Stocks Rising Slightly into Final Hour on Eurozone Rumors, Short-Covering, Seasonality, Investor Performance Angst

Broad Market Tone:

• Advance/Decline Line: Slightly Lower
  
• Sector Performance: Most Rising
  
• Volume: Light
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 27.50 -1.22%
  
• ISE Sentiment Index 171.0 +125.0%
  
• Total Put/Call .76 -21.65%
  
• NYSE Arms .70 +19.24%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 123.85 +2.62%
  
• European Financial Sector CDS Index 256.66 +2.99%
  
• Western Europe Sovereign Debt CDS Index 330.17 +1.54%
  
• Emerging Market CDS Index 288.25 -.10%
  
• 2-Year Swap Spread 43.0 unch.
  
• TED Spread 54.0 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -117.0 +5 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 183.0 +6 bps
  
• China Import Iron Ore Spot $139.60/Metric Tonne -.14%
  
• Citi US Economic Surprise Index 75.10 -2.1 points
  
• 10-Year TIPS Spread 2.09 +2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +55 open in Japan
• DAX Futures: Indicating +39 open in Germany

Portfolio:

• Slightly Higher: On gains in my retail, biotech and medical sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, then covered some them
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 moves to session highs back to its 200-day moving average despite recent gains, rising Eurozone debt angst, rising global growth fears and high energy prices. On the positive side, Oil Tanker, Steel, Drug and Airline shares are especially strong, rising more than +1.25%. The 10-year Yield is rising +4 bps to 2.08%. Johnson Redbook Weekly Retail Sales rose +3.2% this week versus a +3.9% gain the prior week. This is still an decent rate, but a noticeable deceleration from Oct. On the negative side, Road & Rail, Restaurant, Bank, Networking, Internet and Oil Service shares are under mild pressure, falling more than -.5%. (XLK) has underperformed throughout the day. Copper is falling -.33%, lumber is down -1.2%, the UBS-Bloomberg Ag Spot Index is +.34% and gold is gaining +.6%. The TED spread continues to trend higher and is at the highest since June 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is very near the highest since March 2009. The 3M EUR/USD Cross-Currency Basis Swap is still near the worst since November 2008. The Libor-OIS spread is the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -27.2% since February 16th and -22.9% since Sept. 7th. The Shanghai Composite made a new post-RRR cut low overnight, falling -.31%, and is right near its October 24th low. (EEM) is falling -1.0% today despite the sharp reversal higher in US stocks this afternoon. Volume remains poor and leadership is of fairly low-quality again. Breadth is also lacking. The S&P 500 is back to its 200-day moving average and near the high-end of its recent range. Overall, considering how many times Europe has disappointed the market with its debt crisis solution deadlines over the last couple of years, investors seem complacent ahead of the Dec. 9 summit. Rumors today out of the Eurozone suggest their kick-the-can debt crisis "solution" will include the creation of even more debt. As I have said before, this will likely boost markets short-term, but this part of the "solution" will prove disastrous longer-term. I expect US stocks to trade mixed-to-higher into the close from current levels on a bounce in the Euro, short-covering, technical buying, investor performance angst and seasonality.

Today's Headlines

Bloomberg:

• French, Spanish Bonds Fall as S&P Reviews Ratings, Before Summit. French government bonds dropped, leading declines among euro-area government securities, after Standard & Poor’s said it may lower credit ratings across the region. Spanish and Austrian bonds slid after S&P said 15 euro nations may have their rankings lowered as “continuing disagreements” among policy makers on how to tackle the debt crisis risks damaging their financial stability. France’s two- year note yield rose from a one-month low after German Finance Minister Wolfgang Schaeuble said the downgrade warning will help force European leaders to ratchet up efforts to resolve the two- year old crisis at a Dec. 8-9 summit. “The digestion of the ratings news has raised the stakes for the summit,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The debt crisis and the outcome of the meeting of politicians on Friday is the focus for the markets. There was a rally last week on expectations of a positive outcome from this meeting and we see risk for a setback there.” French 10-year yields advanced 11 basis points to 3.24 percent at 4:49 p.m. London time. Two-year French notes and 10-year bonds rose the most in at least five years last week amid optimism that Europe is ready to act to stem the crisis.
• S&P: EFSF May Lose AAA If Any AAA Euro Member Downgraded. The European Financial Stability Facility may lose its top credit rating if any of the bailout fund’s six guarantors face a downgrade from AAA, Standard & Poor’s said. “We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the AAA sovereign ratings, which are currently on creditwatch, on one or more of EFSF’s guarantor members,” S&P said in a statement today. At the same time, the ratings company said it “could affirm the AAA ratings on EFSF and its issues if we affirm the rating on all six of EFSF’s guarantor members currently rated AAA.” Germany, France, the Netherlands, Finland, Austria and Luxembourg are the top-rated nations backing the rescue fund. European stocks the euro fell after S&P said late yesterday that it may cut the debt grade of 15 euro nations, including Germany and France. German Finance Minister Wolfgang Schaeuble said today the downgrade warning should spur European leaders to ratchet up efforts to resolve the region’s debt crisis at a summit in Brussels on Dec. 8-9. “The crisis has become a crisis of euro-zone governance and crisis management,” Moritz Kraemer, managing director of European sovereign ratings at S&P, said on a conference call today. He said the summit is of the “utmost importance” and that leaders must address the turmoil “in a more robust and comprehensive way than what we’ve seen so far.”
• Sovereign, Company Bond Risk Rise in Europe, Default Swaps Show. The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index linked to 15 governments increased five basis points to 325 at 3:30 p.m. in London. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed nine basis points to 726.5, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment- grade ratings was up three at 172.25 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added six basis points to 267 and the subordinated gauge was up 14 at 477.
• U.S. Studies Derivatives That Let Investors 'Game' Tax Rules. U.S. lawmakers seeking to overhaul the Internal Revenue Code are examining how derivatives and other financial products can be used to exploit the tax system. Financial instruments, including exchange-traded notes and options, are susceptible to manipulation, according to a report by the nonpartisan Joint Committee on Taxation. Taxpayers can structure transactions to defer income, accelerate deductible losses and take advantage of lower capital gains rates.
• Sovereign-Debt Test U-Turn Too Late to Save EBA Credibility. Less than five months after conducting stress tests that found banks needed to raise 2.5 billion euros ($3.4 billion), the European Banking Authority may tell lenders that they need 40 times that amount to defend against losses on sovereign debt. The regulator may release updated figures on how much capital lenders should raise to absorb losses from euro-area bonds as early as this week, three people familiar with the matter said. The London-based watchdog’s stress tests in July were criticized for failing to include writedowns on sovereign debt held to maturity. The EBA “has a fundamental problem, which is that they’ve lost credibility and it’s going to be very difficult to claw that back,” Bob Penn, a London-based financial regulation lawyer at Allen & Overy, said in a telephone interview. “Will anyone pay attention? I’m not so sure.”
• UN Says Climate Pact 'Beyond Reach'. United Nations Secretary General Ban Ki-Moon said a global warming treaty may be “beyond our reach” this week as India and China rejected pressure for developing nations to adopt mandatory pollution targets. “We must be realistic about the opportunity of a breakthrough in Durban,” Ban said at UN climate talks in the South African port city today. “There are great economic troubles.” India, speaking with the Basic negotiating group of countries that also includes South Africa, Brazil and China, said industrial nations should move first in cutting fossil fuel emissions. The comments marked a hardening of positions that reduces the scope for an agreement in time for the meeting’s conclusion on Dec. 9. “Basic countries are not major polluters,” Indian Environment Minister Jayanthi Natarajan said today in Durban, South Africa, where the talks are being held. “They are emerging market economies. They have a small footprint in the context of historical emissions.”
• Brazil Economy Contracts as Rousseff Tries to Revive Growth. Brazil’s economy shrank in the third quarter, prompting the government to slash its growth forecast for the year, one week after announcing stimulus measures to contain the spillover from Europe’s debt crisis. Gross domestic product contracted 0.04 percent from the previous three months, the national statistics agency said, as credit curbs, higher borrowing costs and budget cuts checked demand. The contraction, the first since the first quarter of 2009, is equivalent to an annualized decline of 0.17 percent.
• Obama Says U.S. to Weigh Nations' Treatment of Gays in Issuing Foreign Aid. The Obama administration will weigh how countries treat gays and lesbians in making decisions about foreign aid, according to a presidential memorandum released by the White House. Laws prohibit same-sex sexual activity in many nations in the Middle East and Africa, and in two of the largest recipients of U.S. aid, Pakistan and Afghanistan. Homosexuality is punishable by death in Iran, Saudi Arabia and the United Arab Emirates and in some parts of Nigeria and Somalia.

