. “I think credit card debt is going to be flat to up slightly, and mortgage balances are still falling.”
• Harrisburg Plans to Skip Payment for Second Bond Default. Harrisburg, Pennsylvania’s insolvent capital, says it will miss general-obligation bond payments for the second time this year, preserving cash to cover workers’ salaries. The city will miss $3.4 million in payments due Sept. 15 on $51.5 million of bonds issued in 1997, William B. Lynch, Harrisburg’s receiver, said today by telephone. It skipped paying $5.27 million that was due March 15 on the same bonds. “We don’t have enough money to make the payment,” he said. “High finance.”
• Japan Banking Minister Matsushita Found Dead at His Home. Japanese Financial Services Minister Tadahiro Matsushita, who since taking the post in June led a crackdown on insider trading that triggered resignations of the top two executives at Nomura Holdings Inc. (8604), has died. He was 73.

Wall Street Journal:

• Before Scandal, Clash Over Control of Libor.
• Copper Surplus Presents Puzzle.

MarketWatch:

• U.S. to mark somber anniversary of 9/11. The nation will remember those killed by the Sept. 11, 2001, terrorist attacks on the World Trade Center and the Pentagon on Tuesday, an event never far from the minds of New Yorkers, Washingtonians and all Americans.

Business Insider:

• Mario Draghi's Blindness Makes Him A Danger To Europe.
• Defense Firms Warn Of Tens Of Thousands Of Job Cuts.
• The Chinese Leadership Crisis Looks Worse Than In 1989.
• The FBI's Nationwide Facial Recognition System Ends Anonymity As We Know It.

Zero Hedge:

• US August Budget Deficit Soars To $192 Billion, $1.17 Trillion In Fiscal 2012. (graphs)
• India's Second Largest Iron-Ore Miner Halts All Activity.
• The Great Recoupling.

CNBC:

• Ad Growth Slows Dramatically in Second Quarter. The ad market screeched and skidded in the second quarter — U.S. ad spending grew just .9 percent from April to June compared to a year earlier.
• Documents Show Former SEC Official Aided Former Targets. A former regional enforcement official at the Securities and Exchange Commission who was sanctioned in May over alleged conflicts of interest in the multi-billion dollar Allen Stanford Ponzi case has a history of such allegations, according to documents obtained by CNBC.
• No Need to Import OPEC Oil: Pickens. The U.S. has the natural resources to one day stop importing OPEC crude oil, Boone Pickens, founder of BP Capital, told CNBC’s "Street Signs" on Monday. “There are 30 U.S. states producing oil and gas, the highest we’ve ever had,” Pickens said. Interestingly, many of these are the very swing states that could help decide the upcoming presidential election, he noted.
• Kudlow: Fiscal Cliff Won’t Resolve for Months After Election. CNBC’s Larry Kudlow and his Washington colleagues are all hearing that lawmakers won’t attempt to seriously bridge this pressing issue until after the election.

NY Times:

• In Rush to Build, Property Stumbles. At least 10 percent of China’s gross domestic product comes directly from the construction and real estate sectors — far more when the industries that supply them and the consumption linked to the purchase of homes are taken into account, analysts at GK Dragonomics, a research firm in Beijing, wrote in a recent report. Internationally, they added, construction in China has accounted for more than 40 percent of the growth in global demand for steel and 10 percent for copper. No wonder, then, that any signs of weakness in the sector send shivers down the backs of analysts, industry executives and policy makers alike. “The property sector is a pillar industry for the Chinese economy,” said Li-Gang Liu, an economist in Hong Kong for Australia & New Zealand Banking Group. But now, he added, it is “the weakest link in the Chinese economy.”

Read more here: http://blogs.sacbee.com/capitolalertlatest/2012/08/fiscal-analyst-hundreds-of-millions-at-risk-from-facebook-slide.html#storylink=cpy

Reuters:

• Palo Alto Networks'(PANW) Q4 beats Street amid slower growth. Security software maker Palo Alto Networks, which went public in July, promised shareholders continued revenue growth after it beat fourth-quarter revenue and earnings estimates on rising demand for protection against network security attacks. Despite beating fourth-quarter expectations, company shares fell 6.7 percent in after-hours trading after they closed with a gain of 1.43 percent to $71.75 on Monday. Some analysts noted that while revenue growth was strong, the company had not doubled revenue as it had in the past quarters.
• U.S. burger chains aim to scoop up patrons with boozy milkshakes. Gourmet hamburger chains are spiking milkshakes with everything from beer to red wine in a bid to steal customers from "dry" rivals like McDonald's Corp . Red Robin Gourmet Burgers Inc on Tuesday will debut a Samuel Adams Octoberfest milkshake, made with vanilla ice cream, beer and caramel, at its roughly 460 restaurants around the country.

