Stocks Lower into Final Hour on Rising Global Growth Fears, Rising Eurozone Debt Angst, Growing Mid-east Tensions, Earnings Concerns

Broad Market Tone:

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

Equity Investor Angst:

• VIX 14.66 +1.03%
  
• ISE Sentiment Index 120.0 -41.46%
  
• Total Put/Call .85 +25.0%
  
• NYSE Arms 1.21 +49.56%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 84.95 bps +2.29%
  
• European Financial Sector CDS Index 189.06 bps +2.17%
  
• Western Europe Sovereign Debt CDS Index 173.13 +1.38%
  
• Emerging Market CDS Index 195.30 +1.05%
  
• 2-Year Swap Spread 12.75 +.25 basis point
  
• TED Spread 29.0 +.25 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -19.0 -2.25 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .09% -1 basis point
  
• Yield Curve 159.0 -2 basis points
  
• China Import Iron Ore Spot $105.10/Metric Tonne +3.44%
  
• Citi US Economic Surprise Index 19.10 -1.3 points
  
• 10-Year TIPS Spread 2.59 -5 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating +3 open in Japan
• DAX Futures: Indicating -15 open in Germany
  

Portfolio:

• Slightly Higher: On gains in my Biotech/Medical sector longs and index hedges
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges
  
• Market Exposure: Moved to 25% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near session lows on more disappointing US economic data, high food/energy prices, growing Mid-east unrest, US "fiscal cliff" worries and rising global growth fears. On the positive side, Biotech and Tobacco shares are especially strong, rising more than +.75%. The UBS-Bloomberg Ag Spot Index is down -2.8%, Oil is down -2.9% and Gold is falling -.8%. Major Asian indices were mostly higher overnight, boosted by a +.42% gain in India. However, the Shanghai Comp fell -2.1%. This index is down -2.64% over the last week despite sharp gains in the rest of Asia and is down -5.5% ytd. As well, the Shanghai Property Stock Index fell -3.8% overnight and is down -5.9% over the last 5 days. The Germany sovereign cds is down -1.7% to 48.34 bps and the France sovereign cds is down -1.2% to 96.59 bps. On the negative side, Coal, Steel, Paper, Computer, Semi, Disk Drive, Networking, Bank, I-Banking, Homebuilding, Education and Road & Rail shares are especially weak, falling more than -1.5%. Transport, Homebuilding and Financial shares have traded poorly throughout the day. Major European indices are lower today, weighed down by a -.9% decline in Italy. The Bloomberg European Bank/Financial Services Index is down -.14%. Brazilian shares are -.7% lower today. The Spain sovereign cds is up +3.8% to 355.27 bps, the Italy sovereign cds is up +3.1% to 318.62 bps, the Russia sovereign cds is gaining +3.45% to 129.97 bps. Moreover, the European Investment Grade CDS Index is rising +1.9% to 120.37 bps, the Spain 10Y Yld is gaining +3.3% to 5.97% and the Italian/German 10Y Yld Spread is rising 3.7% to 343.21 bps. The UBS/Bloomberg Ag Spot Index is up +24.5% since 6/1. The benchmark China Iron/Ore Spot Index is down -41.9% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, 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 +2.6%. US Trucking Traffic continues to soften. Moreover, the weekly MBA Home Purchase Applications Index 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 +404.0% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 27.50 industry-standard worldscale points, which is 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 is 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. As I have been warning for awhile, the Mid-east is unraveling again at an alarming rate. 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. 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, technical selling and rising global growth fears.

Today's Headlines

Bloomberg:

