Today's Headlines

Bloomberg:

• Service Industries in U.S. Expanded at Faster Pace. Service companies in the U.S. expanded at a faster pace than projected in September, indicating the economic recovery is picking up heading into the fourth quarter. The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, rose to 53.2 from 51.5 in August. The ISM non-manufacturing employment gauge rose to 50.2 from 48.2 in August. The measure of new orders increased to 54.9 from 52.4. The group’s measure of business activity declined to 52.8 from 54.4.
• Gold Rises to Record on Investor Demand for Currency Alternative. Gold futures jumped to a record $1,341.20 an ounce as the dollar sagged, boosting demand for precious metals as alternative assets. Silver advanced to a 30- year high. The greenback fell to the lowest level since January against a basket of six currencies. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. central bank may buy more debt to help the economy. The Bank of Japan today pledged to keep its benchmark interest rate at “virtually zero” percent. Since Sept. 14, gold has risen to a record in 12 sessions.
• Copper Futures Rise to 26-Month High on Dollar Slump; Tin Reaches Record. Copper rose to the highest price in 26 months as the dollar dropped, boosting demand for commodities as alternative assets. Tin climbed to a record.
• Illinois Pays More Than Mexico as Cash-Strapped States Sell Bonds Overseas. Illinois capital-markets director John Sinsheimer and Citigroup Inc. bankers took a globe-girdling trip from the U.K. to China in June to persuade investors that the state’s $900 million of Build America Bonds were a bargain. The seven-country visit worked. The state sold one-fifth of the federally subsidized securities abroad the next month, tapping investors who are the fastest-growing source of borrowed cash for U.S. municipalities. Illinois, with the lowest credit rating of any state from Moody’s Investors Service, dangled yields higher than Mexico, which defaulted on debt in 1982, and Portugal, which costs more to insure against missed payments.
• Ireland's Rating May Be Downgraded by Moody's on Banks. Ireland’s credit rating may be cut by Moody’s Investors Service after the government pledged as much as 50 billion euros ($68.6 billion) to save the country’s banks. Ireland’s Aa2 rating will “most likely” be cut by one level if a downgrade goes ahead, the company said in a statement today. A downgrade by Moody’s, which will finish its review within three months, will bring Ireland’s rating into line with Standard & Poor’s and Fitch Ratings. “We’re monitoring the banking system, which we now see has led to additional capitalization needs,” Dietmar Hornung, Frankfurt-based Moody’s analyst, said in a phone interview, adding the government won’t need outside aid. “The focus is on Ireland’s ability to recover financial strength.”
• Europe Services, Manufacturing Cool as Retail Sales Decline. Europe’s services and manufacturing industries grew at the slowest pace in seven months in September, adding to signs that the economy is weakening as governments from Spain to Ireland implement austerity measures. A composite index based on a survey of euro-area purchasing managers in both industries fell to 54.1 in September from 56.2, London-based Markit Economics said today.
• Downtown Manhattan Office Vacancy Rate Hits Six-Year High as Firms Move. Downtown Manhattan’s office vacancy rate jumped in the third quarter to the highest level since 2004 as new space came on the market from financial companies, according to brokerage Cushman & Wakefield Inc. The vacancy rate climbed to 12.1 percent from 9.9 percent a year earlier, Cushman, the biggest closely held commercial property broker, said today in a statement. It was also 9.9 percent in the second quarter. Rents declined to $39.08 a square foot from $42.01 in the third quarter of 2009.
• GM is Said to Approach Sovereign Wealth Funds to Boost Initial Stock Sale. Investment bankers for General Motors Co. have met with sovereign wealth funds and private investors in the Middle East and Asia to gauge interest in the automaker’s planned stock sale, said two people familiar with the meetings.

Wall Street Journal:

• Retailers Bank Together for Online Shipping Promotion. Some 40 retailers and brands are joining a new loyalty program created by GSI Commerce Inc. to offer shoppers unlimited two-day shipping and returns across their online stores. The program, called ShopRunner, will cost $79 per year—the same as the Prime shipping program offered by the largest online-only retailer Amazon.com Inc.

Barron's:

• Apple: Ticonderoga Starts With Buy, Street-High $430 Target.

