Friday Watch

Evening Headlines

Bloomberg:

• Euro Rescue Plan Falling Short Renews Franco-German Spat Over Role of ECB. The failure of European leaders to end the debt crisis with their broadest effort yet has revived a Franco-German dispute over the European Central Bank’s role and fueled investor concerns over policy makers’ economic impotence. As holders of Greek debt begin talks in Athens on structuring a 50 percent writeoff that was the cornerstone of a deal pieced together last month at an all-night summit, officials in Berlin and Paris swapped barbs and European borrowing costs outside of Germany rose to euro-era records. The discord highlighted markets’ brushoff of a package that included a scaled-up rescue fund, proposed guarantees of sovereign debt and a bid to attract more international loans. The accord, which finance ministers aim to implement next month, was at least the fourth plan billed as a comprehensive strategy to end the crisis born in Greece in 2009, none of which provided a lasting fix. “The crisis is clearly broadening,” Riccardo Barbieri, London-based chief European economist at Mizuho International Plc, told Bloomberg Radio’s Ken Prewitt yesterday. “Only Germany, and to some extent the Netherlands, are immune from the crisis at the moment.” The premium France pays over Germany to borrow for 10 years jumped to a record 200 basis points. Yields on bonds of countries from Portugal to Finland, the Netherlands to Austria also rose relative to Germany.
• European Banks Face $270 Billion Goodwill Hangover for Past Acquisitions. European banks may have to write down some of the $270 billion of goodwill from their purchases in the run up to the financial crisis before they can sell assets, or new stock, to bolster capital. UniCredit SpA (UCG), Italy’s biggest lender, this week opted to take an 8.7 billion-euro ($10 billion) impairment charge following a series of acquisitions at home and in eastern Europe. Other European banks are yet to follow, analysts said. Credit Agricole SA (ACA), Banco Santander SA (SAN) and Intesa Sanpaolo SA are among European banks with the most goodwill remaining on their balance sheets, according to data compiled by Bloomberg. “Banks that paid a premium for businesses when the outlook was better will need to reassess the goodwill on their balance sheets,” said Andrew Spooner, an accounting partner at Deloitte LLP in London. “Previous acquisitions which are exposed to peripheral Europe are most vulnerable to impairments.” European bank stocks are trading at an average 58 percent of their book value, according to Bloomberg data. While writing down goodwill won’t deplete banks’ capital for regulatory purposes, it’s a sign that executives overpaid for purchases.
• GM(GM) Sees Europe Crisis 'More Serious' Than 2008 Credit Bubble. Europe’s debt crisis is a “more serious” situation than the housing bubble three years ago that preceded a global recession, General Motors Co. Chief Executive Officer Dan Akerson said today. “The ’08 recession, which was a credit bubble that manifested itself through primarily the real estate market, that was a serious stress,” Akerson told the Detroit Economic Club today. “The government took some insightful actions. This is much more serious.” GM, which hasn’t turned an annual profit in Europe in more than a decade, has declined in New York trading since rescinding its target for break-even results in the region. European operations lost $292 million before interest and taxes in the quarter ending Sept. 30, GM said last week as it reported a 2.5 percent drop in third-quarter net income. Analysts have slashed their estimates for GM’s adjusted earnings in the fourth quarter by 49 percent after the company said last week that results for the period would be similar to a year earlier, citing weakness in Europe as a factor. All 14 analysts surveyed by Bloomberg cut their estimates in the last two weeks, reducing the average to 44 cents a share, from 86 cents. “We’re dealt a hand and we have to play it as best we can,” Akerson, 63, said today of Europe. “It may get a little ugly at times, a little bumpy.” Asked if some countries such as Greece may eventually leave the euro zone and lead to a breakdown of the currency, Akerson said “I wouldn’t doubt it.” GM slid 3.8 percent to $21.79 at the close in New York. Detroit-based GM plunged 34 percent since its initial public offering a year ago.
• The 3-Month EUR/USD cross-currency basis swap fell -6.25 bps to -129 bps, the lowest since hitting -145 bps Dec. 2, 2008, amid increasing funding concerns as solutions for solving the EU debt crisis are at an impasse. "Cross-currency tells you the whole world is short on dollars," says Nomura strategist Marcus Phua. "Everyone is experiencing tightness in the market. It's how the crisis has become global in the sense of impact." "Euro banks don't trust each other and non-euro banks shy away from issuing to the Eurozone," said Phua.
• Bank Stress Gauges Show Pain Lasting Through '11: Credit Markets. Three weeks after European leaders hailed an "historic" agreement to restore confidence to the region's banking system, rising gauges of stress in funding markets signal tensions will last at least through year-end. The gap between three-month euro interbank borrowing and lending rates rose to the wides since March 2009 yesterday in the forward market, used to speculate on future interest rates, according to Bloomberg. The cost for European banks to fund in dollars surged this month, with the three-month cross currency basis swaps falling to as much as 1.32 percentage points below the euro interbank offered rate, the most since December 2008. "We are in the midst of the crisis," Chiara Manenti, a fixed-income strategist at Intesa Sanpaolo Spa in Milan, said in a telephone interview. "The liquidity in the money market is not flowing normally between banks. Tensions in the funding markets will remain through year-end, and will be more pronounced in Europe."
  
