Wednesday Watch

Evening Headlines
Bloomberg:

• Ireland's Bailout Fails to Revive Market for Bank Bond Sales: Euro Credit. Ireland’s bailout aims to wean the nation’s financial system off European Central Bank life support. Instead, the country’s lenders remain locked out of debt markets, with no relief in sight. Parliament votes today in Dublin on the country’s aid from the European Union and the International Monetary Fund. The rescue package includes as much as 35 billion euros ($47 billion) for the country’s banks, part of an 85 billion-euro accord reached Nov. 28 to avert defaults. With the government enjoying a voting majority and the country due to run out of money next year, the rescue is set to be approved. Yet Ireland’s yield premium to 10-year German bunds is still nine times the average during the past decade. Irish banks are growing more reliant on the ECB, a report last week showed. Ireland absorbs a quarter of emergency ECB bank funding. Irish banks are “clearly finding it difficult to wean themselves from this support,” Eamonn Hughes, an analyst with Dublin-based Goodbody Stockbrokers, wrote in a note to clients Dec. 13. “It is probably unlikely that these trends can be reversed in the short term with further ratings downgrades for the banks in the past fortnight.”
• Real Estate Avoids 'Catastrophe' With Yields at '07 Levels: Credit Markets. Investor confidence in U.S. commercial property is the highest since the 2007 market peak, a sentiment reflected in bonds of real estate companies that own everything from New York skyscrapers to California strip malls. Yields on debt issued by real estate investment trusts average 210 basis points more than Treasuries, the least since Nov. 12, 2007, according to Bank of America Merrill Lynch index data. The debt has returned 13.2 percent this year, trumping a 8 percent gain by investment-grade bonds. The debt of companies that own offices, shopping centers, apartments and warehouses has rallied as a dearth of new development spurs demand “little by little,” according to billionaire investor Sam Zell, chairman of Chicago-based apartment owner Equity Residential. The Moody’s/REAL Commercial Property Price Index has been little changed since October 2009 after plunging 45 percent in two years.
• Chinese Consumers Signal Deepest Concern With Prices Since 1999. Chinese consumers signaled their deepest concern with inflation since 1999, underscoring the case for policy makers to step up efforts to contain the fastest increase in prices in more than two years. A People’s Bank of China survey of 20,000 people in 50 cities showed 74 percent considered prices too high, 15.6 percentage points more than in the third quarter, the bank said on its website today. “Interest rate normalization is the best option,” Yao Wei, an economist at Societe Generale SA, said in Hong Kong today. Inflation is “eroding purchasing power” and encouraging consumers to shift savings into assets such as stocks, she said. The benchmark one-year deposit rate is 2.5 percent and the lending rate is 5.56 percent. A measure of lenders’ confidence fell in the fourth quarter to the lowest level in a year, another central bank survey showed today. About half of financial institution executives expect a tighter monetary policy in the next quarter, according to the poll.
• Dubai Property Prices May Continue to Fall for Two More Years. Dubai property prices may drop for the next two years, extending a decline in the Persian Gulf sheikhdom that’s already cut values by more than 60 percent since the 2008 peak. Residential values may fall as much as 20 percent more by the end of 2012 if new homes are built as planned, according to broker Landmark Advisory in Dubai. Cluttons LLP, a London-based property consultant, and Jones Lang LaSalle Inc., the second- largest publicly traded commercial property broker, also forecast further declines. About 48,000 homes will come on to the market in the next two years, or about 12 percent of existing supply, according to Jesse Downs, director of research at Landmark. “There is still no parity between supply and demand,” said Paul Richard, associate director at Cluttons in Dubai, which estimates that 35,000 homes will be completed through 2012. “You’re looking at a good two years” for Dubai’s market to reach bottom, he said.
