Wednesday Watch

Evening Headlines

Bloomberg:

• Berlusconi Resignation Shifts Italy's Focus. Prime Minister Silvio Berlusconi’s offer to resign leaves Italy struggling to produce a new regime stable enough to implement painful austerity measures in a country that has averaged almost a government a year since World War II. Berlusconi last night said he’d step down as soon as parliament passed austerity measures pledged to European Union allies in a bid to convince investors Italy can curb record borrowing costs. The text of the measures, which the government has yet to present, is due to be approved by parliament in the coming weeks. The euro strengthened and U.S. stocks rose for a second day after last night’s announcement, bolstering optimism a new leader will better be able to tame the euro-region’s second- biggest debt. Europe’s inability to contain the region’s sovereign crisis led to a surge in Italian bond yields in recent weeks that further frayed Berlusconi’s fractious coalition. “While the news could set a positive market tone, that could be short lived,” said Silvio Peruzzo, euro-area economist at Royal Bank of Scotland Group Plc. “Investors will look at the post-Berlusconi and see an option on two outcomes: new elections and a technocratic government. We believe the latter would be strongly preferred and could help the crisis resolution process in Europe.”
• Italian Crisis Ambushes Ireland After Greek Escape: Euro Credit. After convincing investors and the European Central Bank that it’s not Greece, Ireland may find it harder to escape the fallout from Italian turmoil. Irish bonds have declined almost 3.6 percent since the end of September, eroding the highest returns in the world since June. Since falling to an eight-month low on Oct. 4, the yield on two-year Irish notes has jumped to about 75 basis points above its average of the past two months, according to data compiled by Bloomberg. Borrowing costs for Ireland, which announced additional austerity measures last week, have risen as Italian Prime Minister Silvio Berlusconi struggles to cut the region’s second- biggest debt load and Greek premier George Papandreou tries to form a unity government under a new leader. “If the disaster scenario happens, I’m sure they’ll get hit with the same kind of contagion again,” said Haig Bathgate, chief investment officer at Turcan Connell, an Edinburgh-based manager of 1 billion pounds ($1.6 billion) for mainly wealthy clients. Current levels are “probably as good as it’s going to get until the rest of periphery Europe is dealt with,” he said.
  
• Bank Stress Veers From Stocks as Italy Yields: Credit Markets. Measures of bank stress are diverging from the stock market, showing that credit markets remain concerned that Europe's debt crisis may still engulf Italy and threaten the global financial system. A gauge of bank reluctance to lend in dollars, known as the Libor-OIS spread, reached the highest level since July 2009 yesterday, according to Bloomberg. An index that measures instability for lenders from Milan-based UniCredit SpA to Paris-based BNP Paribas SA ended October at about the same level as the months following the failure of Lehman Brothers Holdings Inc., the Bank of Italy said in a report. Concern is mounting that sovereign-debt strains will spiral into a broader crisis for a global financial system that is more linked than ever and where half of Europe's bank bonds are held by other lenders in the region.
  
