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• The European DJ Stoxx 50 this morning is trading -1.13%. The banking sector was undercut by a sharp 5% decline in Merrill Lynch on a rating downgrade by Goldman Sachs. Barclays is down -4% today and Mizuho Financial Group fell -6.4% in Tokyo trading. Oil and mining companies are lower due this morning's drop in metals prices (gold -$4.10, copper -9.2 cents) and oil prices (-$1.54). STMicroelectronics is down -3.7% this morning after UBS cut its rating on Europe's largest chip-maker to "sell" from "neutral" and cut its revenue-growth forecast for global semiconductors to 4% from 8%. The Russian stock market is sharply lower by 5% today as capital ontinued to flow out of Russia due to falling commodity prices and Russia's recent invasion of Georgia. The Russian central bank today was forced to intervene to support the ruble, which fell to a 1-year low against the dollar. Asia-Pacific stocks today closed sharply lower across the board: Japan -2.75%, Hong Kong -2.2 4%, China -3.01%, Taiwan -1.64%, Australia -2.06%, Singapore -1.97%, South Korea -1.68%, and Bombay -2.79%.
• US unemployment – The market is eagerly awaiting today’s August unemployment report to get a sense of whether the labor market continues to deteriorate, as suggested by the recent weekly unemployment claims reports. Today’s Aug payroll report is expected to fall –75,000, adding to the –51,000 decline seen in July. Payrolls have fallen every month this year through July, with a total cumulative decline of –463,000. The average monthly decline has been –66,000. The net job losses in the US economy are pushing the unemployment rate higher. Today’s August unemployment rate is expected to be unchanged from July’s 4-year high of 5.7% following the 0.2 point rise seen in July. The US unemployment rate has so far risen by 1.3 percentage points to the current 4-year high of 5.7% from the trough of 4.4% seen in late-2006 and early-2007. The US unemployment rate during this business cycle could easily match and perhaps the peak of 6.3% seen in June 2003 during the last econ omic soft spot given the extent and the likely duration of the economic problems facing the US. The US labor market data is a lagging indicator for the business cycle, but is nevertheless very important since it provides a sense of where consumer confidence and spending is headed and how nervous businesses are about the economy. If payrolls continue to drop and the unemployment rate continues to rise, that will simply add to the litany of consumer concerns. Consumer spending has so far held up fairly well in the past few months due to the federal stimulus program. However, most observers expect US consumer spending to tail off through year-end due to continued high gasoline prices, the housing slump, and the weakening labor market.
• Mortgage delinquencies – Today’s Q2 US mortgage delinquencies report is likely to see an increase from the record high of +6.35% seen in Q1. The previous record for the mortgage delinquencies series (which has history back to March 1979) prior to the current cycle was 6.07% in Q1-1985. The US mortgage delinquency problem is likely to continue to worsen as US home prices continue to decline, as more variable-rate resets push mortgage payments higher for many homeowners, and as refinancing mortgage options remain limited to only the top-rated borrowers.

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• September S&Ps this morning are trading -6.40 points (-0.52%) due to sharply lower stocks overseas, the Merrill Lynch downgrade by Goldman, and concern ahead of today's Aug unemployment report. The US stock market yesterday sold off sharply with the S&P 500 Index dropping to a 5-week low (Dow -2.99%, S&P 500 -2.99%, Nasdaq Composite -3.20%).
• Bearish factors for stock prices yesterday included (1) the sell-off in the tech sector after Morgan Stanley downgraded US semiconductor stocks, saying a recovery for Dynamic Random Access Memory (DRAM) computer chips will not take place until mid-2009, (2) comments from San Francisco Fed President Yellen that there are "substantial" risks of slower US economic growth and that the US is suffering a "severe economy-wide credit crunch," (3) the weakest gain in ICSC chain store sales since Mar with the +1.7% y/y gain in Aug, (4) the -4.1% fall in an index of steelmakers after Goldman Sachs downgraded steel stocks and reduced its price forecast for steel in the next 16 months because of slowing economic growth in China and a strengthening dollar, (5) comments from Dallas Fed President Fisher that "anemic growth" is possible for a few quarters and that the consumer price inflation trend is the worst in 26 years, (6) the unexpected rise in weekly unemployment claims and the j ump in continuing claims to a 4-3/4 year high, raising concern that the economic slump is worsening, and (7) rumors that hedge funds are being forced to sell shares to raise money to cover losing commodity trades and to cover an increase in margin calls.
• Bullish factors for stock prices yesterday included (1) the unexpected gain in the Aug ISM non-manufacturing index, (2) continued weakness in energy and commodity prices, (3) the report from Merrill Lynch that record cash in NYSE broker accounts indicates hedge funds have "huge potential buying power" for US stocks, and (4) the drop in the 10-year T-note yield to a 4-1/2 month low.
• Dell may sell its global manufacturing plants and outsource all its production to cut costs, according to a report today in the Wall Street Journal.
• Merrill Lynch is down nearly 5% in European trading this morning after Goldman Sachs downgraded Merrill Lynch to its "conviction sell" list on concern about more writedowns.
• AIG was downgraded to "equal-weight" from "overweight" by Morgan Stanley due to concern that AIG may need to raise $10-15 billion in new capital.
• Exxon (XOM) is down 1% and Chevron is down 1.1% in European trading this morning on lower oil prices again today.
• SanDisk (SNDK) is up 16% in European trading this morning after Samsung Electronics said it may buy SanDisk.
• UST Inc (UST) is up 8% in European trading this morning after the New York Times reported that Altria Group (MO) is in talks to buy UST.
• Safeway (SWY) was downgraded to "underweight" from "equal-weight" by Morgan Stanley which expressed concern that high food prices at Safeway will drive away consumers during tough economic times.

