Stocks Falling Substantially into Final Hour on Rising Eurozone Debt Angst, US Tax Hike Worries, Global Growth Worries, Financial Sector Pessimism

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Slightly Above Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 34.27 +4.29%
  
• ISE Sentiment Index 75.0 -13.79%
  
• Total Put/Call 1.27 +14.41%
  
• NYSE Arms 1.83 +84.26%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 133.98 +1.0%
  
• European Financial Sector CDS Index 275.27 +4.30%
  
• Western Europe Sovereign Debt CDS Index 351.17 +1.55%
  
• Emerging Market CDS Index 338.50 +8.0%
  
• 2-Year Swap Spread 30.0 unch.
  
• TED Spread 35.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 166.0 -12 bps
  
• China Import Iron Ore Spot $176.70/Metric Tonne -.39%
  
• Citi US Economic Surprise Index -41.0 +1.3 points
  
• 10-Year TIPS Spread 1.88 -4 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -200 open in Japan
• DAX Futures: Indicating -12 open in Germany

Portfolio:

• Slightly Lower: On losses in my Biotech, Medical and Retail sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, added to my EEM short and then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 reverses hard this afternoon at its downward-sloping 50-day moving average on rising Eurozone debt angst, US tax hike concerns, some disappointing FOMC commentary, rising financial sector pessimism, emerging markets inflation fears, technical selling, more shorting and global growth worries. On the positive side, Computer Hardware shares are holding up relatively well, falling less than -.5%. Oil is falling -1.17%, the UBS-Bloomberg Ag Spot Index is down -1.7% and Gold is down -1.3%. The Ireland sovereign cds is falling -2.24% to 800.0 bps. On the negative side, Road & Rail, Coal, Oil Tanker, Oil Service, Steel, Bank, I-Bank, Insurance, Construction, Homebuilding, REIT and Education shares are under significant pressure, falling more than -4.0%. Cyclicals and small-caps are substantially underperforming again. (XLF) has traded very poorly throughout the day. Copper is falling -.4% and Lumber is down -.2%. Rice is still very near its multi-year high, rising +32.2% in about 11 weeks. The average US price for a gallon of gas is -.01/gallon today to $3.57/gallon. It is up .43/gallon in about 7 months. The Germany sovereign cds is gaining +5.48% to 99.50 bps, the China sovereign cds is gaining +3.85% to 140.24 bps, the UK sovereign cds is gaining +3.12% to 88.0 bps, the France sovereign cds is surging +2.51% to 190.83 bps, the Italy sovereign cds is rising +1.85% to 522.17 bps, the Belgium sovereign cds is gaining +2.45% to 278.83 bps, the Brazil sovereign cds is gaining +7.6% to 185.23 bps and the Spain sovereign cds is jumping +3.35% to 431.83 bps. The Germany and Italy sovereign cds made new record highs again today. The France and Spain sovereign cds are still very near their record highs. The China sovereign cds is braking to the highest level since April 2009. The Brazil sovereign cds is surging to the highest since July 2009. The Russia sovereign cds is close to breaking out of a multi-year trading range. The Western Europe Sovereign CDS Index and European Financial Sector CDS Index are still near their all-time highs. The 2-Year Euro Swap Spread is very close to a multi-year high. The TED spread is still very near the highest level since July 2010 despite Europe's recent efforts. The China Blended Corporate Spread Index is continuing its parabolic move higher, rising another +10.0 bps to 693.0 bps. The Emerging Markets Currency VIX continues to surge, rising another 9.4% to 15.77. Hong Kong shares fell another -1.0% today and are back at their recent lows, falling -18.3% ytd. Russian shares fell another -1.0% today and are back near their recent lows, falling -15.1% ytd. As well, the major European equity indices fell -1.5 to -2.0% today. The 10-year yield continues to fall too much, declining -7 bps to 1.86%. Various credit gauges continue to indicate rising global recession fears. I don't believe the broad equity market is pricing in recession even though many cyclical stocks have been crushed. Select growth stock leaders continue to trounce the major averages. The situation in Europe must at least stabilize very soon or a full test of the August lows is likely. I expect US stocks to trade modestly lower into the close from current levels on profit-taking, rising Eurzone debt angst, more financial sector pessimism, global growth worries, technical selling, emerging markets inflation fears, US tax hike worries and more shorting.

