Tuesday Watch

Evening Headlines
Bloomberg:

• EU Proposals Drive Bank Default Swaps to Record: Credit Markets. The European Union’s proposal that senior note holders share the burden of future government bailouts is driving the cost of insuring the debt of rescued lenders to record highs. Credit-default swaps protecting bonds sold by Commerzbank AG, which has received 18.2 billion euros ($24 billion) from the German government, almost doubled this year, while contracts on Italy’s Banca Monte dei Paschi di Siena SpA jumped 35 percent, according to CMA. Relative yields on European bank and company bonds are the widest on record compared with spreads in the U.S., Bank of America Merrill Lynch index data show. The Markit iTraxx Financial Index of 25 European banks and insurers is at the highest on record relative to the cost to protect U.S. bank debt. The average credit-default swap on the six biggest U.S. banks is 71 basis points below their European counterparts, compared with 341 basis points higher at the height of the credit crisis in October 2008. The EU published its burden-sharing proposal on Jan. 6 as part of draft rules that would also give regulators the power to transfer assets and liabilities, and replace management of lenders judged too big to fail. The plan would “break the link” between senior bondholders and depositors, previously on the same level in terms of getting paid back in a crisis, said Roger Doig, an analyst at Schroders Plc in London, the U.K.’s biggest traded- fund manager. “That means a greater loss for bondholders in a default or restructuring,” he said. Senior bonds are being hurt on speculation funding costs will rise when the rules are adopted, which would be after a consultation period ending March 3, followed by approval from governments and lawmakers in the European Parliament. Investors demand an extra 164 basis points in yield to own European senior bank debt instead of German bunds, compared with 144 basis points for non-financial corporate securities, Bank of America Merrill Lynch index data show. The 20 basis-point gap between the two spreads matches the record set on Dec. 31. Senior European bank debt lost 1.29 percent last quarter, including reinvested interest, and has fallen for four straight months, the longest stretch since the period ended June 2008, based on Bank of America Merrill Lynch index data. “Bank funding will become an issue if these elevated levels in CDS and cash persist,” Suki Mann, senior credit strategist at Societe Generale SA in London, wrote in a report to clients. “It was already the hot topic for 2011, and cynics would suggest that spreads will stay wide or widen further.” The average cost of insuring Citigroup Inc., JPMorgan, Bank of America Corp., Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc. is 139 basis points, from an 11-month high of 198 on June 10, according to CMA. That compares with 210 basis points for Markit’s European financial index, which includes swaps on Barclays Plc and Deutsche Bank AG. That’s the highest since March 2009, the data show. Default swaps protecting senior bonds of Commerzbank, Germany’s second-biggest lender, jumped to 277 basis points, from 147 on Dec. 31, CMA prices show. Contracts on Monte Paschi, the world’s oldest bank and Italy’s third-largest, rose to 356 from 263. Swaps on Landesbank Baden-Wuerttemberg, a Stuttgart-based state-owned lender that received government cash in the crisis, climbed to 242 basis points from 159.5, CMA prices show. Caja de Ahorros y Monte de Piedad de Madrid, the second- largest of the regional Spanish savings banks, increased to 541 from 457.5 on Dec. 31, CMA prices show. Contracts tied to Portugal’s Banco Popolare SC rose to 367 from 284. Banco Pastor SA of Spain jumped to an all-time high 713 from 574 on Dec. 31. Imposing burden sharing will “push up funding costs,” said Gary Jenkins, head of fixed-income at Evolution Securities Ltd. in London. “If you make a grab for other people’s assets, then you’re going to scare the horses.”
• VIX, VStoxx Advance on Concern Europe's Debt Crisis May Spread. The benchmark indexes for U.S. and European stock options jumped on concern Europe’s debt crisis may spread. A gauge of credit-default swaps on European nations rose to a record. The Markit iTraxx SovX Western Europe index, which measures the cost of credit-default swaps, climbed a fourth day to a record 220 basis points. In Europe, the benchmark gauge of stock-market volatility closed at its highest level since Dec. 1. The VStoxx Index, which measures the cost of protecting against a decline in shares on the Euro Stoxx 50 Index, climbed 7.4 percent to 25.72. The Euro Stoxx 50 stock index fell 1.7 percent. The average cost of swaps to protect debt issued by Portugal, Ireland, Greece and Spain from a default rose a third day today to a record 651 basis points, according to data compiled by Bloomberg. The level first exceeded 600 basis points on Nov. 29 and first reached 500 basis points on Nov. 3. Trading of bearish options on developing-nation stocks increased to more than double the four-week average in the U.S. and was quadruple the level for bullish contracts. More than 275,000 puts to sell the iShares MSCI Emerging Markets Index exchange-traded fund changed hands as the ETF slid 1 percent to $46.76.
