Tuesday Watch

Evening Headlines
Bloomberg:

• Spanish Bad Bank Risks Investor Conflict With Stressed Lenders. Spain must ensure a so-called bad bank meets investor demands for yield without undermining the balance sheets of lenders as the government seeks a panacea for the country’s real estate crisis. “If the new investors do not believe they are going to get a good return on their investment, they will not want to get involved,” said Vanessa Gelado, director of Drago Capital, a Madrid-based real estate fund that’s considering investing in the bad bank. “It’s a very difficult equilibrium to achieve.” The terms of Spain’s 100 billion-euro ($129 billion) bank bailout oblige Prime Minister Mariano Rajoy to set up an asset management firm to house foreclosed homes and real estate loans from banks that received state aid. The government wants private investors to own the majority of the bank so the debt doesn’t contaminate national accounts as it tries to rein in the euro region’s third-biggest budget deficit. The strategy pits investor demands for low valuations on assets transferred to the bad bank with the needs of some lenders to support real estate prices to avoid further losses, said Luis Garicano, a professor at the London School of Economics. “It’s a very difficult balance to achieve, or maybe it’s impossible,” said Garicano in a phone interview. “If you’re the government, you’re trying to attract investors, but at the same time you don’t want to underpay for the assets or you risk undermining the banks and maybe having to recapitalize them unnecessarily.”  
• China Stocks Swing Between Gains and Losses. The Shanghai Composite Index fell 0.1 percent to 2,030.68 as of 10:37 a.m. local time, after changing directions at least 10 times. 
• China Wealth Gap to Stay in Danger Zone, Government Adviser Says. China's income gap will persist at a “dangerously” high level over the coming decade, putting pressure on the nation’s incoming leaders to curb corruption and state control of industries, according to a government adviser. China’s Gini coefficient a measure of inequality, may hover around 0.5, Li Shi, who helped draft a government plan on income distribution, said in an interview last week. The government hasn’t published a countrywide Gini figure since 2000. The index ranges from 0 to 1, readings at 0.4 or higher are used by analysts as a gauge of the potential for social disturbances.  
• Pork Supply Shrinks to Lowest Since 1975 on Drought: Commodities. U.S. hog farmers are slaughtering animals at the fastest pace since 2009 as a surge in feed costs spurs the biggest losses in 14 years, signaling smaller herds next year and a rebound in pork prices.   
• Copper Stockpiles in Bonded Shanghai Warehouses Seen at Record. Copper inventories at bonded warehouses in Shanghai probably climbed to a record as import premiums dropped to a four-month low, signaling demand in China may not be improving as much as expected after a summer lull. Reserves were 650,000 metric tons, according to the median of nine estimates from traders, analysts and warehouse managers, compiled by Bloomberg. Five said that this was a record. The amount compared with an estimate of 550,000 tons by Macquarie Group Ltd. on Aug. 20. 
• Financial Firms Post Fewer Job Openings in Global Economic Slump. Financial firms are advertising fewer open jobs worldwide as slower economic growth in the United States and the European debt crisis put pressure on bank revenue, according to data compiled by Bloomberg. Job postings for the sector dropped 21 percent to 7,540 in September from a year earlier, according to Bloomberg Industries. That figure fell 17 percent to 1,373 in the U.S., 24 percent to 2,508 in Britain and 15 percent to 2,377 in Asia, the data show. 
• Caterpillar(CAT) Cuts 2015 Outlook as Mining Spending Falls. Caterpillar Inc., the world’s biggest construction and mining equipment maker, cut its forecast for 2015 earnings after commodity producers reduced capital expenditure. Caterpillar said profit will be $12 to $18 a share, compared with a previous projection of $15 to $20. While a global recession remains possible, Caterpillar is forecasting moderate and “anemic” growth through 2015, Chairman and Chief Executive Officer Doug Oberhelman said today in a presentation to analysts at the MINExpo industry conference in Las Vegas. Construction activity in emerging markets will probably show modest improvements, he said. “We’ve seen a slowing in economic growth that was more than we expected,” he said. “We think ‘13 could look like 2012 in terms of worldwide economic growth.’’ Oberhelman has bet on a continuation of growth in commodity demand by buying mining-equipment maker Bucyrus International Inc. for $8.6 billion last year and agreeing in November to acquire ERA Mining Machinery Ltd. in China. His plans are coming under pressure as mining companies cut capital expenditures after economic expansion slowed in China, the world’s largest user of coal and metals. Global mining capital expenditures will drop 14 percent through 2014 from a peak of $136 billion this year, JPMorgan Chase & Co. said in a Sept. 21 report. Caterpillar fell 2.2 percent to $88.87 at 6:30 p.m. after the close of regular trading in New York.  
• CFTC Will Give Banks 2 Minutes to Accept or Reject Cleared Swaps. Swaps dealers will have two minutes to accept or reject trades that will be sent to clearinghouses starting next month, the Commodity Futures Trading Commission said in the most-detailed requirement about timing to date. The time allowed for trade approval will fall to one minute 90 days after the CFTC rules are published in the Federal Register, according to a Sept. 21 e-mail sent by Ananda Radhakrishnan, director of the division of clearing and risk. Banks including JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley have argued that the technology to instantly verify the credit and risk allowance of their customers doesn’t exist and asked the CFTC to reconsider. 