Financial Times:

• For True Stimulus, Fed Should Drop QE3. The first two rounds of quantitative easing fuelled a commodity bubble, increased income inequality and set a bad example for the rest of the world. During the 16 months of round one, up to March 2010, the CRB commodity price index rose 36 per cent, while food prices rose 20 per cent and oil prices surged 59 per cent. During round two, in the eight months up to June last year, the CRB rose 10 per cent, with food up 15 per cent, while oil prices rose a further 30 per cent.
• China in transition: Ascent of the bureaucrat. The incoming leadership appears more focused on factionalism than on much-needed reform.

Telegraph:

• Spanish PM Mariano Rajoy refuses to accept bailout that dictates cuts. Spain's Prime Minister Mariano Rajoy has said he would not accept an economic rescue that dictates spending cuts or touches old-age pensions.

Passauer Neue Presse:

• German Lawmaker Says ESM Brings Risks to German Budget. Peter Gauweiler, a conservative lawmaker from Merkel's CDU, calls for new deliberations of Germany's Federal Constitutional Court on the ESM, Europe's permanent rescue fund, citing Gauweiler.

Jerusalem Post:

• Lieberman to 'Post': Obama should define how to stop Iran. US Senator Joseph Lieberman encouraged President Barack Obama on Monday to clearly define America's red lines when it comes to dealing with Iran's nuclear program."I hope he can find a way to really spell out with just a little more detail" what the US is willing to do to prevent Iran from become a nuclear power, Lieberman told The Jerusalem Post following an appearance at a B'nai B'rith conference.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 132.50 -1.0 basis point.
• Asia Pacific Sovereign CDS Index 108.50 -6.0 basis points.
  
• FTSE-100 futures -.60%.
  
• S&P 500 futures -.23%.
  
• NASDAQ 100 futures -.17%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (UNFI)/.51

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for August is estimated to rise to 91.4 versus 91.2 in July.

8:30 am EST

• The Trade deficit for July is estimated to widen to -$44.0B versus -$42.9B in June.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports, JOLTs Job Openings report for July, 3Y T-Note auction, EU commissioner speaking on banking union, (TXN) Mid-Quarter Update, IBD/TIPP Economic Optimism Index for Sept, BofA Merrill Healthcare Conference, CSFB Chemical/Ag Science Conference, RBC Industrials Conference, BMO Media/Telecom Conference, Intel Developer Forum and the Deutsche Bank Tech Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by commodity 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 50% net long heading into the day.

Stocks Falling into Final Hour on Rising Global Growth Fears, Rising Eurozone Debt Angst, Tech Sector Weakness, US "Fiscal Cliff" Worries

Broad Market Tone:

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

Equity Investor Angst:

• VIX 15.22 +5.84%
  
• ISE Sentiment Index 129.0 -25.0%
  
• Total Put/Call .77 +5.48%
  
• NYSE Arms 1.14 +32.78%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 94.65 bps +1.73%
  
• European Financial Sector CDS Index 213.66 bps +4.48%
  
• Western Europe Sovereign Debt CDS Index 192.88 +2.39%
  
• Emerging Market CDS Index 218.52 +1.52%
  
• 2-Year Swap Spread 15.25 -.5 basis point
  
• TED Spread 30.75 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -24.75 +2.0 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .10% unch.
  
• Yield Curve 143.0 +2 basis points
  
• China Import Iron Ore Spot $95.0/Metric Tonne +6.74%
  
• Citi US Economic Surprise Index 18.50 +3.5 points
  
• 10-Year TIPS Spread 2.38 +2 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -41 open in Japan
• DAX Futures: Indicating -13 open in Germany
  

Portfolio:

