Wednesday Watch

Evening Headlines
Bloomberg:

• Corporate Spreads Show Strain, Swaps Soar, Returns Dwindle: Credit Markets. The failure of European leaders to contain the region’s debt crisis with a bailout of Ireland has driven relative borrowing costs in the global corporate bond market to a 12-week high. Investors demand an extra 1.77 percentage points in yield to own company bonds instead of government debt, the most since Sept. 8, Bank of America Merrill Lynch index data show. The premium European banks pay in the currency swaps market to borrow in dollars more than doubled in the past three weeks to the highest level since May as the cost to protect against losses on their bonds jumped to a 20-month high. Global debt markets are showing signs of strain amid concern a sell-off in euro-region bond markets will force leaders to bail out more nations, impose losses on creditors and cause the global economy to slow. Company bonds lost 1.04 percent in November, the worst performance since losing 4.44 percent in October 2008, Bank of America Merrill Lynch’s Global Broad Market Corporate index shows. “There’s definitely more fear in the market than we had a couple of weeks ago,” said Eric Stein, a money manager who helps oversee $54.2 billion in fixed-income assets at Eaton Vance Management in Boston. “We need a real sustainable solution. These kind of ad hoc Band-Aid measures aren’t really going to do anything to help Europe over the long term and investors are more and more realizing that.” In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3.5 basis points to 117, the highest since Sept. 23, Markit prices show. In emerging markets, relative yields rose 11 basis points to 273 basis points, the widest since Oct. 4 on a closing basis, according to JPMorgan Chase & Co. index data. Spreads have widened 31 basis points since the end of October. Concern that Spain will fail to close Europe’s third- highest deficit has driven up financing costs for the nation’s lenders. Relative yields on euro-denominated Spanish bank bonds rose 141 basis points to 385 basis points in November -- the biggest monthly jump on record, according to data compiled by Bank of America Corp. Swaps on Spain jumped 13 basis points yesterday to a record 364 on a closing basis, according to CMA. Contracts on Italy, Portugal and Ireland also jumped to records. Signs of strain are showing up in the interest-rate swaps market. The difference between the rate to exchange floating-for fixed-interest payments for two years and the comparable- maturity Treasury yield, known as the swap spread, widened 3.98 basis points to 28.13 basis points, the most since July. The European crisis also is causing a surge in the premium European banks pay to borrow in dollars in the swaps market. The price of two-year cross-currency basis swaps between euros and dollars reached minus 50.6 basis points yesterday, the largest effective premium for dollar borrowing in swaps since May, according to data compiled by Bloomberg. The gap has widened from minus 30.3 basis points on Nov. 22. “People perceive credit risk much higher in European counterparties,” Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading LLC, said in an interview. The increase in swap rates is “extremely aggressive, and what that means is that essentially over the last three or four days, credit departments have gone around saying we need to adjust your credit with local names,” he said.
• Contagion May Force EU to Expand Arsenal to Fight Debt Crisis. Investors’ no-confidence vote in the aid package for Ireland may force European policy makers to expand their arsenal to fight the debt crisis threatening to tear the euro apart. Options outlined by economists at Societe Generale SA and Barclays Capital include: Boosting the 750 billion-euro ($975 billion) temporary rescue fund or turning it into an asset- buying program; cutting interest rates on bailout loans; issuing joint bonds for the 16 euro nations or flooding the economy with cash from the European Central Bank. All would be unprecedented, and none of Europe’s political leaders -- dominated by German Chancellor Angela Merkel -- has indicated the steps are being considered. Earlier this year, they struggled to cobble together the measures that investors and economists now say are proving inadequate to safeguard the euro and keep speculators at bay.