CNBC:

• Fed's Evans Favors 'Much More' Easing: Report. The U.S. Federal Reserve should do "much more" monetary easing to spur a sluggish economic recovery, a top Fed official said in an interview published Tuesday. "In the last several months I've stared at our unemployment forecast and come to the conclusion that it's just not coming down nearly as quickly as it should," Chicago Federal Reserve Bank President Charles Evans told the Wall Street Journal. "This is a far grimmer forecast than we ought to have," he said, for which reason he favors "much more accommodation than we've put in place."
• Flash Crash Continues to Rattle Investors' Faith in the Market.
• Middle Class to Suffer Most From Bank Rules: Whitney. The 26 percent of mostly low-income Americans who don't have bank accounts—as well as the wealthy—are only marginally affected by tighter credit from more stringent banking regulations, Whitney said. But those in the middle class who have relied on access to credit will suffer as banks that "can't price risk now" become increasingly afraid to make loans.

Business Insider:

• Microsoft(MSFT) Slapped With Another Downgrade.
• We Have a New GM, But the Same Old UAW, And That's Going to Be a Major Problem.
• THE RADAR: 10 Emerging Stories You Must Start Watching Right Now.
  

BarclayHedge:

• Only 31% of hedge fund managers are bullish on the S&P 500, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers for September. About 37% of the 109 hedge fund managers surveyed are bearish on stocks, while 32% are neutral. “Hedge fund managers were extremely bearish on equities at the end of August, and they remain downbeat even though the S&P 500 soared 8.8% in September,” said Sol Waksman, founder and President of BarclayHedge. “Negative sentiment has proven costly, as the industry underperformed by more than 500 basis points last month. But managers are sticking to their bearish guns; four in 10 are forecasting stock prices will fall at least 2% in the coming weeks.” About 27% of hedge fund managers are bearish on the 10-year Treasury note, the largest share in four months, while only 24% are bullish. Additionally, 36% are bearish on the U.S dollar index, while only 21% are bullish. These shares are the largest and smallest, respectively, since May. Meanwhile, 19% of hedge fund managers plan to increase leverage in the next month.

The Orange County Register:

• Mark Landsbaum: Escape Clause From California Global Warming Law. If Proposition 23 on the Nov. 2 ballot doesn't pass, your lives, livelihoods and liberties will come inescapably under the thumb of the Administrative State. Hyperbole, you say? Landsbaum's off his rocker, you say? Read on.

St. Louis Federal Reserve:

• Deflation and the Fisher Equation by William T. Gavin.

Washington Examiner:

• Gallup's Astonishing Nubmers and the Lake Superior Congressional Districts. Late yesterday, Gallup came out with new numbers on the generic ballot question—which party’s candidates would you vote for in the election for House of Representatives? Among registered voters Gallup shows Republicans ahead by 46%-42%, about as good a score as Republicans have ever had (and about as bad a score as Democrats have ever had) since Gallup started asking the question in 1942. However, Gallup also shows the results for two different turnout models. Under its “high turnout model” Republicans lead 53%-40%. Under its “low turnout model” Republicans lead 56%-38%. These two numbers, if translated into popular votes in the 435 congressional districts, suggest huge gains for Republicans and a Republican House majority the likes of which we have not seen since the election cycles of 1946 or even 1928.
  

NY Post:

• Gymboree(GYMB) Kids Chain Sees Green in Private Sale. Children's clothing chain Gymboree isn't playing around anymore. The San Francisco-based retailer has hired Goldman Sachs to begin a formal auction of the company, and big-name buyout firms are already lining up in a sale that's expected to fetch well over $1 billion, sources told The Post.

Reuters:

• CBOE to Launch 2nd Exchange in Late Oct. CBOE Holdings Inc (CBOE), the biggest U.S. options market, will launch its planned second exchange targeted at high-frequency traders between Oct. 15 and Nov. 1, Vice Chairman Edward Tilly said on Tuesday.
• Wolverine(WWW) Q3 Beats, Raises FY Profit View. Wolverine World Wide Inc. raised its full-year earnings view for the third time this year on strong order backlogs, after posting a better-than-expected third-quarter profit.

Financial Times:

