Thursday Watch

Evening Headlines

Bloomberg:

• Spain, France Bond Sales Take on Crisis as Firewall Eludes Euro Leaders. Spain and France auction 8.25 billion euros ($11 billion) of bonds today as European efforts to strengthen the region’s firewalls against contagion failed to rein in surging borrowing costs. Spain is selling as much as 3.75 billion euros of notes as the extra yield on its 10-year bonds compared with benchmark German bunds was 395 basis points yesterday. France, rated AAA, is auctioning as much as 4.5 billion euros of debt as its 10- year securities yielded 111 basis points more than comparable German debt. “Judging by where yields are, it’s not going to be pleasant,” said Elisabeth Afseth, a fixed-income analyst with Evolution Securities Ltd. in London, referring to the Spanish auction. “If there are problems getting the full amount away or if yields are pressed to substantially higher levels, it will be bad news and will further intensify the crisis.”
• Fed Dollar-Funding Cut Shows Limits of Action. The Federal Reserve-led global effort to ease borrowing costs for financial firms shows both the central bank’s power to jolt markets -- and the limits of its ability to alleviate the European debt crisis. Stocks rallied worldwide, commodities rose and yields on most European debt fell after the Fed and five other central banks yesterday cut the cost of emergency dollar loans to banks outside the U.S. At the same time, the action falls short of more-drastic moves that central banks are reluctant to take, including purchases or guarantees of countries’ bonds.
• Bank Stress Rewinds to October After Policy Move: Credit Markets. A global effort by central banks to make it cheaper for banks to borrow in dollars to ease Europe's sovereign-debt crisis may prove little more than a "Band-Aid." While the amount European banks pay to borrow in dollars in the swaps market dropped from a three-year high, it's still at some of the highest levels since 2008. The U.S. two-year interest -rate swap spread, a measure of stress that fell by the most in nine months, remains above levels where it traded in October. Even as central banks provide liquidity to avert a credit seizure like the one that followed the failure of Lehman Brothers Holdings Inc. three years ago, their action fails to address the biggest issue of the threat of contagion from bulging budget deficits. Euro area finance ministers are seeking a greater role for the IMF after conceding their efforts to expand the EFSF missed the target. "It's more of a Band-Aid," said Colin Robertson, who oversees $375 billion as Northern Trust Corp.'s managing director of fixed income in Chicago. "The market is ahead of itself in believing this is the end of what's a pretty significant liquidity crisis and the pressure that's been building in the banking system and the euro zone countries."
  