• European Contagion Spreads to Region's Core as Belgian Bond Yields Surge. Europe’s sovereign crisis is spreading to the heart of the 16-nation bloc as investors question Belgium’s ability to cut the euro region’s third- highest debt load, overshadowing its economic performance. The extra yield investors demand to hold Belgian 10-year bonds instead of benchmark German bunds of similar maturity widened to 139 basis points at 5.10 p.m. yesterday in Brussels, the most since at least 1993. The cost of insuring Belgian government bonds rose to a record for a second day, according to CMA prices of credit-default swaps. The European Union’s 85 billion-euro ($111 billion) rescue package for Ireland has failed to quell market turmoil as investors shift their focus from peripheral states to countries such as Belgium, whose capital is home to the EU’s political institutions. “Belgium has moved to the foreground as investors ask themselves ‘who’s next?’ to ask for help,” said Carsten Brzeski, an economist at ING Groep NV in Brussels and a former European Commission official. Six months after the Greek rescue exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency union, investors remain unconvinced. In Belgium, seven political parties involved in coalition talks are still sparring over whether to grant more fiscal autonomy for the country’s regions. Its public debt is approaching 100 percent of gross domestic product and 65 billion euros of bonds and bills are due to mature next year, according to data compiled by Bloomberg.
• Hedge Funds Short Clean Power as Goldman Reduces Stake in Superconductor. Hedge funds increased short selling in U.S. renewable energy stocks to the highest level in a year, boosting bets against First Solar Inc. and Tesla Motors Inc. as government support for low-polluting technologies faltered. Seventeen percent of the freely traded shares of the 35 U.S. stocks in the WilderHill New Energy Index are sold short, compared with 16 percent in October and 15 percent in August, data compiled by Bloomberg show. That’s almost four times the 4.4 percent short ratio of the Standard & Poor’s 500 index. In the run-up to this week’s global climate talks in Mexico, short sellers targeted makers of wind turbines, solar panels and electric cars whose sales also were undermined by cash-strapped European governments cutting subsidies. Goldman Sachs Group Inc. and Deutsche Bank AG trimmed long positions in renewable-energy shares in the third quarter, filings show.
• Guidepoint Subpoenaed by Massachusetts Officials Over Hedge Fund Relation. Guidepoint Global LLC, a research firm that links investors with experts, was subpoenaed by Massachusetts Secretary of the Commonwealth William F. Galvin in connection with its relationship to a hedge fund in the state.
• Nevada Rating Outlook Cut to Negative by Moody's as Gaming Revenues Fall. Nevada’s outlook was lowered to negative from stable by Moody’s Investors Service, citing a $3 billion budget gap and an unexpected decline in the gaming industry, “a sector that was previously believed to be recession proof.”
• Citigroup(C) Said to Discuss Hiring Former White House Budget Director Orszag. Citigroup Inc. , recovering from its $45 billion bailout in 2008, is in advanced talks to hire former White House Budget Director Peter Orszag, people with knowledge of the matter said. Orszag, 41, may take a job in the New York-based firm’s investment-banking division, the people said, declining to be identified because the discussions are private. Orszag, an economist trained at Princeton University and the London School of Economics, helped shape U.S. economic stimulus during the financial crisis and overhaul the health- care system. The youngest member of President Barack Obama’s cabinet, he spent 18 months as White House budget director, stepping down in July. He previously served as economic adviser to President Bill Clinton and was a staff member of Clinton’s Council of Economic Advisers. Orszag’s tenure at the Clinton White House overlapped with Citigroup’s former executive-committee chairman, Robert Rubin, who served as Treasury secretary from 1995 to 1999. In 2006, when Rubin, 72, helped to found an economic research group at the Brookings Institution called the Hamilton Project, Orszag was named its first director. Obama, then a senator from Illinois, spoke at the project’s unveiling.
• U.S. Treasury Envoy to Visit Spain as Bonds, Portugal Show Contagion Risk. The U.S. Treasury Department said its top international official will visit Madrid, as Spanish and Italian bond spreads rose to euro-era records and Standard & Poor’s said it may cut Portugal’s debt ratings. Lael Brainard, the undersecretary for international affairs, will meet this week with senior government officials in Madrid, Berlin and Paris to “discuss economic developments in Europe as well as our longer-term work to advance our shared agenda on strong and sustainable global growth,” the Treasury said in a statement yesterday.