• China's New Banking Regulator Said to Warn on Government Loans. China’s new banking regulator warned lenders that some projects backed by local governments may run out of funds, and loans to property developers are likely to sour as sales slow, a person with knowledge of the matter said. Shang Fulin, who replaced Liu Mingkang last month as chairman of the China Banking Regulatory Commission, told lenders last week to step up asset sales and debt restructuring for local government financing vehicles that are struggling to repay loans, the person said, declining to be identified because the instructions were private. Shang also said banks should cut “high-risk” loans to developers, the person said. “He knows that he has big shoes to fill, and that Liu Mingkang’s biggest achievement was probably raising the alarm early and repeatedly about potential risks in the banking system,” said Barry Naughton, author of the 2007 book “The Chinese Economy: Transitions and Growth” and a China specialist at the University of California, San Diego. “He’s trying to show that he is aware of the problems and he can also be tough.” Shang’s predecessor tightened capital requirements and clamped down on off-balance sheet assets this year. Still, the International Monetary Fund this week called for closer oversight of Chinese banks as risks increase. Home sales plunged 25 percent in October from the previous month. Industrial & Commercial Bank of China Ltd. and its three biggest local rivals have lost about $71 billion in market value this year. Home prices may fall as much as 30 percent in the next year, Barclays Plc’s research unit said last week. They had risen by 140 percent from 1998 to the end of last year, according to the national statistics bureau. The regulator said some developers have used projects funded by such bank loans to improperly raise funds from trusts, which may trigger “major credit risks,” according to the person. Property loans that need to be restructured should be classified as “substandard” at a minimum and downgraded, the watchdog said. The CBRC last week told banks to inspect loans to local government financing vehicles, 35 percent of whose debt matures in the next three years, the person said. Local governments, previously barred from directly selling bonds or borrowing from banks to pay for projects including roads and bridges, set up more than 6,000 financing vehicles and amassed 10.7 trillion yuan ($1.7 trillion) of debt by the end of 2010, with 80 percent owed to banks, the National Audit Office said in a June report. Premier Wen had ordered the first audit of local-government borrowing in March, amid concern spending designed to support the economy following the 2008 global financial crisis would leave a legacy of bad debt. The regulator warned last week that some local governments are circumventing regulatory restrictions and raising funds by using companies that aren’t classified as financing vehicles, the person said. The banking regulator said it will also stop approving the sale of wealth-management products with maturities of one month or less, the person said.
• EU Rules May Soak Up $93 Billion of Utility Cash: Energy Markets. Companies from RWE AG to Vattenfall AB may have to find an extra 69 billion euros ($93 billion) to meet unprecedented European Union regulations designed to crack down on speculation in the region's energy markets. A proposal made last month by the EU may for the first time require utilities and other firms with commodity assets to set aside funds safeguard, their power, fuel and carbon permit trades against default. Those companies don't currently need to clear so-called over-the-counter, or OTC, trades which, in power, account for 73 percent of Europe's electricity market. The cost of these financial rules would come on top of $1.9 trillion of capital investment that's needed to expand and upgrade EU power plants through 2035, the International Energy Agency said in a Nov. 9 report. The additional burden of climate-protection rules has already cut 200 billion euros from power-company share values since January 2009, according to Citigroup Inc. Stockholm-based Vattenfall says the new financial rules may cost it more than 1 billion euros. “I can see that the new collateral requirements and costs associated with over-the-counter trades will be high,” said Jacqui Hatfield, a London-based partner and head of financial services at law firm Reed Smith LLP, which has advised on $21 billion of renewable-energy transactions in the past five years.
• Copper Traders Most Bearish in Two Months on European Crisis: Commodities. Copper traders and analysts are the most bearish in almost two months because of mounting concern that Europe’s debt crisis will curb demand in the region that accounts for about 19 percent of global consumption. Eleven of 23 surveyed by Bloomberg expect the metal to decline, the second consecutive week that their outlook worsened and the highest proportion since Sept. 23. The last time so many were bearish, prices dropped 4.6 percent the following week. The commodity fell more than 20 percent into a bear market since reaching a record in February on signs that economic growth is slowing. European industrial production fell the most in 2 1/2 years in September as governments grappled with sovereign debt crises that have toppled governments in Greece and Italy. Copper demand contracted 0.9 percent in 2008 as economies contended with the worst recession since World War II. “There’s a strong chance of Europe going into a recession,” said William Adams, head of research at London- based Basemetals.com. “Asia is getting more worried that the slowdown in Europe will mean demand for their exports will be hit and therefore that’s going to impact demand for their industrial production.” Copper declined 21 percent to $7,541 a metric ton on the London Metal Exchange this year, heading for the biggest annual drop since 2008.
• China Power Firm Margins Worst Since 2006 as Coal Rises. Chinese power plants face the smallest profit margins in at least five years as government- mandated caps on electricity prices prevent utilities from passing along coal-price increases.
• China Home Prices Fall in 33 of 70 Cities. China’s home prices fell in 33 of 70 cities monitored by the government in October, the worst performance since it expanded property curbs and scrapped the reporting of its national average housing data this year. New home prices in China’s three major cities of Shanghai, Shenzhen and Guangzhou retreated from September after prices stalled for three months, while those in the capital city of Beijing were unchanged, the statistics bureau said in a statement on its website today. The eastern city of Wenzhou posted the biggest drop of 4.6 percent, more than 10 times the average slide among the cities that posted declines. China’s Premier Wen Jiabao said the country won’t waver on its property restrictions this month.

Wall Street Journal:

• European Firms Face Lending Woes. Companies Struggle as Banks Lend Less, at Higher Rates, Forcing Businesses Into Public Markets With Selective Investors. Euro-zone countries aren't the only borrowers whose financing costs are rising: European companies are facing higher capital costs as the debt crisis curtails bank lending and keeps wary investors on the sidelines. The amount of European corporate debt in need of refinancing is set to jump in 2012. But banks are lending less and at higher rates, forcing companies into public markets, where investors are becoming increasingly selective. Less corporate borrowing leads to less corporate investment—another drag on already sickly economies.
• Fund Transfers Are Focus of MF Global Probe. Regulators have unearthed new details indicating MF Global Holdings Ltd. shifted hundreds of millions of dollars in customer funds to its own brokerage accounts in the days before its bankruptcy filing, according to people familiar with the matter. Such moves could violate regulations stipulating that commodities brokers can't mix customer funds with brokerage funds. Brokerage funds often are used to back proprietary trading positions. According to MF Global's internal records, the transactions were as large as hundreds of millions of dollars at a time, these people said.
• Prime-Mortgage Standards Tighter Than Pre-Boom Levels. Lending standards for prime mortgages are tighter now than they were even prior to the housing boom. A chart accompanying the Capital column on mortgages this week showed graphically how lenders raised the bar on making loans after the housing bust — and still haven’t returned it to anything resembling what once was normal.
• Tighter Credit Sending Warning Signals. (graph) The US market has been buoyed by a string of better-than-expected economic reports that have helped encourage the belief that the US is a relatively safe haven, insulated from the problems of Europe. But these data are coincident, or lagging, data at best, warns Mike Darda of MKM Partners. Leading indicators are found in the credit markets and are pointing to tighter financial conditions — and lower stock prices — in the future:
• Tax Spat Stymies Debt Panel. Both Parties Dig In Over Bush-Era Cuts as Deadline Looms for Agreement.
• How Congress Occupied Wall Street. Politicians who arrive in Washington as men and women of modest means leave as millionaires. Why?

Business Insider:

• Warren Buffett's Private Jet Company Is Complaining It Was Overtaxed By The IRS.
• Why The ECB Is NOT Going To Be A Lender Of Last Resort.
• US Debt to GDP Hits 98.9% And Rising. (graphs)
• These Inappropriate Crotchless Panties For Kids Are Causing An Uproar In Colorado. A mother who was shopping at a local mall in Greeley, Colo. was aghast when she saw crotchless panties sold in a children's store called Kids N’ Teen (via Jezebel). "I was mortified. My first initial response was, 'Am I really seeing that?' They're sized to fit a seven-year-old girl," Erin French told 9News.

Zero Hedge:

• New York Fed Swap Lines With Europe Increase By $390MM, Rise To $2.248BN.
• Playing Chicken With The ECB: The Market Has Issued A Boycott On Draghi Until He Prints.
• Watch Nigel Farage Dance On The Euro's Grave. (video)
  

CNBC:

• Banks Bracing for 2012 Euro Financial Apocalypse. As the European debt crisis threatens to spiral out of control, banks are scrambling behind the scenes to protect their balance sheets and hedge their exposure to ride-out an increasingly scary 2012. But while some of the moves may help mitigate the losses from Armageddon, market watchers say certain financial insurance policies — particularly credit default swaps on sovereign debt — may not work in a new financial crisis. Banks are loading up on hedges against a possible European financial collapse. The notional amounts outstanding of over-the-counter derivatives rose 18 percent in the first half of 2011 to $708 trillion as of June 2011, a record high, according to a report by the Bank of International Settlements released Wednesday. In the second half of 2010, the notional value rose only by 3 percent. "Given all the increased volatility — the unusual conditions with the dollar and the euro, the debt crisis in Europe, the debt problems of the U.S. — you are seeing an increase in hedging," says Steve Wyatt, professor and Chair of the Finance Department at the Farmer School of Business at Miami University, Ohio. "The more astute observers in the market have come to the conclusion that the ECB will not buy enough paper to change the market view on this because of inflation fears. The only way out of this is fiscal integration or some modification of the membership in the Euro. That is not going to be quick or clean. That is the risk participants are hedging against." Here's a quick snapshot of their exposure and hedges purchased, according to latest disclosures.
• As New Graduates Return to Nest, Economy Also Feels the Pain.
  

IBD:

• Pelosi Leads List Of Conflict Of Interest Dems.

NY Post:

• Con Ed wants to evict Ground Zero mosque developer over $1.7M back rent. Con Edison wants a judge to give it the green light to evict the would-be developer of a controversial community center and mosque near Ground Zero, arguing he doesn't have a prayer of paying the $1.7 million he owes in back rent. At a hearing in Manhattan Supreme Court today , Con Ed lawyer Scott Mollen portrayed Sharif el-Gamal as a deadbeat slumlord who's far too cash-strapped to pay back all the money he owes the utility.

