Thursday Watch

Evening Headlines
Bloomberg:

• Euro Can Bear Fewer Members as Czech Leader Calls Greeks Victims. The exit of one or more member states from the euro won’t destroy the monetary union or the project of European integration, Czech President Vaclav Klaus said. And a Greek departure from the currency would be a “victory” for that country, which has been a victim of the monetary system, Klaus said yesterday in an interview at Bloomberg’s headquarters in New York. The Czech Republic, which pledged to adopt the euro as part of its agreement to join the European Union in 2004, is under no official deadline to do so and the question of joining the common currency is a “non-issue” in the country, said Klaus, whose second term as president expires in March. “I don’t think the euro as a currency disappears,” Klaus, 71, said. “The issue is whether all of the 17 countries and potentially a few others should be or will be in this system or not.”
• Gilmore Says Irish Debt Deal Won’t Unravel. Eamon Gilmore, the Irish deputy prime minister, said an accord that paved the way to cut Ireland’s legacy bank debt won’t unravel, seeking to calm investor concern that German-led opposition could derail the agreement. Irish bonds slumped yesterday after finance chiefs from Germany, the Netherlands and Finland indicated a retreat from the June agreement to allow the euro-area bailout fund to recapitalize banks. Their statement on Sept. 25 excluded “legacy assets” from the region’s rescue facility’s responsibility.
• Hollande Sruggles to Match Sarkozy Budget-Gap Wins: Euro Credit. Plugging a budget hole of more than 30 billion euros next year against a backdrop of an economy that hasn't grown in three quarters and joblessness that's at a 13-year high will be a tall order, investors such as Dagmar Dvorak at Baring Asset Management say. Failure to do so may drive money away from French debt. 
• GM(GM)-Peugeot Discussion Said to Slow While Economy Worsens. General Motors Co. (GM) and PSA Peugeot Citroen’s efforts to deepen their alliance have slowed recently amid a worsening European auto market and complicated regulatory review, people familiar with the matter said. The companies have already missed a June 30 deadline on the parts-buying plan. The automakers also aimed to announce as soon as this week at the Paris Motor Show more details on plans to jointly build four model lines using common underpinnings and to combine purchasing efforts, said the people, who asked not to be identified discussing internal negotiations.
• Japan Won’t Compromise With China on Claim to Islands: Noda. Prime Minister Yoshihiko Noda said Japan will never budge on its ownership over islands in the East China Sea also claimed by China, doing little to ease tensions with Asia’s top economic power. While Japan isn’t seeking a military confrontation with China and wants to keep talking “calmly,” the disputed islands “are an inherent part of our territory in light of history and also under international law,” Noda told reporters in New York yesterday. “There can’t be any compromise that would be a step back from this basic position.” Tensions over the islands, known as Diaoyu in Chinese and Senkaku in Japanese, spilled over to an annual gathering of world leaders at the United Nations. The foreign ministers of China and Japan held talks on Sept. 25 in New York that failed to ease a feud damaging a $340 billion trade relationship. The conflict has sparked the worst diplomatic crisis between the two nations since 2005, when thousands of Chinese protested Japanese textbooks that downplayed wartime atrocities. Chinese Foreign Minister Yang Jiechi told Japanese counterpart Koichiro Gemba that China “will not tolerate” Japan’s claims, according to a Chinese Foreign Ministry statement. Gemba described the atmosphere at the meeting as “severe” and emphasized Japan’s “maximum restraint” over the dispute, Kyodo News reported.
• Chinese Industrial Profits Fall 6.2% in Fifth Consecutive Drop. Chinese industrial companies’ profits dropped for a fifth month in August, a government report showed, adding to signs the nation’s economic slowdown is extending into a seventh quarter. Net income fell 6.2 percent from a year earlier to 381.2 billion yuan ($60.4 billion), the National Bureau of Statistics said today in Beijing. That compares with a 5.4 percent decline in July and a 1.7 percent slide in June. “Profits are expected to continue to fall as there is a considerable build-up of excess capacity in the economy, and businesses have very little pricing power and in some cases are looking to unload inventory,” Patrick Bennett, a senior strategist at Canadian Imperial Bank of Commerce in Hong Kong, said before the release. The economic slowdown may persist into next year on a lack of funding for investment projects, Song Guoqing, a central bank adviser, said last week. Earnings are declining amid falling prices, higher costs and slower demand. More small companies are halting all or half of their production due to narrowing profit margins, Miao Wei, minister of industry and information technology, said in remarks posted on the agency’s website on Sept. 24. Industrial companies’ profits in the first eight months of the year declined 3.1 percent to 3.06 trillion yuan, according to today’s statement. That compares with a 2.7 percent drop in the first seven months and a 28.2 percent gain in the same period in 2011. Revenue for the companies in the first eight months increased 10.2 percent from a year earlier to 57.6 trillion yuan, today’s statistics bureau report showed. Sales rose 29.9 percent in the January-August period of 2011.
• Foxconn Workers Labor Under Guard After Riot Shuts Plant. Security teams wearing riot helmets and wielding plastic shields marched around a Foxconn Technology Group factory in northern China in a sign that tensions remain high after a fight between 2,000 workers halted production. Foxconn’s complex, home to 79,000 workers in Taiyuan, Shanxi province, still shows damage caused by a Sept. 23 clash in which a dormitory fight escalated into a riot finally quelled by hundreds of security guards and police. More than 40 people were hospitalized in the melee that left shattered windows and damaged parked cars across the campus.
• China Unlikely to Introduce Infrastructure Stimulus: Baosteel. China is unlikely to introduce any large stimulus plans on infrastructure investment in the near term because economic development is already "unbalanced," Zhang Dianbo, president of Raw Materials Procurement Center and the assistant president of Baoshan Iron & Steel Co., told reporters at an iron ore conference in Dalian today. China's stimulus on roads, rail and ports in September won't give a big boost to steel demand, Zhang said. 
• Cosco Sees Extended Slump as Shipper Yields Surge: China Credit. Bonds of China's two biggest shippers are yielding the most in at least nine months as a slump in world trade drags freight rates to levels last seen in the 2008 global financial crisis.

