Stocks Slightly Higher into Final Hour on Less Eurozone Debt Angst, Central Bank Stimulus Hopes, Investor Performance Angst, Homebuilding Strength

Broad Market Tone:

• Advance/Decline Line: About Even
  
• Sector Performance: Mixed
  
• Volume: Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 13.64 -3.81%
  
• ISE Sentiment Index 129.0 +5.74%
  
• Total Put/Call .71 -10.13%
  
• NYSE Arms .76 -46.94%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 84.75 bps -.81%
  
• European Financial Sector CDS Index 190.0 bps -3.42%
  
• Western Europe Sovereign Debt CDS Index 171.50 -2.17%
  
• Emerging Market CDS Index 200.59 +.61%
  
• 2-Year Swap Spread 13.0 -.5 basis point
  
• TED Spread 27.0 -.75 basis point
  
• 3-Month EUR/USD Cross-Currency Basis Swap -20.25 +2.0 basis point
  

Economic Gauges:

• 3-Month T-Bill Yield .11% +1 basis point
  
• Yield Curve 151.0 -5 basis points
  
• China Import Iron Ore Spot $109.50/Metric Tonne -.09%
  
• Citi US Economic Surprise Index 20.50 +.5 point
  
• 10-Year TIPS Spread 2.55 -1 basis point
  

Overseas Futures:

• Nikkei Futures: Indicating -87 open in Japan
• DAX Futures: Indicating -5 open in Germany
  

Portfolio:

• Slightly Higher: On gains in my Tech/Retail sector longs
  
• Disclosed Trades: None
  
• Market Exposure: 50% Net Long

Bear Radar

Style Underperformer:

• Small-Cap Growth +.05%

Sector Underperformers:

• 1) Oil Service -1.11% 2) Road & Rail -.86% 3) Computer -.77%

Stocks Falling on Unusual Volume:

• KLAC, MKSI, CPE, WTI, RES, MCP, NOR, HT, DISH, NIHD, QCOR, DECK, DWRE, LRCX, PDCE, JAKK, BONT, SHPG, NANO, AVG, ASML, ENDP, SBS, NOG, CSTR, THR, DST, AREX, OFIX, AEGN, DDD, WM, IRBT, USO, AGNC, MTGE, VGR, UCO and QCOR
  

Stocks With Unusual Put Option Activity:

• 1) ADBE 2) DECK 3) SWY 4) AZO 5) PXP
  

Stocks With Most Negative News Mentions:

• 1) CHK 2) LRCX 3) ANR 4) HPQ 5) GS
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value +.15%

Sector Outperformers:

• 1) Homebuilders +2.44% 2) Airlines +2.31% 3) Gold & Silver +.95%

Stocks Rising on Unusual Volume:

• ACHN, SNSS, BVSN, CTRP, NSM, FIO, GCI and GLW
  

Stocks With Unusual Call Option Activity:

• 1) PXD 2) QCOR 3) DAL 4) MON 5) SCO
  

Stocks With Most Positive News Mentions:

• 1) VFC 2) GLW 3) LMT 4) EBAY 5) NAV
  

Charts:

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

Wednesday Watch

Evening Headlines
Bloomberg:

• EU Track Record Casts Doubt on Crisis Fight as Draghi Rally Ebbs. Mario Draghi sees reason to be ``optimistic” about the euro-area financial crisis now that he's committed the European Central Bank’s balance sheet to ending it. That confidence depends on political leaders who have rarely missed an opportunity to miss an opportunity since Greece’s 2009 deficit blowout began upending the 17-nation euro zone. Their track record and the compromises required to put their promises into action leave Juergen Michels, chief euro- area economist at Citigroup Inc. (C) in London, skeptical. “There are still a huge amount of unanswered questions and the region has to find a way back to growth and reduced debt,” said Michels. “The journey is still very, very long.” Time has been bought by ECB President Draghi’s pledge to purchase government securities and the imminent birth of Europe’s 500 billion-euro ($653 billion) bailout fund, the European Stability Mechanism. To persuade global investors that the euro area can make it through its second decade intact, French socialists, German burghers, Catalan separatists, Italian technocrats and Greek tax collectors have to forge a rainbow alliance to meet the conditions demanded by markets, creditors and the ECB. Following an unproductive meeting of European finance chiefs in Cyprus last week, a market rally triggered by Draghi’s debt-buying plan has run out of steam. Spanish and Italian bonds have surrendered some of their recent gains.
• Deposit Flight From Europe Banks Eroding Common Currency. An accelerating flight of deposits from banks in four European countries is jeopardizing the renewal of economic growth and undermining a main tenet of the common currency: an integrated financial system. A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year. The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. That’s leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis. “Capital flight is leading to the disintegration of the euro zone and divergence between the periphery and the core,” said Alberto Gallo, the London-based head of European credit research at Royal Bank of Scotland Group Plc. “Companies pay 1 to 2 percentage points more to borrow in the periphery. You can’t get growth to resume with such divergence.”
• Foreign Investment in China Fell in August as Economy Slowed. Foreign direct investment in China fell in August as a deepening economic slowdown hurt overseas confidence in the world’s most populous nation. Spending declined 1.4 percent from a year earlier to $8.33 billion, the Ministry of Commerce said in Beijing today, the ninth drop in 10 months. Investment in the first eight months of the year fell 3.4 percent to $75 billion, the ministry said. “Concerns about an economic slowdown and worsening profitability in certain sectors in China are all contributing to the fall in foreign investment,” Zhu Haibin, Hong Kong-based chief China economist for JPMorgan Chase & Co., said before the release. “China is still in middle of an economic slowdown.”
• Japanese Automakers Bracing for Bashing in China Protests. Two years ago, Sherry Wang bought a Toyota Camry because it offered a comfortable way to commute to her job as a researcher in the Chinese city of Xi’an. Lately, she’s been taking the bus. “I’m afraid that my car or I will become a target” of anti-Japanese protestors, who have thronged China’s streets in recent days, Wang said. “I just hope life will get back to normal as quickly as possible.”

