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Overnight Global News

• The European DJ Stoxx 50 this morning is up +0.74% on reports late yesterday that Lehman may be acquired. European banking stocks this morning are generally higher such as UBS (+3%), Societe Generale (+3%) and Credit Suisse (+2.2%). The Wall Street Journal is reporting that potential buyers for Lehman Brothers were inspecting Lehman's books yesterday. Asia-Pacific stocks today closed mostly higher: Japan +0.93%, Hong Kong -0.18%, China +0.28%, Taiwan +0.94%, Australia +1.86%, Singapore +1.16%, South Korea +2.50%, Bombay -2.26%.
• PPI Today's Aug PPI report is expected at 0.5% m/m overall and +0.2% ex-food and energy (core). That would follow July's strong report of +1.2% m/m overall and +0.7% m/m core. On a year-on-year basis, the overall Aug PPI is expected to climb to +10.2% y/y from the 27-year high of +9.8% y/y posted in July. The core PPI is expected to move higher to +3.7% m/m from the 17-year high of +3.5% y/y posted in July. While the PPI figures on a year-on-year basis are expected to move to new multi-decade highs, the market has become significantly less concerned about inflation in the past two months due to the plunge in crude oil and commodity prices. Lower input prices will slowly feed into the inflation statistics in coming months, allowing the headline PPI and CPI figures to move lower. Still, oil prices remain high on an historical basis and import prices remain strong, meaning the Fed has by no means called off its inflation watch.
• Retail sales Today's Aug retail sales report is expected at +0.2% overall and -0.2% ex-autos. That would follow the July report of 0.1% overall and +0.4% ex-autos. Retail sales have been strong in the past several months due mainly to the federal stimulus program. However, consumer spending is expected to fade going into the year-end. The market is starting to worry that the holiday shopping season will be weak given the myriad of problems facing the US economy and US consumers.
• Business inventories Today's July business inventories report is expected to rise +0.5%, adding to the +0.7% rise seen in June. Despite those increases, overall inventories in the US economy remain tight and are not threatening to cause an inventory overhang. In fact, the business inventories-to-sales ratio in June fell to a record low of 1.23 months. The low level of inventories means that businesses will not be caught with bulging inventories should demand suddenly slack off through year-end.
• US consumer confidence Today's early-Sep U.S. consumer confidence index from the University of Michigan is expected to show a small increase of +1.0 to 64.0, adding to the +1.8 point upward rebound to 63.0 seen in August. The US consumer confidence index bottomed out at a 28-year low of 56.4 in June and has since rebounded mildly higher. The main reason for the improvement is lower gasoline prices. However, consumers have little to cheer about given the historically high level of gasoline and food prices, the ongoing housing slump, the banking crisis with the high-profile Fannie/Freddie government takeover, and the negative drum-beat on the US economy from the presidential campaign trail

Overnight U.S. Stock News

• September S&Ps this morning are trading -3.90 points on some fears of a weak retail sales report today and on uncertainty with the Lehman situation and Hurricane Ike. The US stock market yesterday reversed course from an early sell-off and closed higher (Dow +1.46%, S&P 500 +1.38%, Nasdaq Composite +1.32%).
• Bullish factors for stock prices yesterday included (1) a rally in refining stocks as the crack spread increased more than 35% with crude oil down -$1.71 a barrel and gasoline up over 8 cents a gallon as Hurricane Ike forced a shutdown of most Texas coast refiners (almost 15% of total US refining capacity), (2) the +4.4% rally in the S&P 500 Transportation Index after crude oil dropped to a 5-1/4 month low of $100.10 a barrel and after CSX, the third-largest US railroad, rallied 11% after raising its 2008 profit forecast citing a "positive outlook" for the industry, and (3) a late surge in bank stocks on reports that Bank of America was in negotiations to acquire Lehman Brothers, easing concern of more US bank failures.
• Bearish factors for stock prices yesterday included (1) the weakening labor market with the jump in weekly continuing unemployment claims to a 4-3/4 year high, (2) the larger-than-expected widening of the US July trade balance which has negative Q3 GDP implications, (3) the -42% plunge in Lehman Brothers, extending its loss to 92% over the past year, as several Wall Street firms downgraded the fourth-biggest US securities firm on concern its credit rating may be cut and on Goldman Sachs' assertion that Lehman's initiatives to boost investor confidence by selling assets and cutting its dividend "fell short of what was necessary to lessen the bear case on the stock," and (4) the concern that with more than $500 billion in credit losses and asset writedowns at financial firms worldwide along with slowing global economic growth, the outlook for stock earnings will weaken.
• Lehman Brothers (LEH) is up 25% this morning on reports that CEO Richard Fuld is talking with potential buyers such as Bank of America for the entire company. Bank of America (BAC) this morning is down 1% in European trading. Meanwhile, Washington Mutual (WM) is up 7% this morning after the bank said it is "well capitalized."
• Wal-Mart (WMT) is down -0.2% in European trading this morning ahead of today's Aug retail sales report, which is expected to show a decline of -0.2% ex-autos.