• Slightly Lower: On losses in my Biotech/Tech sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near session lows on eurozone debt angst, high food/energy prices, US "fiscal cliff" worries and rising global growth fears. On the positive side, Steel, Road & Rail, Construction and Airline shares are especially strong, rising more than +.5%. The Transports have outperformed throughout the day. Copper is gaining +.9%, the UBS-Bloomberg Ag Spot Index is down -.4% and Gold is falling -.6%. Major Asian indices were mostly higher overnight, led by a +.34% gain in China. The Shanghai Comp is up +3.7% in 5 days, but still down -2.93% ytd. On the negative side, Energy, Semi, Internet, Computer, Software, Disk Drive, Networking, Bank, I-Banking, Biotech, Hospital, HMO, Homebuilding, REIT and Education shares are especially weak, falling more than -.75%. Tech and Financial shares have traded poorly throughout the day. Major European indices are mostly lower, led down by a -.3% decline in Spain. The Bloomberg European Bank/Financial Services Index is +.17%. The Germany sovereign cds is gaining +1.4% to 53.66 bps, the France sovereign cds is rising +2.7% to 121.55 bps, the Spain sovereign cds is jumping +9.2% to 378.83 bps, the Italy sovereign cds is gaining +10.0% to 344.22 bps, the UK sovereign cds is gaining +2.6% to 46.84 bps and the Israeli sovereign cds is gaining +2.3% to 145.66 bps. Moreover, the Spain 10Y Yld is rising +1.3% to 5.7%, the European Investment Grade CDS Index is gaining +2.8% to 129.62 bps and the Italian/German 10Y Yld Spread is rising +2.75% to 363.60 bps. The UBS/Bloomberg Ag Spot Index is up +26.2% since 6/1. The benchmark China Iron/Ore Spot Index is down -47.5% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, the euro, copper and lumber continue to trade poorly given equity investor perceptions that the Eurozone has successfully kicked-the-can, housing has hit a major bottom and global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +2.5%. US Trucking Traffic continues to soften. Moreover, the weekly MBA Home Purchase Applications Index has declined in 6 out of the last 7 weeks and has been around the same level since May 2010 despite investor perceptions of a big improvement in the nationwide housing market. The Baltic Dry Index has plunged around -70.0% from its Oct. 14th high and is now down around -60.0% ytd. Shanghai Copper Inventories have risen +124% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 25.0 industry-standard worldscale points, which is very near the lowest since May, 2009. The 10Y T-Note continues to trade too well. There still appears to be a fairly high level of complacency among US investors regarding the deteriorating macro backdrop. It remains unclear to me whether or not Germany will destroy its own balance sheet or allow the ECB to monetize debt in a major way in an attempt to "save" the euro even as investors have been pricing this outcome into stocks. Massive tax hikes and spending cuts have still yet to hit in several key eurozone countries that are already in recession. A lack of economic competitiveness and growth incentives remain unaddressed problems. The European debt crisis is also really affecting emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades over the intermediate-term. I continue to believe that China's problems are much larger than commonly perceived and cannot be solved with another massive stimulus package given their real estate bubble, soaring food prices, massive overcapacity in certain key parts of the economy and growing bad loans problem. I continue to believe QE3 would be a major mistake given the recent surge in stock prices, rising inflation expectations, rising gas prices, worrisome food crisis headlines and less pessimistic US economic data. Little being discussed by global central bankers will actually boost global economic growth to an extent that overcomes the growing macro headwinds over the intermediate-term, in my opinion. Uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff" and the election outcome uncertainty will likely become more and more of a focus for US investors into the fourth quarter. The Mid-east appears to be unraveling again at an alarming rate, as well. The quality of the stock rally off the June lows remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/lumber/transports relative weakness all continue to be concerns. Thus, recent market p/e multiple expansion on global central bank stimulus/action hopes, is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. Some market leaders, including (AAPL), are relatively weak today. This report from Bloomberg last Friday could be weighing on the shares. I remain long (AAPL), but have taken some profits recently for the first time in a long time. Long AAPL. For this year's equity advance to regain traction, I would expect to see further European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower food/energy prices, a US "fiscal cliff" solution, a calming in Mid-east tensions and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on rising eurozone debt angst, profit-taking, more shorting, high food/energy prices, US "fiscal cliff" concerns, growing Mid-east unrest and rising global growth fears.

Today's Headlines

Bloomberg:

• Euro Crisis Faces Tests in German Court, Greek Infighting. A German high court decision on bailout funding and Greek coalition infighting this week threaten to derail the European Central Bank’s bid to wrest control over the euro area’s three-year-old crisis. Germany’s Federal Constitutional Court in Karlsruhe will decide whether to suspend the 500 billion-euro ($639 billion) European Stability Mechanism on Sept. 12. In Athens, Prime Minister Antonis Samaras’s governing partners balked at budget cuts demanded by the country’s so-called troika of creditors. In a week of activity that may determine the course of the crisis, the court’s decision comes on the same day as Dutch voters decide whether to back parties questioning an expansion of European powers and as the European Commission issues a proposal for an integrated banking system. “The ECB is saying I’m here to support you but I can only build a bridge for you,” Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co., said in a Sept. 7 Bloomberg Television interview. “You have to do your job as well.”
• Italian, Spanish Bonds Fall as ECB Aid Rules Concern Saps Demand. Italian 10-year bonds snapped a five-day advance, leading declines in Europe’s lower-rated debt, amid concern conditions imposed on nations seeking assistance may hamper requests for European Central Bank bond purchases. Germany’s 10-year bund yield rose after last week climbing the most in six after ECB President Mario Draghi announced details of an unlimited asset-purchase program to tame the region’s debt crisis. Spanish notes dropped before a German high court decision on bailout funding due Sept. 12 and after Greek Prime Minister Antonis Samaras yesterday failed to win agreement from his coalition partners on spending cuts required by lenders to his country to release funds. “Greece shows us how difficult life can be within a program and the ECB’s purchases are conditional,” John Wraith, a fixed-income strategist at Bank of America Merrill Lynch said in a Bloomberg Television interview with Mark Barton. “If the Spanish or Italian governments start to pull back on the prospect of entering any program, then that will give the market a scent of blood and there will be periods where the yields come under upward pressure.” The rate on Italian 10-year debt climbed 11 basis points, or 0.11 percentage point, to 5.17 percent at 4 p.m. London time. It jumped as much as 16 basis points, the biggest intraday gain since Aug. 2.
• Stagnant Incomes Signal Curbs on U.S. Consumer Spending: Economy. Wages are stagnating as the job market cools, restraining the consumer spending that is needed to sustain the U.S. economic recovery. Average hourly earnings were little changed in August from the prior month and up 1.7 percent from a year earlier, matching the smallest gain since records began in 2007, the Labor Department reported last week. Payroll growth slowed to 96,000 last month, while the unemployment rate fell as more people left the labor force.
• HP(HPQ) Says Expands Job Cuts From Reorganizing to 29,000. Hewlett-Packard Co. (HPQ), the world’s largest personal-computer maker, expanded the total job cuts under its reorganization plan announced in May to 29,000, more than it had originally disclosed. The cuts, exceeding the 27,000 estimated earlier, will take place through fiscal year 2014, Hewlett-Packard said today in a regulatory filing. The company said it will book reorganization expenses of about $3.7 billion during the period.
• Goldman Sachs(GS) Analysts Decide Bank Slowdown Isn’t Temporary. New bank regulations and capital requirements are “structural” changes to the industry that are more to blame for declining profits than the U.S. economic slump, Goldman Sachs Group Inc. (GS) analysts said. “The operating environment is unlikely to change any time soon, and we see shareholders of challenged banks becoming more demanding in asking management teams to lay out a path to unlocking value in the near term,” analysts led by Richard Ramsden in New York wrote in a report published today.