Today's Headlines

Bloomberg:

• Europe Banks Have $410 Billion Credit Risk: IMF. The European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending. Political squabbling in Europe over ways to fight contagion and delays in implementing agreed measures are raising concerns about the risk of defaults by governments, the IMF said. Banks in turn face “funding challenges” because of investor concern about their potential losses from government bonds they hold, with some relying heavily on the European Central Bank for liquidity, it said. “A number of banks must raise capital to help ensure the confidence of their creditors and depositors,” the IMF wrote in its Global Financial Stability Report released today. “Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy.”
• ESRB Says Risks to EU Financial System Increased 'Considerably' on Crisis. The European Systemic Risk Board, Europe’s risk watchdog, said threats to the financial system have increased “considerably” as the region’s sovereign debt crisis weakens economic growth and pressures banks. “Key risks stem from potential further adverse feedback effects between sovereign risks, funding vulnerabilities within the European Union banking sector, and a weakening of growth outlooks both at global and EU levels,” the ESRB, hosted by the Frankfurt-based European Central Bank, said today in a statement. “Decisive and swift action is required from all authorities.” Concerns are mounting that European banks may not have sufficient capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Lloyd’s of London has stopped depositing money with some banks in Europe’s peripheral economies, Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview.
  
• Lloyd's Pulls Some Euro Bank Deposits. Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution. “There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”
• SocGen CEO Tells Figaro Funds Pulled Money From Europe's Banks. Societe Generale (GLE) SA Chief Executive Officer Frederic Oudea told Le Figaro in an interview that U.S. monetary funds have progressively withdrawn money from the European bank financing market for regulatory reasons since the start of 2011. The response of central banks in terms of dollars has been a strong one and liquidity in euros is abundant, Oudea said in the interview. The situation now is not ideal and the current role of central banks musn’t become a permanent one, Oudea told Le Figaro.
• Fed Will Shift Treasury Holdings to Longer-Term Securities. Federal Reserve policy makers will replace some bonds in their portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession. The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. The action is intended to “put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said in a statement. The Fed will also reinvest maturing mortgage debt into mortgage-backed securities instead of Treasuries. Three officials dissented, the same as at the prior meeting in August. Chairman Ben S. Bernanke expanded use of unconventional monetary tools for a second straight meeting after job gains stalled and the government lowered its estimate of second- quarter growth. Today’s action, dubbed “Operation Twist” by economists after a similar Fed action in 1961, may lower interest rates and avoids reprising the money creation that sparked Republican criticism last year. “There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said. Stocks and 10-year Treasury yields declined after the statement. The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.”
• BofA(BAC), Wells Fargo(WFC) Downgraded by Moody's. Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) had long-term credit ratings downgraded by Moody’s Investors Service, which said U.S. support is less likely in an emergency. Citigroup Inc. (C)’s short-term rating also was cut.
  
• Alpha Natural(ANR), Walter Energy(WLT) Plunge After Cutting Coking Coal Forecasts. Alpha Natural Resources Inc. (ANR) and Walter Energy Inc. (WLT), two U.S. producers of coal used in steelmaking, tumbled after they cut output and sales forecasts respectively. Shares of Alpha fell $2.65, or 9.7 percent, to $24.31 at 9:33 a.m. in New York Stock Exchange composite trading. Walter declined $11.00, or 15 percent, to $64.00. Alpha’s full-year production will be 102.5 million to 109.5 million tons, compared with a previous prediction of 104 million to 112 million tons, the Abingdon, Virginia-based company said today in a statement. Alpha cited “unexpectedly curtailed customer activity” in Asia and lower-than-expected output from some mines.
• Sales of U.S. Existing Homes Rise 7.7%. Sales of previously owned U.S. homes rose more than anticipated in August as investors scooped up distressed properties with cash. The 7.7 percent increase left purchases at a five-month high 5.03 million annual rate, the National Association of Realtors said today in Washington. The August pace compares with a peak of 7.08 million in 2005, before the housing boom turned into a subprime-mortgage bust that dragged the economy into an 18-month recession. “Housing’s been down for so long, we should take whatever good news we can get,” said Brian Jones, an economist at Societe Generale in New York, whose forecast was among the highest in the Bloomberg survey. “Interest rates are low and pricing is attractive and people are responding.”
• China Faces Surge in 'Hot Money' Inflows on Market Turmoil, PBOC Data Show.
  