Wall Street Journal:

• New Wave of Workers Tries Novel Approach: Save More. As older Americans lose jobs, lose homes and delay retirement, their children are watching and reacting. Growing numbers of young Americans are boosting savings, cutting spending and planning for retirement. 
• Romney Attacks Obama on ‘Bumps in the Road’. Mitt Romney accused President Barack Obama  on Monday of downplaying recent foreign crises as he seeks to gain an edge on foreign policy – a relative area of strength for the president. President Barack Obama was assessing his support for the governments that have sprung up in the wake of the Arab Spring when he argued in a 60 Minutes interview that aired Sunday that “I was pretty certain and continue to be pretty certain that there are going to be bumps in the road.” “Bumps in the road?” Mr. Romney said Monday as he sized up Mr. Obama’s interview performance and rattled off examples of tumult abroad. “We had an ambassador assassinated…twenty thousand people have been killed in Syria. We have tumult in Pakistan and of course Iran is that much closer to having the capacity to build a nuclear weapon. These are not bumps in the road, these are human lives.” 
• State of Europe's Banks: Safe and Stressed. Germany's Lenders Find Fortunes Tied To Spanish Peers.
• Hon Hai Riot Shows Squeeze on Chinese Manufacturers.
• The 10% President. The annotated Obama: How 90% of the deficit becomes somebody else's fault. A question raised by President Obama's immortal line on CBS's "60 Minutes" on Sunday—"I think that, you know, as President, I bear responsibility for everything, to some degree"—is what that degree really is. Maybe 70% or 80% of the buck stops with him? Or is it halfsies? Nope. Now we know: It turns out the figure is 10%. The other 90% is somebody else's fault. This revelation came when Steve Croft mentioned that the national debt has climbed 60% on the President's watch. "Well, first of all, Steve, I think it's important to understand the context here," Mr. Obama replied. Fair enough, so here's his context in full, with our own annotation and translation below:
  

CNBC: 

• More Bank Layoffs Coming: 'Bad as I've Seen It': Whitney. Banks have been behind the curve in terms of downsizing, with their employees paying for it now through a rash of furloughs, analyst Meredith Whitney told CNBC.

Zero Hedge: 

• Now Taiwan Is Also Claiming The Senkaku Islands: 70 Fishing Boats Set Sail To Stake Claim.
• Is Draghi's Bond-Buying Dream Circling The Drain As ECB/Bundesbank Lawyer Up?

Business Insider: 

• Nigel Farage: The Euro Crisis Is Entering The End Game.

NY Times: 

• Ex-Regulator Has Harsh Words for Bankers and Geithner. Sheila C. Bair, who tormented Wall Street and its Washington allies as a banking regulator, is taking a fresh swipe at her foes in retelling the dark days of the financial crisis. In a book to be released on Tuesday, the former chairwoman of the Federal Deposit Insurance Corporation takes aim at the bankers she blamed for the crisis. She also criticized fellow regulators, including current Treasury Secretary Timothy F. Geithner, for their response to the problems. Ms. Bair painted Mr. Geithner, the former head of the Federal Reserve Bank of New York, as an apologist for Wall Street, opposing some postcrisis reforms. She questioned whether his effort to inject billions of dollars into nine big banks masked a rescue intended solely for Citigroup, a theory that other government officials have rejected.

 Real Clear Politics:

• Polls Based Off 2008 Dem Turnout Will Be Wrong.

Rasmussen Reports:

• Generic Congressional Ballot: Republicans 44%, Democrats 43%.

