Sunday, September 27, 2009

Monday Watch

Weekend Headlines

- John Podesta, a chief of staff in Bill Clinton’s White House, compared the nation’s budget crisis to the situation the former president faced in 1993 and said a value-added tax is “more plausible today” than ever. “There’s going to have to be revenue in this budget,” Podesta, co-chairman of President Barack Obama’s transition team, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. A so-called consumption tax would “create a balance” with European and Japanese economies and “could potentially have a substantial effect on competitiveness,” he said. Value- added taxes in Europe and Japan encourage savings by taxing consumption. Podesta said that though such a tax may be regressive, it can be balanced by exempting some products and using “the money to support low-wage workers.” Podesta, who is president of the Center for American Progress, a Washington-based public policy group, is convening a meeting of economic policy experts Sept. 30 to discuss the long-term federal budget deficit. The Congressional Budget Office estimated in August that the deficit will be 11.2 percent of gross domestic product, the highest since World War II. Podesta said Obama will begin tackling the deficit by ending the upper-income tax cuts enacted under his predecessor, President George W. Bush. “Then you have to look at whether that gets you far enough of the way,” he said. On health care, Podesta expressed optimism that Congress will pass a health-care bill in the next couple of months even though so far none of the measures has won Republican support and Democrats are divided over whether to include a government- run program to compete with private insurers. If Maine Senator Olympia Snowe, a Republican who has worked closely with Democrats on compromise legislation, votes for a bill, “that really advances the cause forward,” he said.

- Najibullah Zazi, an Afghan man charged with an alleged plot to detonate explosives in the U.S., may have intended to make a bomb and use it in New York on the anniversary of the World Trade Center bombings, a federal prosecutor said. Zazi, 24, a former airport shuttle van driver, was engaged in “a chilling and disturbing sequence of events,” Assistant U.S. Attorney Timothy Neff told U.S. Magistrate Judge Craig Shaffer at yesterday’s hearing in federal court in Denver. The sequence “suggest that defendant was intent on making a bomb and being in New York on 9/11 for purposes of perhaps using such item.” After Zazi drove from Denver to New York on Sept. 10, he attempted to assemble bomb-making components for an improvised explosive, Neff said in court yesterday. Investigators also had evidence that Zazi stayed at a New York hotel cooking these components, Neff said. “His actions suggest that the defendant was in the throes of making his bomb,” Neff said. “The defendant did receive detailed bomb-making information. Evidence also indicates he and other individuals closely associated to him were seen purchasing” materials, such as hydrogen peroxide and acetone, to make the explosives, Neff told Shaffer.

- Iran fired short-range missiles as part of a military maneuver and said it will give a “crushing” response to any armed aggression. Iran “successfully tested a multimissile launching system,” state-run Press TV reported. “A number of missiles including the homemade Fateh and Tondar” models were launched both simultaneously and consecutively, the report said. The exercises may increase tension over the Persian Gulf country’s nuclear program. Iran’s Revolutionary Guards Corps said yesterday it would conduct the war games to maintain the “deterrent capacity” of the armed forces. The military plans to test medium-range missiles, such as the Shahab 2 missile, later today as well as improved long-range Shahab ones tomorrow, General Hossein Salami, head of the air force, told Press TV. “The message is that of security,” Salami said. “We will respond to any military action in a crushing manner.”

- Iran’s second uranium enrichment facility will “soon” become operational, Supreme Leader Ayatollah Ali Khamenei’s chief of staff said, a day after the Persian Gulf country confirmed reports of the plant’s development. “God willing, this new facility will be operational soon,” Mohammad Mohammadi Golpayegani, the chief of staff of the highest authority in the Islamic Republic, said today, according to the state-run Fars news agency. “It will blind the eyes of the enemies,” he said, referring to a local expression that means overcoming someone’s jealousy.

- President Barack Obama said he remains open to “a serious, meaningful dialogue” with Iran after the U.S., France and Britain disclosed the Islamic Republic has been building a secret nuclear-fuel facility.

