Tuesday Watch

Evening Headlines

Bloomberg:

• Companies Stop Selling Bonds as Costs Jump by 40%: Euro Credit. Company bond sales have ground to a halt in Europe, with August poised to end without a single offering as the sovereign debt crisis drives borrowing costs up by 40 percent. “When spreads are moving so quickly, it’s very difficult to see clearly how to price new issues,” said Olivier Casanova, the head of financing and treasury at PSA Peugeot Citroen in Paris, which last sold bonds in euros on June 15. “Conditions are very volatile.” The extra yield investors demand to own corporate bonds rather than government securities has surged to a two-year high of 186 basis points from 134 at the end of July, Bank of America Merrill Lynch indexes show. Yield premiums are climbing as speculation Greece may default forces the European Central Bank to buy Spanish and Italian bonds, and as second-quarter euro- area growth slowed to the worst since the region emerged from recession in 2009. Gauges of European company creditworthiness are headed for their worst month ever. The Markit iTraxx Crossover Index of credit-default swaps on 40 companies with mostly high-yield credit ratings is up 274 basis points so far in August, climbing to 714 basis points. That compares with a jump of 207 in October 2008 after the collapse of Lehman Brothers Holdings Inc.
• On Company Taxes, U.S. Should Follow World Down: Ramesh Ponnuru. Nations don’t compete with one another the way companies do. Pepsi’s gain is almost always Coca-Cola’s loss, but the same doesn’t always, or even often, hold true for national economies. Governments do compete in some respects: They want to attract capital investment to their countries, for example, to provide more jobs, higher wages and better products and services to their people. That competition offers a reason for optimism that the U.S. Congress will eventually reform our inefficient, investment-destroying corporate taxes.
• Chinese stocks trading in Hong Kong may slump as much as 19% by year-end in a "worst-case" scenario as an order to widen the base of required reserves threatens non-bank lenders, BNP Paribas SA said. Tightening measures have driven the lending rate in the "shadow banking system" from the 13%-17% annual range between 2003 and 2010 to around 26% in the first half of this year, Dorris Chen and Kathryn Ding, analysts at BNP paribas, wrote in a report, citing the rate in the central bank monitored alternative lending market. "The People's Bank of China's new rules broadening the base of required reserve is an incremental threat to liquidity given that acceptance bills and letters of credit are important sources of funding for many alternative lenders and private small and medium enterprises," they wrote.
  

Wall Street Journal:

• German Debate on Bailout Fund Is Test for Merkel. German Chancellor Angela Merkel faces growing resistance within her ruling coalition over expanding the powers of the euro zone's bailout fund, forcing a domestic political debate she will have to win to preserve confidence in her leadership. At issue is securing German parliamentary approval for a deal Ms. Merkel brokered with other European leaders in July to keep the debt crisis from spinning out of control. Part of the agreement involves vesting the bailout fund with powers that were previously the prerogative of national parliaments. Conservative opponents of the deal worry it will open the door to relinquishing more sovereignty to the European Union. Winning a majority of votes from within Ms. Merkel's center-right coalition was seen as relatively smooth sailing after reaching the hard-fought deal, which also included a second bailout for Greece. But in recent days, more dissenters have emerged from the coalition, now putting a sure victory in doubt. The shift reflects the pressure many rank-and-file conservative German politicians face as they try to justify the recent string of bailouts for Greece and other countries to an increasingly skeptical electorate.
  
• Irene's Floods Prove Deadly as Water Continues to Rise. Hurricane Irene never packed the catastrophic winds of more famous tropical storms, but by the time its remnants finally blew into Canada Monday, it had proved to be a slow killer, leaving behind a vast swath of shattered communities and dozens of fatalities.
• Tally of Damages Put at $12 Billion, but That Number Could Yet Rise. The economic damage wrought by Hurricane Irene—everything from washed-out roads to lost hotel bookings—could hit $12 billion or more.
• NLRB Gets New Chairman, Mark Pearce. The National Labor Relations Board has a new chairman: Mark Pearce, a Democrat. But business groups and Republicans are expecting more of the same from the agency they say favors unions over employers.
• Pimco's Gross Has 'Lost Sleep' Over Bad Bets. In recent weeks, Pacific Investment Management Co. founder Bill Gross says he has "lost sleep" over an ill-timed bet on Treasurys. During an Aug. 16 interview at Pimco's Newport Beach, Calif., headquarters, Mr. Gross, manager of Pimco's Total Return Fund, the world's biggest bond fund, acknowledged that his decision to sell all of the fund's Treasury holdings in February, and then use derivatives to place wagers against government-related bonds in March, was a "mistake."
• Europeans Appear Set to Pause Rate Rises. European Central Bank President Jean-Claude Trichet signaled the ECB may reconsider its longstanding warnings about inflation, potentially setting the stage for a lengthy pause in its rate-increase cycle. In testimony to the European Parliament, Mr. Trichet also played down the risks of a renewed recession in the euro bloc, saying he expects growth in the common-currency area to continue at a "modest pace." While euro-zone inflation is likely to remain above the bank's 2% target in the months ahead, "risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released [in] early September," Mr. Trichet said. Mr. Trichet avoided code words the ECB often employs to signal that it is worried about inflation or that interest-rate rises are on the horizon.
• Czech Premier Takes new Dig at Euro Zone. The Czech Republic's euro-skeptic leadership is taking some new swipes at the neighboring single-currency zone, which is struggling to quell internal dissension about how to deal with its weaker members' debt woes. On Monday, Czech Prime Minister Petr Necas told a group of Czech diplomats: "We agreed to join a [monetary] union, not a transfer union or debt union." He went on to say that an independent currency was critical to the country's economic health.

CNBC:

• Hedge Funds Burned by August Market Heat. Many of the world’s largest hedge funds have been left nursing billions of dollars in losses following the industry’s most brutal month since the collapse of Lehman Brothers. Falling equity markets worldwide have caught hedge fund managers off-guard, leading to significant losses as portfolios declined in value and managers sold holdings, crystallizing losses. According to provisional estimates from consultancy Hedge Fund Research, the average hedge fund has lost 4.1 percent during August – making the month the industry’s fourth worst ever.

Business Insider:

• The Rising Mismatch In Chinese Credit Markets. There is a mismatch in the credit market in China that is becoming increasingly pronounced. On the one hand, many privately owned Chinese companies; especially manufacturing and industrial companies are in dire need for capital to cover their short term financing needs and to ramp up further expansions. On the other hand, the domestic Chinese capital markets, dominated by large state owned banks, have been rather unresponsive to such demands.
• Money Game Tip of the Day: Commodities Offer Very Poor Real Returns. (graph)
  

Zero Hedge:

• PIMCO On The Fiscal Folly Of The Keynesian Revolution, And "Just Saying No" To Keynes.

IBD:

• Hansen Natural(HANS) Gets a Buzz With Monster Drinks.

Courier-Journal.com:

• UAW Says It Wants Raises For New Workers at GM(GM), Ford(F), Chrysler.

PIMCO:

• European Austerity Is Not Enough.

Rasmussen Reports:

• Generic Congressional Ballot: Republicans 45%, Democrats 36%.