Wall Street Journal:

• Spanish Scare Roils Europe Markets. Madrid's Borrowing Costs Rise as Investors Fear It Will Delay Bailout Request; Exchanges Fall as 'Draghi Effect' Wanes. Spain's borrowing costs rose and its stock market fell sharply on the eve of Madrid's announcement of new austerity measures, putting the shaky economy again at the center of Europe's race to preserve its currency union. Spain's benchmark IBEX-35 index fell 3.9% and other European exchanges posted losses as well. The government's 10-year borrowing costs rose nearly one-third of a percentage point, to above 6%, placing renewed pressure on Madrid to find a way out of its debt crisis and appearing to crimp its prospects for avoiding a bailout from its euro-zone partners. 
• It's Always the Economy, Stupid. Barack Obama wants to talk about his windmill economy. Next week's debate should discuss the one we've got now.
• Obama's Biggest Opponent Is the Truth. Voters expect Mitt Romney to blow the whistle in the debates.

MarketWatch.com: 

• Spain’s chicken game won’t end happily. Commentary: Politicians, markets assume other will swerve first.

Zero Hedge: 

• Chicago Fed Asks "What Are Asset Bubbles" As Its President Calls For Even More QE. 
• Intrade Implies At Least 65% Odds Of Major Fiscal Contraction Post-Election.
• FX Concepts' John Taylor Will Always Be A EUR Bear. (video)

Business Insider: 

• Europe's Got A New Crisis, And This Time The ECB Can't Solve It. 
• Report: Refs Reach Deal With NFL, Will Be On Field Thursday Night. 
• There Are A Few Developments In Markets We'd Like You To Take A Look At.
• Why A Bar Owner Yelling At The Cops Is The Defining Image Of Spain's New Crisis.
• And Now China Has Angered Australia.

IBD: 

• Food Network, HGTV Drive Scripps Networks(SNI) Rev Growth.

NY Times:

• Spanish Ire, Symbolized by a Carrot. As Spanish domestic politics threaten to spin beyond the control of the central government, they are also making it harder for Prime Minister Mariano Rajoy to meet Spain’s financial obligations to the rest of the euro zone.

Reuters: 

• Europe's dimming prospects in spotlight at Paris auto show. As executives bemoan the worsening outlook for the European car market, they hope the no-frills small cars on display at the Paris auto show will lure customers in austerity-hit markets and premium limousines will attract buyers in China. Even the carmakers that had until recently been thriving, poaching market share from ailing competitors, are now feeling the pinch as austerity measures, high unemployment and fears about the future keep customers away from showrooms. South Korean automaker Hyundai Motor Co on Wednesday said it was deferring its sales and market share target by at least a year due to the dismal outlook that is now starting to worry the stronger carmakers as well as the weak.  
• H.B. Fuller(FUL) cuts forecast for full-year revenue. H.B. Fuller Co's third-quarter profit met analysts' estimates, but the specialty chemicals maker cut its full-year revenue outlook, citing a slight slow down in the global market for industrial adhesives. The company cut its full-year revenue forecast to between $1.88 billion and $1.90 billion from between $1.93 billion and $1.98 billion.

Telegraph: 

• Spain is turning into the new Greece, and Mariano Rajoy has himself to blame. Spain has taken another confident stride to becoming the next Greece, a status long predicted for the country in some quarters.
• Not even the great economists of history can get us out of this fix. Our financial crisis is unique, and the route back to health will be painful, costly and long.

Xinhua:

• China will continue to stabilize land prices and crack down on hoarding and speculation of land, citing an official from the Ministry of Land and Resources.

China Securities Journal:

• Major shareholders of 32 companies listed on China's ChiNext have offered to extend the lockups on the holdings after they become tradable in Oct, citing statements. The move is ant attempt to help stabilize the stock market, according to the report. ChiNext tumbled -3.1% yesterday to the lowest since Feb. 2, extending a 5-day loss to 9.2%.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 143.0 -2.0 basis points.
• Asia Pacific Sovereign CDS Index 120.0 +1.75 basis points.
• FTSE-100 futures +.03%.
• S&P 500 futures +.40%.
• NASDAQ 100 futures +.32%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DFS)/1.03
• (MKC)/.76
• (ATU)/.54
• (NKE)/1.12
• (MU)/-.23
• (GPN)/.87
• (ZZ)/.03
• (AZZ)/.52 

Economic Releases
8:30 am EST

• Final 2Q GDP is estimated to rise +1.7% versus a prior estimate of a +1.7% gain.
• Final 2Q GDP Price Index is estimated to rise +1.6% versus a prior estimate of a +1.6% gain.
• Final 2Q Personal Consumption is estimated to rise +1.7% versus a prior estimate of a +1.7% gain.
• Final 2Q Core PCE is estimated to rise +1.8% versus a prior estimate of a +1.8% gain.
• Durable Goods Orders for August are estimated to fall -5.0% versus a +4.2% gain in July.
• Durables Ex Transports for August are estimated to rise +.2% versus a -.4% decline in July.
• Cap Goods Orders Non-Defense Ex Air for August are estimated to rise +.7% versus a -3.4% decline in July.
• Initial Jobless Claims are estimated to fall to 375K versus 382K the prior week.
• Continuing Claims are estimated to rise to 3288K versus 3272K prior.