• Lacker Says Fed Swap Arrangements Amount to 'Fiscal Policy'. Federal Reserve Bank of Richmond President Jeffrey Lacker said he dissented against the Federal Open Market Committee’s currency-swap decision because it was a form of fiscal policy. “I opposed the temporary swap arrangements to support Federal Reserve lending in foreign currencies,” Lacker said in a statement released on the Richmond Fed’s website. “Such lending amounts to fiscal policy, which I believe is the responsibility of the U.S. Treasury.” The Fed and five other central banks agreed to lower their pricing on temporary U.S. dollar swap arrangements by 50 basis points. The premium banks pay to borrow dollars overnight from central banks will now be the U.S. dollar overnight index swap rate plus 50 basis points. The new pricing will be applied to operations starting on Dec. 5. Lacker said he also opposed lowering the interest rate on the swap arrangements below the Fed’s so-called discount rate on direct loans to banks. The discount rate for primary borrowers is currently at 0.75 percent.
• Riskiest Bonds Rise to Record on Slowing Growth: China Credit. Record bond premiums for high-yield Chinese companies over top-ranked issuers show that investors are shunning riskier debt as economic growth slows. The extra yield investors seek to buy A rated two-year notes, rather than AAA ranked securities, widened to 433 basis points in the past week, the most since at least December 2008, according to Chinabond, the nation's largest debt clearing house. "These lower-rated companies don't have the state ownership that would give you the comfort banks will lend to them," Owen Gallimore, head of credit trading strategy for Asia at Australia & New Zealand Banking Group, said in a phone interview.
• China Home Prices Drop for Third Month in November Amid Curbs, SouFun Says. China’s home prices fell for a third month in November as developers started to cut prices to boost sales amid the government’s housing curbs, according to SouFun Holdings Ltd. (SFUN) Home prices dropped 0.28 percent last month from October, when they retreated 0.23 percent, according to SouFun, the nation’s biggest real estate website owner. Prices slid in 57 of 100 cities tracked by the company, including in all 10 of the country’s biggest cities including Shanghai and Beijing, it said in an e-mailed statement. Premier Wen Jiabao has said the government won’t relax property curbs after raising down-payment and mortgage requirements and imposing home purchase restrictions in about 40 cities this year to avert a bubble. The central bank also increased interest rates three times and reserves ratio six times in 2011, before announcing yesterday it’s planning to cut the reserve requirement for the first time in three years. “The home prices are falling at a faster pace since turning points appeared in September,” Shen Jian-guang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said by phone today, predicting further declines in prices next year. “The government’s tightening measures on the real estate market will continue as bank loans for the sector won’t be loosened despite the reserve ratio cut announcement last night.” “This is just the beginning,” Jinsong Du, a Hong Kong- based analyst at Credit Suisse Group AG, said before the release of the data. “The property price will continue to come down next year. Transaction volume will also continue to be weak even after property companies cut prices.” Du said nationwide home prices may fall 10 percent by the end of the year, and predicted a similar decline in 2012. China’s property market has reached a “tipping point” and the slowdown in the housing industry will have a spillover effect on demand for steel and other construction materials, according to Nomura Holdings Inc. The risk of economic growth falling to less than 8 percent in the first quarter is also higher than before because of the housing market, Zhang Zhiwei, a Hong Kong-based economist at Nomura, said last week.
• Goldman(GS) Urges Bet Against Euro Junk Debt in Top 2012 Trade. Goldman Sachs Group Inc., after this year’s losing endorsement of U.S. bank stocks, recommends as its top trade for 2012 a bet against European high-yield corporate debt and forecasts a “deeper recession” for the region. The fifth-biggest U.S. bank in terms of assets recommended in a research note that investors speculate on the rising cost of insuring against the default of European junk bonds by using the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings. The gauge of derivatives will climb to 950 basis points, or 9.5 percentage points, from 770 basis points, according to Goldman Sachs, which urges investors to exit the trade if the index falls to 680 basis points. “The ongoing shocks from the region’s sovereign crisis -- and policy responses to them -- are likely to be the biggest determinant of the outlook over the next few months,” Dominic Wilson and Jan Hatzius, economists at Goldman Sachs, wrote in the research note, published today.
• Egypt Islamists on Collision Course With Military After Vote. The Muslim Brotherhood may need to wrest power from Egypt’s generals to meet the expectations of voters, whose backing helped the group claim it is on course for an historic election victory. Ali al-Korey, a self-proclaimed secularist, voted for the Brotherhood’s surrogate party because, he said, it’s “capable of helping build Egypt.” So did Fatma Azzam, for a different reason: she said it can help the country get “closer to God.” And Mona Rida was impressed by the free medical services the group offers in her working-class neighborhood.
• Zynga Said to Plan IPO Value as High as $10B. Zynga Inc., the biggest maker of games on Facebook Inc., is seeking a valuation of as high as $10 billion in an initial public offering, according to two people briefed on the matter. Zynga plans to raise about $900 million by selling shares at about $8 to $10 apiece, said one of the people, who asked not to be identified because the plans haven’t been made public. Zynga would sell 10 percent or fewer of its outstanding shares, which are scheduled to be priced on Dec. 15, the person said. At $10 billion, Zynga would be valued at below the $14.05 billion that the company said in regulatory filings represents its fair value. Zynga would also be the second-largest U.S. game company after Activision Blizzard Inc. (ATVI), which has a capitalization of $14.2 billion. Electronic Arts Inc. (ERTS), which bought Zynga rival PopCap Games in August, has a market value of $7.69 billion based on yesterday’s close.

Wall Street Journal:

• Wall Street Pushed Federal Reserve for Europe Action. Wall Street executives, in a private meeting with a top Federal Reserve official in late September, recommended a coordinated effort by central banks to remedy the European financial crisis, according to Fed documents received in an open-records request. The meeting, led by Louis Bacon, founder of hedge fund Moore Capital Management, preceded a joint action Wednesday by the world's major central banks, which banded together to provide liquidity to the markets through cheap U.S. dollar loans. Wednesday's moves involved central-bank coordination to lend to European banks, and it couldn't be determined what precisely prompted the Fed and the other central bankers to act. Mr. Bacon is one of 12 Wall Street members of a 14-member Fed panel, the Investor Advisory Committee on Financial Markets, set up in the wake of the financial crisis to give New York Federal Reserve Bank President William Dudley a pipeline into investors' thinking. The Sept. 27 meeting with Mr. Dudley exemplifies the private meetings some Wall Street investors have with top Fed officials, in which they can gain access to potential early clues about Fed actions. Hedge funds have been pushing to get more information about the inner workings of the Fed, according to people familiar with the situation, as detailed in a Wall Street Journal page-one article Nov. 23. The Fed's meetings with investors present a delicate situation for U.S. officials. They must balance the need for information from investors about the markets against the Fed's internal policy discouraging employees from arranging meetings with investors that would confer a commercial advantage. The Fed's Mr. Dudley declined to comment. In a statement, Mr. Bacon defended the meetings, saying, "The Fed and Treasury canvass market opinions extensively through a variety of private-sector committees, contacts and trading desks in their task to fund the nation's exploding debt load, stabilize markets and optimize economic outcomes." Members of the Investor Advisory Committee on Financial Markets include some of the biggest names on Wall Street, including Keith Anderson of Soros Fund Management; Mohamed El-Erian of Allianz SE's Pacific Investment Management Co.; Peter Fisher of BlackRock Inc.; Joshua Harris of Apollo Management LP; Alan Howard of Brevan Howard Asset Management; Deryck Maughan, a former chief executive of Salomon Brothers who now is at Kohlberg Kravis Roberts & Co.; and David Tepper of Appaloosa Management LP. The group suggested a number of ways to address the European crisis, including "coordinated credit easing and/or quantitative easing by" the European Central Bank. The group also urged "central bank guarantees of sovereign debt," "investments in European sovereigns and banks," "implementation of capital controls" and "government guarantee of bank funding and/or depositors," as well as "recapitalization of the IMF," according to the minutes.
• As Growth Stutters, India Woos Foreign Investment. Acute stress in India's economy, exacerbated by Europe's financial woes, is prompting the government to restart a long-stalled and politically controversial reform agenda aimed at reviving growth and attracting foreign investment. The question is whether it will be enough. The latest evidence of India's woes came Wednesday when the government reported economic output in the June-September quarter was up just 6.9% from a year earlier, the slowest pace in two years. Weakness struck the country's biggest growth engines, with expansion in manufacturing, construction and agriculture all in the low single digits.
• Mr. Corzine and His Regulators. MF Global and the new era of crony capitalist regulation.

MarketWatch:

• Singapore Fund Sells China CCB Shares: Report. Singapore-based hedge fund Broad Peak sold US$267 million worth of shares in China Construction Bank Corp. on Wednesday, the Mingpao Daily reported Thursday, citing unnamed sources.
• China Says Bank-Reserve Cut Just 'Fine Tuning'. China's latest cut in the reserve requirement ratio for banks is within the confines of "fine-tuning," Li Daokui, an academic adviser to the People's Bank of China wrote on his microblog late Wednesday. It's hard to say if the cut reflects a turnaround in monetary policy, Li wrote, noting the need to monitor changing conditions in both domestic and international economies.

Zero Hedge:

• "China Will Not Hesitate To Protect Iran Even With A Third World War". (video)
• China Manufacturing Contracts As New Export Orders See Biggest 2 Month Drop Since Dec. 2008. (graphs)
  

CNBC:

• Democrats Attempt to Gut the Insider Trading Bill. What exactly is Kirstin Gillibrand thinking? The Democratic senator from New York has proposed a new version of a bill to outlaw insider trading by members of Congress that would, in effect, make it completely legal for members of Congress to engage in insider trading. In other words, it does the opposite of what it the bill intended to do.
• Central Bank Action Merely 'Buys Time' for Europe. Stocks in Asia surged on Thursday, after the coordinated action by global central banks to provide cheaper dollar funding to European banks spurred massive gains on Wall Street. But according to a number of analysts CNBC spoke to, the rally is unlikely to last, as the move merely bought time for European leaders and doesn’t solve the euro zone’s fundamental debt problems. "This liquidity is definitely something that's addressing the symptoms of the problems, but we really need the Europeans themselves to be attacking the cause and the solvency issues," said Nick Bennenbroek, Head of Currency Strategy at Wells Fargo in New York.

NY Post:

• Watchdog Critical of SEC Hedge Fund Probe. The Securities and Exchange Commission's watchdog released a report Wednesday examining an anonymous tip explaining that agency staffers discovered a "massive fraud" by a hedge fund manager and never pursued it. The hedge fund investigation was one of a number of investigations detailed in a 228-page semi-annual report to Congress by the SEC's Office of Inspector General (IG). The IG reported that the complaint to the SEC alleged that an agency regional office staff provided the agency's Enforcement Division with a report detailing the "magnitude of the illegal conduct," but the matter was never followed up.
  