Financial Times:

• IASB Criticises Greek Debt Writedowns. Some European financial institutions should have taken bigger losses on their Greek government bond holdings in recent results announcements, according to the body that sets their accounting rules. In a private letter sent to the European Securities and Markets Authority, the European Union’s market regulator, the International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt. “This is a matter of great concern to us,” Hans Hoogervorst, IASB chairman, said in the letter, which was seen by the Financial Times.

ZDF TV:

• Euro-area governments will need to transfer additional sovereign functions to the European Union if they want to establish a European economic government, citing an interview with Luxembourg Prime Minister Jean-Claude Juncker. Regional leaders won't be able to sidestep the issue of joint euro-area bonds indefinitely, he said.

Financial Times Deutschland:

• Andrea Enria, chairman of the European Banking Authority, demanded that the European Financial Stability Facility be allowed to give funds directly to banks to shield them from financial difficulties, citing a letter to be sent to the council of European finance and economy ministers. Currently, the 725 billion-euro fund may give money only to governments, which can then pass it on to lenders. The majority of the 27 EBA members approve of the plan, while Germany is opposed, citing a person close to the German government.

Xinhua:

• The eastern Chinese province of Jiangxi plans to halt production in three major rare earth mines in Ganzhou city for 2011, citing the local government.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +.50% to +1.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 153.0 -5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 150.50 -2.5 basis points.
• FTSE-100 futures +2.90%.
  
• S&P 500 futures +.04%.
  
• NASDAQ 100 futures +.09%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DG)/.48
• (DSW)/.63
• (BKS)/-.96
• (PVH)/.95

Economic Releases
9:00 am EST

• The S&P/CS 20 City MoM% SA for June is estimated unch. versus a -.05% decline in May.

10:00 am EST

• Consumer Confidence for August is estimated to fall to 52.0 versus a reading of 59.5 in July.

2:00 pm EST

• Minutes of FOMC Meeting.

Upcoming Splits

• (HFC) 2-for-1
• (VRUS) 2-for-1
• (RGCO) 2-for-1
  

Other Potential Market Movers

• The Fed's Kocherlakota speaking, Fed's Lockhart speaking, the weekly retail sales reports and the Morgan Stanley Aerospace/Defense Unplugged Conference could also impact trading today.
  

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

Stocks Surging into Final Hour on European Equity Rally, Diminished Hurricane Concerns, Short-Covering, Bargain-Hunting

Broad Market Tone:

• Advance/Decline Line: Substantially Higher
  
• Sector Performance: Almost Every Sector Rising
  
• Volume: Very Light
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 32.39 -9.0%
  
• ISE Sentiment Index 133.0 +44.5%
  
• Total Put/Call .92 -22.03%
  
• NYSE Arms .36 -32.56%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 122.92 -2.58%
  
• European Financial Sector CDS Index 240.05 +2.1%
  
• Western Europe Sovereign Debt CDS Index 303.0 unch.
  
• Emerging Market CDS Index 288.32 -3.77%
  
• 2-Year Swap Spread 30.0 unch.
  
• TED Spread 32.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 206.0 +6 bps
  
• China Import Iron Ore Spot $178.30/Metric Tonne unch.
  
• Citi US Economic Surprise Index -55.0 +12.8 points
  
• 10-Year TIPS Spread 2.03% +1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +90 open in Japan
• DAX Futures: Indicating +29 open in Germany

Portfolio:

• Higher: On gains in my Tech, Medical, Biotech and Retail sector longs
  
• Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added them back
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 rallies meaningfully despite Eurozone debt angst, global growth worries and rising food/energy prices. On the positive side, Airline, Gaming, Homebuilding, Construction, Insurance, Hospital, I-Banking, Bank, Alt Energy, Oil Tanker, Steel, Disk Drive and Networking shares are especially strong, rising over +3.75% on the day. Small-caps and cyclicals are substantially outperforming again. (XLF) has traded very well throughout the day. Gold is falling -2.3%. The 10-year yield is rising +8 bps to 2.27%. The Greece sovereign cds is down -2.7% to 2,189.28 bps and the Germany sovereign cds is falling -1.46% to 83.69 bps. Key European equity indices surged another +2.0% today. On the negative side, Road & Rail, Restaurant, Retail, Telecom and Utility shares are underperforming, rising less than +2.0%. Oil is rising +2.4%, Copper is falling -.25%, Lumber is down -.58% and the UBS-Bloomberg Ag Spot Index is up +.51%. Rice is right near a multi-year high, rising +31.0% in about 8 weeks. The US price for a gallon of gas is +.02/gallon today to $3.61/gallon. It is up .47/gallon in about 7 months. The France sovereign cds is rising +.2% to 165.28 bps, the Russia sovereign cds is gaining +.44% to 206.47 bps and the Belgium sovereign cds is rising +.91% to 243.72 bps. The Eurozone Financial Sector CDS Index is still very near it recent all-time high. The Citi Eurozone Economic Surprise Index has plunged -108.4 points in about 3 weeks to -102.30. The UBS-Bloomberg Ag Spot Index is at a new record high, which is a large negative. The Shanghai Composite did not participate in the Asian equity rally overnight, falling -1.37%, and is down -8.25% ytd. The ongoing trend higher in key cds remains a large negative. Volume was very light on today's stock advance as this year's worst-performers posted the sharpest gains. As well, the euro was unable to rise meaningfully despite equity trader optimism over the questionable prospects for a TARP-style European bank bailout. While stocks could easily head higher in the short-term, I continue to believe any sustainable equity advance must be accompanied by a meaningful decline in Eurozone debt angst, which has yet to be seen. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminished hurricane concerns, bargain-hunting, technical buying and financial sector strength.

Today's Headlines

Bloomberg:

• Merkel Bloc May Lack Majority for EFSF Bill, Handelsblatt Says. German Chancellor Angela Merkel’s ruling bloc of Christian Democrats and Free Democrats may lack a majority to secure passage of a bill to expand the euro’s temporary rescue fund, the Handelsblatt reported. As many as 23 coalition lawmakers may reject the bill that’s due in parliament next month, said the newspaper, without citing names. That underscores her dependence on the oppostion to ensure ratification. To gain passage of the bill on the coalition’s own strength, Merkel needs 311 votes in favor of the changes among the 620 lawmakers sitting in parliament’s lower chamber in Berlin. Her bloc comprises 330 lawmakers, implying that the German chancellor may lack 4 votes to achieve a coalition majority if 23 vote against the bill, Handelsblatt said. Euro-region leaders have pressed parliaments to secure fast-track approval to revamp the fund, called the European Financial Stability Facility, relieving or partly relieving the European Central Bank’s emergency debt purchase program.
• Consumer Spending in U.S. Climbs More Than Forecast on Purchases of Autos. Consumer spending climbed more than forecast in July as Americans dipped into savings to buy cars and cool their homes, showing the biggest part of the economy is holding up. Purchases rose 0.8 percent, the biggest gain since February, after a 0.1 percent decline the prior month, Commerce Department figures showed today in Washington. Incomes grew 0.3 percent and the savings rate dropped to a four-month low.
• Pending Sales of Previously Owned U.S. Homes Decline More Than Estimated. The number of contracts to purchase previously owned U.S. homes fell in July for the first time in three months, a sign that lower prices and borrowing costs aren’t luring in buyers. The 1.3 percent decrease in the index of pending home sales followed a 2.4 percent gain the previous month, the National Association of Realtors said today in Washington. Economists forecast a 1 percent drop, according to the median of 40 estimates in a Bloomberg News survey.
• Copper Falls in New York on Concern Global Economic Recovery Is Faltering. Copper fell for the first time in five sessions on concern that the global economic recovery is faltering. World economic expansion will slow to 3 percent this year from 4.2 percent in 2010, and growth will remain subdued until 2015, the Centre for Economics and Business Research said today in an e-mailed statement. Before today, copper fell 8.1 percent in August, heading for the biggest monthly drop since January 2010, amid escalating debt woes in Europe and the U.S. Copper futures for December delivery fell 1.95 cents, or 0.5 percent, to $4.098 a pound at 9:54 a.m. on the Comex in New York.