Wall Street Journal:

• Leaders' Struggles in Beijing, Tokyo Escalate Island Dispute. The flare-up between China and Japan over a small group of islands has exposed vulnerabilities in the governments of both nations that make diplomatic compromises difficult despite their deep economic ties.
• Growing Restaurant Chains Flock to Malls. Darden, Buffalo Wild Wings, Chipotle Reshape Commercial Landscape, Signing Leases as Struggling Retailers Move Out. Vacant Circuit City Stores Inc. locations, Home Depot Inc. parking lots and excess space in Sears Holdings Corp. stores are finding new life as restaurants in a sign of how the sluggish economy is reshaping the commercial landscape. Darden Restaurants Inc. has been opening Olive Gardens in closed supermarkets, Circuit City stores and motels, and placing its LongHorn Steakhouses in erstwhile Blockbuster Inc. outlets and Borders Group Inc. bookstores. Buffalo Wild Wings Inc. has been taking over space in Sears stores and on the parking lots of big-box retailers with excess land.
• Union Vote Ends Strike by Teachers in Chicago. Chicago teachers union officials voted Tuesday to end a strike that halted classes for 350,000 students and illustrated the intensifying national debate over how teachers are evaluated, hired and fired.
• For Superfast Stock Traders, a Way to Jump Ahead in Line.
• China's CIC Makes Investing Shift. China Investment Corp. is taking a more active role in its investments overseas by co-investing with private-equity fund managers such as Canada's Brookfield Asset Management Inc., according to people with the direct knowledge of the fund, reflecting a shift in how one of the world's largest sovereign funds prefers to invest its money.
• Alpha Natural(ANR) to Shut Coal Mines, Shed 9.2% of Jobs.
• What Romney Might Have Said. Draft remarks for the candidate on taxes, dependency and the 47%.

MarketWatch:

• Samsung to slash semiconductor investment: report. Samsung Electronics Co. plans to cut its investment in the semiconductor business next year by half due to slowing demand and declining prices, the Kyunghyang Shinmun reported Wednesday. "The market conditions are not in good shape and the company has executed a record investment this year," a high-ranking Samsung official was quoted as saying.

CNBC:

• Bullard says would not have voted for QE3. The Federal Reserve should have waited for clearer signs of a flagging economy before launching its new bond-buying program, the head of the St. Louis regional Fed bank said on Tuesday, adding that he would have voted against it. "We should take a little bit more (of a) wait-and-see posture," James Bullard, president of the St. Louis Fed, told Reuters Insider. "I would have voted against it based on the timing. I didn't feel like we had a good enough case to make a major move at this juncture," said Bullard, who has been viewed as a centrist on the spectrum of Fed officials, though in recent months he has sounded opinions that have sounded more hawkish as he has expressed doubts about the need for further stimulus. The Fed's statement in which it unveiled QE3 last Thursday sparked some controversy by saying monetary policy would likely be kept very easy until long after the economic recovery strengthens. This was seen as a signal policymakers would tolerate higher inflation, which some economists say could help the economy by goading spending and helping to slowly reduce the country's debt load. Bullard said he was not in that camp. "I don't think there's a lot of benefit from inflation," he said.
• Goldman(GS) names Schwartz CFO as Viniar retires. Goldman Sachs Group Inc's longtime chief financial officer, David Viniar, will retire at the end of January and be replaced by Harvey Schwartz, the global co-head of securities, the investment bank said on Tuesday. Schwartz, 48, joined Goldman in 1997 from Citibank. He is among a small group of executives who are considered candidates for the chief executive position when CEO Lloyd Blankfein eventually steps down.
• US Fiscal Drag is World's Problem—Cliff or No Cliff.
• Offshore Profits Come Under Senate Scrutiny. A powerful U.S. Senate panel will on Thursday examine the tax implications of how U.S. multinational corporations shift overseas profits around the world.
• Scenes From Anti-Japan Protests in China. (pics)
  

Business Insider:

• A Pending IRS Ruling Puts $50 Billion Worth Of Commodity Mutual Funds At Risk.
• FedEx(FDX) CEO: I'm Amused Watching Observers 'Completely Underestimate' What The Export Slowdown Is Doing To China.
• The iPhone 5 Reviews Are The Most Positive We've Ever Seen For A Smartphone.