• North Korea Building Tunnel for Possible Nuclear Test, Chosun Ilbo Reports. North Korea is building a tunnel at a site where it conducted two underground nuclear tests, the Chosun Ilbo newspaper reported, citing a South Korean intelligence official it didn’t identify. North Korea may be able to conduct a nuclear test as early as March at the rate the tunnel is being built at Punggyeri in the country’s northeastern corner, the Korean-language newspaper said.
• Consumer Agency's Warren Said To Hire Ohio Attorney General. Elizabeth Warren, the special White House adviser setting up the Bureau of Consumer Financial Protection, has selected Ohio Attorney General Richard Cordray to head the new agency’s enforcement arm, according to two people briefed on the appointment.
• U.S. Investors Add Most to Money-Market Mutual Funds in Almost Two Years. U.S. investors added more money to money-market mutual funds in November than they have in almost two years as they took out cash from stock and bond funds in a period of rising interest rates. Money funds attracted a net $24.7 billion, the most since January 2009, Chicago-based Morningstar Inc. said today in a report. Investors pulled $1.9 billion from stock funds and $1.5 billion from bond funds, led by $7.6 billion in withdrawals from municipal-bond funds. “Investors retreated in a big way in November,” Kevin McDevitt, editorial director at Morningstar, wrote in the report.
• New York Democratic Senate Majority Leader Indicted for Stealing From Health Clinics. Pedro Espada Jr., the New York Senate majority leader, and his son were indicted on charges of embezzling more than $500,000 from nonprofit health-care clinics in the Bronx section of New York City. From 2005 through 2009, Espada, 57, and his son, Pedro Gautier Espada, 37, abused their positions at Soundview Healthcare Center in the Bronx, which gets more than $1 million a year in federal funding, according to U.S. Attorney Loretta Lynch in Brooklyn, where the case is filed. “The indictment alleges that funds that could and should have been applied to purchase medical equipment and enhance health-care services for an historically under-served population were diverted by the defendants for their personal use,” Lynch said today in a statement.
• 'Easy Money' Runs Out for Singapore Air, Korean Air as Cargo Demand Slows. Asian airlines expect cargo demand to slow as rising U.S. inventories and waning growth in Europe curbs shipments of electronics and luxury goods. Korean Air Lines Co., the world’s largest international cargo carrier, said demand will fall this month because of rising stockpiles of liquid-crystal display televisions, computers and MP3 players. Increases in yields, a measure of rates, are also likely to “moderate in the near term,” said Singapore Airlines Ltd.’s cargo arm, the fourth-largest. Freight demand may wane after U.S. retailers’ inventories climbed to an 18-month high in September, helped by restocking that drove a 28 percent jump in Asia-Pacific carriers’ cargo traffic through October. Europe’s economic growth may slow to 1.8 percent next year, according to the International Monetary Fund, while tighter lending in China may sap demand for shipments of luxury goods in the world’s most populous nation. “The easy money has been made for cargo operators,” said K. Ajith, an analyst at UOB-Kay Hian Research Pte in Singapore.
• Japan Confidence Deteriorates for First Time Since Crisis. Confidence among Japan’s largest manufacturers worsened for the first time since the end of the financial crisis last year as a stronger yen eroded export gains and the effect of government stimulus measures faded. The quarterly Tankan index of sentiment at large manufacturers dropped to 5 in December from 8 in September, the Bank of Japan said in Tokyo.