Wall Street Journal:

• Iran in Talks to Sell Oil to Egypt.
• Chinese Mystery: What Ails Xi Jinping? Xi Jinping, the man expected to start to take the reins as China's top leader within a few weeks, called off a meeting with Danish Prime Minister Helle Thorning-Schmidt, the latest in a series of canceled meetings, fueling widespread speculation about the health of the future Chinese president.

Fox News:

• Chicago teachers strike for first time in 25 years. Thousands of Chicago teachers walked off the job Monday for the first time in 25 years, after union leaders announced they were far from resolving a contract dispute with school district officials. The walkout in the nation's third-largest school district posed a tricky test for Mayor Rahm Emanuel, who said he would work to end the strike quickly.

CNBC.com:

• How the ‘Fiscal Cliff’ Could Hurt Married Couples.
• Euro Zone Will Pay ‘Terrible Price’: Jim Rogers. Rogers said: “These guys have been saying the same old garbage for a long time. It’s not a game-changer – it’s good for the market for maybe a month. The debt keeps going higher and higher and eventually we’ll all going to pay a terrible price.” He warned that the market rally, which many have seen as an opportunity to get back into riskier assets, would only be a short-term rebound.
• Youthful Pot Use Linked to Testicular Cancer.

Business Insider:

• If You Look At What Chicago Schoolteachers Are Striking Over, You Can See Why People Are Furious.
• More Grandparents Are Bankrolling Families Than Ever Before.

Zero Hedge:

• Goldman(GS) On The Fed: Perception Over Substance.
• Another Ex-Fed Governor Admits "Only So Much Fed Can Do".
• Why 'Tax The Rich' Doesn't Solve Anything: It's The Math, Stupid. (tables)
  
• Europe's Leaking. (graphs)
  

market folly:

• Bill Ackman on Why He Sold Citigroup (C).

Reuters:

• Insight: GM's(GM) Volt: The ugly math of low sales, high costs. n">General Motors Co sold a record number of Chevrolet Volt sedans in August — but that probably isn't a good thing for the automaker's bottom line. Nearly two years after the introduction of the path-breaking plug-in hybrid, GM is still losing as much as $49,000 on each Volt it builds, according to estimates provided to Reuters by industry analysts and manufacturing experts.
• Analysis: Hollande's growth goal gutted by deficit plans. French President Francois Hollande has set himself a deadline to turn around the economy by the end of 2014, but having hamstrung the effort with tax rises to meet deficit targets, economists doubt his growth goals will ever fly. Hollande in "battle mode" pledged to the nation on Sunday to reverse a relentless rise in unemployment and return the stalled economy to growth in two years, but a government spending freeze and looming tax rises in 2013 could stifle growth, much as they have elsewhere in Europe where deficit-cutting measures have been tried.
• Consumer credit falls unexpectedly in July. Consumer credit fell in July for the first time in nearly a year as Americans reduced credit card debt, a worrisome sign for the U.S. economy which has struggled to create jobs. Consumer credit shrank by $3.28 billion in July, the Federal Reserve said on Monday. That was well below the $9.1 billion advance Wall Street economists had forecast in a Reuters poll.