Wall Street Journal:

• Floods Still Threaten as Recovery Begins. Vermont towns battled floods of historic proportions, utility crews struggled to restore power to five million people along the East Coast, and big-city commuters coped with transit-system disruptions Monday as the rainy remnants of Hurricane Irene finally spun into Canada.
• Noda Gets The Nod. Japan is getting another new prime minister this week, with Yoshihiko Noda's victory in yesterday's Democratic Party of Japan leadership race setting him up to take the top job as early as today. He becomes the country's sixth leader in five years, and cynics are already betting he'll be a one-year wonder like his four immediate predecessors. That cynicism may well be justified, though the leadership race has brought a few glimmers of hope.
  
• Hungary Sees a Decade of Euro Zone Turmoil. The euro will be under permanent stress for up to a decade as a result of the sovereign debt concerns of some of its members, Hungary’s prime minister said Monday, pledging he’ll prepare his country for the tumultuous time ahead. “Hungary must prepare for a scenario in which the … economic crisis won’t pass in few months. There are analyses that show it won’t pass in the coming few years, either,” Viktor Orban said.

CNBC.com:

• GOP to Target Regulations in Fall Push to Spur Hiring. The House Republican agenda this fall will focus on repealing environmental and labor regulations that GOP lawmakers say are driving up the cost of doing business and discouraging employers from hiring new workers.
• Is Europe Weighing TARP Program to Bailout Big Banks?
  

Business Insider:

• Hurricane Katia Is Now Forming Over The Atlantic.
• ECRI's Achuthan: "It's Too Late for Obama to Create Jobs'.
• SocGen: "Commodity Prices Seem Much Too High".
• "Beijing Is A Nightmare": Ai Weiwei Denouces Beijing In Controversial Editorial.
  

Zero Hedge:

• NYSE Short Interest Soars By Most Since March 2009 S&P Lows, Highest Shorting Since June 2010. (graphs)
• CMBS Sell Off Continues, Super Dupers Hit Widest Spread Since June 2010. (graph)
• Dallas Fed Survey Respondents' Gloom Soars.
  

New York Times:

• Bank of America Sells Stake in China Construction Bank. Bank of America announced on Monday that it would offload about half of its China Construction Bank holdings to a group of unidentified investors, in a deal expected to raise $8.3 billion.

Nasdaq:

• IMF Cuts US, Euro Zone Growth Forecasts For 2011, 2012 - Report. The International Monetary Fund has cut its 2011-2012 growth forecasts for the U.S. and the 17-nation euro zone and says central banks in both should be prepared to ease monetary policy, Italian news agency ANSA reported Monday, citing an IMF draft report. The fund lowered its forecast for expansion of U.S. gross domestic product this year to 1.6% from a 2.5% view issued in June, and lowered its outlook for next year to 2% from 2.7%, ANSA reported. The IMF cut its euro zone 2011 growth forecast to 1.9% from 2% and the 2012 view to 1.4% from 1.7%, according to the report.

RTT News:

• WSJ: Union Warns of Saab Bankruptcy Over Unpaid Wages. Swedish automaker Saab Automobile AB (SAAB-B,0GWL.L: News ) could be forced into bankruptcy if fails to pay wages by the end of this week, the Wall Street Journal reported Monday, citing one of the company's labor unions, IF Metall. Saab Automobile is owned by Dutch automaker Swedish Automobile N.V.

Rasmussen Reports:

• Voters Express Stronger Enthusiasm for Health Care Repeal. The latest Rasmussen Reports national telephone survey of Likely U.S. Voters shows that 57% at least somewhat favor repeal of the health care law, including 46% who Strongly Favor repeal. Thirty-seven percent (37%) at least somewhat oppose repeal, with 25% who are Strongly Opposed.

AP:

• EU Official: Market Turmoil Threatens Recovery. Turmoil in global financial markets threatens the economic recovery in the European Union, the bloc's top economic official said Monday. The warning from EU Monetary Affairs Commissioner Olli Rehn came after a turbulent summer for markets across the globe, as investors worried about a potential new recession in the United States, the eurozone's ability to resolve its debt crisis and the health of European banks. "The financial markets and the real economy move now more in synchrony, which makes me seriously concerned about continued financial turbulence spilling over to and potentially harming the recovery of the real economy," Rehn told European lawmakers. That statement is a sharp turnaround from comments in recent months, when Rehn consistently pointed out that growth in the EU was strengthening despite the market jitters. As a result, the European Commission now has a somewhat bleaker view of economic growth in Europe than this spring, Rehn said, adding that a new forecast will be released Sept 15. Rehn, meanwhile, sought to dampen expectations that so-called Eurobonds — debt backed by the entire eurozone — could be a quick and easy solution to the currency union's crisis. "It is clear that Eurobonds, in whatever form they were to be introduced, would have to be accompanied by a substantially reinforced fiscal surveillance and policy coordination," Rehn said. Such moves "would have unavoidable implications for fiscal sovereignty" and would require "substantive debate in euro area member states to see if they would be ready to accept it," Rehn added, indicating investors should not expect them to be introduced anytime soon.

Financial Times:

• Market Turmoil Lands Hedge Funds With Big Losses. August, it now seems likely, will be the industry’s worst month since October 2008, when the collapse of Lehman Brothers triggered a worldwide sell-off. It will almost certainly also be one of the top five worst months for the industry since performance data started to be aggregated in 1990. According to the latest provisional figures from Hedge Fund Research, the average hedge fund manager has lost 4.1 per cent in the past four weeks. Equity-focused managers have fared even worse, losing an estimated 6.9 per cent – a staggering drop for an industry that prides itself on risk management, and charges accordingly.
• Sovereign Spreads Challenging Cherished Notions.
  

Corriere Della Sera:

• Italy's tax burden will rise to 48.4% of GDP in 2013 from 46.6% in 2011 under the austerity plan approved by the Italian Cabinet on Aug. 12. The plan includes a tax increase for "high earners" as well as a special tax on profit of electricity utilities.

Il Sole 24 Ore:

• Italy may increase its value-added tax to 21% from 20%.

People's Daily:

• US Fed Chair May Face Tough Sell on Quantitative Easing.