Reuters:

• Clinton reassures Egypt's Mursi on U.S. assistance. Secretary of State Hillary Clinton reassured Egypt's new Islamist president on Monday that the United States would forge ahead with plans to expand economic assistance despite anti-American protests that cast new shadows over U.S. engagement with the region. Clinton met Egyptian President Mohamed Mursi in New York, where both are attending this week's U.N. General Assembly meeting, and reinforced the Obama administration's continued commitment to provide both military and economic aid for Cairo, a senior State Department official said. 
• Red Hat narrows full-year revenue forecast. Red Hat Inc, the world's largest distributor of Linux operating software, reported a lower-than-expected adjusted profit as costs rose, and lowered the top end of its full-year revenue outlook on slow growth in its services business.

Financial Times:

• Wall St engineering revival of CDS. Wall Street financial engineers have devised a new way to combat declining trading in the credit derivatives market – they are revamping an index to add financial instruments that do not exist.

 Telegraph:

• Barack Obama shrugs, but the debt keeps mounting. A fiscal horror is unfolding on the president’s watch, yet few seem concerned , writes Jeff Randall.
• Bundesbank castigates IMF for saving Europe. Germany's central bank has launched a blistering attack on the International Monetary Fund, accusing officials of spraying around money like confetti and overstepping their legal mandate.
• Patience snaps in Portugal.

Nikkei:

• Toyota to Reduce Lexus Output Amid Unrest in China. The co. plans to reduce production of Lexus vehicles for the China market by about 20% as early as this month.

Evening Recommendations 
CSFB:

• Rated (GHDX) Outperform, target $43.

Night Trading

• Asian equity indices are -.50% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 137.0 +3.5 basis points.
• Asia Pacific Sovereign CDS Index 116.50 +5.5 basis points.
• FTSE-100 futures +.27%.
• S&P 500 futures +.28%.
• NASDAQ 100 futures +.28%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FDS)/1.17 
• (CCL)/1.43
• (JBL)/.58
• (CPRT)/.33

Economic Releases
9:00 am EST

• The S&P/CS 20 City MoM% SA for July is estimated to rise +.75% versus a +.94% in June.

10:00 am EST

• Consumer Confidence for September is estimated to rise to 63.2 versus 60.6 in August.
• The Richmond Fed Manufacturing Index for September is estimated to rise to -5 versus -9 in August.
• The House Price Index for July is estimated to rise +.6% versus a +.7% gain in June.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Plosser speaking, ECB's Draghi speaking, Germany inflation data, weekly retail sales reports, 2Y T-Note auction and the (JOY) analyst day could also impact trading today.

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

Stocks Falling into Final Hour on Rising Global Growth Fears, Increasing Eurozone Debt Angst, Earnings Worries, Tech/Energy Sector Weakness

Broad Market Tone:

• Advance/Decline Line: Slightly Lower
• Sector Performance: Mixed
• Volume: Below Average
• Market Leading Stocks: Underperforming

Equity Investor Angst:

• VIX 14.06 +.57%
• ISE Sentiment Index 133.0 +23.15%
• Total Put/Call .79 -1.25%
• NYSE Arms 1.01 -35.65%

Credit Investor Angst:

• North American Investment Grade CDS Index 98.16 bps +1.86%
• European Financial Sector CDS Index 186.60 bps +2.11%
• Western Europe Sovereign Debt CDS Index 135.15 +2.23%
• Emerging Market CDS Index 218.76 +2.41%
• 2-Year Swap Spread 13.25 +.25 basis point
• TED Spread 27.0 +.25 basis point
• 3-Month EUR/USD Cross-Currency Basis Swap -22.0 -1.5 basis points

Economic Gauges:

• 3-Month T-Bill Yield .10% unch.
• Yield Curve 146.0 -3 basis points
• China Import Iron Ore Spot $103.70/Metric Tonne -2.54%
• Citi US Economic Surprise Index 20.6 unch.
• 10-Year TIPS Spread 2.46 -3 basis points

Overseas Futures:

• Nikkei Futures: Indicating -62 open in Japan
• DAX Futures: Indicating +19 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is mildly bearish as the S&P 500 trades slightly lower on rising global growth fears, high food/energy prices, earnings worries, growing Mid-east unrest, increasing China/Japan tensions, US "fiscal cliff" worries and tech/energy sector weakness. On the positive side, Road & Rail and Utility shares are especially strong, rising more than +.75%. The Transports have traded well throughout the day. The UBS-Bloomberg Ag Spot Index is down -.5%, Gold is down -.5% and Oil is down -1.2%. Brazil is +.8% higher on the day. On the negative side, Coal, Alt Energy, Oil Service, Computer, Software, Semi, Biotech and Homebuilding shares are especially weak, falling more than -1.25%. Tech and Energy shares have traded poorly throughout the day. Lumber is falling -1.0 and Copper is down -1.3%. Major Asian indices were mostly lower overnight, led down by a -.5% decline in Australia. The Shanghai Comp(-7.6% ytd) opened at another new multi-year low, but rallied modestly into the close to finish +.3% higher. Major European indices are lower today, led down by a -1.2% decline in Spain. The Bloomberg European Bank/Financial Services Index is -.56% lower. The Germany sovereign cds is jumping +5.9% to 49.79 bps, the France sovereign cds is up +2.9% to 108.0 bps(+12.0% in 5 days), the Japan sovereign cds is up +3.7% to 86.77 bps(+27.6% in 5 days), the Russia sovereign cds is surging +6.2% to 149.87 bps(+15.4% in 5 days), the Saudi sovereign cds is gaining +4.8% to 90.45 bps, the Israel sovereign cds is up +2.5% to 147.99 bps(+13.6% in 5 days) and the Brazil sovereign cds is up +2.2% to 107.31 bps. Moreover, the European Investment Grade CDS Index is gaining +3.0% to 130.47 bps, the Asia Pac Sovereign CDS Index is jumping +4.8% to 116.46 bps and the Italian/German 10Y Yld Spread is up +1.1% to 349.11 bps. The UBS/Bloomberg Ag Spot Index is up +22.0% since 6/1. The benchmark China Iron/Ore Spot Index is down -42.7% 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%. The Philly Fed ADS Real-Time Business Conditions Index has shown meaningful deceleration since early July. 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 -65.0% from its Oct. 14th high and is now down around -55.0% ytd. Shanghai Copper Inventories have risen +360.0% 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 -4 bps to 1.71%. 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. 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. The Mid-east continues to unravel 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. Google(GOOG) is hitting a new all-time high today. While the stock is getting too frothy and extended short-term, I still expect the shares to outperform over the intermediate-term. Long GOOG. 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 lower into the close from current levels on rising global growth fears, earnings worries, rising Japan/China/Mideast tensions, quarter-end profit-taking, more shorting, technical selling, tech/energy sector weakness and US "fiscal cliff" concerns.

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.04%

Sector Underperformer:

• 1) Coal -4.62% 2) Gold & Silver -3.21% 3) Homebuilders -1.90%
  

Stocks Falling on Unusual Volume:

• VECO, GTAT, CTXS, NGD, DNR, CRAY, E, CHTR, ACHN, QCOR, BTH, BPL, LEN, KBW, JBSS, CHTR, KBH, PAAS, CIE, FNV, GORO, TROX, MLI, GRFS, CYS, AG, CYMI, AVGO, MCP, GHDX, PNR and FB
  

Stocks With Unusual Put Option Activity:

• 1) MET 2) XHB 3) XLF 4) CREE 5) VOD
  

Stocks With Most Negative News Mentions:

• 1) AKS 2) BTU 3) GM 4) FDX 5) DOW
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value -.15%

Sector Outperformers:

• 1) Road & Rail +1.17% 2) Airlines +.98% 3) Education +.73%
  

Stocks Rising on Unusual Volume:

• TIVO, RMBS, RKT, MM and CTB

Stocks With Unusual Call Option Activity:

• 1) MET 2) WMB 3) TIVO 4) TTWO 5) STSI
  

Stocks With Most Positive News Mentions:

• 1) LMT 2) HPQ 3) BHI 4) FWLT 5) VZ

Charts:

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

Monday Watch

Weekend Headlines

Bloomberg: 

