Friday Watch

Evening Headlines

Bloomberg:

• Italy Yields Drive Record Central Bank Financing. Italy’s highest bond yields since the birth of the euro are reverberating through the financial system of Europe’s biggest debt issuer, driving lenders to seek record amounts of central bank financing. Italian banks borrowed 111.3 billion euros ($152 billion) from the European Central Bank at the end of October, up from 104.7 billion euros in September and 41.3 billion euros in June, Bank of Italy data show. The five biggest lenders -- UniCredit SpA (UCG), Intesa Sanpaolo, Banca Monte dei Paschi di Siena SpA, Banco Popolare SC and UBI Banca ScpA -- accounted for 61 percent of the country’s use of ECB resources in September, almost double the share in January. After punishing Greece, Ireland and Portugal for their rising debt loads, the bond market is now targeting Italy, pushing bonds yields in the euro zone’s third-largest economy above 7 percent as the nation’s lenders prepare to refinance $120 billion of debt maturing next year. Italy’s $2 trillion in liabilities exceed those three countries combined, plus Spain. “The banks are deleveraging on a tightrope,” Alberto Gallo, a credit strategist at Royal Bank of Scotland Group Plc (RBS) in London, said in an interview. The slump in Italy’s bonds, which sent the 10-year yield soaring to as high as 7.48 percent Nov. 9, is reducing the value of fixed-income securities held by banks, eroding their value as collateral for loans, Gallo said. Bond investors charged the nation an interest rate of 6.087 percent yesterday to buy 5 billion euros of one-year bills, the highest in 14 years. Greece, Ireland and Portugal sought a bailout from the ECB, the European Union and the International Monetary Fund after their bond yields rose above 7 percent amid the region’s sovereign debt crisis. As Italy’s government faces collapse after Prime Minister Silvio Berlusconi promised to resign once Parliament approves austerity measures, deputy finance ministers meeting at the Asia-Pacific Economic Cooperation forum in Hawaii this week expressed concern over the danger Europe poses to the world economy. The extra yield investors demand to hold Italian 10-year debt rather than German bunds rose to a euro-era record 5.53 percentage points on Nov. 9 before falling back to 5.12 percentage points. Italy’s top 32 banking firms have about 88 billion euros, or 3.2 percent of their liabilities, maturing in 2012, according to the Bank of Italy. Next year’s maturities coincide with about 307 billion euros of the government’s debt coming due, the most ever, according to data compiled by Bloomberg. Italian banks’ share of ECB lending rose to about 19 percent of the total in October, according to the Bank of Italy. That’s up from 15 percent, or 91 billion euros, in September, the data show. “The Italian banks are trapped,” said Roger Doig, a London-based analyst at Schroders Plc, which manages about $58 billion in fixed-income assets. “They are where they are and that’s with the Italian sovereign. The austerity required if the sovereign wants to remain in the euro zone means there’s going to be a recession, which will mean losses for the banks.” Credit-default swaps tied to the senior debt of UniCredit, a proxy for the cost of funding at Italy’s biggest lender, jumped 150 basis points this month to 502 basis points, approaching the record 504 reached in September. Contracts on Intesa Sanpaolo, the second-largest, jumped 129 to 467, also close to an all-time high, according to CMA in London. Five-year contracts on Italy were little changed at a record 570 basis points, up from 239 at the beginning of the year, according to CMA.
  
