Friday Watch

Evening Headlines
Bloomberg:

• China Slowdown May Be Longer Than '09 Financial Crisis. China’s economic slowdown may last longer than during the global financial crisis because of worsening external demand and limited lending to smaller companies, a state researcher said. Growth may slow for a ninth straight period to below 7 percent in the first quarter, Yuan Gangming, an economist with the Chinese Academy of Social Sciences, said in an interview Sept. 19 in Beijing.
• U.S. Says Disputed Islands Covered by Defense Treaty With Japan. U.S. Assistant Secretary of State Kurt Campbell said islands at the heart of a dispute between Japan and China fall under an American defense pact with Japan, while urging the sides to resolve the standoff via diplomacy. “We want to focus more on issues associated with the maintenance of peace and stability and less on the particular details of this very complex and challenging matter,” Campbell told a hearing of the Senate Foreign Relations Committee’s East Asian and Pacific Affairs subcommittee yesterday. He said the islands fall under a treaty which obligates the U.S. to defend Japan if it’s attacked. The U.S. doesn’t take a position on the sovereignty of the islands, known as Diaoyu in Chinese and Senkaku in Japanese, Campbell said. His comments echoed those of Secretary of State Hillary Clinton, who said in 2010 that the islands fall under “mutual treaty obligations” with the Tokyo government.   
• Greek Leaders Struggle With Spending Reductions. Greek Prime Minister Antonis Samaras struggled to clinch agreement with his coalition partners on an 11.5 billion euro ($14.9 billion) budget-cut package that’s key to receiving international aid funds. Samaras was handed the third refusal in less than two weeks yesterday from Democratic Left leader Fotis Kouvelis and Pasok leader Evangelos Venizelos, the junior partners in the coalition who met to discuss proposed cuts to wages, pensions and benefits. Finance Minister Yannis Stournaras and the “troika” of inspectors from the European Commission, the European Central Bank and the International Monetary Fund have been locked in talks for two weeks on carving out savings.
• Oracle Sales Miss Estimates as Hardware Sales Decline. Oracle Corp. reported fiscal first- quarter revenue that missed analysts’ estimates as sales of computer hardware fell for a sixth straight period, curbing growth as it navigates a shift to cloud-computing services. Sales for the quarter that ended Aug. 31 declined 2.3 percent to $8.18 billion, and profit excluding some items was 53 cents a share, the Redwood City, California-based software maker said today in a statement. Analysts on average had estimated revenue of $8.42 billion and earnings of 53 cents, according to data compiled by Bloomberg.  
• U.S. Bancorp(USB) Could Face Moody’s Cut as Competitors Recover. U.S. Bancorp, the nation’s fifth- largest commercial lender by deposits, may be downgraded one level by Moody’s Investors Service as rivals recover and pose stronger competition. “The rating review will consider U.S. Bancorp’s long-term ability to sustain its consistent, superior performance in light of increasing competition now that its peers have largely returned to health and are actively seeking growth,” Moody’s said today in a statement.

Wall Street Journal: 

• Miscues Before Libya Assault. Limited Security in Benghazi, Secrecy Over Safe House, Contributed to Tragedy. The deadly assault on a U.S. diplomatic mission in Libya on Sept. 11 was preceded by a succession of security lapses and misjudgments, compounded by fog-of-battle decisions, that raise questions about whether the scope of the tragedy could have been contained. U.S. officials issued alerts and ordered security precautions in neighboring Egypt ahead of protests and violence on Sept. 11, but largely overlooked the possibility of trouble at other diplomatic postings in the region. 
• After Spill, Gulf Oil Drilling Rebounds. Production Dipped After Deepwater Horizon Disaster; New Finds Will Lift Output 28% in a Decade. 
• Protesters in Pakistan Clash With Police. Protesters tried to break into a guarded enclave that houses the U.S. Embassy in Pakistan's capital, in the largest show of anger against an anti-Islam video during a day that saw smaller demonstrations in Indonesia, Iran and Afghanistan. More than a thousand people, including students affiliated with the Islamist hard-line Jamaat-e-Islami party, clashed with riot police outside the enclave in Islamabad, which was cordoned off with hundreds of shipping containers. The State Department issued an alert Thursday, warning Americans to avoid nonessential travel to Pakistan as protests are likely to continue and turn violent. 
• Syrian Activists Say Airstrikes Kill 30. Syrian opposition activists said a regime airstrike hit a gas station in the north of the country Thursday, setting off an explosion that killed at least 30 people and wounding dozens more. 
• Fouad Ajami: Muslim Rage and the Obama Retreat. We can't declare a unilateral end to our troubles, or avert our gaze from the disorder that afflicts the societies of the Greater Middle East.

CNBC:  

• Flash Crash Part 2 Could Come at Any Time: Analyst. A former hedge fund analyst told U.S. senators on Thursday that another “Flash Crash” in financial markets could come at any time as a result of super high-speed computer trading.
• Long Queues Greet Apple's iPhone 5 in Sydney, Tokyo. Apple's iPhone 5 hit stores around the globe on Friday, giving the consumer giant a boost ahead of the crucial end-of-year holiday season as rival Samsung Electronics stepped up its legal challenge over key technologies. 
• US Power Market Regulator Threatens to Suspend JPMorgan(JPM). U.S. federal energy regulators threatened on Thursday to suspend JPMorgan Chase & Co's right to sell electricity at market rates after accusing the bank of misleading authorities — a measure that would effectively banish it from the power market.
• Kudlow: Did White House Lie About Libya Attacks? Larry Kudlow is hearing from his beltway sources that the President may have put politics ahead of national security in the wake of the Libya attacks that killed four Americans, including U.S. Ambassador Chris Stevens. 
• Could Iran Be Behind the Online Attacks on US Banks? The U.S. intelligence community is focused on Iran after a series of web outages at American banks.

