Monday Watch

Weekend Headlines
Bloomberg:

• Merkel, Sarkozy Return to Work on Euro Rescue. German Chancellor Angela Merkel and French President Nicolas Sarkozy meet today for the first time in 2012 as they seek to craft a master plan for rescuing the euro over the next three months. The two leaders gather in Berlin to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the 17-member euro area. They meet at 11 a.m. local time at the Federal Chancellery and hold a joint press conference at about 1:30 p.m. The German and French leaders have sponsored a plan to install new guidelines by March. A crisis that began in Greece more than two years ago has moved to the euro area’s core, and leaders are struggling to persuade investors they can contain the risk and assure the euro’s survival. “They urgently need to formulate and clearly communicate a vision for a sound and stable euro area that deserves the name fiscal compact,” Thomas Harjes, senior European economist at Barclays Capital in Frankfurt, wrote in a note on Jan. 6. The euro extended its decline against the U.S. dollar last year, sliding 1.7 percent so far this year. The single currency lost 9.4 percent in the last six months against the greenback. Borrowing costs for sovereign debt have increased. Spanish 10-year yields rose by the most in almost 17 years last week, leading bonds of the region’s most-indebted countries lower, on concern that they will struggle to cut budget deficits amid the economic slowdown. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence.
• Euro Declines to 11-Year Low Against Yen Ahead of Merkel-Sarkozy Meeting. The euro (EUR) fell to an 11-year low against the yen and dropped to its least in nearly 16 months versus the dollar before the German and French leaders meet amid signs the region’s sovereign-debt crisis is hurting growth. The 17-nation currency slid versus most of its 16 major counterparts ahead of bond sales by Spain and Italy this week after yields rose. A report today is forecast to show industrial production in Germany, Europe’s biggest economy, declined in November. The dollar gained after data Jan. 6 showed the U.S. labor market is strengthening. “We’re going to see more ongoing political noise and that’s really just a distraction from the bigger driver of the euro, which is the relatively weak growth outlook,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “As long as European growth underwhelms, the euro will continue to underperform the U.S. dollar, yen and probably also the rest of the major currencies.”
• EFSF's Regling Plans to Offer Investors 30% Guarantee, Bild Says. Klaus Regling, who heads the European Financial Stability Facility, plans to offer potential investors in the fund a guarantee of as much as 30 percent on their investment, rather than the 20 percent currently offered, Bild- Zeitung reported. The current insurance rate isn’t enough given the risk involved, the newspaper said, citing comments made by Regling to policymakers of the German Christian Social Union at Wildbad Kreuth in Bavaria last week. The CSU belongs to Chancellor Angela Merkel’s ruling coalition. Separately, the German government is considering an earlier start of the planned European Stability Mechanism program, Bild cited unidentified people in the government as saying. European states may add the scheduled 80 billion euros ($102 billion) to the pool in one move rather than in installments or raise the amount to 100 billion euros, Bild said.
• Belgium Freezes $1.7 Billion of Spending After EU Warns of Deficit Overrun. Belgium froze 1.3 billion euros ($1.7 billion) in spending after the European Union warned that a weaker-than-projected economy would push the deficit above the new government’s targets. “It’s a purely administrative suspension to give us time to conduct the budget review,” Budget Minister Olivier Chastel told L’Echo newspaper. He defended the government’s budget math, saying it will squeeze the deficit down to 2.8 percent of gross domestic product in 2012 as planned. The EU’s prediction of a higher deficit weighed on Belgian bonds (GDBR10) yesterday, pushing the extra yield over German debt up by 6 basis points to 278 basis points, the most since a six-party government took office on Dec. 6 with a pledge to cut the budget.
• Monti Says No New Budget Cuts Needed to Balance Budget. The Italian government will not have to carry out an additional package of budget cutting measures to meet its goal of eliminating its deficiti in 2013, Prime Minister Mario Monti said.
