Wednesday Watch

Evening Headlines

Bloomberg:

• Euro Declines to Lowest in Five Weeks Before Spanish, French Debt Auctions. The euro declined to a five-week low against the dollar and the yen as Spain and France prepare to sell securities tomorrow after Italy led a slump in euro-area debt, signaling Europe’s debt crisis is spreading. The 17-nation currency weakened for a third day after the extra yield investors demand to hold bonds from France, Belgium, Spain and Austria instead of German bunds climbed to euro-era records. The dollar rose against 15 of its 16 most-traded peers as investors sought safer assets. China’s yuan declined after the People’s Bank of China set its daily reference rate weaker for a second day, suggesting the nation won’t bow to a U.S. call for faster currency appreciation. “France, Spain, they’re all seeing yields move out, so you get the impression that we’re at some sort of juncture where banks, investors and corporations are starting to prepare for the worst-case outcome,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “The euro will remain under pressure.” The euro fell 0.6 percent to $1.3456 as of 1:21 p.m. Tokyo time from the close in New York yesterday, after touching $1.3437, the weakest level since Oct. 10. The shared currency declined 0.6 percent to 103.69 yen after dropping to as low as 103.59 yen, also the least since Oct. 10. Japan’s currency was little changed from yesterday at 77.06 versus the dollar. Spain is scheduled to sell as much as 4 billion euros ($5.4 billion) of bonds due 2022, while France will auction notes maturing from 2013 to 2016 tomorrow. Spain and Belgium sold less than the maximum target of bills at auctions yesterday as financing costs increased. Ten-year Spanish yields jumped 23 basis points to 6.34 percent. The extra yield over similar-tenor bunds surged to 455 basis points. The spread investors demand to hold 10-year French debt instead of bunds was 190 basis points. The euro extended declines on speculation so-called stop- loss orders around the $1.35 level were activated, according to Satoshi Okagawa, a senior global markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second largest banking group by market value. “There seems to be risk-off sentiment, given worries over France, Italy and Spain,” said Okagawa. “Selling of the euro looks strong, and stop-losses in euro-dollar were probably triggered.”
• No Stopping Technocrats Rule as Debt Crisis Brings Down Europe Governments. The European debt crisis has toppled four elected governments with the last two, in Greece and Italy, falling last week without a shove from voters. The appointment of prime ministers in Athens and Rome to push through unpopular austerity measures echoes efforts in the past five decades by European leaders to control policy-making when democratic means fall short. “The euro zone would never have been created if voters had been given a say,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “It’s an elite project but that doesn’t mean it’s a bad project.” Greek Prime Minister Lucas Papademos, a former central banker, and Italian Prime Minister-designate Mario Monti, an academic and former European commissioner, were chosen by each nation’s president after their elected predecessors were abandoned by political allies, making them unable to pass legislation demanded by the other members of the euro region. “They’re there not just because they’re technocrats, but because it was easier to ask independent personalities to construct political consensus,” European Commission President Jose Barroso said Nov. 14 in Paris. “The level of hostility between different political forces is enormous.” Progress toward building -- and now saving -- the 27-nation union has rested largely with the ruling elites. Decisions are taken at meetings of ministers from national governments, and the commission, its executive arm, is appointed by those governments.
  
• Feldstein Poised to Secure Victory Over Euro as Trichet Departs a Crisis. Harvard University Professor Martin Feldstein, who predicted in 1998 that the euro would prove an “economic liability,” said the single currency will survive for now, even as he bets Greece quits within a year. “With the exception of Greece leaving, I don’t think the whole thing is going to fall apart anytime soon,” Feldstein said in a Nov. 14 telephone interview. “The Greek situation is impossible.” Feldstein’s views on Europe carry increased weight as the region’s two-year debt crisis validates his warnings in the 1990s that uniting so many disparate nations under the same exchange and interest rates could backfire. While he said he doesn’t like to “use the word vindicate,” Feldstein, who turns 72 next week, said he recently reviewed his euro-skeptic articles and “thought they were pretty much on target, even though they were written 20 years ago.” His conclusions often left him at odds with now-former European Central Bank President Jean-Claude Trichet, who consistently rejected as “absurd” any speculation the euro area would shrink and warned that a member shouldn’t be allowed to default.
• JPMorgan(JPM) Joins Goldman(GS) Keeping Italy Derivatives Risk in Dark. JPMorgan Chase & Co. and Goldman Sachs Group Inc., among the world's biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Just don't ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS. As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don't provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether. "If you don't have to, generally people don't see the advantage to doing it," said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 through 2006. "On the other hand, if there were a run on Goldman Sachs tomorrow because the rumor was that they had exposure to Greece, you'd see them produce those numbers." A case in point: Jefferies Group Inc., the New York-based securities firm, disclosed every long and short position it held on European debt earlier this month after its shares plunged more than 20 percent.
• Trading at 2008 Lows in U.S. as Europe Swoons: Credit Markets. Corporate bond trading volume is plummeting in the U.S. to the lowest level in almost three years as concern deepens that Europe's sovereign-debt crisis will slow the global economy. The average daily volume of publicly traded investment-grade and junk bonds has declined to $12.4 billion this month, a 37% drop from January, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That's 23% below the daily mean for this year of $16.2 billion and the lowest level since December 2008. The decline has contributed to a 72% slump in average monthly issuance of high-yield bonds since July, making it harder for the neediest borrowers to tap credit markets, according to Bloomberg.
  
