Thursday Watch

Evening Headlines

Bloomberg:

• ECB May Dig Deeper Into Crisis Toolbox as Leaders Mark 'Date With Destiny'. The European Central Bank may delve deeper into its toolbox today to stimulate bank lending and fight off a recession as Europe’s leaders gather to lay the foundations for a fiscal union. ECB policy makers meeting in Frankfurt will cut the benchmark interest rate by a quarter percentage point to 1 percent, according to 53 of 58 economists in a Bloomberg News survey. They may also loosen collateral criteria to give banks greater access to cheap cash and offer longer-term loans, said three euro-area officials with knowledge of the deliberations. Hours later, Europe’s leaders will convene in Brussels for talks to frame the fifth “comprehensive” solution in 19 months to a debt crisis that’s left Germany and France facing the threat of losing their AAA rating from Standard & Poor’s. The ECB says that governments must address the cause of the turmoil as it focuses on getting banks lending again rather than increasing purchases of indebted nations’ bonds. “It’s yet another date with destiny in the euro area,” said Julian Callow, chief European economist at Barclays Capital in London. “It’s clear there won’t be the ultimate resolution, but the proposals are going in the right direction. The markets seem to have finally understood that in the ECB’s eyes it’s up to governments to solve it, and it’s worth noting that it’s doing a lot on the banking side.”
• Draghi Courts Bundesbank in Bid to Avoid Trichet's Fate on Bond Purchases. Mario Draghi knows he can’t afford to repeat Jean-Claude Trichet’s mistake. A month into his term as European Central Bank president, Draghi is being careful not to alienate Bundesbank chief Jens Weidmann, a vocal opponent of the ECB’s bond purchases. As Europe’s sovereign debt turmoil enters what could be its decisive days, Draghi needs to keep Germany’s central banker onside for any expansion of the ECB’s crisis-fighting role, say economists from Barclays Capital to Societe Generale SA. “Draghi is likely to be very conscious and aware of the Bundesbank’s perspective,” said Julian Callow, chief European economist at Barclays in London. “It’s going to be a hard act for Draghi to balance strong views for dramatic action and calls from Weidmann for a more cautious approach.” Draghi, 64, may need all the diplomatic nous he’s accrued in a career that began under the tutelage of Stanley Fischer at the Massachusetts Institute of Technology and has taken him to Italy’s finance ministry, the boardrooms of Goldman Sachs Group Inc. and now the 35th floor of the ECB’s Frankfurt headquarters. As he pushes governments toward fiscal union to secure a lasting solution to the debt crisis, Draghi has signaled greater central bank intervention could be the quid pro quo.
  
• Europe Calls at 20-Month High Before EU Leaders Convene: Options. Options traders are pushing bullish bets on Europe to the highest level since March 2010 as governments work to forge a solution to the two-year-old sovereign debt crisis. The ratio of outstanding calls to buy the Euro Stoxx 50 Index versus puts to sell has climbed to a 20-month high of .92-to-1, according to data compiled by Bloomberg. The open interest for Euro Stoxx call options has risen 6.1% in the last two weeks to 22.3 million contracts, faster than the increase for puts, which rose 3.5% to 24.3 million. Optimistic investors may be punished as the cuts European economic growth and corporate profits, according to Gergor Smith, a London-based fund manager at Daiwa Asset Management, which oversees $111.3 billion. "It's a very dangerous position to have," Smith said in a phone interview. "The outlook into 2012, at least for the first half of the year, looks pretty poor." Even with those risks, investors are more concerned about trailing the market should equities climb, according to Lothar Mentel, who manages $3.9 billion as chief investment officer for Octopus Investments Ltd. in London.
  
• Deutsche Bank, BNP May Be Cut by S&P in European Credit Review. Deutsche Bank AG and BNP Paribas SA are among European lenders that were placed on CreditWatch negative by Standard & Poor’s amid a similar review of 15 countries in the region. “We intend to resolve the CreditWatch placement on these banks soon after the resolution of the CreditWatch placement on the related sovereign,” S&P said yesterday in a statement. S&P said earlier this week that Germany and France may be stripped of their top credit ratings, and yesterday put the European Union’s AAA rating on CreditWatch negative. The euro area’s six AAA-rated countries were among the nations placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of EU leaders this week, S&P said on Dec. 5. Other firms placed on CreditWatch negative include Frankfurt-based Commerzbank AG, Milan-based UniCredit SpA and French lenders Credit Agricole SA and Societe Generale SA. The ratings company said similar actions on other large European banks will follow. Deutsche Bank’s rating may be cut one-notch and likely will mirror the action on Germany’s rating, S&P said. S&P said it likely would downgrade BNP Paribas’s rating by one notch if it cut the rating on France by more than one level. If France’s rating is maintained or cut one notch, BNP’s rating likely will be affirmed, the ratings company said. S&P said it likely would downgrade Credit Agricole or SocGen with a one- notch cut in France’s rating.
  