• Hendry Plots Path to Go Short on China. Hugh Hendry, the outspoken hedge fund manager, has taken short positions on the bonds of a number of Japanese companies in a trading strategy designed to profit from a downturn in the Chinese economy. Mr Hendry is one of only a handful of hedge fund managers that has begun to explore ways of being “short” China – a trade that has so far proved as tricky to implement as it is unpopular. In June, Eclectica, his firm, opened a fund on the back of investor interest in bearish trades designed to benefit from a Chinese slowdown. Mr Hendry has constructed a portfolio that targets Japanese corporate credits as some of the instruments likely to be worst affected. The fund has taken short positions through credit default swaps, whose prices reflect the solvency position of issuers, against 20-30 single-name corporate bonds, the majority of which are Japanese. Mr Hendry has purchased cheap credit protection on companies such as Nippon Steel or JFE Holdings for as little as 50 basis points annually, expecting that spreads will blow out following an export-led slowdown. Japanese companies were highly exposed to China but such risks were currently underpriced, he said. Mr Hendry expects the trades to pay off within the next 18 months. “We want to be in early and out early,” he said. As yet, few other market participants have voiced such bearish positions on China, partly because of the technical difficulties associated with such trades. Jim Chanos, the renowned short-seller, is understood to have taken a number of short positions against Hong Kong-listed Chinese property firms. Interest from investors in such strategies is growing, however, as part of a trend towards portfolio “disaster insurance” that involves investing in extremely bearish trades designed to reap big rewards from small investments. Eclectica’s China-focused fund, which opened in June, has raised three-quarters of its target capital already, according to people close to the firm. It was likely to close before the year-end, they said. The fund, which will be valued at about $140m, stands to deliver huge returns if its trades pay off.
• Obama's Promise to End Tax Cuts for Rich Unravels. Nobody in Washington has put it quite so bluntly. But it seems almost certain now that Barack Obama will be unable to fulfil his pledge of reversing George W. Bush’s tax cuts for the wealthiest Americans. Last week, Democratic lawmakers returned home to prepare for next month’s midterm elections having failed in either chamber even to put the issue to a vote. In spite of the fact that President Obama made reversing the tax cuts a central pledge of his election campaign – along with ending combat operations in Iraq, a promise he fulfilled in August – the White House was abandoned last week by nervous Democrats to fight alone at the barricades.
• Rehn Warns on Threat From Strong Euro. Europe’s fledgling economic recovery could suffer if the euro is undercut by other currencies, the European Union’s economics chief warned as China rebuffed fresh pleas to allow the renminbi to strengthen. The warning from Olli Rehn, Europe’s commissioner for economic and monetary affairs, reflected a growing concern that moves by other nations to restrain their currencies in order to boost exports was taking its toll on Europe’s competitiveness. “If the euro continues to bear a disproportionate burden in the adjustment of global exchange rates, the recovery of the euro area might be weakened,” Mr Rehn said in Brussels after meetings Wen Jiabao, China’s prime minister, during an EU-Asia summit.

Telegraph:

• Banks' $4 Trillion Debts are 'Achilles' Heel of the Economic Recovery, Warns IMF. More taxpayer support is needed to ensure global financial stability despite the billions already pledged, the International Monetary Fund has warned, as banks remain the “achilles heel” of the economic recovery.

DigiTimes:

• Hard Drive Makers to See 4Q10 Shipments Remain Flat or Drop Sequentially. Hard drive makers expect their shipments in the fourth quarter to only remain flat and they might even drop slightly by 1-2% sequentially, as weak back-to-school demand has created a pileup of hard drive inventory among PC players. These players will work on digesting the inventory in the fourth quarter, so they are likely to reduce their orders for the quarter, with total shipments in the second half to grow only 5-6% compared to the first, according to sources from hard drive makers.

Bear Radar

Style Underperformer:

• Large-Cap Value (+1.83%)

Sector Underperformers:

• 1) Homebuilders +.76% 2) Utilities +.98% 3) Oil Tankers +1.24%

Stocks Falling on Unusual Volume:

• VIP, AXP, JDAS, MRVL, MRVL, PLCM, CAGC, TLB and IRM
  

Stocks With Unusual Put Option Activity:

• 1) CAVM 2) BG 3) AXP 4) NVS 5) CHL
  

Stocks With Most Negative News Mentions:

• 1) WWE 2) RIG 3) AXP 4) WCG 5) RL
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (+1.94%)

Sector Outperformers:

• 1) Gold +4.09% 2) Disk Drives +2.74% 3) Oil Service +2.38%

Stocks Rising on Unusual Volume:

• LFC, STD, ING, HES, DCM, TNE, TOT, GYMB, ERTS, FFIV, BEXP, ILMN, NIHD, BIDU, GMCR, IIT, MIM, TV, TNE, KNM and FUN
  

Stocks With Unusual Call Option Activity:

• 1) CAG 2) ARM 3) TQNT 4) GNK 5) GYMB
  

Stocks With Most Positive News Mentions:

• 1) GOOG 2) WAG 3) MCD 4) IRM 5) SYMC

Tuesday Watch

Evening Headlines
Bloomberg:

• Goldman Sachs(GS), TCW Sued by Landesbank Over $37 Million in Losses From CDO. Goldman Sachs Group Inc. and TCW Group Inc. were sued by Landesbank Baden-Wuerttemberg over $37 million in losses from an investment in a collateralized debt obligation named Davis Square Funding VI. The CDO, for which Goldman was the placement agent and TCW the investment adviser, held 95 percent residential mortgage- backed securities, of which 33 percent were subprime and 46 percent were “midprime,” the German bank said in a complaint filed today in federal court in Manhattan. When Goldman sold the investments to a Luxembourg affiliate of LBBW in March 2006, they were represented as “safe, secure, and nearly risk free,” according to the complaint. At the same time, Goldman senior executives privately observed that “it was game over” for subprime lenders and were reducing their exposure to the mortgages, LBBW said. “Goldman knew at the highest levels of its organization that its representations to LBBW Luxemburg that the notes merited triple-A ratings and were high grade were blatantly false,” the Stuttgart-based bank said. “Goldman committed fraud and, or, was negligent in marketing and selling the notes to LBBW Luxemburg.” Moreover, Goldman was buying credit default swaps in case Davis Square VI and similar CDOs would fail and was also using TCW Group’s parent company, Societe Generale SA, to purchase insurance specifically against Davis Square’s failure, the bank said.
• BofA(BAC) Foreclosures May Prompt Servicer-Rating Cut, Moody's Says. Bank of America Corp., which delayed foreclosures last week to review affidavits it submitted to courts in 23 states, may have its top servicer-quality ratings cut, Moody’s Investors Service Inc. said. “Irregularities” in the bank’s process may delay home seizures, allow legal challenges to completed foreclosures and pose a “reputational risk,” Moody’s said in a statement today. The ratings company also cited “deterioration of the company’s collections, loss mitigation and timeline performance metrics.”
• Buffett's China-Gushing Optimism Sells Like Sex: William Pesek. The marriage of Buffett’s suddenly unbridled optimism and China’s perceived invulnerability is a fascinating milestone. Just two years after pushing a “buy American” campaign, Buffett is leaning toward a “buy Chinese” one. In reality, the Buffett gush-fest is a reminder of the precariousness of the global economy. It’s one in which the biggest economies and the savviest investors may be relying too much, too soon, on a developing nation.
• Emanuel Gets Earful in Chicago Listening Tour for Mayoral Run. Rahm Emanuel discovered today that coming home to Chicago isn’t always sweet. Rivals to the throne of retiring Mayor Richard M. Daley sent supporters to challenge the former White House chief of staff. Protesters jeered his role in President Barack Obama’s support for Wall Street banks. Black voters criticized him for what they said was the administration’s inability to help Chicago communities suffering from unemployment. Rahm Emanuel discovered today that coming home to Chicago isn’t always sweet. Rivals to the throne of retiring Mayor Richard M. Daley sent supporters to challenge the former White House chief of staff. Protesters jeered his role in President Barack Obama’s support for Wall Street banks. Black voters criticized him for what they said was the administration’s inability to help Chicago communities suffering from unemployment.
• Bernanke Calls on Lawmakers to Consider Rules on Limiting Federal Spending. Federal Reserve Chairman Ben S. Bernanke called on U.S. lawmakers to consider rules limiting federal spending, annual deficits or accumulated debt to curtail the risk of a fiscal crisis. “Well-designed rules can help promote improved fiscal performance,” Bernanke said today in a speech in Providence, Rhode Island. A rule “could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence,” he said.
• Elpida Earnings Likely to Miss Forecast, CEO Says. Elpida Memory Inc., the world’s third-largest maker of computer-memory chips, will probably miss previous earnings projections as slowing personal-computer demand drives down chip prices, President Yukio Sakamoto said.
• MSCI China Index May Drop 15% in Fourth Quarter on Stimulus Exit, RBS Says. The MSCI China Index may fall 10 percent to 15 percent this quarter as the government focuses on structural reform instead of boosting the economy as growth moderates, Royal Bank of Scotland Group Plc said. “Beijing is increasingly aware of the side effects of its unprecedented stimulus measures, among which excess liquidity has to be one,” analysts led by Wendy Liu wrote in a report yesterday.

Wall Street Journal:

• Arthur Laffer: The Bill Gates Income Tax. If Washington's most famous billionaires are really worried about their state's finances, they'd write personal checks to the government and leave everyone else alone.

CNBC:

• Citi(C) Critic Mayo Questions Bank Strategy After Meeting. Citigroup failed to silence prominent analyst Mike Mayo in a much-publicized meeting between the bank's senior executives and its long-time critic.
• iPad Adoption Rate Fastest Ever, Passing DVD Player. Apple’s(AAPL) iPad sold three million units in the first 80 days after its April release and its current sales rate is about 4.5 million units per quarter, according to Bernstein Research. This sales rate is blowing past the one million units the iPhone sold in its first quarter and the 350,000 units sold in the first year by the DVD player, the most quickly adopted non-phone electronic product.
• Stung by China, Japan Turns to Recycling for Rare Earth.
  