• HP(HPQ) Board Said to Weigh Ousting Apotheker as CEO. Hewlett-Packard Co. (HPQ)’s board plans to meet to consider whether to oust Leo Apotheker as chief executive officer after less than 11 months on the job, two people familiar with the matter said. Under a scenario being considered, Hewlett-Packard’s directors may appoint former EBay Inc. (EBAY) CEO Meg Whitman as his successor, possibly on an interim basis, said one of the people, who asked not to be named because the plans aren’t public.
• Buffett Is Obama's Fundraising Surrogate. Warren Buffett will be the featured speaker at a Chicago-area fundraiser on Oct. 27 to benefit President Barack Obama’s re-election bid, marking the second time this year the billionaire investor has agreed to help the man who has named a tax-increase proposal after him. The fundraiser in Obama’s political base will follow a Sept. 30 event in New York City that Buffett is also attending. The Chicago event, with a ticket price of $35,800 per person, will be at the home of Byron Trott, the managing partner and chief investment officer at Chicago-based BDT Capital Partners, according to a copy of the invitation obtained by Bloomberg News. Obama isn’t scheduled to be present. “I trust him completely,” Buffett once wrote of Trott, a former Goldman Sachs Group Inc. (GS) managing director. Trott confirmed this week that his firm is part of a group that has bought the landmark Wrigley Building along Chicago’s Michigan Avenue.

Wall Street Journal:

• SEC Pushes Plan for Audit System. U.S. regulators, responding to concerns about their ability to keep pace with fast-evolving markets, are pushing forward with a plan to build a multibillion-dollar computer system to monitor stock trading in real time despite criticism from traders who could foot the bill.
• Another Losing Investment for John Paulson. John Paulson may not have enough buckets to catch all his leaky investments. First, his bank stocks went kaboom. Then he bought Hewlett-Packard at exactly the wrong time. The gold mining investments went south. And now: Coal. One of the stocks in Paulson’s portfolio, Alpha Natural Resources(ANT), is getting clobbered today after the company and rival Walter Energy(WLT) warned that output for steelmaking-coal will fall short of expectations. (The warning also is whacking railroad stocks today. Given Paulson’s luck this year, he probably bought a bunch of those stocks recently.)
• GOP Seeks House Votes on Small-Business Bills By Year's End. House Republicans plan to quickly move forward with a series of bills aimed at increasing small businesses' access to capital, with the goal of passing legislation through the chamber by year's end.

CNBC.com:

• Are Hedge Fund Investors Running for the Exits? Despite a summer that saw several of the hedge fund industry’s biggest titans suffer debilitating losses, investors across the industry generally aren’t panicking or looking for the exits—not yet.

Zero Hedge:

• Bank Downgrades Jump The Atlantic: S&P Cuts Numerous Italian Banks.

Frankfurter Allgemeine Zeitung:

• German Labor Minister Ursula von der Leyen said euro-area nations that breach debt rules should face sanctions to protect the euro, citing an interview with the minister.
• Budesbank President Jens Weidmann invited fellow European Central Bank council members to a meeting to shore up opposition to the ECB's bond purchases. Yves Mersch, governor of Luxembourg's central bank, and Klaas Knot, president of the Dutch central bank, were among those invited.
  

Bear Radar

Style Underperformer:

• Mid-Cap Value (-1.10%)

Sector Underperformers:

• 1) Coal -6.60% 2) Road & Rail -4.0% 3) Steel -2.22%

Stocks Falling on Unusual Volume:

• FSLR, BAS, CLF, IVN, HAL, TSU, NBL, NUVA, AAWW, MNTA, NFLX, ILMN, SREV, PRAA, DMND, CPRT, SINA, PSSI, CMCO, JOBS, SOHU, ATHN, JOYG, IFSIA, HAYN, FNSR, O, WLT, HLS, TNH, NSC, GR, FCX, CSX and ANR
  

Stocks With Unusual Put Option Activity:

• 1) UPL 2) VMC 3) WLT 4) XHB 5) STP
  

Stocks With Most Negative News Mentions:

• 1) BAC 2) WFC 3) ANR 4) AAWW 5) CAB
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Growth (-.23%)

Sector Outperformers:

• 1) Software +1.15% 2) Computer Hardware +.79% 3) Disk Drives +.68%

Stocks Rising on Unusual Volume:

• ORCL, HPQ, HGSI, ROVI, ADSK, RRC, NOG, EQT, COG and GIS
  

Stocks With Unusual Call Option Activity:

• 1) MTW 2) TLAB 3) GIS 4) RRC 5) UA
  

Stocks With Most Positive News Mentions:

• 1) RLOC 2) ADTN 3) GIS 4) T 5) FTI
  

Charts:

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

Wednesday Watch

Evening Headlines

Bloomberg:

• Debt Crisis Infects Companies via Bank Loan Costs: Euro Credit. Banks in Spain and Italy are curbing loans and charging customers more as aftershocks from the sovereign debt crisis drive their own borrowing cost higher. “They can’t lend what they don’t have, I suppose,” said Francesc Elias, the owner of Bomba Elias, a pumps and filters maker near Barcelona, which shelved a 100,000-euro ($144,000) plan to open a Bahrain office when it couldn’t get an affordable bank loan. “The banks are very clever about finding new ways to charge us more.” Spanish and Italian government bond yields surged to euro- era records this quarter as Greece struggled to avoid default, driving the cost of insuring against nonpayment by the region’s banks to a record and making it harder for them to sell bonds. Spain pays 5.35 percent for 10-year money, up from an average of 4.07 percent in the first half of 2010, while Italy pays 5.65 percent compared with a 4.05 percent average last year. As a result, banks such as Banco Santander SA, Spain’s biggest lender, are passing higher funding costs on to their customers. UniCredit SpA, Italy’s biggest lender, said on Aug. 3 it’s being more selective about who it lends to and levying higher rates. One out of three companies asking for credit in the second quarter period didn’t get it or obtained less than they asked for, according to Confcommercio, an Italian retailers’ lobby group. “The cost of financing our current activities has increased significantly,” said Riccardo Illy, chairman of Italian coffee maker Gruppo Illy SpA. “We don’t have any problems accessing credit because we’re large enough, but we know many businesses that are having trouble because banks’ requirements have become increasingly stringent.” Spanish banks including Santander and Bankia SA are shrinking their loan books after being pummeled by a collapse in credit demand for real-estate and surging loan defaults. Santander’s Spanish lending shrank an annual 7 percent through June, mirroring a trend in the Bank of Spain’s data that show a 1.9 percent annual drop in lending to companies and individuals. Lending at Bankia, the third-biggest lender formed from a merger of seven savings banks, was down 2.3 percent from December. Banks face a dilemma when trying to pass on increased funding costs in full because they risk driving more borrowers into default, said Barclays Capital’s Pascual. Bad loans in the Spanish banking system are near 7 percent of total lending, the highest since 1995. As lending slides in Spain and banks struggle to finance themselves, the outlook for growth is worsening, said Antonio Ramirez, an analyst at Keefe Bruyette & Woods in London. “It’s the negative feedback loop between what’s happening to the sovereign and the effect on banks and the economy,” said Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London. “To a large extent, the problems facing Spanish lenders also apply to Italy.” As financing costs rise in Italy, analysts have started revising down their growth estimates for that country.
• Greece Makes 'Good Progress' in Talks to Get Loan Payment. Greek Finance Minister Evangelos Venizelos made “good progress” in a second round of talks with the European Union and International Monetary Fund aimed at staving off default, the EU said. The telephone meeting late yesterday, which followed discussions the day before, were intended to damp concerns that Greece may miss deficit-reduction targets required to received rescue loans. The EU statement said a “full mission” will return to Athens next week after Venizelos’s talks in coming days at the IMF annual meeting in Washington. Staying in the euro area is an “irreversible and fundamental national choice,” Venizelos said in a statement yesterday. “We acknowledge that our fiscal data and economic structures are a problem for the euro area, which we are determined to tackle once and for all.”
• Chanos Shorting Chinese Banks, Property Developers as Debt is 'Staggering'. (video) Jim Chanos, founder of Kynikos Associates Ltd. hedge fund, talks about China's economy, real estate market and investing. He talks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart."
• Chanos Says Europe Stress Tests a 'Joke'. "These tests are a joke, the accounting is a joke and the markets are beginning to say, 'No more,'" Chanos said today in an interview on Bloomberg Television's "Street Smart With Carol Massar and Matt Miller." The austerity measures that the European Central Bank has demanded from member countries such as Greece, Portugal and Italy in return for emergency loans may slow recovery and make it harder for governments to meet deficit goals, Chanos said. "This is so built into the structure of the European economic system that starting down this austerity path, as Greece has found out and Ireland has found out, is not going to increase growth, it's going to decrease growth," said Chanos, whose New York-based hedge fund specializes in short sales.
