Wednesday Watch

Evening Headlines 
Bloomberg: 

• Cameron to Promise Referendum by 2017 on U.K. Leaving EU. Prime Minister David Cameron will today promise a referendum on whether Britain should leave the European Union, allowing U.K. voters to decide on breaking up the 27-nation bloc. Promising to make the case to remain in the EU once he has negotiated a return of some powers to Britain, Cameron will say the democratic consent for the status quo in Europe is “wafer thin.” He will pledge to put the question to a popular vote by the end of 2017, if re-elected in two years. 
• Bank Splits Should Be Paired With Shadow Bank Curbs, Koenig Says. Germany’s top markets regulator said a plan to split bank trading and deposit-taking activities would need to be paired with other measures to supervise global financial activities. Bafin President Elke Koenig told reporters regulation of the banking industry can only be effective if entities that provide so-called shadow banking, including money market funds, are globally supervised as well.
• Monte Paschi Pressed to Disclose Derivative Losses as Vote Looms. Banca Monte dei Paschi di Siena SpA executives are under pressure from investors to fully disclose losses from derivative contracts as shareholders prepare for a key vote on its government rescue this week. Monte Paschi tumbled 5.7 percent in Milan yesterday, the biggest decline in a month, after Il Fatto Quotidiano reported the bank signed a derivative with Nomura Holdings Inc. (8604) three years ago that will cut earnings by 220 million euros ($293 million) in 2012.
• Big Banks Seen in Need of Breakup Amid Mistrust in Poll. The world’s largest banks need to shrink or be broken up in order to regain investors’ confidence after four years of scandals, high-profile trading losses and financial crises, according to a Bloomberg poll. Almost 60 percent of respondents said they were not confident or “just somewhat confident” that banks are taking prudent risks and conforming to the law, and getting smaller was seen as the top fix in the Bloomberg Global Poll, with 29 percent choosing that remedy. Changing the compensation structure was the No. 2 way to improve trust, with 23 percent. 
• Republicans Renew Effort to Dismantle Obama’s Health Law. Two top Republican senators began a fresh effort to dismantle President Barack Obama’s U.S. health- care system overhaul, attempting to succeed where other lawmakers have failed in trying to annul the law. The legislation would repeal a mandate that most Americans carry medical insurance starting in 2014, Senators Orrin Hatch of Utah and Lamar Alexander of Tennessee said today in a statement. The insurance mandate is the heart of the 2010 Affordable Care Act’s purpose of extending health care to most Americans. 
• Crude Oil Options Volatility Falls to Six-Year Low Below 19%. Crude options volatility fell below 19 percent for the first time in at least six years as the underlying futures continued to climb. Implied volatility for at-the-money options expiring in March, a measure of expected price swings in futures and a gauge of options prices, was 18.54 percent on the New York Mercantile Exchange as of 3:40 p.m., compared with 19.25 percent Jan. 18. It was the first time that volatility for the front-month options contract has dipped below 19 percent since at least March 2006, according to data compiled by Bloomberg.
• IBM(IBM) 2013 Forecast Beats Estimates as Software Boosts Profit. International Business Machines Corp. (IBM), the world’s biggest computer-services provider, forecast profit that exceeded analyst estimates as the company shifts to data analysis and cloud computing. 
• North Korea to Boost Nuclear Power After New UN Sanctions. North Korea vowed to boost its nuclear capability after the United Nations Security Council, including its ally China, imposed new sanctions against the totalitarian state for last month’s rocket launch. “Denuclearization of the Korean peninsula is impossible,” North Korea’s Foreign Ministry said in a statement carried by the official Korean Central News Agency. “We will take physical response measures to expand and bolster the quality of our sovereign military power -- including our nuclear deterrence.”

Wall Street Journal: 

• House GOP to Take Aggressive Stand on Deficit. The budget battle took new shape Tuesday when House Republicans disclosed plans to design a tax and spending proposal that would lead to a balanced budget in 10 years, something leaders from neither party have tackled in recent decades. The government spends more money than it brings in, causing large deficits and adding to government debt. The White House has proposed to reduce the deficit over time, but not eliminate it. House Budget Committee Chairman Paul Ryan (R., Wis.) last year proposed to cut spending and reduce the deficit more sharply, but the budget wouldn’t be balanced until around 2040.
• Italy's Banks Lobby Head Resigns on Derivatives Scandal. Giuseppe Mussari, head of Italy's banks lobby ABI, resigned late Tuesday following a media report that under his helm back in 2009 Banca Monte dei Paschi di Siena (BMPS.MI) carried out a derivative transaction likely to cost the bank 220 million euros ($293 million) in losses, to be posted in 2012 accounts. In a letter sent to ABI's Vice President Camillo Venesio, Mr. Mussari said he has always acted respecting the law, but that, at the same time, he didn't want to damage the association, even indirectly.
• Banks Fight Fannie Over Insurance. Banks are fighting an effort by Fannie Mae to cut costs on backup insurance policies often imposed on cash-strapped homeowners, a step that would crimp the lucrative fees the lenders collect on the coverage. Homeowners with mortgages are required to carry insurance policies to protect their property, which serves as collateral for the loans. Banks can "force" these policies on customers who allow their insurance to lapse. Force-placed policies, as they are known, are issued primarily through just two insurance companies. They are expensive, and some banks are paid hefty commissions for arranging them.
• Clinton Could Face Harsh Questioning on Benghazi. Secretary of State Hillary Clinton is making a long-awaited trek to Capitol Hill on Wednesday to answer pent-up questions from lawmakers about September's deadly terrorist assault on U.S. government posts in Benghazi, Libya. The day begins with a 9 a.m. appearance before the Senate Foreign Relations Committee and continues with a 2 p.m. appointment before the House Foreign Affairs Committee. Both will be public. The grueling day comes as Mrs. Clinton recovers from a month of health problems that began with a stomach virus and ended with her hospitalization for a blood clot near her brain. She has been back at work for two weeks, holding meetings, placing phone calls and making several abbreviated public appearances.
• Agenda Gives Centrists Pause. Some Democrats Fear Obama's Social Emphases May Undercut Focus on Economy. President Barack Obama's sweeping liberal agenda, as laid out in Monday's inauguration speech, has some centrist Democrats worried the focus on issues such as gun control and climate change could dilute efforts to boost the economy and create jobs. Mr. Obama's speech was a call to action on Democratic social issues, focusing in part on civil rights, gay rights and efforts to help low-income Americans. But parts of his agenda—which includes controlling gun violence, preserving his health-care law and writing more pro-immigrant laws—could prove a tough sell, even with some Democratic members of Congress.
• Soft PC-Chip Market Hits AMD(AMD), TI(TXN) Results. Two prominent names in semiconductors, Advanced Micro Devices Inc. and Texas Instruments Inc. provided more evidence Tuesday of soft demand for personal computers and other products. AMD posted a wider fourth-quarter loss, reflecting moves to cut costs and modify a manufacturing partnership along with weak demand for PCs that use its chips. The company projected revenue in the current quarter would decline about 9% from the fourth period. "We expect continued choppiness in the PC market in the first half of 2013," said AMD Chief Executive Rory Read during a conference call with analysts. Meanwhile, TI reported its fourth-quarter profit fell 11%, saying customers are holding off on placing orders amid concerns about Europe's economic health as well as growth in China.
• Debt-Ceiling Melodrama. GOP leverage will increase once the sequester cuts hit.