- Pope Benedict XVI called on Europeans to “usher in a new beginning” in the “struggle for freedom and the search for truth” as he helped celebrate the 20th anniversary of the end of Communism during a three-day visit to the Czech Republic. “Freedom seeks purpose, it requires conviction,’ the pontiff said in an address today at Prague’s Hradcany Castle. The end of totalitarian regimes in central and eastern Europe in 1989 had ushered in a “renewal of hope. Is it not precisely that spirit that contemporary Europe needs?”
- Germany’s recovery from recession came in time to give a boost to Chancellor Angela Merkel’s re- election yesterday. It may not last much longer. Unemployment is set to jump and consumer spending to fall in 2010 as government stimulus runs out, according to the Halle- based IWH institute, an adviser to the government. Companies are warning of a credit crunch, and debt at a post-World War II high leaves policy makers with few options to counter a double dip. “The chancellor is not to be envied,” Ulrich Kater, chief economist at Dekabank in Frankfurt, said in an interview. “Having rescued the economy through large government aid programs will soon be forgotten and what’s left is cleaning up the mess.”

- China has begun an investigation into alleged subsidies on imports of American broiler chicken products, two weeks after the U.S. imposed tariffs on tire shipments from the Asian nation. The probe is a response to a petition from the China Animal Agriculture Association and is expected to be completed in a year, the Ministry of Commerce said today in a statement on its Web site. It comes after Group of 20 leaders meeting in Pittsburgh on Sept. 25 released a statement saying they would “fight protectionism.” China announced that it would look into alleged dumping of U.S. auto and chicken products on Sept. 13, two days after President Barack Obama imposed tariffs on imports of automobile tires from the Asian nation. “We’ll need to see what China decides to do after the probe to determine if a trade war is to happen,” Dong Shuzhi, head of research at Jinshi Futures Co. said from Shanghai today. “We would say the probe was a response to the tire dispute.”

- The U.S. may not be able to close its prison camp at Guantanamo Bay, Cuba, by the Jan. 22 deadline set by President Barack Obama, Defense Secretary Robert Gates said.

- Abbott Laboratories(ABT) is close to an agreement to buy Solvay SA’s pharmaceutical unit for about 4.8 billion euros ($7.1 billion) to get full control of the TriCor cholesterol pill, according to three people with knowledge of the situation.

Wall Street Journal:

- While central banks and multinational corporations account for the bulk of the nearly $4 trillion in daily world-wide currency trading, currency trading volume among individuals now approaches $120 billion. That is up about 20% from a year ago and nearly double the level three years ago, according to Aite Group, a Boston-based financial-services industry research and advisory firm.

- Fans of campy science fiction films know all too well that outsized monsters can wreak havoc on an otherwise peaceful and orderly society. But what B-movie writer could have conjured up this scary scenario—Too Big To Fail (TBTF) banks as the Blob that ate monetary policy and crippled the global economy? That's just about what we've seen in the financial crisis that began in 2007. While the list of competitive advantages TBTF institutions have over their smaller rivals is long, it is also well-known. We focus instead on an unrecognized macroeconomic threat: The very existence of these banks has blocked, or seriously undermined, the mechanisms through which monetary policy influences the economy.

- The stock market's strong rally is facing its next test as companies gear up to announce third-quarter earnings that, while still weak, will very possibly be better than investors expect. Earnings in the first two quarters of the year that beat expectations helped propel the market's recovery, and the prospect of a repeat has even some bears wondering if they have been too pessimistic. Morgan Stanley investment strategist Jason Todd, one of the few remaining bears on Wall Street, told clients last week that the stock market is looking stronger than he thought and won't tumble, as he has been predicting, at least through the end of the year. "We think equities will now trade above" his previous target for this year, Mr. Todd said in his report, "in large part because earnings will be higher than we previously anticipated." Until now, Mr. Todd had been predicting the market would fall 14% from today's level by the end of the year. Now he is telling clients that the Standard & Poor's 500-stock index -- which is up 54% from its March 9 low -- is likely to rise marginally between now and year's end and could be up as much as 15% before it gets into trouble. Expectations remain low. Analysts forecast a 25% decline in third-quarter profits for companies in the S&P 500 compared with a year ago, not counting charges and special items, according to Thomson Reuters. When the quarter began, analysts had been forecasting a drop of 21%. For makers of industrial materials, analysts now forecast a 68% third-quarter profit drop. The expected profit decline for energy companies is 64%, for industrial companies, 45%, and for technology companies, 15%, Thomson Reuters says. The one area where expectations are bubbly is at financial companies, whose escape from death is forecast to result in a 60% year-on-year profit gain. The other bright spot is consumer-discretionary stocks, makers of appliances, cars and other things consumers can easily delay purchasing, whose profits are expected to rise 16% compared with a year ago. Many people now expect a high percentage of companies once again to do less badly than the analysts forecast. Early results back that view. While only 16 companies have reported third-quarter results so far (these are companies operating on skewed fiscal calendars), 11, or 69%, have exceeded analyst predictions. The earnings picture will likely improve further in the fourth quarter, if only because last year's fourth quarter was so bad. Analysts expect fourth-quarter profit declines in only four of the 10 S&P sectors, according to Thomson Reuters: energy, industrials, utilities and health care. For the first quarter of 2010, analysts forecast a profit decline only in telecommunications and utilities, and the drop is expected to be only 2% to 3%.

