Wednesday Watch

Evening Headlines 
Bloomberg:

• China Has ‘High’ Chance of Small Bank Failure, Official Says. One or two small Chinese banks may fail next year as they face pressure from their reliance on short-term borrowing, a Communist Party economic official said. Small banks get about 80 percent of their funding from interbank markets and deposits in savings vehicles known as wealth management products, Fang Xinghai, a bureau director at the Central Leading Group for Financial and Economic Affairs, said at a conference in Beijing today. They face risks from the mismatch with their long-term loans to borrowers such as local-government financing vehicles, he said. “Sometime next year, there may be one or two small lenders reporting a bank run or bankruptcies,” said Fang, a former head of Shanghai’s municipal Financial Services Office, whose current organization reports to the Central Committee of China’s ruling party. “That possibility is very high.”

• Chinese Skeptics Deepening Biggest A-Share Discount in 3 Years. China’s largest package of economic reforms since the 1990s is getting a bigger vote of confidence from foreign investors than from the nation’s own citizens. The benchmark index for Chinese stocks traded in Hong Kong has jumped 6.2 percent, more than twice the Shanghai gauge, since policy makers led by President Xi Jinping pledged to ease China’s one-child policy and liberalize interest rates on Nov. 15. That left mainland shares valued at a 5.8 percent discount, the most in three years, according to the Hang Seng China AH Premium Index. In a year when Asian equities are up 10 percent and American stocks are rising the most in a decade, China’s market is getting little respect, even from its own citizens. The Shanghai Composite index is down 3.4 percent, trailing its Hong Kong counterpart by the most since 2010. 

• Emerging-Market Hedging Costs at Five-Year High to U.S.: Options. The cost of options protecting against swings in emerging-market stocks has climbed to an almost five-year high versus U.S. contracts as economic growth slows from India to Brazil and foreign investors sell. Implied volatility on the iShares MSCI Emerging Markets exchange-traded fund was 56% higher than on an ETF tracking the Standard & Poor's 500 Index, according to data compiled by Bloomberg on six-month contracts with an exercise price near the shares. The measures of options prices for the emerging-markets fund was 61% higher on Nov. 8, the most since January 2009, and up from a low of 18% in March.

• Singapore Property Boom Fuels Malaysia Spillover Bubble. Chris Metcalf commutes for 45 minutes to Singapore each day from Iskandar, a region just over the border in Malaysia, to work as a lawyer at Clyde & Co LLP. “It’s too expensive to live in Singapore,” said Metcalf, who moved across the Johor Strait in June after finding he could no longer afford the island-state on a local salary and with four children. “We’re selling a house in the U.K. and when we do we’ll consider buying in Malaysia because it’s definitely better value.” 

• Asian Stocks Fall, Led by Australian Banks, WorleyParson. Asian stocks fell for a second day after valuations on the regional benchmark index reached the highest level since May and as Australian banks declined and WorleyParsons Ltd. (WOR) cut its profit forecast. Australia & New Zealand Banking Group Ltd. (ANZ) and Commonwealth Bank of Australia dropped more than 0.6 percent. WorleyParsons slumped a record 25 percent as Australia’s largest oil and gas engineering company cut its profit estimate. Micronics Japan Co. surged 21 percent in Tokyo after the electronics-component maker raised its full-year earnings forecast. The MSCI Asia Pacific Index fell 0.2 percent to 142.49 as of 12:44 p.m. in Hong Kong, with five stocks declining for every four that rose.

• Rebar Gains as Inventory in China Drops to Lowest Since 2011. Steel reinforcement-bar futures in Shanghai climbed as inventory in China fell to the lowest level in more than two years. Rebar for May delivery, the most-active contract on the Shanghai Futures Exchange, rose as much as 0.8 percent to 3,651 yuan ($599) and traded at 3,646 yuan at 10:50 a.m. local time.

• Hollande’s Tax Rebels Underscore Mounting Opposition. Another week, another round of protests in France against President Francois Hollande’s tax increases. Farmers have threatened to block roads into Paris tomorrow, saying they’re “fed up.” Horse-riding centers are set to protest this weekend against a higher sales tax, an issue ambulance drivers demonstrated against earlier this week.