• BNP Cuts China Developers' EPS Est., Price Targets On Home Price Outlook. BNP Paribas lowers EPS forecasts for property developers by 6%-26% for 2012 and 11%-33% for 2013 to reflect expectations of a 10% drop in home prices from now to 1H 2012, analyst Frank Chen wrote in a note. Price targets for developers were cut by 11%-37%. NAV est. revised down by 9%-29%. The property market will remain challenging until 2H 2012. Developers' Oct. sales declined 24% m/m and 14% y/y.
• Hong Kong Credit Growth Risks Bad Loans Amid EU Crisis, IMF Says. Hong Kong's "rapid" credit growth has increased the risk that bank made bad loans as the city faces a potential recession if the European crisis deepens, the IMF said. "Credit has been growing at an extraordinary pace, particularly for loans in foreign currency," the IMF said in a report. Such growth may "lead to a worsening of average credit quality" and create "strains on bank funding," it said.
  
• Paulson Said to Cut Risk in Main Hedge Funds. John Paulson, the billionaire hedge- fund manager having the worst year of his career, is cutting risk in his hedge funds further as the European sovereign-debt crisis roils markets, according to two people familiar with the matter. The New York-based firm, which has $28 billion in assets, has cut the so-called net exposure in its main hedge funds to 30 percent, Paulson told investors yesterday, according to the people, who asked not to be identified because the company is private. That number stood at 60 percent about four months ago. The firm is reducing its bullish bets across all funds until there is more certainty that Europe can contain its debt crisis, Paulson said during the two-day annual meeting at the Metropolitan Museum of Art in New York. Paulson’s biggest funds, the Advantage Plus and Advantage funds, which have $11 billion in combined assets and aim to profit from corporate events such as takeovers and bankruptcies, have fallen 44 percent and 29 percent this year, respectively.
• Derivatives Market Growth Accelerates to 18%, BIS Says. Growth in derivatives markets accelerated in the first half of this year, a report from the Bank of International Settlements showed today. Notional amounts outstanding of over-the-counter derivatives climbed 18 percent to $707.6 trillion by the end of June, compared with the six months ended December 2010, when they increased 3 percent, the bank said in the report. Interest-rate swaps jumped 21 percent to $441.6 trillion in the first half, accounting for 62 percent of the total amount, the report showed. Credit-default swaps rose 8 percent to $32.4 trillion, the BIS said.
• Facebook Risks Losing Users as Porn, Violence Jam Newsfeeds. Facebook Inc. risks losing users who are offended by what researchers said is an inundation of violent images and hardcore pornography into some newsfeeds. The social network said it's investigating the matter. "We are hearing this problem is spreading," said Graham Cluley, senior technology consultant at security firm Sophos Ltd. "Facebook needs to get this under control, because the content is so offensive. Some people may quit Facebook." Porn, pictures of extreme violence and faked photos of celebrities such as Justin Bieber in sexual situations have overrun the profiles of some Facebook users in the last 24 hours, Abingdon, U.K.-based Sophos said. Some of Facebook's more than 800 million active users may pull the plug on profiles if Facebook doesn't quickly resolve the spam, Sophos said.