Global Times:

• Shanghai Union Pleads for Inflation Fight. The Shanghai Federation of Trade Unions, a labor organization, has called for the local government to take further measures to curb inflation, noting the purchasing power of local workers has fallen 15.1 percent over the last 10 years. Shanghai wage earners' purchasing power dropped by 15.1 percent from 2001 to 2010, according to a survey conducted by the trade union. The survey found the loss grew more severe as the decade went on and purchasing power fell faster from 2006 to 2010 than it did from 2001 to 2005. In addition, Shanghai's consumer price index (CPI) hit a new high in July, up 5.6 percent over the previous month, with price increases in all sectors. On a national level, the price of pork surged 56.7 percent annually in July, putting the CPI up 6.5 percent year on year to hit its highest level in 37 months. Xiao is concerned the pace of salary increases lags far behind the increase of the CPI. "To better address the problem, local governments should perfect the price control system to restrain producers from irrationally raising prices, especially products or services that are tied in closely with daily life," he said.

Bear Radar

Style Underperformer:

• Large-Cap Growth (+2.19%)

Sector Underperformers:

• 1) Gold & Silver -.51% 2) Retail +1.39% 3) Road & Rail +1.49%

Stocks Falling on Unusual Volume:

• SQI, PANL, PWRD, MON, LFC and AUQ
  

Stocks With Unusual Put Option Activity:

• 1) MAR 2) ACN 3) INFY 4) RDC 5) CCL
  

Stocks With Most Negative News Mentions:

• 1) RHI 2) SPLS 3) R 4) CLH 5) BWEN
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth (+2.49%)

Sector Outperformers:

• 1) Airlines +3.69% 2) Insurance +3.29% 3) Networking +2.99%

Stocks Rising on Unusual Volume:

• TSU, SNP, TZOO, DLTR, ACGL, JVA, CAVM, VQ, DCI, B, KIE, DRC and TNH
  

Stocks With Unusual Call Option Activity:

• 1) USG 2) IMAX 3) WIN 4) GLL 5) CEDC
  

Stocks With Most Positive News Mentions:

• 1) EAT 2) HRS 3) BIG 4) CALM 5) VRX
  

Charts:

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

Monday Watch

Weekend Headlines
Bloomberg:

• Italy Tests Appetite for Debt When ECB Is Absent: Euro Credit. Italy will attempt to raise money in the bond market this week without the safety net of buying by the European Central Bank, which has restrained the nation’s borrowing costs for three weeks by buying its debt. The euro’s founding treaty bars the central bank from buying bonds directly from governments, meaning it can only provide secondary market support. As well as 3.75 billion euros ($5.4 billion) of 10-year securities to create a new benchmark, Italy is marketing 4.25 billion euros of bonds maturing in 2014 and 2018, with Spain and France also planning sales. “This is where the litmus test comes, the test to see whether the ECB’s buying power can hold yields where they are,” said Shahid Ikram, head of sovereigns at London-based Aviva Investors, which has some of its $440 billion of assets invested in Italian bonds. “From a risk-return perspective, there’s a great deal of uncertainty. You are going to see more volatility in the Italian yield, some concession will be required and then it’s just a case of what real demand there is.” The ECB began buying Spanish and Italian government bonds on Aug. 8 to stop the debt crisis from spreading to the euro- region’s third- and fourth-biggest economies. The purchases brought the nations’ 10-year bond yields down to about 5 percent from euro-era records, even as Europe’s leaders disagreed over how to contain the turmoil. Both Aviva’s Ikram and Werner Fey, a fund manager at Frankfurt Trust Investment GmbH in Frankfurt, which oversees about 6.5 billion euros of fixed-income assets, said they won’t be buying at this Italian auction. “The problem for fund managers is that there is huge volatility and big event risk,” Fey said. “The politicians are not coming up with a solution. There’s a risk the ECB may end its program and there will be a massive hit on Italian paper. You cannot exclude that the market will test the Italian bond yield highs again.” At the most recent auction on July 28, the 10-year yield demanded by investors climbed to 5.77 percent from 4.94 percent a month earlier. That compares with 4.73 percent at a May 30 sale, while the average yield at three auctions prior to May was 4.83 percent, according to Bloomberg data.
  