• Corporate Profit Growth at 2-Year Low as U.S. Feels Europe Drag. U.S. corporations ended 2011 with the slowest profit growth in two years as the mending economy that lifted Macy’s Inc. (M) was met by a European slump that vexed companies more tied to global sales, such as Cisco Systems Inc. (CSCO) Standard & Poor’s 500 Index companies may have earned $24.74 a share (SPX) in the fourth quarter, according to analysts’ estimates compiled by Bloomberg as of Jan. 6. The projected 6 percent gain is the smallest against a year-earlier quarter (SPWPPRCT) since September 2009, just after the U.S. recovery began. “Slowing global growth, some impairment of export activity to Europe and perhaps even the rise of the dollar collectively have begun to sort of work against the multinational story,” said Mark Luschini, chief investment strategist at Philadelphia- based Janney Montgomery Scott LLC, which manages $54 billion. While growth is still “subpar,” he said he intends to invest more in the U.S. to avoid higher international risk.
• Paulson's Advantage Plus Fund Drops 51% in 'Aberrational Year'. John Paulson, the billionaire money manager mired in the worst slump of his career, lost 51 percent in one of his largest funds last year amid a failed bet on an economic rebound. Paulson’s Advantage Plus Fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, declined 8.6 percent last month, according to an investor update, a copy of which was obtained by Bloomberg News. The fund’s gold share class dropped 10 percent in December and 36 percent last year. “Clearly, this has been an aberrational year for us,” Paulson wrote yesterday in a signed letter to investors that was released with the update. “Going forward, we remain committed to restoring all of our funds to profitability.” Paulson, 56, has scaled back bullish bets across his funds after suffering losses from holdings ranging from Citigroup Inc. to Sino-Forest Corp., the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. One bet that worked for Paulson in the first part of the year was gold, which slumped 14 percent in the final four months of 2011, leaving his Gold Fund, which can buy derivatives and other gold-related securities, with an 11 percent loss last year. The fund declined 20 percent in December. Paulson’s biggest funds, Advantage Plus and Advantage, employ similar strategies and have $11 billion in combined assets, which are mostly invested in shares of banks, insurance companies and other financial services firms. The dollar- denominated Advantage Fund fell 6.2 percent in December and 36 percent last year. Its gold share class slumped 11 percent last month and 22 percent in 2011. Paulson investors can choose between dollar-and gold-denominated versions for most of the firm’s funds. The Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic upturn, including hotels, financial services and real estate companies, rose less than 0.1 percent in December and fell 28 percent last year. The gold share class declined 6.4 percent last month and 18 percent in 2011. The Paulson Partners Enhanced Fund, which invests in the shares of merging companies, decreased 2 percent last month and 19 percent last year. Its gold share class declined 8.7 percent in December and 9.5 percent in 2011. Paulson’s Credit Opportunities Fund slumped 0.2 percent last month and 18 percent last year. Its gold shares dropped 6.2 percent in December and 5.8 percent in 2011.
• Ahmadinejad Woos Chavez-Led Allies in Latest America Tour. Iranian President Mahmoud Ahmadinejad, facing tighter U.S. sanctions and rising tensions in the Persian Gulf, will turn to his diminished group of allies in Latin America for support this week. Ahmadinejad arrived in Venezuela yesterday to kick off a four-nation tour to push investment projects such as a hydro- electric power plant in Ecuador. He’ll be joining forces with leaders like Venezuela’s Hugo Chavez and Cuba’s Raul Castro in taking shots at the U.S. in its own backyard, defying attempts to isolate Iran over its nuclear activities.
• Oil Trades Near One-Week Low as Europe Deb Concern Counters Iran Tension. Oil traded near the lowest settlement in a week in New York as bets that Europe’s debt crisis will worsen and curb fuel demand countered concern that tension with Iran may disrupt Middle East crude exports.
• Cohan: How Wall Street Turned a Crisis Into a Cartel. Almost 65 years ago, in 1947, the U.S. government sued 17 leading Wall Street investment banks, charging them with effectively colluding in violation of antitrust laws. In its complaint -- which was front-page news at the time - -- the Justice Department alleged that these firms had created “an integrated, overall conspiracy and combination” starting in 1915 “and in continuous operation thereafter, by which” they developed a system “to eliminate competition and monopolize ‘the cream of the business’ of investment banking.”
• Bristol-Myers(BMY) Agrees to Acquire Inhibitex for $2.5 Billion. Bristol-Myers Squibb Co. agreed to buy Inhibitex Inc. for about $2.5 billion to boost its position in hepatitis C medicines as it faces generic competition for its best-selling blood thinner Plavix this year. Both boards approved the transaction, the companies said in a statement today. Inhibitex agreed to recommend that its shareholders accept an offer of $26 per share, more than double its closing price of $9.87 on Jan. 6.