• Spanish Banks Bleeding Cash Cloud Bailout Debate: Euro Credit. Spanish banks, already hooked on cheap European Central Bank loans, are hemorrhaging deposits as the government debates whether to seek a bailout. Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain. Shrinking deposits undermine the ability of banks to support economic growth by lending to companies and consumers. “There are significant outflows of deposits now in Spain and they won’t start coming back until people are sure they’re safe and that Spain is secure,” said Simon Maughan, a financial strategist at Olivetree Securities Ltd. in London.
• Spanish 10-Year Yield Rises to 6% as Bonds Slide for Third Day. Spanish 10-year bonds extended their decline, falling for a third day and pushing the yield on the securities to 6 percent. The rate climbed 22 basis points, or 0.22 percentage point, to 6.00 percent as of 3:01 p.m. London time, the highest level since Sept. 7.
• ECB to Set Up Repo Database as EU Moves to Rein in Shadow Banks. The European Central Bank plans to boost oversight of trading in repurchase agreements by setting up a transactions database amid a push by regulators to rein in so-called shadow banking, a European Union document shows. Michel Barnier, the EU’s financial services chief, raised the plan at a meeting of European Union finance ministers and central bankers in Nicosia, Cyprus, on Sept. 14-15, according to the document, whose authenticity was confirmed by an EU official. The database would cover the European market for repos. The official spoke on condition of anonymity because the talks are private. Barnier told the meeting that he is working on regulations targeted at “key actors” in the shadow-banking system, in particular money-market mutual funds, according to the document.
• European Stocks Slip From 15-Month High; SSAB Tumbles. SSAB sank 6.9 percent as the Swedish steelmaker said demand for strip products has been much weaker than expected. Hennes & Mauritz AB slid 1.6 percent after third-quarter sales missed estimates.
• Dry-Bulk Hire Costs Fall to 45-Month Low on Atlantic Cargo Slump. Hire costs for Panamax vessels, the largest to transit the Panama Canal, slumped to the lowest in three years and nine months, as a shortage of cargoes in the Atlantic Ocean region worsened an oversupply of ships. Average daily returns declined for a 17th day, falling 3.9% to $3,833, according to the Baltic Exchange. Rates have plunged 40% in four weeks and are within 8.4% of the record low recorded on Dec. 12, 2008, exchange data show.
• Slowdown Seen in U.S. Manufacturing With Parker Hannifin. Illinois Tool Works Inc. (ITW) and Parker Hannifin Corp. (PH), which will be releasing their quarterly results next month, are showing why the U.S. economy is maintaining a slow expansion. Both could see their total revenue fall “slightly,” primarily because of “adverse currency translation” and also because of disappointing sales in Europe and Asia, according to Robert McCarthy, a senior analyst with Robert W. Baird & Co. in Chicago. While it’s “incrementally more difficult” to forecast order growth in North America, it probably didn’t contract for either company in the three months ending Sept. 30, as this business segment continues to expand, he said.
• China-Japan Dispute Over Islands Risks $340 Billion Trade. China and Japan’s worst diplomatic crisis since 2005 is putting at risk a trade relationship that’s tripled in the past decade to more than $340 billion. Toyota Motor Corp. (7203), Honda Motor Co. (7267) and Panasonic Corp. (6752) reported damage to their operations in China as thousands marched in more than a dozen cities on Sept. 16 after Japan last week said it will purchase islands claimed by both countries. Protesters called for boycotts of Japanese goods and in some instances smashed store fronts and cars.

Wall Street Journal:

• U.S. Balks at GM(GM) Plan to Sell Government Stake at Huge Loss Before Election. Government Is Reluctant to Sell Auto Stake at a $15 Billion Loss. The Treasury Department is resisting a push by General Motors GM Co. to sell the government's entire stake in the auto maker—the latest source of tension between two unlikely partners thrust together at the depths of the financial crisis. U.S. taxpayers kept the nation's largest auto maker by sales afloat with a $50 billion bailout in 2009 and now own 26.5% of the Detroit company. But GM executives have grown increasingly frustrated with that ownership, and the stigma of being known as "Government Motors." Executives have said the U.S.'s shadow is a drag on its reputation and hurts the company's ability to recruit talent because of pay restrictions. Privately, executives are also irked at the continued curbs on corporate jet use. Earlier this summer, GM floated a plan with Treasury officials to repurchase 200 million of the roughly 500 million shares the U.S. holds in the auto maker, according to people familiar with the discussions. Under the plan, Treasury would sell the remaining shares through a public stock offering. But Treasury officials aren't interested in GM's offer at the current price and aren't in a rush to offload shares, according to people familiar with the matter. The biggest reason: A sale now would leave the government with a hefty loss on its investment. At GM's Friday share price of $24.14, the U.S. would lose about $15 billion on the GM bailout if it sold its entire stake. While GM stock would need to reach $53 a share for the U.S. to break even, Treasury officials would consider selling at a price in the $30s, people familiar with the government's thinking have said.
• B-School Applicants Decline for Four Years. The business-school numbers are in and they aren't pretty. Applications for two-year, full-time M.B.A. programs that start this fall declined for the fourth year in a row, according to new data from the Graduate Management Admission Council, which administers the Graduate Management Admission Test. The median number of applications world-wide fell 22% in 2012 for the two-year degrees, after a nearly 10% decline last year.
• Chicago Teacher Strike Moves to Courtroom. The teacher strike that has shut 350,000 students out of classes will continue for at least another day, as a judge declined Monday to immediately rule on a city lawsuit seeking to force teachers back into the classroom. The Chicago school district, under the control of Mayor Rahm Emanuel, had asked a Cook County Circuit Court judge to prohibit the Chicago Teachers Union from striking on grounds that it is illegal.
• BASE METALS: Weaker Manufacturing Data Weigh on Copper. Copper futures fell Monday on unexpected declines in the New York Federal Reserve's manufacturing activity index and amid pressure from a stronger dollar. The most actively traded contract, for December delivery, was recently down 2.45 cents, or 0.6%, at $3.8080 a pound on the Comex division of the New York Mercantile Exchange. The Empire State business conditions index fell to minus 10.41 in September, after it plunged more than 13 points to minus 5.85 in August. The index has been declining since May, though economists had forecast a much healthier reading of 0 for September.
• Protests Turn Violent Around Asia. Hundreds of protesters demonstrating against an anti-Islam film torched a press club and a government building in northwest Pakistan on Monday, sparking clashes with police that left at least one person dead. Rioting demonstrators battled with police outside a U.S. military base in Afghanistan and the U.S. Embassy in Indonesia. In Lebanon, thousands of followers of Lebanon's powerful Hezbollah militant group are rallying against an anti-Islam film that has provoked a week of unrest in Muslim countries worldwide.
• Violent Protests in Kabul, Jakarta (pics).

MarketWatch:

• Moody's lowers 2013 growth forecast for auto sales. Moody's Investors Service said it has lowered its growth forecast for global auto sales in 2013 amid sluggish demand in Europe and weakening sales in China. The ratings company projected growth in global light-vehicle sales of 2.9% for next year, down from its January forecast for a 4.5% increase.

CNBC.com:

• Brusca: China's 'Truth' and Consequences. It is not as though China is being singled out. US energy giant Enron cooked its books. Greece, got help playing hide and seek from the facts using Goldman Sachs’ advice, and hid a pile of its debt to join the European Monetary Union. Bankers have long come to mistrust official data when they make lending decisions in the international realm. But how do they pick and choose who to believe?
• Shine Comes Off Euro Membership, Even for Poorest Country. Once seen as a crowning moment in a long process for new EU states aspiring to full integration, even the EU's poorest member is now having second thoughts.

Business Insider:

• Look How Much Less Americans Can Afford Now Compared To Six Years Ago.
• We Asked David Kotok What His Biggest Economic Fear Was, And What Told Us Was Absolutely Terrifying.
• The 16 Most Insane Images From The Anti-Japan Protests In China.
• 1000 Chinese Boats Now Setting Sail Towards Disputed Islands. (video)
• Wall Street Pros Tell Us The #1 Thing That Could Wreck This Rally.
• Bob Woodward Says Obama Is 'In Over His Head'.

Zero Hedge:

• Empire Manufacturing Index Prints At Lowest Since April 2009. (graph)
• What's More Important - Growth Or Policy? (graph)
• Japanese Businesses Shuttering Chinese Facilities As Mainland Anger Spreads.
• Full Summary Of The Latest In Anti-American Sentiment. (map)
• Update: The San Fran Fed Asks What People Think Of QE3: The People Respond.
  

Rasmussen Reports:

• 53% Favor Repeal of Health Care Law. The latest Rasmussen Reports national telephone survey finds that 53% of Likely U.S. Voters favor repeal, while 43% are opposed. This includes 45% who Strongly Favor repeal of the health care measure and 33% who are Strongly Opposed.
• Swing State Daily Tracking: Romney 47%, Obama 45%.