IBD:

• Credit-Card Companies See Bright Future, Despite Financial Overhaul.

Business Insider:

• Forget China, The New Buzz Will Be All About The Collapse of Brazil.

Zero Hedge:

• Is a 90 Day "Mortgage Meltdown" Foreclosure Moratorium Imminent as the RoboSigning Scandal Goes Mainstream?

NY Times:

• Cities in Debt Turn to States, Adding Strain.

Forbes:

• Billionaire Calls Flash Crash a Regulatory Failure. Ron Baron, the mutual fund magnate, says smart guys will always get around the rules. Baron Capital founder Ron Baron says the flash crash was caused by a crazy, fragmented market.

ABCNews:

• US Plans Law Enforcement 'Surge' On Trains. US authorities plan a law enforcement surge this week along Amtrak routes, an exercise called operation RailSafe, and the heads of the country's biggest mass transit systems were briefed today on the possible terror threat, all part of what is being called an abundance of caution. Amtrak is holding a high-security exercise on Friday in which uniformed officers will be a visible presence on national transit routes.

PIMCO:

• Paul McCulley Discusses PIMCO's Cyclical Outlook. Developed economies must spend an extended period undergoing balance sheet repair. Also, we are confident that monetary policy in the developed countries will remain extraordinarily accommodative for a very extended period. The bottom line for the U.S. is a growth trajectory so slow you’d nearly call it stalled, in the context of a huge output gap, implying further disinflation from an already too-low level for inflation. We are living in a world transforming to greater influence from the emerging countries, with retrenchment in the developed countries. And as strong as many of the emerging markets are, they are still tethered to the developed markets by strong global trade linkages.

AOL News:

• Who's Really to Blame for Monster Deficits? Between 2011 and 2018, Obama would spend $4.9 trillion more than Bush had planned to. Keep in mind that all this extra spending is after the economic stimulus has been almost entirely exhausted. In other words, if Obama had simply kept Bush's spending policies in place, federal deficits over the next eight years would be 60 percent lower. In 2018, we'd have a deficit of just $188 billion, instead of the projected $996 billion under Obama's budget. So while Bush no doubt shares the blame for the dismal budget outlook, the majority of the blame belongs with Obama for putting the government on a far higher spending path.

EE Times:

• Analog Faces Slowdown. Don't look now, but analog is slowing. FBR has lowered its estimates for Linear Technology Corp.(LLTC) and Maxim Integrated Products Inc.(MXIM) And MaxLinear Inc. lowered its sales forecast. ''Recent checks with Asian distributors suggest 4Q analog backlog is falling, and that 4Q '10 distributor shipments may track flat to slightly down sequentially, worse than Street estimates,'' said Craig Berger, an analyst with FBR, in a report. ''We hear PC-related analog demand is weaker than expected as supply chain participants reduce chip inventories for Intel's outgoing Calpella notebook platform, and before Sandybridge notebooks ramp in 1Q '11. While industrial shipments are still robust, we see cracks starting to form there, too.''

Reuters:

• US Regulators May Need Help Policing Swaps Market. U.S. market regulators may need help supervising the dozens of new entities that will serve as trading venues for the $615 trillion over-the-counter derivatives market, regulators and industry officials said on Monday.
• U.S. "Flash Crash" Report Ignores Research - Nanex. Eric Hunsader, a software maven who coined the phrase "quote-stuffing" and created graphics to show how alleged market manipulation worked, said regulators dismissed his extensive research in last week's "flash crash" report.The findings by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said a sale of Chicago Mercantile Exchange stock futures worth $4.1 billion helped trigger the meltdown in U.S. stock prices on May 6 and laid the blame on a lack of liquidity in markets that day. Backers of high-frequency trading, who say they have been unduly blamed for the market's gyrations on May 6, lauded the regulators' findings. But Hunsader said regulators largely ignored his "quote-stuffing" theory which argued that high-frequency traders had contributed to the crash by flooding the market with so many orders that it delayed the posting of prices to the consolidated quote system. "It just seemed to me too much ink was devoted to try to discredit theories without any evidence, without any basis, other than just, 'We looked at it, we talked to these people, and now, we dismissed it,'" Hunsader said. "Obviously they didn't follow up. I felt everything I sent to them went into a black hole," said Hunsader, who runs Nanex, a four-person data provider shop in Chicago.
• Mosaic(MOS) Profit Nearly Triples, But Misses Street. Mosaic Co (MOS) said on Monday its quarterly profit nearly tripled as demand for its fertilizers surged, although results missed expectations and the company's shares fell.