• European Leaders Struggle to Overcome Fresh Crisis Stalemate. European leaders are struggling to overcome a crisis-fighting stalemate as they face discord over a banking union, Greece’s ongoing debate on how to meet bailout commitments and foot-dragging by Spain and Italy on financial aid requests. Chancellor Angela Merkel and President Francois Hollande underlined Franco-German disagreement over the weekend as they clashed on a timetable to introduce joint oversight of the region’s banking sector, with Merkel rebuffing Hollande’s appeal to activate it “the earlier, the better.” “Complacency seems to have affected European policy- makers,” Joachim Fels, chief economist at Morgan Stanley in London, wrote yesterday. “One case in point is the disagreement between governments about the nuts and bolts of a banking union, which remains crucial to break the negative feedback loop between banks and weak sovereigns.”
• Merkel, Hollande EU Unity Pledge Fails to Stretch to Bank Union. Chancellor Angela Merkel and President Francois Hollande’s appeal for German-French unity to tackle Europe’s ills lasted all of three hours as they disagreed over closer integration of the region’s banking system. The two leaders, marking Franco-German reconciliation after World War II, delivered back-to-back speeches in which they hailed their mutual ties, tried out each other’s language and pledged to work together for a more unified Europe to defeat the financial crisis. The bonhomie broke down at a subsequent press conference when they failed to mask their differences on a planned “banking union” meant to achieve that end. “The earlier, the better,” Hollande told reporters in the German town of Asperg yesterday, saying that banking union is “an important step in our targets” with a goal of implementation by year’s end. Merkel, standing alongside, declined to set a target date, saying there’s no point doing something fast if it then doesn’t work.
• Aussie Debacle Signaling China Hard Landing as Iron Market Melts. From the end of 2008 through July, no major currency appreciated as much as Australia’s dollar, thanks to booming shipments of iron ore and other commodities to China. Since then, it’s the worst performer as the engine of world growth slows. The so-called Aussie depreciated 2.5 percent in the past month, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Traders are betting Australia’s central bank will cut interest rates to boost growth, dragging down the currency even though the Standard & Poor’s GSCI Index of commodities has risen almost 20 percent from its low this year in June. This reversal shows the dangers for an economy tied too closely to another. China, which buys 28 percent of Australia’s exports, said industrial output grew at the slowest pace in three years last month as Europe’s debt crisis cut sales of Chinese goods. Polls show Prime Minister Julia Gillard’s governing Labor Party is under pressure before elections due next year. “The Australian dollar is very expensive from whichever metrics you look at,” Dagmar Dvorak, a director of fixed-income and currencies in London at Baring Asset Management, which manages $50 billion, said in an interview on Sept. 20. “When a currency overvaluation is that extreme, you have to question what could be a trigger that stops it. For the Aussie, it’s the economic slowdown in China and falling commodity prices. The currency looks vulnerable.”
• China ‘Strongly’ Opposes Japan Landing on Disputed Islands. China “strongly” opposes the landing of Japanese citizens on disputed islands, the Foreign Ministry said. Japan’s move “constitutes a severe violation of China’s territorial sovereignty” and Japan “must immediately stop all activities that infringe upon China’s sovereignty,” spokesman Hong Lei said in a brief statement late yesterday on the ministry’s website. Japanese nationals visited the islands Sept. 21 with the excuse of preventing a landing by Taiwanese activists, he said. China Central Television described the Japanese group as security personnel. 
• China Beige Book Shows Optimism Drops as Job Cuts Rise. China’s manufacturers and retailers are less optimistic about sales than they were three months ago and more companies are cutting jobs, according to a survey modeled on the U.S. Federal Reserve’s Beige Book. The China Beige Book, through interviews of more than 2,000 company executives and bankers from Aug. 9 to Sept. 3, found limits to monetary easing after interest-rate cuts in June and July, with banks loosening credit while fewer companies are borrowing, according to a summary from CBB International LLC, the New York-based researcher that conducted the survey. “The dramatic and unexpected worsening of the European crisis and slowing of America’s economy brought China’s export order growth to a near-standstill,” said Craig Charney, research director for the China Beige Book.
• China Stocks Drop to 2009 Low on Concern Slowdown Will Persist. China’s stocks fell, dragging down the benchmark index to the lowest level since January 2009, after a central bank adviser said the economic slowdown may extend into next year. The economic slowdown may persist into 2013 amid a lack of funding for approved infrastructure projects, according to Song Guoqing, an academic adviser to the People’s Bank of China, while a survey showed China’s manufacturers and retailers are less optimistic about sales than they were three months ago. Anhui Conch Cement Co. (600585) and Sany Heavy Industry Co. led declines among construction-related stocks. Foshan Electrical and Lighting Co. dropped to the lowest in almost a month after saying a manager was fined for insider trading. “There was no positive news such as government stimulus over the weekend so investors anticipate the current slowdown in the economy hasn’t stopped,” said Wu Kan, Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “There’s still some room for the market to drop.” The Shanghai Composite Index (SHCOMP) slid 0.7 percent to 2,012.36 as of 10:13 a.m. local time. It plunged 4.6 percent last week after a report on manufacturing signaled a contraction and escalating tensions with Japan threatened trade. The Shanghai index has fallen 8.5 percent this year on concern the government isn’t loosening monetary policy or introducing stimulus policies fast enough to counter the slowdown in the economy.
• Rebels Move Command to Syria as Activists Say Military Kills 180. The Free Syrian Army moved its command center from neighboring Turkey into a part of Syria that the rebel fighters described as “liberated,” while human- rights activists said President Bashar al-Assad’s forces killed 180 people yesterday in intensified shelling and airstrikes. Troops clashed with rebels near the town of Nasib along the border with Jordan, the Associated Press reported. Jordan’s border guards arrested militants yesterday after an exchange of gunfire, the state-run Jordanian news agency Petra reported. More than 26,000 people have died since the conflict between Assad’s opponents and the military began in March 2011, the U.K.-based Syrian Observatory for Human Rights said. 
• Hedge Funds Cut Bets as Prices Drop Most Since June: Commodities. Hedge funds cut bullish commodity bets for the first time this month as weaker manufacturing from China and Europe eclipsed central banks’ efforts to boost growth, driving down prices the most since June. Money managers decreased their net-long positions across 18 U.S. futures and options by 1.7 percent to 1.307 million contracts in the week ended Sept. 18, halting two weeks of gains that had sent holdings to a 16-month high, U.S. Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Spot Index (MXWO) of 24 raw materials dropped 4.4 percent last week, the first retreat since the end of July.
• Senate Moves to Bar U.S. Airlines From EU Carbon Curbs. The U.S. Senate passed a measure that would effectively shield U.S. airlines from a European Union program designed to curtail aviation emissions. The bill, supported by the airlines, was approved early today before lawmakers adjourned to campaign for the Nov. 6 election. Under the measure, which must be reconciled with similar legislation passed by the House last year, U.S carriers would be barred from participating in the EU emissions-trading system for carbon credits. The 27-nation EU decided in 2008 to include flights to and from Europe within its greenhouse-gas-reduction system from 2012 after airline emissions in the region doubled over two decades. The expansion of the cap-and-trade program triggered opposition from countries including the U.S., China and Russia.
• Redbox-Verizon Streaming to Challenge Netflix(NFLX) by Year-End. Coinstar Inc. (CSTR)’s Redbox and Verizon Communications Inc. (VZ), providing details of their challenge to Netflix Inc. (NFLX), will offer subscription streaming, movie sales and rentals by Christmas, along with DVDs from the local kiosk. 