• Central Bankers Urge Governments to Keep Global Economic Expansion Intact. Central bankers gathered at an annual retreat in Jackson Hole, Wyoming, this weekend had a message for political leaders: monetary policy alone can’t keep the global expansion going. Federal Reserve Chairman Ben S. Bernanke urged adoption of “good, proactive housing policies” to reverse the depressed U.S. real estate market and warned lawmakers to avoid steps that may hurt short-term growth. Ewald Nowotny of the European Central Bank Governing Council said euro-area governments should expand the powers of their regional bailout fund. “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said at the annual conference of policy makers and economists, sponsored by the Kansas City Fed.
• Greek Notes Slump on Concern Aid Deal Will Fail; Bunds Decline. Greek two-year notes slumped, pushing yields to a euro-era record of 45.91 percent this week, on concern Finland’s demands for loan collateral will endanger the nation’s second bailout package and trigger a default. German 10-year bonds fell for the first week in five as European equities posted a weekly gain, damping demand for the relative safety of government debt. Italian 10-year bonds completed their first weekly loss since the European Central Bank began buying the securities to stem contagion from the sovereign debt crisis. Italy, Spain and France are scheduled to auction debt next week. “With the demands for collateral deals in return for loans to Greece, the risk of the rescue package not being realized has increased quite significantly,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The market is now doubting that there will be a rescue package and Greek bonds have been punished.” Greece’s two-year yields rose 6.17 percentage points to 43.94 percent as of 5:27 p.m. in London yesterday, that’s the biggest ever weekly increase. Yields reached a euro-era record on Aug 25. The nation’s 10-year bonds climbed 1.21 percentage points to 17.86 percent. They reached 18.55 percent on Aug. 25, also the highest since the euro was introduced in 1999.
• German Lawmakers Can Set EFSF Role, Schaeuble Tells Tagesspiegel. German Finance Minister Wolfgang Schaeuble said parliament can decide the scope of its role in determining future euro-region rescue aid, Tagesspiegel reported. In an interview to be published tomorrow, Schaeuble said a law passed in May last year upholds lawmakers’ right to participate in aid decisions. Lawmakers can amend the law as they see fit, he is cited as saying. Germany is preparing legislation to expand the tool kit of the European Financial Stability Facility that has prompted concern that Schaeuble aims in the bill to curb parliament’s control over federal spending. “We need to find a sensible balance between the EFSF and parliament’s justifiable need to co-determine the concrete exercise of the EFSF’s work,” Schaeuble said. “I am with heart and soul a parliamentarian.” Schaeuble said he is “confident” of finding a majority in the ruling coalition to back the EFSF bill as well as gain an overall majority in a plenary vote in parliament at the end of September.
• German FDP Wants Veto Anchored in EFSF Operations, Bild Says. Germany’s Free Democratic Party, Chancellor Angela Merkel’s coalition partner, wants veto rights to be set in a national bill being drawn up to expand the scope of the euro region’s rescue fund, Bild Zeitung said. The German parliament must have the right to approve all aid petitions made to the rescue fund and the weight of its decisions to be reflected in the fund’s actions, the newspaper reported today, citing unidentified FDP officials. If a petition fails to gain a clear parliamentary majority Germany’s representative on the fund’s ruling board must be forced to reject the petition rather than abstain, Bild reported, citing the officials. The Germany government aims to have the bill to expand the toolbox of the European Financial Stability Facility on the statute books by the end of September.
• Wall Street Haunted By Loss Cuts Risk, Trading Costs Soar: Credit Markets. Wall Street traders are demanding the biggest premiums to buy and sell credit in almost two years as they seek protections from market swings driven by Europe’s debt crisis and a slowing global economy. A measure of the cost of trading credit-default swaps has tripled this month as prices gyrate the most in 13 months, according to data compiled by Bloomberg and CMA in London. Amid the volatility, the biggest bond dealers cut their holdings of corporate securities to $73.1 billion as of Aug. 17, the least since July 2009, Federal Reserve data show. The surge underscores the fragility of credit markets three years after the collapse of Lehman Brothers Holdings Inc. triggered the biggest corporate bond losses in at least 35 years. With junk-rated securities poised to lose the most this month since November 2008, banks and investors are bracing for broader declines on concern Europe’s fiscal imbalances will infect the banking system at a time when the economy may not be strong enough to withstand such headwinds. The difference between where dealers will buy and sell the 15 most-traded credit-default swaps on U.S. investment-grade companies has widened to 14 basis points from 4.6 basis points at the start of August, according to market prices compiled by CMA. That’s equivalent to $14,000 on a $10 million contract and up from $4,600. The so-called bid-ask spread has increased to 5.4 percent of the annual cost of the contracts, the most since December 2009 and up from 3 percent on Aug. 1. “The dealer community is not putting risk on,” said Jason Rosiak, the head of portfolio management at Newport Beach, California-based Pacific Asset Management, an affiliate of Pacific Life Insurance Co. “They’re not cushioning the blow as they once upon a time were, and this leads to more volatility.” Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds globally rather than government debentures rose to the highest level in two years last week. The cost of protecting U.S. company debt from default increased for the fifth week as global bond sales plummeted. Leveraged loan prices plunged to the lowest since 2009.
• Hurricane Irene's Estimated U.S. Cost for Insurers Declines to $3 Billion. Hurricane Irene’s estimated cost to insurers fell to $3 billion in the U.S. as the storm weakened on its path toward New England, according to Kinetic Analysis Corp., a firm that predicts the effects of disasters. That compares with a projection last week from the Silver Spring, Maryland-based company of as much as $14 billion. Total economic losses, including those that aren’t insured, may be about $7 billion.
• China Reserve-Ratio Move to Lock Up $140 Billion, Bank of America Says. China’s central bank broadened lenders’ reserve requirements to cover margin deposits, a move that may drain 900 billion yuan ($140 billion) from the banking system over six months, Bank of America Merrill Lynch said. The measure will be phased in from Sept. 5 and take full effect Feb. 15, economist Lu Ting said in an e-mailed note yesterday, without saying where he got the information. Reuters earlier reported such a move, citing unnamed banking officials. In Beijing, a central bank press official declined to comment. Reuters reported yesterday that reserve requirements will now cover margin deposits paid by banks’ clients to secure issuance of bankers’ acceptance, letters of guarantee and letters of credit. Such deposits were 4.4 trillion yuan ($689 billion) at the end of July, the news service reported. The new rules will start to take effect for the biggest banks from Sept. 5, according to Lu. The net effect of the reported rule change “if everything else was unchanged,” would be to tighten monetary policy, Capital Economics said in a note yesterday. “But in fact, we think any such move would be designed as an alternative to further reserve-requirement increases over the rest of the year.” Lu calculated that the latest move may have an effect equivalent to a 130 basis-point increase in reserve requirements. Capital Economics’ estimate was “roughly 125 basis points.”
• Hedge Funds Boost Bullish Agriculture Bets as Corn, Soy Yields May Slump. Speculators increased bullish bets on agricultural commodities to the highest level since early May after adverse weather eroded yield prospects for corn and soybean crops in the U.S., the world’s top grower and exporter. Hedge funds and other speculators raised their net-long positions across 11 agricultural futures and options by 15 percent to 776,774 contracts in the week through Aug. 23, government data compiled by Bloomberg show. That’s the highest since May 6. Funds became bullish on wheat for the first time since June and wagers that soybeans will gain rose 64 percent. “It’s really all on the supply side,” Chris Nagel, a market analyst at Northstar Commodity Investment Co. in Minneapolis, said in a telephone interview. “Investors will keep piling money into corn and beans until they see better certainty what the crop size will be.” A broader measure showed that funds also raised their net- long positions in 18 commodities by 9 percent to 1.11 million futures and options contracts, data from U.S. Commodity Futures Trading Commission show. Speculators reduced positions in gold by 7.8 percent to 201,294 contracts, the third straight decline, government data show. Holdings fell as price rose to a record $1,917.90 an ounce on Aug. 23.
• Congress Deficit Panel Should 'Go Big, Go Bold' on Savings, Warner Says. Democratic Senator Mark Warner, one of the “gang of six” that sought a bipartisan deal on U.S. debt reduction, urged members of both parties on a deficit supercommittee to “go big, go bold” with their savings. “Even if the supercommittee knocks another $1.5 trillion off our debt, that’s still not going to be enough,” Warner said on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “Unless we can also take on the issue of entitlement reform and tax reform to generate revenue, I don’t think we’re going to get there,” he said. Warner of Virginia said the government has exhausted traditional tools for boosting the economy and creating jobs, such as lowering interest rates and injecting stimulus spending.
• Banks Decry Surcharges as Basel Plans Capital 'Punishment' for Size, Risk. Global banks are launching a counterattack against new capital guidelines, warning that they could reduce lending and harm growth as well as alter competition in the financial system. The Clearing House Association and the Institute of International Bankers, whose members include JPMorgan Chase & Co (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Citigroup Inc. (C), Deutsche Bank AG (DBK) and ING Groep NV (INGA), said in a letter that capital surcharges agreed to by the Federal Reserve and international regulators are “deeply flawed” and “reflexively based on the notion that size alone creates prudential concerns.” “There is a real tension between the regulators and the largest global systemically important institutions,” said Margaret Tahyar, a partner in the financial institutions practice at law firm Davis Polk & Wardwell in New York. “Capital is almost being used as a punishment.”
• Nobel Economists Back Austerity Amid Budgets Cuts. Nobel-prize winning economists including Robert Mundell, Reinhard Selten and Myron Scholes favor tough austerity measures to tackle deficits in Europe and the U.S. amid debt crises that shook the euro and saw the world’s largest economy lose a triple-A rating. The Nobel winners, meeting in Lindau, Germany and St. Gallen, Switzerland at a four-day symposium, said “draconian” measures were needed in economies from the U.S. to Greece, to tame debt levels even as global growth cools.
• Eurobank, Alpha Said to Merge Forming Biggest Greek Bank. EFG Eurobank Ergasias SA (EUROB) and Alpha Bank SA, Greece’s second and third-biggest banks, plan to merge in a bid to bolster their assets and ride out a deepening recession and the country’s sovereign debt crisis.
• Dollar Undervalued in Purchasing Power as Investors See Shelter. The dollar is poised for its biggest monthly gain since May, reclaiming its status as a haven while Switzerland and Japan boost efforts to weaken their currencies. The U.S. currency has appreciated 1.2 percent in August against a basket of the developed world’s nine most-traded exchange rates, according to data compiled by Bloomberg. “The dollar is a buy through the end of the third quarter,” Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co., the third-most accurate forecaster in the last six quarters as measured by Bloomberg, said in an Aug. 23 telephone interview. “The yen and the Swiss franc are very expensive and the dollar is very cheap and it’s the only major central bank that is not standing in the way of a currency advance.”
• Rice May Rally 22% on Thai Buying. Rice may rally 22 percent by yearend as Thailand, the world’s largest exporter, buys the grain from farmers at above-market rates, pushing up costs for importers and fanning global inflation even as economic growth slows. The price of 100 percent grade-B Thai rice, the regional benchmark, may rally to $750 per metric ton by Dec. 31, according to the median estimate in a Bloomberg News survey of seven exporters, traders and millers conducted last week. That target is $50 higher than the median estimate in a separate Bloomberg survey undertaken in the first half of this month. The surge may complicate matters for central bankers and policy makers around Asia who are already struggling to cool rising prices. Rice was the only grain separating the world from a food crisis, Abdolreza Abbassian, senior economist at the United Nations Food & Agriculture Organization, or FAO, said in February when worldwide food costs rallied to a record. World food prices, as tracked by the World Bank, surged 33 percent in July from a year earlier, boosted by higher costs of rice, corn, wheat, sugar and soybean oil.
• World economic growth will remain subdued until 2015, according to the Centre for Economics and Business Research, which cut its 2011 forecast. Global economic expansion will now slow from 4.2% in 2010 to 3% this year, compared with a prediction in May for 3.5% growth. "The sluggish growth that we forecast is likely to mean persistent high unemployment in the developed economies," CEBR CEO Douglas McWilliams said. "The silver lining to this could is that the prices of oil and other commodities are likely to be relatively weak for the next five years, putting less downward pressure on living standards than in the past two years."
• Johnson: Euro's Appeal Masks the Gathering Storm. Is the economic and financial situation in Western Europe largely under control, as many prominent Europeans contend? Or is it poised to move into a new and more difficult phase? The crisis feels unreal to some people in the same way that war felt phony to some Britons from September 1939 through spring 1940. In contrast to previous crises in emerging markets, Europe hasn’t moved precipitously toward collapse. But the main element that lets the European crisis unfold in slow motion -- the existence and appeal of the euro -- also explains why a great deal of volatility lies ahead. The storm is gathering.

