Tuesday Watch

Late-Night Headlines
Bloomberg:

- Financial markets have grown too dependent on mathematicians who use models to anticipate price moves and need to start injecting “common sense” into the equation, said Paul Wilmott, a London-based author and quantitative finance instructor. Wilmott has warned that so-called quants who use mathematics to forecast how markets will behave can overlook errors in the models, leading to flawed predictions. In a New York Times column July 28, Wilmott also said so-called high- frequency trading, where hedge funds and other firms use advanced computers to buy and sell thousands of shares a second, threatens to destabilize the market. “There is too much mathematics in this business,” Wilmott, author of “Paul Wilmott on Quantitative Finance,” said in a Bloomberg Radio interview. “I just want people to stop and think for once. People just rush into these things without any thought for what the consequences might be.”

- Saudi Aramco, the state-run oil monopoly, sees little chance of pumping crude from idle fields next year because a recovery in world demand has yet to begin, its chief executive officer said. Saudi Arabia has idled about 4 million barrels a day, or about one third of its crude-oil production capacity, according to the oil ministry. The Dhahran-based company, the biggest exporter of unrefined crude oil, is spending $90 billion to develop new reserves and refineries over five years to 2012. “We’re prepared for the long-haul,” Saudi Aramco CEO Khalid al-Falih said in an interview yesterday in Jeddah, on the Red Sea coast of Saudi Arabia. “We have the excess capacity in case it’s needed but we also have the ability to sustain ourselves with production levels similar to what we see today at prices similar to what we have seen so far.” “I don’t expect a major shift in demand unless we see an acceleration of the economic recovery, which is not yet apparent,” said al-Falih, who took over as Aramco president and CEO from Abdallah Jum’ah in January. As stockpiles grow, traders are paying more than ever in the options market to protect against a possible plunge in crude prices. Gasoil inventories near Europe’s refining hub of Rotterdam reached a record 3.03 million tons on Sept. 10, according to PJK International BV of Oosterhout, the Netherlands. The gap between prices of options betting on a decline and those that would profit from a rise in New York oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch. This year, Aramco’s output capacity reached 12 million barrels a day after it opened the 1.2 million barrel-a-day Khurais field, the 100,000 barrel-a-day Nuayyim field, and expanded Shaybah by 50 percent to 750,000 barrels a day. Saudi Arabia produces another 500,000 from the Neutral Zone it shares with Kuwait.

- Vicis Capital LLC, the $2.9 billion hedge fund started by former Lehman Brothers Holdings Inc. trader John Succo in 2004, barred clients from withdrawing money from its main fund after losses this year. The firm received “higher-than-anticipated” requests for a Sept. 30 distribution from its Vicis Capital Fund, according to a letter sent to clients today and obtained by Bloomberg News. The New York-based hedge fund will resume withdrawals if clients approve a plan to separate hard-to-sell assets into another pool, the letter said. Vicis clients sought to withdraw $550 million at the end of September, after $2.7 billion was returned to them since October, according to a person familiar with the firm. The $2.5 billion Vicis Capital Fund, a volatility hedge fund that makes bets on converging or diverging prices of options and securities, has lost about 12 percent this year through August.

- Refined copper imports by China, the world’s largest consumer of the metal, dropped to 219,731 metric tons in August, customs office data showed. Imports were 292,226 tons in July.

- The link between Canada’s dollar and the Standard & Poor’s 500 Index is breaking down as concern increases that a stronger currency will undermine economic growth, according to CIBC World Markets Inc. The 30-day correlation between the U.S. stock index and the Canadian currency decreased to 0.66 from 0.77 a month ago. A reading of 1 would indicate they move in lockstep. The S&P 500 gained 3.4 percent in August and reached a high for the year last week, while the Canadian dollar fell 1.5 percent versus the U.S. currency in August and increased 1.4 percent in September. “The two have parted ways,” said Krishen Rangasamy, an economist in Toronto at CIBC, in an interview. “The Canadian dollar has remained more or less where it was, while the S&P 500 has taken off.” A breakdown in the correlation between the stock index and many of the U.S. dollar’s most-traded counterparts was “inevitable” because continued appreciation of currencies such as the Canadian currency would choke off economic growth, wrote Rangasamy and CIBC’s chief economist, Avery Shenfeld, in a report today.

- American International Group Inc.’s U.S. rescue package, revised three times in the past year, would be eased again under a proposal being pushed by the leader of the House Oversight and Government Reform Committee. Representative Edolphus Towns may start talks with Treasury Department and Federal Reserve officials about the plan from Maurice “Hank” Greenberg, the former AIG chief executive officer, said a committee aide. Greenberg visited Towns, the New York Democrat who leads the committee, on Sept. 17, according to the staffer, who declined to be identified because the meeting was private. AIG surged 21 percent in New York trading.

