- Equities have returned to strength this morning, with markets opening well above yesterday's close and heading higher in early trading. Lehman Brothers has displaced the GSEs as the market-moving flavor of the day, with traders optimistic over continuing speculation that the troubled firm has become a takeover target. A $3 decline in front-month crude is adding to the sunny outlook. LEH opened up 15% before trading off slightly. Strength in the name has continued from yesterday's session, sustained by reports that the Korean Development Bank (KDB) has been mulling a takeover offer for the firm. Overnight, South Korean newspaper Chosun reported that KDB had held talks to buy a stake and management rights in Lehman, but failed to reach an agreement due to concerns about its financial health. Ladenberg's Dick Bove, said just before the open that he is standing by his $20/shr take-out price. The news has returned the major financials to strength after three days in the doldrums, helping GS+2% and MS+4% shake off EPS estimate cuts, while JPM+5%, C+3%, MER+3%. New York AG Cuomo announced last night that Merrill, Goldman and Deutsche Bank are settling over auction-rate securities. Under the terms of the deal, MER will pay a $125M fine and buy back $10-12B in securities, GS will pay a $22.5M penalty and buy back about $1.5B in ARS, and DB will pay $15M and buy $1.0B. FRE and FNM opened up about 8% each before falling into negative territory, helped along by Moody's cutting their preferred stock ratings. CNBC interviewed Warren Buffett, who prognosticated on various themes and discussed his investments. The Sage of Omaha noted that he is not positioned against the dollar or any other currency, that equities are more attractive than they were a year ago and that he has bought more of "either AXP+4% or WFC+4%" in recent months, but would not specify which name he bought. He also noted that there has been a slowdown in BRK.A's business. Another round of retail reports came through yesterday and this morning. Similar sentiment was seen among the winners: Both GPS+5.5% and ANN+1.5% beat EPS targets and reaffirmed FY08 guidance, while expressing uncertainty and pessimism over 2H performance. The CEO of GPS said that "there is no reason for optimism in the second half." ZUMZ+11% came in a hair above the consensus, but cut earnings and revenue guidance for the year and echoed the pessimism regarding sales in the second half. BEBE-3% and PSUN-32% both came in more or less even with estimates, guided much lower earnings and predicted very negative same-store sales for the coming quarter. KG+8% is up after offering to acquire ALO+43% for $33/sh in cash, in a $1.4B deal. KG's CEO said he sees $50-70M worth of synergies emerging from the deal after two years.

- The Greenback was able to find some footing overnight helped by fresh signs of slowing growth across the pond. In the UK preliminary Q2 GDP and exports missed expectations, sending cable lower by some 200 pips to back below 1.86. The USD's firmer tone was only reinforced by a solid New York equity open, declines in commodity markets and the comments from Buffett. Firmer US equities have helped push the USD/JPY back towards the 110 figure trading up some 1.50 pips. The euro has given back nearly half of yesterday's gains trading back towards the 1.48 mark.

- Fed Chairman Bernanke's comments at the Jackson Hole Fed conference seem to have had little overall effect on the currency markets. Given the lack of any big surprises and the sustained rally in equities money is coming out of the bond market. The benchmark curve is flattening as some of the recent-flight-to-safety trades are unwound. The two-year yield is climbed to 2.41% while the ten-year is back towards 3.89%.