- The more we inspect Max Baucus's health-care bill, the worse it looks. Today's howler: One reason it allegedly "pays for itself" over 10 years is because it would break all 50 state budgets by permanently expanding Medicaid, the joint state-federal program for the poor. Democrats want to use Medicaid to cover everyone up to at least 133% of the federal poverty level, or about $30,000 for a family of four. Starting in 2014, Mr. Baucus plans to spend $287 billion through 2019—or about one-third of ObamaCare's total spending—to add some 11 million new people to the Medicaid rolls. About 59 million people are on Medicaid today—which means that a decade from now about a quarter of the total population would be on a program originally sold as help for low-income women, children and the disabled. State budgets would explode—by $37 billion, according to the Congressional Budget Office—because they would no longer be allowed to set eligibility in line with their own decisions about taxes and spending. This is the mother—and father and crazy uncle—of unfunded mandates. This burden would arrive on the heels of an unprecedented state fiscal crisis. As of this month, some 48 states had shortfalls in their 2010 budgets totaling $168 billion—or 24% of total state budgets. The left-wing Center for Budget and Policy Priorities expects total state deficits in 2011 to rise to $180 billion. And this is counting the $87 billion Medicaid bailout in this year's stimulus bill.

- Independent mortgage banks, fearing extinction, are organizing efforts to defend their interests in Congress. A group of mortgage lenders plans to announce this week the launching of the Community Mortgage Lenders of America. The new trade group plans to lobby for the interests of local mortgage banks and other lenders that aren't owned by large banking companies. Two weeks ago, another group with similar aims, the Community Mortgage Banking Project, announced its formation.

- Amid the worst recession since the 1930s, Monster Worldwide(MWW), parent of online job site, has been busily investing in its business. Over the past three years, it has spent more than $200 million to redesign its Web site for job seekers; to purchase to boost its presence abroad; and to buy Trovix, a technology company with a vaunted new search tool that should appeal to Monster's key clients: staffing companies and corporate human-resources departments.

- Already facing the loss of federal government funding, the community-organizing group Acorn also has run afoul of one of its big corporate partners, Bank of America(BAC) Corp. In response to questions from The Wall Street Journal, a spokesman for the banking company said it has "suspended current commitments" to Acorn Housing, an affiliated group, and "will not enter into any further agreements with Acorn or any of its affiliates," pending assessments by the bank of the organization's operations.

- The discovery that Countrywide Financial Corp. recorded phone conversations with borrowers in a controversial mortgage program that included public officials -- and that those recordings have been destroyed -- has prompted new congressional calls for more information about the program. Rep. Darrell Issa of California, the ranking Republican on the House Oversight and Government Reform Committee, is trying to subpoena the remaining records of Countrywide's VIP loan program. So far, the committee's chairman, New York Democratic Rep. Edolphus Towns, has turned down that request.

- China's sovereign-wealth fund, China Investment Corp., has committed to invest about $1 billion with Los Angeles-based Oaktree Capital Management LP, according to a media report Saturday. Oaktree is expected to invest CIC's money in distressed debt and other fixed-income assets, The Wall Street Journal reported in its online edition, citing unnamed sources. The firm, which oversees more than $60 billion in assets, makes investments ranging from the debt of battered casino operators to entire companies. Oaktree was among the nine big asset-management firms chosen by the Treasury Department as fund managers for the Public-Private Investment Partnership, or PPIP, the government program designed to rid banks of toxic assets. CIC owns stakes in Blackstone Group LP(BX) and Morgan Stanley(MS) .
- Twenty-two large banks in Europe may have accumulated credit losses of close to €400 billion for this year and next, according to officials who have seen a draft of conclusions of “stress tests” conducted by European regulators. At a meeting next Thursday and Friday in Sweden, European Union finance ministers are planning to publish at least one headline figure on banking health based on the results of the tests, the officials, who were not authorized to speak publicly, said Friday.