• Climate Rift Widens as Poor Nations Seek Clarity on Aid Pledges. A debate over climate aid is widening the rift between richer and poorer nations at United Nations climate talks in Warsaw, creating another obstacle in the fight against global warming. Industrial nations have pledged to boost aid to $100 billion a year by 2020 for developing countries seeking to reduce their own pollution and cope with more intense storms and higher sea levels that come with higher temperatures. Poorer countries are seeking a predictable funding schedule to help them plan, and the richer states aren’t providing that.

• Coal Seen as New Tobacco Sparking Investor Backlash: Commodities. About $8 trillion of known coal reserves lie beneath the earth’s surface. The companies planning to mine and burn them are being targeted by a growing group of investors concerned with the greenhouse gases that will be made.

Wall Street Journal:

• Meet the Syrian Rebel Commander Assad, Russia and the U.S. All Fear. Tarkhan Batirashvili, Ethnic Chechen, Leads Group Deeply at Odds with Western-Backed Rebels in Syria. 

• 'Volcker Rule' Faces New Hurdles. Objections From SEC, CFTC Officials That Measure Is Too Soft on Banks May Delay Startup.

• Price War Looms for Electronics. Wal-Mart and Best Buy, Girding for Holidays, Poised to Fight for Market Share.

Fox News:

• Solar firm linked to Obama donors could be 'next Solyndra,' top GOP Sen. warn. A California-based solar company backed by several Obama supporters has been receiving millions in federal tax credits while losing $322 million since 2008, raising concerns about the company “becoming the next Solyndra.” Among SolarCity Corp.’s(SCTY) biggest investors is Elon Musk -- the high-profile donor and fundraiser who co-founded PayPal and whose companies SpaceX and electric-car company Tesla Motors have received at least $846 million in loans and startup money from the Obama administration. Alabama Sen. Jeff Sessions, the top Republican on the Senate Budget Committee, warned about SolarCity’s financial standing in a letter Monday to the Treasury Department. “There is concern that SolarCity might become the next Solyndra -- a company propped on the back of the taxpayers,” Sessions wrote. 

MarketWatch.com:

• China hard landing is likely: Andy Xie. Commentary: Real reform may not come fast enough for bubble economy. China’s asset bubble increasingly depends on financing from the shadow banking system. The carry trade — borrowing dollar loans at low interest rates offshore and converting the loans into yuan, either disguised as foreign direct investment or export revenue, for lending at a high interest rate — has become a significant source of funding in the shadow banking system. The recent surge of land prices in big cities may be due to it. The rising share of unstable financing for the country’s asset bubble threatens a chaotic ending. If the bubble suffers a confidence crash or a receding tide of liquidity, the unwinding of speculative holdings would be chaos, causing a hard landing. The carry trade drove the property bubble in Southeast Asia before 1997. The rising U.S. interest rate triggered its collapse. China is under the influence of the same force but on a much larger scale. The Fed’s massive quantitative easing has driven up China’s money supply, partly through the carry trade. If the Fed unwinds the QE, China’s bubble will burst.

• Bitcoin drops from $900 to $502 as swings widen.

CNBC:

• Obamacare bombshell: IT official says HealthCare.gov needs payment feature. (video) Another day, another big, bad black eye for HealthCare.gov. A crucial system for making payments to insurers from people who enroll in that federal Obamacare marketplace has yet to be built, a senior government IT official admitted Tuesday. The official, Henry Chao, visibly stunned Rep. Cory Gardner (R-Colo.) when he said under questioning before a House subcommittee that a significant fraction of HealthCare.gov—30 to 40 percent of it—has yet to be constructed. 

• Bernanke backs Yellen: Taper depends on economy. (video) Federal Reserve Chairman Ben Bernanke said on Tuesday the Fed would maintain its ultra-easy U.S. monetary policy for as long as needed and only begin to taper bond buying once it is assured that improvements in the labor market would continue.

Zero Hedge:

• Shopping With Bernanke: Where QE Cash Ends Up Tells Us Who Benefited. (graph)

• Berserk HFT Algo Du Jour. (graph)

• Look Away. (graph)

• Fuel Imports Send Japan's Deficit Careening To 3rd Worst On Record. (graph)

• How Washington D.C. Is Sucking The Life Out Of America.