• Ackman to Lose 'Lot of Money' on Hong Kong Bet, Tsang Says. William Ackman, founder of hedge fund Pershing Square Capital Management LP, will “lose a lot of money” on his bet that Hong Kong will amend its currency peg to the dollar, city Chief Executive Donald Tsang said. Ackman, who netted more than $1 billion on a six-year short bet against the bond insurer MBIA Inc., said in September that he is buying Hong Kong dollar call options. The wagers will make money if Hong Kong changes its three-decade long linkage to the U.S. dollar and allows the currency to rise or if option prices increase before maturity. “I think he’s going to lose a lot of money on that,” Tsang, 67, said in a Bloomberg Television interview in New York yesterday. The peg is a “very important anchor underpinning Hong Kong growth and Hong Kong’s monetary stability and we are not going to change,” he said.
• Aluminum Slump Means 25% of Smelters Losing Money: Commodities. The biggest decline in aluminum prices since the global recession means at least 25 percent of the world’s smelters may be unprofitable. The metal fell 23 percent to $2,135.50 a metric ton on the London Metal Exchange since May 1 and energy costs gained 16 percent in the past month. Twenty-five percent of production loses money below $2,350 and 50 percent under $2,000, according to estimates by Bloomberg Industries. About 10 percent of output may be shut by the first quarter, said Jochen Hitzfeld, the analyst at UniCredit SpA in Munich ranked by Bloomberg as the most-accurate price forecaster over two years.
• Oil Gains a Sixth Day in New York on Iran Nuclear Risk. “This current supply-shock potential that the markets are looking at with Iran has pushed the price well above our outlook,” said David Lennox, a resource analyst at Fat Prophets in Sydney, who had forecast oil to trade from $80 to $90 a barrel. Crude oil for December delivery gained as much as 52 cents to $97.32 a barrel in electronic trading on the New York Mercantile Exchange and was at 97.18 at 12:30 p.m. Sydney time. The contract yesterday advanced $1.28, or 1.3 percent, to $96.80, the highest settlement since July 28. Prices are 6.3 percent higher the past year. Brent oil for December settlement gained 59 cents, or 0.5 percent, to $115.59 a barrel on the London-based ICE Futures Europe exchange.
• Ackman Said to Recommend Lowe's(LOW) Shares at Investment Conference. Pershing Square Capital Management LP’s Bill Ackman recommended at a conference that investors buy shares of Lowe’s Cos., according to a person who attended the presentation who declined to be identified. The home-improvement retailer has fallen 9.2 percent in 2011 after rallying two straight years. It rose 2.1 percent to $22.77 today, extending gains after 3 p.m. New York time.
• Consumer Reports Recommends iPhone After Apple(AAPL) Fixes Antenna. Consumer Reports is recommending the new iPhone 4S after Apple Inc. fixed an antenna glitch that left the magazine unwilling to endorse the previous model.
• Hong Kong Won't Relax Housing Curbs, Chief Executive Tsang Says. The Hong Kong government plans to keep curbs on the housing market even after the value of home sales halved last month from a year earlier, Chief Executive Donald Tsang said. “You can see a soft landing, which is quite nice, but we are not going to retract or retrench some of the measures we have taken,” Tsang said in an interview at Bloomberg LP’s head office in New York today. “The market will not totally collapse. But over time, we’ll see a moderation in prices, which is exactly what we want.”

Wall Street Journal:

• Rajaratnam Ordered to Pay Record SEC Penalty. Raj Rajaratnam, the former hedge-fund manager sentenced to more than 11 years in prison for insider trading, was ordered to pay a record financial penalty of more than $92.8 million in a related civil case brought by the Securities and Exchange Commission.
• Ohio Voters Reject Public-Union Limits. Voters on Tuesday defeated by a wide margin a law that would have restricted the powers of unions representing teachers, police officers and other public-sector workers. The law would have stripped the state's 350,000 public employees of most of their collective-bargaining rights and forced workers to pay at least 15% of their health-care costs. With 88% of precincts reporting, about 61% of voters in a referendum voted against the Republican-backed law, known as Senate Bill 5, while 39% supported it.
• Europe's Entitlement Reckoning. From Greece to Italy to France, the welfare state is in crisis. In the European economic crisis, all roads lead through Rome. The markets have raised the price of financing Italy's mammoth debt to new highs, and on Tuesday Silvio Berlusconi became the second euro-zone prime minister, after Greece's George Papandreou, to resign this week. His departure may keep the world's eighth largest economy solvent for the time being, but it hardly addresses the root of the problem.

Dow Jones:

• Deutsche Bank(DB) CEO: Restructuring Greek Debt Sets Risky Precedent For Banks - FT. Agreeing to a 50% cut in value on Greek sovereign debt holdings could set a risky precedent for banks and other bond holders, the chief executive of Deutsche Bank AG said, according to a Financial Times report Tuesday. "If you open up the Pandora's box, then who is willing to invest in sovereign risk?" Josef Ackermann told the newspaper. "The violation of a risk-free asset class will have long-term consequences." Ackermann did insist that the deal on Greece's sovereign debt should be an "exception," the FT cited him as saying.

MarketWatch:

• Adobe(ADBE) to Cut 750 Jobs, Shares Fall. Adobe Systems on Tuesday said it is cutting about 750 jobs, mainly in North America and Europe, as part of an effort to restructure of the company. Shares of Adobe ADBE -9.04% fell more than 8% in after-hours trading, as the software maker also lowered its earnings target for the quarter ending Dec. 2, to reflect a charge related to the restructuring.
• China’s BYD veers off entrepreneurship road. Shenzhen-based BYD Co. is a private auto maker. It’s also a company heavily reliant on government support.