• Bubble-Era Mortgage Wave Maturing Imperils CMBS: Credit Markets. A $19 billion wave of five-year commercial mortgages originated at the height of the property- market bubble starts maturing in less than a month, sparking concern that delinquencies will accelerate. About 43 percent of the $44 billion in loans packaged into bonds that come due next year were arranged in 2007 before property values tumbled 42 percent, according to Bank of America Corp. The largest deal ever, a $7.3 billion issue by Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc, has $586 million of loans maturing in 2012, Bloomberg data show. Owners of everything from strip malls to Manhattan skyscrapers may find it harder to refinance after Europe’s fiscal crisis sent relative yields on commercial-mortgage securities to the highest level since February 2010, roiled credit markets and forced a pullback in lending. Late payments, which declined to 9 percent from a record 9.1 percent in October, are likely to rise in part because of the 2007 class of maturing debt, according to Barclays Capital. “These loans were done at the peak of the market,” said Julia Tcherkassova, a commercial-mortgage debt analyst at Barclays in New York. “They will have trouble refinancing today.”
• Poll: Investors Predict China Bank Crisis. Most global investors predict China will face a banking crisis within the next five years, paring their appetite for the nation’s shares and eroding confidence in its leadership, a Bloomberg Global Poll indicated. Sixty-one percent of respondents said they anticipate a crash in the financial industry by late 2016, and only 10 percent were confident China’s banks will escape trouble, according to the quarterly poll of 1,097 investors, analysts and traders who are Bloomberg subscribers conducted Dec. 5-6. Evidence of slowing growth in China -- including the weakest manufacturing performance in more than two years, falling home sales and ebbing export growth -- has stoked concern that non-performing loans will climb in the world’s second-largest economy. The risk is a legacy of a record 17.6 trillion-yuan ($2.8 trillion) lending boom unleashed by Premier Wen Jiabao in 2009-2010 amid the global recession. “The deep-seated misallocation of resources, particularly in the real estate and banking sectors, will lead to a combination of political and economic instability,” says Lance Depew, managing director of UPI Management LLC in Santa Barbara, California, and a participant in the poll. “I expect further macroeconomic weakness and sub-par returns in the stock market for the foreseeable future.”
• Wheat Prices Shredded With Near-Record Crop Boosting Reserves: Commodities. The biggest slump in wheat prices in three years may have further to go as expanding harvests from Russia to Canada bolster inventories to the most in a decade. The U.S. Department of Agriculture will predict tomorrow a 3.4 percent gain in stockpiles to 202.89 million metric tons by June, according to the average of 16 analyst estimates compiled by Bloomberg. Prices that fell 34 percent from a 29-month high of $9.1675 a bushel in February will drop 12 percent more to $5.30 in the next 12 months, Credit Suisse Group AG forecasts. Global food costs tracked by the United Nations have declined 9.1 percent from a record in February, helping to contain inflation as economic growth slows. Corn and soybeans are also tumbling after farmers responded to record-high prices by planting more crops. Combined output of wheat, corn and soy will jump 3.4 percent to a record 1.8 billion tons this season, 32 percent more than a decade ago, the USDA said last month. “Every country that can plant more corn and wheat has done so,” said Alex Bos, the manager of agricultural commodities at Macquarie Group Ltd. in New York. “It’s an incredible shift, and there’s still spare farmland capacity that can be put into production.”