Reuters:

• France calls emergency G20 grains meeting for mid-Oct. France has called an emergency meeting of G20 farm ministers for mid-October to discuss curbing price swings on grain markets, the French president's office said, after a year of drought and record prices renewed fears of a crisis in food supplies. France currently presides over a grains body created last year under the Group of 20 major economies and it has made several proposals in recent days, including the development of strategic stocks and a halt in the expansion of biofuels that use food crops.
• Muslim protesters rage at United States in Asia, Middle East.
• Schwab trading volumes fall in August. Charles Schwab Corp said on Monday its trading volumes fell 31 percent in August from a year earlier, highlighting the difficult environment for brokerage firms due to disengaged retail investors and low volatility in the markets. Schwab, one of the largest U.S. brokerages, said its clients made an average of 375,900 trades a day in August, down 31 percent from August 2011 and down 5 percent from July.
• Hezbollah leader warns U.S. over Prophet film. Hezbollah leader Sayyed Hassan Nasrallah made a rare public appearance on Monday to warn the United States that it faced further anger and repercussions across the Muslim world unless it suppressed a video that mocks the Prophet Mohammad. "The world should know our anger will not be a passing outburst but the start of a serious movement that will continue on the level of the Muslim nation to defend the Prophet of God," Nasrallah told tens of thousands of marchers in Beirut's southern suburbs.

Die Welt:

• ArcelorMittal warns against the costs of the energy shift in Germany leading to potential factory closures, citing an interview with Lutz Bandusch, the co.'s head in Hamburg. Steel companies will have to pay an additional $2 billion a year as of 2013, he said.
  

Bear Radar

Style Underperformer:

• Small-Cap Value -1.10%

Sector Underperformers:

• 1) Homebuilders -2.04% 2) Education -2.03% 3) I-Banking -1.32%

Stocks Falling on Unusual Volume:

• CLF, VLTR, BMA, BAC, UIL, BIP, THLD, ACHN, CAF, CHL, NTES, SHS, SWC, SBS, RKT, VMC, GSM, KEYW, PNW, ADI, BECN, PCH, NRGY, MBT, MNRO, BLOX, SATS, NU, EW, RS and WPRT
  

Stocks With Unusual Put Option Activity:

• 1) RVBD 2) TYC 3) XHB 4) HD 5) AFL
  

Stocks With Most Negative News Mentions:

• 1) NAV 2) CLF 3) OPEN 4) VLO 5) WFC
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth +.15%

Sector Outperformers:

• 1) Biotech +.51% 2) Tobacco +.36% 3) Drugs +.34%

Stocks Rising on Unusual Volume:

• ONXX, JAZZ, WCN, GILD and CIE
  

Stocks With Unusual Call Option Activity:

• 1) PAAS 2) IAG 3) EDU 4) GILD 5) ONXX
  

Stocks With Most Positive News Mentions:

• 1) RTN 2) BLMN 3) HST 4) F 5) ADS
  

Charts:

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

Monday Watch

Weekend Headlines
Bloomberg:

• Netanyahu Says Iran’s Nuclear Program Is in a ‘Red Zone’. Israeli Prime Minister Benjamin Netanyahu said Iran’s effort to develop nuclear weapons is now in a “red zone”, and the U.S. must set a clear “red line” that Iran can’t cross without risking a military attack. “They’re in the red zone,” Netanyahu said in an interview on NBC News “Meet the Press,” according to a transcript. “You know, they’re in the last 20 yards. And you can’t let them cross that goal line. You can’t let them score a touchdown.”
• European Squabbling on Currency Crisis Solution May Test Rally. Squabbling among European governments over the next steps needed to overcome the region’s sovereign debt crisis raised the specter of renewed turmoil as last week’s market rally eased pressure to forge a common path. A Sept. 14 European Union finance ministers meeting in the Cypriot capital of Nicosia deadlocked over the timetable for a more unified EU banking sector, with a German-led coalition pushing back against a more ambitious plan sought by France, Spain and Italy. The ministers also bickered over the terms of bailout requests and the role of the European Central Bank. “Experience suggests that just as day gives way to night, improvement gives way to policy complacency, which is then followed by renewed crisis,” Joachim Fels, chief economist at Morgan Stanley in London, wrote in a note yesterday.
• Finance Industry Warns of ‘Cliff Effect’ in ECB’s Bond Plan. The Institute of International Finance warned that the European Central Bank’s plan to buy sovereign bonds may result in a “cliff effect” if a country fails to meet conditions tied to the purchases. Termination of bond purchases could lead to an “abrupt” market correction, the IIF’s market monitoring group said in a statement today. Some countries may also be put off from seeking aid because of the requirements, said the Washington-based IIF, which represents more than 450 financial companies.
• German Savings Banks Disagree on Deposit Guarantees With Barroso. The German DSGV savings banks association opposes a plan by the European Commission for a common European deposit insurance with funds set aside by the lenders and cooperative banks, DSGV President Georg Fahrenschon said.
  