Telegraph:

• Debt crisis: ECB's Draghi Plan doused by rebellions in Germany and Greece. A delay to the highly anticipated German court decision on bail-out funding and a rebellion in the Greek government over austerity doused hopes that the European Central Bank will be able to stem the crisis after all.

Handelsblatt:

• ECB Bond Buys Need Full Conditions, Meister Says. Euro region countries that want bonds purchased by the ECB must also request a full aid program under the area's financial backstops, German lawmaker Michael Meister from Chancellor Angela Merkel's Christian Democratic Union said. Any aid program must be approved by the German lower house of parliament, Meister said.
  

Bear Radar

Style Underperformer:

• Large-Cap Growth -.43%

Sector Underperformers:

• 1) Education -2.80% 2) Semis -1.20% 3) Networking -.90%

Stocks Falling on Unusual Volume:

• MLNX, TEO, NXPI, PHG, XYL, AAPL, OMG, CYT, PBH, TITN, PXP, SPRD, BTI, GWRE, CL, ABAX, FNV, Z, ABMD, MMM, BA, INTC, RKT, UTHR, JIVE, RIG, TCAP, WPRT, BNNY, DDD, HSP and BLOX
  

Stocks With Unusual Put Option Activity:

• 1) TWX 2) PSX 3) YUM 4) PXP 5) PNC
  

Stocks With Most Negative News Mentions:

• 1) PKG 2) STX 3) RKT 4) TITN 5) WLP
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Value +.16%

Sector Outperformers:

• 1) Steel +3.38% 2) Airlines +.94% 3) Alt Energy +.88%

Stocks Rising on Unusual Volume:

• GTAT, VELT, CLF, MCP, FRAN, GMCR and SWHC
  

Stocks With Unusual Call Option Activity:

• 1) HES 2) MLNX 3) DTV 4) TIVO 5) CL
  

Stocks With Most Positive News Mentions:

• 1) NEE 2) DTG 3) HPQ 4) MSFT 5) PSA
  

Charts:

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

Monday Watch

Weekend Headlines
Bloomberg:

• German Court Decision on Bailout Funding Looms Over Euro Crisis. Germany’s high court decides the fate of Europe’s bailout this week when it judges the viability of the single currency’s emergency fund, after the European Central Bank pledged unlimited funding to overcome the crisis. The Federal Constitutional Court in Karlsruhe will issue a decision on whether to suspend the 500 billion-euro ($641 billion) European Stability Mechanism on Sept. 12, nine weeks after hearing arguments challenging the fund. The ESM would work in tandem with the ECB in buying bonds to lower yields for indebted states, including Spain and Italy.
• Greek Coalition Partner Says No Decision Taken on Spending Cuts. Democratic Left leader Fotis Kouvelis, who supports the coalition government of Prime Minister Antonis Samaras, said no decision had been taken on 11.5 billion euros of spending cuts needed to release international funds. Kouvelis said he aimed to protect lower-income earners from the cuts and that another meeting would be held on Sept. 12. “Our European partners need to know that Greeks can’t take anymore,” Kouvelis said after meeting with Samaras and Pasok leader Evangelos Venizelos in Athens today.
• ECB Sees Bond Costs of Up to 100 Billion Euros, Spiegel Reports. The European Central Bank may spend between 70 and 100 billion euros ($90 to $128 billion) on bond purchases this year if interest rates on Spanish and Italian debt rise again “sharply”, Der Spiegel reported, citing internal information used at the central bank. The figures are based on a scenario under which the ECB buys 10 to 14 percent of bonds eligible under the new plan, Der Spiegel said. The European Commission sees a Spanish request for ESM aid as “probable”, the German magazine said, citing a member of the Commission it did not name.
• Monti Says Public Sentiment Undermining Leaders’ Crisis Fighting. Italian Prime Minister Mario Monti said euro-skepticism among voters is undermining the progress leaders have made fighting the sovereign debt crisis. “It’s paradoxical and sad,” Monti said today in Cernobbio, Italy, in a statement to reporters. “One can’t help note a growing and dangerous sentiment of antagonism in member states.” The three-year crisis has taken its toll on voters from Greece to Paris and produced a surge in popularity for politicians who oppose European integration. In Italy, Monti’s parliamentary coalition has lost ground in opinion polls to euro-skeptic comedian Beppe Grillo, even as the prime minister’s policies helped lower the country’s borrowing costs. “Just when we hoped to complete the integration both at a psychological level and in the public opinion -- so eventually at the political level -- we are rather witnessing the opposite trend,” said Monti as he stood next to European Union President Herman Van Rompuy. Monti cited, “a number of conflicts aiming at disintegration in almost all member states.”
• Hollande’s Approval Rating Drops to 40 Percent, Le Parisien Says. President Francois Hollande’s popularity dropped as a majority of French people now disapprove of his work, a BVA poll published in Le Parisien newspaper showed. Hollande’s approval rating dropped 22 percentage points to 40 percent from the previous BVA poll released May 31, according to the newspaper. Dissatisfaction with Hollande’s presidency rose to 59 percent, the survey showed.
• Hollande May Cut 2013 French Growth Forecast to 1%, JDD Says. French President Francois Hollande may lower the country’s 2013 economic growth forecast to 1 percent, Le Journal du Dimanche reported, without citing anyone. Hollande may unveil the cut from the initial 1.2 percent forecast during his television interview later today. He may also announce the first elements of the 2013 budget, which is due to be unveiled at the end of the month, the weekly newspaper said today. Hollande last week pledged to stick to his 3 percent budget deficit target and may today announce taxes increases of as much as 20 billion euros ($25.6 billion), JDD said.
• Ireland Is ‘Pushed’ by Troika on Tax and Welfare, Post Reports. Ireland’s government is being “pushed” to make faster progress on a property tax and a reform of social welfare by the troika of the International Monetary Fund, the European Union and the European Central Bank, the Sunday Business Post reported, without citing anyone. The IMF’s quarterly report on the country will be published tomorrow and will say that aspects of Ireland’s social welfare system are “unsustainable” while a property tax should be implemented quickly, the Dublin-based newspaper reported.
• Hu Says China’s Growth Is Facing ‘Notable Downward Pressure’. Chinese President Hu Jintao said a slowdown in exports is putting downward pressure on the world’s second-biggest economy, and he pledged to boost domestic demand and promote more balanced growth. “Economic growth is facing notable downward pressure, some small and medium enterprises are facing a hard time and exporters are facing more difficulties,” Hu said yesterday at the Asia-Pacific Economic Cooperation CEO Summit in Vladivostok, Russia. “We have an arduous task of creating jobs for new entrants to the labor force.”
• Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%. Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens. Bond market measures from overnight index swaps, which indicate no rise in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
• U.S. Fiscal Cliff Endangers World Economy, Lagarde Tells APEC. U.S. tax increases and spending cuts set to take effect by the beginning of next year pose one of the biggest risks to the global economy, International Monetary Fund Managing Director Christine Lagarde said today. While Lagarde has warned about the U.S. fiscal situation before, this time she took her case directly to leaders attending the Asia-Pacific Economic Cooperation Summit in Vladivostok, Russia. She said the fiscal cliff was one of “three key risks” -- the other two being the euro crisis and medium-term public financing. “We discussed over lunch with the leaders of APEC, the global economic situation, with the three key risks that we see on the horizon,” Lagarde told reporters today. She said there are a “combination of factors that could also increase the vulnerabilities of emerging economies.”
• Hedge Funds Lift Bets to 16-Month High Before Rally: Commodities. Hedge funds raised bullish commodity bets to the highest in 16 months before speculation that policy makers in the U.S., China and Europe will revive global growth pushed prices higher for a sixth week. Money managers increased their net-long positions across 18 U.S. futures and options by 2.3 percent to 1.33 million contracts in the week ended Sept. 4, the highest since May 3, 2011, U.S. Commodity Futures Trading Commission data show. Wagers on a silver rally climbed for a sixth week and to the highest since Feb. 28, while those for cocoa jumped 57 percent to the most since May 2010.
• Scrap-Steel Futures Debut on CME as Global Demand Increases. CME Group Inc. (CME), the owner of the world’s biggest futures exchange, is betting that a surge in demand for recycled steel and price swings will drive trading in its scrap futures that start today. The contract will be the first ferrous-scrap futures available to the U.S. steel industry, according to Chicago-based CME. It will complement hot-rolled coil steel derivatives that the exchange already offers, said Youngjin Chang, the director of metals research and product development at CME Group.
• BP Is Said to Near $6 Billion Sale of Gulf Assets to Plains. BP Plc is in advanced talks to sell a group of oilfields in the Gulf of Mexico to Plains Exploration & Production Co. (PXP), said two people with knowledge of the matter.

Wall Street Journal:

• Banks Rethinking Executive Pay. Directors at J.P. Morgan Chase & Co. and Citigroup Inc. are wrestling with new approaches to executive compensation, in a bid to respond to a series of management miscues this year, said people close to the institutions. At J.P. Morgan, the biggest U.S. bank by assets, directors are considering lower 2012 bonuses for Chief Executive James Dimon and other top executives in the wake of a multibillion-dollar trading disaster, said people close to the discussions. But they also are grappling with the question of how to do that without drastically reducing the executives' take-home pay, the people said.
• Toys 'R' Us Rolls Out Its Own Tablet. In a bid to battle the "showrooming" phenomenon that is hurting big-box retailers, Toys "R" Us Inc. is expected to disclose Monday that it plans to sell a proprietary tablet designed for children.
• U.S. Plans $18 Billion Sale of AIG(AIG) Stock. The Treasury Department said it would sell $18 billion of American International Group Inc. stock in a public offering, slashing its stake by more than half and making the government a minority shareholder for the first time since the financial crisis was roaring in September 2008.
• Inspectors Reject Some Cuts By Greece.
• Gold Jumps in Bet on Fed Action.
• Charles G. Koch: Corporate Cronyism Harms America. When businesses feed at the federal trough, they threaten public support for business and free markets.