NY Times:

- Crisscrossing the country, hundreds of thousands of long-haul truckers use computers in their cabs to get directions and stay in close contact with dispatchers, saving precious minutes that might otherwise be spent at the side of the road.

- The nation’s drive toward computerized medical records is getting a push from big hospitals, which hope not only to improve patient care but to gain an edge on competitors. And an effort to be announced on Monday by a big New York regional hospital group may be the most ambitious effort of this type yet — a sizable investment intended as a linchpin in the group’s $400 million commitment to digitize patient records throughout its system, including 13 hospitals. North Shore-Long Island Jewish Health System plans to offer its 7,000 affiliated doctors subsidies of up to $40,000 each over five years to adopt digital patient records. That would be in addition to federal support for computerizing patient records, which can total $44,000 per doctor over five years. The federal program includes $19 billion in incentive payments to computerize patient records, as a way to improve care and curb costs. And the government initiative has been getting reinforcement from hospitals. Many are reaching out to their affiliated physicians — doctors with admitting privileges, though not employed by the hospital — offering technical help and some financial assistance to move from paper to electronic health records. Efforts by hospital groups to assist affiliated doctors include projects at Memorial Hermann Healthcare System in Houston and Tufts Medical Center in Boston. But the size of the North Shore program appears to be in a class by itself, according to industry analysts and executives.

The Business Insider:
- While the US crisis shares some similarities to The Great Depression, overall it's not "the worst since the depression." You don't need to go back that far. The early-1980's were worse than today in many ways. At the same time the US embarked on one of its strongest economic expansions, starting in 1982.

NY Post:

- The unemployment rate for young Americans has exploded to 52.2 percent -- a post-World War II high, according to the Labor Dept. -- meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time. And worse, without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost. Al Angrisani, the former assistant Labor Department secretary under President Reagan, doesn't see a turnaround in the jobs picture for entry-level workers and places the blame squarely on the Obama administration and the construction of its stimulus bill. "There is no assistance provided for the development of job growth through small businesses, which create 70 percent of the jobs in the country," Angrisani said in an interview last week. "All those [unemployed young people] should be getting hired by small businesses." There are six million small businesses in the country, those that employ less than 100 people, and a jobs stimulus bill should include tax credits to give incentives to those businesses to hire people, the former Labor official said. "If each of the businesses hired just one person, we would go a long way in growing ourselves back to where we were before the recession," Angrisani noted.

- Apple's (AAPL) fiscal year, which ends Saturday, finished on a strong note.

Business Week:
- In the past few weeks, Jon A. Woodruff, who heads up technology mergers and acquisitions in Goldman Sachs (GS)' San Francisco office, has seen the mood shift in Silicon Valley. Tech companies are stepping up their dealmaking after a quiet year. In a span of 21 days, Goldman has worked on three major deals—eBay (EBAY)'s sale of Skype, Adobe (ADBE)'s purchase of Omniture (OMTR), and Dell (DELL)'s acquisition of Perot Systems (PER). "People seem more willing to take out their checkbooks again for the right assets," says Woodruff. The surge in deal activity is a sign of broader change: Risk-taking is making a comeback in the tech industry.

LA Times:

- A funny thing has happened during the airline industry's economic slump.The airlines have actually improved customer service. During the first seven months of the year, nearly 79% of flights in the U.S. were on time, compared with 74% for the same period last year, according to the Bureau of Transportation Statistics. Reports of mishandled baggage -- including lost or damaged luggage -- dropped to 3.89 claims per 1,000 passengers in the busy vacation month of July from 4.87 a year earlier, according to the bureau. The overall number of complaints filed against airlines for such problems as lost baggage, oversold flights, cranky reservation workers and missing pets also dropped to 0.98 complaint per 100,000 passenger trips this July from 1.25 in July 2008.