• LivingSocial Receives Funding Valuing It at $6B. LivingSocial.com, the online-coupon provider that competes with Groupon Inc., lined up $400 million in funding that gives it a valuation of about $6 billion, according to a person with direct knowledge of the matter. The company has already sold $176 million of the total, Washington-based LivingSocial said in a filing with the U.S. Securities and Exchange Commission. The funding will be a mix of equity and debt, said the person, who declined to be identified because the figure hasn’t been disclosed. The investment will come from both existing and new backers, the person said.
• Electronic Book Industry Probed by U.S. Over Possible Antitrust Violations. The U.S. is probing the possibility of anticompetitive practices in the e-book industry, the acting chief of the U.S. Justice Department’s antitrust division told a House committee in Washington. “We’re also investigating the electronic book industry along with the European Commission and state attorneys general,” Sharis Pozen today told the House Judiciary antitrust subcommittee, where she appeared for a general oversight hearing.
• Japan Machinery Orders Fall on Strong Yen, Global Slowdown. Japan’s machinery orders unexpectedly fell for a second straight month in October, signaling that a slowing global economy and the strong yen are prompting companies to postpone investment. Bookings, an indicator of capital spending, decreased 6.9 percent from a month earlier, the Cabinet Office said in Tokyo today. The median forecast of 27 economists surveyed by Bloomberg News was for a 0.5 percent gain. Orders fell 8.2 percent in September. Today’s report indicates that capital expenditure could slow next year as Japan struggles to recover from the March 11 earthquake and tsunami.
• Singh Retail Retreat 'Nail in the Coffin' for India Opening. Prime Minister Manmohan Singh’s decision to backtrack on plans to let overseas retailers expand in India may undermine efforts to revive growth and curb inflation, while deepening a yearlong paralysis in government. The 79-year-old Singh, credited with sparking India’s economic transformation when finance minister two decades ago, yesterday bowed to opposition protests that had forced repeated adjournments of parliament since the Nov. 24 move to allow foreign investment in multibrand retail. Finance Minister Pranab Mukherjee told lawmakers the decision was suspended until a consensus could be reached. The reversal indefinitely puts off an influx of foreign investment from companies including Wal-Mart Stores Inc. and Tesco Plc that are bidding to enter the $396 billion market, at a time when the rupee is already trading near a record low. It also adds to a list of unfinished economic initiatives that includes a proposed tax overhaul and changes to how land is acquired for infrastructure projects.
• China's Pork Prices May Have Reached Bottom, New Hope Group Says. Pork prices in China, the biggest consumer, may have bottomed after declines in the last two months reduced profits and curbed restocking of inventories, said New Hope Group Co. vice president Wang Hang. Prices of hogs, which are slightly above the profitability margin, "should not fall" further, Wang said in an interview. New Hope is China's biggest producer of animal feed. "Hog prices may rise as much as about 12.5%" before the January Spring Festival, returning to September levels said Feng Yonghui, general manager of Soozhu.com, which is China's biggest independent hog industry researcher.
• Japan Expands Rice Ban as Contamination Spreads. Japan will extend a ban on rice shipments from a third city in Fukushima prefecture after local authorities found more tainted grain, deepening food-safety concerns nine months after a nuclear disaster.
• German Lawmakers Call for Europe Ratings Company, Passauer Says. Michael Fuchs, the Christian Democratic Union’s deputy leader in Germany’s parliament, and Rainer Bruederle, parliamentary leader of Germany’s Free Democratic Party, want Europe to create an independent European debt-rating company, Passauer Neue Presse reported, citing interviews. Fuchs said the existing ratings companies appear to be “making policy” and “that is not their job,” according to the newspaper.