Zero Hedge:

• Jim Grant: We Are Now All Labrats Of Bernanke And The Fourth Branch Of Government. 
• The US Will Spend Between $3 And $7 Per Gallon Of Gasoline "Saved" By Consumers Driving Electric Vehicles. 
• European Car Engine Sputtering.
• US Credit Formation And Destruction Since The Second Great Depression.

Business Insider:

• Elizabeth Warren Just Got Slammed Again For Claiming To Be Native American.
• This Graph Shows Just How Badly Millennial Salaries Have Taken A Nose Dive.
• A High Frequency Trader Explains The Three Basic Advantages He Has Over Regular Investors.

NY Times:

• Behind the Scenes, Some Lawmakers Lobby to Change the Volcker Rule.

LA Times:

• James Murdoch to control News Corp. TV divisions. James Murdoch, the 39-year-old son of media mogul Rupert Murdoch, is expected to take charge of the Fox broadcast network, FX cable channel, regional sports networks, Fox International channels and National Geographic channels — some of the most profitable assets in the $34 billion-a-year media conglomerate.

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

Washington Times:

• In Pakistan, U.S. ads try to dampen anger over anti-Islam film. The television ads in Pakistan feature clips of President Barack Obama and Secretary of State Hillary Rodham Clinton during press appearances in Washington in which they condemned the video. Their words were subtitled in Urdu.

Gallup:

• Obama Job Approval: 48% Disapprove, 46% Approve. (graph)

Telegraph: 

• Spain risks break-up as Mariano Rajoy stirs Catalan fury. The ruling parties of Catalonia have sought guidance from Brussels on the legality of secession from Spain, requesting a “route map” for membership of the European Union and the euro as an independent state. 
• ECB's new HQ will cost €200m more than expected. The European Central Bank's new headquarters, scheduled to be completed in 2014, will cost a lot more than expected, a top ECB official has admitted.
  

Kyodo News:

• Cyberattacks hit Japan websites amid Chinese protests over Senkakus. The websites of at least 19 Japanese public and other institutions, including banks and universities, have come under cyberattack since Japan nationalized the Senkaku Islands, also claimed by China, on Sept. 11, the National Police Agency said Wednesday. The cyber-attacks made it impossible for computer users to access the websites at least temporarily, while some of the attackers tampered with their contents, the NPA said. An NPA official said the attacks appear to have originated in China, judging from the fact that more than half of the 19 sites had been named as the objects of cyberattacks on the message boards of Chinese hacking groups or on major Chinese chat sites. The Tokyo Institute of Technology said the website of the university's Center for the Study of World Civilization have come under attack, causing personal data on 1,068 people who had taken part in the center's events to be leaked. The data included the participants' names and telephone numbers.

Sankei:

• Customs departments in China's Beijing, Shanghai, Tianjin, Qingdao and Guangzhou have tightened inspections of materials and products imported by Japanese cos.

China Securities Journal:

• China May Lower Listed Banks' Dividend Payout Ratio. China may lower the dividend payout ratio of listed banks to help them retail more profits for use as capital, citing people familiar with the matter.
• China Shouldn't Further Loosen Monetary Policy. Consumer prices are currently more sensitive to demand expansion and loosening of monetary policy may have lesser impact on growth while at the same time, fueling inflation, China Securities Journal publishes in its front-page commentary written by Ren Xiao, a reporter at the newspaper. China is unlikely to cut interest rates in the short-term.

Netease:

• China to Expand Property Tax Trials. Details to deepen property taxes may be announced by the end of this year or the beginning of next year, citing Cong Ming, an official from the State Administration of Taxation.
• China May Trial Taxing Public on Oil Product Use. China may trial the collection of oil product consumption tax at petrol stations to help shift the burden from collecting the tax from corporations to collecting from the public, citing Cong Ming, an official at the State Administration of Taxation.

Economic Information Daily:

• Some Chinese Cities Are Unveiling Large-Scale Land Sales. Some Chinese cities, including Hangzhou, Nanjing, Wuhan and Wenzhou are introducing large-scale land sales, citing information from local authorities. More land sales may break the public's expectations for rising home prices and exacerbate pressure on the property market rebound.

Evening Recommendations 
Jefferies:

• Rated (EMC) Buy, target $33.

Raymond James:

• Rated (MCO) Outperform, target $52..

Night Trading

• Asian equity indices are unch. to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 134.0 +3.0 basis points.
• Asia Pacific Sovereign CDS Index 110.0 -2.5 basis points.
• FTSE-100 futures +.39%.
• S&P 500 futures +.30%.
• NASDAQ 100 futures +.29%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KBH)/-.16
• (DRI)/.84

Economic Releases

• None of note

Upcoming Splits

• (MDVN) 2-for-1
  

Other Potential Market Movers

• The Fed's Lockhart speaking, Spanish bank audit results and the (PFG) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and consumer staple 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 Falling Slightly into Final Hour on Rising Global Growth Fears, Earnings Worries, Rising Eurozone Debt Angst, Profit-Taking

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 14.22 +2.45%
• ISE Sentiment Index 124.0 -10.79%
• Total Put/Call .84 +20.0%
• NYSE Arms 1.18 +22.55%

Credit Investor Angst:

• North American Investment Grade CDS Index 95.77 bps new series
• European Financial Sector CDS Index 187.33 bps new series
• Western Europe Sovereign Debt CDS Index 134.39 bps new series
• Emerging Market CDS Index 236.67 bps new series
• 2-Year Swap Spread 13.25 +.25 basis point
• TED Spread 26.75 -.25 basis point
• 3-Month EUR/USD Cross-Currency Basis Swap -22.25 -2.0 basis point

Economic Gauges:

• 3-Month T-Bill Yield .11% unch.
• Yield Curve 151.0 unch.
• China Import Iron Ore Spot $109.10/Metric Tonne -.37%
• Citi US Economic Surprise Index 20.60 +.1 point
• 10-Year TIPS Spread 2.50 -5 basis points

Overseas Futures:

• Nikkei Futures: Indicating -43 open in Japan
• DAX Futures: Indicating +6 open in Germany

