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• The European DJ Stoxx 50 this morning is up +0.92% with help from the AIG bailout and positive news on Morgan Stanley and Goldman Sachs. Morgan Stanley is up +10% this morning in European trading after reporting much better than expected earnings of $1.32 per share versus the analyst consensus of 78 cents. Goldman Sachs is up +2% in European trading this morning after a recommendation upgrade to "outperform" from "market perform" from Wachovia analysts due to Goldman's "power position within the financial services industry." Bearish factors for global stock markets today include (1) higher oil prices (+$2.74), (2) a terrorist attack on the US Embassy in Yemen's capital which was repelled but in which a total of eight people died, (3) the 2-day melt-down in the Russian stock market, and (4) the lack of a Fed rate cut yesterday. Asia-Pacific stocks today closed mixed: Japan +1.21%, Hong Kong -3.63%, China -3.57%, Taiwan +0.77%, Australia -0.60%, Singapore -1.71%, Sou th Korea +2.54%, Bombay -1.89%.
• The news emerged early yesterday evening that the Treasury and Fed blinked and the Fed gave AIG a $85 billion 2-year loan in return for 79.9% ownership in the firm, thus giving the firm time to sell assets, restructure itself, and use asset sale proceeds to repay the loan. The Fed will get a hefty interest rate on the loan of 3-month Libor plus 8.5 percentage points. Separately, Barclay's bought Lehman's investment banking unit for $1.75 billion, which took some of Lehman's problems off the table.
• Trading halted in Russia stock market - The latest addition to this week's crisis is that the Russian stock market today plunged by as much as 10% to add to yesterday's 17% decline, causing the Russian Micex Stock Exchange to suspend trading indefinitely. The Russian stock market plunged in the past several weeks on Russia's invasion of Georgia, which caused a large outflow of investor capital from Russia. This week, the Lehman bankruptcy has caused serious disruptions of capital flows and lending within the Russian banking and brokerage system. A Russian brokerage firm, KIT Finance, is apparently insolvent due to a default on repo agreements and is looking for a buyer.
• Mortgage apps – This morning's MBA mortgage applications report showed a small +2.4% gain in the purchase mortgage sub-index and a very sharp +88.1% jump in the refinancing sub-index. The overall MBA market index rose +33.4%. Refinancing activity soared due to the recent decline in mortgage rates. The 30-year mortgage rate fell to a 5-month low 5.93% in the week ended Sep 11, which was down sharply by 69 bp from the recent 1-year high of 6.62%. The drop in mortgage rates was due to the combination of the Fannie/Freddie government bailout and the recent sharp drop in Treasury yields.
• US current account deficit – Today’s Q2 current account deficit is expected to widen to -$180.0 billion from -$176.4 billion in Q1. The wider deficit will be due to the surge in oil prices, which lasted through Q2. In the bigger picture, the US current account deficit has narrowed mildly in the past two years from the record high of -$210.91 posted in Q3-2006. As a percentage of GDP, the US current account deficit has narrowed to the current level of 5.0% of GDP from the record high of 6.56% posted in Q4-2005. The US current account deficit has narrowed mainly because of strong demand for US exports from overseas combined with the lower dollar, which has made US exports cheaper. Nevertheless, the US current deficit is still huge and is producing a net outflow of $1.9 billion of US dollars per day from the US. To the extent that foreign recipients of those dollars are not willing to place them into dollar denominated investments, they instead sell those dollars in the foreign exchange market and cause dollar weakness.
• Housing starts – Today’s Aug housing starts report is expected to show a –1.6% decline to 950,000, adding to the –11.0% decline to 965,000 seen in July. The July housing starts level was a 17-1/2 year low. A decline today would produce a new 17-1/2 year low. There is little reason to expect any significant pickup in housing starts over the near-term. US homebuilders are in a survival mode and are only building homes for which they have a sales contract. They are not building any spec homes that they would have to sell later. The number of new homes available for sale remained extremely high at 10.1 months in July, just mildly below the 27-year high of 11.2 months posted in March 2008. Until new home buying picks up and the current inventory overhang is cleared, US homebuilders are not going to be planning any significant pickup in home building activity.