CNN:

• Secret Service Confirms Cain Protection. Presidential candidate Herman Cain will receive protection from the United States Secret Service, the agency confirms to CNN. Cain will be the first candidate in the race for the Republican presidential nomination in the 2012 election cycle to be placed under the protection of this federal law enforcement agency. It is not yet clear why Cain is getting Secret Service protection.

Rasmussen Reports:

• Iowa: Gingrich 32%, Romney 19%, Cain 13%.
• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -24 (see trends).

Reuters:

• S&P to Update Bank Credit Ratings Within 3 Weeks. Standard & Poor's plans to update its credit ratings for the world's 30 biggest banks within three weeks and may well mete out a few downgrades in the process, possibly surprising battered global bond markets. Among the institutions that could be downgraded are Bank of America Corp , Citigroup Inc and Morgan Stanley , said Baylor Lancaster, an analyst at CreditSights Inc.
• UK Banks Sharply Cut Lending to Periphery Eurozone - FT. Britain's banks have shrunk their lending exposure to peripheral euro zone counterparts by a quarter in just three months, the Financial Times reported on Friday. According to data compiled by the newspaper, used as the source for the article, the big four UK banks cut interbank loan volumes by more than 24 percent to 10.5 billion pounds ($16.6 billion) in the three months to end-September, as Europe's debt crisis worsened. UK's Big Four of HSBC, Lloyds, RBS and Barclays reduced sharply their volume of loans to Greek and Spanish banks, continuing an earlier pattern, but the Italian loan slump was new.
• Salesforce.com(CRM) Shares Drop On Tepid Outlook. Web-based software maker Salesforce.com Inc forecast current-quarter earnings broadly in line with Wall Street estimates and posted a quarterly net loss as its marketing and sales costs increased sharply. The tepid outlook from one of the leaders in Internet-based "cloud" computing suggests it will not avoid the effects of broad cutbacks in corporate spending which have ravaged other technology firms. Salesforce shares fell 6 percent after hours.
• North America Oct. Chip-Gear Orders Rise 1.4% vs. Sept.
  

Financial Times:

• Spain Pushed to Frontline of Euro Crisis. Spain was thrust on to the frontline of the eurozone’s debt crisis on Thursday as investors forced its borrowing costs sharply higher just three days ahead of a general election that opinion polls predict will topple the ruling Socialist party.

Telegraph:

• Angela Merkel Says UK Must Work With The Eurozone Or Risk Being 'Left Behind'. Angela Merkel has charged Britain to “work with us on the euro” or risk being “left behind” ahead of a testy summit with David Cameron in Berlin on Friday. The German Chancellor will demand British support for treaty changes to allow greater intervention in national economies – powers she says are vital to stem the crisis engulfing Europe’s core.
• Asian Powers Spurn German Debt On EMU Chaos. Asian investors and central banks have begun to sell German bonds and pull out of the eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy. Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region. "The question on everybody's mind in the debt markets is whether it is time to get out Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are there yet," he said. Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said.
  

Caixin Online:

• Weaker external demand shouldn't be the basis for China's policy adjustments as the nation's trade surplus decreases and its contribution to economic growth is currently small, citing Long Guoqiang, a researcher at the State Council's Development Research Center. China's policy easing should depend on whether or not the government's inflation target has been met, Long said.

21st Century Business Herald:

• China plans to allow local government financing vehicles to securitize assets under a trial program in Guangdong, Jiangsu and Zhejiang provinces and in Beijing city, citing National Assoc. of Financial Market Institutional Investors. Airports, toll roads and sewage treatment projects will be among assets that can be securitized.
• China should include financial risk prevention in its 2012 macro policy, citing Zhang Xiaojing, director of the department of macroeconomics at the state-run Chinese Academy of Social Sciences. This year's macro policy doesn't include financial risk as a task. Zhang's team provides policy-making suggestions to the central government.
  

China Securities Journal:

• Chinese exports next year will be "very grim," citing He Fan, deputy director of the Chinese Academy of Social Science's institute of world economics and politics. The euro zone may have another crisis early next year, He says.

Evening Recommendations
Jefferies:

• Rated (KO) Buy, target $80.

Night Trading

• Asian equity indices are -2.0% to -1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 215.0 +6.0 basis points.
  
• Asia Pacific Sovereign CDS Index 161.0 +3.5 basis points.
• FTSE-100 futures -1.13%.
  
• S&P 500 futures -.19%.
  
• NASDAQ 100 futures -.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ANN)/.57
• (CPWM)/-.37
• (HIBB)/.51
• (HNZ)/.80
• (CYBX)/.30
  

Economic Releases
10:00 am EST

• Leading Indicators for October are estimated to rise +.6% versus a +.2% gain in September.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Williams speaking, Fed's Fisher speaking, ECB's Mario Draghi speaking and the (PFCB) investor day could also impact trading today.
  

BOTTOM LINE: Asian indices are 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 modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Dropping into Final Hour on Rising Eurozone Debt Angst, Tech/Financial Sector Pessimism, Global Growth Fears, High Energy Prices

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Every Sector Declining
  
• Volume: Slightly Above Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 35.53 +6.06%
  
• ISE Sentiment Index 79.0 -19.39%
  
• Total Put/Call 1.25 -8.76%
  
• NYSE Arms 3.02 +72.34%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 134.73 +2.35%
  
• European Financial Sector CDS Index 285.80 +6.80%
  
• Western Europe Sovereign Debt CDS Index 356.0 +.51%
  
• Emerging Market CDS Index 333.25 +2.93%
  
• 2-Year Swap Spread 53.0 +2 bps
  
• TED Spread 48.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 169.0 -6 bps
  
• China Import Iron Ore Spot $147.60/Metric Tonne +.27%
  
• Citi US Economic Surprise Index 49.10 -.8 point
  
• 10-Year TIPS Spread 1.92 -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -105 open in Japan
• DAX Futures: Indicating -60 open in Germany

Portfolio:

• Slightly Higher: On gains in my Index hedges and Emerging Markets shorts.
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short and then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 trades to session lows as it falls back near its 50-day moving average on rising Eurozone debt angst, US Super Committee rumors, rising global growth worries and rising tech/financial sector pessimism. On the positive side, Tobacco, HMO, Utility, Telecom and Drug shares are holding up relatively well, falling less than -1.0%. Gold is falling -2.31%, Oil is falling -2.4%, Lumber is rising +4.1% and the UBS-Bloomberg Ag Spot Index is declining -2.41%. On the negative side, Coal, Oil Service, Ag, Steel, Internet, Software, Computer, Semi, Disk Drive and Airline shares are under significant pressure, falling more than -3.0%. (XLK) has traded poorly throughout the day. Copper is down -3.8%. India's Sensex continues to trade very poorly, falling another -1.87% overnight, and is now down -20% ytd. Major European equity indices fell 1-2% today. The Germany sovereign cds is gaining +1.15% to 95.14 bps, the Spain sovereign cds is climbing +2.4% to 480.82 bps, the Brazil sovereign cds is jumping +3.55% to 173.17 bps, the Russia sovereign cds is rising +2.57% to 246.50 bps, the China sovereign cds is gaining ++2.12% to 146.95 bps and the Japan sovereign cds is gaining +2.22% to 114.99 bps. The TED spread continues to trend higher and is at the highest since June 2010. The 2-Year Swap spread is at the highest since May 2010 today. The FRA/OIS Spread is jumping +3.75 bps to 72.25 bps, which is the highest since May 2010. The 2yr Euro Swap Spread is at the highest since Nov. 2008. The 3M Euro Basis Swap is falling -5.08% to -129.37 bps, which is the worst since November 2008. The Libor-OIS spread is near the widest since July 2009, which is also noteworthy considering the recent strong equity advance off the lows. China Iron Ore Spot has plunged -23.1% since February 16th and -18.5% since Sept. 7th. The 10-year yield is falling -5 bps to 1.95% today despite some more positive US economic data. Ag-related stocks(such as CF, AGU, POT, MOS) are seeing large-volume declines today. I would not try to bottom-fish in these shares around current levels. As well, oil likely made another tradable top over the last 24 hours as its divergence from other economically-sensitive commodities became too great, the euro weakens and imminent Iran attack fears diminish. So far, stocks have just experienced a pullback after a strong surge off the lows, however I still think the risk of another meaningful turn lower in equities is substantial unless a positive catalyst emerges from Europe very soon. I expect US stocks to trade mixed-to-lower into the close from current levels on rising Eurozone debt angst, rising global growth worries, profit-taking, rising financial/tech sector pessimism, more shorting, high energy prices and technical selling.