Wall Street Journal:

• Weakened Irene Rakes Coast. Hurricane Irene menaced the Eastern seaboard, pounding tens of millions of Americans with wind, rain and floods—but largely sparing New York after an unprecedented shutdown of the largest U.S. city ahead of the massive storm.
• U.S., Israel Monitor Suspected Syrian WMD. Intelligence Services Allege Significant Stockpiles of Gases, Missiles at Military Bases Could Be Targets Amid Unrest. The U.S. and Israel are closely monitoring Syria's suspected cache of weapons of mass destruction, fearing that terror groups could take advantage of the revolt against President Bashar al-Assad to obtain blistering agents, nerve gas and long-range missiles, according to officials from both countries.
• Robust Profits Face Hurdles. Corporate America racked up big profits in the first half of the year even as economic growth slowed to a crawl. Now companies are facing the biggest test of the recovery in trying to maintain that momentum amid a dimming economic outlook. Among the potential land mines ahead: slowing global growth, a worrisome fiscal picture as Washington battles over the debt and plunging sentiment among U.S. consumers and businesses, raising risks of a pullback in spending.
• An EPA Moratorium. Obama has the power to delay new rules that will shut down 8% of all U.S. power generation. Since everyone has a suggestion or three about what President Obama can do to get the economy cooking again, here's one of ours: Immediately suspend the Environmental Protection Agency's bid to reorganize the U.S. electricity industry, and impose a moratorium on EPA rules at least until hiring and investment rebound for an extended period. The EPA is currently pushing an unprecedented rewrite of air-pollution rules in an attempt to shut down a large portion of the coal-fired power fleet. Though these regulations are among the most expensive in the agency's history, none were demanded by the late Pelosi Congress. They're all the result of purely bureaucratic discretion under the Clean Air Act, last revised in 1990.
• A Short Primer on the National Debt. With a return to 1990s growth rates, the debt-to-GDP ratio could drop to 56.7%, about where it was in 2000, in just one decade.

Marketwatch.com:

• Fed's Bullard Sees No Need for Easing. Economic conditions are not at the point now where the Federal Reserve should ease monetary policy further, James Bullard, the president of the St. Louis Fed, told MarketWatch in an interview on Saturday. Bullard said he was not convinced that the economy would suffer in coming quarters, as many leading economists are predicting. “I think there are good reasons to be optimistic even though when you look around these days there is a lot of gloom and doom,” Bullard said.

CNBC:

• Trichet Gives Master Class in Saying Nothing. On Sunday, the Sunday Times in the UK reported that policy makers in Brussels are drawing up radical plans to offer central guarantees over certain types of debt issued by banks. The move is reported to be a direct response to the sharp fall in U.S. funding for Europe’s banks. If true, this is clearly something the boss of the ECB can't be discussing in public. So as Trichet prepared for his speech, he turned to the history books and gave a master class on how to say something while actually saying nothing at all.
• Sino-Forest CEO Resigns Amid Allegations of Fraud. Sino-Forest, a Chinese forestry company accused of fraud, said Sunday Allen Chan had resigned as chairman and CEO and that it placed three senior employees on administrative leave, due to information uncovered in an ongoing internal review.

Business Insider:

• 13 Ways The Recession Has Completely Changed How Young People View Work.
• Obama Seeks The Ultimate Free Lunch For Housing, And It's A Bank Bailout In Disguise.
• San Francisco Is Building A Net Around The Golden Gate Bridge To Stop People From Killing Themselves. 24 people have killed themselves by jumping off the Golden Gate Bridge so far this year, putting 2011 on a pace to have the most such suicides ever (the previous high is 1977, which had 39), reports Scott James for the New York Times.
• Another Sign That The Huge Aussie Housing Bubble Is Popping.
  

Zero Hedge:

• Paul Wooley: "The Market Has Become Dangerous For Humanity... It Isn't Reaching Equilibrium, It Is Falling Into Chaos".
• As Stock and Sector Correlation Hits Fresh 20 Year Highs, Here Is Who Is Benefiting. (graphs)
• Wikileaks Reveals Early Chinese Warning of Domestic Asset Bubbles, Overcapacity, Bashing Of "Copy and Paste" Educational System.
  

IBD:

• Monro Muffler(MNRO) Brake Offers TLC For Old Cars.