Wall Street Journal:

- Facebook Inc. plans to announce a deal with online measurement company Nielsen Co., in a step to address advertisers' frustration with measuring how their ads perform on the social network. Under the partnership, terms of which aren't expected to be disclosed, Facebook advertisers who are also Nielsen customers will be able to measure the impact of the ads they buy on Facebook through polls that Facebook will show its users who have seen the ads.

- Sen. Max Baucus said he would revamp his health-overhaul proposal to ease the financial burden for middle-income Americans and pare back a key tax increase, responding to critics on Capitol Hill who called the measure too harsh. The Senate Finance Committee chairman was seeking to shore up support ahead of meetings by the panel this week to consider amendments to his bill.

- The health bill drafted by Senate Finance Committee Chairman Max Baucus (D., Mont.) would fine families up to $3,800 annually if they don't buy health insurance. In an interview with ABC's "This Week" that aired Sunday, President Barack Obama said he rejected the notion that the fee represents a tax increase.

- While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.

- Big Wall Street firms such as Deutsche Bank AG and Credit Suisse Group that attracted new hedge-fund clients during the financial crisis are hiring and making selective bets where they expect business to pick up in 2010. They are looking at Asia-based hedge funds and U.S. and European start-ups planning to launch with roughly $100 million to $250 million in assets.

- The Pentagon has told its top commander in Afghanistan to delay submitting his request for additional troops, defense officials say, amid signs that the Obama administration is rethinking its strategy for combating a resurgent Taliban. Gen. Stanley McChrystal, the U.S. commander in Afghanistan, recently completed a classified report asking for significant numbers of new American troops. Military officials familiar with the matter says the report lays out several options, including one that seeks roughly 40,000 reinforcements, which would push the U.S. military presence in Afghanistan to more than 100,000 for the first time. But the commander has been told to delay submitting the troop request to the Pentagon at the direction of Defense Secretary Robert M. Gates and other top civilian officials, according to defense officials.

- Political intimidation has always been part of the current Congress's health-care strategy: "If you're not at the table, you're on the menu" is tattooed on every lobbyist and industry rep in Washington. But Max Baucus's latest bullying tactics are hard to believe by even these standards, as the Senate Finance Chairman has sicced federal regulators on the insurer Humana Inc. for daring to criticize one part of his health bill.

MarketWatch.com:
- Bank of America(BAC) said late Monday that it will pay $425 million to end a big government asset guarantee that was set up earlier this year to help the giant lender close its acquisition of Merrill Lynch.

CNBC.com:
- Lincoln Educational Services Corp.(LINC) said Monday it expects its third-quarter earnings and revenue to exceed an earlier forecast, and announced a shareholder's offering of 4 million shares.

NY Times:

- Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government. Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks. The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

Business Week:
- Shrinking Money Supply Dampens Inflation Fears.

CNNMoney.com:

- Technology stocks have outperformed the broader market during the past six months -- and with good reason.

The Business Insider:

- As we wrote this morning, President Obama is looking at a newspaper bailout because he is concerned that blogs will take over the world, which would be a threat to democracy. Now, Scott Reeves at Minyanville, argues that a bailout would have the reverse effect as it would kill the independence of the press by killing its watchdog role. Who wants to read a newspaper that has to kow-tow to the government in order to preserve its tax-free status?

Politico:

- The telephone town hall, a forum that members of Congress insist offers them an opportunity to reach out to more constituents than through traditionaltown halls, is coming under increasing scrutiny from critics who insist that the events are largely rigged and designed to shield skittish lawmakers from facing hostile questioning. While the tele-town hall isn’t exactly a new communications tool, it’s hard not to notice the sudden proliferation of these events at a time when members have struggled to control raucous crowds and deal with the presence of unfriendly, camera-wielding attendees who are eager to post unflattering videos on the Internet.

Dallas Morning News:

- Polozola tells me this year has been one of the best ever for the hedge fund industry, with many funds up 30 percent to 40 percent. In fact, if the gains hold for the remainder of the year, many fund managers will earn performance bonuses, which they didn't last year. Hedge funds typically take 20 percent of the profits as a bonus, but they won't get this until the fund recoups last year's losses. "Most of my client funds are now creeping toward break-even" from last year's losses, Polozola said. Some of the hedge fund trading strategies are so complex they will make your head hurt, but Polozola says most of the funds are doing well by simply buying beaten down stocks like Citigroup, Bank of America and other stocks in the Dow Jones industrial average. Also, they are beginning to dabble again in collateralized mortgage obligations (CMOs) – the product that almost brought down Western Civilization. Polozola says the funds are picking up this stuff for pennies on the dollar. But guess what else the hedgies are up to? You've heard that banks aren't lending much these days. Well, several Dallas hedge funds are stepping up and loaning money to businesses, churches and other hedge funds. The interest rates are just slightly above what the banks charge. "Anybody and everybody who needs to borrow and can't get the money from banks are turning to hedge funds," Polozola said.

