Tuesday Watch

Evening Headlines

Bloomberg:

• France's AAA Status in Tatters as Yields Surge: Euro Credit. Investors aren't waiting for Standard & Poor's or Moody's Investors Service to strip France, Europe's second-biggest economy, of its top credit rating. The extra yield demanded to lend to AAA-rated France for 10 years was 154 basis points more than the German rate yesterday. The gap was 200 basis points on Nov. 17, the widest spread since 1990. The French 10-year yield is at 3.4 percent, about midway between top-rated Holland and Belgium, which is graded one level lower at Aa1 by Moody's. French borrowing costs are more than a percentage point above the AAA-rated U.K. "France isn't trading like a AAA," said Bill Blain, a strategist at Newedge Group in London, who recommends buying U.K. government debt. "The market has made its judgment already." The debt crisis that began more than two years ago in Greece and snared Ireland, Portugal, Italy and Spain is close to reaching France. Moody's said in a report published yesterday that any persistent increase in borrowing costs would amplify the French government's challenges as economic growth slows. President Nicolas Sarkozy has unveiled two sets of budget cuts since August to preserve the credit rating and try to calm jittery markets. Two-year yields on French debt have climbed 59 basis points to 1.7 percent since Sept. 1, while the rate on German bunds of similar maturity fell 24 points to 0.4 percent. "The market is concerned about the dissolution of the euro itself, hence only bunds are acting as a safe haven," said Richard McGuire, a fixed-income strategist at Rabo Bank International in London. Germany is the region's largest nation. French 10-year bond yields may climb above 5 percent, analysts at Credit Suisse Group AG said in a note to investors yesterday. Euro leaders must reach "a momentous deal" for fiscal and political union by mid-January to save the 17-nation bloc, Credit Suisse said in the report. Yield spreads have widened for the other AAA-rated euro- zone countries -- Austria, Finland, the Netherlands and Luxembourg -- bringing the crisis from the periphery to the so- called core. France has the biggest debt burden of the top-rated euro nations, at 85 percent of gross domestic product. Its financial institutions also have the largest debt holdings in the five crisis-hit countries, at 681 billion euros ($921 billion) as of June, according to data from the Bank for International Settlements in Basel. "France is not a AAA at all," said Nicola Marinelli, who oversees $150 million at Glendevon King Asset Management in London. "French banks are very exposed to euro-zone periphery. If they were to mark to market these loans at current levels, there would be huge losses."
• Euro to Drop as Investors Cease Repatriating Funds, Nomura's Nordvig Says. The euro will drop by the end of the year as the region’s sovereign-debt crisis deepens, pressuring investors who have buoyed the currency by repatriating assets to rethink their strategy, according to Nomura Holdings Inc. The 17-nation currency has traded at least 12 percent higher this month than its lifetime average as European investors brought home 65.9 billion euros ($89 billion) in August and 11.6 billion euros in September, higher than the 12-month average of 629 million euros in inflows, according to European Central Bank data compiled by Bloomberg. The inflows may not continue to be so strong as rising bond yields in Italy and Spain increase concern about contagion in the region and damp investor appetite for European assets, said Nomura’s Jens Nordvig, a managing director of currency research in New York. “You have to evaluate the strength and persistency of this repatriation trend,” Nordvig said in a telephone interview. “Given how the crisis is worsening on an almost daily basis, the pressure on the inflow side is going to be very persistent. Eventually that will win out, and we’ll see the euro lower.”
• Greece's Samaras Told to Stop Playing 'Political Games' to Ensure EU Aid. Antonis Samaras, head of Greece’s New Democracy party, was told by the president of the European Commission to quit playing “political games” and drop his refusal to pledge written support for Greek budget cuts as a condition for the next installment of international aid. “For the European Union and IMF to support, they need to be sure that this is for a sustainable effort,” commission President Jose Barroso said yesterday in a joint press conference with Greek Premier Lucas Papademos. “What we have to do now is to concentrate on implementation -- less politics and more commitment. It’s not just a sprint; it’s a marathon.”