10:00 am EST

• Pending Home Sales for August are estimated to rise +.3% versus a +2.4% gain in July.

11:00 am EST

• Kansas City Fed Manufacturing for September is estimated to fall to 5 versus a reading of 8 in August.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Spanish retail sales report, Germany unemployment rate, Italy 10Y Bond Auction, UK GDP, Spanish 2013 Budget Approval, Spanish bank stress tests, 7Y T-Note auction, Japan Industrial Production report, weekly Bloomberg Consumer Comfort Index and the weekly EIA natural gas inventory report could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted  by consumer staple and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Falling into Final Hour on Soaring Eurozone Debt Angst, Rising Global Growth Fears, Escalating China/Japan Tensions, Tech/Homebuilder Weakness

Broad Market Tone:

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

Equity Investor Angst:

• VIX 16.32 +5.77%
• ISE Sentiment Index 131.0 +36.46%
• Total Put/Call .90 -2.17%
• NYSE Arms 1.14 -62.68%

Credit Investor Angst:

• North American Investment Grade CDS Index 102.68 bps +2.31%
• European Financial Sector CDS Index 209.27 bps +7.83%
• Western Europe Sovereign Debt CDS Index 149.27 +9.06%
• Emerging Market CDS Index 232.14 +1.28%
• 2-Year Swap Spread 16.0 +2.25 basis points
• TED Spread 26.0 +.25 basis point
• 3-Month EUR/USD Cross-Currency Basis Swap -26.75 -4.0 basis points

Economic Gauges:

• 3-Month T-Bill Yield .10% -1 basis point
• Yield Curve 136.0 -5 basis points
• China Import Iron Ore Spot $104.20/Metric Tonne +.48%
• Citi US Economic Surprise Index 28.9 -.2 point
• 10-Year TIPS Spread 2.43 -1 basis point

Overseas Futures:

• Nikkei Futures: Indicating -31 open in Japan
• DAX Futures: Indicating +17 open in Germany

Portfolio:

• Slightly Higher: On gains in my Retail sector longs, emerging markets shorts and index hedges
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and covered some of my (EEM) short, then added them back
• Market Exposure: 25% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades lower on soaring Eurozone debt angst, rising global growth fears, high food/energy prices, earnings worries, growing Mid-east unrest, increasing China/Japan tensions, US "fiscal cliff" worries and tech/homebuilding sector weakness. On the positive side, Tobacco, Education and Gaming shares are especially strong, rising more than +.75%. Consumer Staple shares have traded well throughout the day. The UBS-Bloomberg Ag Spot Index is down -2.0%, Gold is down -.5% and Oil is down -1.1%. On the negative side, Oil Service, Software, Computer, Disk Drive, Networking, Biotech and Homebuilding shares are especially weak, falling more than -1.25%. Tech and homebuilding shares have traded poorly throughout the day. Lumber is falling -.8% and Copper is down -1.3%. Major Asian indices were lower overnight, led down by a -2.0% decline in Japan. The Shanghai  Comp fell another -1.2%(-8.9% ytd) to the lowest since Feb. 2009, which remains a large red flag for the global economy. China’s ChiNext Index of faster growing smaller companies fell another -3.0% overnight and is down -13.2% in 2 weeks. Major European indices are under substantial pressure, led down by a -3.9% decline in Spain. The Bloomberg European Bank/Financial Services Index is dropping -3.7% today. Brazil is -.2% today and testing its 200-day. The European Investment Grade CDS Index is gaining +4.6% to 141.28 bps. The European Financial Sector CDS Index is jumping +6.3% to 206.2 bps. The Germany sovereign cds is jumping +8.8% to 57.12 bps(+21.9% in 5 days). The France sovereign cds is soaring +10.2% to 122.83 bps(+28.6% in 5 days). The Spain sovereign cds is up +9.6% to 399.37 bps. The Italy sovereign cds is gaining 10.1% to 367.12 bps. The Portugal sovereign cds is soaring +11.7% to 530.64 bps. The Ireland sovereign cds is jumping +7.9% to 306.33 bps. The Spain 10Y Yld is jumping +4.8% to 6.02% and the Italian/German 10Y Yld Spread is gaining +5.4% to 370.61 bps(+11.8% in 5 days). The China sovereign cds is up +1.6% to 93.0 bps(+26.9% in 5 days). The China Development Bank Corp CDS is rising +3.7% to 141.0 bps(+19.9% in 5 days). The Russia sovereign cds is gaining +4.4% to 155.41 bps(+19.4% in 5 days). The Brazil sovereign cds is gaining +4.5% to 116.6 bps(+15.5% in 5 days). The UBS/Bloomberg Ag Spot Index is breaking down from its recent range, but is still up +20.3% since 6/1. The benchmark China Iron/Ore Spot Index is down -42.4% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, copper, oil 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 +2.4%. The Philly Fed ADS Real-Time Business Conditions Index has shown meaningful deceleration since early July. 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 -65.0% from its Oct. 14th high and is now down around -55.0% ytd. Shanghai Copper Inventories have risen +314.0% 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 with the yield falling -6 bps to 1.61%. 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 after the US election. 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, rising food prices/labor costs, massive overcapacity in certain key parts of the economy and growing bad loans problem. Little being done 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. Over the intermediate-term, the Fed's recklessness greatly increases the chances of hard-landings in key emerging markets and of a serious global stock swoon, in my opinion. Moreover, 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 continues to unravel at an alarming rate, as well. The quality of the stock rally off the June lows has been very 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 and China/Japan tensions and higher-quality stock market leadership. I expect US stocks to trade modestly lower into the close from current levels on rising global growth fears, earnings worries, rising Japan/China/Mideast tensions, quarter-end profit-taking, more shorting, technical selling, tech/homebuilding sector weakness and US "fiscal cliff" concerns.