Wall Street Journal:

• Japan Leader Warns China on Islands Dispute. Japan's prime minister warned China that its inflammatory reaction to a territorial dispute—from violent protests to apparent informal trade sanctions—could further weaken China's already-fragile economy by scaring away foreign investors. The comments showed the risks that the diplomatic standoff could broaden into a damaging commercial tit-for-tat between the world's second- and third-largest economies. "China should be developing through the various foreign investments it receives," Yoshihiko Noda told The Wall Street Journal following a tense week filled with news of Japanese factories torched and cars overturned, and Chinese patrol boats hovering in and around territorial waters controlled by Japan.
• Pension Crisis Looms Despite Cuts. Almost Every State Trims Public-Employee Benefits but $900 Billion Retirement Funding Gap Remains. 
• Fed's Tarullo Stays in Touch With Bankers. Bankers have been spending a lot of time bending Daniel Tarullo's ear. The top banking regulator at the Federal Reserve met in person or talked on the phone more than 60 times during one recent year with top U.S. bank executives. That is five times more often than bankers spoke with Fed Chairman Ben Bernanke. Even U.S. Treasury Secretary Timothy Geithner met face to face with top bank executives less frequently during his tumultuous first year in office, when the financial crisis was raging.

Fox News: 

• Ideology, political calculation put Obama in a bind on Muslim uprisings.

Business Insider: 

• The Unintended Consequences Of QE Infinity. 
• The World's #1 Housing Market Is Ridiculous Again.
• There's A Basic Flaw At The Heart Of Obamacare.
• Catalonia Cries for Independence, Spain Might Break Apart, And Its Military Threatens To 'Crush' The 'Vultures'.
• Meet America's Hidden Unemployed: The Workers So Discouraged, They Don't Even Count.
• Germans Are REALLY Worried About Inflation. (table)

Zero Hedge:

• Draghi's Coup D'Etat And Why OMT Is Illegal.
• Greece Caught Underreporting Its Budget Deficit By Nearly 50%.
• Weekly Chartopia.
• From Complacency To Crisis Around The World.