Portfolio:

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

Today's Headlines

Bloomberg:

• China Stocks Fall to Lowest Level Since 2009 on Japan Row, Data. China’s stocks slumped, dragging down the benchmark index to the lowest level since February 2009, after a report on manufacturing signaled a contraction and escalating tensions with Japan threatened trade. Dongfeng Automobile Co., which makes light trucks in China with Nissan Motor Co., slumped to the lowest level since November 2008 as a Japanese auto group said protests over disputed islands will hurt sales of the nation’s cars in China. Jiangxi Copper Co. and Aluminum Corp. of China Ltd., the biggest copper and aluminum producers, led declines for metal stocks after a HSBC Holdings Plc and Markit Economics survey showed factory output may contract for an 11th month in September. The Shanghai Composite Index (SHCOMP) fell 2.1 percent to 2,024.84 at the close, the most among Asia’s benchmark indexes. The CSI 300 Index (SHSZ300) dropped 2.2 percent to 2,195.95, with eight of 10 industry groups losing more than 2 percent.
• Citigroup(C) Warns Irish Investors to Plan for Losses. As Irish bonds extend their rally, the gains for investors may be disguising a different story. The yield on Ireland’s benchmark 2020 bond fell below 5 percent today for the first time since the country’s international rescue in November 2010. The debt is the second- best performing in the euro region this year, trailing only fellow bailout recipient Portugal. All of the optimism that Ireland can raise money in the markets and avoid a debt restructuring is premature as the nation struggles to emerge from its worst recession in modern history, said Michael Saunders, Citigroup Inc.’s head of European economics in London. “Ireland faces an almost impossible task to get back to fiscal balance,” Saunders said. Visits to the country showed “life is tough, very tough and not getting that much better anytime soon,” he said. Saunders said a slower economic revival may eventually make Ireland’s debt, which more than tripled during the past five years, unsustainable.
• Noyer Says All Euro Banks Must Be Supervised by ECB, FAZ Reports. European Central Bank Governing Council member Christian Noyer said the ECB must have oversight of all euro-area banks when it takes up its new role as a supervisor, Frankfurter Allgemeine Zeitung reported, citing an interview. The ECB, which is due to take the role from January under a proposal by the European Commission, “must cover, in any case, all 6,000 banks within the euro area,” FAZ quoted Noyer as saying. “It’s better to forget about the entire project if it only includes the 20 biggest banks.” Asked whether there might be a conflict of interest between monetary policy and banking supervision, Noyer, who heads the Bank of France, said that “14 out of 17 central banks in the euro area are also responsible for banking oversight,” FAZ reported. “Monetary policy is separated from banking supervision by Chinese walls.” With regard to the ECB’s new bond-buying program, Noyer said it will be “up to elected governments and the IMF” to say whether or not countries under the program “fulfill conditionality,” according to FAZ. “We will not hesitate to stop the bond purchases right away if a country doesn’t adhere to the conditions under the ESM.” 
• European Stocks Drop on China Manufacturing Report. European stocks declined for the third time in four days after a report signaled that Chinese manufacturing will contract for an 11th month, adding to concern the global economic slowdown is deepening. A gauge of mining companies posted the biggest drop of the 19 industry groups in the benchmark Stoxx Europe 600 Index. (SXXP) Daimler AG (DAI) lost 2 percent after saying earnings will fall at its Mercedes Benz Cars business. Telenet Group Holding NV (TNET) surged 13 percent after Liberty Global Inc. (LBTYA) made a $2.5 billion offer to buy the rest of the communications company. 
• Pakistan Deploys Army as Protests Over Anti-Islam Film Flare. Pakistan deployed the army to protect diplomatic missions in Islamabad amid some of the most sustained and violent protests yet against an American-made film that denigrates Prophet Muhammad. “We have to do everything we can to protect foreigners in the country,” Information Minister Qamar Zaman Kaira said in an interview with the GEO television channel, criticizing violence he said was an attempt to sabotage the government’s call for peaceful rallies tomorrow. “Is this the way to show respect to our Prophet?” Kaira said. Earlier riot police had fired tear gas and warning shots as hundreds of stick-wielding students, some in college uniforms, converged on the so-called red zone that houses the U.S. embassy and the prime minister’s house, breaking through barbed-wired barricades flung across roads. “We will not tolerate insult to our Prophet,” demonstrators shouted as they bid to outwit police and gain access to the heavily guarded enclave. The State Department in a statement warned Americans against non-essential travel to Pakistan, citing a series of recent developments that may put U.S. citizens at risk.
• Philadelphia Area Manufacturing Contracts for Fifth Month. Manufacturing in the Philadelphia region shrank for a fifth straight month in September, reinforcing signs the industry will offer less support to the U.S. economy. The Federal Reserve Bank of Philadelphia’s general economic index improved to minus 1.9, higher than forecast, from minus 7.1 in August. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware. The median forecast of 62 economists surveyed by Bloomberg was minus 4.5. The figures, which showed a slump in sales and cutbacks in employment, add to concern a pillar of the expansion is faltering. Cooling exports due to the European debt crisis, combined with slower business investment and restrained household spending in the world’s largest economy, mean manufacturing may stay depressed.
• More Americans Than Forecast Filed Jobless Claims. More Americans than forecast filed applications for unemployment benefits last week, adding to concern the labor market is slackening.
  Jobless claims decreased by 3,000 in the week ended Sept. 15 to 382,000, Labor Department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg projected 375,000. Looming tax increases and government spending cuts slated to take effect next year, should lawmakers fail to act, may block any pickup in hiring following last month’s smaller-than-projected gain in payrolls.
• Index of U.S. Leading Indicators Declined in August. The index of U.S. leading economic indicators fell in August, led by a decline in new orders for manufacturing. The Conference Board’s gauge of the outlook for the next three to six months decreased 0.1 percent after a revised 0.5 percent increase in July, the New York-based group reported today. Economists projected the gauge would fall by 0.1 percent, according to the median estimate in a Bloomberg survey.
• Household Worth in U.S. Fell in Second Quarter as Stocks Dropped. Net worth for households and non-profit groups decreased by $322 billion in the second quarter, or 0.5 percent from the previous three months, to $62.7 trillion, the Federal Reserve said today in its flow of funds report from Washington.
• UPS Hurt by Slowdown in Manufacturing in Asia, Brutto Says. United Parcel Service Inc. (UPS) projects short-term economic headwinds amid a decline in manufacturing orders in Asia while the company pursues a major acquisition in Europe, the head of its international division said. “We’ve seen down-trading at UPS,” Dan Brutto said this morning at a Bloomberg Government newsmaker breakfast in Washington.
• Norfolk Southern(NSC) Profit Drop Echoes FedEx(FDX) Slowdown Signal. Norfolk Southern Corp. (NSC)’s quarterly profit will trail analysts’ estimates as dwindling volumes at the second-biggest eastern U.S. railroad add to signs of a slowing domestic economy. A drop in coal carloads and merchandise shipments will offset container-freight gains, paring revenue by about $120 million for the three months ending Sept. 30, the company said late yesterday. Fuel-surcharge receipts will decline by $80 million. Norfolk Southern’s disclosure built on FedEx Corp. (FDX)’s cut in its annual earnings forecast a day earlier, when the operator of the world’s largest cargo airline cited falling delivery demand and customers choosing cheaper services. Those carriers span the shipping spectrum, moving everything from commodities and new cars to overnight-express envelopes and pharmaceuticals. “Those are two aspects of the same issue,” said Robert Dye, chief economist at Dallas-based Comerica Inc. (CMA) “With FedEx we can probably broaden the scope out and say they’re responding to cooler global macroeconomic conditions. But with Norfolk Southern they’re clearly responding to the U.S.”
• Libor-Like Manipulation Possible in Benchmarks Around the World. The same lack of oversight that enabled traders to manipulate the London interbank offered rate plagues other benchmarks around the globe, according to a group of international securities regulators. Fewer than half of the benchmark interest rates surveyed in the U.S., Europe and Asia were based on actual transactions, according to a confidential International Organization of Securities Commissions discussion paper obtained by Bloomberg News. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations, the group said.
• Emerging-Market Company CDS Gauges Start Up as Indexes Roll. Two new measures of default risk on emerging-market debt start trading today along with the latest series of existing corporate and sovereign benchmarks. Markit Group Ltd., which administers gauges of credit- default swaps, said it’s offering the Markit iTraxx CEEMEA and Markit CDX LatAm Corporate indexes “in response to increasing client demand for an efficient tool to hedge and gain exposure to corporate debt” in central and eastern Europe, the Middle East and Africa as well was Latin America.
• Microsoft(MSFT) Avoided Billions in U.S. Tax, Senate Memo Says. A U.S. Senate committee memo said Microsoft Corp. (MSFT) used aggressive international tax maneuvers to avoid billions of dollars in taxes over the past three years. The committee memo, released in advance of a 2 p.m. hearing in Washington today, said Microsoft used transactions with subsidiaries in Puerto Rico, Ireland, Singapore and Bermuda to save at least $6.5 billion in taxes. In 2008, Hewlett-Packard Co. (HP) created a series of short-term internal loans that allowed the company to tap its offshore cash for domestic operations without paying taxes, according to the memo.