- In Canada, a move toward a private healthcare option. In British Columbia, private clinics and surgical centers are capitalizing on patients who might otherwise pay for faster treatment in the US. The courts will consider their legality next month. Reporting from Vancouver, Canada - When the pain in Christina Woodkey's legs became so severe that she could no long hike or cross-country ski, she went to her local health clinic. The Calgary, Canada, resident was told she'd need to see a hip specialist. Because the problem was not life-threatening, however, she'd have to wait about a year. So wait she did. In January, the hip doctor told her that a narrowing of the spine was compressing her nerves and causing the pain. She needed a back specialist. The appointment was set for Sept. 30. "When I was given that date, I asked when could I expect to have surgery," said Woodkey, 72. "They said it would be a year and a half after I had seen this doctor." So this month, she drove across the border into Montana and got the $50,000 surgery done in two days. "I don't have insurance. We're not allowed to have private health insurance in Canada," Woodkey said. "It's not going to be easy to come up with the money. But I'm happy to say the pain is almost all gone."


- Independent candidates are poised to run serious campaigns for governor in at least a half-dozen states, a development that threatens Democratic fortunes in some of the bluest and most progressive-minded states in the nation. In New Jersey, where Democratic Gov. Jon Corzine is seeking a second term in November, polls suggest an independent candidate is carving a sizable portion of voters out of his hide. In two other reliably Democratic states, Massachusetts and Rhode Island, well-known politicians running as independents could significantly undermine Democratic chances in 2010, if not flat-out win.

- President Barack Obama used a dinner-time address to the Congressional Black Caucus Foundation Saturday night to make an impassioned plea for health care reform, placing it in the tradition of the civil rights struggle.

Rasmussen Reports:

- The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 30% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty percent (40%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -10 (see trends).


- The Pittsburgh Convention Center proudly proclaims to be the greenest convention center in the world, certified Gold LEED by the U.S. Green Building Council, which grades buildings on their energy and water efficiency, the materials used in construction and so on. As far as large buildings go, it's a gem of environmental design. And so far, it's the greenest thing at the confab. Advocates for an agreement on global climate change are exasperated by the quiet thus far from world leaders on the environment.

San Francisco Chronicle:

- Companies that produce large amounts of greenhouse gases will have to pay new state fees under a decision made Friday - a key step in California's far-reaching program aimed at slowing global climate change. The California Air Resources Board voted unanimously in favor of the fees, which will raise $63 million next year for monitoring and regulating greenhouse gases as required by AB32, the Global Warming Solutions Act of 2006. "This is a necessary step for California to continue its implementation of the nation's first-ever statewide cap on global warming pollution," said Bill Magavern, director of Sierra Club California. The decision, made at a meeting in Los Angeles County, follows in the path of the Bay Area Air Quality Management District, which became the first in the country to put a fee on large greenhouse gas producers last year. Local air-quality officials use the money to monitor the gases. The fee will apply to major utilities as well as producers or users of natural gas, gasoline and diesel fuels, electricity, coal and cement. It will cost some companies, such as PG&E, millions of dollars per year, while others will pay tens of thousands of dollars. The air board expects the fees to be passed through to consumers.


- Venezuela Science and Technology Minister Jesse Chacon said Venezuela is working with Russia, not Iran, to search for uranium deposits. The statement contradicted Mining and Basic Industries Minister Rodolfo Sanz, who a day earlier said Iran was helping Venezuela search for the metal. Venezuela wants to develop a nuclear energy and medicine program, citing President Hugo Chavez.


- Epic swindler Bernard Madoff’s two sons, his brother and a niece will be sued this week for $198 million, the trustee winding down the Madoff firm told CBS News' "60 Minutes" broadcast on Sunday.

- Kraft Foods Inc is poised to launch a hostile bid for Cadbury Plc valuing the British confectionery business at around 11 billion pounds ($17.6 billion), a report in The Observer newspaper said.

Financial Times:

- London has been knocked from the top of a list of best European cities for real estate investment for commercial property occupiers and investors for the first time since 2005, according to LaSalle Investment Management, a leading global property fund manager. Munich has been identified as European city most attractive for investment on a medium term outlook, followed by Paris, according to LaSalle’s eleventh European Regional Economic Growth Index.