Zero Hedge:

• Can Saudi Arabia Really Lower US Gas Prices Ahead Of The Election?
• Your Taxes At Work: All You Need To Know About Who Pays What Taxes In The US. (graphs)
• Bernanke, The Blind Archer.
• Re-Retaliation: Fire Spotted At Gate Of Chinese School In Kobe, Japan.
• Corporate Profits Squeeze For Large Caps. (graphs)
  

IBD:

• Seagate(STX) Has Front Row Seat In Disk Drive Data Boom.

NY Times:

• Euro or No, Economics of Everyday Greek Life Is Eroding. When a visitor raised the issue on everyone’s minds — Greece’s future in the euro zone — Mr. Skouros pursed his lips for a long moment before speaking. “The problem has now gone beyond whether we remain in the euro or not,” said Mr. Skouros, 54. “The issue is, Can Greece be fixed?”

Read more here: http://blogs.sacbee.com/capitolalertlatest/2012/08/fiscal-analyst-hundreds-of-millions-at-risk-from-facebook-slide.html#storylink=cpy

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows Mitt Romney attracting support from 47% of voters nationwide, while President Obama earns 45% of the vote. Four percent (4%) prefer some other candidate, and three percent (3%) are undecided.

Reuters:

• BOJ eases monetary policy as global slowdown bites. The Bank of Japan eased monetary policy on Wednesday by boosting asset purchases, as slowing global demand and heightening tensions with China hurt chances of a near-term recovery in the export-reliant economy. The central bank expanded its asset buying and loan programme, currently its key monetary easing tool, by 10 trillion yen ($127 billion) to 80 trillion yen, with the increase to be for purchases of government bonds and treasury discount bills. The deadline for meeting the overall target was extended by six months to December 2013. As widely expected, the central bank maintained its key policy rate in a range of zero to 0.1 percent.
• American issues layoff notices, cuts flight schedule. American Airlines said on Tuesday it has notified more than 11,000 workers they could lose their jobs as part of its bankruptcy reorganization, and said it was cutting flights by one to two percent for the rest of September and October.
• Global growth worries dent Asia business sentiment in Q3-survey. Business sentiment among Asia's top companies fell for the second straight quarter, dragged down by export-orientated economies such as China and Japan, while domestic spending helped boost Southeast Asia's outlook, a Thomson Reuters/INSEAD survey showed. Concerns over global demand are hurting Asia's export engines, with autos, technology and shipping sectors among the least upbeat in the survey. Sectors more exposed to domestic growth were much more optimistic. The Thomson Reuters/INSEAD Asia Business Sentiment Index fell to 62 in the third quarter from 69 in the second quarter of 2012, having peaked at 80 in the first quarter of 2011. A reading above 50 indicates an overall positive outlook, while one below 50 points to pessimism.
• Oil service stocks spike in short flurry before market's close. A handful of oil services stocks spiked up in price and trading volume less than 15 minutes before the market's close on Tuesday, but Nasdaq let the trades stand after an investigation by its surveillance team, the exchange said. After the market's close, Nasdaq said it was investigating potentially erroneous transactions involving seven securities. At 5:15 p.m. the exchange said it had reviewed the transactions and had determined that all trades would stand.
• NYC commercial construction down by half in FH 2012-trade group. Commercial construction in New York City fell by nearly one-half in the first six months of 2012 to $3.2 billion from $6.1 billion a year earlier, due to the still tepid economic recovery, a trade group said on Tuesday.

Telegraph:

• Beijing hints at bond attack on Japan. A senior advisor to the Chinese government has called for an attack on the Japanese bond market to precipitate a funding crisis and bring the country to its knees, unless Tokyo reverses its decision to nationalise the disputed Senkaku/Diaoyu islands in the East China Sea.
• IMF bail-out plans face 'serious challenges' due to 'ineffective' EU. The International Monetary Fund says it faces “serious challenges” in drawing up bail-outs for heavily indebted eurozone countries because of ineffective European Union decision-making and the bloc’s opposition to restructuring debt.

IrishTimes.com:

• US Loans Initiative Could Hit Lending. BANKS COULD be deterred from lending under a new approach to bad-loan provisioning being developed in the US, according to the head of the body that sets rival international accounting rules. In another sign of how attempts to create global accounting rules have unravelled, Hans Hoogervorst, International Accounting Standards Board (IASB) chairman, criticised a more conservative attitude to bank accounting that has gained favour in the US. The former Dutch finance minister claimed the method, which involves upfront recognition of all expected lending losses, could have “unintended consequences”. The “day one” losses it would entail could encourage financial institutions to cut back on new lending in tough economic conditions to boost profits, Mr Hoogervorst said. The financial crisis was exacerbated by accounting rules that allow banks to avoid setting aside money to cover losses, which they know are likely to happen.