Reuters:

- Bank of America failed to meet a Monday deadline to hand lawmakers further details about its acquisition of Merrill Lynch and faces the possibility of new charges from U.S. securities regulators. The standoff with the House oversight committee heightened the chances lawmakers may subpoena the bank and raised the stakes for a Tuesday meeting between a senior bank executive and the committee chairman. Separately, the Securities and Exchange Commission said it could pursue additional charges against Bank of America after a federal judge last week rejected a $33-million settlement between the bank and the regulator.

- Hassan Nemazee, a fund-raiser for Barack Obama, Hillary Clinton and other Democrats, has been indicted for defrauding Bank of America (BAC), HSBC (HBC)

and Citigroup Inc (C) out of more than $290 million in loan proceeds, U.S. prosecutors said on Monday. The announcement follows last month's indictment of

Nemazee, head of a private equity firm and an Iranian American Political Action Committee board member, on one count of defrauding Citigroup's Citibank. The new indictment adds allegations that he defrauded two other banks, Bank of America and HSBC Bank USA, in a similar fashion by falsifying documents and signatures to purportedly show he had hundreds of millions worth of collateral.

The office of the U.S. Attorney in Manhattan and the FBI said he used the proceeds of his scheme to make donations to election campaigns of federal, state and local candidates, donations to political action committees and charities.

Financial Times:

- A growing rift between the US and Europe is overshadowing Tuesday’s United Nations climate change summit in New York, further damping hopes for a breakthrough at the Copenhagen talks in December. Connie Hedegaard, the Danish environment minister, lowered expectations, saying: “Things are looking difficult and too slow, that is the fact.” The downgrading of expectations comes as relations between the US and Europe, which started the year of talks as allies, near breakdown. “So far, we thought the basic problem was the Chinese and the Indians. But now I think the problem appears to lie most clearly with the US,” a European Commission official said. Talks were “not going well”. European officials say the Obama administration lacks focus because its top talent is wrapped up in the all-consuming debate over healthcare.

- Billions of dollars’ worth of the complex securities at the heart of the financial crisis are being liquidated, enabling banks, insurance companies and other investors to clear toxic assets from their books. Market participants say the unwinding is occurring in the market for collateralized debt obligations (CDOs), complex securities backed by the payments on mortgages, corporate loans and other debt. “There has been a significant increase in the amount of CDO liquidations,” said Vishwanath Tirupattur, analyst at Morgan Stanley. “The rally across asset classes has given investors an incentive to liquidate.” The recent rally has been particularly marked for CDOs backed by corporate bonds and loans. Of the more than $500bn of CDOs backed by asset-backed securities sold in the boom years, $350bn have already experienced an “event of default”.

- Patients who fail to pop pills on time could soon benefit from having a chip on their shoulder, under a ground-breaking electronic system being developed by Novartis, the Swiss pharmaceuticals group. The company is testing technology that inserts a tiny microchip into each pill swallowed and sends a reminder to patients by text message if they fail to follow their doctors’ prescriptions.

- Few could argue with Barack Obama last week when the US president said Wall Street owed a debt of gratitude to taxpayers. Some of America’s largest banks would not have survived without the trillions of dollars the government used to shore up the financial sector. Less remarked upon, however, is the personal windfall executives of the bailed-out institutions received as a result of Washington’s largesse. Whether these men received a cash bonus or not in 2008 almost certainly obscures the important larger point: the bail-outs of their banks through the Tarp, through the Federal Deposit Insurance Corporation guarantees of their debt financings and through government-backed securitization programs such as the term asset-backed loan facility, or Talf, provided an essential boost to long-term investor confidence – and their stock prices – at a crucial juncture. This is how each of these men benefited personally from the government bail-outs. The smorgasbord of government programs and initiatives have helped ensure the survival of these institutions by restoring investor confidence, in turn boosting their stock prices and the value of the chief executives’ stock holdings. For instance, Mr Blankfein’s 3.4m shares of Goldman, worth about $168m at one point last year, were worth closer to $623m (€425m, £385m) at Friday’s closing prices. Mr Mack’s 4m Morgan Stanley shares, which were worth as little as $27m, have rebounded to $125m. Mr Dimon’s 11.2m shares of JPMorgan are valued at about $503m these days, up considerably from their recent low of $168m. And Mr Lewis’s 4.7m Bank of America shares, at one point valued at around $15m, are now worth about $83m. These calculations do not reflect the additional increased value of the executives’ stock options and unvested stock awards, which have moved up smartly – at least on paper (they are not tradable) – as a result of the rise in the banks’ stock prices. This is not a trivial matter, although it is barely mentioned. Those who find the observation petty or unfair would do well to ask Dick Fuld, Lehman Brothers’ one-time chief executive, if he would be willing to trade places with any of his former Wall Street brethren. Unlike Mr Blankfein and Mr Mack, he could not win Fed approval to convert Lehman into a bank holding company. We all know there was no government bailout for Lehman. After Lehman filed for bankruptcy a year ago, Mr Fuld’s 10m shares of Lehman plus options – once worth as much as $1bn – were rendered worthless, which seems like the correct price for the stock of a bank that was way overleveraged and took too many foolish risks. “I don’t expect you to feel sorry for me,” Mr Fuld testified in front of Congress last October. And we don’t. But a year later, we still have no good answer as to why the other chief executives were permitted to benefit from the government’s largesse while Mr Fuld could not.