  Wall Street Journal:

• Stocks to Get Boost, Again, from Research. Some newly public companies again will be in line to benefit from "booster shots" to their stock prices. Securities regulators are set to lift a nine-year ban that prevents analysts from issuing research on initial public offerings their banks have underwritten around the expiration of lockup periods, according to regulators. In the past, banks were accused of using the research to hype stocks at a time when the shares might face selling pressure. 
• Holder Aide Faces Heat Over Fast and Furious. House Republicans on Thursday took aim at Lanny Breuer, the Justice Department's top criminal prosecutor, a day after a report by the department's internal watchdog on the bungled Fast and Furious gun-trafficking case largely spared him from blame. Republicans have called for Mr. Breuer's resignation and stepped up the attacks at a hearing Thursday of the House Oversight and Government Reform Committee on the report. "How does he escape discipline?" said Rep. Trey Gowdy (R., S.C.). 
• French Downturn Tests Hollande's Strategy. François Hollande talked a lot about focusing more on growth and less on austerity when he was campaigning for the French presidency. But the latest flash Markit purchasing managers indexes present him with a problem. They show the sharpest decline in French private-sector output since April 2009, raising the stakes for next week's budget by adding to the pressure for further savings.

 Fox News:

• Former GM CEO Urges U.S. Treasury to Sell Stake in Automaker. The U.S. government should sell all of its stake in General Motors Co as quickly as possible, former GM chairman and chief executive Ed Whitacre said on Thursday. In an opinion piece published in the Wall Street Journal, Whitacre called the Treasury Department's holding a "distraction" for the company, which exited U.S.-funded bankruptcy protection more than three years ago. The Treasury now owns about 26.5 percent of GM's shares. Unless the U.S. government sells all it remaining share, the automaker will never be able to shake its "Government Motors" moniker, Whitacre wrote. "That label, as competitors and GM employees are keenly aware, is code for one thing: 'GM is a failure'," Whitacre wrote. "And while GM might have been a failure three years ago, it's not today." GM's $50 billion bailout was funded through the Troubled Asset Relief Program, which imposes rules about how the money can be used. As a result, GM spends too much time discussing executive compensation, hiring and management with Washington officials, said Whitacre. This prevents the automaker from being "a master of its own destiny."