• Asia Exports Cooling Damps Commodity Shipping Outlook. exports in 2011 may rise at a third of last year’s pace of as much as 24 percent, according to DBS Group Holdings Ltd. The island’s government joins Asian exports that helped power the world recovery last year are poised to grow more slowly as the region’s manufacturing rebound eases and U.S. unemployment restrains consumption after a post-recession spending spree. Container traffic growth in Shanghai, Singapore and Hong Kong, the world’s busiest ports, has cooled since the first half of 2010. SingaporeTaiwan and South Korea in predicting smaller gains in overseas sales. “2011 is not looking as exuberant as 2010,” said Vishnu Varathan, an economist at Capital Economics (Asia) Pte in Singapore. “The easy part of the trade upswing is over now and demand is getting tighter,” making the outlook for shipping “less bubbly,” he said. While container-shipping companies may profit from rate increases, the export slowdown may damp growth in other Asia shipping and transport stocks, which are already underperforming Asian stock indexes.
• Intel(INTC) to Pay Nvidia(NVDA) $1.5 Billion Over Five Years to End Licensing Dispute. Intel Corp. agreed to pay Nvidia Corp. $1.5 billion over the next five years, gaining the right to use Nvidia’s graphic patents and ending a legal dispute over the use of each other’s technology. Under the deal, the companies will receive a license to each other’s patents, subject to certain terms, Santa Clara, California-based Intel said today in a statement.
• SEC Watchdog Probes Enforcement Chief Over $75 Million Citigroup(C) Agreement. The U.S. Securities and Exchange Commission’s internal watchdog is reviewing an allegation that Robert Khuzami, the agency’s top enforcement official, gave preferential treatment to Citigroup Inc . executives in the agency’s $75 million settlement with the firm in July. Inspector General H. David Kotz opened the probe after a request from U.S. Senator Charles Grassley, an Iowa Republican, who forwarded an unsigned letter making the allegation. Khuzami told his staff to soften claims against two executives after conferring with a lawyer representing Citigroup, according to the letter.
• AMD's(AMD) Meyer Resigns, Will Be Replaced by CFO on Interim Basis; Shares Drop. Advanced Micro Devices Inc., the second-biggest seller of processors for personal computers, said Chief Executive Officer Dirk Meyer resigned and will be replaced by finance chief Thomas Seifert as interim CEO.
• New York, Northeast May Get 14 Inches of Snow From New Storm.
• Noda Says Appropriate for Japan to Buy Bonds to Aid Ireland.
• China's Biggest Lenders Said to Expect About 14% Loan Growth. China’s four biggest banks may need to limit loan growth to about 14 percent this year under a new system created by the central bank for managing credit expansion, three people with knowledge of the matter said.
• Portuguese Bond Buyers Set to Demand 'Unsustainable Yields': Euro Credit. Portuguese yields may be rising to levels that force the nation to follow Greece and Ireland in requesting a bailout from the European Union and the International Monetary Fund to avert default. The nation plans a 10-year sale tomorrow, the first bond auction by any of the euro region’s most indebted countries this year. Its existing 10-year debt has yielded more than 7 percent in 10 of the past 62 days, according to Bloomberg data. Greece needed a rescue within 17 days of its 10-year yield breaching 7 percent on April 6, while Ireland lasted less than a month after it cracked that level in October. “Even if we see a successful auction, it doesn’t mean anything, because at rates above 7 percent it’s not sustainable,” said Ioannis Sokos, a strategist at BNP Paribas SA in London. “It is inevitable that Portugal has to turn to the EU and IMF if they keep borrowing at these levels.”
• Alaska Pipeline Operator Builds Bypass to Restore Oil Production.
• Australian Flood Deaths May Rise as Waters Head to Brisbane. The death toll from the latest downpour to hit the Australian state of Queensland is set to climb as rising waters rush toward the coastal city of Brisbane, where evacuations are underway. Four children were killed as a wall of brown water cascaded through the town of Toowoomba without warning yesterday, slamming cars against bridges. With about 72 people still missing, the number of dead may rise “dramatically” from eight, Queensland Premier Anna Bligh said at a news conference today. “We hold very grave concerns for a number of these people,” Bligh said. “We are anxiously worrying that we will see this toll rise.”

