Monday Watch

Weekend Headlines
Bloomberg:

• North Korea's Kim Jong Il Dies. Kim Jong Il, the second-generation North Korean dictator who defied global condemnation to build nuclear weapons while his people starved, has died, state media reported. A government statement called on North Koreans to “loyally follow” his son, Kim Jong Un. Kim, 70, died on Dec. 17 of exhaustion brought on by a sudden illness while on a domestic train trip, the official Korean Central News Agency said. Kim probably had a stroke in August 2008 and may have also contracted pancreatic cancer, according to South Korean news reports. The son of Kim Il Sung, North Korea’s founder, Kim was a chain-smoking recluse who ruled for 17 years after coming to power in July 1994 and resisted opening up to the outside world in order to protect his regime. The likely succession of his little-known third son, Jong Un, threatens to trigger a dangerous period for the Korean peninsula, where 1.7 million troops from the two Koreas and the U.S. square off every day. “Kim Jong Un’s taking complete control of the helm will not take place for a while due to his youth and inexperienced leadership,” said Yang Moo Jin, a professor at the University of North Korean Studies in Seoul. “The North will likely be under the control of a governing body for about a year.” A state television announcer wept as she read the news of Kim’s death. Footage was aired of thousands of people in the main square of the capital of Pyongyang cheering in unison and waving Kimjongilia, a flower named after the deceased leader. Jong Un, is at the “forefront of the revolution,” KCNA said in its statement of the elder Kim’s death. While official reports give Kim’s age as 69, Russian records indicate he was born in Siberia in February 1941. South Korea’s won declined as much as 1.6 percent to a two-month low of 1,177.15 per dollar and government bonds dropped after the news. The Kospi index lost 4.2 percent to 1,762.34 as of 12:38 p.m. in Seoul.
• French Take Aim at Britain as Credit-Downgrade Worry Mounts. French officials deflected concern about a looming cut in the country’s AAA credit rating by lashing out at Britain. “It’s better to be French than British, economically speaking,” French Finance Minister Francois Baroin said in an interview yesterday on Europe 1 radio, following verbal jabs against the U.K. by Prime Minister Francois Fillon and Christian Noyer, the governor of the Bank of France. British Deputy Prime Minister Nick Clegg called the remarks “unacceptable” and asked for steps “to calm the rhetoric.” With the French economy sinking into recession amid the euro-area credit crunch, the officials’ comments serve two purposes, according to Paul Vallet, a professor of international relations at Paris’ Sciences-Po university: prepare public opinion for a possible rating cut and convince voters in an election year that President Nicolas Sarkozy is an effective crisis manager. “There’s a lot of political posturing going on with the elections,” said Vallet. “They have to convince public opinion they are responding to the crisis and that it’s much worse elsewhere.” Sarkozy trails his Socialist Party challenger Francois Hollande by six points before May’s presidential election, according to a Harris Interactive poll published Dec. 15. “There is a search for scapegoats across Europe,” said Vallet. “In the U.K. they are shifting blame to the Germans, and the Germans are blaming everyone.”
• Euro 8% Stronger Than Average Since 1999 as Losses Seen for 2012. The euro, after falling to its weakest level against the dollar since January, is poised to depreciate further as traders lose confidence in the ability of European leaders to contain the region’s debt crisis. Measures in the derivatives market ranging from future volatility implied by option prices to the cost of insuring against a drop in the euro to the record number of bearish bets by hedge funds and other speculators, show traders expect the blueprint unveiled by European leaders this month for a closer fiscal accord will fail to stem the declines. While the euro at $1.3046 remains 8.3 percent above the average since it began trading in 1999, bears say that provides more scope for depreciation as bond yields in Italy and Spain approach levels that prompted bailouts of Greece, Ireland and Portugal. Companies from Spain’s Grupo Gowex to Germany’s GEA Group AG are preparing for some countries to leave the euro and bank failures. “The euro trading where it is now reflects a global lack of confidence in those dealing with the sovereign debt crisis,” Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London, said in a telephone interview on Dec. 14. “It is also a signal of more bad news to come in the euro zone. I am not certain what future euro negatives lie ahead, but I am certain there will be more.”
• IMF Bazooka Is Between Meaningless, Dangerous: Simon Johnson. Financial rescue plans for Europe are becoming ever more fanciful. Increasingly, policy analysts in Europe and the U.S. turn to the International Monetary Fund to provide what is termed “the bazooka” -- meaning a lot of money underpinning a scaled-up bailout for Italy, other troubled countries and, of course, Europe’s failing banks. This proposal is somewhere between meaningless and dangerous, depending on its precise form. The good news is that it will not happen. The bad news is that no one is prepared for the real consequences of the bazooka proving to be illusory.
• China Debts Dwarf Official data With Too-Big-to-Finish Alarm. A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout. Debt accumulated by companies financing local governments such as Tianjin, home to the New York lookalike project, is rising, a survey of Chinese-language bond prospectuses issued this year indicates. It also suggests the total owed by all such entities likely dwarfs the count by China’s national auditor and figures disclosed by banks. Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund. There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt. The fact so few of the companies have accumulated that much debt suggests a bigger problem, says Fraser Howie, the Singapore-based managing director of CLSA Asia-Pacific Markets who has written two books on China’s financial system. “You should be more worried than you think,” he said of Bloomberg’s findings. “Certainly more worried than the banks will tell you. “You know how this story ends -- badly,” he said.
