Thursday Watch

Evening Headlines
Bloomberg:

• Merkel Channeling Antony Comes to Praise Euro While Burying It. Every time German Chancellor Angela Merkel talks about how investors will have to swallow losses in future debt crises, financial markets shudder. Irish 10-year bond yields climbed to a record on Nov. 2 after Merkel said the European Union was drafting plans to force investors to cover losses in a repeat of the sovereign debt slump that started earlier this year in Greece. Her comment in a Nov. 23 speech that the euro’s condition is “exceptionally serious” helped drive the currency down 1.6 percent that day. With EU leaders meeting in Brussels today as the region’s debt woes threaten Portugal and Spain, Merkel’s statements may raise financing costs for the euro area that she says she’s defending, said Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin. Her outbursts may also derail efforts by other EU states and the European Central Bank to fend off bondholders who are betting on a default. At stake are European efforts to contain weakness in the bond markets that threatens to blow the euro region apart. The single currency dropped 6.7 percent against the dollar this year and the extra yield investors demand to hold 10-year bonds of Italy, Spain and Portugal over German equivalents rose last month to euro-era records. “The shape of the euro zone is going be driven by Germany’s political attitude and willingness to underwrite the debt of the peripheral countries,” Marshall said. “That’s why the market is reacting so much to what she said.” Merkel, who faces seven regional elections next year, has said her aim is to put Germany’s stamp on the euro area by getting all countries to reduce budget deficits, thus shielding German taxpayers from the cost of any future bailouts.
  
• Spain Goes Into Last Bond Sale With Sovereign Rating at Risk: Euro Credit. Spain goes into its final bond sale of the year with the threat of a credit rating downgrade, undermining the government’s efforts to convince investors the nation and its lenders can meet their refinancing needs in 2011. Today’s auction of 10-year and 15-year bonds aims to raise as much as 3 billion euros ($4 billion), after a surge in borrowing costs led the Treasury to reduce the habitual goal of as much as 4 billion euros, Finance Minister Elena Salgado said. The yield on 10-year bonds approached a decade-high yesterday, rising to 5.56 percent, before closing at 5.50 percent. Moody’s Investors Service said yesterday it may lower the country’s Aa1 rating less than three months after the previous cut. Spain’s central government, regional administrations and banks collectively require 290 billion euros of financing next year, leaving the country “susceptible to further episodes of funding stress,” the company said.
• China May Lift Rates 6 Times Next Year on Inflation, Mizuho's Suzuki Says. China may raise interest rates up to six times by the end of next year as inflation becomes more entrenched in the economy, according to Mizuho Research Institute Ltd. China’s central bank has relied on reserve-requirement ratios to help control liquidity, and with levels near 20 percent there’s little room for increases, said Takamoto Suzuki, a senior economist at the unit of Japan’s third-largest bank. “A rate hike will be inevitable,” Tokyo-based Suzuki said. “It wouldn’t be surprising if the central bank lifts interest rates by about 1.5 percentage points by the end of next year.” Consumer prices climbed 5.1 percent in November from a year earlier, the fastest since July 2008, the statistics bureau said on Dec. 11. The People’s Bank of China this month announced its sixth increase in reserve-requirement ratios, making major banks to set aside 18.5 percent of deposits. The PBOC raised borrowing costs in October for the first time since December 2007, increasing the one-year deposit rate to 2.5 percent and the lending rate to 5.56 percent.
• Commodity Assets Expand to Record $345 Billion in November, Barclays Says. Commodity assets under management rose $11 billion last month to a record $354 billion, led by demand for index-linked investments, Barclays Capital said. Investment flows into products linked to commodity indexes reached $3 billion in November, Suki Cooper, Roxana Mohammadian Molina, Kevin Norrish and Amrita Sen, Barclays analysts based in London, said today in a report. Total inflows into indexes, medium-term notes and exchange-traded products were $6.1 billion. New investments in 2010 are poised to reach $60 billion, trailing only $76 billion in 2009, Barclays said. The Federal Reserve has kept its benchmark interest rate close to zero percent since December 2008, and the U.S. central bank plans to pump an additional $600 billion into the economy through June by buying government bonds. The Fed purchased $1.7 trillion of securities in a phase that ended in March.
  