- The performance of synthetic hedge fund clones is strong enough to start to put pressure on the high fees charged by many real hedge funds, according to a comprehensive academic review of the controversial concept. A swathe of hedge fund replication products have been launched by banks such as Goldman Sachs, JPMorgan, Barclays Capital and Bank of America Merrill Lynch since 2006. They are designed to replicate the underlying exposures, and therefore performance, of the hedge fund industry at a fraction of the typical “2 and 20” hedge fund fee structure (2 per cent of assets and 20 per cent of returns). Clones typically charge a flat fee of 1-2 per cent of assets. The clones are also highly liquid, allowing investors to escape the gating and suspension of redemptions that plagued the industry in the wake of the financial crisis. They also bypass the risk of losing money to a fraudster such as Bernard Madoff. Now analysis* by Erik Wallerstein and Nils Tuchschmid of the Geneva School of Business Administration and Sassan Zaker of Julius Baer Asset Management suggests the clones are broadly succeeding in replicating the investment returns of real hedge funds. The report, which looked at 21 clones over the period April 2008 to May 2009, concluded: “Hedge fund replication products seem to deliver competitive performance relative to hedge funds. More importantly they are able to deliver this at a far lower fee level than hedge funds.” “If they get enough attention and assets under management then I believe they will exert some fee pressure on hedge funds. Then it will be difficult for hedge funds that do very similar things,” said Mr Wallerstein, who believed that strategies such as long/short equity and some fixed income-based approaches were easiest for the clones to replicate. The research found that the vast majority of clones exhibited a correlation of at least 70 per cent to industry benchmarks operated by Hedge Fund Research and Credit Suisse/Tremont. Most lost less than the typical 10-15 per cent declines recorded by the industry at large, although Mr Wallerstein cautioned that the relative performance of clones in a bull market remained unproven. “Shortable” clones, which allow investors to benefit from losses in the underlying industry, appear to succeed in mirroring long approaches.

- Goldman Sachs(GS) has launched an aggressive recruiting drive to build its asset management business at a time when its rivals are pulling back from fund management. The US bank will hire up to 200 staff across all regions in an attempt to establish a dominant position as one of the world’s leading asset managers. In 2007 Goldman was ranked 17th in the world in terms of assets under management. “We are moving back on the offensive,” Marc Spilker told the Financial Times in his first interview since being appointed co-head of the bank’s investment management business in June 2008. The move comes as several of its rivals, such as Credit Suisse and Barclays, have reined back their global asset management ambitions amid sharp falls in assets and revenues.

- US financial regulators are working on new rules aimed at helping banks avoid the sudden funding withdrawals that doomed Bear Stearns and Lehman Brothers, officials say. The deliberations represent a deepening of the US regulatory response to the financial crisis. In recent months, regulators have focused on making sure banks have sufficient capital to withstand the kind of financial shock that hit them last year. Now, regulators are considering proposals to prevent banks from growing overly dependent on short-term borrowings – as was the case with Bear and Lehman. The idea behind the discussions is that capital alone is not enough to prevent a run on a bank that depends on the overnight markets for funding. “Capital is critical, but liquidity enhancement is a necessary piece of the puzzle,” said Kevin Bailey, deputy comptroller for regulatory policy at the Office of the Comptroller of the Currency, which regulates national banks. The proposals being discussed would require banks to operate under new measures – or ratios – gauging their dependence on short-term funding and their susceptibility to market shocks. One ratio would compare a bank’s assets to its stable sources of funding, such as deposits or longer-term unsecured debt. This would help regulators determine whether a bank is too dependent on short-term borrowings. Another ratio would compare borrowings to easily sold assets – measuring, in other words, how quickly a bank could unwind its positions were it to lose its access to short-term market funding. The ratios would come on top of guidance on liquidity issues proposed by banking regulators in July. Those proposals were part of a global effort to address bank liquidity.

- The recent rally in the markets for “toxic” securities could deliver a significant boost to US banks’ third-quarter earnings if financial groups decide to book accounting gains on assets that caused them billions of dollars in losses during the crisis. Wall Street executives and analysts say the significant rise in the price of mortgage-backed securities and other once-battered debt offers banks the first meaningful chance to “write up” some of the value of these distressed assets. In the last three months, the Markit ABX index, which tracks securities backed by home loans such as subprime mortgages issued to borrowers with weak credit, has gained more than 30 per cent, as investors rediscovered their risk appetite and the US government flooded the debt markets with liquidity. The extent of the write-ups is difficult to predict because of banks’ complex balance sheets and uneven use of accounting rules, but some experts believe the rallying credit markets could pave the way for billions of dollars in accounting gains. Senior US bankers say the size of the write-ups to be revealed in the third quarter, which ends on Wednesday, will depend on how aggressively financial institutions take advantage of the rallying credit markets. Some executives believe that auditors and boards will advise banks to take a cautious stance. They point out the market for toxic assets has been fairly thin, suggesting that the price increases could be short-lived – a reversal that would force banks to take further write-downs.