Wall Street Journal:

• Justice Department to Join Oil-Spill Lawsuits. The Justice Department on Wednesday is expected to seek to join civil lawsuits resulting from the Gulf of Mexico oil spill, the first major federal legal action in the probe of the disaster, according to people familiar with the matter. Dozens of private-party lawsuits have been consolidated in so-called multidistrict litigation in federal court in New Orleans, representing claims against BP PLC(BP) and its contractors for damages from the worst oil spill in U.S. history.
• Philip Falcone's $22.5 Million Mortgage. Harbinger Capital founder Philip Falcone’s personal finances have garnered a bit of attention of late. Now, Deal Journal colleague Robert Frank has news of new loan that the hedge fund manager and his wife took out.
• Harry Reid's Holiday Jam. What the Senate wants to pass while you're not paying attention. In Majority Leader Harry Reid's rush to beat the looming expiration of the 111th Congress, the Senate has become the express lane to jam through changes in military rules, a giant spending bill and even an arms treaty—and all with virtually no deliberation. Why are Republicans putting up with it?

Business Insider:

• And Now Presenting: Amazing Satellite Images Of The Ghost Cities Of China. The hottest market in the hottest economy in the world is Chinese real estate. The big question is how vulnerable is this market to a crash. One red flag is the vast number of vacant homes spread through China, by some estimates up to 64 million vacant homes. We've tracked down satellite photos of these unnerving places, based on a report from Forensic Asia Limited. They call it a clear sign of a bubble: "There’s city after city full of empty streets and vast government buildings, some in the most inhospitable locations. It is the modern equivalent of building pyramids. With 20 new cities being built every year, we hope to be able to expand our list going forward."
• Belgium and Austria Are Now Targets As Europe's Sovereign Debt Crisis Spreads by Stratfor.
• Gasparino: The Government is Trying to Bust the Mob Boss of Insider Trading.
  

Zero Hedge:

• Goldman(GS) Works Its Capture Magic, Hires 15 Year New York Fed Derivatives Reform Veteran. If you can't beat them, might as well get paid by them. Such were the prevailing thoughts in the head of New York Fed veteran Theo Lubke, who after 15 years at Liberty 33, most recently as head of reform efforts in the private derivative market, famous due to its size of roughly €583 trillion which may or may not take the financial system down with it during the next market meltdown. And so, after realizing the derivatives reform is impossible, and further realizing that getting paid a grossly exaggerated government salary for what is basically a lobby job, Lubke has instead decided to get paid an even more exorbitant amount by everyone favorite monopolistic bloodsucking parasite. What is most ironic is that during an ISDA conference in Beijing in April 2009, Ludke said: “It is simply unacceptable in today’s environment that the design and structure of the OTC derivatives market can be controlled by a handful of large dealers.” Oh well - an average government salary is $119,982, an average Goldman Sachs salary is about 4 times greater, an infinite amount of hypocrisy - priceless. For everything else there is the taxpayer bailout debit card.

IBD:

• Peak Conditions Provide Fertile Grounds For Farm Equipment. Right now, farmers in the U.S. and around much of the world are enjoying boom times. This should turn into continuing gains for major farm equipment makers Deere (DE), Agco (AGCO) and CNH Global (CNH), who stand to profit from a mix of factors now aiding farmers.

Forbes:

• Meet The Heiress Bailing Out Julian Assange. As WikiLeaks founder Julian Assange continues his fight against extradition in a London court, several high-profile benefactors have stepped in with offers to pay surety on his £200,000 ($378,000) bail. Some, like Fahrenheit 9/11 filmmaker Michael Moore and director Ken Loach, are well-known social and political activists. One of Assange’s most vocal financial backers is better known as the wealthy scion of one of Britain’s most famous banking dynasties — although she herself might be annoyed with that characterization.

Politico:

• Financial Crisis Committee in Turmoil. Another bipartisan commission – this one seeking the causes of the financial crisis – is ending up deadlocked in a partisan dispute. Republican members of the Financial Crisis Inquiry Commission, which was supposed to complete its final report Wednesday, are preparing to issue dissenting opinions on their own in the coming days. They are unhappy that commission chairman Phil Angelides, a Democrat, has delayed the report until late January, and that he has reserved just 36 pages for dissenting opinions in a document expected to run many hundreds of pages.
• Democrats' Budget Bill: $1 Trillion; 1,900 Pages. Defying the political odds, Senate Democrats rolled out a year-end, governmentwide spending bill Tuesday that cuts more than $26 billion from President Barack Obama’s 2011 requests even as it holds firm to thousands of the appropriations earmarks so adamantly opposed by critics of Congress. Filling more than 1,900 pages, the $1.1 trillion measure represents an increase of less than 2 percent in annual spending but makes for an easy target of ridicule — a last stand by the Senate’s old bulls before the tea party takeover.