CNBC.com:

• Nomura Cuts Up to 30% of Europe Investment Bank Jobs. Nomura is making wide-ranging cuts in its European investment banking division on Thursday, according to sources, with up to 30 percent of jobs likely to go. 
• Spain's Business Leaders: We Need Bailout Now. Spain borrowed money at the lowest rates in months on Thursday, but the country's business leaders want the government to seek help from the European Central Bank to prevent the country’s interest rates from rising again. 
• US Household Debt Rises, Largest Jump Since 2008.
• China's a 'Roach Motel'; Don't Trust the Numbers: Chanos. China's economy continues to deteriorate despite the government's efforts to paper over the troubles, making the country's stocks ripe for short-selling, hedge fund titan Jim Chanos told CNBC.
• High-Frequency Trading: It's Worse Than You Thought.
• Bank group warns of heightened risk of cyber attacks.
• Storm Clouds Darken Over Global Economy.

Zero Hedge:

• Overnight Sentiment: Tumbling Into Global Recession. (graph) The biggest surprise was the sheer collapse in French manufacturing data which tumbled from 46.0 to a 4 year low of 42.6 on expectations of a rise to 46.4.
• The New Con: Three-Card-Mario.
• Number of States With Negative Economic Outlook Rises to 20. (graph)
• Reality Strikes As Italy Slashes Economic Growth, Hikes Deficit Forecast.
• Popularity Of Greek Neo-Nazi Party Continues Surging.

Business Insider:

• Pentagon Plans To Weaponize Internet As Response To Soaring Private Network Vulnerability 
• JIM CHANOS: Investing Based On Hedge Fund Filings Is Dangerous.
• GALLUP TIED: OBAMA 47, ROMNEY 47. 
• Greece Is Days Away From Another Vote That Will Determine Its Future.

Reuters:

• Copper falls after China, France factory data. London copper fell on Thursday after data from top consumer China showed manufacturing activity continued to contract, while prices came under more pressure as a poor reading from France pushed the euro down against the dollar. Manufacturing in China contracted for an 11th month in a row in September, according to a private sector survey of factory managers that indicated the world's second largest economy remains on track for a seventh quarter of slowing growth. French business activity tumbled at its fastest rate since April 2009 raising worries of a deepening recession and pushing the euro down, although a German private sector contraction eased in September. Three-month copper on the London Metal Exchange fell by 1.21 percent to $8,248.75 a metric ton by 0736 GMT.
•  Daimler warns on full-year Mercedes profit. Daimler warned that profit would slip at its flagship Mercedes-Benz Cars division this year due to a deteriorating market in Europe and China, spooking investors in German rivals including BMW and Volkswagen. "We are gearing up for a challenging environment," Chief Executive Dieter Zetsche told reporters in Stuttgart.
• Fitch: U.S. non-profit hospitals face reimbursement reductions.
• US urges Brazil in "clear terms' not to hike tariffs. U.S. Trade Representative Ron Kirk, in a letter obtained on Wednesday, urged the Brazilian government to reconsider plans for "protectionist" tariff increases expected to have a significant negative effect on U.S. exports. "I am writing to state in strong and clear terms the United States' concern about scheduled and proposed tariff increases in Brazil and Mercosur," Kirk said in a Sept 19 letter to Brazilian Foreign Minister Antonio de Aguiar Patriota.
• White House Now Backs U.S. View That Libya Attack Was Terrorism. The White House said on Thursday it was "self-evident" that a deadly assault on the U.S. consulate in Libya was a "terrorist attack" that may have had an al Qaeda connection, reinforcing an intelligence assessment of the violence. "It is self-evident that what happened in Benghazi was a terrorist attack," White House spokesman Jay Carney told reporters travelling with President Barack Obama. "Our embassy was attacked violently and the result was four deaths of American officials."

Financial Times:

• Brazil’s finance chief attacks US over QE3. Guido Mantega, Brazil’s finance minister, has warned that the US Federal Reserve’s “protectionist” move to roll out more quantitative easing will reignite the currency wars with potentially drastic consequences for the rest of the world. “It has to be understood that there are consequences,” Mr Mantega told the Financial Times in an interview on Thursday. The Fed’s QE3 programme would “only have a marginal benefit [in the US] as there is already no lack of liquidity . . . and that liquidity is not going into production.”

Telegraph: 

• Eurozone economic woes suggest ECB's Draghi Plan isn't enough to stem debt crisis. Private business activity in the eurozone plunged at the fastest rate in more than three years, while consumer confidence also sank, according to “dismal” economic data that doused hopes the European Central Bank bond-buying plan would unleash a wave of optimism. 
• Italy slashes economic growth forecasts. Italy slashed its economic growth forecasts on Thursday saying it was now expecting contractions of 2.4pc for 2012 and 0.2pc for 2013 due to "a deterioration in the international environment".

Financial Times Deutschland:

• German coalition lawmakers back Finance Minister Wolfgang Schaeuble in opposing an EU Commisison plan to give the ECB blanket powers of oversight for the currency area's lenders. Lawmakers want to limit ECB oversight to system-relevant banks.

Les Echos:

• Brazil's Mantega Says Credit May Dry Up in Europe. This year is already a lost year for Europe, Brazilian finance minister Guido Mantega says in an interview. "We are at the stage of promises in Europe. Too little has been done, too late," Mantega said. Brazil will continue to take steps to keep the real devalued, he said.