• Merkel's Greek Strategy Risks Backfiring as Euro's Exit Routes Are Mapped. Germany and France’s drive to force Greece to honor its euro commitments risks backfiring on Chancellor Angela Merkel and President Nicolas Sarkozy. A week after the currency’s guardians declared for the first time that countries can be ejected from the 17-nation bloc, U.S. stocks tumbled on concern German politicians are already creating exit chutes for the weakest members. The sell-off suggests Europe’s crisis is spiraling into a new stage as investors bet on which countries are most likely to quit the euro, starting with Greece. The risk is that this will make it harder for debt-laden countries to convince investors they can get their finances in order and for policy makers such as Merkel, Sarkozy and European Central Bank President Mario Draghi to bolster the euro’s defenses. “This is a dangerous phase,” Neil MacKinnon, global macro strategist at VTB Capital in London and a former U.K. Treasury official, told Bloomberg Television’s “On the Move” with Francine Lacqua yesterday. “All of a sudden, we’re talking about the future of monetary union in its current format.”
• Europe's Small Businesses Seek Exports - Fast. Small-to-midsize enterprises struggle with high costs and little domestic demand. The small-to-midsize enterprises of Europe’s periphery—Ireland, Spain, Greece, Portugal, and Italy—have their backs to the wall. Their domestic markets are tanking.
• Greek Unity Government Led by Lucas Papademos Will Seek to Avoid Collapse. The new Greek unity government led by Lucas Papademos, former vice president of the European Central Bank, will face the task of securing funds to avert the country’s economic collapse. President Karolos Papoulias gave Papademos the mandate to form a government after receiving proposals from Prime Minister George Papandreou, Antonis Samaras, leader of the opposition New Democracy party, and opposition LAOS party leader George Karatzaferis, according to an e-mailed statement from the president’s office in Athens. The new government will be sworn in today at 2 p.m. “I am not a politician but I have dedicated the biggest part of my professional life to economic policy both in Greece and Europe,” Papademos told reporters after being named. “The Greek economy still faces huge problems despite the huge efforts that have been made for fiscal consolidation and to improve competitiveness. Greece is at a critical crossroads.”
• Panetta Says Attack on Iran Would Only Delay Nuclear Program. U.S. Defense Secretary Leon Panetta said an attack on Iran’s nuclear facilities might delay its alleged nuclear weapons program by only up to three years and he warned of “unintended consequences.” While a military option must be kept available, it might not result in “really deterring Iran from what they want to do,” he said. “You’ve got to be careful of unintended consequences here,” Panetta said at a Pentagon press conference. “It could have a serious impact in the region and it could have a serious impact on U.S. forces in the region,” he said of a hypothetical U.S. military strike.
• MF Global(MF) Missing Funds May Be 'Massive' Ploy, Chilton Says. The $593 million shortfall in client money at MF Global Holdings Ltd., the broker that filed for bankruptcy on Oct. 31, appears to result from a "massive hide- and-seek ploy," Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, said today. The agency took the rare step of publicly announcing its investigation, which began on Oct. 31, saying it was in the public interest to confirm the enforcement action. Jill E. Sommers was named as the senior commissioner during the probe, after Gary Gensler, the agency's chairman, recused himself. "This isn't just a lost and found inquiry; it's a full-on effort to get to the bottom of what appears to be a massive hide-and-seek ploy," Chilton, a Democrat, said in an e-mail. "It's a distinct possibility, some would say probability, that somebody has done something with the money, and that it's not going to be 'all of a sudden discovered' with an innocent explanation," Chilton said. "If that's the case, it's patently illegal. I don't know yet. Our investigation will uncover that, and we're aggressively pursuing this." Gensler recused himself from the investigation because of his history with Jon S. Corzine, the former head of MF Global. Gensler worked with Corzine at Goldman Sachs Group Inc. and during his time as a Senate aide, while Corzine represented New Jersey as a U.S. senator.
• Gold Traders Most Bullish Since '04 on Debt Crisis: Commodities. Gold traders and analysts are the most bullish in at least seven years as investors accumulate metal at the fastest pace since August to protect their wealth from a widening European debt crisis. Twenty-one of 22 surveyed by Bloomberg expect bullion to rise on the Comex in New York next week, the third consecutive increase and the highest proportion in data going back to April 2004. Holdings in exchange-traded products backed by gold rose 25.4 metric tons this week, within 1 percent of the record set almost three months ago, data compiled by Bloomberg show. Gold exceeded $1,800 an ounce for the first time in seven weeks on Nov. 8 and hedge funds are holding their biggest bet on higher prices since mid-September, Commodity Futures Trading Commission data show.
• Harvard's Walkout Students Misunderstand Economics: Amity Shlaes. What’s wrong with Ec 10? The dozens of Harvard University undergrads who walked out of the school’s famous introductory economics course this month think they know. The students’ general criticism is that Ec 10, in which some 700 students are enrolled, “espouses a specific -- and limited -- view of economics.” Their specific criticisms are that economics as taught in this class, formally called Economics 10, failed to prevent the financial crisis and does nothing to narrow the gap between rich and poor.
• JPMorgan Grabs Europe Loan Share as French Waver: Credit Markets. U.S. banks led by JPMorgan Chase & Co. and Citigroup Inc. are boosting their share of loan underwriting in Europe to the highest since 2007 as French lenders' dominance ebbs amid the region's expanding debt crisis. The Wall Street banks captured 10 percent of the $860 billion of loans arranged this year, up from 8 percent in 2010. BNP Paribas SA, Credit Agricole SA and Societe Generale SA have 15 percent of the market, the least since 2006 and down from 16.5 percent a year ago, according to data compiled by Bloomberg. BNP Paribas and Credit Agricole remain the top two lenders. Societe Generale slipped back to its No. 6 ranking of 2009. “The trend of U.S. banks taking market share from the French banks has started and will probably continue as U.S. lenders are in a better situation now having addressed their problems from 2007 and 2008, whereas French banks are facing the need to adapt,” said Elisabeth Grandin, a director in Standard & Poor's European financial services group in Paris.