Wall Street Journal:

• Banks Prep for Life After Euro. Some central banks in Europe have started weighing contingency plans to prepare for the possibility that countries leave the euro zone or the currency union breaks apart entirely, according to people familiar with the matter. The first signs are surfacing that central banks are thinking about how to resuscitate currencies based on bank notes that haven't been printed since the first euros went into circulation in January 2002. At least one—the Central Bank of Ireland—is evaluating whether it needs to secure additional access to printing presses in case it has to churn out new bank notes to support a reborn national currency, according to people familiar with the matter. Outside the 17-country euro zone, numerous European central banks are eyeing defensive measures to protect against the possible fallout if the euro zone were to unravel, other people said. Several, including Switzerland, are considering possible replacements for the euro as the external reference point, or peg, they use to try to keep their currencies' values stable.
• China's Company-to-Company Loans Double in First 9 Months. Business-to-business lending, or so-called "entrusted" loans, rose by 562.5B yuan y/y in the first 9 months to 1.07t yuan, citing the most recent data from the PBOC.
• Euro's Allure Dims in Eastern Europe.
  
• Banks' Ratings Reliance Nears End. The largest U.S. banks would have to stop relying on credit ratings to evaluate the risk of assets they hold in their trading accounts under proposed rules aimed at reducing ratings firms' influence on financial markets. The proposal unveiled Wednesday by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency is a big first step toward complying with a directive in last year's Dodd-Frank financial-overhaul law.
• Copper Bets Flash a Warning. Despite a raft of good news—rising employment in the U.S., stronger growth in the euro zone and monetary easing in China—"Dr. Copper" believes the global economy is in poorer health than many think.
• Subsidizing Wall Street to Buy Chinese Solar Panels.
  

Business Insider:

• Roger McNamee Explains Why Windows Is Dying.
• Kuwait Is Building A $132 Billion City Around A Skyscraper With An 'Arabian Nights' Theme. (pics)
  

Zero Hedge:

• Goldman(GS) On Deleveraging And The Sovereign-Financial Feedback Loop.
• Pivot Capital On China's Investment Boom (And Pending Bust).
  

CNBC:

• JPMorgan(JPM) CEO Jamie Dimon: Stop Bashing the Rich. Dimon was responding to a question at an investor conference about the hostile political environment towards banks. "Acting like everyone who's been successful is bad and that everyone who is rich is bad — I just don't get it," said Dimon at the conference.

IBD:

• Ugg Boots Help Deckers(DECK) Step Up Pace.

NBC New York:

• NYPD Warns Banks About Letter Bombs After Device Mailed to Bank HQ in Germany. The NYPD is warning New York banks to concentrate their security efforts on mailrooms after a confirmed letter bomb was sent to the CEO of Deutsche Bank in Frankfurt, Germany, law enforcement officials said.

The Detroit News:

• California Proposes Rules to Boost Electric Vehicles by 2025. The California Air Resources Board proposed Wednesday new regulations to dramatically increase the number of electric vehicles on the Golden State's roads by 2025. By 2025, zero-emission or plug-in hybrid vehicles must account for one in seven new cars sold in California, under a proposal released Wednesday.
  

Orlando Sentinel:

• Turf War Brews for Prosecutors Probing MF Global. A turf war may be brewing between two high-profile U.S. prosecutors over who will take the lead in a criminal probe of collapsed futures brokerage MF Global Holdings Ltd . U.S. Attorney Patrick Fitzgerald in Chicago and Preet Bharara, his counterpart in Manhattan, are examining how hundreds of millions of dollars went missing from the futures brokerage, sources familiar with the matter have told Reuters. No charges have been brought, and no one at MF Global has been accused of wrongdoing.
  

Rasmussen Reports:

• 17% Say Country Heading In Right Direction, 75% Say On The Wrong Track.

Reuters:

• Singapore Property Shares Plunge On Gov't Cooling Move. Shares of Singapore property developers fell sharply on Thursday after the government announced new measures to cool the city-state's housing market. CapitaLand Ltd shares fell as much as 6.5 percent to S$2.44 while smaller rival City Developments Ltd fell 7.6 percent to S$9.26 and Wing Tai Holdings was down 6.5 percent at S$1.00. Shares of Ho Bee Investment Ltd, which develops high-end condominiums in Singapore, tumbled by as much as 12.1 percent to S$1.09. Singapore said on Wednesday foreigners who buy private homes will have to pay an additional stamp duty equal to 10 percent of the property value. Analysts said they expect developers with greater exposure to high-end luxury apartments to face more pressure because as foreign buyers make up a large chunk of their sales. "We believe each of the key residential demand drivers, foreign buying, job creation and credit availability, will likely see signs of softness," Goldman Sachs said in a report. It added that this could lead to a 15 percent decline in home prices over the next 18 months with the prime segment facing more immediate pressure as foreign buyers pull back.

Financial Times:

• JPMorgan(JPM) Increases Lending to Eurozone. JPMorgan Chase has increased its lending to troubled eurozone economies, its chief executive said on Wednesday, as US rivals retreat from the region. The bank’s loans in Spain, Italy, Greece, Portugal and Ireland have jumped 9 per cent since September 30, according to a presentation by Jamie Dimon, JPMorgan chief executive. The New York-based lender, the largest US bank by assets, has steadily increased its loans in the five economies since midyear, from $14bn as of June 30 to $15.2bn at the end of the third quarter and $15.9bn on November 17, according to filings with securities regulators and presentations to investors.