Wall Street Journal:

• LME: Trader Holds Up to 80% of Exchange Copper Stocks. Up to 80% of London Metal Exchange's copper stocks are held by a single trader, according to the exchange's daily warrant banding report. The dominant position holder owns between 50% and 80% of the 355,750 metric tons currently held in LME listed warehouses. This amounts to more than 177,875 metric tons of copper, worth about $1.5 billion. "That's a big market, it's not too easy to get that kind of material, that much tonnage," said a U.S.-based physical metal trader. It is unusual for one trader to hold such a large amount of exchange-warehoused stocks as it gives the participant greater control over the amount of copper available to fill futures contracts. With more than half the stock held by one participant, physical traders may find it difficult to borrow metal stored in a particular location and may help lift premiums for key storage hubs. The dominant holder is raising the cost of copper for prompt delivery compared to metal delivered three-months out. Cash copper is trading at a $60 per metric ton surcharge to metal for three-month delivery. The surcharge was just $40 a few days ago, but has increased as the dominant position emerged, traders said. Copper traders have been bracing for a metal supply squeeze since October, when three separate companies announced plans for physical copper exchange-traded funds. These funds would let investors trade shares listed on a stock exchange and backed by LME grade metal held by the trust. The three trusts include the 61,800 metric ton J.P. Morgan Physical Copper Trust, 121,200 metric ton Blackrock iShares Copper Trust and an as-yet-unspecified sized product from ETF Securities. While both Blackrock and ETF Securities plan to back their products with LME warrants, J.P. Morgan's trust will house the copper off the exchange and is thus a less likely candidate. However, any one of the three trusts could potentially hold the dominant warrant position, traders said. "I just can't see why anyone other than an ETF would want something like that," said a U.S. based physical trader.
• Plans for New EU 'Stress Tests' Spur Squabbling. European officials are planning a new round of bank "stress tests" designed to be more rigorous than last summer's widely criticized exams, but the effort is already beset by squabbling and the possibility that the test results won't become public. While some European leaders are pushing for next year's tests to be broader and more transparent than last summer's exercise, the agency that will oversee the tests says it might opt to not publicly disclose the results.
• Some U.S. Money Funds Exposed to European Banks. Some of the largest U.S. money-market funds hold billions of dollars in securities issued by Spanish and Italian banks, highlighting the risk that further deterioration in Europe could have broad impact. Many European banks have long been dependent on investors for funding because their deposit base is too small relative to their loans outstanding. U.S. money-market funds have been a major source of that cash. Money-market funds in the U.S. hold about $400 billion of their $2.8 trillion in assets in foreign banks, according to J.P. Morgan.
• Google(GOOG) Set to Launch E-Book Venture. Google Inc. is in the final stages of launching its long-awaited e-book retailing venture, Google Editions, a move that could shake up the way digital books are sold. The long-delayed venture—Google executives had said they hoped to launch this summer—recently has cleared several technical and legal hurdles, people close to the company say. It is set to debut in the U.S. by the end of the year and internationally in the first quarter of next year, said Scott Dougall, a Google product management director.
• Comcast(CMCSA) Disputes Level 3's(LVLT) Accusations. Comcast Corp. defended its move to ask Level 3 Communications Inc. to pay for delivering more Internet traffic across its network in a letter to the Federal Communications Committee, rebutting Level 3's charge that it was erecting a "toll" to its network.
• Why the Spending Stimulus Failed by Michael J. Boskin. New economic research shows why lower tax rates do far more to spur growth.
• In Iraq, a Very Busy Iran. U.S. Cables Depict Tehran's Extensive Efforts to Further Its Interests Next Door.