Today's Headlines

Bloomberg: 

• Spanish Bonds Slump as Marchers Plan Further Protests. Spanish bond yields climbed the most this month as a second night of violent protests loomed amid sparring over the police response to clashes in Madrid. Spain’s 10-year benchmark yield rose above 6 percent, approaching the levels seen before European Central Bank President Mario Draghi offered to buy struggling nations’ debt. Prime Minister Mariano Rajoy told the Wall Street Journal in comments confirmed by his office that he would “100 percent” seek a rescue if borrowing costs stayed “too high.” “The negative newsflow on Spain is gaining momentum,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “The protests will definitely add to the pressure, but negative news regarding the regions pose a bigger risk.” The slump in Spanish bonds sent the yield to 6.06 percent, up 32 basis points, at 5:55 p.m. in Madrid. The benchmark Ibex stock index slid 3.9 percent. 
• Rajoy Bets Italian Woes May Ease Spain Rescue Terms: Euro Credit. Spanish Prime Minister Mariano Rajoy may be delaying a bailout request on a bet that renewed market tension will also force Italy to seek aid, strengthening his bargaining power and giving political cover. Spain will have more leverage if it can fend off a rescue until Italy joins it in needing ECB help to bring down the cost of servicing its debt, said Raphael Gallardo, head of macroeconomics at Rothschild Asset Management in Paris.
• Greek Protests in Athens End After Police Use Tear Gas. Protests in Athens ended today after police fired tear gas in response to fire-bombs thrown by demonstrators during a strike over wage cuts and austerity that Prime Minister Antonis Samaras said are vital to keep the euro. Demonstrators earlier filled central Syntagma Square in Athens, opposite the Parliament House, shouting slogans such as “struggle, clash, overturn: history gets written by those who disobey.” Police spokesman Takis Papapetropoulos estimated the crowd at 35,000 people. Police said 105 people were detained, 21 were arrested and 8 officers were injured. Schools, hospitals, ferries and government services shut down in the first walkout since February. Shops closed from 3 p.m. today to let staff take part in demonstrations. Public transport operated to allow protesters to attend rallies in Athens city center. A three-hour walkout by air traffic controllers disrupted flights around the country.
• Credit Risk Surges as Catalan Concern Adds to Spanish Bank Woes. Credit-default swaps on sovereign and corporate debt rose on concern Spain faces a constitutional crisis after its richest region called early elections and that recapitalization of the nation's banks faces new hurdles. The Markit iTraxx SovX Western Europe Index rose 12 basis points to 150 with contracts on Spain climbing 30 basis points to 400 at 2:53 pm in London, the biggest rise in almost three weeks. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 11 basis points to 205. 
• European Stocks Drop Most Since July Before Spain Budget. European stocks slid the most in two months as Spain prepared to present its budget and Federal Reserve Bank of Philadelphia President Charles Plosser said the third round of bond buying may fail to stimulate growth. Acciona SA (ANA) sank 9.9 percent, leading Spanish builders lower a day before the government presents its budget for next year. Banco Santander SA (SAN), Spain’s largest lender, retreated 4.5 percent. Anglo American Plc (AAL) lost 3.7 percent after saying that it plans to reduce its production of coal. The Stoxx Europe 600 Index plunged 1.8 percent to 270.72 at the close, its largest drop since July 23.
• China’s Stocks Fall to 2009 Low on Concern About Economy, Profit. China’s stocks fell, with the Shanghai Composite Index briefly sliding below the 2,000 level for the first time in three years, on concern the deepening economic slowdown is hurting corporate profits. The Shanghai Composite dropped 1.2 percent to 2,004.17 at the close, after slumping to as low as 1,999.48 in the last five minutes of trading. The benchmark gauge has lost 9.9 percent this quarter, the most in a year, and is the worst performer among global markets after Cyprus.
• Foxconn Workers Labor Under Police Watch After Riot Shuts Plant. Security teams wearing riot helmets and wielding plastic shields marched around a Foxconn Technology Group factory in a show of force after a fight involving 2,000 workers prompted the company to suspend production there. The campus used by 79,000 workers in Taiyuan, in northern Shanxi province, showed the damage caused by a Sept. 23 clash between laborers from different provinces that left more than 40 people hospitalized. Windows in a bath house, supermarket, arcade and parked cars were shattered as investigators tried to determine how a fight in a dormitory escalated into a riot quelled by hundreds of security guards and police.
• U.S. Grads Work As Waiters While Italy’s Remain Jobless. 
• Fed’s Evans Calls for More Easing, Warns of ‘Lost Decade’. Federal Reserve Bank of Chicago President Charles Evans said policy makers must not be passive in the face of high U.S. unemployment, firing back at critics of the Fed’s decision this month to step up record stimulus. “We cannot be complacent and assume that the economy is not being damaged if no action is taken,” Evans said today in the text of remarks prepared for delivery in Hammond, Indiana. “If we continue to take only modest, cautious, safe policy actions, we risk suffering a lost decade similar to that which Japan experienced in the 1990s.”