• Bullion Vaults Run Out of Space on Gold Rally. Deep in the 7.4-acre Singapore FreePort next to Changi International Airport’s runways is the bullion vault of Swiss Precious Metals, behind seven-metric-ton steel doors built to survive a plane crash or earthquake. The rooms are almost full after demand rose fivefold in the year since the Geneva-based company opened the facility. The firm plans an extension, and relocated Chief Executive Officer Jean-Francois Pages to Singapore last month to cope with the surge of investors willing to pay as much as 1 percent of the value of their holdings each year to keep them secure.
• Oil Drops in New York on Speculation Demand Will Falter as Supplies Rise. Oil fell in New York as investors speculated that demand will falter amid increasing U.S. crude stockpiles in the world’s biggest consumer of the commodity. Brent oil’s premium to the U.S. contract widened. Crude for November delivery slipped as much as 60 cents to $86.32 a barrel in electronic trading on the New York Mercantile Exchange and was at $86.36 at 11:42 a.m. Sydney time. The contract yesterday advanced $1.11, or 1.3 percent, to $86.92. Prices are 18 percent higher the past year.
• Lending Curbs Help Propel Commercial Paper Yields to Record: China Credit. Companies in China face record interest rates on short-term debt as curbs on lending force them to rely on commercial paper to pay back loans. The average yield on top-rated, one-year corporate notes has risen 101 basis points since June 30 to 5.9 percent, and is poised for the biggest quarterly increase in Chinabond data going back to 2007. High yields reflect “the market concern about liquidity and also the view that monetary policy may not change in the short-term,” said George Weisi Tan, who oversees about 300 million yuan as head of bond investments at Fortune SGAM Fund Management Co. in Shanghai. “It’s hard to get a loan from the bank these days.” Banks are demanding near-record interest rates to lend to one another for six months or more, Shanghai interbank rates show. The Shibor rate on six-month yuan loans was 5.2968 percent yesterday, after reaching 5.3093 percent on July 14, the highest level since the daily fixing was introduced in October 2006. Five-year credit-default swaps on China’s sovereign bonds rose 49 basis points this quarter to 133 basis points yesterday, the highest since April 2009, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
• Reid Says Democrats Undecided on Handling of $447 Billion U.S. Jobs Plan.
• Solyndra Chief Won't Answer U.S. House Queries. Solyndra LLC Chief Executive Officer Brian Harrison will decline to answer questions this week at the House Energy and Commerce Committee’s investigation hearing into the failure of the solar-panel manufacturer. “Mr. Harrison intends to invoke his Fifth Amendment rights in response to any questions asked by this subcommittee and will not provide testimony,” Walter Brown, a lawyer at Orrick, Herrington & Sutcliffe LLP in San Francisco representing Harrison, wrote today to the investigations panel. The letter, obtained today, cited the Sept. 8 FBI raid on Solyndra’s Fremont, California, offices and a Justice Department investigation into the company, which got about $527 million in U.S. loan guarantees from President Barack Obama’s administration. The company sought bankruptcy protection two days before the raid by Federal Bureau of Investigation agents. “Mr. Harrison regrets that these circumstances prevent him from offering full and complete answers to this subcommittee,” Brown wrote to Representatives Cliff Stearns, a Florida Republican and chairman of the Energy committee’s investigation panel, and Diana DeGette of Colorado, the panel’s top Democrat. Solyndra spokesman David Miller said Harrison and Chief Financial Officer W.G. Stover Jr. wouldn’t provide “substantive answers” to questions from the committee.
• Australian Mortgage Stress Climbs as Rental Vacancies Decline. A quarter of Australian homeowners are experiencing mortgage stress and rental vacancies remain “tight,” driven by higher interest rates, rising costs and a shortage of rental properties in some cities. The number of homeowners facing mortgage stress has jumped from 21 percent in June, mortgage insurance provider Genworth Financial Inc. said in its September Homebuyer Confidence Index, based on surveys conducted from July 30 to Aug. 5, and released today. Rental vacancies slipped to 1.8 percent from 1.9 percent in the previous month and below the equilibrium 3 percent rate, according to data from SQM Research Pty.