Financial Times:

• Call for New Global Currencies Deal. The world’s leading countries should agree a new currency pact to help rebalance the global economy, a leading association of financial institutions has urged. The Institute of International Finance, which represents more than 420 of the world’s leading banks and finance houses, warned on Monday that a lack of such co-ordinated rebalancing could lead to more protectionism. Charles Dallara, IIF managing director, said: “A core group of the world’s leading economies need to come together and hammer out an understanding.”
• EU Nations Win a Year's Reprieve on State Aid. European governments will be allowed to provide soft loans and other concessionary support to their banking and industrial sectors for one more year because of the lingering effects of financial crisis, according Europe’s top competition regulator.

Telegraph:

• World's Powers Must Head Off Threat of Currency War. The world’s major economic powers must do more to head off the prospect of a global currency war, a body representing the world’s financial institutions has warned.
• No New Bail-Out for UK Banks, Says Chancellor George Osborne. The prospect of a second round of bailouts for the UK's banks has been dismissed by Chancellor George Osborne and the industry's main trade body.

South China Morning Post:

• France won't join the U.S. to push for Chinese government currency policy reforms at the G20 summit in Seoul next month, citing the French ambassador to China, Herve Ladsous.

The Standard:

• Chinese Property Tax on 'Hot' Cities First. "Overheated" mainland cities are likely to be the first to be hit with a property tax in a bid to cool the sizzling real estate sector. Beijing announced a second round of tightening measures last Wednesday to curb speculation and stabilize home prices. Shanghai and Shenzhen have already received approval to introduce an annual property tax of 0.3 to 0.4 percent of a home's market value as part of a pilot scheme, said Yang Hongxu, an analyst at Shanghai E-house China Research, citing market sources. Nomura Holdings said authorities may consider introducing a property tax in cities such as Beijing, Shanghai, Shenzhen and Hangzhou, as well as "fully" enforcing the land appreciation tax. Such measures would pull down house prices by 5 to 10 percent by the end of next year, wrote Nomura analysts Alvin Wong and Sunny Tam.
  

Evening Recommendations

• None of note
  

Night Trading

• Asian equity indices are -.50% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 116.0 +1.5 basis points.
  
• Asia Pacific Sovereign CDS Index 107.0 -2.5 basis points.
  
• S&P 500 futures -.13%.
  
• NASDAQ 100 futures -.03%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (WWW)/.66
• (DMND)/.28
• (YUM)/.73
  

Economic Releases
10:00 am EST

• The ISM Non-Manufacturing Composite for September is estimated to rise to 52.0 versus 51.5 in August.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports, weekly ABC Consumer Confidence report, Citi Biotech Day, Johnson Rice Energy Conference, William Blair Growth Stock Conference, (IRM) Investor Day, (FISV) Investor Conference and the (LZ) Analyst Meeting could also impact trading today.
  

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

Stocks Lower into Final Hour on European Debt Worries, Proft-Taking, Shorting, Technical Selling

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Almost Every Sector Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 24.06 +6.93%
  
• ISE Sentiment Index 91.0 -30.0%
  
• Total Put/Call .82 +2.50%
  
• NYSE Arms 1.52 +123.94%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 104.73 bps -.22%
  
• European Financial Sector CDS Index 119.05 bps -1.75%
  
• Western Europe Sovereign Debt CDS Index 153.66 bps -.32%
  
• Emerging Market CDS Index 220.43 bps -.31%
  
• 2-Year Swap Spread 19.0 -1 bp
  
• TED Spread 14.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .15% unch.
  
• Yield Curve 210.0 +2 bps
  
• China Import Iron Ore Spot $141.10/Metric Tonne unch.
  
• Citi US Economic Surprise Index -4.40 +2.0 points.
  