• Gregoire Proposes 'Devastating' Cuts in Budget Plan. Governor Christine Gregoire of Washington, one of seven states without an individual income tax, proposed cuts she called “devastating” to bridge a $4.6 billion deficit in a two-year budget that takes effect in July. Gregoire, 63, a Democrat in her second term, is asking the Legislature for about $3 billion in spending cuts and $1.1 billion in savings by suspending pay raises for teachers and a program that provides smaller class sizes, according to a statement from her office. It said fund transfers, pension reforms and use of reserves will also help cover the deficit. The proposal “is not a budget I ever expected to see in the state of Washington, and the choices in it are the most difficult ones I’ve ever faced,” Gregoire said in a message included in the spending plan. “The result is a 2011-13 budget that contains devastating reductions,” she said.
• Taxable Bond Funds Have First Net Withdrawals by Investors in Two Years. U.S. investors pulled $401 million from taxable bond mutual funds in the week ending Dec. 8, the first net withdrawals in two years. Municipal bond funds lost $1.3 billion to redemptions, according to data released today by the Investment Company Institute, a Washington-based trade group for the mutual funds industry. Investors took out $2.7 billion from domestic stock funds, their 32nd straight week of withdrawals, while stock funds that invest outside the U.S. attracted $1.3 billion.
• S&P May Downgrade More Than 1,000 'Incorrectly Analyzed' Mortgage Bonds. Standard & Poor’s said it may downgrade 1,196 securities tied to U.S. residential mortgages after it “incorrectly analyzed” the bonds because of the way interest payments on the debt are structured. The securities were created mostly this year in 129 transactions called re-remics, which are formed by repackaging existing bonds backed by home loans, New York-based S&P said today in a statement. “An admission of guilt by a rating agency: How refreshing, and also what a wonderful Christmas-time present,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press. “What I want to know is, is anyone going to get fired over this?”
• Crisis Panel's Split on Blaming Wall Street May Limit Impact of Findings. The partisan split on the federal panel exploring the origins of the financial crisis may undermine the impact of its findings on the banks, bond-rating firms and regulators it investigated, legal scholars and former national commission members said.
• Pakistani Nuclear Weapons Program's Aid From UN Shows Weakness of Watchdog. The United Nations agency tasked with curbing nuclear proliferation may have unwittingly helped Pakistan develop its atomic-weapons program because of weak internal oversight, according to documents and interviews with three former UN scientists. The UN’s International Atomic Energy Agency provided financial and technical aid to develop Pakistan’s uranium mines and improve plutonium-producing reactors even after the country tested a nuclear weapon in 1998 in defiance of a non- proliferation treaty, IAEA documents show.
• Big Oil Sells Assets at Record $49 Billion Pace as China Inflates Prices. The world’s largest oil companies sold assets at a record pace this year, finding buyers at higher prices as China and other emerging economies vie for reserves. BP Plc, Royal Dutch Shell Plc and ConocoPhillips led 95 sales in 2010 valued at $49.5 billion, the most in at least 12 years, data compiled by Bloomberg show. The pace of disposals has picked up through the year -- deals in the fourth quarter topped $20 billion -- signalling momentum may carry into 2011. China’s state-controlled oil companies were the biggest buyers. Cnooc Ltd. and Bridas Corp’s $7.06 billion purchase of BP’s 60 percent interest in Argentina’s Pan American Energy was the largest acquisition of an energy asset from a major. Last week, Occidental Petroleum Corp. agreed to sell its fields in Argentina to Sinopec Group for $2.45 billion.
• U.S. Afghanistan War Study Notes Military Progress, Questions Transition. The Obama administration’s Afghanistan war review concludes that while sending more troops and civilian resources has yielded gains, it’s too soon to say when a full transition to Afghan control will be feasible, according to a U.S. official who worked on the report.
• Goldman Sachs's(GS) Sze Said to Plan Asia-Focused Global Hedge Fund. Morgan Sze, global head of Goldman Sachs Group Inc.’s principal strategies proprietary trading desk, plans to start a global hedge fund that will be 75 percent invested in Asia, said two people with knowledge of the matter.
• Copper Drops For a Third Day as Global Inventories Expand. Copper declined for a third day as stockpiles expanded and renewed concern that Europe’s debt crisis may hamper the global economic recovery hurt the outlook for demand. Futures in Shanghai and New York also fell. Three-month-delivery copper on the London Metal Exchange dropped as much as 0.9 percent to $9,018 a metric ton, and traded at $9,034.75 at 11 a.m. in Singapore. Inventories of copper tallied by the London Metal Exchange rose for a third day yesterday by 7,050 tons, the largest one- day tonnage increase since January, to 357,950 tons. Of that amount, 6,700 tons entered LME warehouses in South Korea, the nearest location to China, the world’s largest metal user. “It’s probably metal being re-routed from China because importers can’t make money bringing it in,” said Zhu Lin, an analyst at Shanghai Metals Market. The metal for March-delivery on the Shanghai Futures Exchange lost as much as 1.1 percent to 67,140 yuan ($10,080) a ton, while futures on the Comex in New York dropped as much as 0.9 percent to $4.0960 a pound. “The potential for further tightening in China” was also weighing on investors, said Li at Sinolink Futures. Policy makers in China have said they may curb lending and raise interest rates to stem accelerating inflation.