- The rebound of the dollar at the height of last year’s financial crisis was one of the few silver linings for policymakers. Increased risk aversion prompted investors to return to the safety of liquid US Treasuries, averting a collapse of America’s currency. This year the greenback has weakened again as risk-seeking US investors have bought higher-yielding foreign assets. This dollar weakness should be benign, and the currency is likely to strengthen if investor bullishness eases. But a collapse of the dollar would have grave consequences for the world economy. Already officials at the Bank of Canada and the Reserve Bank of New Zealand are warning about developments in the currency markets. This month G20 policymakers should discuss exchange rates when they meet in Pittsburgh. For most of this decade, the world economy has been able to accommodate sliding currencies as global growth has boomed. But in the credit crunch world, a super-weak dollar risks exporting deflation across the globe. In the rich G7 economies, official interest rates are very low, central banks are printing money and finance ministries are running big fiscal deficits. This leaves policymakers with little scope to deal with a sudden appreciation of their currencies against the dollar. In the worst-case scenario, a rout of the greenback could tip some G7 countries into liquidity traps where extremely loose monetary and fiscal policies are unable to prise their economies out of deflation. It is only a short step from debt and depression to governments resorting to protectionism. To avoid this ruinous path, the G7 should be prepared to act in the currency markets should the dollar plunge unexpectedly. Over the last three decades there have been five bouts of co-ordinated intervention in the major currencies. Four of these five episodes were ultimately successful in changing the trend of the currency markets.

- Hedge funds are losing their clout in financial markets, according to new research. After a year of painful investor redemptions, sharply reduced leverage available from banks and economic uncertainty, hedge funds now exert a far smaller pressure on prices than they once did. They currently account for just 12 per cent of average volume in the $33,500bn US fixed income market, compared with nearly a third in 2007, according to research by US consultancy Greenwich Associates. A 40 per cent decline in hedge funds’ trading volume since last year alone has resulted in a “dramatic reduction in hedge funds’ overall presence in the US market,” says Greenwich, which based its findings on a poll of more than 1000 institutional investors. US equity markets, too, have seen hedge funds pull back. “Hedge funds still have a long way to go before they are able to recover funding and exert the necessary influence on markets, and this is relevant across different market sectors,” said research analysts at UBS in a note to clients on Monday. Whereas leverage of about five times was not uncommon for the average fixed income strategy in 2007, hedge funds are now investing with a maximum of two times leverage, or more often, none at all, according to prime brokers. Greenwich data shows that the hedge fund pullback has been particularly acute in the US government bond market. Whereas hedge funds accounted for 29 per cent of total trading volume in the market in 2007, they now make up only about 5 per cent.

- Remember the summer of 2007, and the onset of the Credit Crunch, when all the equity quantitative strategies fell over? Well, it appears to be happening again.

TimesOnline:

- Regulators around the world will be handed new powers to limit the share of profits that banks can spend on bonuses under a compromise deal to be tabled in Pittsburgh this week at the G20 meeting of leaders of the largest economies.

Late Buy/Sell Recommendations
Citigroup:

- Upgraded (M) to Buy, target $30.

- Reiterated Buy on (LNCR), Added to Top Picks Live list, target $45.

BMO Capital Markets:

- Rated (ARUN) Outperform, target $12.

- Rated (NVTL) Outperform, target $8.

Night Trading
Asian Indices are -.25% to +.75% on average.

Asia Ex-Japan Inv Grade CDS Index 114.0 -2.50 basis points.
S&P 500 futures +.17%.
NASDAQ 100 futures +.27%.

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Earnings of Note
Company/EPS Estimate
- (PRGS)/.39

- (FDS)/.74

- (CCL)/1.18

- (KMX)/.18

- (CAG)/.34

- (AIR)/.25

- (FUL)/.36

Economic Releases

10:00 am EST

- The House Price Index for July is estimated to rise .5% versus a .5% gain in June.