NY Times:

• As Trade Volumes Soar, Exchanges Cash In. The latest financial market convulsions have been tough for almost everyone, including traders caught on the wrong side of another big swing and pained everyday investors watching their dwindling holdings go down and up — and down again. But there is a silver lining to even this latest market horror show, at least for the exchanges where the financial instruments change hands.
• As Fortunes Dim, Banks Confront a Leaner Future. Battered by a weak economy, the nation’s biggest banks are cutting jobs, consolidating businesses and scrambling for new sources of income in anticipation of a fundamentally altered financial landscape requiring leaner operations. Bank executives and analysts had expected a temporary drop in profits in the aftermath of the 2008 financial crisis. But a deeper jolt did not materialize as trillions of dollars in federal aid helped prop up the banks and revive the industry. Now, however, as government lifelines fade and a second recession seems increasingly possible, banks are finding growth constrained. They are bracing for a slowdown in lending and trading, with higher fees for consumers as well as lower investment returns amid tighter regulations. Profits and revenues are slipping to the levels of 2004 and 2005, before the housing bubble.

Gallup:

• Obama Job Approval: Approve 38%, Disapprove 55%. (graph)

Politico:

• Buffett BofA(BAC) Buy No Seal of Approval.

Reuters:

• Iraq al-Qaeda Regroups, Shi'ite Militias. Al Qaeda has resurfaced in former Iraqi strongholds, adding to the threat from more powerful and organised Shi'ite militias just as U.S. troops prepare to leave, Iraqi officials say. Despite the deaths of leaders and pressure from U.S. and Iraqi forces, al Qaeda's Sunni insurgents have been carrying out bolder attacks, seeking to rattle local security forces, officials said.
• LG Display Cuts 2012 Capex by at Least 25% From 2011. LG Display , the world's No.2 flat-screen maker, plans to cut next year's investment by at least a quarter and will hold off building new production lines, as global demand for flat-screen panels remains weak.
• Italy Readies Austerity Changes, Tremonti Under Fire. Italy's ruling coalition is preparing significant changes to its austerity plan presented in mid-August and Economy Minister Giulio Tremonti, who put together the original plan, appears increasingly isolated. The 45.5 billion euro ($65.3 million) austerity package, drawn up at the insistence of the European Central Bank, is currently being examined by the Senate, where any amendments must be presented by 1800 GMT Monday. Ahead of this deadline, tensions have been running high in Silvio Berlusconi's centre-right coalition, with Tremonti widely blamed for what are seen as failings of the original package and also for resisting the changes that are now being proposed. Italian newspapers report Berlusconi himself is exasperated by Tremonti's inflexibility and politicians and media close to the prime minister now regularly attack him in a way that would have been unthinkable a few months ago.

Financial Times:

• US Coal-Fired Power Stations Under Threat. The US power industry is facing its biggest shake-up since the Three Mile Island accident of 1979. That incident killed off investment in new nuclear plants for a generation. This time, it is coal-fired power stations that are under threat. New regulations governing pollution from coal plants that have been proposed by the US government’s Environmental Protection Agency could force up to 20 per cent of those plants to shut down, according to analysts and industry executives. The American Legislative Exchange Council, a free market campaign group, has described the impending upheaval as a “train wreck” that will cost jobs, send power prices soaring and lead to blackouts.
• Push For Permits in Gulf of Mexico. Sixty per cent of rigs contracted in the Gulf of Mexico are not working almost a year and a half after the Macondo disaster. Of 115 rigs in the gulf, 51 have no contracts, said Cinnamon Odell, senior rig market reporter at ODS-Petrodata, which provides data on the energy sector. Of the 64 with contracts, she said, only 48, or 41.5 per cent of the fleet, are working.

Telegraph:

• Euro Bail-Out In Doubt as "Hysteria" Sweeps Germany. German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga. If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union. The seething discontent in Germany over Europe's debt crisis has spread to all the key institutions of the state. "Hysteria is sweeping Germany " said Klaus Regling, the EFSF's director. German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel's own coalition plan to vote against the package, including twelve of the 44 members of Bavaria's Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse. A CSU document to be released on Monday flatly rebuts the latest accord between Chancellor Merkel and French president Nicholas Sarkozy, saying plans for an "economic government for eurozone states" are unacceptable. It demands treaty changes to let EMU states go bankrupt, and to eject them from the euro altogether for serial abuses. "An unlimited transfer union and pooling of debts for any length of time would imply a shared financial government and decisively change the character of a European confederation of states," said the draft, obtained by Der Spiegel. Mrs Merkel faces mutiny even within her own Christian Democrat (CDU) family. Wolfgang Bossbach, the spokesman for internal affairs, said he would oppose the package. "I can't vote against my own conviction," he said. The Bundestag is expected to decide late next month on the package, which empowers the EFSF to buy bonds pre-emptively and recapitalize banks. While the bill is likely to pass, the furious debate leaves no doubt that Germany will resist moves to boost the EFSF's firepower yet further. Mrs Merkel's aides say she is facing "war on every front". The next month will decide her future, Germany's destiny, and the fate of monetary union.
• Ben Bernanke Realized Printing Yet More Money Would Look Desperate. Why didn't Ben Bernanke signal a third round of quantitative easing on Friday at the long-anticipated Jackson Hole summit? The real motivation behind QE, of course, has been to allow essentially insolvent but politically connected financial institutions to recapitalise themselves. Many QE proceeds have been used to rebuild bank balance sheets rather than stimulate the broader economy. By propping up US Treasury and UK gilt prices, QE has also allowed weak governments, for now, to keep on spending, rather than genuinely tackling our fiscal predicament. In addition, QE is part of a deliberate but still largely unspoken ploy to gradually weaken the dollar (and pound), so debasing the enormous debts of the US (and UK) governments.
• European Banks Set Cash Test by IMF Chief. European banks face ordeal by fire this week after the International Monetary Fund called for “urgent” action to shore up their defences, if necessary with state money and under legal compulsion. Christine Lagarde, the IMF’s new chief, set off tremors at the Jackson Hole summit over the weekend with warnings that the global financial system is on very thin ice and vulnerable to the slightest shock. “We are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed, so we must act now,” she said. “Banks need urgent recapitalisation. If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalisation,” she said.

Sunday Times:

• European policy markers are considering providing central guarantees over some types of debt sold by banks to prevent a new credit crunch in the region. The debt guarantee would allow cash from the $635 billion European Financial Stability Fund to be used temporarily to insure banks' bonds.

The Independent on Sunday:

• Rebels Settle Scores in Libyan Capital. UN urges restraint as the rebels wreak their revenge on 'loyalists'.

Der Spiegel:

• Germany's CSU party, which is in a governing coalition with German Chancellor Angela Merkel's party, wants to ban European countries from the euro region that don't comply with criteria. There should be the possibility that a member country that "notoriously" fails to fulfill debt criteria is banned, citing a policy paper written by CSU General Secretary Alexander Dobrindt and Reinhold Bocklet, the vice president of the Bavarian state parliament.

Wirtschaftswoche:

• Euro region states that tap aid in the debt crisis should sell gold reserves and buy back their sovereign debt, Michael Fuchs, a lawmaker from German Chancellor Angela Merkel's Christian Democrats, was cited as saying. In an interview to be published tomorrow by the business weekly, Fuchs said such a step is preferable to the bond buying program of the ECB. Such as step would also be suitable for Italy, which controls large gold reserves though has not tapped aid, he said.