Wall Street Journal:

• Full Text: Republicans' Letter to Bernanke Questioning More Fed Action. It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has not facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy. We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.
• Brazil Finance Minister: Euro Zone Must Fix Crisis Before BRICS Aid. Brazil has set a high bar for providing support to the euro-zone under a potential plan that would involve other large developing nations, demanding that the common currency bloc first find concrete solutions for its sovereign debt crisis.
• Banks Shun Financing of Riskier Buyouts. Wall Street banks are turning cautious about the normally lucrative business of financing buyouts and mergers, as less-hospitable credit markets are making deals harder to pull off.
• Hedge Fund Assoc. Readies for Regulation.
• Joyless Holiday Retail Forecast. Christmas is already shaping up to be a struggle for the nation's retailers. It isn't even fall yet, but the first forecasts of the all-important year-end period are out, and they're pointing to more muted gains than last year. Shoppers are expected to make fewer trips to stores and, when they do show up, to head straight for bargains they've researched in advance. Retailers, meanwhile, have been working down inventory where possible, hoping to avoid the markdowns that eat into their profit margins.
• Prosecutors Focus on Goldman(GS) Ex-Director. Federal prosecutors are moving closer toward bringing criminal charges against Rajat Gupta, a former Goldman Sachs Group Inc. director who allegedly leaked inside information about the Wall Street giant at the height of the financial crisis, according to people familiar with the situation.
• Commercial Space Starts to Wobble. Jittery investors, wary banks, the struggling economy and turbulent financial markets are stalling a two-year rebound in the U.S. commercial real-estate industry. Across the country, companies that were looking for large chunks of office space have delayed those plans as uncertainty has risen.
• U.S. Alleges Poker Site Stacked Deck. As professional poker players, Howard Lederer, Chris Ferguson and Rafael Furst got rich by bluffing players out of their money in televised tournaments. Now, the U.S. government alleges that they and their colleagues used this same approach in running one of the world's largest online poker sites.
• The Fed 'Twist' That Won't Dance by David Malpass. Bond-buying creates an obvious conflict of interest because the Fed's portfolio loses value if it raises interest rates.

MarketWatch:

• StanChart Warns on China's Local-Government Debt. Bank’s China chief: Up to 80% won’t be able to cover debt service. The majority of local-government financing vehicles cannot repay their debt principle and interest, and are putting an enormous strain on local governments, said Stephen Green, head of Standard Chartered Greater China research department, in a forum on Saturday.

CNBC:

• Oracle(ORCL) Tops Forecasts, Helped by Rise in Licensing. Oracle posted quarterly revenue slightly above Wall Street expectations, defying a weak outlook for global technology spending. New software sales, a gauge of future profit because they generate high-margin long-term service contracts, rose 17 percent compared with analysts' expectations for 15 percent.
• Adobe(ADBE) Profit Beats Expectations; Shares Jump. Adobe Systems reported quarterly profit that beat Wall Street estimates and forecast a strong end to the year, sending its shares higher in extended trade.
• House Probes Alternative Energy Loans After Solyndra. Republican lawmakers are stepping up their investigation into alternative energy loan programs in the wake of the collapse of the Solyndra solar company, the first company to receive such funding.
• Swift Exit From Emerging Market Currencies. The other shoe has finally dropped: emerging market currencies have followed emerging market equities into the global financial storm.
• Japan Exports Disappoint, Could Weaken Further. Japan's exports rose in the year to August at less than half the pace expected as a global economic slowdown, a strong currency and Europe's sovereign debt crisis put the country's own recovery increasingly in doubt. Exports rose 2.8 percent in August from a year earlier, much less than a median forecast for an 8.0 percent annual increase, Ministry of Finance data showed on Wednesday.

Zero Hedge:

• Goldman(GS) Fires Another Warning Shot Across Bernanke's Bow.

Washington Post:

• U.S. Building Secret Drone Bases in Africa, Arabian Peninsula, Officials Say. The Obama administration is assembling a constellation of secret drone bases for counterterrorism operations in the Horn of Africa and the Arabian Peninsula as part of a newly aggressive campaign to attack al-Qaeda affiliates in Somalia and Yemen, U.S. officials said. One of the installations is being established in Ethi­o­pia, a U.S. ally in the fight against al-Shabab, the Somali militant group that controls much of the country. Another base is in the Seychelles, an archipelago in the Indian Ocean, where a small fleet of “hunter killer” drones resumed operations this month after an experimental mission demonstrated that the unmanned aircraft could effectively patrol Somali territory from there.