• China November Home Prices Post Worse Performance This Year. China’s home prices posted their worst performance this year with more than half of the 70 biggest cities monitored in November recording declines after the government reiterated plans to maintain property curbs. New home prices dropped from the previous month in 49 of the cities monitored by the government, compared with 33 posting decreases in October, the national statistics bureau said in a statement on its website yesterday. Only five cities had gains in home prices, according to the statement. “Home prices will fall further as the government’s tightening continues,” said Jinsong Du, a Hong Kong-based property analyst for Credit Suisse Group AG. “We’ll see more small developers file for bankruptcy or sell off their assets next year.” The government said last week it won’t back away from real- estate industry curbs that are damping home sales and pulling down prices. China intensified measures this year by raising down payment and mortgage requirements and also imposed home purchase restrictions in 40 cities. New home prices in China’s four major cities of Shanghai, Beijing, Shenzhen and Guangzhou each retreated 0.3 percent from October, the biggest monthly falls for these metropolitan areas this year, according to data from the statistics bureau. The eastern port city of Ningbo and Shenyang in the north close to the North Korean border posted the biggest month-on- month declines of 0.6 percent.
• China 2012 Metals Demand to Grow at Slower Pace, Group Says. Metal demand in China, the biggest consumer of copper and aluminum, may grow at a slower pace in 2012 and prices may be lower than this year, Wang Huajun, deputy secretary-general of the China Nonferrous Metals Industry Association. “It is unlikely to see metals demand to grow at more than 10 percent next year,” given the macroeconomic environment, Wang said at a forum in Shanghai. He did not give comparative figures for this year. Slower China demand may further pressure metals prices, which have fallen 23 percent this year on the London Metal Exchange LMEX Index, the first decline since 2008. (LMEX) Commodities are set for a “difficult environment” in 2012 amid a possible dissolution of the European Union and a “hard landing” in China, UBS AG said Nov. 30.
• Hong Kong Luxury Rents Reach 'Tipping Point' as Banks Retrench. Hong Kong luxury home rents, which fell last quarter for the first time since mid-2009, may slump 10 percent next year as banks and hedge funds scale back amid the threat of a global recession, according to brokers including Jones Lang LaSalle Inc. and Colliers International. “We’re definitely at that tipping point,” said Anne-Marie Sage, Hong Kong-based head of residential leasing at Jones Lang, the world’s second-largest commercial brokerage. “We’ve began to see vacancies at the very top end of the market. The banking and the financial sector have basically stopped all movement.”
• U.S. 'Deeply Concerned' Hungary Democracy Weakening, Hvg.hu Says. The U.S. is “deeply” concerned that Hungary’s democracy is weakening as the government “eliminates” checks and balances on its power, news website hvg.hu reported late yesterday, citing Thomas O. Melia, Deputy Assistant Secretary at the Department of State. A draft law which would curb the power of the central bank is the latest in a series of measures that add to the worries the U.S. government has over Hungary, hvg.hu said, citing an interview with Melia. Hungary’s ruling party’s action of filling the judiciary with its own people also threatens the independence of that branch of the state, Melia told the website. The proposed changes on the governance of the central bank are “even more problematic” because they may undermine an institution central to the working of the free market, he added.
• India Inflation, Infrastructure Problems Persist. Truck driver Sujan Singh should be delivering cars to Mumbai from Maruti Suzuki India Ltd. (MSIL)’s plant near New Delhi. Instead, he’s sitting at a roadside cafe by one of India’s busiest highways, waiting for the traffic to ease. “I’ll start again in the evening and travel through the night as you face huge congestion during the daytime,” he said, enjoying the warmth of a burning pile of trash in the New Delhi winter air. “Most of the highways are just single lanes and the roads are so uneven and bad that that it causes accidents.” India’s failure to upgrade its 4.2 million kilometers (2.6 million miles) of roads, close a 10 percent power deficit and ease congestion at ports is hobbling the central bank’s efforts to beat inflation. Even after raising interest rates by a record 375 basis points in 1 1/2 years, wholesale prices have risen more than 9 percent for 12 straight months.
• U.S. Online Holiday-Season Spending Close to $31 Billion, ComScore Says. U.S. online spending for the holiday season has risen 15 percent to $30.9 billion from the year- earlier period, ComScore Inc. (SCOR) said. Four days during the week ended Dec. 16 topped $1 billion, the Internet-traffic researcher said in a statement. Sales for last week were $6.32 billion, also up 15 percent. Spending is expected to slow as Christmas Day nears, ComScore said. This means Cyber Monday, Nov. 28, is likely to be the single top online spending day with $1.25 billion, followed by $1.13 billion in purchases on Dec. 12 and $1.07 billion on Dec. 16, or Free Shipping Day. The data measured the 46-day period from Nov. 1 to Dec. 16.
• Oil Trades Near Six-Week Low on Speculation Europe Crisis Will Curb Demand. Oil dropped for a fourth day before Europe’s latest attempt to contain a sovereign debt crisis that threatens to slow economic growth and demand for fuel. Futures in New York fell as much as 0.5 percent in the longest losing streak since the five days ended Aug. 4. European Union finance ministers will hold a conference call today in an attempt to meet a self-imposed deadline for drawing additional aid and cobbling together new budget rules. Europe’s demand for crude will decline 2.8 percent in the first quarter of next year from this year’s fourth quarter, the International Energy Agency forecast on Dec. 13. “The demand picture is starting to look weak,” said Jonathan Barratt, a managing director at Commodity Broking Services Pty in Sydney who predicts oil in New York may drop to $90 a barrel. “You are seeing continued news that reinforces a slowdown and that’s weighing on the price of crude.” Crude for January delivery fell as much as 47 cents to $93.06 a barrel in electronic trading on the New York Mercantile Exchange and was at $93.25 at 1:57 p.m. Sydney time.

