Thursday Watch

Evening Headlines

Bloomberg:

• Merkel Buffeted by Domestic Disputes That May Sidetrack Her Crisis Efforts. German Chancellor Angela Merkel is being buffeted by domestic political turbulence, threatening to distract her efforts to follow through on a European summit agreement last week to tackle the euro debt crisis. Christian Lindner, the general secretary of Merkel’s Free Democratic coalition partner, unexpectedly quit yesterday amid a party tussle over bailouts. Separately, Merkel’s spokesman said the chancellor had full confidence in Christian Wulff, Germany’s president, after a Bild report that he misled lawmakers over a 500,000 euro ($649,000) home loan. The political turmoil engulfed Merkel’s administration five days after she secured what she called a “breakthrough” European deal to enforce stricter budget rules and to stem the financial contagion now in its third year. That uncertainty may disrupt her efforts to restore market confidence by pushing the steps agreed on in Brussels through parliament in Berlin. “The FDP and Wulff are a distraction in many ways,” Joerg Forbrig, an analyst at German Marshall Fund of the United States, said by phone. “The FDP is basically in the process of dismantling itself as a party while serving in government.” It’s “the last thing Merkel needs right now.” The disruptions came as Bundesbank President Jens Weidmann, her former economic adviser, hinted the central bank may not provide its share of loans to the International Monetary Fund that was part of last week’s summit agreement.
• Euro Region Faces Recession as Breakup Risk Remains, E&Y Says. The euro-area economy is likely to slip back into a recession and its leaders’ new plan to end the debt crisis hasn’t completely eliminated the risk of a breakup of the currency region, according to Ernst & Young LLP. The economy of the 17 nations using the euro will probably shrink in the current and next quarters, the group said in a report published in London today. The economy will barely grow in 2012, with E&Y forecasting expansion of just 0.1 percent. “The latest developments in Greece, Italy and Spain and the European agreement lower the risk of a breakup of the euro zone,” said Marie Diron, an economist at Oxford Economics and adviser on the report. “This risk remains, however, especially since in 2012 very large amounts of sovereign debt require refinancing which could cause tensions.”
  