CNBC:

• Stocks Tumble Whopping 20% If Lawmakers Flub 'Fiscal Cliff'. According to new research from Citi, if lawmakers can’t stop their squabbling over the "fiscal cliff" and get their acts together – the sell-off in the stock market could be horrendous. 
• France's Hollande hits new low in popularity poll. French President Francois Hollande's approval ratings have tumbled to their lowest level since he first took office in May, a new poll showed on Sunday, as France's grinding economic stagnation and record unemployment show little sign of easing. According to the Ifop poll for Sunday newspaper JDD, Hollande now has a 43 percent positive rating, down from 54 percent in August - one of the sharpest drops in over a decade. 
• China Will Not Ease Grip on Property Market. China plans to stick to its tight property sector policies and a nationwide rebound in home prices remains unlikely, a senior official at the housing ministry said in remarks published by state media on Sunday.   
• China's Corruption Crackdown Takes Shine Off Luxury Boom. Luxury brands banking on a China rebound to boost sales may be in for an unpleasant surprise: weak demand in the world's second largest luxury market may last longer than the economic slowdown as Beijing cracks down on conspicuous consumption.

New York Times:

• Medicare Bills Rise as Records Turn Electronic. When the federal government began providing billions of dollars in incentives to push hospitals and physicians to use electronic medical and billing records, the goal was not only to improve efficiency and patient safety, but also to reduce health care costs.
• Iran Says Nuclear Equipment Was Sabotaged. Iran on Saturday accused the German technology company Siemens of planting tiny explosives inside equipment Iran bought for its disputed nuclear program, a charge Siemens denied.

CNN:

• Facebook(FB) raises fears with ad tracking. Facebook is working with a controversial data company called Datalogix that can track whether people who see ads on the social networking site end up buying those products in stores. Amid growing pressure for the social networking site to prove the value of its advertising, Facebook is gradually wading into new techniques for tracking and using data about users that raise concerns among privacy advocates.

Forbes:

• A "Mean Green," Obama Wages War Against Cheap Energy. You know who the “mean greens” are. They are those curmudgeonly misanthropes who begrudge and bewail humankind’s economic progress and the high standards of living attained in the modern era.

Atlanta Journal Constitution:

• School test cheating thrives while investigations languish. Allegations of test tampering often get limited scrutiny.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows President Obama and Mitt Romney each attracting support from 46% of voters nationwide. Three percent (3%) prefer some other candidate, and five percent (5%) are undecided.

Reuters:

• From Nigeria to Athens, Muslim protests rumble on. Muslims protested in Nigeria, Iran, Greece and Turkey on Sunday to show anti-Western anger against a film and cartoons insulting Islam had not dissipated. As delegates from around the world gathered in New York for a U.N. General Assembly where the clash between free speech and blasphemy is bound to be raised, U.S. flags were once again burning in parts of the Muslim world. Iranian students chanted "Death to America" and "Death to Israel" outside the French embassy in Tehran in protest at the decision by satirical magazine Charlie Hebdo to publish cartoons of the Prophet Mohammad, days after widespread protests - some deadly - against a film made in the United States. Shi'ite Muslims in the Nigerian town of Katsina burned U.S., French and Israeli flags and a religious leader called for protests to continue until the makers of the film and cartoons are punished. In Pakistan, where fifteen people were killed in protests on Friday, a government minister has offered $100,000 to anyone who kills the maker of the short, amateurish video "The Innocence of Muslims". Calls have increased for a U.N. measure outlawing insults to Islam and blasphemy in general. In Athens, some protesters hurled bottles of water, stones and shoes at police who responded with teargas. Calm returned when demonstrators interrupted the protest to pray. Hours later, dozens of Muslim inmates in Athens' main prison set mattresses and bed sheets on fire in protest. Firemen with four engines battled the flames in some cells but police and government officials said late at night the situation was under control. 
• France needs 37 bln euros in savings by 2013 - finmin. France needs a total of 37 billion euros in budget savings to reach its deficit target of 3 percent of GDP next year, including some 7 billion euros of taxes passed this year, Finance Minister Pierre Moscovici said on Sunday.

International Monetary Fund: 

• IMF Sets Out a Strategy for Financial Surveillance.

Financial Times:

• Hedge funds play long game for profits. Profit-starved hedge fund managers, best known as masters of the financial universe, are turning to an unlikely place for their next windfall: the unglamorous world of long-only asset ­management. Amid volatile markets, constraints on the capacity of their main trading strategies and an ever more conservative investor base, some of the industry’s biggest names are focusing on raising money for pared-back versions of their main portfolios, eschewing leverage and short selling in pursuit of assets and stability.