Wall Street Journal:

• Live Blog: North Korea Leader Kim Jong Il Has Died.
• US Lenders Losing Battle of 'Basel'. The Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, said people familiar with the situation. The central bank's decision to accept the rules laid out by regulators in Basel, Switzerland, as part of a draft proposal that could come before Christmas is a defeat for giant U.S. banks that argued the guidelines needn't be so strict. They contended the Basel approach could prompt them to reduce lending and hurt the economy.
• Apple(AAPL) Plots Its TV Assault. Apple Inc. is moving forward with its assault on television, following up on the ambitions of its late co-founder, Steve Jobs. In recent weeks, Apple executives have discussed their vision for the future of TV with media executives at several large companies, according to people familiar with the matter. Apple is also working on its own television that relies on wireless streaming technology to access shows, movies and other content, according to people briefed on the project.
• Beyond Borders: Europeans Stash Money Elsewhere. Southern European investors, fearful of the health of their banks and the future of the euro, are increasingly stashing their wealth in currencies, real estate and investment products outside the euro zone, say bankers and government officials. In a troubling sign for European banks, investors in Greece, Portugal and Italy are asking bankers and lawyers for ways to protect their money in the case of a failure of euro-zone banks or a breakup of the euro itself. Some are converting deposits into currencies such as the Swiss franc.
• Fitch: Let's Talk About It. The president of Fitch Ratings said the credit-rating firm has sought to telegraph credit-rating changes to investors in order to limit the volatility that can be caused by such moves. "We're trying to be less volatile," Paul Taylor, Fitch's president since January 2010, said in an interview. "We're trying to give as good a direction as we can by laying out what the outcomes could be."
• Italian Industry Minister Rules Out Another Austerity Package. Italian Industry Minister Corrado Passera Sunday ruled out a new austerity plan, adding that the government will continue to fight tax evasion, sell digital-television frequencies and continue the liberalization of professions as part of its program of boosting economic growth.
• The EPA's Fracking Scare. Breaking down the facts in that Wyoming drinking water study.