• Former China Banking Regulator Liu Calls Fed's QE3 Irresponsible. Liu Mingkang, former chairman of the China Banking Regulatory Commission, called the U.S. Federal Reserve's latest round of quantitative easing "irresponsible." QE3 is "irresponsible to the U.S., and also irresponsible to us," he said in an interview in Beijing, declining to elaborate.
• Hong Kong Adds Curbs to Cool Home Prices as Fed Starts QE3. Hong Kong has widened efforts to cool home prices that have gained almost 90 percent since early 2009, as the U.S. Federal Reserve’s third round of quantitative easing risks fueling asset bubbles in the city.
• China’s Stocks Drop Most This Month on Policy, Growth Concerns. China’s stocks fell the most this month on speculation the government won’t ease monetary policy as quickly as anticipated and after Citigroup Inc. said the economic growth slowdown will extend into next year. Poly Real Estate Group Co. plunged 6 percent, leading declines for property developers, after Chinese home sales slumped. China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, dropped more than 2 percent after Citigroup cited slumping export demand in cutting its growth forecast. The Federal Reserve’s economic stimulus plan will stoke inflationary pressure, reducing the room for looser policies, according to Industrial Securities, top-ranked for equity strategy research by New Fortune magazine. The Shanghai Composite Index (SHCOMP) slid 1.3 percent to 2,096.03 at 11:08 a.m. local time, dragged down by a 3.5 percent slide for a gauge of property stocks.
• China-Japan Island Dispute Grows in ‘Blow’ for Global Economy. A territorial dispute between China and Japan worsened as Prime Minister Yoshihiko Noda said he’ll demand the Chinese government ensure the safety of Japanese citizens, thousands protested in Chinese cities and Toyota Motor Corp. (7203) and Panasonic Corp. (6752) reported damage to their operations. Demonstrators took to the streets in a dozen cities across China including Beijing, Shanghai and Guangzhou, calling for Chinese sovereignty over disputed islands and the boycott of Japanese goods. In the city of Shenzhen, police used tear gas and water cannons to stop protesters from reaching a Japanese department store, Radio Television Hong Kong reported. “I intend to strongly demand that the Chinese government ensure security” of Japanese citizens, Noda said yesterday on public broadcaster NHK’s “Sunday Debate” program.
• China Commerce Minister Chen Deming says foreign trade faces greater challenges for a "period of time" in the future as it is hard for the external trade environment to show "obvious" improvements, according to a statement posted to the ministry's website yesterday.
• Singapore Exports Drop More Than Estimated on Electronics. Singapore’s exports fell more than economists estimated in August as shipments of electronics dropped and companies sold fewer goods to Europe. Non-oil domestic exports slid 10.6 percent from a year earlier, after a revised 5.7 percent increase in July, the trade promotion agency said in a statement today. The decline exceeded all 15 estimates in a Bloomberg News survey, where the median was for a 4 percent drop. Singapore’s electronics shipments by companies such as Venture Corp. fell 11 percent in August from a year earlier, after climbing 2 percent the previous month.
• Bullish Commodities Wagers at 16-Month High on QE3 as Citi Sees Gains. Bullish commodity wagers rose to a 16-month high just before the Federal Reserve’s pledge for more stimulus drove prices to a seventh weekly advance and banks from HSBC Holdings Plc to Citigroup Inc. forecast more gains. Hedge funds and other speculators lifted their net-long positions across 18 U.S. futures and options by 0.3 percent to 1.33 million contracts in the week ended Sept. 11, the most since May 2011, U.S. Commodity Futures Trading Commission data show. Copper holdings surged 25-fold to 17,509 contracts, the biggest gain on record. Gold bets climbed to the highest since Feb. 28, and silver wagers advanced for a seventh week.
• Fed’s Lacker Opposed QE3 as Tantamount to Fiscal Policy. Richmond Federal Reserve President Jeffrey Lacker said that he opposed the central bank’s third round of quantitative easing in mortgage-backed securities because allocating credit should be the province of fiscal authorities such as the U.S. Treasury or Congress. “I strongly opposed purchasing additional agency mortgage- backed securities,” Lacker said in a statement released yesterday by the Richmond Fed. “Such purchases, as compared to purchases of an equivalent amount of U.S. Treasury securities, distort investment allocations and raise interest rates for other borrowers.”
• Korea Department Store Sales Fall Most Since at Least ’05. Sales at major South Korean department stores declined the most since at least 2005 in August as Europe’s debt crisis weighed on consumer sentiment and a national holiday fell later in the year. Outlays at the three biggest chains declined 6.9 percent from a year earlier in August after a 1.3 percent drop in July, the Ministry of Knowledge Economy said in a statement today. Discount-store sales slipped 3.3 percent last month, the report showed. The ministry’s comparable sales data begin in January 2005.
• U.S. Banks Ignore Europe’s Lesson on Greed. Four years after the collapse of Lehman Brothers Holdings Inc. and the near-total paralysis of capitalism’s central nervous system -- the moment fear completely overwhelmed greed on Wall Street -- we are starting to see a few glimmers of hope. The good news: Several big banks have finally started taking steps to reform Wall Street’s out-of-control compensation system, which rewards bankers and traders with big bonuses for taking insane risks with other people’s money. The bad news: These banks are in Europe, and most of their U.S. cousins still just don’t get it.