Rasmussen Reports:

• Election 2012: Generic Republican 47%, Obama 42%.

USA Today:

• GM(GM) Deal Moves Electric Car Development to China. General Motors agreed in Shanghai today to develop an electric vehicle platform with longtime Chinese partner SAIC. It effectively moves GM's future electric vehicle development to China. Unclear is whether this would also lead to assembly of future EVs for the U.S. market in China. The deal came as the Chinese government is pushing foreign automakers to give Chinese companies EV technology they lack, according to an Associated Press report. U.S. lawmakers have complained that China is "shaking down" GM to get Volt secrets. Electric vehicle development in the U.S. has been developed with extensive U.S. taxpayer funding.

Reuters:

• Taliban Says Won Rabbani Trust in Order to Kill Him. The Taliban said on Tuesday it had won assassinated former Afghan president Burhanuddin Rabbani's trust by using a high-level team that feigned interest in talks but instead was intent on killing him.
• Greek Default Could be Disaster for Portugal - PM. A debt default by Greece could have disastrous consequences for Portugal, which must take steps to avoid the fall-out from such an event, Prime Minister Pedro Passos Coelho said on Tuesday.

Financial Times:

• Palestinian Move Hits Obama Vote Base. At a time when Mr Obama is sweating on every vote he can muster for the 2012 poll, the Palestinian push for statehood is playing into the Republican narrative that he has let Israel and the US Jewish community down. A sliver of the electorate, making up a little under 3 per cent of voters, the Jewish community is nonetheless pivotal in the swing states of Florida and Ohio, and also important for fundraising.
• Regulators Take Aim at Exchange-Traded Funds. Financial regulators across the world are racing to step up supervision and impose limits on the little known but rapidly growing world of exchange-traded funds, the investments that allegedly enabled junior trader Kweku Adoboli to rack up $2.3bn in losses at UBS. Concerns about mis-selling and systemic risk connected with ETFs have been mounting in recent months and the International Organisation of Securities Commissions recently launched a global study of the threats they pose to financial stability.

Telegraph:

• Debt Crisis: EU 'Refusing to recognize China as a market economy'. China has signalled that the West must do more to recognise it as a market economy if Europe wants further help in fixing its debt crisis. Beijing's warning comes as Spain, Portugal, Greece and Italy have all turned to the Asian superpower as a potential buyer of their debt.

Sky News:

• The International Monetary Fund isn't considering the possibility of Greece leaving the euro under any scenario in the world economic outlook, IMF economist Jorg Decressin said in an interview. Greece exit from the euro is "not inevitable at all" and "can be avoided if the right policy decisions are being taken by everyone," Decressin says.

21st Century Business Herald:

• China will end its home appliance purchase subsidies in November.

China Daily:

• China will launch an unmanned module next week that will pave the way for a planned space station, citing Cui Jijun, director of the Jiuquan Satellite Launch Center.

Evening Recommendations
CSFB:

• Rated (HEI) Outperform, target $69.
• Rated (TGI) Outperform, target $64.
• Rated (ESL) Outperform, target $79.

Night Trading

• Asian equity indices are -.50% to +1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 197.50 -1.5 basis points.
  
• Asia Pacific Sovereign CDS Index 146.50 -8.0 basis points.
• FTSE-100 futures -.37%.
  
• S&P 500 futures +.55%.
  
• NASDAQ 100 futures +.38%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (IHS)/.84
• (GIS)/.62
• (BBBY)/.84
• (RHT)/.25
• (FUL)/.47
• (SCS)/.17

Economic Releases
10:00 am EST

• Existing Home Sales for August are estimated to rise to 4.75M versus 4.67M in July.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,300,000 barrels versus a -6,704,000 barrel decline the prior week. Distillate supplies are estimated to rise by +1,000,000 barrels versus a +1,711,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +1,350,000 barrels versus a +1,940,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.28% versus a -2.0% decline the prior week.

2:15 pm EST

• The FOMC is expected to leave the benchmark fed funds rate at .25%.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly MBA mortgage applications report, China Flash Manufacturing PMI, Barclays Clean Tech Conference, Deutsche Bank Energy Conference, Citi Industrials Conference, BMO Real Estate Conference, (CETV) investor day, (LVS) investor conference and the (INTU) investor day could also impact trading today.
  