Wall Street Journal:

• Bank of America(BAC) in Settlement Talks Over Mortgages. Bank of America Corp., after vowing to fight requests that it repurchase certain loans, has begun potential settlement discussions with some of its largest mortgage investors. The 17-member group now in talks with the nation's largest bank as measured by assets includes the Federal Reserve Bank of New York, government-owned mortgage company Freddie Mac, BlackRock Inc., and Allianz SE's Pacific Investment Management Co., or Pimco. The bank's approach with this group appears to signal a change in tone for Chief Executive Brian Moynihan, who in November pledged to engage in "day-to-day, hand-to-hand combat" on investor requests to repurchase flawed mortgages made before the U.S. housing collapse.
• Unions Take Fight With Pulte(PHM) to Congress. Unions are pressing Congress to assess how home builder Pulte Group Inc. spent about $900 million in government tax breaks meant to help spur job creation and avoid layoffs. Unions say Pulte has laid off workers and question whether the Michigan-based giant has created new jobs. The unions’ real beef: Pulte’s use of contractors that don’t hire unionized workers, a practice that hurts union members and makes it harder for union organizers to justify why other workers need to join their ranks.
• Officials Warn U.S., Europe of Terror Plot. Iraqi authorities have obtained confessions from captured insurgents who claim al Qaeda is planning suicide attacks in the U.S. and Europe during the Christmas season, two senior Iraqi officials said Wednesday. A U.S. official familiar with the matter confirmed the threat as credible. "People are looking at this very closely," the U.S. official said. "We take it very seriously."
• The 111th Congress's Final Insult. The 111th Congress began with an $814 billion stimulus that blew out the federal balance sheet, so we suppose it's only fitting that the Members want to exit by passing a 1,924-page, $1.2 trillion omnibus spending bill.

MarketWatch:

• Insiders Betting That Rally Will Soon Reverse Course. Corporate insiders evidently believe that the stock market’s rally will soon run out of steam. That’s because they recently have been selling the shares of their companies’ stock at a pace last seen since early 2007.
• U.S. Stock Watchers Optimistic on 2011. The U.S. stock market -- at its loftiest perch since before Lehman Brothers collapsed two years ago -- can rise further in 2011 as long as there are signs the economic recovery is strengthening. That’s the view of many stock strategists.
• Housing is The Forgotten Crisis. Falling prices once again threaten economy.

Business Insider:

• 15 Examples of Government Pork That Are Driving John McCain Crazy.
• Here Are the 10 'Dumbest' U.S. News Websites According to Google(GOOG). Google has launched a new search filter to its "advanced search page" that allows people to sort content based on...reading level - basic, intermediate, or advanced. It also allows you to chart how 'smart' or 'dumb' any website is by using the search function.
  