• Spain Needs Euro Area Pact to Save Nation's Solvency, People's Party Says. Spain needs a euro-region accord to “save and guarantee the solvency” of its debt amid surging bond yields, said Maria Dolores de Cospedal, deputy leader of the People’s Party, which won the Nov. 20 general election. “Spain cannot continue financing itself at 7 percent,” Cospedal told reporters late yesterday after a meeting of the party’s executive committee in Madrid. “So an agreement through a joint euro-zone operational strategy to save and guarantee our sovereign debt has to come from the European institutions.” PP leader Mariano Rajoy, who won’t take office until the second half of next month, spoke to German Chancellor Angela Merkel yesterday. He told her that “those countries that meet their obligations and responsibilities must be helped by European institutions,” said Cospedal, who is also president of the region of Castilla-La Mancha. Spain’s 10-year borrowing costs rose to 6.553 percent yesterday after the PP, which campaigned on pledges to slash spending and overhaul the economy, won the biggest majority in three decades. In his acceptance speech, Rajoy warned Spaniards to brace for hard times, and said he hadn’t promised any “miracles.”
• U.S. Rating Affirmed by S&P, Moody's as Supercommittee Fails. Standard & Poor’s and Moody’s Investors Service said they won’t lower ratings on the U.S. after the congressional committee charged with finding $1.5 trillion of deficit cuts failed to reach an agreement. S&P, which stripped the U.S. of its top AAA grade on Aug. 5, said yesterday that the supercommittee’s inability to reach agreement didn’t merit another downgrade because the inaction will trigger $1.2 trillion in automatic spending cuts. The deliberations were “not decisive,” Moody’s spokesman Eduardo Barker said in an e-mail after the panel issued a statement. Fitch Ratings reiterated that the talks failure would likely lead to a revision of the U.S. rating outlook to negative.
• Wall Street Unoccupied With 200,000 Job Cuts. John Brady, co-head of MF Global Inc.’s Chicago office, was having a vodka cocktail at the Ritz- Carlton in Naples, Florida, overlooking the Gulf of Mexico, on the day his company reported its largest-ever quarterly loss. “Wow, the sun just set,” Brady said to his wife and two colleagues attending a conference with him, he recalled in an interview. “I hope it doesn’t set on MF Global.”
• Oil Trades Near One-Week Low on European Crisis Concern, U.S. Stockpiles. Oil traded near the lowest price in more than a week in New York as investors speculated that fuel demand may falter as economic growth in Europe stalls and supplies rise in the U.S. Futures were little changed after dropping for a third day yesterday. Growth in Germany, Europe’s largest economy, may slow next year, the Bundesbank said. A U.S. Energy Department report tomorrow may show oil and fuel supplies increased last week, according to a Bloomberg News survey. Saudi Arabian Oil Co. Chief Executive Officer Khalid Al-Falih said the world economy is at risk of a double-dip recession. “We think consumption in the U.S. is still very subdued,” said David Lennox, a resource analyst at Fat Prophets in Sydney, who previously forecast oil would trade from $85 to $95 a barrel. “Any economic slowdown in Europe impacts on crude demand. We see $80 being the floor.”
• Hewlett-Packard(HPQ) Forecast Misses Estimates Amid Slump. Hewlett-Packard Co. forecast first- quarter profit that missed analysts’ estimates, a sign that Chief Executive Officer Meg Whitman may struggle with the slump that led to the ouster of her predecessor, Leo Apotheker. Profit for the quarter ending in January will be 83 cents to 86 cents a share, excluding some items, the company said in a statement today. The average estimate of analysts surveyed by Bloomberg was for $1.11 a share. The profit forecast for 2012 also fell short of predictions.
• Oil-Tanker Rally Threatened as Ships Seen Accelerating: Freight. The biggest rebound in oil-tanker rates in almost two years is already being threatened by signs the surge may spur ships to speed up, increasing vessel supply and undermining the rally. The largest tankers cut their speed to an average of 10 knots in October, from 10.8 knots a year earlier, after eight months of unprofitable rates, data compiled by Bloomberg show. A one-knot change adjusts the fleet’s capacity by 5.8 percent, Oslo-based Arctic Securities ASA estimates. Shares of Frontline Ltd., the biggest operator of the ships, jumped 19 percent in the past two weeks as tanker earnings approached break even.