Wall Street Journal:

• A Quiet Fed Voice Emerges as Force Inside the Temple. Five years ago, a brainy San Francisco researcher named John Williams co-wrote an academic paper called "Revealing the Secrets of the Temple," in which he argued that the Federal Reserve should be more open about its plans for interest rates. Mr. Williams, now president of the Federal Reserve Bank of San Francisco, will get what he asked for when Fed officials gather this month.
• Mr. Corzine Is Seeking Manhattan Office Space.
• Romney at Bain: Big Gains, Some Busts. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.
• Investing in a 'Fat Tail' World by Mohamed A. El-Erian. By pushing interest rates to very low levels, central banks are pushing investors out the risk spectrum.
• Parties Maneuver in Germany's Political Crisis. The chairman of Germany's largest opposition party said the Social Democrats would work with Chancellor Angela Merkel to find a consensus candidate for the German presidency, as pressure mounted on President Christian Wulff to resign, a party spokesman said on Sunday.

Marketwatch.com:

• QE Not Likely Now, Given Data: Fed's Bullard. More bond purchases, otherwise known as quantitative easing, are not likely at least in the short term because the economy seems on more solid ground, St. Louis Federal Reserve Bank President James Bullard said Saturday. “We already have an easy policy, and the economy is improving, and so we can probably wait and see for now,” Bullard said. There is no risk that inflation will be too low in 2012, Bullard said. The personal consumption expenditure index — the Fed’s favorite inflation target — rose 2.5% for the 12 months ending November. “I am not worried that inflation is going to be too low. Either it will come back toward our longer-run implicit inflation target [of 2.0% or a little less] or there is some risk that it would stay fairly high where it is and not come down too much further,” he said.
• Obama Facing Uphill Re-Election Battle: Economist. President Barack Obama is facing an uphill re-election battle and on track to receive only 43% of the vote in a two-man race, according to an election model by IHS Global Insight. Sara Johnson, senior research director at the Lexington, Mass.-based firm, said that the model has been wrong only twice in the past 16 presidential races. In a presentation Friday at the American Economic Association meeting, Johnson said that the high unemployment rate is the biggest factor hurting Obama’s re-election chances. Another factor is the slow growth in real per-capita disposable income, Johnson said.

Business Insider:

• Slow Growth And High Unemployment Is Pulling Europe Back Into Dangerous Territory.
• Check Out All The Best Gadgets From CES 2012 Right Here.
• America's Secret Demographic Trump Card. (graph)
• An Alarming Development In China That Everyone Has Missed.
  

Zero Hedge:

• UBS Predicts Greece to Experience "Coercive" Restructuring With CDS Triggering Around March.
• Key Events In The Following Week.
• Russia, Iran Proceed With Bilateral Trade, Drop Dollar; Russian Warships Park In Syria; Iran Accelerates Nuclear Enrichment.

CNBC:

• US Holiday Electronics Sales Drop 5.9%. A research firm says U.S. sales of consumer electronics fell 5.9 percent this past holiday season, as smartphones cannibalize sales of standalone gadgets like cameras, camcorders and GPS navigation devices. The NPD Group says electronics sales, including TVs and PCs, totaled $9.5 billion in the five weeks ending Dec. 24. Camcorder sales plunged 43 percent, and sales of digital picture frames fell 38 percent. GPS units slumped 33 percent. PC and TV sales slipped just 4 percent, bolstered by sales of TVs bigger than 50 inches.

Wall Street All-Stars:

• Indicator Update: New Year, New Tone?
  

Seeking Alpha:

• Education Stocks Hedge Funds Are Buying.
• Hedge Funds Love These 9 Rebounding Biotech Stocks.
  

IBD:

• TJX Cos.(TJX) Prices For Profits.

NY Times:

• Lull in Strikes by U.S. Drones Aids Militants in Pakistan. A nearly two-month lull in American drone strikes in Pakistan has helped embolden Al Qaeda and several Pakistani militant factions to regroup, increase attacks against Pakistani security forces and threaten intensified strikes against allied forces in Afghanistan, American and Pakistani officials say.
• Germany Resists Europe's Pleas to Spend More. Spain, Italy and Greece are taking a knife to public spending because they have no choice. But Germany is still healthy enough that it could do its troubled trading partners a favor and focus more on promoting demand and less on cutting debt. Could, but almost certainly will not. Even if German lawmakers had not made a balanced budget a constitutional obligation two years ago, there is a deep consensus among policy makers and economists that austerity and growth are not enemies. They are comrades.