Wall Street Journal:

• Fed Mulling Higher MBS Collateral From Primary Dealers - Sources. The Federal Reserve is mulling increasing collateral requirements on 21 primary dealer banks in transactions dealing with mortgage-backed securities, a move that would be aimed at securing an extra layer of protection against settlement risks with its counterparties, according to several people familiar with the matter.
• Citi(C) May Slash 3.000 Jobs. Citigroup Inc. is preparing to eliminate 900 jobs in its securities and banking division, or about 5% of the unit's world-wide staff, as turmoil in the equity and debt markets erodes revenue, people familiar with the situation said.
• Purgatory for MF Global Customers. About 33,000 Account-Holders Can't Get to Their Cash: 'My Entire Business Has Come to a Halt'.
• Gimmicks Could Help Rescue Deficit Talks. Experts Say Accounting Tricks Are Being Used Instead of Fundamental Policy Changes Needed for Long-Term Budget Fix. With Congress's deficit-reduction supercommittee barreling toward a deadline for striking a big budget deal, both parties are reaching for accounting gimmicks to help reach their target of $1.2 trillion in savings over 10 years. Some tools are familiar to old Washington hands, such as massaging budget assumptions and painting rosy economic scenarios. Others include taking credit for "saving" money on wars that are ending and putting off until next year what lawmakers don't want to deal with now. All told, none of these efforts make the fundamental policy changes needed for a long-term budget fix.
• The Keystone Debacle. Was Obama's decision to delay the Canadian oil pipeline shrewd politics? Maybe not.
• As Rivals Slip, Gingrich Finds Traction.
• To Increase Jobs, Increase Economic Freedom by John Mackey. Business is not a zero-sum game struggling over a fixed pie. Instead it grows and makes the total pie larger, creating value for all of its major stakeholders, including employees and communities.

Barron's:

• Credit Suisse: Bove Downgrades as Dark Clouds Gather. Credit Suisse (CS) is “in the wrong place at the wrong time”, veteran analyst Richard Bove wrote in a note today downgrading the shares to Neutral from Buy. Bove, of Rochdale Partners, sees five problems facing Credit Suisse:

MarketWatch:

• Apple(AAPL) Names Levinson Chairman; Iger Joins Board.

Business Insider:

• The Part Of The Jerry Sandusky Interview That Didn't Air Last Night Is Just As Disturbing As The Rest Of It.
• Here's How The Post Office Lost $5 Billion In 2011(And Will Lose Almost Three Times That Next Year).
  

Zero Hedge:

• JPMorgan(JPM) To Issue CMBS Backed By... Defaulted Loans. JP. Morgan Chase & Co. (JPM) next year plans to issue the first U.S. commercial mortgage-backed securities supported by defaulted loans since the 1990s as it revives a practice that regulators used to extricate the nation from the savings-and-loan crisis. The investment bank has approached rating agencies with two pools of distressed loans that it acquired from European banks and other financial institutions, according to people familiar with the matter.
• Dark Pool Flush: Game Over Pipeline; Next Up Goldman's Sigma X?
• Kyle Bass Summarizes Europe: "They Have A German Pope And An Italian Central Banker". (video)
  

CNBC:

• BOJ Keeps Policy On Hold But Cuts Economic Assessment. The Bank of Japan kept monetary settings unchanged on Wednesday but toned down its economic assessment and warned of a widening fallout from Europe's debt crisis, signaling readiness to ease its policy again if risks to the country's recovery heighten.
• Dell(DELL) Earnings Beat Forecast While Revenue Falls Short. Dell reported quarterly earnings that beat Wall Street's expectations and revenue that fell short of analysts' forecasts on Tuesday, hurt by lower sales to consumers.
• Woori to Sue Citi(C), Merrill, RBS Over Derivatives. Woori Bank is preparing to sue Citigroup, Bank of America Merrill Lynch and Royal Bank of Scotland over losses on as much as $300 million in derivatives investments, a spokesman of the South Korean bank said, in the latest legal salvo against large banks that sold risky debt.

IBD:

• Panera Bread(PNRA) Stays On Top With Good Food And Service.
  

Reuters:

• Iran Ready To Help Turkey With Nuclear Plant - Aide. An adviser to Iran's Supreme Leader said on Tuesday that Tehran was willing to share its controversial nuclear technology with neighbouring countries, suggesting it could help Turkey build an atomic power plant. The United States, European Union and their allies suspect Iran is trying to develop nuclear weapons and, along with the U.N. Security Council, have imposed sanctions to try to stop it from enriching uranium. But Tehran says its nuclear program is to generate electric power and refuses to halt it. "Iran developed a very sophisticated nuclear science and technological capability, which we are quite ready to share with ... neighbouring countries and friendly countries in the region," the adviser, Mohammad Javad Larijani, said.