Bear Radar

Style Underperformer:

• Small-Cap Growth -.91%

 Sector Underperformers:

• 1) Road & Rail -5.03% 2) I-Banking -1.82% 3) REITs -1.73%

Stocks Falling on Unusual Volume:

• IYT, NSC, CSX, SWKS, GTAT, CLF, BCS, TOT, E, GMCR, CIG, ACHN, TCRD, CQP, AREX, IHS, BBBY, XPO, MLHR, JEF, CBRL, CLC, SPG, CLH, WPRT, KMX, GGC, TGH, JCP, SAIA, NUS, AXO, SHPG, CP, SPLK, DLR, AIR, NUS and HEES

Stocks With Unusual Put Option Activity:

• 1) SYMC 2) SWKS 3) BBBY 4) CSX 5) LYB

Stocks With Most Negative News Mentions:

• 1) HAL 2) WFC 3) ERTS 4) GM 5) GGP

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value -.36%

Sector Outperformers:

• 1) Foods +.33% 2) Drugs +.12% 3) Utilities +.05%

Stocks Rising on Unusual Volume:

• CAG, SCMR, BVSN, QCOR, YELP, CXS and DLTR 

 Stocks With Unusual Call Option Activity:

• 1) NIHD 2) CVS 3) HLF 4) ARIA 5) QCOR

Stocks With Most Positive News Mentions:

• 1) FWST 2) AOL 3) ECL 4) CAG 5) BAC
  

Charts:

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

Thursday Watch

Evening Headlines
Bloomberg:

•  Euro Remains Lower Before Region’s PMI Data. The euro remained lower against the yen before data today forecast to show European services and manufacturing contracted, adding to evidence that the region’s debt crisis is sapping growth. “We think at these levels, euro is a sell” because of the state of the European economy, said Joseph Capurso, a strategist at Commonwealth Bank of Australia (CBA) in Sydney. “The lessons of the last decade have shown that the Bank of Japan’s asset purchases are simply not enough to change the trajectory of the Japanese economy or the currency.” “The economy is going to get worse before it gets better in Europe,” Commonwealth Bank’s Capurso said.
• Japan’s Exports Slide a Third Month on Weakness in Global Demand. Japan’s exports fell 5.8 percent in August from a year earlier, the third straight decline, as a territorial dispute with China and weak global demand cloud the outlook for shipments. Imports slid 5.4 percent, leaving a trade deficit of 754.1 billion yen ($9.6 billion), the Finance Ministry said in Tokyo today. Median forecasts in Bloomberg News surveys of analysts were for a 7.5 percent export decline and an 829.3 billion yen trade gap. Tensions over islands in the East China Sea are a risk for bilateral trade in goods from rice to tractors that has tripled in the past decade to more than $340 billion. Strength in the yen will weigh on exports even after the Bank of Japan (8301)’s surprise decision yesterday to expand monetary easing, with the currency up about 7 percent against the dollar since mid-March. “We have to price in further developments in territorial issues, which could damp export numbers,” Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo and a former central bank official, said before the report.
• Sword-Bearing Islamist Signals Peril for Arab Spring Democracies. Days after publishing an article on Salafi Muslims displacing moderate clerics from hundreds of Tunisia’s mosques, Walid Mejri found a sword against his neck. Stopped on the street by religious extremists in Ghardimaou, 180 kilometers (112 miles) north of Tunis, he was accused of “apostasy and atheism, fighting against Islam and sowing discord among them,” Mejri, a writer and journalist recalled in an interview. “One of them lifted a sword to my face, intending to kill me,” said Mejri, who’d recently written the “Battle of the Mosques” in the Assarih newspaper, in which he chronicled the installation by militants of favored clerics. “A soldier stepped in and saved me.” The incident is part of a simmering battle between ultraconservative Islamists and moderate new governments in Tunisia, Libya and Egypt.
• Turkey Rocked by Wave of Attacks as Syria Fallout Emboldens PKK. Turkey’s war with Kurdish militants has entered its bloodiest phase in more than a decade, with attacks on soldiers and police almost every day and a breakdown in ties with neighbors that had helped to contain the threat. On Sept. 18, a convoy of conscripts in the largely Kurdish southeast was ambushed with rocket launchers, leaving 10 dead. Two days earlier, eight police were killed when a mine blew up their minibus, and the day before four soldiers died in a similar blast. The army has killed 500 members of the Kurdistan Workers’ Party or PKK since February, Prime Minister Recep Tayyip Erdogan said this week. Turkey’s fraying ties with Syria, Iran and Iraq, neighbors with their own Kurdish minorities that have collaborated against the PKK, offers new openings for the group. Erdogan, who had vowed to end the Kurdish conflict, now risks presiding over an escalation that could undermine the $800 billion economy and encourage a backlash by Turkish nationalists.
• China Expresses ‘Regret’ for Attack on U.S. Ambassador’s Car. China expressed “regret” over an incident in which demonstrators in Beijing caused minor damage to the official vehicle of U.S. Ambassador Gary Locke on Sept. 18, a State Department spokeswoman said. Locke was unharmed and Chinese police stationed outside of the embassy cleared the demonstrators from the scene after they surrounded the vehicle, State Department spokeswoman Victoria Nuland said at a press briefing in Washington yesterday.
• Bush-Era Tax Cuts May Expire as Step to Budget Deal, Tyson Says. Bush-era tax cuts may be allowed to expire at the end of the year as a prelude to an agreement on the budget, according to Laura Tyson, an economics professor who advises President Barack Obama on the labor market. An expiration “is the major scenario right now,” Tyson, a professor at the University of California-Berkeley and a member of Obama’s jobs advisory board, said in an interview today with Bloomberg News editors and reporters in Washington. Tyson played down the impact of such a step on the economy, saying the tax cuts could be reinstated later and made retroactive to the start of 2013. The expiration though might help “force” through a deal on the budget, she said.
• Fed Stimulus Fading as Forecasters Say Best Is Over: Commodities. The biggest advances in commodities this year may be over because of mounting concern that policy makers aren’t doing enough to bolster economic growth at a time when producers are expanding supply. Commodity assets under management reached $406 billion at the end of July, from $399 billion at the start of the year, based on Barclays’ estimates of money tied to exchange-traded products, medium-term notes and indexes. Assets reached a record $451 billion in April 2011. Open interest, or contracts outstanding, across the members of the S&P GSCI rose 16 percent this year, data compiled by Bloomberg show. Morgan Stanley is forecasting supply surpluses in aluminum, nickel, zinc and thermal coal in 2013 and Barclays expects a glut in lead for at least a third consecutive year. The rally in aluminum and zinc makes production cuts in China less likely, prolonging excessive production, Macquarie Group Ltd. said in a report Sept. 17.
• Adobe(ADBE) Forecast Misses Amid Move to Subscriptions. Adobe Systems Inc. forecast fiscal fourth-quarter sales and profit that missed analysts’ estimates as the company offered a lower-priced subscription version of its flagship Creative Suite software.