Wall Street Journal:

• Europe Bank Woes Felt Around Globe. Companies in Emerging Markets Feel Pinch as Lenders From Euro-Zone Countries Retreat to Shore Up Their Finances. A pullback in lending by European banks is beginning to be felt by companies in Africa, Australia and Latin America, making borrowing harder and more expensive, and putting pressure on slowing economies. European banks in recent years dramatically boosted lending to emerging markets and were among the biggest cross-border lenders in these countries. Their retreat has tightened credit in industries—from aircraft to media to mining— squeezing economies already feeling the effects of reduced demand from the developed world for their exports.
• BofA(BAC) Warned to Get Stronger. Bank of America Corp.'s board has been told that the company could face a public enforcement action if regulators aren't satisfied with recent steps taken to strengthen the bank, said people familiar with the situation. The nation's second-largest lender has been operating under a memorandum of understanding since May 2009, following repeated tussles with regulators over the purchase of securities firm Merrill Lynch & Co. and a downgrade of the company's confidential supervisory rating. The memorandum, which isn't public, identified governance, risk and liquidity management as problems that had to be fixed, according to people familiar with the document.
• Egypt Unrest Raised Heat on Military. Thousands of protesters clashed with Egyptian security forces for a third straight day Monday in an increasingly violent showdown with the country's ruling generals, who face unprecedented and rapidly escalating discontent less than a week before scheduled elections. As night descended on Cairo, scores of unconscious protesters continued to be dragged from smoke and teargas-clogged side streets leading into Tahrir Square, the heart of Egyptians' protests early this year. Fighting between security forces and protesters have left 33 people dead since Saturday morning and injured more than 1,000, say health officials.
• Senator Schumer Urges Audit Watchdog to Act on China. A prominent senator is expected to urge the U.S. auditing-oversight agency to refuse to allow Chinese accounting firms to audit U.S.-traded companies until American inspectors are allowed to evaluate the firms' work.
• Why the Super Committee Failed.
  

Business Insider:

• Fitch Is Reviewing Its US Credit Rating. Around two hours after S&P and Moody's reiterated their ratings on U.S. credit, Fitch came out with its own statement.
• More Bad News For Netflix(NFLX): It's Raising $400 Million At A Demolished Stock Price.
  

Zero Hedge:

• 35 Seconds Of TV Air Time Explaining Why Austria's AAA Rating Is Doomed.
• Goldman(GS) Explains What The Supercommittee Failure Means.
  

CNBC:

• China Property Dip Sparks Bank Fears. The number of property transactions in China’s largest cities has fallen to dangerously low levels, according to regulatory documents obtained by the Financial Times. According to the documents, the China Banking Regulatory Commission earlier this year ordered domestic banks to weigh the impact of a 30 per cent decline in housing transactions in “stress tests” aimed at determining the health of the Chinese financial system. While the government has been trying to rein in sky-high property prices, a Chinese real estate slump would have a significant ripple effect on the global economy. Property construction accounted for more than 13 per cent of China’s economy last year. In April the CBRC told banks to test their loan books against a 50 percent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 percent year-on-year in China’s 15 biggest cities , according to government data. Nationwide, transactions dropped 11.6 percent, accelerating from a 7 percent fall in September.The fall-off in transactions has affected developers’ cash flows and, in some cases, their ability to repay bank loans.

Seeking Alpha:

• How Big Derivatives Dealers Caused 'Contagion' In The Eurozone. Did the International Swaps & Derivatives Association (ISDA) throw Europe into chaos? Is it responsible for causing Italy and other European nations' woes, for the sudden spike in southern European interest rates? It is an interesting question to explore.

Seattle Weekly:

• Occupy Oakland Votes to Shut Down Entire West Coast Port System on Dec. 12. Peter McGraw, spokesman for the Port of Seattle, tells Seattle Weekly that he's taking a threat of a "total West Coast port shutdown" by Occupy and labor protestors to "very seriously." The threat was announced via a resolution passed by the Occupy Oakland "general assembly", which cited the ongoing fight between Port of Longview union workers at the port's EGT company as one of the main reasons for demanding the work stoppage. The group released the following call to action, which was picked up by numerous Indy Media sites:

Charles Gasparino:

• Sources tell FBN $1 billion in lost MFGlobal $ may never be found; re: It was likely used to pay off losses; no legal right to force return.