China Daily:

• QE3 to Hurt Emerging Economies, China State Economists Writes. Quantitative easing in the U.S. will "do serious damage" to the global economy and particularly emerging economies, Zhang Monan, an economic researcher at the State Information Center, wrote today.Liquidity from QE3 will flow to emerging economies seeking short-term profits, hurting the independent decision making of authorities in those countries, Zhang wrote. Commodities prices will rise, causing damage to the development of emerging economies, he said. Dollar depreciation as a result of QE3 will cause "other countries to pay for the U.S. crisis," Zhang wrote.
• China State Researcher Recommends Economic Steps Against Japan. China should implement "economic sanctions" against Japan in response to the Japanese purchase of islands claimed by both nations, Jin Baisong, deputy director of the department of Chinese trade studies at the Chinese Academy of International Trade and Economic Cooperation, wrote. China could use the "security exceptions" granted by the WTO to reduce the export of "some important materials" to Japan, Jin wrote.
  

China Business News:

• China's makers of wind energy equipment have had as much as 40% of their capacity unused this year, citing research by the China Assoc. of Resource Comprehensive Utilization. The manufacturing has been idled because of overcapacity. Price competition has also squeezed profit margins, citing Cai Fengbo, an official with the China Wind Energy Association.

Evening Recommendations
RBC Capital:

• Rated (SHW) Top Pick, target $195.

Night Trading

• Asian equity indices are unch. to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 116.0 -.5 basis point.
• Asia Pacific Sovereign CDS Index 95.50 +1.0 basis point.
  
• FTSE-100 futures -.08%.
  
• S&P 500 futures +.34%.
  
• NASDAQ 100 futures +.36%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GIS)/.62
• (CBRL)/1.30
• (AZO)/8.40
• (ADBE)/.59
• (BBBY)/1.02
• (SCS)/.18

Economic Releases
8:30 am EST

• Housing Starts for August are estimated to rise to 767K versus 746K in July.
• Building Permits for August are estimated to fall by -1.9% versus a +6.8% gain in July.
  

10:00 am EST

• Existing Home Sales for August are estimated to rise +2.0% versus a +2.3% gain in July.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory gain of +1,000,000 barrels versus a +1,994,000 barrel gain the prior week. Distillate supplies are estimated to rise by +1,000,000 barrels versus a +1,476,000 barrel gain the prior week. Gasoline inventories are expected to rise by +1,000,000 barrels versus a -1,177,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +1.0% versus a -1.4% decline the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's George speaking, Fed's Fisher speaking, German 2Y auction, China HSBC Flash PMI, weekly MBA mortgage applications report, Citi Industrials Conference, UBS Life Sciences Conference, Goldman Sachs Communacopia Conference, CSFB Steel/Mining Conference, (KMT) analyst day and the (BG) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Slightly Lower into Final Hour on Rising Eurozone Debt Angst, Global Growth Fears, Rising China/Japan Tensions, Mid-east Unrest

Broad Market Tone:

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

Equity Investor Angst:

• VIX 14.43 -1.23%
  
• ISE Sentiment Index 115.0 -1.71%
  
• Total Put/Call .79 -7.06%
  
• NYSE Arms 1.60 +35.40%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 86.08 bps +1.0%
  
• European Financial Sector CDS Index 196.78 bps +4.1%
  
• Western Europe Sovereign Debt CDS Index 175.25 +1.25%
  
• Emerging Market CDS Index 198.52 +1.86%
  
• 2-Year Swap Spread 13.5 +.75 basis point
  
• TED Spread 27.75 -1.25 basis points
  
• 3-Month EUR/USD Cross-Currency Basis Swap -22.25 -3.25 basis points
  

Economic Gauges:

• 3-Month T-Bill Yield .10% +1 basis point
  
• Yield Curve 156.0 -3 basis points
  
• China Import Iron Ore Spot $109.60/Metric Tonne +4.3%
  
• Citi US Economic Surprise Index 20.0 +.9 point
  
• 10-Year TIPS Spread 2.56 -3 basis points
  

Overseas Futures:

• Nikkei Futures: Indicating -23 open in Japan
• DAX Futures: Indicating +3 open in Germany
  

Portfolio:

• Slightly Higher: On gains in my Biotech/Medical sector longs and index hedges
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower on high food/energy prices, earnings worries, growing Mid-east unrest, increasing China/Japan tensions, US "fiscal cliff" worries and rising global growth fears. On the positive side, Hospital, Education and Tobacco shares are especially strong, rising more than +.75%. The UBS-Bloomberg Ag Spot Index is down -1.4% and Oil is down -.8%. The Germany sovereign cds is down -2.0% to 47.33 bps. The Spain 10Y Yld is down -1.3% to 5.90%. On the negative side, Coal, Oil Tanker, Oil Service, Homebuilding, REIT, Retail and Airline shares are especially weak, falling more than -1.25%. Homebuilding shares have traded poorly throughout the day again. Consumer cycilicals, in general, are weak. Gold is rising +.83% and Lumber is falling -.72%. Major Asian indices were lower overnight, led down by a -.91% decline in China. The Shanghai Composite is down -2.9% in 5 days and down -6.4% ytd. Major European indices are lower today, weighed down by a -2.4% decline in Italy. The Bloomberg European Bank/Financial Services Index is down -1.7%. The Spain sovereign cds is gaining +3.8% to 369.82 bps, the Italy sovereign cds is rising +3.4% to 329.33 bps, the Portugal sovereign cds is rising +5.1% to 475.60 bps, the Japan sovereign cds is soaring +13.9% to 77.43 bps and the Israeli sovereign cds is jumping +7.8% to 140.41 bps. Moreover, the European Investment Grade CDS Index is rising +2.3% to 123.13 bps and the State Bank of India cds is jumping +3.3% to 265.0 bps. The UBS/Bloomberg Ag Spot Index is up +22.8% since 6/1. The benchmark China Iron/Ore Spot Index is down -39.4% since 9/7/11. The China Hot Rolled Steel Sheet Spot Index also continues to trend lower despite the recent bounce. As well, copper and lumber continue to trade poorly given equity investor perceptions that the Eurozone has successfully kicked-the-can, housing has hit a major bottom and global central bank stimuli will boost economic growth in the near future. US weekly retail sales have decelerated to a sluggish rate at +2.5%. US Trucking Traffic continues to soften. Moreover, the weekly MBA Home Purchase Applications Index has been around the same level since May 2010 despite investor perceptions of a big improvement in the nationwide housing market. The Baltic Dry Index has plunged around -70.0% from its Oct. 14th high and is now down around -60.0% ytd. Shanghai Copper Inventories have risen +440.0% ytd. Oil tanker rates have plunged, with the benchmark Middle East-to-US voyage down to 27.50 industry-standard worldscale points, which is near the lowest since May, 2009. The 10Y T-Note continues to trade too well with the yield falling -3 bps to 1.81%. There still appears to be a fairly high level of complacency among US investors regarding the deteriorating macro backdrop. It remains unclear to me whether or not Germany will destroy its own balance sheet or allow the ECB to monetize debt in a major way in an attempt to "save" the euro even as investors have been pricing this outcome into stocks. Massive tax hikes and spending cuts have still yet to hit in several key eurozone countries that are already in recession. A lack of economic competitiveness and growth incentives remain unaddressed problems. The European debt crisis is also really affecting emerging market economies now, which will further pressure exports from the region and further raise the odds of more sovereign/bank downgrades over the intermediate-term. I continue to believe that China's problems are much larger than commonly perceived and cannot be solved with another massive stimulus package given their real estate bubble, rising food prices/labor costs, massive overcapacity in certain key parts of the economy and growing bad loans problem. Little being done by global central bankers will actually boost global economic growth to an extent that overcomes the growing macro headwinds over the intermediate-term, in my opinion. The Fed’s QE3 will likely continue to boost stocks for awhile longer, as designed. However, over the intermediate-term the Fed's recklessness greatly increases the chances of hard-landings in key emerging markets and of a serious global stock swoon, in my opinion. Moreover, uncertainty surrounding the effects on business of Obamacare, the "US fiscal cliff" and the election outcome uncertainty will likely become more and more of a focus for US investors into the fourth quarter. As I have been warning for awhile, the Mid-east is unraveling again at an alarming rate. The quality of the stock rally off the June lows remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/lumber/transports relative weakness all continue to be concerns. Thus, recent market p/e multiple expansion on global central bank stimulus/action hopes, is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. For this year's equity advance to regain traction, I would expect to see further European credit gauge improvement, a subsiding of hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower food/energy prices, a US "fiscal cliff" solution, a calming in Mid-east and China/Japan tensions and higher-quality stock market leadership. I expect US stocks to trade modestly higher into the close from current levels on global central bank action/stimulus hopes, investor performance angst and short-covering.

Today's Headlines

Bloomberg:

• Ford(F) Leads European Car Sales Drop as German Demand Falls. Ford Motor Co. led the steepest decline in European car sales in six months as the region’s economic woes hurt demand in Germany. Industrywide car registrations fell 8.5 percent from a year earlier to 722,483 vehicles in August, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement. Ford’s European sales dropped 29 percent, and the company accounted for 6 percent of the region’s deliveries compared with 7.7 percent in August 2011. The European car market has shrunk for 11 consecutive months as governments grapple with a sovereign-debt crisis, and the ACEA is forecasting a 17-year low for full-year sales. Registrations in Germany, Europe’s biggest economy, fell 4.7 percent. The European car-market decline last month was the biggest since a 9.2 percent contraction in February. Italy’s car registrations plunged 20 percent, while sales in France dropped 11 percent. Across the region, eight-month sales fell 6.6 percent to 8.59 million cars. Registrations in July fell 7.5 percent to 972,860 vehicles, the ACEA also said today. “We’ll probably see a continued weakness in southern Europe and in addition to that an accelerated weakness in France and Germany,” Arndt Ellinghorst, a London-based analyst at Credit Suisse Group AG, said today by phone. “That would be a big problem next year as Germany and France are more profitable than Italy and Spain.” The ACEA compiles sales figures from the 27 European Union countries plus Switzerland, Norway and Iceland. The group forecast on June 6 that industry sales in the region will shrink 7 percent this year to the least since 1995 and 21 percent below the 2007 peak. The market is likely to drop 9 percent this year and 3 percent in 2013 before recovering in 2014, Goldman Sachs said Sept. 12.
• European Stocks Decline for Second Day; Akzo Nobel Falls. European stocks declined the most in two weeks as investors bet that the rally in the Stoxx Europe 600 Index (SXXP) to a 15-month high overshot the economic outlook and prospects for corporate earnings. Akzo Nobel NV (AKZA), the world’s largest paintmaker, tumbled the most in one year after saying Chief Executive Officer Ton Beuchner will go on sick leave. Aviva Plc (AV/) slid 4 percent after analysts downgraded the stock. PSA Peugeot Citroen and Fiat SpA led a gauge of European automakers lower after a report showed car sales slumped in August.
• PBOC Inflation Focus Halves Rate-Cut Bets in Swaps: China Credit. Swap traders have halved expectations for the scale of China's interest-rate cuts in the coming year as policy makers signal concern that global monetary easing will reignite inflation. The derivatives reflect bets the PBOC will lower its one-year deposit rate of 3% by 44 basis points, compared with expectations a month ago for a 90 basis point reduction, according to Bloomberg.
• Uniqlo, Aeon Shut China Stores as Island Spat Escalates. Japan's Fast Retailing Co. (9983) and Aeon Co. (8267) shuttered stores in China, the world’s second-biggest economy, as a territorial dispute and the anniversary of the Japanese invasion prompted thousands to protest in Beijing, Shanghai and other cities.
• Anti-Japan Protests Raise Risks for China’s Leadership Transfer. Demonstrations across China against Japanese businesses and property pose a growing risk for the country’s leaders as the economy slows and the Communist Party prepares for a once-a-decade transition of power. With growth in danger of reaching a 22-year low, ousted Politburo member Bo Xilai’s case still pending public resolution and the biggest diplomatic spat with Japan since 2005, any uncontrolled protests risk undermining authority before the handover. Thousands waved flags and brandished Mao Zedong portraits yesterday at Japanese diplomatic posts in Beijing and Shanghai in a sign of public fury over a territorial dispute. “They do not want things to get out of control; there will be more attempts to contain the protests,” said Joseph Cheng, a political science professor at the City University of Hong Kong. The portraits of Mao “are implicit criticisms of the present leadership,” he said. Bo Xilai championed resurrection of Mao slogans before his downfall as Chongqing party boss this year.
• China’s Stocks Fall on Concern Japan Tensions May Hurt Economy. China’s stocks fell, capping the biggest two-day drop in almost six months, on concern escalating tensions with Japan over a territorial dispute will hurt trade and deepen an economic slowdown. Guangzhou Automobile Group Co., which has ventures with Japanese automakers including Toyota Motor Corp., slid to a record low as a Chinese industry association said some dealerships that sell Japanese cars shut after outlets were attacked. Chengdu Galaxy Magnets Co., which derived two-thirds of revenue from Japan, dropped to the lowest this month. Zijin Mining Group Co. and Jiangxi Copper Co. led a gauge of material producers to the biggest slump among 10 industry groups. “Historically, whenever there’s unrest nearby, stocks will decline because of the uncertainty,” Zhang Gang, a strategist at Central China Securities Holdings Co., said by phone in Shanghai today. “With no new stimulus from the central bank, investors are negative and stocks keep going down.” The Shanghai Composite Index (SHCOMP) slumped 0.9 percent to 2,059.54 at the close, the lowest close since Sept. 6, while the CSI 300 Index (SHSZ300) declined 1 percent to 2,235.24.
• Brazil Finance Chief Blasts QE3 as Damaging for Emerging Markets. Brazil’s finance chief blasted the latest round of U.S. monetary easing, saying that the Federal Reserve’s resumption of asset purchases could damage growth in emerging markets. Finance Minister Guido Mantega, who coined the term “currency war” in 2010 to describe advanced economies’ use of monetary policy to boost exports, said the Fed’s open-ended plan to purchase assets will erode the competitiveness of Brazilian manufacturers by weakening the U.S. dollar. A decline in the dollar also cuts into the value of Brazil’s foreign currency reserves, he said. “QE3 is a worry of ours,” Mantega told reporters in Paris following a meeting with his French counterpart, Pierre Moscovici.
• S&P 500 Puts Reach Three-Year Low: Options. Bearish options on the S&P 500 have dropped to the cheapest level in more than three years. Puts protecting against a 10% decline in the S&P 500 cost 7 points more than calls betting on a 10% increase, according to one-month data compiled by Bloomberg. The price relationship known as skew fell to 6.4 on Sept. 14, the lowest level since April 2009.
  