Zero Hedge: 

• The Real Housing Recovery Story. (graphs)
• Chinese Politicians Are Buying Billions In U.S. Real Estate.
• This Is What 1,230 Days (And Counting) Of Explicit Market Support By The Federal Reserve Looks Like. (graphs)

Business Insider: 

• Germany's Gold Clawback Is Cause For Concern.
• GMO: Here Are 10 Scary Signs Of Fragility In China's Massive Financial System.
• Chinese General Ominously Warns Australia Not To Side With The US 'Tiger'.
• Woman Sues Match.com For Allegedly Setting Her Up With A Murderer.
• Why Shale Fracking Is An Economic Game-Changer That Cannot Be Overhyped.
• 3 Charts Show How Google May Have Fixed Its Mobile Ad Problem.

Reuters:

• Google's(GOOG) fourth-quarter results shine after ad rate decline slows. Revenue from Google Inc's core Internet business outpaced many analysts' expectations during the crucial holiday quarter and advertising rates fell less than in previous periods, pushing its shares up roughly 5 percent. 
• Intuitive Surgical(ISRG) profit tops Street, shares rise. Intuitive Surgical Inc reported higher-than-expected fourth-quarter profit on Tuesday on increased sales of its da Vinci surgical robots and a rise in gynecologic procedures using the pricy machines. Intuitive shares rose more than 8 percent after the company announced its quarterly results.
• Nikkei heads for third day of decline, as BOJ action falls short.
• Storm off Australia iron belt intensifies to cyclone strength. A tropical low off Australia's northwest coast that brought nearly half the world's iron ore trade to a halt intensified to cyclone strength on Wednesday, keeping huge ports used by miners Rio Tinto and BHP Billiton idle. Cyclone Peta has formed just off the Pilbara coast where the ports are located, generating 100-kph gales, the Australian Bureau of Meteorology said.

Telegraph:

• Central bankers should be brought to heel by elected parliaments. Intellectual fashion is changing. Central bankers around the world no longer command the charisma of a high priesthood.

Haaretz.com: 

• Israel's right, left blocs in dead heat as 99% of votes tallied. Likud-Yisrael Beiteinu claimed 31 seats, Yesh Atid 19, Labor 15, Shas 11, Habayit Hayehudi 11, United Torah Judaism 7, Hatnuah 6, Meretz 6, United Arab List-Ta’al 5, Balad 3, and Kadima likely to win 2 seats. Hours after polls closed on Tuesday, and after some 95 percent of the votes were tallied, Prime Minister Benjamin Netanyahu claimed a mandate to third term as premier, but the battle between the country's right- and left-wing blocs remained virtually in a dead heat.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.50% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 107.5 +.75 basis point.

• Asia Pacific Sovereign CDS Index 85.5 -.25 basis point.

• FTSE-100 futures +.33%.

• S&P 500 futures -.15%.

• NASDAQ 100 futures +.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GD)/1.89
• (APD)/1.29
• (BHI)/.61
• (WLP)/.94
• (PX)/1.38
• (UTX)/1.03
• (TXT)/.56
• (COH)/1.28
• (DGX)/1.04
• (STJ)/.89
• (ABT)/.46
• (MCD)/1.33
• (SYK)/1.12
• (AMGN)/1.39
• (CCI)/.13
• (SNDK)/.76
• (NFLX)/-.13
• (FFIV)/1.15
• (SYMC)/.38
• (LRCX)/.44
• (WDC)/1.82
• (ALTR)/.39
• (AAPL)/13.54   
• (BXS)/.24
• (PMTC)/.33
• (JEC)/.75 

Economic Releases
9:00 am EST

• The House Price Index for November is estimated to rise +.7% versus a +.5% gain in October.

Upcoming Splits

• (SBS) 2-for-1
  

Other Potential Market Movers

• The IMF World Economic Outlook, China HSBC Flash PMI, World Economic Forum, UK unemployment rate, BoE Minutes, Bank of Canada rate decision, weekly retail sales reports, weekly MBA mortgage applications report and the CIBC Institutional Investor Conference could also impact trading today.

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