Upcoming Splits
- (UTHR) 2-for-1

Other Potential Market Movers
- The Richmond Fed Manufacturing Index, weekly retail sales reports, TAF results, 2-year Treasury note auction, ABC consumer confidence reading, API energy inventory report, CIBC Institutional Investor Conference, Bank of America Smid Cap Conference, (LOW) analyst meeting, (BRCD) analyst meeting, (BEXP) analyst conference, (UFI) Investor Meeting, RBC Financial Institutions Conference, UBS Global Life Sciences Conference and the Bank of America Power/Gas Leaders Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and industrial shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Lower, Weighed Down by Commodity, Construction, Homebuilding and REIT Shares

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Stocks Slightly Lower into Final Hour on Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs and Medical longs. I added (ESI) long and took profits in another long this morning, thus leaving the Portfolio 100% net long. The tone of the market is neutral as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Investor anxiety is high. Today’s overall market action is mildly bullish. The VIX is falling .75% and is high at 23.74. The ISE Sentiment Index is around average at 153.0 and the total put/call is around average at .82. Finally, the NYSE Arms has been running around average most of the day, hitting 1.43 at its intraday peak, and is currently .71. The Euro Financial Sector Credit Default Swap Index is rising 1.43% today to 72.50 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is falling 8.33% to 95.49 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is down 1 basis point to 20 basis points. The TED spread is now down 443 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 2.96% to 36.88 basis points. The Libor-OIS spread is up 1 basis point to 11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.81%, which is down 86 basis points since July 7th. The 3-month T-Bill is yielding .09%, which is up 1 basis point today. Despite weakness in select sectors and overseas shares, the bears have been unable to gain any meaningful traction again today. The heavily-shorted education stocks are soaring on volume today. As well, airline shares continue to soar. Finally, healthcare-related shares are also strong today. One of my longs, (QSII), is breaking to a new ALL-TIME high today on above-average volume. I still think this stock has further room to run meaningfully higher over the intermediate and long-term. Nikkei futures indicate an +50 open in Japan and DAX futures indicate an +15 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing economic fear, short-covering, lower energy prices, declining healthcare reform worries, technical buying and investment manager performance anxiety.

Today's Headlines

Bloomberg:

- Never before have U.S. companies piled up cash faster compared with interest costs than they are now, setting the stage for a surge in mergers and acquisitions. As the economy emerges from the worst recession in 70 years, cash flow may rise from the $1.5 trillion reported by the Commerce Department for the year ended in June, according to data compiled by Credit Suisse Group AG and Bloomberg. The amount reached a record in the past 12 months amid the biggest wave of firings since World War II and central bank interest rates near zero percent. Cash relative to share prices will climb to the highest in at least two decades next year compared with yields on corporate bonds, the data show. The previous high in 2005 preceded the two busiest years ever for takeovers.

- The U.S. economy will add jobs by the end of this year, said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. The unemployment rate will “peak slightly below 10 percent,” Maki said today in an interview on Bloomberg Radio. “We don’t think there’s a lot left to go.” In August, the rate reached a quarter-century high of 9.7 percent. After losing jobs every month since December 2007, “payroll growth turns positive” within three months, Maki said. September, however, will show another net loss in non- farm payrolls, he said. After expanding at a 3.5 percent annual rate this quarter, the economy will grow at a 4 percent pace in the fourth quarter and at a 5 percent rate at the start of 2010, Maki wrote in a research report issued Sept. 17. Maki previously forecast a 3 percent growth rate at the start of 2010. “Housing has turned in a durable way in our view” and “consumer spending is actually coming in stronger than we expected,” he said. In housing, “affordability has improved so dramatically” and “housing prices have fallen faster than incomes.”

- The best outcome for an international agreement on climate change this year won’t include specific emissions targets for greenhouse gases, European Commission President Jose Manuel Barroso said. There’s too little time to narrow the differences between countries before a December deadline to complete a global warming accord in Copenhagen, Barroso said. Even an interim agreement that spells out basic principles of a deal will require stepped-up efforts, he told reporters today in New York.

- Dell Inc.(DELL) agreed to buy Perot Systems Corp.(PER) for $3.9 billion, undertaking its biggest purchase to compete with International Business Machines Corp. and Hewlett-Packard Co. in computer services. Dell, the second-biggest maker of personal computers, offered $30 a share in cash, about 68 percent more than Perot’s closing price Sept. 18. The acquisition probably will boost profit in fiscal 2012, Round Rock, Texas-based Dell said in a statement today.

- Nanya Technology Corp., Taiwan’s biggest maker of computer-memory chips, said it plans to raise prices by as much as 20 percent in the first half of October because of a shortage. “Some of our clients complained that our prices are too high, however, we really can’t fulfill all the orders because of the current short supply,” Pai Pei-lin, vice president at the Taoyuan-based company, said by phone today. “We will negotiate with whoever can accept the price.” The chipmaker plans to raise prices 10 percent to 20 percent in the first half of October after increasing prices twice this month, Pai said. Contract prices of the benchmark dynamic random access memory chip rose an average of 8.5 percent to $1.53 in the first half of September, according to Dramexchange Technology Inc., a Taipei-based clearinghouse that compiles memory-chip prices.