Wall Street Journal:

• New Group in NY Says 'Hydrofracking' Can Be Safe. A new coalition of New York business groups, landowners and construction companies is weighing in on the controversy over hydraulic fracturing of gas wells in the Marcellus Shale formation. Clean Growth Now says it's a grass-roots group that hopes to strike a middle ground for safe, responsible drilling in the Southern Tier. The group says it will be a moderate voice between the gas industry and environmentalists who oppose "hydrofracking." The group's leaders say Thursday they fear the polarization could lead to the upstate economy missing out on the boom they see in northern Pennsylvania. The group of 16 organizations includes the Associated Builders and Contractors, the state Business Council and the Greater Binghamton Chamber of Commerce.
• U.S. Plans Bomb Sales in Gulf to Counter Iran. The Obama administration has quietly drawn up plans to provide a key Persian Gulf ally with thousands of advanced "bunker-buster" bombs and other munitions, part of a stepped-up U.S. effort to build a regional coalition to counter Iran. The proposed sale to the United Arab Emirates would vastly expand the existing capabilities of the country's air force to target fixed structures, which could include bunkers and tunnels—the kind of installations where Iran is believed to be developing weapons.
• Risk Rises for Housing Agency. Concerns are rising that the Federal Housing Administration could run out money if the economy doesn't recover soon, raising the risk the agency would seek a taxpayer bailout for the first time in its 77-year history. Since the mortgage crisis erupted five years ago, the FHA has played a critical role in housing finance as private lenders retreated. It backs about a third of all new mortgages originated for home purchases, up from around 5% in 2006.
• If Iran Gets the Bomb. The world immediately becomes a far more dangerous place.

Business Insider:

• Morgan Stanley: A Super-Committee Failure Could Trigger Another S&P Downgrade.
• Congratulations Occupy Wall Street. You're Officially Making Companies Scared.
• The Privatization Of Britain's National Health Service Has Begun.

Zero Hedge:

• Fed Opens New FX Swap Line With Bank Of Japan; Second After ECB.
• Italian Banks Are 'Free'-To-Trade As Short-Sale-Ban Is Not Extended.
  

CNBC:

• Ties to Oil World Hit Emerging Markets. As the eurozone crisis spreads from Greece to Italy, countries far afield are being sucked into the maelstrom. The world’s emerging markets, which led the way out of global recession in 2009, are now suffering because of their ties to the Old Continent. And they may not be as well placed as three years ago to again help pull the world back from the brink.
• Disney(DIS) Beats Earnings Forecast; Shares Rise Slightly. Walt Disney topped analysts' expectations for its quarterly profit and revenue on Thursday as advertising held strong at its ESPN sports channel and other media networks, sending shares higher after the closing bell.

NY Times:

• In MF Global's(MF) Wake, Regulators to Audit All Futures Firms. Federal regulators have ordered an audit of every American futures trading firm to verify that customer money is protected, a move that comes after roughly $600 million in client funds went missing from MF Global, the bankrupt brokerage firm once run by Jon S. Corzine.

Seeking Alpha:

• 16 Retail Stocks Bought Up By Hedge Funds.

Fox News:

• Perry's Performance Opens Door Wider For Gingrich.

USA Today:

• Traditional Turkey Dinner Costs 13% More Than A Year Ago.

Reuters:

• EFSF's Regling Says Market Turmoil May Affect Rescue Fund - FT. The head of the euro zone's rescue fund Klaus Regling believes this week's market upheaval in Europe has made it difficult to increase the bloc's 440 billion euro bailout fund to 1,000 billion, the Financial Times reported on Friday. Euro zone countries had hoped to leverage the European financial stability facility fund by December, but that possibility has been reduced by the problems in the bloc this week, the newspaper paraphrased Regling as saying. Investors have fled from bonds issued by highly indebted countries and luring them back by offering insurance on losses, the centrepiece of a plan agreed in Brussels on October 26, would now probably use up more of the fund's resources, the article cites Regling as saying. "The political turmoil that we saw in the last 10 days probably reduces the potential for leverage. It was always ambitious to have that number, but I'm not ruling it out," he is quoted as saying. Regling said, according to the article, that heightened investor skittishness meant the guarantees would now have to be bigger in order to convince investors to participate, meaning the fund was likely to have only three to four times the firepower. "At least for a while, maybe the leverage is less than what we hoped three weeks ago. My expectation is it will get better because we do have a new government in Greece, and that helps."
• INSIGHT - China's Cash For Commodities Gamble Heightens Property Threat. Sitting in China's copper and steel warehouses is a hidden risk to the world's second-largest economy -- banks' indirect exposure to a property market that is showing signs of stress. Since late 2010, Chinese entrepreneurs and state firms have used trade loans to import goods such as copper and soybeans, which they have then quickly sold or used as collateral for further loans, skirting government credit curbs. Many lent that cash in informal markets, earning as much as 70 percent interest -- a nice return given that bank fees and commissions on letters of credit (LC) can be as low as 3 percent for established companies, and allow payment some six months down the line. With a chunk of their loans business in lockdown after Beijing clamped down on lending, especially for the property sector, banks found such trade financing an attractive alternative as it had not fallen under the central bank's ever-tightening restrictions. While Beijing has moved to clamp down on the practice, banks are still exposed to an unexpected batch of bad loans should a slump in property prices and sales coincide with another sharp fall in commodity prices. "Banks are already heavily exposed to the property sector and if a chunk of their trade finance books is also exposed to real estate, they could be in for a double whammy," said Stanley Li, China banking analyst at Mirae Assets. "The end-game may be very nasty if higher financing costs, a property price correction and a slump in commodity prices trigger waves of defaults," said Li, who has researched extensively into the risk of this cash-for-commodity phenomenon in China.
• Molycorp(MCP) Q3 Profit Soars, Misses Estimates. Molycorp swung to a third-quarter profit on Thursday as it sold more rare earth product at a higher average price, but the company missed analysts' estimates and shares were down in aftermarket trade. Shares were down 9.3 percent at $35.10 in aftermarket trade on Thursday on the New York Stock Exchange.

Financial Times:

• Pirelli Chairman Marco Tronchetti Provera said the tire producer is preparing a worst-case contingency plan for the possibility that the euro-area crisis will trigger a drop in global car sales of 10% and in truck sales of 20%, citing an interview. Pirelli is also preparing for the eventual further consolidation of trading blocs and protectionist measures should there be "a slowdown and a severe slowdown linked to the crisis," Tronchetti Provera said.
• US Officials Consider Options On Mortgages. US policymakers are considering ways to buy troubled government-guaranteed mortgages from a new refinancing programme in case investors balk, according to people familiar with the matter.

Telegraph:

• The Euro Is Being Held Together Only By Fear. There has been a lot of "thinking the unthinkable" over the past week. If the euro is ultimately unsustainable, why not just face up to reality and let this grand exercise in political hubris go? Would the consequences really be quite as bad as conventional analysis makes out? These questions need deconstructing.
• New Recession Threatens the Globe as Debt Crisis Grows. Europe's escalating debt crisis has cast a black shadow over the world's fragile recovery, threatening to tip large parts of the global economy into a deep downturn and even outright recession. The OECD's index of leading indicators for China, India, Brazil, Canada, Britain and the eurozone have all tipped below the warning line of 100, with the pace of the decline in Europe exceeding the onset of the Great Contraction in early 2008.

Ansa:

• Italian Prime Minister Silvio Berlusconi said during a meeting with lawmakers from his People of Liberty part last night that they "must meet again to decide" on their position about a new government. The meeting "will be on Sunday night or Monday, citing Senator Sergio Di Gregorio speaking as he was leaving the senate. The People of Liberty party mustn't allow itself to be "influenced" or have terms "dictated" to it by others, Berlusconi said during the meeting. The party could suggest a candidate of its own, such as former Italian prime minister, Lamberto Dini, Berlusconi said.

cbcnews:

• Alberta Posts Oilsands Information Online. The Alberta government opened an online oilsands site which posts information on everything from greenhouse gas emissions to oil production to land disturbance — in one place, for free.
  

South China Morning Post:

• China Advised to Reduce or Scrap Electric-Car Subsidies. National Energy Advisory Committee Vice Chairman Zhou Dadi said the technology hasn't reached maturity and consumers aren't yet interested.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 204.50 -11.0 basis points.
  
• Asia Pacific Sovereign CDS Index 151.75 -3.5 basis points.
• FTSE-100 futures +.91%.
  
• S&P 500 futures +.61%.
  
• NASDAQ 100 futures +.71%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DHI)/.14

Economic Releases
9:55 am EST

• Preliminary Univ. of Mich. Consumer Confidence for November is estimated to rise to 61.5 versus 60.9 in October.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Yellen speaking, Fed's Williams speaking, ECB's Gonzalez-Paramo speaking, (NTCT) Investor Day and the (KBR) Investor Day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity 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 50% net long heading into the day.