• Euro Is Near 11-Month Low Before Spain Bond Sales, German PMI. The euro traded 0.3 percent from the weakest level in 11 months as Spain prepares to sell bonds amid concern Europe’s policy makers are struggling to stem the region’s debt crisis. The 17-nation euro was near the lowest level in 10 weeks against the yen before a report forecast to show Germany’s manufacturing industry contracted for a third-straight month, spurring concern that Europe’s fiscal problems will hamper growth in the region’s biggest economy. The dollar maintained gains against most major peers as Asian stocks dropped for a third day, extending a global decline in shares and bolstering demand for the world’s reserve currency as a refuge. “We’ve got a very negative view on growth for Europe next year,” said Robert Rennie, Sydney-based chief currency strategist at Westpac Banking Corp., Australia’s second-largest lender. Fiscal austerity and tightening financial conditions “will develop into a fully blown recession,” he said.
• Foreign Direct Investment in China Falls on Global Turmoil. Foreign direct investment in China fell last month from a year earlier, the first decline since 2009, amid global financial turmoil and diminished prospects for gains in the yuan. Investment slid 9.8 percent to $8.76 billion, after expanding 8.8 percent in October, the Ministry of Commerce said in a statement today. The previous decline was in July 2009. Communist Party leaders yesterday described the global outlook as “very grim.”
• Record Big Ship Deliveries to Hit Asia Lines as Europeans Team Up: Freight. Container lines are losing money on Asia-Europe routes after slashing rates more than 50 percent this year because of a price war and excess capacity. In 2012, 42 of the biggest ships ever built will join the competition. The record number of ships able to hold more than 13,000 containers entering service will be almost double this year’s tally of 22, according to Alphaliner and Clarkson Plc data. They will boost the total fleet to about 100.
• Wall Street Traders Confounded as Volatility Extends Record Run. Duke Buchan III’s $1 billion hedge fund beat U.S. stocks by 46 percent in the decade through March, a period that included the steepest equity-market losses since the 1930s. Then came the selloff in August when global stocks suffered their worst nine-day drop since the 2008 financial crisis. For four days, The Dow Jones Industrial Average (INDU) alternated between gains and losses of more than 400 points, the longest streak ever, and its intraday swings have averaged twice the level seen during the first seven months of the year. Last week, Buchan told clients he is shutting his firm Hunter Global Investors LP. “Markets seem to be driven more by the latest news out of Europe than by a company’s earnings prospects,” Buchan, 48, said in a Dec. 8 investor letter. “We have not weathered the ensuing volatility well.”
• Japan's Tankan Sentiment Slides as Pessimism Reigns on Yen. Sentiment among Japan’s largest manufacturers deteriorated from three months ago, underscoring the fragility of a post-quake recovery threatened by Europe’s debt crisis and a strengthening yen. The Tankan large manufacturer index fell to minus 4 from 2, the Bank of Japan said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a reading of minus 2.
• Bernanke Tells Senators Fed Plans No Aid to European Banks. Federal Reserve Chairman Ben S. Bernanke told Republican senators the Fed plans no additional aid to European banks amid the region’s sovereign debt crisis, according to two lawmakers who attended the meeting. Senator Bob Corker, a Republican from Tennessee, said Bernanke made it “very clear” in closed-door comments today the central bank doesn’t intend to rescue European financial institutions. Lindsey Graham, a South Carolina Republican, said Bernanke told lawmakers that “he doesn’t have the intention or the authority” to bail out countries or banks. Both senators spoke to reporters after leaving the one-hour session at the Capitol in Washington. “People walk away knowing he has no intentions whatsoever of furthering U.S. involvement in the crisis,” Corker said. The Fed chairman also said he doesn’t foresee the U.S. providing any more money to the International Monetary Fund to combat Europe’s debt turmoil, Corker told reporters. Corker cited Bernanke as saying that “he doesn’t have the legal authority to loan money to European banks.”
• Lam Research(LRCX) to Buy Novellus Systems(NVLS) for $3.3 Billion. Lam Research Corp (LRCX.O), a supplier of wafer fabrication equipment, agreed to buy smaller rival Novellus Systems Inc (NVLS.O) for $3.3 billion in stock as it looks to gain cutting-edge technology and become more efficient. The deal is the latest acquisition in the semiconductor industry as manufacturers and chip-gear makers wrestle with cutthroat competition, waning PC sales growth and a weak economy. Under agreement's terms, Novellus stockholders will receive 1.125 shares of Lam Research common stock for each Novellus share held, or a 28 percent premium to the stock's close on Wednesday on Nasdaq.
• Paulson's Bright Spot Amid Slump May Fade as Gold Drops to Five-Month Low. John Paulson, the hedge-fund manager enduring the worst year in his career, may be facing a final blow from this month’s selloff in gold, an investment that mitigated losses at his $28 billion firm earlier in 2011. The SPDR Gold Trust (GLD) exchange-traded fund, of which Paulson was the largest shareholder as of Sept. 30, fell 10 percent from the end of last month, and all eight of his gold stocks slumped with a 9.6 percent decline for bullion. The declines would translate into a $672.1 million paper loss on those securities for Paulson & Co., assuming his holdings haven’t changed since the end of the third quarter, when the firm reported its equity stakes in a regulatory filing. Until this month, gold had been the bright spot for Paulson & Co. clients, who can choose to invest in gold-denominated shares of the hedge funds. Gains in bullion had alleviated losses of 46 percent, in the dollar share class, for one of the firm’s biggest funds this year through November. Paulson also offers a dedicated Gold Fund, its best performer this year.