- Oil traders are paying more than ever in the options market to protect against a plunge in crude prices. The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch. Oil inventories totaled about 2.8 billion barrels at the end of July within the 30 nations of the Organization for Economic Cooperation and Development, according to the IEA. The total is equal to 62 days of demand, and 4.6 percent more than the same time last year. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.

- Amaranth Advisors LLC, the hedge fund that lost $6.6 billion in September 2006, sued Paul Touradji and his employees, seeking at least $350 million for claims including breach of contract and misappropriation of trade secrets. Amaranth says Touradji breached two contracts agreed to in September 2008 regarding the transfer and purchase of Amaranth’s base-metals portfolio, according to a complaint filed Sept. 18 in New York State Supreme Court in Manhattan. Touradji and employees at Touradji Capital Management LP used the information “to recover profits obtained by defendants through improper trading practices and misuse of plaintiffs’ proprietary and confidential information,” according to the document.

- Natural gas futures, which jumped 28% last week, may revisit seven-year lows after surging into an “overbought” area of resistance between $3.58 and $3.87 per million British thermal units, according to a technical analysis by Barclays Capital.

- Iranian Supreme Leader Ayatollah Ali Khamenei’s comments that a “cancer of Zionism” is eating away at the Muslim world are “profoundly shocking,” the French Foreign Ministry said. Khamenei’s comments about the “deadly cancer spreading through the invading hands of the occupiers and arrogant powers” was made during an Eid sermon yesterday in Tehran, Agence France-Presse reported. Khamenei also described Israel as a “counterfeit government.” The comments followed President Mahmoud Ahmadinejad last week reiterating his view that the Nazi Holocaust is “a myth.” “These statements are profoundly shocking and we condemn them with the greatest firmness,” French Foreign Ministry spokeswoman Christine Fages said in an e-mailed response to questions.

- Ford Motor Co.(F) said it’s researching a voice-to-text system for use by motorists, after endorsing a proposed U.S. ban on texting while driving. “A voice-recognition approach is better than bringing in a piece of paper and unfolding a map or looking down at a mobile device,” Jim Buczkowski, Ford’s director of electronics, said after a press conference today in Dearborn, Michigan. “We’re looking at various combinations of accomplishing that task because it’s being asked for by consumers.”

Wall Street Journal:

- Federal Communications Commission Chairman Julius Genachowski Monday outlined his plan for requiring Internet-service providers to keep their networks open to legal content and external devices. The plan, which is a top priority of Internet advocates who aggressively supported President Barack Obama in his run for the White House, would put into law the FCC's principles to treat all Web traffic equally, a concept known as "net neutrality."

- The Small Business Administration, after enduring a backlash from lenders and business appraisers, plans Oct. 1 to modify a restriction it had placed on loans used to finance acquisitions of small companies. In March, the SBA, capped the guarantee it was willing to extend on "goodwill" financing, which is the amount of a loan used to purchase an existing business's intangible assets, such as an established name, brand or customer base. The market price of a small business is based partly on its tangible assets, such as property, equipment and inventory, but often primarily on its goodwill. For some firms for sale, such as professional practices, Internet companies and service firms, the value of intangible assets can range between 55% and 95%. For years, lenders were free to administer SBA-guaranteed loans with any amount of goodwill financing. But in March, the SBA changed its rules so that guarantees for goodwill financing would be capped at $250,000, or 50% of the loan amount, whichever was lower. The rules were designed in part to prevent sellers from inflating companies' intangible assets. SBA-guaranteed loans are a small proportion of small-business loans. But the move didn't help in a market already taking a beating, business-acquisition specialists said. In March, closed business sales were 33% below the levels seen a year earlier, according to BizBuySell.com, an online marketplace for business acquisitions based in San Francisco. "It was the antistimulus," said Ronald Feldman, chief executive of Siegel Financial Group, a consultancy firm for small-to-midsize business acquisitions in Bala Cynwyd, Pa. Starting in October, the SBA is raising the cap on its guarantee of goodwill financing to $500,000.

- Despite a deep recession, rising competition and sluggish stock prices, AT&T Inc. (T) and Verizon Communications Inc. (VZ) continue to pour billions of dollars into their networks in anticipation of a bigger payoff down the line. Given the worst U.S. slump in decades and a stock market 31% off its record high, AT&T and Verizon normally would have been expected to slash capital investments. Instead, they plan to spend as much as $35 billion combined in 2009, similar to what they spent the year before.