• Twitter is Now Worth Almost TWICE as Much as The New York Times(NYT).

Zero Hedge:

• Contrary to Rumors, New York Comptroller Sees an Increase in Banker Bonuses in 2011, as Rick's Cabaret Prepares to Add Locations.
• Nic Lenoir of ICAP On Why the Euro is About to Crash and Burn, And Why His Concern for the "New Normal" is Not Slow Growth But Civil War.
  

NY Times:

• Europe Staggers as Critical Summit Looms. Europe’s smoldering financial crisis flared up on Wednesday, with riots over austerity spending in Greece, new signs of troubles in Spain and little indication that European leaders were moving any closer to agreement on a systemic approach to long-term stability. The day’s events emphasized the complex social, political and economic challenges facing government leaders at a European Union summit meeting on Thursday and Friday in Brussels. The meeting is expected to focus on the financial crisis, but there was no sign of the emergence of the sort of comprehensive plan that financial experts say is needed to beat back the unfolding turmoil.
• Bloomberg to Publish Editorials. The mayor’s company, Bloomberg L.P., said on Wednesday that it would begin publishing editorials across its vast media enterprise in an effort to broaden the company’s influence on national affairs. And though Mr. Bloomberg has an agreement with the city to have no involvement in the “day-to-day operations” of his company, the endeavor, called Bloomberg View, is intended to channel his personal philosophy and worldview. “I think it’s very important that everyone understands that our editorial page is going to be, for sure, consistent with the values and beliefs of the founder — even if he happens to be mayor of New York City,” said Matthew Winkler, the editor in chief of Bloomberg News. “I fully expect us in our Bloomberg View always to reflect those values. In fact, I want people to come away from reading the Bloomberg View infused with those beliefs and values.”
• China's Push Into Wind Worries U.S. Industry. “These are very sophisticated machines,” he said. They are also the only three Chinese-made wind turbines operating in the United States. That could soon change, though, as Goldwind and other Chinese-owned companies plan a big push into the American wind power market in coming months.

Politico:

• House Democrats Resigned to Tax Bill's Passage. For House Democrats, reality finally set in. Just one week ago, Democrats were furious over President Barack Obama’s tax compromise with Republicans, hollering “no, we can’t” in a basement room in the Capitol, and eventually approving a resolution to try to block the bill from coming to the floor. But now, after several late-night gripe sessions and a flurry of calls from the administration, House Democrats are resigned to the fact that one of their final votes of this Congress – and for some, their careers – will be to extend the very tax cuts they railed against for the last decade.
  

Reuters:

• U.S. Says Chavez Subverting Will of Venezuelans. Venezuelan President Hugo Chavez is using autocratic powers to subvert the will of the people, the U.S. State Department said on Wednesday after the socialist leader said he would rule by decree for a year. On Thursday, Venezuela's National Assembly is due to grant Chavez the authority to fast-track laws in a move that undermines a bloc of opposition lawmakers who join parliament next month.
• NYC Faces $17 Billion of Budget Gaps in FY2011-'14- Report. New York City might have to close $17 billion of budget gaps from fiscal 2011 through 2014, the city comptroller said in a report on Wednesday, despite a series of spending reductions and service cuts. Though last month Bloomberg announced 6,000 layoffs over 18 months and $1.5 billion of budget cuts, Comptroller John Liu said the biggest danger with the city's forecasts was its reliance on teachers and school administrators agreeing to no wage increases for the first two years of the next contract. And New York state could, by the actions it takes on taxes and school and health programs, drive the city's budget gaps $1 billion higher each year, Liu said.
• U.S. State Dependence on Federal Funds Grows - NASBO. Despite an historic collapse in revenue, U.S. states were able to modestly increase their spending for two years after the federal government sent them aid through the economic stimulus plan, according to a report released on Wednesday. State leaders have warned that their budgets have become so dependent on federal money that they risk new budget holes or possibly another recession next year as the final stimulus funding dries up. "Looking beyond fiscal 2010, states are very concerned that state revenues will not have recovered to pre-recession levels by the time the additional federal funds begin winding down in fiscal 2011," the report from the National Association of State Budget Officers said, adding states are likely to face increased demands for healthcare and public assistance. State general funds declined 3.3 percent in fiscal 2009 and an additional 5.9 percent in fiscal 2010, which ended for most states in June, according to the group. "At the same time general fund spending was rapidly declining, federal fund spending experienced sizable increases," the report said. The $814 billion economic stimulus plan included the largest transfer of federal funds to states in U.S. history. State spending of federal money shot up 17.7 percent in fiscal 2009 and 23.4 percent in fiscal 2010, the association said.