Today's Headlines

Bloomberg:

• European Stocks Decline as Lower Spanish Bond Demand Fuels Crisis Concern. European stocks fell after Spain’s borrowing costs surged to a euro-era record on waning demand at a bond sale, adding to concern the region’s sovereign debt crisis is deepening. BNP Paribas SA and Societe Generale SA led a sell-off in banks, both dropping at least 3.9 percent as dollar funding costs for European lenders climbed to a three-year high. Mining companies tumbled with metal prices. The benchmark Stoxx Europe 600 Index lost 1.3 percent to 233.97 at the close in London, extending the decline from this year’s high on Feb. 17 to 20 percent as the debt crisis spreads across the region’s core. “You have a lot of pressure on yields, you have the structural issues, the liquidity issues, plus market fears -- it’s very bad,” said Patrick Legland, head of research at Societe Generale, on Bloomberg Television. “We are not very far from the point where the European Central Bank will need to intervene one way or another.” Spanish bonds sank, driving 10-year yields to as much as 6.78 percent, the highest since before the euro was introduced, as borrowing costs climbed to the most in at least seven years at an auction of securities. The benchmark yield was trading at 6.49 percent at 4:39 p.m.
• France Clashes With Germany on ECB's Rescue. German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil. As the crisis sent borrowing costs in core economies outside Germany to euro-era records, Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a “snappy debt cut” as proposals that won’t work. “I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis,” Merkel said in a speech in Berlin today. “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” Merkel’s comments underscore German reluctance to assume more liability for taming the debt crisis even as it roils France, the euro region’s second-largest economy, and threatens to trigger a global recession.
• IMF to Wait for Political Support for Greek Funds. The International Monetary Fund won’t release the next tranche of funding for Greece until there is broad political support for the measures attached to the loan, a spokesman said. “It’s important that the unity government now shares its commitment to the implementation of the economic program” and the decisions agreed by European leaders last month, IMF spokesman David Hawley told reporters today. “Once broad political support” for the measures “is assured, then we can proceed with completion” of the review and the release of the tranche.
• Irish Government Draws Fire as Budget Plans Shown to Lawmakers in Germany. Ireland’s government laid out plans to raise sales tax and pledged to consider “ambitious” asset sales in documents shown to lawmakers in Germany before their Irish counterparts, drawing criticism from opposition politicians in Dublin.
  
• Crude Oil Falls From Five-Month High on Signs Europe Crisis Is Spreading. Oil fell from a five-month high in New York as Spain’s borrowing costs surged, heightening concern that Europe’s debt crisis is spreading and will hurt demand. “We expect the euro zone to get into recession next year,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, who expects the price of Brent to slip to $100 a barrel by the end of the year. “I don’t think prices fully reflect the weakening outlook for Europe. There’s still some geopolitical fears priced in with Brent at $112.” Crude for December delivery fell as much as $2.58 to $100.01 a barrel in electronic trading on the New York Mercantile Exchange and was at $101.04 at 1:19 p.m. London time. Earlier it reached $103.37, the highest price since May 31. Prices have gained 11 percent this year, after increasing 15 percent in 2010. Brent oil for January settlement on the London-based ICE Futures Europe exchange was down $2.26, or 2 percent, at $109.62 a barrel. Supplies at Cushing increased for the fifth time in six weeks, rising to 32 million barrels in the period to Nov. 11, according to yesterday’s Energy Department report. Oil has technical resistance at $103.39 a barrel, near where yesterday’s rally was halted, according to data compiled by Bloomberg. On the weekly chart, that’s the 61.8 percent Fibonacci retracement of the intraday decline to $32.40 in December 2008 from a record high of $147.27 in July that year. The 14-day relative strength index climbed above 70 for the first time since April 8, signaling further gains aren’t sustainable. The reading was 73.5 today.
  
• Gold Falls Most in Seven Weeks as Equities, Commodities Slump on Euro Debt. Gold fell the most in more than seven weeks as commodities and equities slumped after Fitch Rating said U.S. banks face a “serious risk” from Europe’s debt woes. Silver tumbled. The MSCI World Index of equities dropped for a fourth day, and the Standard & Poor’s GSCI index of 24 raw materials fell the most in eight weeks. Fitch said yesterday that “the broad credit outlook for the U.S. banking industry could worsen,” unless Europe’s woes are resolved soon. Before today, gold rose 25 percent this year on demand for a store of value. “Apparent liquidation from fear of possible contagion from the European crisis has commodities, including gold, under continued pressure,” Miguel Perez-Santalla, a sales vice president at Heraeus Precious Metals Management in New York, said in telephone interview. “This is a big collapse.” Gold futures for December delivery fell 2.9 percent to $1,722.60 an ounce at 1:17 p.m. on the Comex in New York. A close at that price would mark the biggest drop for a most- active contract since Sept. 23.
• Sears(SHLD) 3rd-Quarter Loss Widens on Softness in Canada, Weaker Consumer Electronics sales. Sears Holdings Corp. turned in a wider-than-expected loss in its third-quarter, dragged down by weakness in Canada, declining consumer electronics sales and softer clothing sales at its Kmart stores. The downbeat report, announced Thursday, underscored the big challenges the ailing chain faces as it heads into the critical weeks of the holiday shopping season.
• Solyndra Funding Mostly Lost to Taxpayers: Chu. Energy Secretary Steven Chu told lawmakers he was responsible for the $535 million U.S. loan guarantee to Solyndra LLC and said he doubted much of the money would be recovered after the company’s bankruptcy. Chu, who once predicted the California maker of solar panels would be a “shared success story,” testified today before a House Energy and Commerce subcommittee investigating the Energy Department’s reasons for backing Solyndra and providing refinancing as it slid toward collapse. “Red flags” about the company’s prospects were “either ignored or minimized by senior officials” in the Obama administration, Representative Fred Upton, a Michigan Republican and chairman of the Energy Committee, told Chu. “Who is to apologize for the half-billion dollars out the door?” Upton asked. “Was there incompetence?” Chu said. “Was there any influence of a political nature? So I would say no. It is extremely unfortunate what has happened to Solyndra.” Asked how much of the taxpayer funding invested in Solyndra may be recovered, Chu, 63, said, “I’m anticipating not very much.”
• Legg Mason's Miller to Exit Main Fund. Bill Miller, the Legg Mason Inc. (LM) manager famous for beating the Standard & Poor’s 500 Index for a record 15 years through 2005, will step down from his main fund after trailing the index for four of the past five years. Miller, 61, will be succeeded by Sam Peters as manager of Legg Mason Capital Management Value Trust (LMVTX) on April 30, which is the 30-year anniversary of the fund, the Baltimore-based firm said today in an e-mailed statement. Miller will remain chairman of the Legg Mason Capital Management unit while Peters will be chief investment officer.
• Initial U.S. Jobless Claims Fall to 7-Month Low. Claims for unemployment benefits dropped to the lowest level in seven months and housing starts exceeded forecasts, signaling improvement in the weakest areas of the U.S. economy. Applications for jobless benefits decreased 5,000 in the week ended Nov. 12 to 388,000, Labor Department figures showed today in Washington.
• Bullard Warns Additional Stimulus Risks Emergence of 1970s-Style Inflation. “If you try to push really hard, even harder, you might get a lot of inflation in the U.S.,” Bullard said in a CNBC interview today. “You might replay the 1970s. I’m telling you, people will not be happy if we go to that situation.”