• The American Model Of "Growth": Overbuilding And Poaching.

• Jim Rogers: "Own Gold" Because "One Day, Markets Will Stop Playing This Game".

Business Insider:

• CHANOS: Big Oil Companies Are The Next Value Trap.

• Washington's Top Watchdog Is Getting Involved In The Jobs Report-Rigging Story.

• The Situation For Journalists In China Is Becoming Untenable.

Washington Post:  

• The Insiders: Obamacare shifts voters’ thinking. A Gallup poll released yesterday says 56 percent of Americans do not believe it is Washington’s responsibility to “make sure all Americans have healthcare coverage,” while 42 percent believe the federal government is responsible.  Two years ago, it was a different story.  The same poll conducted by Gallup in 2011 showed that 46 percent of Americans believed the federal government was not responsible for making sure all Americans have healthcare coverage, and 50 percent said the federal government was responsible.

Reuters:

• Yahoo(YHOO) increases share buyback authorization by $5 billion.

Obama takes on coal with first-ever carbon limits
Read more at http://www.philly.com/philly/news/politics/20130919_ap_0f857b20e0c144a5a1e1b9dddc9f9d72.html#YRThyDOhArykUeYy.99

Financial Times:

• U.S. Funds' Holding in Big Eurozone Banks Up 40% Since June. Share value in 10 largest listed banks totals $33b, as number of shares held rose by 10% over the same period, citing its own calculations. Big investments made by groups including T Row Price, BlackRock, Waddell & Reed. U.S. money market funds have also returned to the region, with lending to eurozone banks up 89% over the past year, citing rating co. Fitch.

Yonhap News:

• South Korea Concerned About Won's One-Sided Moves. South Korean authorities are concerned the volatility in the currency has been drastic and that the moves have been one-sided, citing a Bank of Korea official. Biggest concern is there's only dollar sales and no purchases in the market.

• S. Korea steps up defense on northwestern islands. South Korea has beefed up its forces on a group of northwestern islands along the tensely guarded maritime border with North Korea to counter provocations from its archrival, military officials said Wednesday.

Evening Recommendations

• None of note
  

Night Trading

• Asian equity indices are -1.0% to -.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 132.0 +2.0 basis points.

• Asia Pacific Sovereign CDS Index 103.75 +2.0 basis points. 

• FTSE-100 futures -.34%.

• S&P 500 futures -.02%.

• NASDAQ 100 futures +.07%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DE)/1.90

• (ADT)/.46

• (SJM)/1.59

• (SPLS)/.42

• (LOW)/.47

• (JCP)/-1.74

• (GMCR)/.75

• (JACK)/.39

• (LTD)/.28

• (WSM)/.54

Economic Releases
8:30 am EST

• Retail Sales Advance MoM for October are estimated to rise +.1% versus a -.1% decline in September.

• Retail Sales Ex Auto MoM for October are estimated to rise +.1% versus a +.4% gain in September.

• Retail Sales Ex Auto and Gas for October are estimated to rise +.3% versus a +.4% gain in September.

• The CPI MoM fore October is estimated unch. versus a +.2% gain in September.

• The CPI Ex Food and Energy MoM for October is estimated to rise +.1% versus a +.1% gain in September.

10:00 am EST

• Existing Home Sales for October are estimated to fall to 5.14M versus 5.29M in September.

• Business Inventories for September are estimated to rise +.3% versus a +.3% gain in August.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +412,000 barrels versus a +2,640,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +50,000 barrels versus a -838,000 barrel decline the prior week. Distillate inventories are estimated to fall by -489,000 barrels versus a -481,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise +.64% versus a +1.9% gain the prior week.

2:00 pm EST

• FOMC minutes from Oct 29-30 meeting.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Bullard speaking, Fed's Dudley speaking, BoE minutes, weekly MBA mortgage applications report, BofA Energy Conference, Morgan Stanley Tech/Media/Telecom Conference, Goldman Megtals/Mining/Steel Conference, Jefferies Healthcare Conference, (RRGB) investor day and the (QCOM) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.