Business Insider:

• Report: The Number Of Potential Victims In The Penn State Scandal Has DOUBLED In The Last 24 Hours. The number of alleged victims in the Jerry Sandusky child-molestation case has more than doubled since Monday, FOX29 in Philadelphia reports. Eight victims were named the intial grand jury report against Sandusky, but now that number is closer to 20, the TV station was told.
• Riot Police Are Out At Penn State As Students Fill The Streets In Support Of Joe Paterno.
• With The Nord Stream Pipeline, Russia And Europe Are Slowly Becoming Completely Interdependent.

Zero Hedge:

• As Geithner Says Supercommittee "Holds Key To Rebuiling Confidence" Supercommittee Says "Trillions Of Dollars Apart".
• Barclays Says Italy Is Finished: "Mathematically Beyond Point Of No Return".
• ECB 'Inaction' Succeeds In Doing What Nobody Has Achieved In Decades! Sending Risk Soaring. (graphs)
  

CNBC:

• China October Inflation Easses. China's annual inflation rate eased to 5.5 percent in October, a third straight month of decline from July's three-year peak.
• For Her: Trendiest Holiday Gifts, 2011.
  

Mediaite:

• Jon Stewart Skewers Former NJ Gov. Jon Corzine For Risky Bank Bets. (video)

Rasmussen Reports:

• Election 2012: Generic Republican 46%, Obama 42%.

Reuters:

• Caterpillar(CAT): China Price Pressure Due In 2012. Caterpillar Inc's head of emerging markets said on Tuesday the company expects to see pressure on pricing in China as early as next year as machinery manufacturing capacity could grow beyond demand levels. Rich Lavin, who also heads Caterpillar's construction industries business, said that "there will be overcapacity" in China into 2012 and 2013, and "that could create downward pressure on pricing." Caterpillar has been among a chorus of companies warning that the global economy is headed for slow growth in 2012. Lavin was speaking at a Robert W. Baird & Co investor conference in Chicago.
• Fannie Mae Taps Taps $7.8 Billion From Treasury, Loss Widens. Fannie Mae , the biggest source of money for U.S. home loans, on Tuesday said it needed a further $7.8 billion in federal aid to stay afloat as a shaky housing market widened its third-quarter loss to $5.1 billion. The government-controlled firm also attributed the deeper cash drain to losses on derivatives used to hedge its exposure to interest-rate swings and on expenses related to home loans made prior to the 2008 financial collapse. In the year-earlier quarter it had a loss of a $1.3 billion. Fannie Mae has now drawn $112.6 billion in bailout funds from the Treasury Department since being seized by the government in 2008 as mortgage losses mounted.
• IMF Chief Warns World Economy Risks "Lost Decade". The head of the International Monetary Fund warned on Wednesday that Europe's debt crisis risked plunging the global economy into a "lost decade" and said it was up to rich nations to shoulder the burden of restoring growth and confidence. Christine Lagarde told a financial forum in Beijing that European plans to bolster a rescue package for Greece were a "step in the right direction," but that the outlook for the world economy remained dangerous and uncertain. "There are clearly clouds on the horizon," Lagarde said. "Clouds on the horizon particularly in the advanced economies and particularly so in the European Union and the United States." "Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand... we could run the risk of what some commentators are already calling the lost decade."
• Sina(SINA) Swings to Q3 Loss, Cautious on 2012 Ad Spend Outlook. Sina Corp , the operator of China's largest Internet portal, swung to a third-quarter loss on steep investment losses and said it doesn't expect a significant increase in advertising spending next year. Sina shares were down nearly 4 percent in extended trade after closing at $86.94 on Tuesday on Nasdaq.
• Italy Faces Limbo After Berlusconi Agrees To Go. Italy looks set for lengthy political uncertainty after Prime Minister Silvio Berlusconi's pledge to resign, with his centre-right party calling for elections and the main opposition for a national unity government.
• Papademos candidacy for Greek PM hitting snags - sources. A plan for former European Central Bank vice-president Lucas Papademos to lead a Greek coalition government has run into trouble, sources from the Socialist and Conservative parties said on Wednesday, delaying a resolution to the country's political limbo. "The Papademos candidacy has hit problems that have to do with both parties," one of the sources told Reuters on condition of anonymity. The parties are looking at other options for the new prime minister, the sources said. Greek media have mentioned parliament speaker Filippos Petsalnikos and socialist PASOK party MP Apostolos Kaklamanis but both have denied the reports that they had been picked.
• US Senate Bill Would Clear Way For Online Sales Tax. State governments would be able to collect online sales taxes under a bill due to be introduced in the U.S. Senate on Wednesday, said sources familiar with the bill.
• Blue Nile(NILE) Forecasts Weak FY, CEO Resigns. Blue Nile Inc forecast weak full-year earnings and said its Chief Executive Diane Irvine has resigned, sending its shares down 15 percent after the bell.