Wall St. Journal: 

• Carney: Obama Does View Libya Attack as ‘Terrorist Attack’. The White House fielded questions Wednesday about why President Barack Obama has not gone as far as members of his administration — including his top spokesman — in labeling the violence in Libya that killed four Americans a terrorist attack. 
• Israel Must Be 'Eliminated'. Netanyahu has to take Iran's words seriously. Why doesn't Obama? 
• Factory Riot Spotlights Breaking Point in China. The pressures threatening China's status as the world's factory floor have been laid bare by a riot this week at a factory that makes parts for Apple Inc. and other electronics companies, a clash that workers said was sparked by onerous security and repressive living conditions. The consequences of a riot that erupted on Sunday in the Hon Hai Precision Industry Co.'s plant go far beyond the security of Apple's supply chain, which relies on armies of industrious and docile Chinese workers. The riot raises questions about the sustainability of China's vaunted manufacturing machine.

MarketWatch.com: 

• The emerging headache of QE3: Andy Xie.

CNBC: 

• Fed Virtually Funding the Entire US Deficit: Lindsey. The latest round of extraordinary Federal Reserve stimulus is risky and leaves little room to maneuver should another crisis hit, economist Lawrence Lindsey told CNBC’s “Squawk Box” on Wednesday. Lindsey said that with the Fed purchasing at least $40 billion a month in mortgage debt through QE3, “they are buying the entire deficit.”

Zero Hedge:

• California Screaming as 4th Muni Bankruptcy Looms in Atwater. 
• Less Than Expected 31,000 New Homes Sold In August; Dent "Recovery" Meme. (graph) 
• When Spain Unveils Its New Budget Tomorrow, You'll Understand Why The Catalan Separatist Movement Is So Explosive.
• Meanwhile, At The Greece 'Mass Strike' Protest-Cam. (video)
• Spanish 10Y Bond Yield Breaches 6% - Highest In 3 Weeks As Nothing Still Fixed. (graphs)
• Next Steps For Spain.

Business Insider:

• Chinese Hospitals Are Sending Japanese-Made Medicine Back.
• Ahmadinejad Calls For A 'New World Order' In United Nations Speech.
• Egyptian Journalist Arrested For Defacing Anti-Muslim Poster In New York Subway.
• Photos Of The Giant Protests Rocking Greece And Spain.
• Bloomberg's Guide To The Fiscal Cliff Is Best We've Seen.
• The Eurozone Con Game Just Keeps Cracking.
• The Chinese Stock Market Sank To A New 3-Year Low. (graph)
• The World's Largest Oil Trader Is Ignoring Sanctions And Trading With Iran.

CNN:

• Risky Loans Are Back.

RasmussenReports:  

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows both President Obama and Mitt Romney attracting support from 46% of voters nationwide. Three percent (3%) prefer some other candidate, and five percent (5%) are undecided.

Reuters:

• CEO confidence tumbles to three-year low: Roundtable. U.S. chief executives' view of the economy deteriorated sharply in the third quarter and is now as bleak as it was in the immediate aftermath of the last recession, with more planning to cut jobs over the next six months, according to a survey released by the Business Roundtable on Wednesday. The group's CEO Economic Outlook Index tumbled to 66 in the third quarter from 89.1 in the second, in the sharpest drop recorded in the survey's decade-long history. Confidence fell to its lowest point since the third quarter of 2009. Thirty-four percent of U.S. CEOs expect to cut jobs in the United States over the next six months, up from 20 percent a quarter ago, while 30 percent plan to raise capital spending, down from 43 percent. Fifty-eight percent expect their sales to rise over that time period, down from the previous survey's 75 percent.
• Austerity-hit Italians avoid shops, sales drop. Italian retail sales fell for the fourth month running in July, data showed on Wednesday, highlighting how austerity measures and unemployment are discouraging shoppers and deepening a year-long recession. Sales dropped 3.2 percent in July compared to the same month last year, National statistics office ISTAT said, for their steepest fall since a 6.8 percent drop in April, the largest decline since the current data series began in January 2001. With Italians buckling under the impact of a severe recession, tax hikes, falling disposable incomes and rising unemployment, the prospects for a rebound in consumer spending are looking increasingly bleak. Retail lobby Confcommercio said this week that consumer spending is set this year for its biggest post-World War Two decline, and data from ISTAT shows consumer morale has only recovered slightly from a historic low hit in June. 
• Copper slides on renewed European debt worries. 
• Shanghai rebar falls, pressure on iron ore as restocking stalls.  
• U.S. recession signal from the Philly Fed. (graph) Tom Porcelli, economist at RBC Capital, says he’s concerned about a new trough from a little-watched Philadelphia Fed survey of coincident indicators. 
• French joblessness tops 3 mln for first time in 13 yrs. The number of unemployed in France topped the 3 million mark in August for the first time in 13 years, official figures showed on Wednesday, adding to President Francois Hollande's woes as he seeks to revive a stalled economy and his tumbling poll ratings. Marking its 16th consecutive monthly rise, the number of registered jobseekers in mainland France increased by 23,900 last month to 3,011,000, Labour Ministry data showed. That was a 9 percent increase year-on-year and the highest figure since June 1999.