• FedEx Cuts(FDX) Forecast as Economy Hurts Premium Shipping. FedEx Corp. (FDX), operator of the world’s largest cargo airline, cut its annual profit outlook as a weakening economy spurs shippers in the U.S. and overseas to switch to cheaper delivery options. Earnings for the year ending in May will be $6.20 to $6.60 a share compared with a previous forecast of $6.90 to $7.40, the Memphis, Tennessee-based company said today. That excludes potential benefits from cost cuts currently under review. FedEx, an economic bellwether because it ships goods from financial documents to electronics, pared its forecast for U.S. expansion next year to 1.9 percent from a June prediction of 2.4 percent. It trimmed its forecast for global growth this year and next to 2.3 percent and 2.7 percent, down from 2.4 percent and 3 percent, respectively. “Fundamentally what’s happening is that exports around the world have contracted and the policy choices in Europe, the U.S. and China are having an effect on global trade,” Chief Executive Officer Fred Smith said on a conference call. “Over the last few months, exports and trade have gone down at a faster rate than GDP has.” In the Express segment, FedEx’s largest by sales, operating margin slipped to 3.1 percent in the three months through August from 4.4 percent a year earlier. Revenue from domestic shipments in the U.S. grew 2 percent per package as higher rates eased the effects of a 5 percent drop in average daily volume. Unfavorable currency exchange rates and lower fuel surcharges pulled revenue per package down 4 percent in international exports, eroding a 1 percent increase in average daily volume. Express profit dropped 28 percent to $207 million, the company said. “The global trading economy is still the largest single economy in the world,” Smith said. “But over the last several months, particularly as we went into this fiscal year, it’s been disappointing. It’s reflective of the low growth in the U.S., contraction going on in Europe” and the effect those issues are having on Chinese exports, he said. Simultaneously, increasing fuel prices have “had very big implications on the way people think about supply chains, whether they move things by ocean or move things by air,” he said.
• Escape of 131 Mexican Inmates Near U.S. Prompts Border Alert. At least 131 Mexican inmates escaped through a tunnel at a prison across from Eagle Pass, Texas, prompting local officials to alert the U.S. border patrol and detain the prison’s director and security chief. Eighty-six of the inmates from the prison had been charged with federal crimes, Coahuila’s state government said in a statement last night. Authorities are investigating whether inmates had a firefight with police after their escape, state prosecutor Hector Ramos said in an interview on Milenio TV. Police lowered the number of fugitives today to 131 from 132. “The state’s combined police forces are carrying out continued operations,” Ramos said last night. “We’ve alerted U.S. authorities, who immediately deployed border patrol speed boats.”

Wall Street Journal:

• Kabul Attack Sparked by Video Kills 12. A suicide bomber in Kabul struck a minivan packed with employees of an American aviation firm working for the U.S. government, killing at least 12 people, in an attack that an insurgent group claimed was payback for the anti-Islam video posted on YouTube. The bombing on Tuesday was the deadliest targeting foreign civilians in over a decade of war. Afghan officials said eight South Africans, one Kyrgyz citizen and at least three Afghan civilians were killed in the 6:30 a.m. blast on the road to Kabul airport. Another 11 people were wounded.
• Mortgage Lending Slid to 16-Year Low in 2011. Mortgage lending continued to drop off last year in the U.S., falling to a 16-year low as the housing market struggled to recover and refinancing activity slowed, U.S. regulators said Tuesday. The number of home loans issued tumbled 10% in 2011 to 7.1 million, the lowest level reported under the Home Mortgage Disclosure Act since 1995. Mortgages for purchasing a home fell about 5%, while refinancings contracted by 13% despite a pickup late in the year as 30-year mortgage rates fell to around 4%.

Barron's:

• Builder Confidence, Goldman Report Can’t Lift Homebuilders. Homebuilders are feeling better than they have since 2006 about the market for new single-family homes, the National Association of Home Builders reported today. An index tracking sentiment rose to 40 in September from 37, its fifth straight month of gains. That said, NAHB Chairman Barry Rutenberg raised concerns about tight credit conditions and higher prices for building materials cooling the recovery. “Given the fragile nature of the housing and economic recovery, these are significant red flags,” he said in a statement.

MarketWatch:

• Why QE3 makes retirees queasy.

CNBC.com:

• Poll: Are Many Americans Too Dependent on Government?
• Copper eases for second day as stimulus rally sputters. Copper eased for a second straight session on Tuesday as a rally in the wake of fresh U.S. stimulus began to splutter, with traders from top metals consumer China unwilling to chase prices that last week hit the highest since May.

Business Insider:

• GALLUP: Obama's Convention Bounce Is Completely Gone.
• FINANCE EXPERT ASWATH DAMODARAN: The Fed's Latest Plan To Save The Economy Looks Like A Step Toward Insanity.