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• September S&Ps this morning are trading -2.60 points. S&Ps initially rallied last night on the AIG rescue news but have since fallen back as the market waits to see if there is going to be more banking system problems. The 3-month dollar Libor rate has spiked up to 3.06% from 2.82%, illustrating funding stress in the inter-bank lending market. In addition, the Fed yesterday refused to cut interest rates, highlighting the fact that the federal government is taking a generally tough approach to the latest flare-up in the banking crisis by letting Lehman Brothers go under and by not cutting interest rates. The US stock market yesterday overcame early weakness and closed higher (Dow +1.30%, S&P 500 +1.75%, Nasdaq Composite +1.28%).
• Bullish factors for stock prices yesterday included (1) hopes that the Fed would rescue AIG from collapse after the world's largest insurer had its credit ratings cut, (2) the 16% advance in Washington Mutual after the Daily Mail reported that JPMorgan Chase is in "advanced talks" to buy Washington Mutual, (3) the 12% rally in Travelers and the 13% gain in Chubb after Citigroup recommended that investors buy both AIG competitors saying they should both benefit as AIG struggles with liquidity, and (4) the sell-off in crude oil prices to a 7-month low.
• Bearish factors for stock prices yesterday included (1) the worsening credit crunch as global banks are in survival mode and continue to hoard dollars which sent the dollar Libor rate to a 7-year high, (2) the post-FOMC meeting statement which hinted at stagflation as the Fed said "Downside risks to growth and the upside risk to inflation are both of significant concern," (3) the 36% plunge in Constellation Energy Group as the biggest US power marketer fell on concern credit market turmoil will hurt its search for a partner to share the risk of its growing energy-trading business, and (4) the 11% fall in Dell after the world's second-biggest personal computer maker predicted "further softening" in global demand this quarter and said it expects increased costs to incur from job cuts and realigning its business.
• SunDisk (SNDK) is up 40% in European trading this morning after Samsung made a $5.85 billion hostile bid for the memory-card producer.

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• December 10-year T-notes this morning are trading -5 ticks as the banking crisis settled down a bit with the Fed's rescue of AIG. December T-note prices yesterday rallied to a contract high early but gave up all of the gains and closed -10.5 ticks. The 10-year T-note yield fell to a 5-year low yield of 3.247% before turning higher. Bearish factors for T-note prices yesterday included (1) the lack of a Fed rate cut, (2) the larger-than-expected gain in the Sep NAHB housing market index (+2 to 18 versus expectations of +1 to 17), and (3) profit taking after T-note prices surged almost 4-00/32 points in the last two sessions. Bullish factors for T-note prices yesterday included (1) a continued flight-to-quality as global equity markets plunged after Moody's and S&P cut their credit ratings for AIG, and (2) the seizure of the global credit markets as banks worldwide are hoarding dollars which caused the Libor dollar rate to soar 3.33 points to a 7-year high of 6.44%, th e biggest one-day increase in history.
• The dollar is mixed today with the dollar/yen up +0.32 yen and the euro/dollar up +0.85 cents. The dollar index yesterday closed slightly higher. Bullish factors for the dollar yesterday included (1) dollar hoarding by global banks due to the current financial market turmoil which more than doubled the dollar Libor rate to a 7-year high, and (2) the FOMC's decision not to cut interest rates at yesterday's meeting which boosted the perception of US interest rate differentials. Bearish factors for the dollar yesterday included (1) the rally in the yen to a 3-1/2 month high as the carry trade continues to be unwound due to this week's crisis environment and weakness in global stocks, and (2) the Fed's post FOMC statement that said "tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters." 
• October crude oil prices this morning are trading +$2.74 a barrel and October gasoline is trading +4.87 cents a gallon. The main bullish factor this morning is the AIG rescue, which improves the outlook for the US economy. October crude oil prices yesterday continued Monday's sell-off and closed -$4.56 a barrel. October gasoline closed -16.06 cents a gallon. October crude oil and gasoline yesterday both posted 7-month lows on the weekly-nearest chart. Bearish factors for crude oil prices yesterday included (1) concerns that the current turmoil in the financial markets may weaken the global economy and cut fuel demand, (2) OPEC's cut in its 2009 global oil demand forecast by 140,000 bpd to 87.66 million bpd versus last month's forecast of 87.80 million bpd, citing the spreading US-led economic slowdown, and (3) the stronger dollar. Bullish factors for crude oil prices yesterday included (1) the prediction from the chief economist at Saudi British Bank that Saudi Ar abia will probably reduce crude supplies before the next OPEC meeting in December so they can keep prices in the $80-$90 a barrel range, and (2) the fourth day of militant attacks on Nigerian crude oil installations. Expectations for today's DOE weekly inventory report are for a -3.35 million bbl drop in crude oil inventories, a -3.5 million bbl decline in gasoline stockpiles, a -1.8 million bbl fall in distillate inventories and a -1.0 point drop in the refinery capacity rate to 77.3%

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Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): MS-Morgan Stanley (BEST earnings consensus $0.78 per share), GIS-General Mills (0.88), CLC-Clarcor (0.53), BRC-Brady Corp. (0.62), MLHR-Herman Miller (0.55), PFGC-Performance Food Group (0.42)

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