CFO:

• Managing Euro Exit Risk. CFOs and treasurers, it's time to break the glass that houses your eurozone crisis contingency plan. Don't have one? Get out your models. Now that the danger of a full or partial breakup of the eurozone has increased, with one country or more potentially going off the euro, experts say it's time for finance departments to take concrete action around managing their risk exposure in Europe. That means developing contingencies to deal with volatile exchange rates, commercial relationships in Europe, financial institution counterparty risk, and any knock-on effects to U.S. financial markets. "The treasurer and CFO really need to sit down and take a close look at what the risks will be and what the proper response is," said Jeff Wallace, managing partner of Greenwich Treasury Advisors, in a webinar on Wednesday.

Reuters:

• U.S. Uncertain Israel Would Advise Before Iran Strike. The top U.S. military officer told Reuters on Wednesday he did not know whether Israel would alert the United States ahead of time if it decided to take military action against Iran. General Martin Dempsey, the chairman of the Joint Chiefs of Staff, also acknowledged differences in perspective between the United States and Israel over the best way to handle Iran and its nuclear program.
• Deal Building to Pump Up IMF to Handle Europe Bailout. A deal is building to boost the International Monetary Fund's resources even as the world presses euro-zone leaders to put more of their own firepower on the line to defeat a debt crisis that threatens global growth. Mexico, which assumes on Thursday the rotating presidency of the Group of 20 nations, said on Wednesday it would make increasing IMF resources a priority. IMF members agree the global lender needs more money to handle the fallout from the euro zone's fiscal mess. The effort raises two issues: whether Europe is doing enough on its own to deal with the crisis and where the money for the IMF will come from. Some G20 officials see increased IMF funding as a potential "grand bargain" in the making: Euro-zone leaders would commit to credible deficit-reduction plans and easier monetary policy, while countries with current account surpluses would pump more money into the IMF. The motivation is to prevent Europe from pulling the rest of the world into a deep recession. Funding from the IMF, accompanied by ECB bond purchases, would buy euro-zone countries some time to put political mechanisms in place for strong fiscal discipline. In a major development on Tuesday, euro-zone governments said they were looking at providing bilateral loans to the IMF from national central banks, a move that would mark a critical first step by Europe to meet international demands that it use more of its own money to tame the crisis. Within the euro zone, lending through national central banks would circumvent any concern that the European Central Bank was funding profligate governments. Making the IMF the sole task master for governments receiving aid could also bolster the credibility of austerity programs. "Nobody wants to spend money on something they doubt would work," a G20 source said. "The threshold for seeking IMF help is quite high. Those seeking help need to be willing to give up some of their jurisdiction on fiscal policy and willing to undergo painful reform. Mere pledges and speeches won't do," the official added. Italy has been in preliminary talks about possible IMF financial support and Spain has indicated it could turn to the global lender. But the financial needs of both Spain and Italy would be beyond what the IMF can currently afford. The IMF's lending capacity is roughly $380 billion. G20 officials estimate it needs roughly between $400 billion and $500 billion more. An IMF document leaked to Reuters in September said the IMF's potential needs totaled about $825 billion if larger economies such as Italy and Spain required a bailout.
• China Vice Finmin Warns Crisis Worse Than 2008. The world economy is facing a worse crisis now than in 2008 and stimulating growth should be a priority for global policymakers, a Chinese vice finance minister said on Thursday. The comments by Zhu Guangyao marked the latest grim warning from a Chinese official over the state of the world economy. Vice Premier Wang Qishan said in November that a chronic global recession was certain. Zhu, China's sherpa for G20 talks, urged euro zone leaders to press forward with plans to resolve the two-year debt crisis, saying China hoped to see more progress at a summit of European leaders on Dec. 9. "The current crisis, to some extent, is more serious and challenging than the international financial crisis following the fall of Lehman Brothers," he said. "At that time (in 2008), the world economy maintained overall growth and the governments, especially G20 countries, were still able to implement fiscal and monetary stimulus measures," Zhu told a forum. "But now, to be honest, some countries have very difficult fiscal situations, and there is limited room to adjust monetary policies."
• Finisar(FNSR) Sees Q3 Profit Below Street; Shares Fall. Network equipment maker Finisar Corp reported second-quarter results above market estimates, but muted third-quarter outlook sent its shares down 3 percent in extended trading.
• Republicans Make Pipeline Jobs Issue for Obama. Republicans in the U.S. Congress signaled on Wednesday that they plan to keep the Keystone XL pipeline alive as a tool for skewering President Barack Obama on jobs, the top political issue ahead of the 2012 elections.