Reuters:

• US Retail Gasoline Demand Down 2.7% - Mastercard. U.S. retail gasoline demand fell 2.7 percent last week as prices rose to their highest level this year, MasterCard Advisors' SpendingPulse report showed on Tuesday. Average gasoline demand fell by 255,000 barrels per day (bpd) to 9.182 million bpd in the week to Dec. 10. Demand was 1.3 percent lower than levels seen the same week last year. Over the latest four weeks, U.S. gasoline consumption was 0.3 percent lower year-over-year. Average retail gasoline prices went up 9 cents to $2.96 a gallon, according to MasterCard.
• US Air Force Blocks NYT, Guardian Over WikiLeaks. The U.S. Air Force has blocked employees from visiting media websites carrying leaked WikiLeaks documents, including the New York Times (NYT) and the Guardian. Major Toni Tones, a spokeswoman at Air Force Space Command in Colorado, said it had blocked employees whose computers are connected to the Air Force network from accessing at least 25 websites that have posted WikiLeaks documents.
• Greek Anti-Austerity Strike to Paralyze Transport. Striking Greek workers will ground flights, shut down schools and paralyse public transport in a nationwide walkout on Wednesday, the culmination of protests against austerity laws aimed at stemming a debt crisis.
• US Senate Bill Would Limit Entry of China Poultry. The United States would restrict entry of poultry products from China as part of a Senate spending bill assembled at the same time U.S. and Chinese officials met to resolve trade disputes.

EUBankers:

• Investors Shun Banks' Junior Bonds. Investors are shunning the junior debt of European banks as officials in Ireland and elsewhere move forward with plans to force losses on holders of riskier subordinated bonds. The spread, or gap, between the cost of protecting senior European bank debt against default and that for subordinated debt has hit its widest level since March 2009. According to the Markit iTraxx Senior/Sub Financials index, which measures credit default swap prices, the cost of insuring junior debt has risen by 14 per cent this month – compared with just 3 per cent for senior debt. It now costs €325,000 ($436,000) a year to insure €10m of bank junior bonds over five years.

China Daily:

• The city of Beijing may introduce additional measures aimed at curbing home price gains in the Chinese capital, including ones related to taxes and the availability of credit, citing Xu Zhijun, spokesman for the Beijing Municipal Commission of Housing and Urban-Rural Development.

China Securities Journal:

• China has "basically" spent all of its 4 trillion-yuan government stimulus program announced in 2008, citing Zhang Ping, the head of China's National Development and Reform Commission.

Evening Recommendations
Citigroup:

• Reiterated Buy on (SKS), target $15.

CSFB:

• Rated (LULU) Outperform, target $85.
• Rated (COH) Outperform, target $70.
• Rated (GPS) Outperform, target $26.
• Rated (TIF) Outperform, target $77.
• Rated (URBN) Outperform, target $45.
  

Night Trading

• Asian equity indices are -1.0% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 102.50 -1.5 basis points.
  
• Asia Pacific Sovereign CDS Index 103.0 -1.25 basis points.
  
• S&P 500 futures -.10%
  
• NASDAQ 100 futures -.06%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JOYG)/1.16
• (NDSN)/1.37
• (ABM)/.43
• (HEI)/.40

Economic Releases
8:30 am EST

• The Consumer Price Index for November is estimated to rise +.2% versus a +.2% gain in October.
• The CPI Ex Food & Energy for November is estimated to rise +.6% versus a +.6% gain in October.
• Empire Manufacturing for December is estimated to rise to 5.0 versus a reading of -11.14 in November.
  

9:00 am EST

• Total Net TIC Flows for October are estimated to fall to $51.0B versus $81.7B in September.

9:15 am EST

• Industrial Production for November is estimated to rise +.3% versus 0.0% in October.
• Capacity Utilization for November is estimated to rise to 75.0% versus 74.8% in October.

10:00 am EST

• The NAHB Housing Market Index for December is estimated at 16.0 versus 16.0 in November.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,500,000 barrels versus a -3,819,000 barrel decline the prior week. Gasoline supplies are expected to rise by +2,000,000 barrels versus a +3,811,000 barrel gain the prior week. Distillate inventories are estimated unch. versus a +2,154,000 barrel rise the prior week. Finally, Refinery Utilization is expected unch. versus a +4.9% increase the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lockhart speaking, weekly MBA Mortgage Applications report, BofA Merrill Lynch Basic Materials Conference, Deutsche Bank BioFEST Conference, (DAL) investor day, (AVT) analyst day, (DG) analyst meeting, (DHR) analyst meeting, (VFC) analyst day and the (DGI) analyst meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by real estate 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.