Wall Street Journal:

• Interview: Resona Chairman Warns Over Japan Debt "Danger Zone". The chairman of Japan's fourth-largest bank, Resona Holdings Inc. (8308.TO), warned that Japan could face similar problems to Greece or Italy given the country's huge debt holdings.
• Philly Fed Manufacturing Index Slips. The Philadelphia Fed said its index of general business activity within the factory sector has fallen to 3.6 in November. Economists surveyed by Dow Jones Newswires expected the November index to remain at 8.7.
• Obama Abandons (Private) Labor.
  

CNBC.com:

• China Doesn't Have a Forex Bazooka to Bail Out Europe. Europeans searching for a bazooka to blast away euro zone debt problems might well eye China's $3.2 trillion foreign exchange arsenal with envy, but Beijing has far less firepower available than many assume. Most of money in the world's biggest store of FX reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if sold in size to help Europe, would spark panic on global financial markets. In fact, analysts reckon China's armory has only about $100 billion to spare. "The sheer size of China's foreign exchange reserves is massive, but the actual amount of money available for investing in Europe each year isn't that big," said Wang Jun, an economist at CCIEE, a top government think-tank in Beijing.
• With MF Global Money Still Missing, Suspicions Grow. Nearly three weeks after $600 million in customer money went missing from MF Global, the search for the cash has been hampered by the bankrupt brokerage firm’s sloppy record-keeping, an increasingly worrisome situation that has left regulators frustrated and customers in the lurch.

Business Insider:

• Here's What It Was Like To Be In The Middle Of This Morning's Dramatic Protest On Wall Street.
• To Save The Euro We Must Destroy Germany. Yesterday German Chancellor Angela Merkel came flat out and said, "To save the Euro we must Destroy Germany". Well not exactly, but she may as well have because that is the implication.
• In His Own Words: GOP Slams Obama for Allowing The National Debt to Break $15 Trillion. (video)
  

Zero Hedge:

• The Technocratic Revulsion Begins: Photos and Video as Thousands of Italians Protest Monti's "Banker" Government.
• Greek Crowd Now Amassed In Front Of US Embassy - Live Video.
• Global Dollar Liquidity Freeze Leads To Pervasive Sell Off. (graphs)
• Presenting The First MF Global Casualty. BCM Has Ceased Operations (source).

NY Post:

• Loading The Dice. Kingpins Bet Feds Will Legalize Online Gambling.

Forbes:

• Smart Money Is Short France, Italy, The Euro, Long Germany.

Carbon Finance:

• US States Formally Quit the Western Climate Initiative Leaving Only California. Six US states have now entirely dropped out of the Western Climate Initiative (WCI), leaving California as the only participating US state. On 10 November, only California of the US and four Canadian provinces—British Columbia, Manitoba, Ontario and Quebec – announced the formation of a non-profit organisation to administer the WCI cap-and-trade programme and service its technical needs. Arizona and the other US states formerly associated with the WCI have now clarified that they are no longer associated with the organisation, according to Arizona Department of Environmental Quality Director Henry Darwin, in announcing that his state has formally withdrawn from the WCI. While some states and provinces may continue to pursue cap and trade, Arizona will not be one of them, he emphasised. “Arizona believes there are more effective, responsible ways to realise the environmental and health benefits the WCI programme seeks to achieve while avoiding the economic costs to industries that are subject to cap and trade,” Darwin said, adding that those costs are ultimately borne by customers.

DesMoinesRegister.com:

• Corn Prices Plunge. The corn market has taken a sudden nasty turn, dropping 30 cents per bushel to $6.12 for December delivery through noon on the Chicago Board of Trade. Soybeans are down 23 cents per bushel to $11.64 and wheat, which has traded at an unusual discount to corn this week, is down 24 cents per bushel to $5.92. The market was spooked by a lackluster weekly export report from the U.S. Department of Agriculture. For the marketing year corn exports are down 18.6 percent, soybeans down 33 percent and wheat down 17 percent.

LA Times:

• California Attorney General's Office Subpoenas Fannie, Freddie. Information is sought on the mortgage giants' roles as landlords who own thousands of foreclosed properties in California. Also sought are details of their mortgage-servicing and home-repossession practices, a source says.

Huffington Post:

• 'The Daily Show' Takes On Occupy Wall Street's Own Class Warfare. (video)

Reuters:

• Fed Alone Cannot Cure Economy's Ills - Pianalto. The U.S. Federal Reserve must do its part to boost a "frustratingly" slow recovery, a top Fed official said on Thursday, but low interest rates alone cannot get households spending again. "Our policy is appropriate in this economic environment; it is supporting a stronger recovery while ensuring that inflation remains consistent with our mandate," Federal Reserve Bank of Cleveland President Sandra Pianalto told the Rotary Club of Lexington, Kentucky. "But in this economy, monetary policy alone cannot cure all of the economy's ills."

Telegraph:

• Debt Crisis: Live. Job of new Italian government will be harder as country is 'likely already in recession', warns ratings agency Fitch, while Spain and France were forced to pay higher borrowing costs in bond auctions.

Frankfurter Allgemeine Zeitung:

• Wolfgang Franz, who heads German Chancellor Angela Merkel's council of economic advisers, is against making the European Central Bank the euro-area's lender of last resort, citing an interview. "Based on all historic experiences, including in Germany, the monetization of government debt is one of the deadly sins for a central bank," Franz said. He said the ECB would lose its policy-making independence and risk stoking inflation.

Rheinische Post:

• Germany aims to reduce annual solar power installations to 1 gigawatt from July 2012 to cut costs, Economy Minister Philipp Roesler said.

Expansion:

• Spanish opposition People's Party advisers are considering the creation of a so-called bad bank to lift from banks the burden of covering losses linked to real estate, citing party officials. The new government will make public funds available to clean up financial entities' balance sheets.

Epikaira:

• Antonis Samaras, Greece's main opposition leader, said he won't sign a letter pledging commitment to new austerity measures, as requested by European Union officials, saying his support for the transitional government is enough, citing an interview.