• 10-Year TIPS Spread 1.80% -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -66 open in Japan
• DAX Futures: Indicating +4 open in Germany

Portfolio:

• Slightly Lower: On losses in my Biotech, Tech and Medical long positions
  
• Disclosed Trades: Added to my (IWM)/(QQQQ) hedges and then covered them
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades near session lows despite better economic data and buyout speculation. On the positive side, Disk Drive, REIT and Gaming shares are higher on the day. (IYR) has traded well throughout the day. On the negative side, Coal, Alt Energy, Oil Service, Gold, HMO, Education, Semi, Paper, Steel, Defense and Airline shares are under meaningful pressure, falling more than 2.0%. Small-cap and cyclical shares are underperforming today. The S&P GSCI Ag Spot Index, which led the recent stock rally, is declining another -.64% today. Lumber is falling -2.27%, which puts it below its 50-day moving average. Copper is also falling -.72%. Despite better economic data of late and recent declines, the 10-year yield is falling another -3 bps to 2.48%. The Portugal sovereign cds is rising +2.1% to 406.50 bps and the Spain sovereign cds is rising +.9% to 228.83 bps. This is the first day in quite some time that the market is reacting negatively to negative news out of Europe. The euro's weakness today is noteworthy given the negative news the currency has been ignoring. (MSFT) is weighing on the Naz today on comments from Goldman. Unless this company makes some major changes in direction, the stock will likely head significantly lower over the longer-term as competition mounts. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, rising sovereign debt angst, technical selling and China worries.

Today's Headlines

Bloomberg:

• Asset-Backed Bond Sales Fall to Lowest in 15 Years as Consumer Cut Back. Sales of bonds tied to consumer debt including credit card payments and car loans may fall short of $100 billion for the first time in 15 years in 2010 as U.S. households seek to save more. Issuance of so-called asset-backed securities linked to household borrowing stands at $80.4 billion, compared with $110.1 billion in the same period in 2009, according to Wells Fargo Securities data. Bond sales tied to credit card payments fell more than 83 percent to $7 billion as lenders funded consumer demand with money from bank deposits rather than tapping the bond market, according to data compiled by Bloomberg. “We are at the mercy of the economy right now,” John McElravey, an analyst at Well Fargo Securities, said in an interview yesterday at Information Management Network’s annual ABS East conference in Miami. “If people have jobs they can go out and spend.”
• Beijing Second-Hand Home Sales Fall on Government Curbs, China News Says. Beijing’s second-hand home sales fell to 18 units on Oct. 1 and Oct. 2 combined, from 1,067 on Sept. 30 alone, after the government and provincial authorities stepped up measures to cool property prices, China News said. Home sales in the eastern city of Suzhou dropped to 169 units on Oct. 1 from 519 the day before, and in Hangzhou halved on Sept. 30 from the previous day, the news service said. Zhejiang provincial government said it would tighten the monitoring of developers’ pre-sale funds from November, while Xiamen of Fujian Province limited new home purchases to one unit per household until the end of this year, China News reported.
• Corn Falls for Third Day as U.S. Harvest Advances, Supply Hits 3-Year High. Corn slumped for a third day to a one-month low after the Department of Agriculture said supplies left from last year’s crop climbed to the highest level since 2006, and as dry weather speeds the U.S. harvest. Inventories on Sept. 1 rose 2 percent from a year earlier to 1.708 billion bushels, the USDA said on Sept. 30. That was 322 million bushels above the agency’s Sept. 10 estimate. About 27 percent of the crop was harvested as of Sept. 26, up from 18 percent a week earlier, the USDA said last week.
• Microsoft(MSFT) Cut From Goldman(GS) Buy List on Mobile Weakness. Goldman Sachs Group Inc. analysts cut Microsoft Corp. shares to “neutral,” citing the world’s largest software company’s struggles to gain market share in mobile devices. Microsoft was removed from the bank’s Americas Buy List, with a price target of $28 rather than $32, Goldman Sachs analysts including Sarah Friar wrote in a note to clients. The company needs to win “a firmer foothold in the growing migration to mobile devices” in order to improve investor sentiment, they wrote.
• California Has to Delay Bills to Avert IOUs, Controller Says.
  

Wall Street Journal:

• California Budget Plan Draws Skepticism. Rank-and-File Lawmakers Express Doubts About Proposal From Governor, Legislative Leaders to Close $19.1 Billion Gap.
• Google(GOOG) Enters Content Partnerships for Google TV.
  

CNBC:

• Plosser Voices Concern Over Further Easing. The US Federal Reserve must not launch a new round of asset purchases without setting out what they are meant to achieve, the president of the Philadelphia Fed has warned in an interview with the Financial Times. “I think that before we engage (in further quantitative easing) we need to be very clear about what it is we’re trying to do, how we’re going to go about doing it, how we’re going to measure whether we’re effective at it or not, and how we’re going to communicate that,” said Charles Plosser, who opposes a second round of quantitative easing – nicknamed “QE2” – at this point.
• Flawed Paperwork Aggravates a Foreclosure Crisis.
  