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• December 10-year T-notes this morning are trading +9 ticks on this morning's sharp sell-off in overseas stocks and -6.40 point sell-off in S&Ps. December T-note prices yesterday rallied and closed +10.5 ticks at a 5-1/4 month high. Bullish factors for T-note prices yesterday included (1) the unexpected jump in weekly unemployment claims (+15,000 to 444,000 versus expectations of -5,000 to 420,000 with continuing claims +6,000 to a 4-3/4 year high of 3.435 million), (2) a flight-to-quality as the S&P 500 Index slumped to a 5-week low, (3) comments from bond fund manager Bill Gross that the US government needs to start buying assets to stem a bourgeoning "financial tsunami," and (4) carryover strength from European debt prices after dovish comments from ECB President Trichet sent the 10-year German bund yield down to a 3-3/4 month low. Bearish factors for T-note prices yesterday included (1) the stronger-than-expected Aug ISM non-manufacturing index (+1.1 to 50.6 versu s expectations of unchanged at 49.5), and (2) comments from Dallas Fed President Fisher that there is a 50% chance that inflation will accelerate even amid slowing economic growth.
• The dollar/yen is down -0.81 yen this morning as the yen is being boosted by weak global stocks and the exit of carry trades. However, the dollar is higher against the euro, with the euro/dollar down -0.93 cents on continued fallout from ECB President Trichet's negative economic comments yesterday. The dollar index yesterday continued this week's rally and soared to a 10-3/4 month high. Bullish factors for the dollar yesterday included (1) comments from ECB President Trichet that the Euro-Zone is in an "episode of weak activity," which sent the euro tumbling to an 8-1/4 month low against the dollar, (2) comments from Luxembourg Finance Minister Juncker that the euro was "effectively overvalued," and (3) the unexpected drop in German factory orders in July for their eighth straight monthly decline. Bearish factors for the dollar yesterday included (1) the rally in the yen to a 5-week high against the dollar as the sinking equity market forced the unwinding of carry t rades, and (2) the unexpected rise in weekly US unemployment claims as weekly continuing claims rose to a 4-3/4 year high. 
• October crude oil prices this morning are trading -$1.54 a barrel and October gasoline is trading -3.04 cents a gallon. October crude oil prices yesterday continued this week's sell-off and closed -$1.46 a barrel and October gasoline closed -2.64 cents a gallon. Bearish factors for crude oil prices yesterday included (1) the continued rally in the dollar index to a 10-3/4 month high, curbing the appeal of commodities as an inflation hedge, and (2) concern the slowdown in Europe is deepening as the ECB lowered their Euro-Zone GDP forecasts for 2008 and 2009 and Luxembourg Finance Minister Juncker said the Euro-Zone economic situation is "not good" and that the European Union will cut its 2008 Euro-Zone GDP forecast next week to 1.0% from a previously forecast 1.7%. Bullish factors for crude oil prices yesterday included (1) the unexpected decline in crude oil inventories in the weekly DOE inventory report (-1.9 million bbl versus expectations of +450,000), and (2) the continued threat of hurricanes as Hurricane Ike strengthed to a dangerous Category 4 as it moves west across the Atlantic, possibly into the Gulf of Mexico later next week.

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