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading -8 ticks on ideas that a Lehman takeover may occur over the weekend, thus reducing systemic credit risks. December T-note prices yesterday moved higher and closed +5.5 ticks. Bullish factors for T-note prices yesterday included (1) the larger-than-expected increase in weekly continuing unemployment claims (+122,000 to a 4-3/4 year high of 3.525 million versus expectations of +25,000 to 3.460 million), (2) the larger-than-expected drop in Aug import prices (-3.7% m/m and +16.0% y/y versus expectations of -1.8% m/m and +20.2% y/y), (3) the larger-than-expected July US trade deficit (-$62.2 billion versus -$58.0 billion) which has negative implications for Q3 GDP, (4) a flight-to-safety as the stock market moved lower on concerns about Lehman Brothers, and (5) strong demand seen at the Treasury's auction of $12 billion 10-year T-notes. A bearish factor for T-note prices yesterday was the late rally in the equity market on word that Bank of America was in talks to acquire Lehman Brothers.

• The dollar is mixed this morning with the dollar/yen slightly higher by +0.10 yen and with the euro/dollar up +0.97 cents on some short-covering. The dollar index yesterday closed higher and continued its recent rally up to a new 1-year high. Bullish factors for the dollar yesterday included (1) the drop in the euro to an 11-3/4 month low against the dollar on speculation that economic growth in Europe will be slower than in the US, prompting the ECB to lower interest rates, and (2) comments from German Finance Minister Steinbrueck that the recent depreciation of the euro against the dollar was "not dramatic," signaling he favors a weaker euro currency. Bearish factors for the dollar yesterday included (1) the larger-than-expected decline in the US July trade balance which has negative Q3 GDP implications, and (2) the prediction from China International Capital Corp. that the Chinese government, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may reduce its dollar holdings due to losses on US agency debt it currently owns.

• October crude oil prices this morning are trading +$1.30 a barrel and October gasoline is trading +5.67 cents a gallon. Hurricane Ike is expected to make landfall near Houston late tonight or early tomorrow and oil and refinery production in the area has been closed. October crude oil prices yesterday closed lower although October gasoline prices closed higher. October crude oil closed -$1.71 a barrel and October gasoline closed +8.72 cents a gallon. October crude oil yesterday posted a 5-1/4 month low of $100.10 a barrel and has now closed lower in 9 of the last 10 sessions. Bearish factors for crude oil prices yesterday included (1) the continued rally in the dollar index to a 1-year high, lessening the appeal of commodities as an inflation hedge, and (2) Barclays' cut in its Q4 crude oil price forecast by 21% to $97.50 a barrel from a previous forecast of $123.90 a barrel and in its 2009 price forecast to $115.50 a barrel from $123.20 a barrel. Bullish factors for crude oil prices yesterday included (1) the rally in gasoline prices on concern that Hurricane Ike may damage refineries along the Texas coast which is home to nearly 3.0 million bpd or 15% of total US refining capacity, and (2) the prediction from Barclays Capital that the US faces a gasoline supply "crunch" because gasoline inventories are at their lowest level in almost eight years

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): n/a (BEST earnings consensus $0.00 per share)

Global Financial Calendar