Telegraph: 

• Spanish GDP falling at 'significant pace'. Spain's recession is deepening with economic output sliding at a "significant pace" in the third quarter of this year, the Bank of Spain warned on Wednesday.  
• ECB will not fill Greek budget gaps, says Bundesbank president. The European Central Bank will not fill potential financing gaps in Greece's budget, Governing Council member Jens Weidmann said on Wednesday.
• Greece austerity strike and protests: in pictures.

Sueddeutsche Zeitung:

• Slovakia won't agree to give Greece "more money, more time," Prime Minister Robert Fico said. Euro countries can only get money from bailout funds if they meet conditions, he said.

Bear Radar

Style Underperformer:

• Mid-Cap Growth -.70%

Sector Underperformer:

• 1) Homebuilders -2.80% 2) Computer Hardware -1.60% 3) Oil Service -1.50%
  

Stocks Falling on Unusual Volume:

• DB, BMA, CTCM, PRGS, STO, TOT, AAPL, TDG, BTH, COLB, FTNT, SNX, RAH, TROX, JBL, MKTX, RNF, AI, AMTG, PAY, LPX, ARII, CMO, NOW, EPL, NRP, MSM, ARI, DXPE, PKX, THR, PNR, TDG, FTK, SPN and NRP
  

Stocks With Unusual Put Option Activity:

• 1) URBN 2) MRVL 3) JBL 4) HYG 5) DISH
  

Stocks With Most Negative News Mentions:

• 1) SNDK 2) CCL 3) LEN 4) EPL 5) MRVL
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value -.60%

Sector Outperformers:

• 1) Gaming +.73% 2) Tobacco +.56% 3) Utilities +.43%
  

Stocks Rising on Unusual Volume:

• KEP, AM, IDCC and ZUMZ

Stocks With Unusual Call Option Activity:

• 1) DNDN 2) ETP 3) CE 4) SAN 5) QID
  

Stocks With Most Positive News Mentions:

• 1) ALK 2) MDT 3) DTV 4) ORCL 5) KO

Charts:

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

Wednesday Watch

Evening Headlines
Bloomberg: 