Telegraph:

• The New START Treaty: President Obama is Pushing for a Monumental Surrender to Russia. The Obama administration has an impeccable track record of caving in to Russian demands, as part of its controversial “reset” policy. Last year, it threw key US allies Poland and the Czech Republic under the bus, ditching plans for Third Site missile defences in deference to Russian opposition. It is now planning another surrender to Moscow, by pressing for Senate ratification of the new START Treaty in the lame duck session of Congress. Instead of allowing the newly elected Congress to vote on the treaty, the Obama administration is trying to ram New START through without proper debate. No major treaty has ever been forced through Congress in a lame duck session. There is mounting opposition in Washington to the New START Treaty, which would significantly weaken US security by undermining America’s ability to deploy an effective global missile defence system.

Irish Times:

• Irish support for the ruling Fianna Fail party fell 7 percentage points to 17%, according to a poll carried out for the Irish Times. Backing for Fine Gael rose 6 percentage points to 30%. Support for the Labour party fell 8 percentage points to 25%.

Oriental Morning Post:

• China Banking Regulatory Commission's Shanghai branch ordered halts on lending to companies for the purchase of fixed assets until the end of the year.

Shanghai Securities News:

• Chinese central bank governor Zhou Xiaochuan urged the use of a "pool" to absorb hot money inflows to the nation.

WSJ China:

• China Construction Bank Corp. Chairman Guo Shuqing said the nation's central bank should raise benchmark interest rates because beative real rates aren't good for China's economic growth.

People's Bank of China Financial News:

• A large movement in the yuan exchange rate would have a "relatively large" impact on China's economic and financial stability next year.

Evening Recommendations
Citigroup:

• Reiterated Buy on (VFC), target $100.
• Reiterated Buy on (AVT), target $39.
• Rated (DRI) Buy, target $60.
• Rated (SBUX) Buy, target $40.
• Reiterated Buy on (DHR), target $53.

Night Trading

• Asian equity indices are -1.0% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 105.0 +2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 105.50 +2.5 basis points.
  
• S&P 500 futures -.09%
  
• NASDAQ 100 futures -.07%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ATU)/.34
• (DFS)/.43
• (FDX)/1.31
• (GIS)/.78
• (SCHL)/2.19
• (WGO)/.02
• (ACN)/.75
• (ORCL)/.46
• (ZQK)/.07
• (RIMM)/1.64
• (SCS)/.14
• (TTWO)/.31
  

Economic Releases
8:30 am EST

• Housing Starts for November are estimated to rise to 550K versus 519K in October.
• Building Permits for November are estimated to rise to 560K versus 550K in October.
• The 3Q Current Account Deficit is estimated to widen to -$126.0B versus -$123.3B in 2Q.
• Initial Jobless Claims for last week are estimated to rise to 425K versus 421K the prior week.
• Continuing Claims are estimated to rise to 4115K versus 4086K prior.
  

10:00 am EST

• Philly Fed for December is estimated to fall to 15.0 versus a reading of 22.5 in November.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Geithner testimony to Congressional Oversight Panel, weekly EIA natural gas inventory report, BofA Merrill Healthcare Conference, BofA Merrill Industrial Conference, (CNC) investor meeting, (PG) analyst meeting, (LUV) analyst day, (ABC) investor day and the (GPRO) analyst day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.