CNBC:

• US SEC Pushed for Quick End to BofA, Merrill Probe.
• China Manufacturing Activity Jumps to 7-Month High. China's factories revved up production in November, but a big jump in input prices also pointed to more inflationary pressure in the pipeline and a need for more monetary tightening. The official purchasing managers' index (PMI) rose to a seven-month high of 55.2 in November from 54.7 in October, the China Federation of Logistics and Purchasing said on Wednesday. The reading compared with the median forecast of 54.7 in a Reuters poll of 11 economists. While a rise in output and export orders helped power the rise, the biggest increase came in the sub-index for input prices, which climbed to 73.5 from 69.9 a month earlier. "The main problem for the economy is still inflation," said Jun Ma, China economist at Deutsche Bank in Hong Kong.

Business Insider:

• Even Fewer People Are Watching Eliot Spitzer's Show This Month. Time does not seem to be doing ParkerSpitzer any favors. According to Nielsen, in its second month the program dropped in both total viewers (506,000 to 453,000) and in the 25-54 demographic (145,000 to 129,000). Perhaps needless to say the show also clocked in fourth in the 8pm time slot for the month of November, behind FNC, MSNBC and HLN in both categories. It gets worse. The program also dropped by double digits over the same time period last year: the show is down 35% in total viewers and down 28% in the 25-54 demographic from its predecessor Campbell Brown.
• Here's Why Raids Without Arrests Are Still Bad News For Hedge Funds Connected to New Scandal.
• Morgan Stanley(MS) Jacks Christmas Smartphone Sales Expectations.
• Deficit Panel Final Recommendations: Raise Social Security Retirement Age, Curb Benefits.
• Get Ready For Wednesday's Big Announcement: Fed Set to Release Bailout Documents. Tomorrow, the Fed will begrudgingly release documents that may reveal which banks would have failed without a bailout.
  

Zero Hedge:

• Without Much Fanfare, The HSKAX Is Back To August 2007 "Quant Implosion" Levels. (graph) While everyone knows that it was two and a half decades of imbecilic monetary policy courtesy of the Monstro [sic] that caused the credit bubble, few things were as much of a direct proximal cause of the market crash as the August 2007 quant collapse. And few indices tracked the obliteration of the M/N quant landscape that followed as well as the HSKAX (below). Well, after two years of painful grinding (for the market neutrals), the HSKAX is back to the same level to which it plunged in that week in early August 2007.

IBD:

• Chipmaker's Vintage Products Power Phones, Cars and Industry. Such high-end packages are driving the current recovery in auto sales, analysts say. No wonder it's also helping the bottom line of Analog Devices (ADI), whose microchips power such features.

CNN Money:

• Oil Execs: Drilling Ban Will Hurt for Years. Drilling activity in the Gulf of Mexico will remain light in the years ahead, despite the fact that the ban on drilling there has been lifted, according to a survey of oil executives released Tuesday. Nearly 70% of industry executives expect drilling activity in the Gulf to remain below 2009 levels until at least 2012, according to a survey by BDO, a Chicago-based accounting and consulting firm. Some say it will never return to 2009 levels.

Real Clear Politics:

• Paul Ryan: You Can't Fix Deficit With ObamaCare in Place. (video)

Reuters:

• 'Flash Crash' Fixes Delayed at U.S. SEC - Sources. U.S. securities regulators are having trouble crafting permanent rules to prevent future stock market flash crashes because fixes are so complicated and rule makers are overburdened from financial reform, sources said on Tuesday.
• OmniVision(OVTI) Sees Strong Q3, Shares Rise. OmniVision Technologies Inc forecast a strong third quarter as it expects to gain from the demand for smartphones and its new image sensors, sending its shares up 5 percent in extended trade.

Financial Times:

• Bank of America(BAC), JPMorgan(JPM) and other banks may be required to buy back more mortgages that failed to meet underwriting standards, citing an interview with Dominic Frederico, CEO of Assured Guaranty Ltd. "This saga of mortgage dislocation has a lot more chapters to play," Frederico said. "I think we're at the tip of the iceberg."