- BREVAN HOWARD, the UK’s largest hedge fund, is planning to open an office in Switzerland, perhaps signaling the beginning of a mass exodus by financial groups from London. The hedge fund, which has assets under management of close to $27 billion (£17 billion), has instructed property agents to find an office in the tax haven with capacity for at least 100 staff. It has narrowed the search to Geneva and the nearby Nyon. In June, James Vernon, the firm’s chief operating officer, said that a proposed EU directive on hedge-fund regulation would make it “impossible” for it to do business in the UK. Moving to a low-tax jurisdiction would also save its highly-paid traders millions in taxes. The firm employs about 100 investment professionals, from a workforce of 240 in London. Their performance fee will be subject to the new 50% income tax rate coming into force next April — in Switzerland the rate would be closer to 25%. One London-based hedge-fund manager said: “They have no choice but to do this. We tried to hire a trader last week but he said he would not join unless he could be based in Geneva. These people don’t want their personal fortunes subject to the ever-changing whim of the UK government.”


- More than half of UK voters want Prime Minister Gordon Brown replaced as leader of the governing Labour Party, according to a YouGov poll published today. Fifty-four percent of voters polled thought Brown should be removed while 71% said they are dissatisfied with his performance as prime minister. Thirty-nine percent of those polled intend to vote for the opposition Conservative Party, compared with 26% for Labour and 20% for the Liberal Democrats.

- Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days. The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP. The grim forecast is starkly at odds with claims by premier Jose Luis Zapatero, who still says Spain's recession will be milder than elsewhere in Europe.

- FSA told to clean up oil markets. The FSA has been told to examine its statutes to ensure it can prosecute oil speculators practicing market abuse. The financial watchdog must also consider bringing in stronger measures to detect speculators using techniques such as phone-tapping, as well as ensuring they have enough staff to investigate and potentially prosecute them. The FSA, along with all national commodities regulators, has been instructed by the G20 to beef up its surveillance of the energy market as part of a cross-border push to clamp down on the type of speculation which last year pushed the price of crude oil above $140-a-barrel.


- France is hoping to unseat London as the European hub for Islamic finance after its parliament this month approved legislation changes allowing the issuance of Islamic bonds, known as sukuk. French Finance Minister Christine Lagarde and central bank Governor Christian Noyer are due to address a conference in Paris this week and may use the event to promote the use of Islamic finance in the French economy. France is home to five million Muslims, the most among western European nations.

Corriere della Sera:

- European Central Bank President Jean-Claude Trichet said a strong US dollar is “very, very important for the stability of the global economy,” citing an interview. He also said governments should begin cutting debt as soon as economic recovery is under way.

O Globo:

- The Brazilian state of Espirito Santo estimates it offshore oil and gas reserves may hold as much as 12 billion barrels, citing the state’s Governor Paulo Hartung. About 8 billion barrels of oil and gas would be in areas that are not yet under concession for exploration. The other 4 billion barrels are in the Whales Park field, which is being explored by state-controlled company Petroleo Brasilero SA and its private partners.

EFE News Agency:
- The Bank of the South, a financial institution backed by seven South American nations, may open with initial capital of $20 billion, citing Venezuelan President Hugo Chavez.

Kyodo News:

- Chinese Premier Wen Jiabao will visit North Korea from Oct. 4 to attend an event celebrating the 60thChina’s foreign minister. anniversary of diplomatic ties between the two nations, citing officals at

Weekend Recommendations
- Made positive comments on (AIG), (CB), (MSFT) and (TRV).

- Made negative comments on (SAP), (OXPS), (FSLR), (TSL) and (STP).


- Upgraded (ACN) to Buy, target $45.

Night Trading
Asian indices are -1.75% to -.50% on avg.

Asia Ex-Japan Inv Grade CDS Index 109.50 -.5 basis points.
S&P 500 futures -.28%.
NASDAQ 100 futures -.32%.

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Politico Headlines
Rasmussen Reports Polling

Earnings of Note
- (SNX)/.67

Upcoming Splits

- None of note

Economic Releases

10:30 am EST

- Dallas Fed Manufacturing Activity for September is estimated -4.0% versus a -9.1% decline in August.

Other Potential Market Movers
- The Chicago Fed National Activity Index and the (FDX) annual meeting
could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by shipping and commodity stocks in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.

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