Why is China loading up on US Treasuries? At first glance that seems strange because the dollar keeps falling. Doesn't a falling dollar mean that inflation is on the way? Not necessarily. The Labor Department reported that prices of imported goods fell 15% in August from a year ago, this after a 19.2% drop in July. These numbers are telling us that there is no inflation coming in the near future. The Fed has plenty of wiggle room. It can afford to keep interest rates at historic lows.

So then why is the dollar weak? We know what the answer is. The Fed has pledged $12 trillion dollars to bail out the bankers, housing and the mortgage market, just to name a few areas where the money is going. Then too, we have sky high deficits. The current account deficit will rise to 3.2% of GDP in 2010 and 3.5% in 2011.

The head of State Street's (NYSE: STT) investment unit has resigned, the company announced Thursday. It also said that it will set aside $618 million, including $279 million, or 71 cents per share, to establish a fund to cover legal and related costs due to losses in its fixed-income strategies.

State Street said William Hunt, CEO of State Street Global Advisors (SSgA), was replaced by James Phalen on an interim basis. Phalen will report directly to State Street's CEO, Ronald Logue.

"We have reviewed the actively managed fixed-income strategies at SSgA that contained investments backed by sub-prime mortgages. Based on our review and discussions with certain customers who were invested in these strategies, we have established this reserve to address legal exposure and other costs relating to these strategies," Logue said in a statement.

Including the aforementioned earnings charge, 2007 earnings per share are expected to be $3.42-$3.45. Excluding the charge, 2007 earnings per share are expected to be $4.54-$4.57. The Reuters 2007 EPS consensus estimate for STT is $4.20, excluding charges.

Relief rally?

Wall Street's reaction to State Street's announcement was decidedly not negative, as State Streets' shares gained more than 5% or $4.72 to $83.61 in Thursday morning trading.

Bear Stearns Cos. (NYSE: BSC) embattled CEO Jimmy Cayne is lucky his firm reported its horrid quarterly results showing its biggest profit decline in more than a decade so soon after Ben Bernanke delighted the market through a larger-than-anticipated rate cut. Good thing too that the market reacted positively to comments made by CFO Samuel Molinaro that the worst is over though it wasn't clear when he developed his psychic abilities.

For now, investors are basking in the present sending shares of New York-based Bear are up in early afternoon including Goldman Sachs (NYSE: GS), which reported better-than-expected third-quarter results today. Lehman Brothers Holdings Inc. (NYSE: LEH), which reported strong earnings yesterday, also showed gains as did Merrill Lynch & Co. (NYSE: MER). Morgan Stanley (NYSE: MS), which disappointed investors, was a laggard.

Nonetheless, the contrasts between Bear Stearns and the rest of Wall Street are stark.

Moody's (NYSE: MCO) volatility elevated into 2Q revenues increasing 52% to $261M. MCO, a provider of credit ratings, research and analysis covering fixed income securities closed at $53.89. MCO reported 2Q EPS of 95 cents verses consensus estimates of 69 cents. MCO over all option implied volatility of 45 is above its 26-week average of 33 according to Track Data, suggesting larger fluctuations.

McGraw-Hill (NYSE: MHP) implied volatility Elevated at 34. MHP, a global information service provider, closed at $60.50. MHP's S&P division Standard & Poor's, is a provider of market intelligence, including independent credit ratings, risk evaluation and data. MHP over all option implied volatility of 34 is above its 26-week average of 22 according to Track Data, suggesting larger risk.

Amex Financial Select Sector (NYSE: XLF) call implied volatility Elevated at 38. XLF seeks to replicate the total retune of the Financial Select sector of the S&P 500 Index. XLF implied volatility is elevated on uncertain submprime mortgage risk exposure. C, BAC, AIG, JPM, WFC, WB & GS are components of the XLF. XLF August at the money option call implied volatility is at 38, puts are at 35; above its 26-week average of 17 according to Track Data, suggesting larger risk.

Macquarie Infrastructure (NYSE: MIC) volatility Elevated at 26 into 8/9 EPS. MIC, a market leader in the ownership and operation of infrastructure businesses in the US, will announce EPS on August 9th. MIC over all option implied volatility of 26 is above its 26-week average of 21 according to Track Data, suggesting larger risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.