NY Post:

• Bonus Battles: Disgruntled Bankers Threaten to Sue or Walk. Wall Street bankers are fuming about the prospect of paltry payouts come bonus time — and plan to go nuclear. They’re taking their cues from their disgruntled brethren in London, who are eyeing lawsuits to regain their over-the-top pay. Here at Jefferies Group, a group of brokerage executives reportedly threatened management that they would walk away from the firm if their year-end compensation was not up to par with The Street. This hubris is just the beginning of much more to come as the downtrodden banking industry gets ready to dole out the most meager bonuses since the 2008 financial crisis.
• Icahn't Believe Carl's 35% Return. Investors who fled Carl Icahn’s hedge funds after losing money with him in 2008 might want to sit down for this one. In a year when the average hedge fund fell between 4 percent and 7 percent — with some prominent funds down in the deep double-digits — the Far Rockaway native returned 35 percent in trading profits last year. “I didn’t think we’d do so great this year, but we did very well,” Icahn told The Post when asked about the returns. “I was pretty hedged this year too,” he said, referring to his protective moves against big losses.

Forbes:

• East Asian Economies Slump. Singapore’s economy contracted last quarter, falling 4.9%. Not all analysts predict the current period will also be down, but don’t expect a robust expansion anytime soon.

CNN:

• Happy New Year? Gas Prices on the Rise Again. Gas prices in the United States increased by more than a dime over the past three weeks, the first increase seen since mid-October, according to a survey published Sunday. The average price of a gallon of regular gasoline was $3.35 as of Friday, the Lundberg Survey found. That's an increase of 12 cents from the last survey of 2011, conducted December 16.

NJ Today:

• Fraud and Folly: The Untold Story of General Electric's(GE) Subprime Debacle. Ex-employees say GE ignored warnings from whistleblowers. For General Electric Co., hawking subprime mortgages was a long way from making light bulbs and jet engines. That didn’t stop the industrial giant from jumping into the subprime business in 2004, lending blue-chip respectability to the market for risky home loans by paying roughly half a billion dollars to buy California-based WMC Mortgage Corp.

USA Today:

• Possible U.S., China Trade Dispute Looms. Strained trade relations between the world's largest economies will be further tested this year as the U.S. weighs anti-dumping duties on a range of Chinese products.

Reuters:

• Germany's CSU - Europe works even if some drop currency. The head of one of Angela Merkel's coalition partners contradicted Saturday one of her tenets on the euro, saying that the EU would be fine if a country dropped the currency. Horst Seehofer, leader of the conservative Christian Social Union (CSU), said in an interview with Deutschlandfunk radio that he did not agree with Merkel's statement "If the euro fails, Europe fails." "There are many healthy economies in Europe that do not have the euro, and Europe works nonetheless," he said in a transcript of the interview. "Great Britain is an example." Turning to Greece, arguably the worst-off member in the euro zone, Seehofer said that the country's small size meant that its withdrawal from the currency bloc would not bring economic side effects strong enough to harm Europe. "I am not proposing it, but if Greece did leave, it would not bring damage and destruction to European integration," he said. Despite warnings by the head of Europe's current bailout fund, Klaus Regling, Seehofer said that his party continued to insist that the euro zone should be able to eject member states that repeatedly breach debt rules. "Kicking them out may be a rather crude term, but removal must be possible as a last resort. This has been our position for months."

AP:

• Nigerian Sect Kills 15 Churchgoers; Christians Vow Defense. A radical Muslim sect attacked a church worship service in Nigeria's northeast during assaults that killed at least 15 people, authorities said Saturday, as Christians vowed to defend themselves from the group's widening sectarian fight against the country's government. The attacks by the sect known as Boko Haram came after it promised to kill Christians living in Nigeria's largely Muslim north, exploiting long-standing religious and ethnic tensions in the nation of more than 160 million people. The pledge by the leader of an umbrella organization called the Christian Association of Nigeria now raises the possibility of retaliatory violence. In the last few days alone, Boko Haram has killed at least 44 people, despite the oil-rich nation's president declaring a state of emergency in regions hit by the sect. Speaking Saturday to journalists, Pastor Ayo Oritsejafor, president of the Christian Association of Nigeria, vowed the group's members would adequately protect themselves from the sect.
  