Wall Street Journal:

• Fed's Fisher: Fed Blundered in Opting for New Bond Buying. A veteran central banker attacked Wednesday the Federal Reserve's decision to provide new monetary policy stimulus, while blasting Congress for its own set of failures. In a speech in New York, Federal Reserve Bank of Dallas President Richard Fisher argued, as he has in a series of media interviews over recent days, that the Fed's decision to launch opened-ended mortgage bond buying, in a bid to speed up growth, was a mistake. Mr. Fisher doesn't have a voting role on the monetary policy setting Federal Open Market Committee. He has for some time been a very vocal and persistent opponent of giving the economy additional stimulus, believing the Fed has already done enough. "Why would the Fed provision to shovel billions in additional liquidity into the economy's boiler when so much is presently lying fallow?" Fisher asked in a speech delivered before an audience at the Harvard Club. "I did not argue in favor of additional monetary accommodation during our meetings last week," the official said, adding "I have repeatedly made it clear" the Fed is venturing into unknown territory with its bond buying and other stimulus efforts.
• Bank of America(BAC) Ramps Up Job Cuts.
• Incomes Fell or Stagnated in Most States Last Year. 
• Derivatives Rule Changes in Europe to Roil Bourses. Stock exchanges are facing a shake-up in Europe over the next few years, as continental lawmakers establish new rules to boost competition in the profitable derivatives-trading sector. Currently, European derivatives trading is led by Deutsche Börse AG and NYSE Euronext. The sector contributes more than 36% of Deutsche Börse's revenue and about 25% of NYSE Euronext's, but their dominance could be threatened by proposed European Union legislation.
• Bed Bath & Beyond(BBBY) Net Falls 2.2% in Takeover-Jumbled Quarter. Bed Bath & Beyond Inc.'s (BBBY) fiscal second-quarter income fell 2.2% in results muddled by its first acquisitions in nearly half a decade, which hoisted sales but sank the bottom line. Shares dropped 4.4% to $65.80 after hours as the company posted its first decline in quarterly profit in more than three years.
• Regulators Try to Beat Clock in LIBOR Probe.
• High-Speed Trading in the Spotlight. Former Trader to Testify on Hill About Techniques He Says Put Ordinary Investors at a Disadvantage.
• Debt Investors Aren't Just Waiting For the Next Downgrades in Europe.
• Cartoons Prompt French Closures. France said it would close its embassies as well as French schools in 20 countries on Friday, amid fears of backlash after a magazine published a series of caricatures of the Prophet Muhammad.
• Welfare Reform as We Knew It. Inside the Obama work waiver: It's worse than Romney says. 

  Fox News:

• Al Qaeda, ex-Gitmo detainee involved in consulate attack, intelligence sources say. Intelligence sources tell Fox News they are convinced the deadly attack on the U.S. Consulate in Benghazi, Libya, was directly tied to Al Qaeda -- with a former Guantanamo detainee involved. That revelation comes on the same day a top Obama administration official called last week's deadly assault a "terrorist attack" -- the first time the attack has been described that way by the administration after claims it had been a "spontaneous" act. "Yes, they were killed in the course of a terrorist attack on our embassy," Matt Olsen, director of the National Counterterrorism Center, said during a Senate hearing Wednesday. Olsen echoed administration colleagues in saying U.S. officials have no specific intelligence about "significant advanced planning or coordination" for the attack. However, his statement goes beyond White House Press Secretary Jay Carney and Susan Rice, the U.S. ambassador to the United Nations, saying the Sept. 11 attack on the consulate was spontaneous. He is the first top administration official to call the strike an act of terrorism.

Barron's:

• Railroads Decline on Norfolk Southern(NSC) Warning. Railroad stocks fell after hours following an announcement by Norfolk Southern (NSC) that it is lowering its earnings outlook because of weak coal and merchandise shipments and lower revenue from fuel surcharges. NSC reduced its expectations for Q3 EPS to $1.18-$1.25, well below analysts’ expectations for $1.64. “Decreased coal and merchandise shipments, offset in part by growth in intermodal volumes, are together expected to reduce revenues by approximately $120 million compared with third quarter 2011.” Earlier on Wednesday, UBS analyst Kevin Crissey cut his ratings on railroad companies on continuing weak macro factors, particularly in coal. “Rails have some good commodity trends but were hit by a massive drop in coal volumes as natural gas prices plunged and now face a weak harvest and soft met coal trends.” He cut Union Pacific (UNP), CSX (CSX) and NSC to Neutral and Kansas City Southern (KSU) to Sell. NSC was off 5.4% in after-hours trading.

MarketWatch:

• Bernanke, lawmakers talk fiscal cliff scenarios. Federal Reserve Board Chairman Ben Bernanke warned members of the Senate Finance Committee that the so-called fiscal cliff could damage the U.S. economy, Senators who attended the closed-door meeting said Wednesday. Higher taxes and deep cuts in federal spending are slated to take effect Jan. 1 unless Democrats and Republicans agree to change the current law. Bernanke said the fiscal cliff "would be a severe, negative shock to the economy," said Sen. Chuck Grassley, a Republican from Iowa, in a statement.

CNBC:

• Slide in Oil Prices Shows Loss of 'Faith' in QE.

Zero Hedge:

• What Mitt Romney Also Said: A Glimpse Of The Endgame?
• Bullish Sentiment Surging. (graphs)
• 'Krugman's Kryptonite' Pedro Schwartz On Creating Money Out Of Thin Air. (video)
• China Flash PMI Prints 'Not Bad Enough' But Still In Contraction For 11 Months. (graph)
• China's Delinquent Loans Rise 333% Since End 2011.