- In the near future, consumers will be playing videogames without controllers, giving directions to lifelike avatars and waving files from screen to screen a la “Minority Report,” according to Microsoft.

- Human Genome Sciences Inc.'s (HGSI) chief executive believes a small, specialized sales force, built with its partner GlaxoSmithKline PLC (GSK), can comfortably bring in annual sales exceeding $1 billion for its experimental lupus drug, Benlysta.

MarketWatch.com:
- American International Group shares jumped 10% Monday amid hope the government may ease the terms of its bailout of the giant insurer again. Rep. Edolphus Towns, D-N.Y., chairman of the House Oversight and Government Reform Committee, has told the panel's staff to review a proposal put forward by former AIG Chief Executive Maurice "Hank" Greenberg to restructure the insurer's government rescue package, Bloomberg News reported Monday on its Web site.

- The U.S. recession is bottoming out and a recovery is near, economists for the Conference Board said Monday after reporting that the index of leading economic indicators rose 0.6% in August, the fifth straight increase.

NY Times:

- The research arm of Congress reported on Monday that the American International Group’s financial condition had stabilized but said it was not clear whether the giant insurance group would ever be able to restructure and repay its federal rescue package.

- Netflix(NFLX), the movie rental company, has decided its million-dollar-prize competition was such a good investment that it is planning another one.

Washington Post:

- The top U.S. and NATO commander in Afghanistan warns in an urgent, confidential assessment of the war that he needs more forces within the next year and bluntly states that without them, the eight-year conflict "will likely result in failure," according to a copy of the 66-page document obtained by The Washington Post. Gen. Stanley A. McChrystal says emphatically: "Failure to gain the initiative and reverse insurgent momentum in the near-term (next 12 months) -- while Afghan security capacity matures -- risks an outcome where defeating the insurgency is no longer possible." His assessment was sent to Defense Secretary Robert M. Gates on Aug. 30 and is now being reviewed by President Obama and his national security team. McChrystal concludes the document's five-page Commander's Summary on a note of muted optimism: "While the situation is serious, success is still achievable." But he repeatedly warns that without more forces and the rapid implementation of a genuine counterinsurgency strategy, defeat is likely.

CNSNews:

- Deficit spending and government debt are reaching a level that could culminate in another economic crisis as big as the one that hit the United States last year, Minnesota’s Republican Governor Tim Pawlenty told CNSNews.com. “One of the main things I’m very worried about is this administration and the Democratically-controlled Congress running on a pathway to bankruptcy,” Pawlenty said. “I mean, we have a reckless amount of deficit and debt in this country. The Obama administration and this Congress are exponentially growing that.” The $787 billion stimulus package pushed by the Obama administration and congressional Democrats was supposed to salvage the tanking economy, but that measure – along with the $700 billion bailout of the financial industry pushed by the Bush administration and supported by Obama – will boost the nation’s debt by $9 trillion to a total of $14.5 trillion by 2019, according to the non-partisan Congressional Budget Office. It took the United States 232 years accumulate $5.8 trillion in debt under Obama’s 43 predecessors, according to a report by the Republican staff of the Senate Budget Committee earlier this year. “It’s going to massively burden our children and our grandchildren,” Pawlenty told CNSNews.com. “I think we’re going to have government debt equivalent to the subprime mortgage meltdown in the not too distant future. And for those of us who can see that coming, we need to stand up. We need to shout that that is reckless, that is irresponsible, and we can’t allow that to continue.”

cnet:

- Some analysts believe that the Apple(AAPL)-branded chip in the iPhone is a fairly unique design and that Apple is simply using Samsung as a chip "foundry" or manufacturer. That would mean Apple is already competing with Intel's Atom, not to mention the host of ARM chip suppliers such as Texas Instruments and Qualcomm.

Bespoke Investment Group:

- US stock markets rose about 2.5% last week, but the biggest news came in the credit markets where default risk had its biggest weekly decline since the March equity market lows. Below is a one-year chart of a credit default swap (CDS) index that measures default risk for 125 North American investment grade entities. We also overlay a chart of the S&P 500.

Rassmussen:

- Voters have mixed feelings about President Obama’s decision to halt the deployment of a proposed anti-missile shield in Eastern Europe, but many worry that it will hurt America’s relationship with its European allies. A new Rasmussen Reports national telephone survey finds that 31% of voters agree with the decision to stop the shield, but 38% disagree.

Politico:

- The cap-and-trade movement, spooked by the pounding health care reform took over the August break, is scrambling to persuade nervous Democrats they won’t suffer politically for taking another tough vote this year. “When you get your butt kicked, like we did [after the House energy vote], it focuses the mind,” said Steve Cochran, director of the Environmental Defense Fund’s National Climate Campaign. “We found out that this is not something to hide from but something to lean on — even in places where coal is king and Blue Dogs were perceived to be running for cover.” Climate bill supporters say they have spent the summer building precisely the kind of grass-roots network that health care didn’t have, with grass-roots operations in more than 20 states. A “climate war room” — funded by more than 60 labor, business, faith, agriculture and environmental groups — has been set up to coordinate ad dollars and communications.