Marketwatch.com:

• France Finally Realizing What a Bad Deal Euro Was.
  

CNBC:

• Cost of Payroll Tax Cut: Another $17 a Month on Most Mortgages. Who is paying for the two-month extension of the payroll tax cut working its way through Congress? The cost is being dropped in the laps of most people who buy homes or refinance beginning next year.
• Housing Recovery Held Back by Web of Program Roadblocks.

Business Insider:

• The ONLY 10 Things That Are Known About North Korea's New Leader.
• You've Got To See The Latest Pictures From Tahrir Square. Even as votes are being counted from Egypt's election, the country is descending into levels of violence seen during the Arab Spring. A sit-in around government buildings in Cairo -- #OccupyCabinet -- was broken up by the army on Friday morning. Over the next 24 hours unrelenting clashes left buildings on fire, 8 dead, and 299 injured.
• China: The Hard Landing Is Still In Sight.
• There's An 82% Chance That California's Public Pension System Will Run Out Of Money.
• 14 Straight Quarters Of Falling Home Prices May Be More Than Spanish Banks Can Survive.
• Moody's Cuts Belgium's Credit Rating By Two Notches.
• Here's What Happens If Nicolas Sarkozy Can't Win Re-Election.

Zero Hedge:

• Things That Make You Go Hmmm - Such As Europe's "Comprehensive Solution".
• Fed May Inject Over $1 Trillion To Bail Out Europe.

NY Post:

• MF 'broke the rules'. He’s turning into Jon Corzine’s worst nightmare. And Terrence Duffy, CEO of CME Group(CME). the Chicago-based commodities exchange, appears to be the most vocal critic during the seven-week scavenger hunt for the $1.2 billion in missing MF Global’s client funds. During multiple Capitol Hill hearings — all held in the last 10 days — to get to the bottom of the missing money, Duffy has made no bones that he thinks the money vanished because MF “broke rules.” “I’m here to tell the truth to the Congress,” Duffy told The Post exclusively. Duffy, 53, who heads up the nation’s biggest derivatives and futures exchange, said “I’m here to protect this business and grow it.” And he does not want the CME to be harmed by MF’s actions.
  

Washington Examiner:

• EPA Sets Air Toxics Rule for Coal-Fired Power Plants, Group Says. The Environmental Protection Agency signed a rule to curb toxic emissions from coal-fired power plants, the most-expensive order being considered by President Obama's administration, according to an environmental advocate briefed on the agency's action. The regulation includes details for how companies such as American Electric Power Co. and Southern Co. can apply for additional time to comply with the standards for emissions of mercury, arsenic and acid gases, said Howard Learner, executive director of the Environmental Law & Policy Center in Chicago.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 23% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19 (see trends).

AP:

• ECB's Stark Discusses Resignation. A top European Central Bank official has publicly discussed the reasons for his surprise resignation, saying he is not satisfied with the direction Europe's currency union has taken. Juergen Stark said in an interview in Monday's edition of Germany's Wirtschaftswoche magazine that the ECB had done its job by keeping inflation under control across the eurozone, which it does through adjusting interest rates. But he said some governments had tolerated excessive wage costs and unsustainable real estate booms that preceded today's debt crisis. Stark is leaving at the end of the year, 2 1/2 years before the end of his eight-year term on the bank's six-member executive board. The council runs the bank day-to-day at its Frankfurt heaquarters, while interest rate decisions are taken by the broader 23-member government council, on which Stark also sits. Stark was quoted as saying that "there is a broad theme that serves as the reason for this: that I am not satisfied with the way this currency union has developed." Stark said the ECB had done its part by keeping inflation under control but could not be expected to clean up policy mistakes by individual governments that ran up too much debt or let their economies become uncompetitive through high labor costs. "Don't overburden the central bank," he said. Analysts have said he appears to have left because of opposition to the European Central Bank's program to buy government bonds. Stark repeated his longstanding opposition to calls for the ECB to sharply increase the bond purchases through its power to create new money. He said that would violate the prohibition in the EU treaty on the ECB using its monetary powers to finance governments, although it is a step that the U.S. Federal Reserve has been allowed to take. Stark dismissed calls by "real or self-styled experts" to use the "big bazooka" of printing money. "It is a fundamental arrangmenet of a currency union that the monetary financing of state debts through the ECB is not permitted," he said.