• Rajoy Nemesis Opens Catalonia Front in Europe Debt-Crisis Fight. Spanish Prime Minister Mariano Rajoy’s dispute with the leader of his country’s richest region erupted into the newest front of Europe’s effort to extinguish the financial crisis. Catalan President Artur Mas yesterday called early elections, with greater autonomy at stake, five days after Rajoy rejected his bid for increased control of his region’s tax revenue. Mas set the vote for Nov. 25, saying the time has come to seek “self-determination.” The move risks plunging Rajoy into a constitutional crisis amid a recession that has sent unemployment to 25 percent. He’s struggling to persuade Spaniards to accept the deepest austerity measures on record and stoking frustration in Germany over his foot-dragging on whether to seek a bailout. As police clashed with protesters in Madrid yesterday, Rajoy didn’t respond to Mas’s defiance. “It’s the very last thing Rajoy needed right now, and the last thing Europe needed,” said Ken Dubin, a political scientist who teaches at Carlos III University and IE Business School in Madrid. The standoff may mark the end of the rally in Spanish bonds triggered by the European Central Bank’s decision to buy struggling nations’ debt on condition they accept the terms of a bailout from euro-area governments.
• Rajoy Bets Italian Woes May Ease Spain Rescue Terms: Euro Credit. Spanish Prime Minister Mariano Rajoy may be delaying a bailout request on a bet that renewed market tension will also force Italy to seek aid, strengthening his bargaining power and giving political cover. Spain will have more leverage if it can fend off a rescue until Italy joins it in needing ECB help to bring down the cost of servicing its debt, said Raphael Gallardo, head of macroeconomics at Rothschild Asset Management in Paris.
• ECB’s Bond Buying May Hinder Reforms, Weidmann Tells Zuercher. The European Central Bank’s bond purchasing program could hinder a recovery in the euro zone if it eases pressure on governments to implement reforms, German Bundesbank President Jens Weidmann said in an interview with Swiss newspaper Neue Zuercher Zeitung. Weidmann questioned whether bond-purchase programs are the appropriate mechanism for solving structural problems, such as the lack of competitiveness and loss of trust in an individual country’s fiscal policies, according to the interview. Weidmann was the only member of the ECB Governing Council to oppose the so-called Outright Monetary Transactions program. Weidmann said the ECB’s fiscal policy seeks to keep risk low and buying back bonds causes the opposite. Maintaining price stability is the bank’s primary purpose, he said.  
• Barclays(BCS) Sued by U.S. Regulator Over Mortgage Security Sales. Barclays Plc is being sued by the U.S. regulator of credit unions, which says the bank sold $555 million in misrepresented mortgage-backed securities that contributed to two lender failures. The National Credit Union Administration announced the suit filed in federal court in Kansas in a statement today. 
• China-Japan Foreign Ministers Meet as Island Tensions Hurt Trade. The foreign ministers of China and Japan met in New York in an attempt to ease rising tensions over a territorial dispute that is hurting trade between Asia’s two biggest economies. China’s Yang Jiechi held talks with Japanese counterpart Koichiro Gemba on the sidelines of the United Nations General Assembly. Yang reiterated China’s “solemn position” over claims to islands in the East China Sea, the official Xinhua News Agency said. Gemba told reporters that the atmosphere in the meeting was “severe,” Japan’s Kyodo News reported.   
• Buffett-Backed BYD Tumbles as CLSA Cuts Share-Price Target 94%. BYD Co., the Chinese carmaker partly owned by Warren Buffett’s Berkshire Hathaway Inc., fell the most in two months in Hong Kong trading after CLSA Asia Pacific Markets cut the stock’s price target by 94 percent. BYD dropped 5.2 percent to HK$13.94 at 9:33 a.m., headed for its biggest drop since July 16. CLSA lowered its 12-month price goal for the Hong Kong-traded shares to HK$0.41, from a previous estimate of HK$7.40. The electric-car maker, based in Shenzhen in southern China, reported on Aug. 27 first-half profit plunged 94 percent as sales of handset components and batteries shrank. Net income for the first nine months is expected to fall by as much as 95 percent, the company said. MidAmerican Energy Holdings Co., a unit of Buffett’s Berkshire Hathaway, bought 9.9 percent of BYD in September 2008 to tap rising demand for clean technology. “The company will likely deteriorate further due to declining business in mobile phone components, rechargeable batteries and new energy,” Scott Laprise, a Beijing-based analyst at CLSA, wrote in a research note yesterday. “We see few positive catalysts going forward and maintain our conviction” to sell the stock, Laprise wrote.  
• China’s Stocks Fall, Poised for Biggest Quarterly Loss in Year. China’s stocks fell, sending the benchmark index toward its biggest quarterly decline in a year, on speculation the economic slowdown is deepening and measures by global central banks won’t be enough to boost growth. China Vanke Co. (000002) and Poly Real Estate Group Co. dropped more than 1 percent on earnings concerns after the southern city of Guangzhou restricted sales of homes before they are completed. BYD Co. (002594), the automaker part-owned by Warren Buffett’s Berkshire Hathaway Inc., slid to a five-week low after CLSA Asia Pacific Markets cut its share-price estimate of the company’s Hong Kong- listed stocks by 94 percent. “The market has no confidence in China’s old growth model of investment and exports any more,” said Wang Zheng, Shanghai- based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “With the two growth drivers fading, we haven’t found a new engine. That’s why stocks are performing so poorly.” The Shanghai Composite Index (SHCOMP) fell 0.3 percent to 2,023.75 as of 10:41 a.m. local time, heading for a 9.1 percent slump this quarter.
• Iron Ore Unlikely to Rebound as China Slows, Shale-Inland Says. Iron-ore prices, down 25 percent this year, probably won’t rebound as the economy slows in China, the world’s biggest importer and steelmaker, according to Shale- Inland Holdings LLC. Prices for steel, which have dropped 10 percent in 2012, also won’t recover, said Craig Bouchard, the chief executive officer of Shale-Inland, which fabricates and distributes metals. China’s economy will grow less than analysts expect, at 5 percent to 6 percent in 2013, Bouchard said. That compares with a Bloomberg survey of as many as 45 analysts, which showed a median forecast of 7.7 percent growth this year and 8 percent in 2013. There’s a 50 percent chance that the U.S. will slide into a recession next year as consumer spending ebbs, he said. “There’s not going to be a recovery in steel in the next six months,” Bouchard, who founded Schiller Park, Illinois- based Shale-Inland in 2010, said in a telephone interview. “You can’t expect a recovery in iron-ore prices until we see a recovery in the world economy.” 
• CMBS Selling Like It's 2007 in Pre-Crisis Spirit: Credit Markets. Commercial-mortgage bond sales are surging to the most in almost five years with yields at record lows, fueling a lending boom. Banks have arranged $6.9 billion this month in sales of bonds linked to skyscrapers, shopping malls and hotels, the most since December 2007, according to data from Bank of America Corp. Securities in the Barclays Investment Grade CMBS index yield 2.15%, the lowest since the index started in 1997. Property owners are benefiting as investors chase riskier assets with Federal Reserve Chairman Ben S. Bernanke saying this month that interest rates will likely hold near zero at least through mid-2015.
• SEC Says New York Firm Allowed High-Speed Stock Manipulation. A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission. Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said today in a release. Hold Brothers, its owners, and the foreign firms Trade Alpha Corporate Ltd. and Demonstrate LLC agreed to settle allegations that the New York broker failed to supervise customers and pay $4 million in total SEC fines. The SEC complaint targeted practices that abused high-speed computer trading on American equity venues. As high-frequency activity has grown in recent years, the agency’s efforts to stop fraudulent practices such as “layering” or “spoofing” have extended to the automated trading tactics. “Direct access firms like these are the gatekeeper to our markets,” Sang Lee, managing partner at research firm Aite Group LLC in Boston, said today in a phone interview. “That’s why the SEC is doing this. This is certainly the area that they need to focus on, and on a larger scale.”