Reuters:

• China Automakers See Slower Growth Ahead. Car sales growth in China will remain stagnant next year in the absence of incentives for buyers and China's tight credit control, raising pressure on car makers to cut prices and improve after-sales services, industry executives and analysts said on Monday. China, the world's largest automobile market, is likely to see car demand grow between 3 and 10 percent in 2012, compared with about 5-6 percent expected for this year and down from 33 percent in 2010, industry executives said at an auto show in Guangzhou. Car sales in China climbed just 1.4 percent in October, causing growth for the first 10 months to ease to 5.9 percent as the government removed subsidies on small cars and raised the eligibility for fuel-saving incentives. "Sales are affected by government policies, including banks tightening lending. We can feel that. Dealer credit and car financing are also tightening," Zeng added.
• China may have a trade deficit in 2012 because of poor overseas demand, citing Xia Bin, a PBOC adviser. The government may face pressure to keep inflation next year at 2% to 3% because of excessive liquidity, Xia said.
• EPA Delays Carbon Limts On Oil Refineries. The U.S. Environmental Protection Agency, struggling with an ambitious agenda on clean air regulations, said it will delay proposing the country's first-ever greenhouse gas limits on oil refineries.

Financial Times:

• Only Way to Stop the Run on Eurozone Debt by Peter Bofinger and George Soros.
  

Caixin Online:

• China Provincial Toll Ways Deeply in Debt. Most toll roads fail to make back the money it cost to build them, according to government reports. Most toll ways in 29 provinces across China are badly in debt after failing to earn back the money they cost to build, according to data compiled by Caixin. As of 2010, outstanding loans for toll way construction in 29 provinces totaled almost 2.2 trillion yuan, according to toll way management reports. Of that amount, 1.95 trillion yuan, or 89 percent, was provided by banks, putting financial institutions at risk if local governments fail to pay up. Guangdong had the most toll-related debt of any province, with an outstanding loan of 227 billion yuan. Eight other provinces each had more than 100 billion yuan outstanding. The reports also reveal that the majority of tolls went to repaying debts, leaving little money to cover expenses like road maintenance.

South China Morning Post:

• Warning on Risk of Property Bubble. Housing prices haven't dropped to "satisfactory" levels, citing Financial Secretary John Tsang's comments to city lawmakers. Tsang said he is still concerned about the formation of another bubble.

Financial News:

• China's economy's relatively fast growth and initial success in fighting inflation faces uncertainty from internal and external sources such as the European debt crisis, citing Hu Xiaolian, the central bank deputy head. China should continue stable monetary policy with "appropriate" minor adjustments, Hu said. Financial institutions should reduce over-reliance on debt for growth, Hu said.
• China's 2011 CPI May Rise More Than 5.5%, citing Zhang Shuguang, the chairman of Unirule Institute of Economics's academic board. Unirule is a private think tank in Beijing.
  

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 222.50 +7.0 basis points.
  
• Asia Pacific Sovereign CDS Index 164.50 +4.0 basis points.
• FTSE-100 futures +.64%.
  
• S&P 500 futures +.45%.
  
• NASDAQ 100 futures +.41%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PDCO)/.46
• (HRL)/.42
• (GCO)/.94
• (CHS)/.20
• (CPB)/.79
• (DSW)/.80
• (CBRL)/1.07
• (MDT)/.82
• (EV)/.43
• (NUAN)/.41
• (FRED)/.22

Economic Releases
8:30 am EST

• Preliminary 3Q GDP is estimated to rise +2.5% versus a prior estimate of a +2.5% gain.
• Preliminary 3Q Personal Consumption is estimated to rise +2.4% versus a prior estimate of a +2.4% gain.
• Preliminary 3Q GDP Price Index is estimated to rise +2.5% versus a prior estimate of a +2.6% gain.
• Preliminary 3Q Core PCE is estimated to rise +2.1% versus a prior estimate of a +2.1% gain.

2:00 pm EST

• Minutes of FOMC Meeting.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Kocherlakota speaking, 5-year Treasury Note Auction, weekly retail sales reports, China Manufacturing PMI and the Richmond Fed Manufacturing Index could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and industrial 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.