Telegraph:

• Portugal Banks Face 'Intolerable' Risk Unless Austerity Measures Are Implemented. Failure to consolidate the public finances will put the country's banks in danger, the Bank of Portugal said in a report, which followed Prime Minister Jose Socrates last week pushing through an austerity budget. The Portuguese government says no bail-out is needed, but markets are already pointing the finger at the country as the next to follow Greece and Ireland in requesting a rescue package. "The risk will become intolerable if we do not see the implementation of measures that consolidate public finances in a credible and sustainable way," the central bank said.

The Guardian:

• WikiLeaks: Interpol Issues Wanted Notice for Julian Assange. WikiLeaks founder Julian Assange facing growing legal problems around world. The WikiLeaks founder, Julian Assange, is tonight facing growing legal problems around the world, with the US announcing that it was investigating whether he had violated its espionage laws. Assange's details were also added to Interpol's worldwide wanted list. Dated 30 November, the entry reads: "sex crimes" and says the warrant has been issued by the international public prosecution office in Gothenburg, Sweden. "If you have any information contact your national or local police." It reads: "Wanted: Assange, Julian Paul," and gives his birthplace as Townsville, Australia.

Les Echos:

• France currently deserves its AAA credit rating and the outlook on the rating is stable, Standard & Poor's President Deven Sharma said in an interview. Every rating can change with new circumstances, he said, when asked if France could lose the rating.

Evening Recommendations
Citigroup:

• Rated (DSW) Buy, target $45.
• Rated (ANF) Buy, target $57.
• Rated (GPS) Sell, target $20.
• Rated (URBN) Sell, target $32.
• Rated (ROST) Sell, target $60.
• Rated (AEO) Buy, target $21.
• Rated (CHS) Buy, target $16.

Susquehanna:

• Rated (VMW) Positive, target $100.
• Rated (INFA) Positive, target $50.
• Rated (CPWR) Positive, target $13.
• Rated (RHT) Positive, target $52.
• Rated (CRM) Positive, target $175.
• Rated (TIBX) Positive, target $25.
  

Night Trading

• Asian equity indices are -.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 123.0 +5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 118.0 +4.5 basis points.
  
• S&P 500 futures +.23%
  
• NASDAQ 100 futures +.21%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JOSB)/.50
• (SCMR)/-.06
• (CHRS)/-.08
• (ZUMZ)/.37
• (FNSR)/.36
• (PSS)/.51
• (ARO)/.66
• (JAS)/1.07
• (RUE)/.27
• (SNPS)/.39

Economic Releases
8:15 am EST

• The ADP Employment Change for November is estimated at 70K versus 43K in October.

8:30 am EST

• Final 3Q Non-Farm Productivity is estimated to rise +2.3% versus a prior estimate of a +1.9% gain.
• Final 3Q Unit Labor Costs are estimated to fall -.2% versus a prior estimate of a -.1% decline.
  

10:00 am EST

• ISM Manufacturing for November is estimated to fall to 56.5 versus 56.9 in October.
• ISM Prices Paid for November is estimated at 71.0 versus 71.0 in October.
• Construction Spending for October is estimated to fall -.3% versus a +.5% gain in September.
  

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory drawdown of -1,150,000 barrels versus a +1,029,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +300,000 barrels versus a +1,913,000 barrel gain the prior week. Distillate inventories are expected to fall by -1,100,000 barrels versus a -541,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise +.4% versus a +1.5% gain the prior week.

2:00 pm EST

• Fed's Beige Book.

Afternoon:

• Total Vehicle Sales for November are estimated to fall to 12.1M versus 12.25M in October.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Yellen speaking, Fed's Tarullo speaking, Fed's Fish speaking, Challenger Job Cuts Report for November, weekly MBA Mortgage Applications report, (TAP) analyst meeting, (XEL) investor meeting and the Piper Jaffray Healthcare Conference, CSFB Tech Conference, Jefferies Energy Conference, CSFB Aerospace/Defense Conference and the Citi Basic Materials Conference could also impact trading today.
  

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