Financial Times:

• Draghi Warns on Eurozone Break-Up. Mario Draghi has warned of the costs of a eurozone break-up, breaching a taboo for a president of the European Central Bank, even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis. Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis, which has rattled global financial markets.

The Telegraph:

• Workers of Europe Unite, You've Only Euro Chains to Lose. The question for today’s Left is whether it is in their interests to keep apologising for an EU monetary regime that has pushed the jobless rate for youth to 49pc in Spain, 45pc in Greece, 30pc in Portugal and Ireland, 29pc in Italy and 24pc in France – yet 8.9pc in undervalued Germany – and that offers no credible way out of the slump for the Southern half. Comrades across Europe, come over to the eurosceptic side. You have only your euro chains to lose.
• If the euro is saved then Britain should quit the EU and say good riddance. The season of good cheer may be upon us but in this, my last column of the year, I want to discuss the attractions of good riddance. My subject is Britain’s relations with the EU.

RAI TV:

• Italy's 30 billion euro emergency-budget plan is too focused on raising taxes and should have reduced public spending more, former Finance Minister Giulio Tremonti said. The package should have contained more economic-growth measures and has not sparked a positive reaction from financial markets, Tremonti said in an interview. Italy will probably need to pass additional austerity measures, though Tremonti opposes such a move, he said.

Il Sole 24 Ore:

• Italy would have ended up like Greece had the government not pushed through a $39 billion emergency budget, Deputy Finance Minister Vittorio Grilli said. Without the package, "our future was Greece," Grilli said.
• Increasing the haircut on Greek sovereign debt to 80% is "unacceptable," BNP Paribas SA Chairman Baudouin Prot said in an interview. BNP Paribas has "absolutely no" contingency plan for a possible breakup of the euro area, Prot said.

Australian Financial Review:

• Australian Bank Rules May Trigger Credit Squeeze. Local regulator's 'hardline' application of new int'l bank rules are at odds with Europe, U.S., may put Australian banks at a disadvantage and force higher interest rates for business, former Commonwealth Bank of Australia boss Ralph Norris wrote.

Xinhua:

• Chinese Vice President Xi Jinping urged local governments not to evaluate officials' performance based 'simply' on economic output or growth rate.
  

Beijing News:

• Zhang Ping, China's National Development and Reform Commission Chairman, said the nation will continue to "strictly" implement measures to curb speculative demand in the property market. China will continue to improve control measures on property prices and study rules to prevent exorbitant profit in the area of housing, citing Zhang.
  

Jordan Times:

• The U.S. will give Jordan an annual assistance of $660 million next year, citing the Ministry of Planning and International Cooperation.
  

Asharq Al-Awsat:

• The Gulf Cooperation Council's plan for a single currency has been postponed indefinately, citing Abdullah Al-Shebli, assistant secretary-general for economic affairs at the GCC Secretariat.

Weekend Recommendations
Barron's:

• Made positive comments on (CSTR) and (RGR).
• Made negative comments on (CONN).
  

Night Trading

• Asian indices are -3.0% to -1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 211.0 -1.0 basis point.
• Asia Pacific Sovereign CDS Index 157.0 -.75 basis point.
• FTSE-100 futures -1.15%.
  
• S&P 500 futures -.68%.
• NASDAQ 100 futures -.58%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (RHT)/.26

Economic Releases
10:00 am EST

• The NAHB Housing Market Index for December is estimated at 20.0 versus 20.0 in November.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lacker speaking, 2-Year Treasury Note Auction and the (HI) Investor Day could also impact trading today.
  

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and technology 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 week.