Tuesday Watch

Evening Headlines

Bloomberg:

• MF Global(MF) Told SEC, CFTC of Potential 'Deficiencies' in Customer Accounts. MF Global Holdings Ltd. (MF) told U.S. regulators this morning there were potential “deficiencies” in some customer accounts, according to a joint statement from the Securities and Exchange Commission and the Commodity Futures Trading Commission. Federal regulators have found that hundreds of millions of dollars have recently gone missing from MF Global, prompting an investigation, the New York Times reported today on its website, citing several unidentified people briefed on the matter. The discovery of the missing funds, now numbering less than $700 million, scuttled MF Global's effort to sell a part of the firm to another brokerage, the Times reported. The regulators are probing whether MF Global diverted some customer money to support the firm's trades, the paper said. “For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global Inc., a jointly registered futures commission merchant and broker- dealer, in anticipation of a transaction that would include the transfer of customer accounts to another firm,” the regulators said in the e-mailed statement. “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.” The regulators said they determined that a bankruptcy proceeding “would be the safest and most prudent course of action to protect customer accounts.” Diana DeSocio, an MF Global spokeswoman in New York, didn't immediately reply to a phone call and an e-mail from Bloomberg News requesting comment. MF Global Holdings, the holding company for the broker- dealer run by ex-Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy protection today as it seeks to reorganize after making bets on European sovereign debt. Its broker-dealer unit, MF Global Inc., faces liquidation.
  
• Britain's Economy May Struggle to Grow as BOE Faces Threat of Recession. Britain’s economic recovery will continue to falter in the current quarter after it struggled to build momentum in the previous three months, economists said. Gross domestic product rose 0.3 percent in third quarter compared with a 0.1 percent increase in the second quarter, according to the median of 36 forecasts in a Bloomberg News survey. The Office for National Statistics will publish the data at 9:30 a.m. in London. Manufacturing probably stagnated in October and services growth slowed, according to separate surveys of economists before reports this week.
• Iron-Ire Collapse Seen Ending Most Profitable Shipping in a Year: Freight. Steelmaker demand for iron ore, the biggest source of cargoes for commodity carriers, is weakening, threatening to end the most profitable shipping rates in almost a year. Ore stockpiles at ports in China, the largest user, already expanded to within 3.6 percent of a record, according to Antaike Information Development, a Beijing-based researcher. Chinese steelmaking is near the least profitable in almost three years, data compiled by Bloomberg Industries show. Iron-ore swaps, traded by brokers and used to bet on future costs, show no price rebound until at least 2013, according to Clarkson Securities Ltd., a unit of the world’s biggest shipbroker. ArcelorMittal, the world’s biggest steelmaker, and Angang Steel Co. are among producers that idled furnaces as slowing global growth drove benchmark prices for the metal down 15 percent since March. For capesizes, vessels hauling about 80 percent of seaborne iron ore, that means a 40 percent drop in rates in the next quarter, according to Pareto Securities AS. “The decline we have seen in both iron-ore and steel prices is a sign of slower demand in China,” said Martin Korsvold, an analyst at Pareto Securities in Oslo, whose recommendations on shipping companies have returned 13 percent in the past year. “It’s a very stark indicator of what’s going to happen for capesizes.” Benchmark iron-ore prices at the Chinese port of Tianjin fell 35 percent to $118.40 a metric ton since Sept. 7, according to The Steel Index Ltd., which publishes data on the cost of steel, ore and scrap metal.
• U.S. Raises Borrowing Estimates on Spending, Lower Revenue. The U.S. Treasury Department raised its estimate for fourth-quarter government borrowing by $21 billion to $305 billion, reflecting in part lower revenue and higher spending. The estimates set the stage for the Treasury’s quarterly refunding announcement later this week. Officials on Nov. 2 will reveal their plans for sales of longer-term notes and bonds during the current quarter. “The increase in borrowing relates to lower receipts, higher outlays and changes in the cash balance assumptions partially offset by higher net issuances of state and local government series securities,” the Treasury said in a statement today in Washington, revising upward the fourth-quarter projection of about $285 billion made three months ago. U.S. Treasury officials also project borrowing of $541 billion from January through March of next year. That projection is the highest since the October-to-December 2008 period.
• Selling More Insurance on Europe Debt Raises Risk for U.S. Banks. U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults. Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show. The payout risks are higher than what JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc., the leading CDS underwriters in the U.S., report. The banks say their net positions are smaller because they purchase swaps to offset ones they're selling to other companies. With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren't being reduced, said Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc. “Risk isn't going to evaporate through these trades,” Cannon said. “The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who's ultimately going to pay for the losses?”

Wall Street Journal:

• Price of Foreclosure Settlement Climbs Higher. The price tag to settle the state and federal investigation of bank foreclosure practices has increased by at least $5 billion in recent weeks, people familiar with the negotiations say. The proposal on the table now puts a $25 billion value on a settlement by the nation's five largest mortgage servicing companies—Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. In exchange for picking up a bigger tab, banks would be released from certain legal claims tied to mortgage originations. Representatives of the five banks declined to comment.
• A Slow-Growth America Can't Lead the World by John B. Taylor.
  