Wall Street Journal: 

• Spanish Leader Outlines Fresh Overhauls. Rajoy, in Interview, Pledges to Limit Early Retirement, Set Budget Monitor. The Spanish government will restrict programs that allow people to take early retirement as part of overhauls to rein in the country's debt and shore up its shrinking economy, Prime Minister Mariano Rajoy said on Tuesday. In an interview with editors and reporters of The Wall Street Journal, Mr. Rajoy said measures to be unveiled Thursday would also include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations.
• Alan Dershowitz: The Message Obama Should Have Sent. Forget about a 'red line.' Try a warning to Iran in black-and-white.

Barron's:

• Jabil(JBL) Slips: FYQ4 EPS Missses, Q1 View Light.

MarketWatch.com: 

• UBS chairman sees risks in QE programs: report. Widespread central bank action to support economies by printing money is distorting market prices and may create asset bubbles, said UBS Chairman Axel Weber, according to a report in the Australian Financial Review.

 CNBC: 

• Romney's Take-Home-Pay Message. In a 60 Minutes interview this past Sunday, Romney did mention tax cuts, and take-home pay, too. Whoa. (Read More: Obama and Romney Offer Possible Preview of Their First Debate.) “Take-home pay” is an old Reagan line. The Gipper appealed to middle-class voters who clearly understood that if you keep more of what you earn, and your take-home pay goes up, that’s the benefit of a tax cut.
• Bet You Don't Know About These Obama Gaffes.

Zero Hedge:

• Five SAC Traders Implicated In Insider Trading Case. 
• Several Exponential Charts.
• Quantifying The 6 Downside And 2 Upside Risks To Global Markets.

Business Insider: 

• Chinese Government Publishes Paper Calling Itself The 'Indisputable Owner' Of The Diaoyu Islands.  
• Crazy Video Of Spanish Protesters Dropkicking A Cop.
• Spain Has A Brand New Double-Crisis On Its Hands.
• There's Another Imminent 'Cliff' You Should Know About, And It's $1.6 Trillion Tall.
• Intel's(INTC) CEO Says Windows 8 Is Full Of Bugs.

Reuters: 

• China carrier a show of force as Japan tension festers. China sent its first aircraft carrier into formal service on Tuesday amid a tense maritime dispute with Japan in a show of force that could worry its neighbours. China's Ministry of Defence said the newly named Liaoning aircraft carrier would "raise the overall operational strength of the Chinese navy" and help Beijing to "effectively protect national sovereignty, security and development interests". 
• Euro zone will struggle to create fiscal union-former UK PM. Europe is enjoying a moment of calm due to the European Central Bank's plan to buy debt of euro zone countries, but the region will struggle to solve more fundamental problems, former British Prime Minister Gordon Brown said on Tuesday.  
• Syrian rebels bomb security building in Damascus. Syrian insurgents detonated bombs at a building occupied by pro-government militias in Damascus on Tuesday and France called for U.N. protection of rebel-held areas to help end Syria's bloodshed and rights abuses. Activists say that more than 27,000 people have been killed in the 18-month-old uprising against President Bashar al-Assad but jostling for regional advantage by world powers has thwarted effective U.N. Security Council action to defuse the conflict.

Financial Times: 

• ‘Big disparity’ in banks’ loan risk ratings. European banks are using such different estimates of risk that some are holding between double and four times as much capital as their competitors hold against potential losses from apparently similar loans, analysis by Barclays shows. Lloyds Banking Group assigns a risk weighting of 28 per cent to its portfolio of A-rated corporate loans, while BNP Paribas gives the same category a 14 per cent risk rating. As a result, BNP is required to hold half as much capital.

Telegraph:

• Spanish austerity protest turns violent: in pictures.

Kathimerini: 

• General Strike to Shut Down Greece on Wednesday.

Asahi:

• Toyota to Cut Planned China Output to Zero in October. The company has scrapped production plans for October as sales of new vehicles in China are expected to be difficult due to the islands dispute. The company will also halt exports of finished vehicles including Lexus models from Japan to China. Difficulty in importing parts from Japan due to tightened customs checks may also be a factor. The company produced 78,000 vehicles in October of lats year.

Nikkei: 

• Toyota, Nissan to Cut China Output on Islands Dispute. The companies will lengthen a planned suspension of output for the forthcoming national holidays as anti-Japanese consumer sentiment in China is expected to impact sales. Honda is also considering cutting operating hours at plants.   

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.50% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 145.0 +8.0 basis points.
• Asia Pacific Sovereign CDS Index 118.25 +1.75 basis points.
• FTSE-100 futures -.80%.
• S&P 500 futures +.07%.
• NASDAQ 100 futures +.02%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PRGS)/.23
• (FUL)/.53
• (WOR)/.47

Economic Releases
10:00 am EST

• New Home Sales for August are estimated to rise to 380K versus 372K in July.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,900,000 barrels versus a +8,534,000 barrel gain the prior week. Distillate inventories are estimated to rise by +500,000 barrels versus a -322,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +500,000 barrels versus a -1,407,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.25% versus a +4.2% gain the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly MBA mortgage applications report, Italian retail sales report and the 5Y T-Note auction could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by technology and automaker shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.