Telegraph:

• Italy Still at Risk as Silvio Berlusconi Delays Departure. Silvio Berlusconi has given a "commitment to resign" but defied calls to step down immediately, prolonging a political deadlock that has pushed Italy's borrowing costs to danger levels.
• ECB Stymied On Debt Crisis Without Fiscal Union. Germany's top banker has vehemently rejected demands from David Cameron and other world leaders for drastic action by the European Central Bank to stop the eurozone crisis spiraling out of control.

China Daily:

• The migration of China's wealthy abroad to the U.S. and other nations will hurt the Chinese economy and prevent the creation of an "olive-shaped" society with a large middle class, Zhang Monan, a researcher with the State Information Center, wrote in a commentary today. Only by making China more attractive can the nation keep its wealthy from leaving, Zhang writes. "Skyrocketing" living costs, pollution, poor social welfare and a growing tax burden are contributing to the move by wealthy Chinese abroad, Zhang said.

Economic Observer:

• The eastern Chinese province of Jiangsu banned lending between companies to prevent risk from spreading to state-owned companies from private enterprises, citing a notice from the local government. Many state-owned companies, with easy access to funds, have acted as "shadow banks," lending money to small companies and real estate developers.

Shanghai Securities News:

• The China Insurance Regulatory Commission has banned insurers from private lending on concern of risk, citing a notice from the regulator. The regulator last month ordered a nationwide investigation into whether insurance companies have taken part in informal lending.
• China May Limit Power Use in 17 Provinces, Cities. Guizhou, Hunan and 15 other Chinese provinces and cities may limit the use of electricity this winter, citing the State Electricity Regulatory Commission. Rising coal costs are to blame for the possible limits on power usage, citing Li Zhaolin, a coal industry researcher. China's Bohai-Rim steam-coal price index is at 853 yuan a ton, the highest level in more than a year, according to the report.
  

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.50% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 193.50 -2.0 basis points.
  
• Asia Pacific Sovereign CDS Index 148.25 -2.0 basis points.
• FTSE-100 futures +.76%.
  
• S&P 500 futures -.31%.
  
• NASDAQ 100 futures -.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GGP)/.22
• (WEN)/.04
• (DF)/.15
• (LIZ)/-.04
• (GM)/.96
• (RL)/2.24
• (CSC)/.68
• (MBI)/.30
• (GMCR)/.47
• (RKT)/.56
• (AAP)/1.18
• (CSCO)/.39
• (PEGA)/.31
• (M)/.16
• (PSMT)/.54

Economic Releases
10:00 am EST

• Wholesale Inventories for September are estimated to rise +.5% versus a +.4% gain the prior week.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +500,000 barrels versus a +1,826,000 barrel gain the prior week. Distillate supplies are estimated to fall by -2,200,000 barrels versus a -3,575,000 barrel decline the prior week. Gasoline inventories are estimated to rise by +1,000,000 barrels versus a +1,356,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.35% versus a +.5% gain the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke speaking, Fed's Tarullo speaking, ECB's Stark speaking, 10-year Treasury Note Auction, weekly MBA mortgage applications report, USDA Crop Report, Sandler O'Neill Financial Services Conference, (CY) Analyst Meeting, (ADBE) Analyst Meeting, (HAS) Investor Day, (LOGI) Investor Day, (AA) Investor Day, (CBI) Investor Day, (BDX) Analyst Day and the (OWW) Investor Day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted 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 75% net long heading into the day.