MarketWatch:

• Australia's RBA Cuts Key Cash Rate to 4.5%.
• South Korea Inflation Set to Accelerate.
  

Business Insider:

• Inside Groupon: The Truth About The World's Most Controversial Company.

Zero Hedge:

• China Manufacturing PMI Drops to 32-Month Low. (graph)

CNBC:

• No Inflation? Fed Calls Food, Energy Gains 'Temporary' Despite 24-Year Rise.
• Deficit Super Committee a 'Charade': Ken Langone.
  

Reuters:

• MF Global(MF) Slow to Turn Over Data to Regulators - Source. U.S. regulators are unhappy with the failure of MF Global Holdings Ltd to provide them with the required data and records, a source close to one regulator told Reuters on Monday. "So far they've been very disappointed with the cooperation in the fulsomeness of records and data from MF," the source said, noting regulators have been working with the firm since late last week. "They were supposed to be able to show us their books and they're supposed to be able to tell us what's what and where their customer funds are and how they've been segregated and protected and to date we don't have the information that we should have," the individual told Reuters.

Telegraph:

• Italy, Europe, and Red Brigade Terror. Those of us in Anglo-Saxon cultures may find it remarkable that Italy still has laws that make it extremely hard for companies to lay off workers when needed. It is clearly a reason why the country has struggled to adapt to the challenge of China, rising Asia, and Eastern Europe. But that is not the point. Are such changes to be decided by Italy’s elected parliament by proper process, or be pushed through by foreign dictate when the country is on its knees? “Political ownership” is of critical importance. The EU is crossing lines everywhere, forgetting that it remains no more than a treaty organization of sovereign states. Democratic accountability is breaking down. This is dangerous. It is only a question of time before the EU itself becomes the target of terrorist attacks in a string of countries, and then what? Will the Project start to demand coercive powers? Will it acquire them? Eurosceptics have been vindicated. They warned from the start that EMU was a dysfunctional under-taking and that in order to stop it leading to calamitous failure, there would have to be ever deeper intrusions into the affairs of each state and society. This is now happening at a galloping pace. We really will end up an authoritarian supra-national octopus if this goes on much longer.
• Greece to Hold Referendum on EU Debt Deal. Greece is to hold a referendum on whether to accept the rescue package from the European Commission, European Central Bank and International Monetary Fund troika.
• Italy's Crisis Deepens on Eurozone Slump, Bail-Out Doubts. Italy's borrowing costs have once again surged to danger levels amid growing doubts over the viability of Europe's bail-out machinery, dashing hopes that last week's summit deal would at last contain the crisis.

Financial Times Deutschland:

• G-20 countries plan to bring so-called shadow-banking activities by hedge funds under the supervision of a financial regulator, citing people close to the German government.

South China Morning Post:

• Chinese Shipyards Receive Lowest Orders Since 2006. September new orders 940K deadweight metric tons, least since June 2006, citing the National Development and Reform Commission. As of Sept. 30, 30% of the nation's yards hadn't received orders. 9M orders drop 43% on year to 29M dwt. Sept. ship completions jump 67% m/m to 7.86m dwt.

21st Century Business Herald:

• Chinese provinces including Henan, Hainan, Guangxi and Sichuan have reduced the number of affordable housing units that they'll build next year because of a cash shortage.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.25% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 183.0 +12.0 basis points.
  
• Asia Pacific Sovereign CDS Index 149.50 +3.5 basis points.
• FTSE-100 futures -1.31%.
  
• S&P 500 futures -.68%.
  
• NASDAQ 100 futures -.50%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FSS)/.08
• (VSH)/.34
• (MLM)/1.09
• (RDC)/.38
• (OSG)/-2.37
• (DTG)/1.99
• (CKP)/.29
• (IT)/.29
• (MRO)/.84
• (COCO)/-.02
• (HCA)/.43
• (AMT)/.25
• (ABC)/.56
• (BHI)/1.22
• (EMR)/.96
• (CME)/4.69
• (OSK)/.32
• (PFE)/.55
• (ADM)/.66
• (JDSU)/.13
• (WMB)/.42
• (VLO)/1.95
• (CF)/4.93
• (HTZ)/.50
• (PBI)/.53
• (OPEN)/.30
• (DISCA)/.55
• (IPGP)/.64
• (ED)/1.33
  

Economic Releases
10:00 am EST

• Construction Spending for September is estimated to rise +.3% versus a +1.4% gain in August.
• ISM Manufacturing for October is estimated to rise to 52.0 versus a reading of 51.6 in September.
• ISM Prices Paid for October is estimated to fall to 55.0 versus 56.0 in September.
  

Afternoon

• Total Vehicle Sales for October are estimated to rise to 13.2M versus 13.04M in September.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports and the Needham Communications Conference 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 lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.