Marketwatch.com:

• China bank loans strain steel sector. Firms that cross-guaranteed loans are struggling in weak market.

Business Insider:

• REPORT: Merkel Is Getting Ready To Cave On Greece. First Merkel endorses the ECB's action to buy unlimited amounts of sovereign debt. Now this. According to Reuters, the German magazine Der Spiegel is reporting that Angela Merkel is getting ready to agree to give Greece more leniency on its bailout so it can stay in the Eurozone.
• Work Force Participation Is At A 31-Year Low And The Details Spell CRISIS.
• These Charts About The Global Economy Will Give You Cold Sweats.
• The Truth About The ECB's Plans To 'Sterilize' Its Purchases Of Government Debt.
• Draghi's 'Rescue' Might Deepen Pain For The Recession-Hit South.

Zero Hedge:

• Subprime Auto Nation.
  
• Uncle CyberSam Prepares To Defend Your Internet For You.
• Is The Fed Losing Faith... In Itself?
• 54% Of Germans Hope Krimson Kardinals Just Say "Nein" To ESM, As Greece Is Once Again On The Edge.
• The Biggest Shock From This Friday's Payroll Report (Sorry Men).
• Five Years Since The Great Financial Crisis: "No Growth, No Deleveraging"

CNBC:

• Italy Has No Plans to Access ECB Bond-Buying Plan: Monti. Italian Prime Minister Mario Monti said he is not expecting Italy to access the European Central Bank's new bond-buying program anytime soon in an exclusive interview with me for CNBC's "Closing Bell."
• China's Factories Run at Lowest Rate in 39 Months. Industrial output growth slowed to 8.9 percent year on year, the weakest since May 2009 and below market forecasts of a 9.1 percent rise, data from China's National Bureau of Statistics (NBS) showed on Sunday. Fixed asset investment, which accounted for half of China's net economic growth in the first-half of 2012, grew 20.2 percent between January and August compared to the year earlier period, a touch below expectations for a 20.4 percent expansion.
• China August Imports Shrink 2.6%; Exports Grow. China's imports fell by 2.6 percent on year in August, while exports grew by a less-than-expected 2.7 percent, the customs administration said on Monday. The country logged a trade surplus of $26.7 billion, topping forecast of $19.8 billion, from July's $25.1 billion. China's trade outlook for 2012 is worsening, darkened especially by growing problems in Europe, the Commerce Ministry said last month.
• Downturn in China Spreads to Key Sectors.

New York Times;

• Construction and Real Estate Hinder China’s Growth. With more than 100 tall cranes on the skyline, this metropolis in western China looks vibrant at first glance despite the country’s sharp economic slowdown. But only a few cranes — those building national government projects like a high-speed rail line — are floodlit and busy far into the night. The more numerous cranes looming above the skeletons of future high-rises move much less often, even by day, and are dark and deserted by night. The pattern among Chengdu’s construction cranes is evident across the country. As summer fades into autumn, Beijing is stepping up investment in a bid to rescue the economy, but consumers, businesses and debt-burdened local governments in China are showing little interest in spending money again.

The Daily Caller:

• The Obamacare Fallacy: Bigger is better.
  

Reuters:

• Germany should back growth or leave euro-Soros. Germany should leave the euro zone if it is not prepared to take a more decisive lead in helping the euro zone's weaker nations escape a spiral of increasing indebtedness and economic decline, veteran financier George Soros said on Saturday. Soros said Europe faced a prolonged depression and an acrimonious end to the European unification project if steps were not taken to help its southern nations grow their way out of the debt crisis by collectively assuming some of their debt and relaxing its German-led insistence on austerity. "Germany should either lead in developing a growth policy, political union and burden-sharing, accept the cost of leadership, or leave through an amicable arrangement," Soros said in an interview with Reuters television in Vienna.
• Spaniards see European rescue as inevitable: poll. The vast majority of Spaniards believe it is inevitable the country will be rescued by the European Union as their confidence in the government continues to slide, according to a poll published on Sunday. Seventy-two percent of those questioned by polling agency Metroscopia thought Spain would be rescued by the EU, up from 62 percent who believed the same a month ago. The poll showed a fall in support for Prime Minister Mariano Rajoy with 73 percent saying they did not think he was doing a good job. It showed that 84 percent of people had little confidence in Rajoy, with even 59 percent of voters of his People' Party (PP) saying the same.
• Iraq blasts kill 100 as fugitive VP gets death sentence. Car bombs tore through mainly Shi'ite Baghdad districts on Sunday after Iraq's fugitive Vice President Tareq al-Hashemi was sentenced to death, as more than 100 people were killed across the country in one of the bloodiest days this year. Hashemi's sentencing in absentia and the violence threatened to further stoke sectarian tensions in Iraq where a Shi'ite-led government is battling political deadlock and a Sunni Islamist insurgency nine months after U.S. troops left. A senior Sunni politician, Hashemi fled Iraq after the authorities issued a warrant for his arrest in December, a move that threatened to collapse a fragile power-sharing deal among Shi'ite, Sunni and Kurdish blocs. After Sunday's court ruling, bombs tore through six mainly Shi'ite neighborhoods around Baghdad, one going off outside a restaurant and another in a busy commercial district, following earlier bombs that had hit other cities nationwide. "I heard women screaming, I saw people running in all directions, chairs scattered in the street. My windows were blown out, my mother and two kids were injured too," said Alla Majid, still shaking after a blast in Baghdad's Sadr City.
• EU banks face ring-fence on trading assets-FT. Europe's big banks could be forced to protect trading assets as the consensus recommendation of an European Union-wide review is due to be completed next month, the Financial Times reported on Monday. The Liikanen review was set up in November by Michel Barnier, the EU commissioner in charge of regulation, to review of the structure of Europe's banks. The newspaper cited people close to the project as saying a clear majority was in favour of a combination of a ban on so-called proprietary trading and a ring-fence on retail banking activities. Two people cited by the FT said the 11-member Liikanen committee had made particularly good headway towards a unanimous view at a meeting in Brussels last week. At least seven are thought to support a trading ring-fence.
• France's Hollande says 75 pct tax to last around 2 years.
• U.S. gasoline rises 8 cents a gallon. The national average price of a gallon of regular gas was $ 3.838 o n Sept. 7, u p f rom $3.759 on Aug. 24, said Trilby Lundberg, editor of the Lundberg Survey, which covers some 2,500 gas stations nationwide.
• German MP makes new court complaint against euro plans. A lawmaker from Angela Merkel's conservatives has lodged a new complaint with Germany's top court over euro zone bailouts, but legal experts and MPs say this is unlikely to prevent the court from making a key ruling on the bloc's rescue fund this week.

Financial Times:

• US companies gloomy about earnings growth. During the latest reporting season S&P 500 groups were three times more likely to say they would miss analysts’ expectations of third-quarter earnings than beat them. That was the worst guidance ratio since the final quarter of 2008, immediately after the collapse of Lehman Brothers.

Telegraph:

• Regulators must shine a light on 'shadow banking'. In 2008, the developed world’s banking system suffered a huge crisis and only bank bail-outs prevented financial meltdown. Despite these rescues, a “Great Recession” has followed.
• Carthaginian terms for Italy and Spain threaten Draghi bond plan. The cold douche begins. Markets will now learn that the European Central Bank's bond plan is a devout wish, not a done deal. Europe's political minefield lies ahead.
• What if Spain refuses to play Mario Draghi’s game?

Bild am Sonntag:

• German Finance Minister Wolfgang Schaeuble says governments must not reduce reform efforts following the ECB's announcement that it plans to buy euro-area bonds. Markets are not confident the euro will survive, he said. Euro area members must cut deficits, improve competitiveness, he said. The ECB should not be used for government financing, Schaeuble said.
  

El Economista:

• Spanish Prime Minister Mariano Rajoy is planning to delay a bailout request until after Galicia region holds elections, citing people familiar with the situation. Galicia holds elections Oct. 21. Spain will hold 6 bond sales from now to Oct. 21.

Financial News:

• China 2013 consumer prices may rise around 3%-4%, citing Ba Shusong, a researcher at the State Council's development research center.

China Securities Journal:

• China Interest Rate Cut Much More Unlikely. The likelihood of the Chinese central bank cutting interest rates again this year has greatly dropped as inflation rebounds, according to a front-page commentary published today. Using interest rates as a monetary policy tool may "fade out" in the short term and may enter an "observation period," according to the commentary written by Ren Xiao.
  

Weekend Recommendations

Barron's:

• Made positive comments on (TSO), (BZH), (LEN), (HD) and (DHI).

Night Trading

• Asian indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 133.50 -8.0 basis points.
• Asia Pacific Sovereign CDS Index 114.50 -6.5 basis points.
• FTSE-100 futures -.17%.
  
• S&P 500 futures -.31%.
• NASDAQ 100 futures -.22%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JW/A)/.73
• (CASY)/.95
• (PANW)/.00
• (TITN)/.43
  

Economic Releases
3:00 pm EST

• Consumer Credit for July is estimated to rise to $9.55B versus $6.46B in June.

Upcoming Splits

• (ODFL) 3-for-2
  

Other Potential Market Movers

• The Italian GDP report, Greece Industrial Production report, Morgan Stanley Healthcare Conference, Barclays Financial Services Conference, KeyBanc Basic Materials/Packaging Conference and the (CSC) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial 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 week.