Financial Times:

• West 'should not fear Islamist movements'. Islamists are likely to represent the “next wave” of political power in the Arab world, Qatar’s prime minister said, as early indications from Egypt’s elections suggested the Muslim Brotherhood’s political arm was heading for victory. But Hamad bin Jassim bin Jabr al-Thani, the influential prime minister who has led Qatar’s backing for revolutions across the Arab world, told the Financial Times the west should embrace the rise of Islamist movements.
• EU finance ministers look to ECB as saviour. European finance ministers have increasingly settled on the European Central Bank as the indispensable saviour of the single currency after two days of meetings that revealed the shortcomings of other tools to fight the crisis. The collective turn toward the ECB emerged as Italy’s new government received a dire warning from Brussels to reform its economy quickly or face a “full-blown” liquidity crisis.

Telegraph:

• US Fed Saves Europe's Banks as ECB Stands Pat. Stripped to essentials, America is once again having to rescue Europe from itself. The interwoven banking and sovereign debt crisis in the eurozone has become so dangerous for the world that the US Federal Reserve has been forced to take emergency action, acting as global lender of last resort to shore up Europe's banking system. That it should have to do so as Germany and the European Central Bank hold back for legal reasons and refuse to commit decisive power adds a strange diplomatic twist.
• Central Bank Deal Should Remind Eurozone Leaders of Looming Disaster. Although welcome, this arrangement can only be a short term palliative to the banking crisis developing in Europe which is linked directly to the area's sovereign debt debacle which in turn has its roots in the unsustainable economic model foistered on countries by the single currency.

Focus Taiwan:

• Taiwan Housing Price to Income Ratio Hits New Record. The housing price to income ratio for the third quarter of this year in Taiwan edged up by 0.2 to 9.2 from the previous quarter, hitting a new all-time high -- an indication that affordable housing is still scarce for the public, said the Construction and Planning Agency on Wednesday.
  

Hong Kong Economic Times:

• 50% of Leqing's Shipbuilders Halt Production. Shipbuilders in the city in China's Zhejiang province have suspended production after the European debt crisis hit Chinese exports, global shipping demand and new ship orders, citing an official of the local industry association. There are 24 shipbuilders in Leqing.

China Daily:

• China doesn't need to worry about a hard landing because its economy still has "lots of room" for growth, Li Daokui, an adviser to the People's Bank of China and a professor at Tsinghua Univ., writes in a commentary. The pace of economic growth will continue to slow during the coming two to three years, Li said. Local government reliance on land sales for financing is the most pressing issue that needs to be addressed, he wrote.

China Daily:

• China Must Consider Cost of Averting Slowdown, IMF's Lee Writes. A decision by China to boost investment over a prolonged period through non-market based allocation to support growth as the global economy weakens could reduce the government's "fiscal space" to an "uncomfortably low level," Lee Il Houng, the IMF's chief China representative, writes in a commentary.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +1.75% to +3.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 208.0 -18.0 basis points.
  
• Asia Pacific Sovereign CDS Index 160.25 -5.25 basis point.
• FTSE-100 futures +.81%.
  
• S&P 500 futures -.20%.
  
• NASDAQ 100 futures +.09%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (BIG)/.10
• (SCMR)/-.12
• (TLB)/-.16
• (BKS)/.03
• (PVH)/1.81
• (HRB)/-.35
• (ULTA)/.38
• (JCG)/.67

Economic Releases.
8:30 am EST

• Initial Jobless Claims are estimated to fall to 390K versus 393K the prior week.
• Continuing Claims are estimated to fall to 3650K versus 3691K prior.
  

10:00 am EST

• Construction Spending for October is estimated to rise +.3% versus a +.2% gain in September.
• ISM Manufacturing for November is estimated to rise to 51.8 versus 50.8 in October.
• ISM Prices Paid for November is estimated to rise to 45.0 versus 41.0 in October.
  

Afternoon

• Total Vehicle Sales for November are estimated to rise to 13.4M versus 13.2M in October.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bullard speaking, ECB's Mario Draghi speaking, RBC Consumer Outlook Index for December, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, ICSC Chain Store Sales for November and the (XEL) investor meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are sharply higher, boosted by industrial and financial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.