Wall Street Journal:

• Internal Rifts Color Anti-U.S. Protests. Fierce anti-American protests waned around the Middle East on Sunday, but the delicate, often tense politics that helped fuel them will be the defining dynamic in the region for some time, politicians and analysts warned. In Egypt, a presidency that is headed by an Islamist has struggled to connect with an old-regime Interior Ministry that is controlled and staffed by longtime opponents of political Islam. Along with the Egyptian presidency's own slowness to curb a protest initially called by Islamists in the wake of last week's release of a vulgar video depicting the Muslim prophet that fueled anger at U.S. foreign policy, the friction between Egyptian leadership and security forces appears to have undermined defense of the U.S. Embassy in Cairo as demonstrators stormed the compound.
• Slow Path to Policing Europe Banks. Agreeing What Will Make the New Banking Supervisor 'Effective' May Hinder Rapid Establishment. When euro-zone leaders decided in June to equip the European Central Bank with new powers to police banks in the currency union, the agreement appeared clear. "When an effective single supervisory mechanism is established," they declared, the euro zone's bailout fund would "have the possibility to recapitalize banks directly."
• SEC Keeps Wary Eye on Exchanges. Fining of NYSE Demonstrates Scrutiny Being Given to New Products Geared to High-Speed Traders.
• Union Votes to Keep Striking. Delegates for Chicago's public-school teachers union voted Sunday night to extend their members' strike into a second week, and Mayor Rahm Emanuel said he would go to court to force them back into the classroom. The city's first teacher strike in a quarter century, which has canceled classes for 350,000 students, has catapulted the nation's third-largest school district into the national debate over teacher evaluations and job security.
• Apple(AAPL) iPhone 5 Preorders Suggest Strong Demand. Apple Inc. appeared to have sold out of its initial inventory of the iPhone 5 just an hour after it began accepting preorders Friday, suggesting strong consumer interest.
• U.S. to File WTO Charges on China.
• The Video Did It. The White House finds a root cause of anti-American violence. The Obama Administration dispatched Ambassador to the U.N. Susan Rice to the talk shows Sunday to explain the outbreak of anti-American protests in the Arab world. Her message: It's all the fault of that 13-minute anti-Islamic video on YouTube. U.S. policies or foreign terrorists have little or nothing to do with it.
• The Magnitude of the Mess We're In. The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.

Marketwatch.com:

• Beware China’s quantitative tightening. Watch the People’s Bank of China, not the Federal Reserve. Some analysts warn China’s money tap is running dry and this could trigger the next major deflationary shock.

