Tuesday Watch

Weekend Headlines
Bloomberg:

• Euro Maintains Decline Against Yen Before Italy Auctions Government Debt. The euro maintained a two-day drop against the yen before Italy sells bills and bonds this week amid concern Europe’s debt crisis will drive up borrowing costs for the region’s larger economies. The Dollar Index held losses from last week before U.S. reports forecast to show consumer confidence rose to the most since July and regional manufacturing gauges increased, reducing demand for haven assets. Australia’s currency ended a five-day rally as Asian stocks slid. Thailand’s baht weakened versus the greenback as investors reduced holdings of the nation’s assets. “The markets are waiting to see how much demand there’ll be for Italian debt,” said Junichi Ishikawa, a Tokyo-based market analyst at IG Markets Securities Ltd. “If the results deepen doubts about Italy’s funding ability, they will weigh on the euro. I still don’t see any reason to buy the currency.” Italy is scheduled to sell 9 billion euros ($11.8 billion) of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 bonds tomorrow. The nation will auction debt due in 2014, 2018, 2021 and 2022 the following day. Ten-year bond yields in Italy advanced six basis points to 6.98 percent on Dec. 23, approaching the 7 percent level that spurred Greece, Ireland and Portugal to seek bailouts.
• China Stocks Drop to 20-Year Low on Cash Crunch, Slowing Industrial Profit. China’s stocks fell, driving the benchmark index lower for the sixth time in seven days, on concern about a cash crunch after interbank lending rates jumped and profit growth for industrial companies slowed. China Construction Bank Corp. (601939) and China Minsheng Banking Corp. paced declines for lenders after one-month interbank borrowing costs surged the most since June. Anhui Conch Cement Co. and Sany Heavy Industry Co. dropped more than 2 percent, leading losses for industrial companies after a report showed earnings growth for the first 11 months of the year decelerated. “Tight liquidity and slowing economic growth are key concerns for investors and that hasn’t changed,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Stocks have room for further declines because we don’t see a reversal of fundamentals.” The Shanghai Composite Index (SHCOMP) slid 18.97 points, or 0.9 percent, to 2,171.14 as of 10:31 a.m. local time, heading for the lowest level since March 16, 2009. The CSI 300 Index (SHSZ300) fell 0.9 percent to 2,313.82. A measure of small and medium-size companies slid 1.4 percent in Shenzhen. Hong Kong’s market is shut today, while the U.S. was closed yesterday for the Christmas holiday. The Shanghai Composite has fallen 7 percent in December as concern about an economic slowdown overshadowed the first cut in reserve requirement ratios in three years on Nov. 30. For the year, the measure is down 23 percent after the central bank raised interest rates three times to cool inflation and exports to Europe slowed because of the region’s debt crisis.
  
• Rubber Demand in China to Slow in 2012 as Auto Sales Decline, Okachi Says. Natural rubber demand in China, the world’s largest consumer, may slow in 2012 and prices may extend the biggest annual decline in three years as economic growth and auto sales ease, an executive at Okachi & Co. said. “There’s growing concern that the whole economic situation will face downward pressure in the first quarter next year because of weak economies in both emerging and developed countries,” said Lizhi Tang, president of Okachi’s greater China region. Okachi is the largest broker for rubber contracts on the Tokyo Commodity Exchange, he said. Slower demand may extend a 33 percent decline in prices this year, the biggest drop since 2008, amid higher supply from producing countries including Thailand, and as the sovereign debt crisis in Europe deepens and growth in the U.S. slows. China accounted for about 34 percent of global demand last year, according to the International Rubber Study Group. “Growth in China’s demand for natural rubber next year is poised to slow down amid sluggish new auto sales,” Li Shiqiang, general manager at Sri Trang (Shanghai) Ltd. (STA), a unit of Thailand’s largest publicly traded rubber exporter, said in a phone interview on Dec. 22. “Chinese tire makers are confronting problems such as tight cash flow, declining sales, overcapacity, pressure to lower tire prices and consolidation,” Li at Sri Trang said. Shares in Giti Tire Corp. (600182), China’s largest tiremaker, have dropped 30 percent this year in Shanghai and Double Coin Holdings (600623) has plunged 42 percent as auto sales have slowed. The benchmark Shanghai bourse has dropped 22 percent. “Next year it’s likely that supply will outstrip demand because of a slowdown in the global economy and the subsequent weak demand from the auto and tire sectors,” He Yihua, a trading manager at Okachi, said in an e-mail. The increasing use of substitute synthetic rubber will also lead to reduced use of the natural product, He said. Synthetic rubber may have reduced natural rubber consumption by about 545,000 tons in 2011, he said. “The weak fundamentals in the real estate market and other infrastructure sectors will also reduce the demand for tires in the logistics chain,” Sri Trang’s Li said. “So far there’s nothing to be optimistic about in 2012.”
• PBOC's Zhou Says China Should Cut Reliance on Foreign Rating. China should reduce its reliance on overseas rating companies by encouraging large financial institutions to strengthen their research and make their own judgments, central bank Governor Zhou Xiaochuan said. The nation is also considering establishing credit-rating companies backed by the government, Zhou said at a financial forum in Beijing today. A copy of his speech transcript was posted on financial news portal hexun.com. Zhou’s remarks reflect China’s desire to seek alternatives to the top-three global rating companies amid skepticism among officials about the firms’ independence.
• U.S.. Says Iran Elite Profiting From Currency Plunge Triggered by Sanctions.
• Obama Campaign Returns $70,000 of Corzine Campaign Donations. President Barack Obama’s re-election campaign returned campaign contributions from Jon S. Corzine, former chairman and chief executive officer of MF Global Holdings Ltd., according to a Democratic official. Obama for America and the Democratic National Committee refunded the money from the former New Jersey governor out of an abundance of caution, said the official, who requested anonymity. Republicans have criticized the president for keeping contributions from the head of a firm that collapsed and filed for bankruptcy.
• Job Creation is Price for New U.S. Health Law: Andrew Puzder.
  