Bear Radar

Style Underperformer:

• Large-Cap Growth (-2.63%)

Sector Underperformers:

• 1) Coal -5.0% 2) Computer -4.21% 3) Oil Service -3.83%

Stocks Falling on Unusual Volume:

• YOKU, DK, WNR, AMAT, RVBD, CHKP, PERY, NTAP, SHLD, DWSN, DGIT, AMAP, FDML, TSRA, GLPW, CHKP, AMAT, ROVI, MRVL, SWKS, NATR, SCVL, SSRI, CVV, PBE, IAI, PUW, PIV, KCE, IXG, IYF, FEU, IGV, TDG, JKG, MPC, RATE, CVI, DAN, SLM and DK
  

Stocks With Unusual Put Option Activity:

• 1) CVI 2) AGU 3) LTD 4) SHLD 5) HYG
  

Stocks With Most Negative News Mentions:

• 1) NTAP 2) STT 3) CHK 4) JEF 5) MRVL
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Thursday Watch

Evening Headlines

Bloomberg:

• Spain's Salgado Cuts GDP Forecast, Says Too Early to Know Regions' Deficit. Spanish Finance Minister Elena Salgado said the economy will grow about 0.8 percent this year, less than the government’s target, and it’s too early to know if the regions will meet their deficit goal this year. The new forecast is below the 1.3 percent government target that Salgado had said since August would be hard to meet, and is in line with the estimate of 0.7 percent published by the European Commission last week. Salgado said that while the central government will meet its budget-deficit target, it’s not clear whether the regional governments will do so, casting doubt on the overall budget- deficit goal of 6 percent of gross domestic product. “I maintain 6 percent as the priority,” Salgado said in an interview with Cope, when asked if the goal would be met. “We don’t have the regions’ third-quarter budget data yet.” Spain’s economy stagnated in the third quarter, data showed yesterday, as the unemployment rate approached 23 percent. The yield on Spain’s 10-year bond surged to 6.4 percent, the highest since August before the European Central Bank started propping up the nation’s bond market with debt purchases.
• Moody's Cuts Landesbank Ratings on Lower Likelihood of State Aid. Moody’s Investors Service downgraded the senior debt and deposit ratings of 10 German public-sector banks citing its assumption that “there is now a lower likelihood” that the lenders would get external support. The new bank resolution regime that allows the state to impose losses on creditors outside liquidation is a “key” driver for Moody’s assumptions of “reduced support,” the ratings company said. “With authorities now taking steps that reduce the probability, predictability and likely extent of future support, Moody’s has removed some of this extraordinary support” that it factored into the ratings, it said.
• Weil: UniCredit Bombshell Shouldn't Be the Last One. Everyone in the world who pays any attention to the financial markets seems to know that the balance sheets of European banks are a joke. All you have to do is compare the stock prices of these companies with the book values on their balance sheets to see that. On average the shares of the 32 companies in the Euro Stoxx Banks Index trade for about 44 percent of book value, or common shareholder equity, according to data compiled by Bloomberg.
• France, Spain Sales Test Contagion as Yields Ascend: Euro Credit. France and Spain sell 12.2 billion euros of bonds today in a test of investor demand as surging borrowing costs infect the region's core.
  
• Money-Market Spreads Surge to Two-year High on Europe Crisis. Investor demand for the relative safety of Treasuries during the European debt crisis has sent the difference between U.S. short-term yields and credit-market rates surging to levels not seen in more than two years. The gap between the London interbank offered rate and the overnight index swap, or what traders expect Federal Reserve’s benchmark to be over the term of the contract, widened to 38 basis points as of 9:58 a.m. in Tokyo. It was the highest level since June 2009. U.S. five-year swap spreads climbed to 45 basis points, the most since August 2009. “It’s a flight to safety,” said Akira Takei, head of the international fixed-income department at Mizuho Asset Management Co. in Tokyo, which has the equivalent of $42.7 billion in assets. “I have quite a bullish view on U.S. Treasuries. The market is quite risk-averse.” The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 47 basis points, or 0.47 percentage point. It was the most since June 2010. Two-year swap spreads increased to 52 basis points today, the most since May 2010.
• IMF Europe Unit Chief Quits One Year Into Job. The head of the International Monetary Fund’s European department quit less than a year into the job and was replaced by a veteran staffer as the European debt crisis worsens. Antonio Borges, a Portuguese native whose unit oversees bailouts in the euro region, resigned for “personal reasons,” the Washington-based IMF said today in an e-mailed statement. His successor is Reza Moghadam, who has made his career at the fund and headed the strategy department.
• U.S. Banks Face Contagion Risk From Europe Crisis, Fitch Says. U.S. banks face a “serious risk” that their creditworthiness will deteriorate if Europe's debt crisis deepens and spreads beyond the five most-troubled nations, Fitch Ratings said. “Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said yesterday in a statement. Even as U.S. banks have “manageable” exposure to stressed European markets, “further contagion poses a serious risk,” Fitch said, without explaining what it meant by contagion. The “exposures” of U.S. lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain, known as the GIIPS, are smaller than those to some of the continent's larger countries, Fitch said. The six biggest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- had $50 billion in risk tied to the GIIPS on Sept. 30, Fitch said. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion, including $114 billion to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively. Europe's debt crisis has toppled four elected governments, with the last two, in Greece and Italy, falling last week. Italian bond yields remained at about 7 percent -- the threshold that led Greece, Portugal and Ireland to seek bailouts -- and shares of French banks, including BNP Paribas SA and Societe Generale SA, dropped amid concern they'll need more capital.
• The Yen's basis swap spread vs the dollar widened to the most since at least June 1997, signaling that Japanese banks are facing tightening dollar funding. The 2-year cross-currency basis swap, the rate which banks pay to convert yen payments into dollars, was at 76 bps below the Libor for yen, according to Bloomberg.
• Singapore's Exports Slide the Most in 30 Months as Electronics Sales Slump. Singapore’s exports fell the most in more than two years in October as a slowing global economy curbed demand for electronics products. Non-oil domestic exports fell 16.2 percent from a year earlier, after a revised 4.6 percent decline in September, the island’s trade promotion agency said in a statement today. The median of 12 estimates in a Bloomberg News survey was for a 7.8 percent drop. Singapore’s expansion will stall over the next few quarters as the global economy worsens, before a “modest recovery” in the second half of 2012, the central bank said last month. “The fact that the drop in electronics occurs ahead of the festive season has further highlighted the weakness in global demand,” said Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore. “The risk of gross domestic product shrinking in the fourth quarter cannot be discounted.” Electronics shipments by companies such as contract manufacturer Venture Corp. dropped 31.2 percent in October from a year earlier, after declining 13.6 percent the previous month.
• Zoomlion Sees 'Drastically' Slower Demand for Cranes, Excavators in China. Zoomlion Heavy Industry Science & Technology Co. said a slowdown in China’s demand for cranes and excavators will carry on next year because of waning economic growth and cutbacks in railway building. “Demand for construction machinery has shrunk drastically and growth will no doubt continue to slow next year,” Chairman and Chief Executive Officer Zhan Chunxin said in a Nov. 15 interview in Hong Kong. Meeting a 50 billion yuan ($7.9 billion) sales target for this year will also be “challenging,” he said. China’s second-biggest maker of construction equipment fell in Hong Kong trading as the forecast added to signs of cooling in the nation’s economy and in spending on new factories and houses. “There’s no doubt China’s infrastructure investment will slow in 2012,” said Banny Lam, Hong Kong-based economist at CCB International Securities Ltd., a unit of China’s second-largest lender. “The overall economy will also cool because of weaker export demand.” Zoomlion declined as much as 6.3 percent to HK$8.60, the lowest intraday level since Oct. 6, in Hong Kong trading. It was down 5.7 percent at HK$8.66 as of 11:33 a.m. That’s 42 percent below the price it sold shares at in December 2010.
• Moore Capital Said to Overhaul Coffey's Fund as Returns Trail Averages. Moore Capital Management LLC restructured its main emerging-markets hedge fund in a move that may improve the below-average returns posted by Greg Coffey since he took over as manager three years ago.
• Mosaic(MOS), the largest U.S. potash producer, said additional supplies from so-called brownfield expansion projects will make prices unsustainable above $600 a ton through 2020.
• Finance Job Losses Near 200,000 as BNP, Citigroup Cut Staff. Job losses in the global financial services industry this year are close to surpassing 200,000 as Citigroup Inc., France's BNP Paribas SA and Bank of America Corp. eliminate jobs to reduce costs. Citigroup, the U.S. bank that shook up senior management earlier this month, may cut as many as 3,000 jobs as Chief Executive Officer Vikram Pandit squeezes out costs, said a person familiar with the company's plans. BNP Paribas, France's biggest bank, said today it will trim about 1,400 jobs at its investment-banking unit, with most coming from the lender's capital markets and structured-finance teams. Bank of America also cut part of its equities unit in Europe yesterday. The reductions add to the 195,000 banks, insurers and asset managers announced this year, and surpass the 174,000 losses in 2009, data compiled by Bloomberg show.
• Stifel Is Said to Be in Exclusive Talks to Buy Morgan Keegan. Stifel Financial Corp. is in exclusive talks to buy Regions Financial Corp.’s Morgan Keegan brokerage after prevailing over private-equity bidders, said people with knowledge of the matter.
• India Stocks May See 'Sharp' Fall, Franklin Templeton Says. Indian stocks, the second-worst performers among Asia’s biggest markets this year, may decline further as investors shun riskier assets amid the global economic turmoil, according to Franklin Templeton Investments.