- Blue Dogs and other conservative Democrats — uneasy with a key element of President Barack Obama’s plan to regulate Wall Street — are rallying around an alternative proposal that scraps the consumer financial protection agency the president has been pushing. Rep. Walt Minnick, a freshman Democrat from Idaho, has floated the new plan. Instead of creating a new federal agency to protect consumers from predatory financial firms and shoddy products, Minnick’s plan would have existing state and federal regulators work together in a “consumer financial protection council.” “We’re trying to come up with something that will achieve the objectives of what the White House is asking us to do without creating a new stand-alone federal regulator,” Minnick told POLITICO.

- The Democrat-versus-Democrat battle over Senate Finance Chairman Max Baucus’s health care proposal is more than just political posturing: It’s the latest sign that Senate Democrats so far lack a clear public leader on the issue at a crucial time in the debate. Part of the problem facing Senate Democrats is institutional; unlike the House, the Senate is a body that gives each member great power to influence the legislative process — significantly limiting the power of leaders. Another part of the problem is the sweeping nature of the issue: Health care reform falls into the jurisdiction of several House and Senate committees, putting far more cooks in the kitchen than on most other matters on Capitol Hill.

AP:

- Iran's president said Monday he is proud to stoke international outrage with his latest remarks denying the Holocaust as he heads for the United Nations this week — showing he is as defiant as ever while his country comes under greater pressure to curtail its nuclear program. Mahmoud Ahmadinejad takes the world stage with a speech Wednesday to the U.N. General Assembly. He appears intent on showing he has not been weakened by three months of turmoil at home, where the pro-reform opposition has staged dramatic protests claiming Ahmadinejad's victory in June presidential elections was fraudulent.

USA Today:

- Ex-lawmakers working as lobbyists or advisers to those seeking to influence federal policy are pumping leftover campaign funds into the accounts of their former congressional colleagues — including colleagues who oversee the industries the ex-lawmakers now represent, a USA TODAY review of campaign-finance records shows. The donations are legal. Federal law allows former members of Congress to keep campaign accounts active and dole out the money to candidates, political parties and charities. However, critics of the practice, such as Meredith McGehee of the non-profit Campaign Legal Center, call the accounts "political slush funds," that are tapped to curry favor with lawmakers. "Being able to give money is a huge advantage in establishing yourself as a lobbyist," McGehee said. "Money buys you face time. But this isn't money that's coming from their pockets. This is money other people have given them that they are using to set up their next careers."

Reuters:
- Chinese oil demand in August slid 5.4% from July, arresting a month-on-month climb seen since March this year, as the world's second largest oil consumer reined in oil imports as well as crude throughput rates at domestic refineries, according to a data analysis just released by Platts. China's implied oil demand totaled 33.02 million metric tons in August versus 34.92 million metric tons in July, a Platts analysis showed September 21. The country had ratcheted up crude imports as well as refining rates to an all-time high in July, which is said to have left state-owned refiners Sinopec and PetroChina with swollen refined product inventories in the face of lackluster demand. August seems to have brought a reality check for refiners in China," said Vandana Hari, Asia news director at Platts. "Domestic fuel demand has clearly been lagging their high processing rates, and storage space is finite.

Refined product stockpiles held by Sinopec and PetroChina at the end of July

were some 30% higher than the corresponding period of 2008 and had crept up 7%

from a month ago, Chinese media reported earlier. At the same time, July oil

products sales in China fell about 6% from a year ago and shrank 10% from

June. Refiners responded by cutting collective crude throughput in August by 1.7%

from July to 32.56 million metric tons or 7.7 million barrels per day -- the

first monthly reduction since February 2009. Crude imports were cut by 5.9%

from July to 18.48 million metric tons or 4.38 million barrels per day in

August. Chinese companies also slashed August refined product imports by 28% from July and boosted exports of their own output by nearly 10%, which sent net products imports plunging to 460,000 metric tons, a level not seen in many years.

The Independent:

- Stephen King: Obama must resist the siren call of protectionism ahead of the G20.

Bear Radar

Style Underperformer:
Small-Cap Value (-.92%)

Sector Underperformers:
Gold (-1.86%), Construction (-1.43%) and Homebuilders (-1.40%)

Stocks Falling on Unusual Volume:
CVD, ONB, IRE, AMSC, MEOH, CVLT, STEC, JACK, DOM, AMN and ZN

Stocks With Unusual Put Option Activity:
1) EL 2) ODP 3) IPI 4) FWLT 5) ATVI