Wall Street Journal:

• Views Dim on NYSE(NYX) Tie-Up. Some shareholders of NYSE Euronext are losing enthusiasm for the planned tie-up with Deutsche Börse AG, in another sign that prospects for the deal have dimmed amid protracted negotiations with European antitrust regulators.
• Banks Struggle With Euro Contingencies. As the euro-zone debt crisis intensified in recent months, at least two global banks took steps to install back-up technology systems that could handle trades in old European currencies like drachmas, escudos and lire. That, the banks quickly found, is not so easy in a financial world that is trying to both exhibit confidence in the ailing euro and—just in case—plan for its possible demise. Technology managers at the banks contacted Swift, the Belgium-based consortium that manages the network used in financial transactions, said people familiar with the matter.
• SEC Ups Its Game to Identify Rogue Firms. It is the Securities and Exchange Commission's new "most-wanted" list: a chart covered with handwritten notes, yellow highlighter and the names of about 100 hedge funds. The hedge funds have one thing in common: Their performance seems too good to be true, with some trouncing the overall market and others churning out modest results without ever suffering a down month. Some funds on the list stumble but still always outperform rival hedge funds. "There is serious fraud in this space, and we have been attacking it," said Bruce Karpati, co-chief of the SEC's asset-management enforcement unit. The hedge-fund chart dominates a corner of his lower Manhattan office.
• Iraq Crisis Grows With New Threat. Iraq's political crisis entered its second week one step closer to the potential dissolution of the government, with a call for elections by a vital coalition partner and a suicide attack that extended the spate of violence that has followed the withdrawal of U.S. troops.
• Badly Written Bad Rules. New studies show the quality of federal regulation is plummeting. President Obama is leading his regulators in an anvil chorus unlike anything in modern U.S. history. So it is unsurprising but still instructive that independent students of regulation say the quality of the many rules they're putting out seems to be at all-time lows.

CNBC:

• Bank of America(BAC) Mulls More Asset Sales to Boost Capital.
• Syria Tanks Fire, 23 Die in Fighting; Monitors Awaited.
• Tens of Thousands in Moscow Put Pressure on Putin. Tens of thousands of flag-waving and chanting protesters called on Saturday for a disputed parliamentary election to be rerun and an end to Vladimir Putin's rule, increasing pressure on the Russian leader as he tries to win back the presidency.

Business Insider:

• Online Shopping Spiked 16.4% On Christmas Day, 7% Of Purchases Were Made On iPads.
• Nancy Pelosi Is Spending Her Christmas In A $10,000-A-Night Suite.
• Turkey Could Well Be Sliding Into Authoritarianism.
• This Monster From The Deep Could Change Everything For Norwegian Oil. With relatively little fanfare on the international stage, Lundin Petroleum and Statoil (and partners) have just recently jointly discovered one of the largest oil fields ever found in the North Sea.
• A Few Chinese Storm Clouds To Spoil A Happy New Year. (graphs)
  

Zero Hedge:

• Hold On Tight: European Bond Issuance In January Is About To Get Very Bumpy.
  
• China Insolvency Wave Begins As Nation's Biggest Provincial Borrowers "Defer" Loan Payments.
  