Fox News:

• QE3 Sparks U.S. Credit Ratings Downgrade From Egan-Jones. Fearing the negative repercussions of the Federal Reserve’s latest easy-money program, ratings firm Egan-Jones once again slashed the U.S.'s credit rating on Friday. The latest downgrade brings the firm’s rating on the world’s largest economy down to “AA-,” which is three notches below the coveted “AAA” threshold. Egan-Jones said it believes the Fed’s third round of quantitative easing, which sent stock prices surging on Thursday, “will hurt the U.S. economy and, by extension, credit quality.” The firm said that while the program should boost equity markets, issuing additional currency and depressing interest rates through purchasing mortgage-backed securities will hurt the value of the U.S. dollar and cause a painful increase in commodity prices. “In our opinion, QE3 will be detrimental to credit quality for the U.S.,” Egan-Jones said.

Business Insider:

• The Fed Is Committed To Making Food And Gas Even More Expensive.
• Obama's Foreign Policy Of Reconciliation Lies In Tatters.
• Tunisian Embassy Protesters Chanted: 'Obama, Obama, We Are All Osamas'.
• CHART OF THE DAY: The American Paycheck Buys Half As Much Gas As It Did 10 Years Ago.
• Thousands Of Protesters Across Europe Demonstrate What Europe's Next Crisis Will Be.
• America Cannot Escape The Consequences Of Its Massive Deficit.
• Thousands Of Chinese Protesters Besiege Japanese Embassy Over Disputed Islands.
• A Referendum In France Could Blow The Whole Fiscal Union Apart.

Zero Hedge:

• Janet Tavakoli: Understanding Derivatives and Their Risks.
• The Chart Spain's Mariano Rajoy Wishes Could Be Swept Under The Rug.'
• On Covered Bonds, Collateral Crunches, And The Circular Logic Of Central Banks.
• The Fed May Be Pumped Up.
• Visualizing Japan's Debt Crisis.

CNBC:

• European Lenders Hooked on Central Bank Cash. European banks are failing to wean themselves off central bank money, even though steep falls in the cost of collateralised borrowing over the summer mean some now have the option of funding via public markets. Like their US counterparts, European banks can now fund certain loans more cheaply than at any time in four years by bundling them into so-called asset-backed securities (ABS) and selling them to investors with interest backed by cash flow from repayments on products such as credit cards, car loans or mortgages. But the issuance of European ABS to investors is at a three-year low as banks use assets as collateral for central bank funds instead.
• Could Fed's QE Spiral Out of Control? If supply grows more rapidly than expected, prices of the securities could fall. In order to support the prices, the Fed would have to buy ever bigger amounts. This could become a dangerous spiral, in which the Fed has to continuously raise the amount of securities it is purchasing just to keep up with the new supply. Exiting this could be tricky.
• US Jobless Rate Really at 16%, Not 8.1%: Expert. The U.S. unemployment rate of 8.1 percent is probably double that number when you include a host of measures of the jobless rate that are not included in the official data, one professional tells CNBC.
• Romney Hits Obama on Looming 'Fiscal Cliff'. Republican presidential candidate Mitt Romney accused President Barack Obama on Saturday of standing by while a looming budgetary calamity unfolds in Washington.
• Occupy Wall Street Plans to Surround NYSE Monday. Occupy Wall Street marks its first anniversary on Monday, and, in a bid to rejuvenate a movement that has failed to sustain momentum after sparking a national conversation about economic inequality last fall, activists plan once again to descend on New York's financial district.

IBD:

• Amgen(AMGN) Bounces Back On Strong 2012 Performance.

CNN:

• More Details Emerge on U.S. Ambassador's Murder. Three days before the deadly assault on the United States consulate in Libya, a local security official says he met with American diplomats in the city and warned them about deteriorating security.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows Mitt Romney attracting support from 47% of voters nationwide, while President Obama earns 46% of the vote. Three percent (3%) prefer some other candidate, and four percent (4%) are undecided.