Financial Times:

• Sovereign CDS Soar For Bid Eurozone Countries. The cost to insure eurozone debt against default soared to record highs for most of the leading economies amid growing fears over the single currency. The jump in credit default swap prices on Tuesday came as the extra cost to swap euros for dollars jumped to highs last seen in December 2008 when many markets had seized up in the wake of the collapse of Lehman Brothers. The cost to insure the debt of Italy, Spain, France, Belgium, Austria and the Netherlands hit all-time highs since the sovereign CDS markets saw their first trades around 2002, according to Bloomberg data.

Telegraph:

• Paul Krugman is Rewriting History on Eurzone Decline. There is only one path Europe can take if it is to avoid economic meltdown: dramatic cuts in public spending, the dismantling of its welfare states, the removal of crippling taxes and business regulations, the downsizing of the public sector, and a return to self-determination for EU member states. It is Europe’s lack of fiscal responsibility, economic freedom, and national sovereignty, that are at the heart of the current economic crisis, and the United States must do all it can to avoid European-style decline.
• Italian Unity Fails to Stem Market Fears Over Eurozone. Economists at Schroders warned that Rome's borrowing costs were "unsustainable" even with the help of the European Central Bank (ECB). "With no solution to Italy's problems in sight... we are heading for an almighty crash," they said in a note.
• Bank of England to Downgrade UK Growth Forecasts. The Bank of England is set to give a gloomy update on the state of the British economy, sharply downgrading growth forecasts and issuing a stark warning on the eurozone debt crisis.

Hong Kong Economic Times:

• Li Daokui, an adviser at the People's Bank of China, forecast that property prices in China won't fall by more than 15% in the next two to three years. Sharp declines in home prices will cause social problems, citing Li at a conference in Hong Kong.

21st Century Business Herald:

• China may limit financial asset management companies and financial leasing firms to invest in trust products or may ban them from such investment, dealing a "blow" to "shadow banking," citing a company official.

Evening Recommendations
Raymond James:

• Rated (PCLN) Outperform, target $620.
• Rated (MELI) Outperform, target $98.
• Rated (ACTV) Strong Buy, target $20.
• Rated (SFLY) Strong Buy, target $50.

Night Trading

• Asian equity indices are -2.0% to -.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 208.50 +7.5 basis points.
  
• Asia Pacific Sovereign CDS Index 155.0 +1.75 basis points.
• FTSE-100 futures -.76%.
  
• S&P 500 futures -.97%.
  
• NASDAQ 100 futures -.68%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (TGT)/.74
• (ANF)/.71
• (AMAT)/.19
• (NTAP)/.60
• (PETM)/.48
• (LTD)/.24
• (ZOLL)/.49
• (BJ)/.49

Economic Releases
8:30 am EST

• The Consumer Price Index for October is estimated unch. versus a +.3% gain in September.
• The CPI Ex Food & Energy for October is estimated to rise +.1% versus a +.05% gain in September.
  

9:00 am EST

• Net Long-term TIC Flows for September are estimated to fall to $50.0B versus $57.9B in August.

9:15 am EST

• Industrial Production for October is estimated to rise +.4% versus a +.2% gain in September.
• Capacity Utilization for October is estimated to rise to 77.6% versus 77.4% in September.

10:00 am EST

• The NAHB Housing Market Index for November is estimated at 18.0 versus 18.0 in October.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,200,000 barrels versus a -1,370,000 barrel decline the prior week. Distillate supplies are estimated to fall by -2,350,000 barrels versus a -6,020,000 barrel decline the prior week. Gasoline supplies are expected to fall by -1,000,000 barrels versus a -2,107,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.5% versus a -2.7% decline the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Rosengren speaking, Fed's Lacker speaking, weekly MBA mortgage applications report, (QCOM) analyst meeting, (OMX) investor day, (ALK) investor meeting, Citi Small/Mid-cap Conference and the Morgan Stanley Tech/Media/Telecom Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by real estate and technology shares in the region. I expect US stocks to open modestly lower and to maintain loses into the afternoon. The Portfolio is 50% net long heading into the day.