Frankfurter Allgemeine Zeitung:

• The euro region should consider amending the Maastricht Treaty to further limit permissible annual budget deficits, said Philipp Roesler, chairman of Germany's co-ruling Free Democratic Party, in an interview to be published tomorrow. Cutting the current permitted deficit limit of three percent of a member country's gross domestic product would foster greater budget discipline, Roesler said.

Frankfurter Rundschau:

• Germany will have to make sacrifices in order to save the euro and solve the debt crisis, Han-Peter Keitel, head of the BDI federation of German industry, was cited as saying.

Die Welt:

• German Foreign Minister Guido Westerwelle said the EU should respond to the debt crisis by fostering integration around a core even if this means creating a union of "two speeds". In an interview published tomorrow, Westerwelle said all 27 states should be invited to speed up integration of economic and budget policy as well as of defense policy. Those states who are unable to participate "shouldn't hold up the others," he said.
• DZ Bank AG wrote down the value of its Greece portfolio by $352 million in the first six months of the year
  

Bild am Sonntag:

• German Chancellor Angela Merkel is optimistic that the increased euro-region bailout will get majority approval in the Bundestag, citing an interview. Merkel rejected euro bonds as a means to tackle the crisis, saying that won't solve the root of the problem, namely the massive debts.

Focus:

• Germany's Christian Social Union party, an affiliate of Chancellor Angela Merkel's Christian Democrats, wants the country to uphold the European Union's no-bailout rule. The CSU has drawn up a position paper for an Aug. 29 meeting that will focus on revamping its strategy in the euro debt crisis, said the magazine. "Turning away from the precept of no-bailouts amounts to turning away from the conditions on which the currency union rests," said Focus, citing the CSU paper directly. "That's the same as turning away from self-responsibility and national sovereignty to create a transfer union."

Il Sole 24 Ore:

• Italy needs to adopt a growth stimulus package as fiscal measures aren't enough to tame its debt, Pier Carlo Padoan, chief economist of the OECD, said. Italy has to address "the causes of its high public debt, it can't live forever with a debt of that dimension," Padoan said. On the purchase by the ECB of bonds of countries including Italy, Padoan said that it's a "temporary" measure that has to be followed by a long-term strategy.

The Globe and Mail:

• Rally in Equities Defies Credit Gloom. Financial markets have been gripped by a striking dichotomy for much of the past week: while credit markets have continued to rumble and are arguably pricing in a global recession, many equity markets have managed to claw back some of their losses. Debt markets have been roiled by heightened concerns over stresses in bank funding and worries that Greece’s second bail-out package could be delayed or even unravel due to Athens’ agreement to supply Finland with collateral for its share of the rescue. This has led to several other eurozone countries seeking similar bilateral deals, potentially endangering the painstakingly negotiated bail-out agreement just months after it was struck. High-yield debt in the U.S. is on track for its worst monthly return since November 2008, down 5 per cent so far this month, with junk credits yielding nearly 10 per cent. But the Greek imbroglio and bank funding concerns have had a markedly negative effect on Europe’s bond markets in particular. Markit’s Crossover index of European high-yield bond credit default swaps, a gauge of default risk, spiked to 724 basis points on Friday, the highest since July 2009. Similar indices for European investment grade debt, bank bonds and western government bonds have also risen markedly this week. “Credit markets are pricing in a global recession, whatever way you look at it. The only question is whether it is a shallow or deep recession,” Mr Spajic says. “The bank spreads are at deep stress levels for the financial system.” On the other hand, equity markets are still pricing in some growth – albeit more modest than at the start of the summer. “The fixed income market is telling us different things than the equity market, and only one of them is right,” says Ajay Rajadhyaksha, head of U.S. fixed income strategy at Barclays Capital. “The question is which one.” “The divergence between credit and equity can only go on for so long,” warns Chris Whitman, global co-head of equity capital markets at Deutsche Bank. Ronan Carr, European equity strategist at Morgan Stanley, estimates that European equities are pricing in a 6 per cent decline in company earnings as a result of the slowdown in growth, but warns that the risks are skewed to the downside: “We don’t think equities are pricing in a recession, so if one materializes, stock markets probably have further to fall.” A note from Suki Mann, a credit strategist at Société Générale, seemed to sum up the mood: “We remain fearful of political event risk as it continues to cast a pall over all risk asset markets. “We know that many are itching to get involved, but unfortunately, we fear we’re in for a fairly tumultuous period for a while still.”

People's Daily:

• China must improve people's livelihoods amid many unfavorable factors that may affect economic stability in the second half, the People's Daily said in a front-page commentary today. The country's social management is facing "brand-new challenges," the commentary said.
• Jia Kang, head of China's Ministry of Finance's research institute for fiscal science, said a property tax could curb bubbles in the real estate market and support the industry's sustainable development in the long-term, citing Jia. The country should accelerate systemic reform while implementing current property control measures, the report said.
• Beijing will reduce property agent commissions for home purchases by .5 percentage points from Aug. 31, the Beijing Municipal Commission of Development and Reform said in a statement on its website today. Agent commissions for home purchases of no more than 5 million yuan will be cut to 2 percent, the statement said.
  

Caijing:

• Some Southern European countries with heavy liabilities may be forced to implement debt restructuring or "partially default" as the European sovereign debt turmoil develops, citing Li Daokui, an adviser to the People's Bank of China. S&P did the right thing in recognizing the fact that the U.S.'s sovereign credit has declined, Li said. The U.S. started to fall off its economic and global pedestal this year, Li said.

China Securities Journal:

• Taizhou city in China's eastern province of Zhejiang has imposed limits on the purchases of homes by families, citing the local government. The measure, which takes effect on Sept. 1, will far families that own two homes in the city from buying new homes. More second- and third-tier cities will likely introduce similar limits.

Weekend Recommendations
Barron's:

• Made positive comments on (JNY).
• Made negative comments on (DNKN).
  

Night Trading

• Asian indices are -.75% to +2.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 158.0 -2.0 basis points.
• Asia Pacific Sovereign CDS Index 153.0 +.25 basis point.
• FTSE-100 futures n/a.
  
• S&P 500 futures +.84%.
• NASDAQ 100 futures +.53%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DCI)/.79

Economic Releases
8:30 am EST

• Personal Income for July is estimated to rise +.3% versus a +.1% gain in June.
• Personal Spending for July is estimated to rise +.5% versus a -.2% decline in June.
• The PCE Core for July is estimated to rise +.2% versus a +.1% gain in June.

10:00 am EST

• Pending Home Sales for July are estimated to fall -.9% versus a +2.4% gain in June.

10:30 am EST

• Dallas Fed Manufacturing Activity for August is estimated to fall to -8.5 versus -2.0 in July.

Upcoming Splits

• (HFC) 2-for-1
• (VRUS) 2-for-1
• (RGCO) 2-for-1
  

Other Potential Market Movers

• The 3 & 6-Month Treasury Bill Auctions could also impact trading today.
  

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