Wall Street Journal:

• Rep. Issa Promises 'Significant' Findings in Countrywide Probe.
• Banks Face Funding Stress. European Institutions Resort to Potentially Risky Swaps to Generate Liquidity. European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank. The banks' maneuvers, which include behind-the-scenes swapping of assets among financial institutions, could heighten risk across Europe's already fragile financial system, say some senior industry officials and regulators. They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB. The Continent's intensifying financial crisis has made it difficult for many banks to obtain funding from customary market sources. Some banks are exhausting their supplies of assets—such as European government bonds and certain types of asset-backed securities—that the ECB accepts as collateral and that the banks haven't already committed to other uses, according to bankers and analysts. Others are scrambling to stockpile such assets to comfort analysts and investors worried about the banks' abilities to weather a long-term freeze in bank-funding markets. Some regulators and bankers are worried. By transferring potentially risky assets among a wide range of institutions, the so-called liquidity swaps have the potential to "create a transmission mechanism by which systemic risk across the financial system may be exacerbated," the U.K.'s Financial Services Authority warned in a July consultation paper. The scramble for ECB-eligible collateral highlights the tenuous state of Europe's banking industry. Traditional sources of bank funding, including institutional investors and fellow banks, have largely fled amid concerns that many lenders are sitting on huge piles of risky government bonds and loans to shaky borrowers. That has left a funding vacuum that a growing group of banks are filling with loans from the ECB. In the increasingly popular liquidity swap, banks transfer illiquid assets such as non-investment-grade loans to corporations or to finance public-infrastructure projects—and which aren't eligible to serve as collateral for ECB loans—to investment banks or insurance companies. In return, the investment banks or insurers provide government bonds or other liquid assets that the original bank can use as collateral to secure loans from the ECB. The investment banks apply a discount to the assets they are receiving—shielding them from some potential losses—and receive commissions on the trades. A number of French, Italian and other European banks, including bailed-out Franco-Belgian lender Dexia SA, recently have entered into such transactions, according to people familiar with the matter. "It's a way to improve your liquidity and to get liquid some assets that are not liquid," said a senior Dexia executive, who says he has crafted billions of euros of such trades in recent months. The ECB's extensive loans to banks have put its own balance sheet at risk, many analysts say. Partly to protect banks in the periphery, ECB officials suspended rules that had confined the central bank to only accepting investment-grade government bonds. As a result, the ECB now holds junk-rated Greek, Irish and Portuguese bonds.
• Euro-Dollar Basis Swap Cost t 2008 Crisis Levels. Elevated concerns about the fate of the euro zone sent a widely tracked measure of European funding costs to levels not seen since the 2008 financial crisis. The three-month euro-dollar cross currency basis swap traded as wide as minus 126 basis points on Wednesday, its peak since December 2008. This shows it is exceedingly more expensive to swap euros into scarce dollars for European financial institutions. Its elevated costs reflect investor concern that the European Central Bank is not buying enough bonds to bring down yields to stabilize European debt markets. Italian bond yields are hovering in the 7% range, a euro-era high. Yields on French bonds have also risen by 50 basis points in the last week. “People are looking at (the swap) and talking about it,” said Todd McDonald, head of foreign exchange trading at Standard Chartered in New York. “Conviction and volumes are both low. People are trying to avoid trading it.” However, some have no choice but to use the swap market or lean on the ECB for funds. Many avoid taking the latter route because it might damage the reputation of the borrower. The swap has widened despite the European Central Bank’s efforts to ease the situation by establishing a window for banks and others to exchange the common currency for greenbacks.
• U.S. Levels Subpoenas in Probe of MF Global. Federal prosecutors in Chicago and New York have issued subpoenas in the probe of the collapse of MF Global Holdings Ltd., people familiar with the case said, a sign of an intensifying Justice Department criminal investigation as authorities try to track down about $600 million in client funds. Chicago U.S. Attorney Patrick Fitzgerald and New York U.S. Attorney Preet Bharara, regarded as two of most aggressive and high-profile federal prosecutors in the country, are using subpoenas to gather company records, the people familiar with the matter said.
• Congress to Investigate Electronic Spy Threats. Congress is launching an investigation into whether Huawei Technologies Co. and other Chinese telecommunications firms pose a potential national-security threat as they expand in the U.S. The probe by the House intelligence committee marks an intensification of U.S. scrutiny of the potential threat, in particular from Chinese firms like Huawei and ZTE Corp. Intelligence officials have shared with lawmakers concerns that such expansion could give China a foothold for electronic spying in the U.S., according to a congressional aide.
• China, Russia Resist Sanctions Against Iran. A new U.S. and European-led push to censure Iran before the United Nations nuclear agency for alleged efforts to develop atomic weapons is facing resistance from Russia, China and a bloc of developing countries, which threaten to dilute any international punishment. American and European officials on Wednesday said they believed they would reach an agreement with Beijing and Moscow on a resolution condemning Tehran's nuclear work, which will be presented to the International Atomic Energy Agency's 35-nation board of governors in Vienna on Thursday.

MarketWatch:

• Some Commodities to Take Hit from China: Analysts. Demand for industrial commodities is headed for a softening because China won't be able to offset dwindling consumption in the euro-zone economies, Capital Economics analysts said in a note distributed to reporters Thursday. Views that China's rising demand will support the global commodities is misguided, the analysts said. China's annual growth rate is set to slow to about 6% on average during the next decade as the supply of cheap labor dries up, cooling from current annual growth of about 10%. Crude oil in particular may see a potential drop as falling demand in Europe outpaces rising consumption in China.

Business Insider:

• A Look At People's REAL Holiday Shopping Plan. (graph) Based on their historical data, Gallup explains that "The 7% increase in Americans' 2011 November Christmas spending forecast compared with last year's -- from $714 to $764 -- points to a modest increase in 2011 holiday retail sales, perhaps on the order of 3% to 4%."
• Congress Insider Trading: Here's How Senator John Kerry Made Bank On Obamacare.
• The Guy Arrested For Firing A Shot At The White House May Have Spent Time At 'Occupy' Protests.
• Blue Dog Dems Break With Obama, Back Balanced Budget Amendment.
  

Zero Hedge:

• Citi Chief Economist Willem Buiter: A Spanish or Italian Default Could Happen Soon. (video)
• It's Official: Total US Debt Passes $15 Trillion. Total US debt has increased by 41.5%, or $4.4 trillion, from $10,626,877,048,913 on January 20, to $15,033,607,255,920, under Obama as president.

CNBC:

• France and Germany Clash Over ECB Crisis Role. France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets.
  
• Apple(AAPL) Launches Audit of Chinese Suppliers. Apple has hired an outside specialist firm to help audit the environmental practices of its suppliers in China following a series of critical reports by activists.