Business Insider:

• Here are the 12 Huge Bets Hedge Funds are Making Right Now. (graphs)
• A Shocking 53% of Investors See a US Sovereign Debt Crisis in the Next Two Years.
  

Zero Hedge:

• Rare Earth Mineral Prices Explode in Q3. (graph)

MarketWatch.com:

• Dollar Gains on Renewed Euro-Zone Worries. The dollar rose against the euro on Monday on renewed worries about the impact of the single-currency region’s ongoing debt woes. The greenback also strengthened against the yen ahead of the Bank of Japan’s monetary policy meeting.

BusinessofVideo.com:

• AT&T(T) Partners With Cotendo for App Acceleration, Will Challenge Akamai(AKAM).

FINalternatives:

• LTCM Survivor Meriwether Launches Global Macro Hedge Fund. Two-time hedge fund loser John Meriwether has launched two new hedge funds, hoping that the third time turns out better.

Politico:

• Environmental Protection Agency Rules Could Hurt Barack Obama in 2012. President Barack Obama’s Environmental Protection Agency is putting some hazardous speed bumps on his 2012 electoral road in key swing states. Controversial rules covering everything from power plants to petroleum refiners, manufacturers, coal mines and farmers could come back to haunt the White House in industrial and Midwestern states that carried Obama to the presidency two years ago. Political battlegrounds like Ohio, Pennsylvania and Virginia that Obama won in 2008 will be watching how the EPA moves on climate change. Coal-reliant states such as Missouri — which Obama lost by less than 1 percentage point — will be monitoring clean air rules and coal ash standards. And farm states that Obama carried, including Indiana, Iowa, Minnesota and Wisconsin, are waiting on a proposal to tighten air quality limits for microscopic soot. Obama’s situation is tricky. He campaigned on the need to address climate change and faces pressure on his left to tackle a range of issues that environmentalists complain were neglected by former President George W. Bush. But with EPA regulations expected to come out in rapid-fire succession over the next two years, Republican presidential hopefuls are already adding them to the larger, anti-Obama narrative against expansive government. “Some of the things his administration is proposing are just disastrous in the heartland,” Sen. John Thune (R-S.D.) said in an interview. “If he has any hope of winning votes in the center of the country, then he is going to have to reconsider a lot of these things the EPA and some of his agencies are trying to get done.”
• GOP Ready to Rumble on Health Law. If Republicans regain control of the House, the one issue likely to be most transformed is the health care overhaul. The debate on and passage of the new law became a galvanizing call for the GOP’s depressed and disillusioned base last summer and will be a driving force in November for voters who oppose the law.
• Task Force Undermines Freedom. Americans know best what kind of health care coverage is right for them and their families. They should be able to work with their own trusted physicians to determine the treatments and services that meet their needs. Unfortunately, the health reform law, which was rushed through Congress and forced on the American public, empowers the government to make decisions that should be left to doctors and patients.

Reuters:

• Iraq Raises Proven Oil Reserves Figure by 25%. Iraq raised its proven oil reserves figure by a quarter on Monday in a bid to match the clout of leading producer Saudi Arabia and strengthen its case for OPEC to grant it a higher output quota. New estimates at West Qurna and Zubair fields helped push the figure to 143 billion barrels. That would allow Iraq to surpass Iran to become the world's No.3 reserves holder after Saudi Arabia and Venezuela, according to BP (BP) data.
• US Clean Energy Loan Chief Says Ramping Up Lending. The former venture capitalist who now is in charge of about $70 billion in federal funding for alternative-energy projects is trying to bring a dash of private-sector efficiency to his new government job.

Financial Times:

• Ireland's Economic Outlook Worsens. Ireland’s economic outlook worsened on Monday as the country’s central bank cut its growth forecast for this year, with gross domestic product now set to increase 0.2 per cent against previous forecasts of 0.8 per cent. The slowing economy will compound the challenges the Fianna Fáil-led government faces in framing this year’s budget, which is critical to restoring investor confidence in Ireland’s fiscal consolidation plan.

Naftemporiki:

• Greece's government will increase objective property values by an average of 30% from Jan. 1 to boost state revenue by at least 400 million euros. In neighborhoods where the market value is close to the objective value the increase will be between 10% and 20% as of Jan. 1. The increase will be over 50% in coastal areas and areas earmarked to be included in town plans.

Cinco Dias:

• Compania Espanola de Petroleos SA said gasoline demand is declining, citing an interview with CEO Dominque de Riberolles. "The situation is somewhat better than last year though demand is still falling," the executive said. "Gasoline demand is falling 6% and diesel once again declined in July and August .6%."