Business Insider:

• Why Markets Should Get Over The 'Hype' About The Chinese Stimulus.
• Nearly 6 Million Americans Will Face A Tax Penalty Under Obama's Healthcare Overhaul.
• Greece Is Embarking On A Firesale.
• Barack Obama Gave A Horrible Answer To David Letterman When Asked About The National Debt.

IBD:

• Celgene's(CELG) Drug Pipeline News Soothes Investor Worries.

Washington Post:

• HUD paid over $1B in false claims. The U.S. government may have paid hundreds of millions of dollars in mortgage aid to struggling homeowners who did not qualify for that help, a new report found.

The Blaze:

• Obama Campaign Actually Replaces 50 Stars on American Flag With Campaign ‘O’ Logo. (pic)

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows Mitt Romney attracting support from 47% of voters nationwide, while President Obama earns 46% of the vote. Three percent (3%) prefer some other candidate, and four percent (4%) are undecided.

Reuters:

• Japan manuf sentiment cools as China slows -Reuters Tankan. Japanese manufacturers' sentiment hit its lowest since February and is expected to stay negative in the coming months, a Reuters poll showed, with the global slowdown and friction with China clouding the outlook for the export-reliant economy.
• Nike(NKE) approves $8 bln share repurchase program.
• Google(GOOG) seen taking Facebook's(FB) crown in U.S. display ads. Google Inc is set to become the biggest earner in U.S. display ads this year, taking the No. 1 rank away from Facebook Inc and cementing its dominant presence in online advertising.
• New picture emerging of 'terrorist attack' in Benghazi. The U.S. Consulate in Benghazi apparently was not troubled at first by a smattering of protesters on the anniversary of the Sept. 11 attacks last week, but that changed abruptly at 9:35 p.m. when it sent a message that the building was under heavy assault, U.S. government sources said. New information emerging a week after attackers launched rocket-propelled grenades and mortars and killed four Americans, including U.S. Ambassador to Libya Christopher Stevens, suggests that the protests at the outset were so small and unthreatening as to attract little notice. While many questions remain, the latest accounts differ from the initial information provided by the Obama administration, which had suggested that protests in front of the consulate over an anti-Islamic film had played a major role in precipitating the subsequent violent attack. A senior U.S. counterterrorism official on Wednesday branded the assault in which the four Americans died a "terrorist attack."
• Ads criticizing "Jihad" bound for New York City subway stations. As Muslim countries reverberate with fierce protests over a film mocking the Prophet Mohammad, an ad equating Islamic jihad with savagery is due to appear next week in 10 New York City subway stations despite transit officials' efforts to block it. The city's Metropolitan Transportation Authority had refused the ads, citing a policy against demeaning language. The American Freedom Defense Initiative, which is behind the ad campaign, then sued and won a favorable ruling from a U.S. judge in Manhattan. According to court documents, the ad reads: "In any war between the civilized man and the savage, support the civilized man. Support Israel/Defeat Jihad."

Telegraph:

• China, Japan and the world’s Agadir Crisis (1911).
• Money printing has only allowed governments to duck their problems. Forget QE3 in the US, or whatever round of quantitative easing we are now up to here in the UK; in Japan they are about to embark on QE7, or is that QE8 – it’s hard to keep up.

China Daily:

• China Should Be Prepared for Conflict, Naval Researcher Writes. China should make all possible preparations in regard to its territorial dispute with Japan over islands in the East China Sea, including for military conflict and "even war," Wang Xiaoxuan, director of the Naval Research Institute of the People's Liberation Army, writes in the China Daily. The Japanese government's stance on the islands has come amid "renewed militarism" in Japan, Wang said. China is a "peace-loving" nation and the Chinese people are opposed to the use of war to resolve disputes, Wang wrote. However, that doesn't mean they lack "the courage to stand up for ourselves," Wang said. Japan should not mistake China's "patience and tolerance" as an opportunity to press for more "concessions," Wang wrote. The U.S. is "large responsible" for the island dispute as it has favored Japan and allowed Japanese officials to claim the security treaty between the nations is applicable to the islands, Wang said. China will not back down "an inch" on issues related to its sovereignty, Wang wrote.
• U.S. Failed in Role to Reform Japan. The U.S. failed in its role to reform Japan into a "normal" country, citing Zhong Sheng. The U.S. needs to be "wise" on issues concerning China's core interests in order to establish a new kind of relationship with China, the commentary said.

China Securities Journal:

• Dual-Listed China Companies Have Internal Control Flaw. 49, or 73.1% of, Chinese dual-listed cos. have internal control problems, citing a report from the Ministry of Finance and China Securities Regulatory Commission.

Evening Recommendations 

•  None of note
  

Night Trading

• Asian equity indices are -1.50% to -.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 131.0 new series.
• Asia Pacific Sovereign CDS Index 112.5 new series.
• FTSE-100 futures -.55%.
• S&P 500 futures -.28%.
• NASDAQ 100 futures -.17%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (IHS)/1.00
• (CAG)/.35
• (KMX)/.51
• (JEF)/.26
• (ORCL)/.53
• (TIBX)/.27
• (CTAS)/.58

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to fall to 375K versus 382K the prior week.
• Continuing Claims are estimated to rise to 3300K versus 3283K prior.

8:58 am EST

• Preliminary Markit US PMI for September is estimated at 51.5.

10:00 am EST

• Philly Fed for September is estimated to rise to -4.5 versus -7.1 in August.
• Leading Indicators for August are estimated to fall -.1% versus a +.4% gain in July.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Bullard speaking, Fed's Pianalto speaking, Fed's Kocherlakota speaking, Fed's Lockhart speaking, Fed's Rosengren speaking, Eurozone PMI data, Eurozone Consumer Confidence, Spain's 10Y bond auction, ECB's Draghi speaking, Rajoy/Monti meeting, weekly Bloomberg Consumer Comfort Index, Bloomberg Economic Expectations Index for September, CSFB Smid-Cap Conference and the (MA) investment community meeting could also impact trading today.

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