CNN:

• Gas Mileage Boost Means Pricier Cars - EPA. New federal gas mileage rules proposed Wednesday will add thousands of dollars to the cost of new cars.
  

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 23% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19 (see trends).

Reuters:

• BHP Billiton(BHP) Turns More Cautious On Outlook. BHP Billiton, the world's biggest miner, has turned more wary on the outlook for commodity markets, warning on Thursday that customers are starting to face tighter access to trade finance and some are cutting production. BHP and rivals such as Rio Tinto and Anglo American, have warned that markets are likely to remain volatile in the near term, but BHP is the first to highlight that customers are starting to face tougher credit conditions. "The heightened volatility and uncertain economic outlook are expected to continue to weigh on sentiment in the markets for our commodities," Chief Executive Marius Kloppers told shareholders at the group's annual meeting in Australia.
• Applied Materials(AMAT) Warns of "Challenging Economy". Chip gear maker Applied Materials Inc gave a cautious quarterly revenue outlook and warned it expects to be affected by a tough economy. Economic uncertainty in the United States and Europe has hurt demand for consumer electronics in recent months, leading many chip manufacturers to put expansion plans on hold.
• Greek Protesters to March as Warning to New PM. Thousands will protest in Athens on Thursday to warn Lucas Papademos' new government that despite parliament's backing for more austerity steps, many ordinary Greeks are not ready to endure further years of painful belt-tightening. The size and mood of the rally, the first big protest in almost a month, will signal just how bitterly a restive public will fight further tax rises and spending cuts that international lenders demand in return for a massive bailout.
• Limited Brands(LTD) Profit Beats View, Raises Outlook. Limited Brands Inc , parent of lingerie chain Victoria's Secret, reported a higher-than- expected quarterly profit, as tight expense control boosted operating margins and raised its profit outlook for the year. However, the company, which also operates the Bath & Body Works and La Senza chains, forecast a profit for the key holiday quarter mostly below analysts' expectations. The company's shares edged down to $42.70 after closing at $42.97.
• Oil Sands Opponents "Treacherous" - Canada. In a sign of the strain the Canadian government is feeling over development of the tar sands, Environment Minister Peter Kent said on Wednesday that opposition legislators who campaigned in Washington against the idea were treacherous.
• NetApp(NTAP) Sees Q3 Profit Below Street, Shares Fall. Data storage equipment maker NetApp Inc reported a 6 percent dip in fiscal second-quarter profit and forecast lower than expected results for the current quarter as large corporations trim technology spending in a shaky economy.

Financial Times:

• Call For Triple A 'Power Core' In Eurzone. The eurozone’s six triple A rated countries should have greater say in economic affairs within the single currency and act as its inner “core”, Finland’s Europe minister will on Thursday argue, the latest sign that a small subset of countries are attempting to band together to set new rules for the euro. Alex Stubb said in an interview he did not believe new institutions should be created to give the triple A countries more power. But he said European Union rules that allowed “enhanced co-operation” between member states might be needed so they could co-ordinate economic policies.
• IASB Considers Amending 'Fair Value' Accounting Rules. The Intl. Accounting Standards Board is considering limiting the extent to which insurers will be compelled to recognize "fair value" losses and profits arising from the fluctuating prices of financial assets they hold. Under pressure from the European Commission, the IASB is studying whether insurers could keep these movements out of their income statements under new accounting rules, which would make their profits less volatile.
  

Telegraph:

• Political Fires Are Alight Across Europe As Currency Debt Burns Again. The widening spreads of eurozone bond yields over Berlin's anchor rate are consistent with a currency system breaking apart. The badly bolted together superstructure, creaking heavily for the past two years, is beginning to buckle and pull apart. There has, until now, been an assumption in the capital markets that while this was a financial crisis involving sovereign debt and affected banks, the politics underpinning the system would resolve the problems. The eurozone may have been politically dysfunctional but its democratically elected leaders would arrive at the right answer and take the right action, eventually. But that's not happened. The scale of the political failure in the eurozone has become one of the biggest shocks for the market to come to terms with in recent months, a failure that's accelerating. Political argy-bargy is one thing, but the eurozone crisis now risks creating a democratic deficit, alongside the area's trade and budget deficits.
• Latin Showdown With Germany Over ECB. Germany is facing a moment of strategic truth. The sacred union with France that has held together through thick and thin for half a century is in growing danger as contagion spreads North, engulfing the French bond market.
• Don't Blame the ECB for Europe's Failures. Sir Mervyn King had good reason to leap to the defence of his friends in Frankfurt. It’s not up to the central bank, he said, to act as the mechanism for making transfer payments between surplus and deficit nations; that is essentially a political decision and therefore one that only governments can take. Printing money to buy up distress debt (debt “monetisation”) cannot be a part of any central bank’s armoury.

China Daily:

• Chinese Buyers and Developers Face Some Harsh Home Truths. Confidence shaken amid falling property prices as real estate agents suffer sudden slowdown in top-tier cities, Hu Yuanyuan reports in Beijing.

21st Century Business Herald:

• The China Banking Regulatory Commission has barred banks from selling wealth-management products with maturities of one month or less, citing people close to the regulator. Banks rely heavily on sales of short-term wealth-management products to increase deposits, causing volatility and liquidity risk.

China Securities Journal:

• Some Chinese Listed Firms Drop Property Business. Jiangsu Hengshun, Western Mining and Kingfa Sci. & Tech. are among companies planning to pull out of the housing business because of weak markets. Advances from customers at Jiangsu Hengshun slumped more than 50% y/y in the first three quarters. 477 Beijing-based companies lost qualification as developers amid weak sales, tight cashflow, high inventory and government curbs.

Beijing Business Today:

• Average home prices for China's tier 1 cities may fall between 20% to 30%, citing a research report by Ba Shusong, a researcher at the State Council's Development Research Center. Tier 2 cities' home prices may fall 10% to 20%, Ba says. China's property industry may face its first "meaningful" big adjustment "soon", Ba said.

Evening Recommendations
Jefferies:

• Rated (VZ) Buy, target $45.
• Rated (S) Underperform, target $2.50.
• Rated (CTL) Buy, target $45.
• Rated (FTR) Buy, target $7.

Night Trading

• Asian equity indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 209.0 +.5 basis point.
  
• Asia Pacific Sovereign CDS Index 157.50 +2.5 basis points.
• FTSE-100 futures -.73%.
  
• S&P 500 futures +40%.
  
• NASDAQ 100 futures +.46%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DLTR)/.83
• (PERY)/.61
• (WSM)/.38
• (PLCE)/1.27
• (SHLD)/-2.13
• (ROST)/1.26
• (GME)/.39
• (GPS)/.37
• (INTU)/-.12
• (CRM)/.31
• (FL)/.39
• (DLB)/.68
• (SJM)/1.39

Economic Releases
8:30 am EST

• Housing Starts for October are estimated to fall to 610K versus 658K in September.
• Building Permits for October are estimated to rise to 603K versus 594K in September.
• Initial Jobless Claims are estimated to rise to 395K versus 390K the prior week.
• Continuing Claims are estimated to rise to 3635K versus 3615K prior.
  

10:00 am EST

• The Philadelphia Fed for November is estimated to rise to 9.0 versus 8.7 in October.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Dudley speaking, Fed's Pianalto speaking, 10-Year TIPS Auction, 3Q Mortgage Delinquencies, 3Q Mortgage Foreclosures, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, Bloomberg Economic Expectations Index for Nov., Morgan Stanley Metals/Mining Conference, RBC MLP Conference, Morgan Stanley Chemicals Conference, UBS Energy Conference, (ROK) Investor Meeting, (SANM) analyst day and the (SXCI) Investor Day could also impact trading today.
  

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