Wall Street Journal:

• Feds Depict Deliberate Plot. Federal prosecutors are assembling a case against suspected killer Jared Lee Loughner that portrays him as a man with psychological problems who was nonetheless competent enough to plot an assassination.
• Fed's Fisher Sees No Extension of Bond Buys. The Federal Reserve is unlikely to extend its plan to buy $600 billion in Treasury bonds, said Dallas Fed President Richard Fisher, who this month joins the central bank's policy-making committee as a voting member. In an interview Monday with Dow Jones Newswires and The Wall Street Journal, Mr. Fisher—an early opponent of the Fed's plan to buy billions of dollars in Treasury debt by this summer—said he expects the program "to be carried through" to its planned end but not beyond. "I wouldn't be personally terribly keen on that idea given what I'm seeing in the economy now," he said. Growth this year should be better than in 2010, amid gathering momentum and a "slow haul" adding new jobs. "We have a better tone to the economy," Mr. Fisher said. Mr. Fisher, who has led the Dallas Fed since 2005, has been a vocal skeptic about the need for the bond purchases. Last year, he blamed much of the U.S. economy's lack of vigor on uncertainty about legislative overhauls of the financial oversight system and health care. He said Monday that he doubted that new monetary-policy action could do much more for the economy. Instead, Mr. Fisher said, further economic progress will have to come from the government. "I do think the new congress is very important, and what fiscal policy does now, to me, is going to be the determinant of business confidence in the future," and in turn the power of the recovery, he said. "I think monetary policy has done a great deal, and it's now in the hands of the fiscal authorities and the regulatory authorities," he said, explaining that the Fed's role is limited in part because "right now there is a lot of liquidity in the markets. I don't hear corporations complaining about the cost of capital or lack of access to capital." He noted that the recent rise in bond yields appears to be in part driven by investors' improved economic outlooks, and said that even with the higher borrowing costs, 10-year Treasury yields remained "cheap" by historical standards.
• Harbinger Investment Officer to Launch Own Hedge Fund. A top investment executive at Harbinger Capital Partners left the hedge-fund firm and plans to launch his own fund, he said. Lawrence M. Clark Jr., who resigned Friday, was a senior analyst who reported directly to Harbinger founder Philip Falcone and had been a Harbinger partner since 2005.
• Goldman(GS) Opens Up to Molify Its Critics. Goldman Sachs Group Inc., seeking to beat back criticism that it abused its muscle and trading savvy to put its own interests ahead of clients, agreed to release details on how and where the Wall Street giant makes its money. In a 63-page report set to be released Tuesday, Goldman says that for the first time in its 142-year-history, it will start disclosing how much revenue comes from the firm's own trading and investing, according to a copy of the report reviewed by The Wall Street Journal.
• Spill Panel Pushes Liability Cap. Congress should raise the cap on oil companies' liability for offshore spills and improve the U.S. Coast Guard's ability to respond to spills in the Arctic, a presidential panel is set to conclude Tuesday. The panel's report, which could influence federal policy on offshore drilling, is also expected to recommend that as much as 80% of fines paid by companies for Clean Water Act violations in connection with last spring's Deepwater Horizon accident go toward funding the long-term restoration of the Gulf Coast's ecosystem, according to people familiar with the report.
• Study Recommends Installing Air Bags on Private Planes. Federal air-safety investigators on Tuesday are slated to issue the first formal government nonbinding recommendations for installing air bags to save lives in private-plane accidents.
• GM(GM) Again Sees Need for GMAC. General Motors Co. is revisiting the idea of buying back part of its former GMAC auto loan business, half a year after it acquired a subprime loan company to help fill the role of an in-house lender, according to three people familiar with the situation. GM executives are weighing the idea of a new approach to Ally Financial, the renamed GMAC, to give the auto maker's dealers better access to wholesale credit.
• Human Genome(HGSI) Sets Lupus Drug Sales Goal. Chief Executive Tom Watkins said Monday that Human Genome Sciences Inc. expects its yet-to-be-approved Lupus drug Benlysta to help generate "multi-billion dollar annual revenues" for the company by 2015.
• Citi(C) Prepares Tranche Market for Muni Bond Derivatives. Citigroup (C) is planning to start quoting derivatives on different slices of the MCDX, a derivatives index tracking 50 municipal issuers. The move would allow investors to hedge or speculate on the likelihood of municipal defaults in a new way, by taking on the risk of a wave of losses in the underlying portfolio in return for a high premium, or by betting on the relative value between the loss scenarios, or "tranches," in the structure.
• Downturn's Ugly Trademark: Steep, Lasting Drop in Wages. In California, former auto worker Maria Gregg was out of work five months last year before landing a new job—at a nearly 20% pay cut. In Massachusetts, Kevin Cronan, who lost his $150,000-a-year job as a money manager in early 2009, is now frothing cappuccinos at a Starbucks for $8.85 an hour. In Wisconsin, Dale Szabo, a former manufacturing manager with two master's degrees, has been searching years for a job comparable to the one he lost in 2003. He's now a school janitor. They are among the lucky. There are 14.5 million people on the unemployment rolls, including 6.4 million who have been jobless for more than six months.
• Abortion Rate Rises After a Long Decline.
  