Wall Street Journal:

• Europe Strains World's Banks. The world's financial system showed new signs of strain on Wednesday as banks and investors clamored for U.S. dollars and two European banks took emergency measures to address the deepening crisis. Stresses rippled through debt and stock markets despite measures taken by European leaders last week to help restore investor confidence. Reflecting the tension, rates that banks charge each other for short-term borrowing in dollars continued to climb, hitting their highest level since July 2009. Long-term Italian government bond yields jumped back above 7%, a level that would crimp Italy's ability to borrow in the future.
• U.S. Shoppers Foot Bill for Soaring Pay in China. One of the things that's showing up in Christmas stockings this year: higher prices, courtesy of China. After decades as America's go-to destination for low-cost consumer goods, China is undergoing a profound shift. Rapid economic development and a smaller supply of young migrant workers are pushing up labor costs. Tack on rising raw-materials prices, driven largely by Chinese demand, and a strengthening currency, and China-made goods aren't the bargains they used to be. In the past year, labor costs have risen 15% to 20% at Michaels Stores Inc.'s Chinese suppliers, says John Menzer, chief executive of the arts-and-crafts retailer.
• Hospitals Cut Doses Amid Drug Shortage. Hospitals are grappling with a shortage of nutrition drugs and disinfectant products that has led doctors to cut doses and ration supplies, prompting patients at a handful of facilities to get sick. The crunch is part of a broader drug shortage that has federal health officials rethinking how they monitor the nation's pharmaceutical supply. On Thursday, a Senate committee is slated to consider legislation requiring companies to notify the Food and Drug Administration of problems that might result in a shortage so the agency can help prevent them.
• Loan Costs Hit Asian Firms. Airlines, Shippers Turn to Bond Market as Banks Pull Back, Imperiling Spending. Asian airlines and shipping companies, already battling a slowdown in cargo traffic, are facing significantly higher borrowing costs as European banks pull back from lending. The companies are turning to the bond market and government export agencies and seeking out new banks to fill the lending gap, but industry executives worry that if credit remains tight, it could force companies to scale back spending. "It's manageable at the moment, but the credit pullback is going to have a pricing effect," said Robert Martin, chief executive of BOC Aviation, the leasing arm of China's Bank of China.
• The Euro Zone's Double Failure by Martin Feldstein. Europe needs country-by-country fiscal reforms, not a renewed push for political integration. The recent euro-zone summit was a double failure. It failed to achieve the increased European political integration that was the primary goal of German Chancellor Angela Merkel and the other European political leaders. And it failed to improve the outlook for euro-zone sovereign bonds because those politicians continued to insist that only a fiscal union and political integration could limit the interest rates on sovereign debt.

Zero Hedge:

• David Stockman's Thoughts on the Coming European Train Wreck.
• Germany Preparing Plans For Commerzbank Bail Out.
• Fitch Downgrades Credit Agricole To A+, Outlook Stable.
• Game Theory Over: Bank Of France's Noyer Says Britain Should Be Downgraded, Not France.

CNBC:

• Investors Still Reluctant to Buy Euro Zone Bank Debt. Investors are not likely to open their wallets to European banks any time soon despite the efforts of central banks to protect global funding markets from the euro zone debt crisis.
• China December Flash PMI at 49; Factory Output Shrinks. China's factory output shrank again in December after new orders fell, a preliminary purchasing managers' survey showed, entrenching expectations that manufacturers are struggling with waning global demand and tight domestic credit conditions. The HSBC flash manufacturing purchasing managers' index (PMI), the earliest indicator of China's industrial activity, stood at 49 in December, a modest rise from November's 47.7 but pointing to a monthly contraction in activity nonetheless.

IBD:

• Fortinet(FTNT) Finds Secure Footing In Unsecure Networks.

NY Times:

• Euro Zone Deal Runs Into Second Thoughts. The deal reached at the emergency European summit meeting in Brussels last Friday was supposed to cement a consensus for better fiscal discipline and reassure the financial markets about the European Union’s resolve. By Wednesday, it was clearly not convincing investors.

Reuters:

• Exclusive - Regulators Know Where MF Global Funds Went. U.S. regulators now have a more complete picture of money transfers in the final days of bankrupt brokerage MF Global (MFGLQ.PK), but must sort out which transactions were legitimate before more money can be released to customers, a top official told Reuters on Wednesday. Jill Sommers, who is heading the Commodity Futures Trading Commission's review of MF Global, said regulators "are far enough along the trail" that they know where the money went. "Now it's just finding out which ones of those transactions are legitimate and which ones of them are illegitimate," Sommers said.
• Michael Kors upsizes IPO, prices above range-underwriter. Luxury lifestyle company Michael Kors Holdings Ltd raised the size of its initial public offering and priced it above the expected range, according to an underwriter. In all, 47.2 million shares were sold at $20 each, generating proceeds of $944 million. At that price, the company is valued at about $3.82 billion.
• More Pain For Euro As Growth Fades, Crisis Endures. The euro is likely to stay under pressure until early next year as investors grow bearish about euro zone growth prospects and policymakers' ability to bring a rapid conclusion to the region's debt crisis. The single currency has shed more than 3 percent against the dollar so far this week, equivalent to all its losses for 2011, as a European Union summit last week fell short of investor expectations for decisive steps to stem the bloc's debt crisis.

Financial Times:

• European Banks May Need Further EU200 Bln for Basel Rules. European banks may have to raise almost EU200 bln in new capital or reduce their assets and liabilities by around 20% in order to meet Basel III rules, citing a study by the Boston Consulting Group. Boston Consulting Group reviewed 145 large banks worldwide, found they need to raise EU354 bln or cut risk-weighted assets by 17%. Banks in the U.S. and Asia each face collective shortfalls of about EU70 bln, citing the study.

Telegraph:

• China's Epic Hangover Begins. China's credit bubble has finally popped. The property market is swinging wildly from boom to bust, the cautionary exhibit of a BRIC's dream that is at last coming down to earth with a thud. It is hard to obtain good data in China, but something is wrong when the country's Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control. The growth of the M2 money supply slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains. The question is whether the People's Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble. Chinese stocks are flashing warning signs. The Shanghai index has fallen 30pc since May. It is off 60pc from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933. "Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)... a 'Bloody Ridiculous Investment Concept' in my view," said Albert Edwards at Societe Generale.

Sky News:

• Goldman Sachs Asset Management Chairman Jim O'Neill said the euro are won't fall apart in the next 12 months, though some countries may not be able to "stick with the program." European leaders have "failed with this summit, but they'll be back again and try with something else," O'Neill said in an interview.

Financial Times Deutschland:

• Bundesbank President Jens Weidmann was refused a meeting with the German Parliament's budget committee to discuss boosting contributions to the IMF. The government put pressue on the committee not to meet with Weidmann, who had called on parliament to share responsibility for agreeing to an increase of up to 45 billion euro in IMF contributions.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -2.0% to -1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 215.0 +3.0 basis points.
  
• Asia Pacific Sovereign CDS Index 158.50 +2.75 basis points.
• FTSE-100 futures -.25%.
  
• S&P 500 futures -.22%.
  
• NASDAQ 100 futures -.24%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PIR)/.20
• (SCHL)/2.32
• (WGO)/.06
• (FDX)/1.52
• (DFS)/.92
• (ADBE)/.60
• (HOV)/-.38
• (HEI)/.42
• (MLHR)/.41

Economic Releases
8:30 am EST

• The Producer Price Index for November is estimated to rise +.2% versus a -.3% decline in October.
• The PPI Ex Food & Energy for November is estimated to rise +.2% versus unch. in October.
• The 3Q Current Account Deficit is estimated at -$108.4B versus -$118.0B in 2Q.
• Empire Manufacturing for December is estimated to rise to 3.0 versus .61 in November.
• Initial Jobless Claims are estimated to rise to 390K versus 381K the prior week.
• Continuing Claims are estimated to rise to 390K versus 381K prior.
  

9:00 am EST

• Net Long-Term TIC Flows for October are estimated to fall to $62.5B versus $68.6B in September.

9:15 am EST

• Industrial Production for November is estimated to rise +.1% versus a +.7% gain in October.
• Capacity Utilization for November is estimated at 77.8% versus 77.8% in October.

10:00 am EST

• The Philadelphia Fed for December is estimated to rise to 5.0 versus 3.6 in November.
  

Upcoming Splits

• (ROST) 2-for-1
  

Other Potential Market Movers

• The ECB's Mario Draghi speaking, 5-Year TIPS Auction, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, BofA Merrill Healthcare Conference, (AET) Investor Conference, (HANS) Business Update, (HON) Update and the (UTX) Analyst Meeting could also impact trading today.
  

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