US Market Update

- Equity markets are feeling the pain once again from the flailing US financial industry. Stocks opened lower after the government was forced to step in and help engineer the sale of the troubled investment bank, Lehman Brothers, to a consortium of private firms. Reports have circulated regarding the identity of the potential acquirers, with the WSJ and FT putting Bank of America at the front of the line of candidates, although the firm has not confirmed these reports. Other names from an FT report this morning include the investor JC Flowers & Co and China Investments Company, the Chinese sovereign wealth fund. Given the precedent set by the Bear Stearns rescue earlier this year, many are speculating about the role the government will play in the deal. Former Fed member Poole said he hopes the government "draws a line in the sand" and doesn't inject any capital in Lehman, noting that private companies must be allowed to fail. CNBC's Liesman reported this morning that his sources in the Treasury said no government money will be involved in the deal, emphasizing that markets have had time to prepare themselves for the current situation (unlike the sudden decline of Bear Stearns). Ladenburg's Dick Bove said he believes Bank of America will win the auction for Lehman, and took the opportunity to lower BAC's FY08 EPS outlook somewhat while maintaining a buy rating. Washington Mutual is adding to the sense of crisis today, after loosing nearly half of its value this week: Moody's and Fitch cut their ratings for the bank to the very edge of junk status after WM released an update yesterday on its Q3 performance metrics, insisting that its capital ratios remain significantly above levels for well-capitalized institutions. AIG-19% is under heavy pressure as its credit default swaps rise to all-time highs. Merrill is also under the gun, down more than 7% in early trading. Outside of the financial sector markets are finding some support from a return to strength in many commodities that in turn is boosting commodity stocks. Mining names RTP, RIO, FCX and PCU are all gaining ground while the oil patch is experiencing nice gains as well, which has helped indices rally late in the New York morning. Investors are bullish on POT's board raising the firm's buyback ceiling to 10% of the company's public float. PDGI is down more than 50% after slashing guidance due to postponement and cancellation of key drug trials. CMG is off more than 20% after guiding lower earnings and sales for the coming quarter.

- Bond prices have been slipping lower since the open of floor trade putting upward pressure on yields. Traders may be spooked by talk of yet another bailout by Uncle Sam. Despite the higher yields, fed fund futures continue to project a small probability that the FOMC could cut rates before year's end.

- In currencies, the greenback continued to experience some retracement following the advances seen earlier in the week. EUR/USD continues to hover around the 1.41 handle while GBP/USD regained a foothold above 1.77. The EUR/JPY cross is holding above its 200-week moving average at 150.22, which last experienced a price violation back in April 2002. The slowing global growth scenario is reflected in today's US retail sales data, but offset by a positive reading in Michigan confidence survey. Dealers are focusing as the final resolution of the Lehman question. All signs point to the firm's fate being sealed by Monday.

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