Zero Hedge:

• US Totalitarian State Wins After All: Obama Reinstates NDAA Military Detention Provision.
• Score 1 For Japan As Chinese Protest At US Embassy In Beijing.
• Some Shocking Perspectives On Inflation And Currency Destruction By None Other Than The Federal Reserve.
• Operation Adios Rajoy Begins. (graphs)
• Why A Centrally-Planned Heroin Addiction Never Has A Hollywood Ending.

New York Times:

• Spain Sells Debt Amid Questions Over Bailout. Spain took advantage of improved bond-market sentiment in the euro zone to sell government debt Tuesday, but questions still lingered over whether, or when, it will seek European help to lower its borrowing costs.

LA Times:

• Northrop(NOC) to shed nearly 600 jobs. Responding to proposed Pentagon budget cuts, Northrop accepts buyouts from about 590 workers in its aerospace unit, most of whom are in Southern California. In another wallop to Southern California's aerospace industry, defense giant Northrop Grumman Corp. said it is preparing to trim its payroll by nearly 600 workers. Responding to billions of dollars in proposed Pentagon budget cuts, Northrop confirmed it has accepted buyouts from about 590 employees in its aerospace division. Most employees participating in the voluntary buyout program, which began in July, will leave by the end of September. The rest will remain as long as Dec. 14.
• Japanese businesses close in China in face of protests. Japanese factories, restaurants, mini-marts and clothing retailers across China closed en masse Tuesday as protests continued in nearly 100 cities over a territorial fight between the two nations centered on some uninhabited islands near Taiwan. Nissan, Honda, Toyota and Mazda suspended operations at some plants, as did Sony. Hundreds of 7-Eleven shops run by a Japanese company were shuttered, as were dozens of outlets of the popular Gap-like Japanese clothing chain Uniqlo. Eateries serving Japanese food -- even those with Chinese owners and staff -- closed as well, shaken by weekend demonstrations that saw protesters overturning Japanese cars, looting businesses and setting factories on fire.
  

IFLR:

• Why Small Banks Need Volcker Rule Amendments.

InvestmentNews:

• Why Ben Bernanke Needs To Go. The economy's failure to respond sufficiently to traditional monetary and fiscal stimuli raises many questions.

Townhall.com:

• NBC News: Obama Administration Not Telling the Truth on Benghazi Security Lapses. I'm somewhat mystified by the Obama administration and campaign's continued attempts to convince Americans that the deadly raid on our consulate in Benghazi was not premeditated. They're obviously trying to shield the president from political fallout for the horrifically inadequate security measures at our outpost there, but contradictory evidence is mounting. Libyan officials and eyewitnesses have described the nature of the attack as clearly pre-planned, and US Senators briefed on the matter have drawn similar conclusions.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows Mitt Romney attracting support from 47% of voters nationwide, while President Obama earns 45% of the vote. Four percent (4%) prefer some other candidate, and three percent (3%) are undecided.

Reuters:

• Dallas Fed's Fisher says QE3 may not be effective. The Federal Reserve's aggressive stimulus program to tackle unemployment will probably be less effective because other factors were standing in the way of job creation, a top Fed official said on Tuesday. The Fed announced last week that it would inject $40 billion into the economy each month through purchases of mortgage-linked debt, until it saw a sustained upturn in the weak jobs market. Dallas Fed President Richard Fisher told CNBC that while he understood the logic behind the third round of bond purchases, or quantitative easing, he was doubtful it would work. "I would argue that it is less impactful right now because you have other things inhibiting businesses from making decisions on capex and employment," Dallas Fed President Richard Fisher told CNBC. "I would like to see people going out and build and commit to capex that's job creating in the United States and have some more immediate effect. I don't think this program will have much efficacy.
• Euro drops from 4-month high on Spain uncertainty.
• Bad loans, deposits increase stress on Spain's banks.
• Syrian rebels battle Assad forces near Turkish border. Syrian rebels battled government forces along the Turkish border on Tuesday in an attempt to seize a border crossing into its northern neighbour, which has backed the 18-month-old uprising against President Bashar al-Assad.

Telegraph:

• Debt crisis: central bank action is work of the devil, says Germany's Jens Weidmann. The head of Germany’s Bundesbank has raised eyebrows across Europe after he appeared to compare Mario Draghi’s bond buying programme with the "devil’s work".

Handelsblatt:

• UBS's Weber Says ECB Bond Plan May Fuel Renewed Market Turmoil. UBS AG Chairman and former European Central Bank Governing Council member Axel Weber said the ECB's record-low interest rates and new bond-purchase plan may fuel "new financial market tensions," citing a speech delivered in Basel. Weber said the new program will not solve the crisis and instead cause new problems.
  

El Pais:

• EU's Alumina Says Spain Faces Risks Delaying Bailout. EU Competition Commissioner Joaquin Almunia says Spain faces growing risks as it delays making a decision about Spain's bailout, citing comments by Almunia in Amsterdam.