NY Times:

• U.S. Embraces a Low-Key Response to Turmoil in Iraq. Sectarian violence and political turmoil in Iraq escalated within days of the United States military’s withdrawal, but officials said in interviews that President Obama had no intention of sending troops back into the country, even if it devolved into civil war.
• Foreclosure Relief? Don't Hold Your Breath. THROUGHOUT the foreclosure crisis, Washington has done little to help people hang on to their homes. All those programs that were supposed to help — HAMP, HARP, Hope for Homeowners — have mostly failed.
• Hackers Breach the Web Site of Stratfor Global Intelligence. While the rest of the world engaged in merriment and good cheer, hackers used the holidays to attack a United States research group that puts out a daily newsletter on security issues.
• Nigeria Arrests 2 in Blast That Killed 26 in Church on Christmas Day. As Nigerian officials announced arrests Monday in connection with the deadly bombing of a church on Christmas Day, American officials and analysts said the violence underscored the increasing ability of a shadowy Islamist insurgency to carry out complex strikes against multiple targets, complicating the fight against it.

The Sacramento Bee:

• Congressional Recess Means the End of 30 Years of US Tariffs on Imported Ethanol.

Washington Post:

• Falling Home Values Mean Budget Crunches for Cities. The nation’s housing crisis is five years old, but for local governments across the country, the worst of the reckoning might only now be at hand. Because of the time it often takes for property assessments to reflect falling home values, the bust that began in 2007 has just begun to ravage tax revenues in communities from coast to coast. The problem is unlikely to subside soon.

The Telegraph:

• UK Treasury Plans for Euro Failure. The Government is considering plans to restrict the flow of money in and out of Britain to protect the economy in the event of a full-blown euro break-up. The Treasury is working on contingency plans for the disintegration of the single currency that include capital controls. The preparations are being made only for a worst-case scenario and would run alongside similar limited capital controls across Europe, imposed to reduce the economic fall-out of a break-up and to ease the transition to new currencies. Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. Capital flight from weak euro nations to countries such as the UK would drive up sterling, dealing a devastating blow to the Government’s plans to rebalance the economy towards exports.

Focus:

• Germany's government is revising its forecast for 1 percent economic growth in 2012 and will present a lower figure in mid-January.
  

Efe:

• Spain's economy will contract in the fourth quarter of 2011 and the first quarter of 2012, a trend that would constitute entering into recession, citing comments by Economy Minister Luis de Guindos.

Il Sole 24-Ore:

• The European Central Bank won't become the lender of last resort for governments struggling to finance their debt, and will also focus on prospects for economic growth when settling monetary policy, Governing Council member Ignazio Visco said in an interview. "It's not in the nature of a central bank to be the ultimate financier of the state," he said. "That role isn't permitted in the European treaty." In his role as top regulator of the Italian banking system, Visco said that Italian lenders are mistaken in calling for the European Banking Authority to ease its demands for higher capital levels.
• Italy plans to sell almost $586 billion of debt next year to pay for maturing bonds and bills and cover the government's budget deficit, citing an interview with Maria Cannata, director of public debt.
  

Xinhua:

• China Should Be Prepared for Possible Inflation Rebound. China should be prepared for a possible inflation rebound next year, citing Yang Weimin, vice chairman of the Office of the Central Leading Group on Financial and Economic Affairs. The global economic situation will be "very tough and complicated" next year with increasing instability and uncertainty, Yang says.
• Shanghai started today a trial of requiring new users of microblogging services to register with real names, citing China's internet information regulator. Chinese cities including Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen have started the trial.

Financial News:

• Japan's purchases of Chinese government bonds may add to inflationary pressures in China because of the foreign capital inflow, citing Wang Yongzhong, a researcher at the Chinese Academy of Social Sciences.
  

Study Times:

• China will keep its macro policy basically stable in 2012, citing Ma Jiantang, head of the National Bureau of Statistics.
  

Weekend Recommendations

Barron's:

• Made positive comments on (GPS).
• Made negative comments on (PPC) and (HOV).
  

Night Trading

• Asian indices are -.75% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 207.0 unch.
• Asia Pacific Sovereign CDS Index 158.0 unch.
• FTSE-100 futures n/a.
  
• S&P 500 futures n/a.
• NASDAQ 100 futures n/a.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CALM)/.89

Economic Releases
9:00 am EST

• The S&P/CS 20 City MoM% SA for October is estimated to fall -.34% versus a -.57% decline in September.

10:00 am EST

• Consumer Confidence for December is estimated to rise to 58.6 versus 56.0 in November.
• Richmond Fed Manufacturing Index for December is estimated to rise to 5.0 versus 0.0 in November.

10:30 am EST

• Dallas Fed Manufacturing Activity for December is estimated to rise to 4.5 versus 3.2 in November.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

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