Reuters:

• Iran's Revolutionary Guards commander says its troops in Syria. Members of Iran's Islamic Revolutionary Guards Corps (IRGC) are providing non-military assistance in Syria and Iran may get involved militarily if its closest ally comes under attack, commander-in-chief Mohammad Ali Jafari said on Sunday. Jafari's statement is the first official acknowledgement that Iran has a military presence on the ground in Syria where an 18-month-old uprising has left tens of thousands dead. Western countries and Syrian opposition groups have long suspected Iran has troops in Syria. Iran has denied this.
• Japan's ambassador-designate to China dies in Tokyo - ministry. Japan's ambassador-designate to China, Shinichi Nishimiya, died on Sunday in a Tokyo hospital, the Foreign Ministry said, three days after he was found unconscious on a Tokyo street. Doctors were looking into the cause of death, ministry official Takashi Ariyoshi said in a statement, but no other details were available. Nishimiya, 60, was found unconscious on a street near his home on his way to work.
• Probe focuses on JPMorgan's monitoring of suspect transactions. A U.S. regulatory probe of JPMorgan Chase & Co's anti-money laundering systems is focusing on potential lapses in how the largest U.S. bank monitors suspect money transactions, according to people familiar with the situation. The probe appears to be focused on the systems and personnel that JPMorgan uses to safeguard against illicit money flows, the sources said, declining to be identified because they were not authorized to speak to the media.
• Exclusive: Ghost warehouse stocks haunt China's steel sector. Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place. China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth. As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said. Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments. "What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry."

Telegraph:

• The End of China's Easy Growth. The more we learn about China’s vast stimulus plans, the more far-fetched they seem.
• Spain shuns further cuts as unrest grows. Spain is digging in its heels against further austerity as protests sweep the country and mounting tensions with Catalan nationalists threaten to split the country.

Welt am Sonntag:

• Deutsche Bank Says Inflation in Europe 'Unavoidable'. Inflation will be a consequence of current policy to save the euro, citing an interview with co-CEO Anshu Jain.
  

Die Welt:

• Peter Gauweiler, a lawmaker from Merkel's CSU Bavarian sister party, asks German government to take the ECB to the European Court of Justice over its unlimited bond-purchase program, citing an interview.
  

Tagesspiegel:

• Kauder Says Help to Indebted Nations Can Be Denied. Volker Kauder, the floor leader for Merkel's CDU, rejected concern that European indebted countries could be financially helped by the ECB without any conditions in return. The ECB bond program requires governments to seek aid from the rescue fund and the German parliament must have a says in this process, Kauder said. The Bundestag can always ask for conditions in return when a country requests aid and aid can be denied if the country does "in no case" accept this, citing Kauder. Kauder opposes plans to put German savings banks and cooperative banks under the control of a European banking supervisor.
  

WiWo:

• The German government must build a reserve fund of $221 billion to be able to handle at short notice the country's liability risks linked to the ESM, lawmaker Peter Gauweiler said. Germany must now be in a position to meet the ESM's demands for capital at anytime in order to avoid a suspension of Germany's voting rights, Gauweiler said.

Frankfurter Allgemeine Sonntagszeitung:

• The European Commission would file a lawsuit at the European Court of Justice if the ECB went beyond its mandate, Commission President Jose Barroso said in an interview. Barroso said he "doesn't want a European super state".
  

Xinhua:

• China May Face More Pressure to Control Inflation On Fed's QE3. China needs to be more cautious with its monetary policies as quantitative easing in the U.S. will create more pressure to control inflation, citing Lu Zhengwei, chief economist at Industrial Bank Co.

Weekend Recommendations

Barron's:

• Made positive comments on (JWN), (KTOS), (CMP), (MRK), (MCD), (IBM) and (ORCL).
• Made negative comments on (IRM).
  

Night Trading

• Asian indices are -.75% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 112.50 -3.0 basis points.
• Asia Pacific Sovereign CDS Index 95.50 -6.5 basis points.
• FTSE-100 futures -.38%.
  
• S&P 500 futures -.27%.
• NASDAQ 100 futures -.26%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• Empire Manufacturing for September is estimated to rise to -2.0 versus -5.85 in August.

Upcoming Splits

• (LKQ) 2-for-1
  

Other Potential Market Movers

• The Eurozone trade data, India interest rate decision and the China Home Price report could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and commodity shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on rising global growth fears, Eurozone debt angst, US "fiscal cliff" concerns, increasing Mid-east unrest, rising food/energy prices, more shorting and profit-taking. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.