Business Insider:

• A Quick Look at the Emerging Market Inflation That's Panicking Investors Worldwide.

Zero Hedge:

• Hedge Fund Position Update. (graphs) In her weekly HF positional analysis, BofA' Mary Ann Bartels (whose recent technical prediitions did not quite pan out) finds that Long Short hedge fund exposure has declined from 25% to 18% as of January 10, well below the 40% average, market neutrals are -3% net short (explaining the ongoing bloodbath in the space), and that macro HFs are long commodities and short US equities and 10 year Treasuries. All in all, exposure continues to be below average bullish levels, yet the market continues to go up. Cue in TrimTabs and let them answer just how is doing the buying. On Long-Short exposures:

Forbes:

• Score One For David Einhorn, St. Joe(JOE) Receives SEC Inquiry. Back in October noted short-seller David Einhorn, the manager of hedge fund Greenlight Capital, laid out his case for shorting the stock of Florida real estate developer St. Joe Company. His case hinged on the belief that St. Joe is not accurately accounting for the value of its assets, and now it appears the SEC is taking a look at that very possibility.

Yahoo News:

• Steve Jobs to Join Murdoch on Stage to Unveil iPad Paper. Rupert Murdoch will unveil News Corp.'s much-anticipated iPad newspaper onstage this month with Apple chief executive Steve Jobs, The Cutline has learned. The two media moguls will appear together at the San Francisco Museum of Modern Art, according to a source familiar with preparations for the event. The launch date is expected to be Jan. 19, but that may change. Known as The Daily, Murdoch's iPad publication has been the talk of the media world over the past couple months, and the News Corp. chief has even dubbed it his "No. 1 most exciting project."

LA Times:

• Business Would Feel the Sting of Brown's Budget Proposals. The governor wants to close a $25-billion gap in California's spending plan partly by eliminating redevelopment agencies and enterprise zones and ending a new corporate tax break.
• 3 Accused Bell Officials Want Cash-Strapped City to Pay Their Legal Bills. Three present and former Bell City Council members charged with public corruption are asking a judge to order the city to pay some of their legal bills.

Politico:

• Critical Moments Are Still Ahead for Gabrielle Giffords.

Reuters:

• China Overshoots Loan Target, More Tightening to Come.
• Alcoa(AA) Posts Q4 Profit, Sees 12% Aluminum Growth. Alcoa Inc (AA), the largest U.S. aluminum producer, reported a fourth-quarter profit on Monday and projected a 12-percent rise in demand for the metal in 2011, driven by aerospace and auto manufacturing. But Alcoa shares, which hit a 12-month high last week, dropped 1.3 percent to $16.24 in after-hours trade on the New York Stock Exchange, with some analysts questioning whether the company's bullish forecast was realistic. Others suggested some profit-taking by investors.
• Apollo Group(APOL) Q1 Tops; Sees Further Drop in Enrollments. Apollo Group's (APOL) quarterly results blew past expectations on higher tuition fee, but the largest U.S. for-profit education company spelt out a tough year as it expects a further fall in enrollments. Apollo's shares, which rallied 12 percent after the bell, lost most of their gains on the company's warning.

South China Morning Post:

• Rising Costs May Push Toymakers Out of China.

Evening Recommendations
Deutsche Bank:

• Raised (WERN) to Buy, target $31.
• Raised (LSTR) to Buy, target $53.
  

Night Trading

• Asian equity indices are -.50% to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 113.0 +2.0 basis points.
  
• Asia Pacific Sovereign CDS Index 115.0 +4.75 basis points.
  
• S&P 500 futures +.11%.
  
• NASDAQ 100 futures +.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LEN)/.00
• (SVU)/.31
• (FUL).39

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for December is estimated to rise to 94.5 versus a reading of 93.2 in November.
  

10:00 am EST

• Wholesale Inventories for November are estimated to rise +1.0% versus a +1.9% gain in October..

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Plosser speaking, Fed's Kocherlakota speaking, weekly retail sales reports, JOLTs Job Openings for November, weekly ABC consumer confidence index, $32 Billion 3-Year Treasury Notes Auction, $22 Billion 1-Year Treasury Bills auction, the Needham Growth Conference, Goldman Sachs Energy Conference, Kaufman Brothers Tech Conference and the Deutsche Bank Auto Industry Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and technology 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.