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

Stocks Slightly Lower into Final Hour on Rising Eurozone Debt Angst, US Tax Hike Worries, Global Growth Concerns, Technical Selling

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 32.06 -2.05%
  
• ISE Sentiment Index 101.0 +62.90%
  
• Total Put/Call 1.11 +12.12%
  
• NYSE Arms .96 -48.76%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 132.65 +3.53%
  
• European Financial Sector CDS Index 271.77 +1.44%
  
• Western Europe Sovereign Debt CDS Index 348.50 +2.36%
  
• Emerging Market CDS Index 312.50 +2.7%
  
• 2-Year Swap Spread 30.0 -2 bps
  
• TED Spread 35.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 178.0 -1 bp
  
• China Import Iron Ore Spot $177.40/Metric Tonne -.06%
  
• Citi US Economic Surprise Index -42.30 -.1 point
  
• 10-Year TIPS Spread 1.92 +3 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -51 open in Japan
• DAX Futures: Indicating -35 open in Germany

Portfolio:

• Slightly Higher: On gains in my Biotech/Medical sector longs and Index hedges
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, added to my EEM short and then covered some of them
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 weakens this afternoon at its downward-sloping 50-day moving average on rising Eurozone debt angst, US tax hike concerns, some more disappointing economic data, emerging markets inflation fears and global growth worries. On the positive side, Drug, Biotech, Medical, Computer Service and Utility shares are especially strong, rising more than +1.0%. Lumber is rising +2.2%. Weekly retail sales rose +4.5% versus a +4.7% gain the prior week. On the negative side, Road & Rail, Education, Homebuilding, Construction, HMO, Hospital, Networking, Disk Drive, Computer, Software, Paper, Steel, Alt Energy and Coal shares are under meaningful pressure, falling more than -1.5%. Cyclicals and small-caps are substantially underperforming again. Oil is rising +.39%, Gold is jumping +1.35% and Copper is falling -1.94%. Rice is still very near its multi-year high, rising +32.5% in about 11 weeks. The average US price for a gallon of gas is -.01/gallon today to $3.58/gallon. It is up .44/gallon in about 7 months. The Germany sovereign cds is gaining +4.6% to 94.33 bps, the China sovereign cds is gaining +2.0% to 172.15 bps, the Japan sovereign cds is rising +4.2% to 127.49 bps, the Saudi sovereign cds is surging +5.86% to 117.50 bps, the UK sovereign cds is gaining +3.16% to 85.17 bps, the France sovereign cds is surging +2.6% to 186.17 bps, the Italy sovereign cds is rising +5.36% to 514.83 bps, the Belgium sovereign cds is gaining +2.1% to 272.17 bps, the Brazil sovereign cds is gaining +2.0% to 172.15 bps and the Spain sovereign cds is jumping +2.7% to 417.83 bps. The Germany sovereign cds surpassed its Feb. 24, 2009 record high today. As well, the Japan sovereign cds also hit an all-time high today. The France and Italy sovereign cds are still very near their record highs. The China sovereign cds is braking to the highest level since April 2009. The Russia sovereign cds is close to breaking out of a multi-year trading range. The Western Europe Sovereign CDS Index and European Financial Sector CDS Index are still near their all-time highs. The 2-Year Euro Swap Spread is very close to a multi-year high. The 3-Month Euro Basis Swap is falling -6.03 bps to -98.06 bps and has given back about half its gains since last week's European liquidity measures. The TED spread is still very near the highest level since July 2010 despite Europe's recent efforts. The China Blended Corporate Spread Index is continuing its parabolic move higher, rising another 15.0 bps to 683.0 bps. Brazilian equities fell -1.25% today and are now down -18.6% ytd. Select growth stock leaders continue to prop up the major averages. Breadth and volume were poor even as the major averages surged this morning. The 10-year yield continues to fall too much. Various credit gauges continue to indicate rising global recession fears. However, it appears to me equity investors continue to expect stagnation, rather than true recession, which is likely the main reason a handful of true growth stocks are seeing huge outperformance and multiple expansion. Gauges of European debt angst must stabilize very soon for equities too build on recent gains. I expect US stocks to trade modestly lower into the close from current levels on profit-taking, rising Eurzone debt angst, global growth worries, emerging markets inflation fears, US tax hike worries and more shorting.