Telegraph:

•  ECB in 'panic', say former chief economist Juergen Stark. The European Central Bank is in "panic" over the eurozone crisis and acting outside its mandate with its new bond-buying plans, the bank's former chief economist said in comments published Saturday. Mr Stark said the ECB's new plan to buy up unlimited amounts of eurozone states' bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided. "Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally," Mr Stark said. 
• World on track for record food prices 'within a year'. Brace yourself for some painful "agflation". That is the shorthand for agricultural commodity inflation, otherwise known as rising food prices.

Bild:

• New Greek Haircut Would Cost German Taxpayers at Least 8 Billion Euros. The calculation is based on another potential 50% debt reduction for Greece, citing Carsten Schneider, the budget spokesman for the Social Democratic Party, the biggest opposition group in the German parliament.

Der Spiegel:

• Germany's ex-Finance Minister Peer Steinbrueck, who might challenge Chancellor Angela Merkel in the next federal election, said banks should create a rescue fund financed by their own money. The fund could help to cushion the impact for taxpayers if a bank is insolvent.
  The fund could amount to 200 billion euros. Steinbrueck plans to separate investment banking from credit and saving banking as risk and liability don't go together.

ABC:

• European authorities want to halt planned mergers among Spanish lenders to prevent weakening stronger banks set to be buyers in the transactions.

El Mundo:

• The European Commission and ECB are asking Spain to stop linking pensions to inflation, citing people in the government.

Yonhap News Agency:

• Trade Between North Korea, Russia Soars 50% in First Half. According to the report from Seoul's state-run Korea Trade-Investment Promotion Agency (KOTRA), the amount of bilateral trade between the two countries in the January-June period came to US$38.8 million, up 49 percent from the same period last year.

Australian Financial Review:

• BRIC Man Urges Caution on $A, China. Jim O’Neill, the man famous for ­coining the term BRIC, believes the Australian dollar is overvalued at above parity with the US dollar and warns investors to adjust their thinking on China’s contribution to the global economy in the next ­decade. The London-based chairman of Goldman Sachs Asset Management, who earlier this month downgraded his 2012 forecasts for growth in China and India, arrives in Australia on Tuesday for the first time in two years and is bracing for a big change in the attitude of local investors. “Back then there was a sort of mood that not only were you guys the lucky country, but you were the lucky country to the power of 10 and nothing could go wrong. I suspect I am coming this time where a rapidly shifting mood is taking place,’’ he told The Australian Financial Review. Mr O’Neill, who coined the acronym that stands for the four rapidly developing nations of Brazil, Russia, India and China, is urging clients to get their heads around a “new” China. He believes growth rates of about 7 per cent, as outlined in Beijing’s five-year plan, will be the norm, as opposed to the halcyon days of “old” China when growth was regularly more than 10 per cent.

China Business News: 

• Home Prices in Major Chinese Cities May Rebound. Avg. inventory-sales ratio for 10 major Chinese cities including Beijing and Shanghai fell to 9 in August, indicating greater odds of a rebound in home prices.

Xinhua:

• China to Use Drones to Monitor Disputed Islands.. China will use unmanned aerial vehicles to strengthen surveillance of the disputed islands, citing Yu Qingsong, an official at the State Oceanic Administration.

DawnNews:

• Pakistani Federal Minister for Railways Ghulam Ahmed Bilour has offered a bounty of $100,000 to anyone who kills the maker of an anti-Islam film produced in the U.S., citing the minister.

Weekend Recommendations

Barron's:

• Made positive comments on (BGFV) and (INTU).
• Made negative comments on (FB).

Night Trading

• Asian indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 133.50 -.5 basis point.
• Asia Pacific Sovereign CDS Index 111.0 +1.0 basis point.
• FTSE-100 futures -1.0%.
• S&P 500 futures -.09%.
• NASDAQ 100 futures +.02%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LEN)/.27
• (PAYX)/.41
• (RHT)/.29

Economic Releases
10:30 am EST

• The Dallas Fed Manufacturing Activity Index for September is estimated to rise to -1.4 versus -1.6 in August.

Upcoming Splits

• (MDVN) 2-for-1

Other Potential Market Movers

• The Fed's Williams speaking, Chicago Fed National Activity Index for August, European Parliament LIBOR hearing and the Germany Business Expectations Index could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and commodity 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 week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on rising global growth fears, Eurozone debt angst, US "fiscal cliff" concerns, increasing Mid-east unrest, high food/energy prices, more shorting, earnings worries and quarter-end profit-taking. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.