Financial Times:

• The Unprecedented Behaviour of the Central Banks. In economic policy nowadays, the unthinkable suddenly becomes the inevitable, without pausing for long in the realm of the improbable. (See this piece in The Economist.) Nowhere has this been more true than in central banking, where the recent huge expansion in the size of balance sheets would have seemed inconceivable as recently as 4 years ago.
• Basel Rejects Delay to Liquidity Buffers. Banks will be required to hold emergency stocks of easy-to-sell assets starting in 2015 but will be permitted to dip into these liquidity buffers during times of stress, said global regulators meeting in Basel, Switzerland.

Der Spiegel:

• Greece will not be able to bear its debt burden under the current restructuring plan because of a worsening economy, citing an internal IMF document. IMF experts plan to adjust key points of the current rescue plan as part of the next Troika mission, set to start in mid-January. Greece must do more to consolidate its finances, or private creditors must write off a larger share of their claims or euro area countries have to add more funding, the IMF document said.
• Hans-Werner Sinn, president of the Munich-based Ifo economic institute, said Germany is being "marginalized" in the European Central Bank, citing an interview.
  

Vima:

• The planned 50% writedown of Greek government bonds held by private creditors as part of a debt swap won't be enough to make the country's debt sustainable, an adviser to German Finance Minister Wolfgang Schaeuble said in an interview.

Asahi:

• North Korea's new leadership led by Kim Jong Un asked the U.S. for food aid at the end of last year, citing unnamed people.

The Times of India:

• India Seeks Waivers on Iran Sanctions. As new US sanctions on Iran's oil sector take effect, India, which expects to be hit, will ask the US for waivers to minimize the effect of the curbs that may be given to Washington's key allies like Japan, Turkey and South Korea, who, like New Delhi, are all importers of Iranian oil.

Yonhap News:

• S. Korea Central Bank May Raise Reserve Ratio. The Bank of Korea is also considering reducing the aggregate loans it provides to smaller companies in an effort to curb inflation.
  

Xinhua:

• Beijing will continue regulatory measures on the real estate sector and bring housing prices to "reasonable levels," citing the municipal housing and urban-rural development committee.
• Land sales in China's southern city of Shenzhen fell 21.7% last year from 2010, citing a government report released at a local government meeting.
• Chinese central bank governor Zhou Xiaochuan said the nation must be ready to pick appropriate policy instruments to combat external shocks at any time, citing an interview. The global economy will face a 'string' of difficulties and uncertainties, Zhou said. China shouldn't loosen policies that were designed to rein in consumer prices and manage inflation expectations, citing Zhou. In a global downturn, China would likely see a "mass" withdrawal of foreign capital, he said.
• Chinese central bank governor Zhou Xiaochuan said the country doesn't need to adjust its total money supply because of structural problems, citing an interview with Zhou.
  

Economic Information Daily:

• Chinese companies may enter into the "hardest period" this year since the start of the century, citing a report by the State Council's Development Research Center. Chinese companies will face weak demand internally and externally, increasing labor and raw material costs, yuan gains and other challenges, citing Zhao Changwen, a researcher at the center.

China Securities Journal:

• China should adopt a tight monetary policy and a loose fiscal policy this year, citing Li Daokui, an adviser to the People's Bank of China.

Al Ahram:

• A delegation from the IMF will arrive in Eqypt on Jan. 15 to resume talks on a $3.2 billion loan, citing Finance Minister Momtaz El-Saieed. The IMF isn't imposing conditions to help Egypt, the minister said.
• Egypt's Freedom and Justice Party, an affiliate of the Muslim Brotherhood, won 35.2% of votes in the third and final round of parliament elections.
  

Tehran Times:

• Iran plans to increase daily crude oil exports to Jaapn to 240000 barrels in 2012, citing Mohsen Qamsari, head of international affairs at the state-owned National Iranian Oil Co.

Weekend Recommendations
Barron's:

• Made positive comments on (JOY) and (AA).

Night Trading

• Asian indices are -1.0% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 208.50 +4.0 bps.
• Asia Pacific Sovereign CDS Index 159.50 +2.25 bps.
• FTSE-100 futures -.37%.
  
• S&P 500 futures -.48%.
• NASDAQ 100 futures -.35%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AA)/-.01
• (SMSC)/.34
• (AYI)/.65
• (SCHN)/.23

Economic Releases
3:00 pm EST

• Consumer Credit for November is estimated to fall to $7.0B versus $7.645B in October.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lockhart speaking, Merkel/Sarkozy Summit and the JPMorgan Healthcare Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and technology shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.