Telegraph:

• Mario Draghi to Drag Out ECB Rescue. Investors have febrile expectations of Mario Draghi. They are strangely hopeful that the Italian chief of the European Central Bank will soon unleash a blitz of bond purchases to halt the death spiral in southern Europe. Today they will learn whether this is wishful thinking. "The markets have come to believe wrongly there is a grand master plan to save the world," said Andrew Roberts, credit chief at RBS. "They have built up enormous hopes that a deal will be struck to unlock the ECB's balance sheet. They will be extremely disappointed if there isn't a big acceleration in bond buying." The ECB does not have a clear mandate to act as lender of last resort for sovereign states. "The bank is very conscious that it is a European institution and has to abide by EU treaty law, and Article 123 of the Lisbon Treaty prohibits the financing of governments," said Julian Callow from Barclays Capital. What the ECB does have is authority to backstop Europe's €23 trillion banking system – by far the biggest in the world. It is doing so with a ballooning balance sheet of €2.4 trillion or 26pc or eurozone GDP. It has increased bank support by over €500bn since March, including $51bn in US dollars for 34 lenders under the latest swap arrangement with the US Federal Reserve.

Die Welt:

• Greece's central government "doesn't have the capacity nor the knowledge to execute far-reaching reforms," with the 14 ministries lacking in data, knowledge, organization and co-operation, citing Caroline Varley, head of the government judgement panel at the OECD. The Greek general secretary meets with senior civil servants in ministries only twice a year and officials have little contact with colleagues in other departments or the same office, citing a study by the OECD in Athens. "The administration isn't working and is stopping Greece from pushing forward with structural reform," Varley said. "The central administration lacks the practical tools, culture and ability to form, execute and control constructive policies," the report concluded.

livemint:

• Indian Rating Agencies May Downgrade More Power Firms. Banks have stopped lending to loss-making power cos. due to concern about defaults.
  

The Times of India:

• Industrial Output Shrank 7% in Oct., Initial Data Show. There is more disappointing news for the slowing Indian economy. According to initial estimates, the country's industrial output has declined by 7% in October, dragged down by a fall in the capital goods sector. This is the first time industrial output has entered negative territory since June 2009 and comes at a time when the economy is passing through a difficult period. The industrial sector has been under stress for the past few months, hit by rising interest rates, input costs and stubbornly high inflation. Industrial growth slowed to a two-year low of 1.9% in September as a sluggish manufacturing sector hit by rising interest rates and a decline in mining output hurt expansion. The RBI has raised interest rates 13 times since March 2010 to tame price pressures. The news should ring alarm bells for a government already grappling with sliding export growth and vanishing capital flows. Public finances are also under stress with the fiscal deficit, the measure of the government's borrowing, set to widen due to the impact of subsidies. "IIP is negative, exports are slowing, and politicians don't want capital to come in. The policy is totally divorced from the fact that the country doesn't have money to invest and create jobs," said a senior finance ministry official.

Economic Observer:

• China to Keep 'Stable Policy Tone' Next Year. China will keep a "stable macroeconomic policy tone" next year, unchanged from this year. China's top government leaders will hold the country's annual economic work meeting from Dec. 12 to 14, the report said.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.50% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 191.0 -3.5 basis points.
  
• Asia Pacific Sovereign CDS Index 151.0 -1.0 basis point.
• FTSE-100 futures +.54%.
  
• S&P 500 futures -.09%.
  
• NASDAQ 100 futures +.06%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JW/A)/1.00
• (CIEN)/.05
• (SFD)/.70
• (BF/B)/1.09
• (COO)/1.21
• (ESL)/1.19
• (PLL)/.65
• (CMTL)/.29
• (COST)/.80
• (KFY)/.34

Economic Releases
8:30 am EST

• Initial Jobless Claims are estimated to fall to 395K versus 402K the prior week.
• Continuing Claims are estimated to fall to 3700K versus 3740K prior.
  

10:00 am EST

• Wholesale Inventories for October are estimated to rise +.3% versus a -.1% decline in September.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The EU Finance Ministers Summit, ECB Rate decision, BoE Rate Decision, ECB's Constancio speaking, EBA's Stress Test Results, China CPI, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report, Goldman Sachs Clean Energy Conference, (TXN) Mid-Quarter update, (HIG) Investor Day, (HRB) Investor Conference, (LYB) Investor Day and the (AKAM) Analyst Day could also impact trading today.
  

BOTTOM LINE: Asian indices are lower, weighed down by industrial and real estate 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.