Wall Street Journal:

• Solving Euro-Zone Crisis Will Take Time, Hungarian Ministers Say. Members of the euro zone will surely solve the ongoing crisis, but it has to be accepted that the process won’t be fast, Hungarian Economy Minister Gyorgy Matolcsy said Monday. Prime Minister Viktor Orban said, however, that he anticipates major steps Friady at the European Union summit. “Everybody anticipates European leaders — we ourselves anticipate them also — to make decision that will stabilize Europe for many years to come and decide on the fate of the continent for even more than a decade,” Mr. Orban said after holding talks with German Finance Minister Wolfgang Schaeuble.
• Blasts Kill Dozens in Afghanistan. Twin blasts in Kabul and the northern city of Mazar-e-Sharif targeted Afghanistan's minority Shiite community on Tuesday, killing nearly 60 people in one of the war's deadliest attacks and raising the danger of sectarian strife. A caller claiming to speak on behalf of Lashkar-e-Jhangvi, a Pakistani militant group notorious for attacks on Shiites, took responsibility for the attacks in a call to the Pashtu-language arm of Radio Free Europe. The claim couldn't be independently verified.
  

CNBC.com:

• Geithner Doesn't See Fed Funding IMF Euro Bailout. U.S. Treasury Secretary Timothy Geithner said in Germany on Tuesday that the European Central Bank was playing a positive role in the euro zone debt crisis, but he played down talk that the U.S. Federal Reserve could boost IMF funding for the crisis.
  

Business Insider:

• Greek Bank Run Hits The Big Time...
• You Really Should Be Watching What's Happening In Moscow Right Now.
• TIMBER! Home Prices Are Crashing In China's Most Famous Ghost City. (video) Home prices in China most notorious "ghost city," a city called Kangbashi constructed outside Ordos, have fallen from $1,100 per square foot in 2006 to $470 per square, according to the Hong Kong Standard. In the past few months alone prices have plunged by almost a third. This severe drop, amid declining prices around China, has convinced both the people and developers that Kangbashi is a lost cause. New Tang Dynasty News, a New York based company, interviewed some of the less-than-50,000 people who live in Kangbashi. Locals say that they have all invested their own money in housing and that they can't get their money back. This winter even the cranes have stopped construction and the migrant workers are fleeing. We can only wonder what's happening in China's other ghost cities.
• Europe Is Setting Itself Up For A Decade-Long Recession.
  

Zero Hedge:

• Iran Moves to War Alert.
• Live Hearing On Whether Insider Trading By Congress Should Be Illegal.
• "The Honorable" Jon Corzine To Testify On Thur. Over MF Global Collapse.
• Eurozone to Avoid Any Popular Vote In Treaty Change.
  

Washington Times:

• North Korea Making Missile Able to Hit U.S. New intelligence indicates that North Korea is moving ahead with building its first road-mobile intercontinental ballistic missile, an easily hidden weapon capable of hitting the United States, according to Obama administration officials.The intelligence was revealed in a classified Capitol Hill briefing last month.

Financial Times:

• EU Talks On Doubling Financial Firewall. Eleventh-hour negotiations have begun to create a much bigger financial “bazooka” to present at this week’s European Union summit that could include running two separate rescue funds and winning increased support for the International Monetary Fund. This three-pronged rescue system would form part of a carefully crafted package EU leaders hope will win over financial markets, just two months after a similar summit failed to convince bond investors Europe could contain its spiralling debt crisis. The rescue system would be introduced alongside proposals to rewrite EU treaties with far tougher budget rules for the eurozone.

Telegraph:

• S&P Has No Choice: Euroland Risks Bankruptcy On Current Policies.
• Debt Crisis: Live.
  

BBC:

• Eurozone Crisis: UK's Cameron 'may refuse to sign EU treaty'. David Cameron has said he will not sign any reworked EU treaty designed to solve the eurozone crisis if it does not contain safeguards to protect British interests.

Die Welt:

• European Commission President Jose Manuel Barroso said joint euro bonds present "no answer" to the current crisis, citing an interview. Barroso said euro bonds require a level of integration and discipline that the euro area does not currently have.

Hospodarske Noviny:

• ArcelorMittal Ostrava, the Czech unit of the world's largest steelmaker, said steel prices started to fall in May, CEO Tapas Rajderkar said. The company doesn't have many indications when prices might recover, he added. The fourth quarter has been the worst of the year, he said.

Shanghai Daily:

• Housing Deals Post Decline. HOME transactions in more than 70 percent of China's major cities in November fell monthly, with over half of them declining between 10 and 50 percent, according to a latest industry research yesterday. The report released by Soufun.com showed that transactions fell between 10 and 30 percent in 13 cities from October while they tumbled from 30 to 50 percent in 11 cities. "The central government's unwavering stance to curb housing speculation has begun to have an effect on real estate developers as some of them started to offer notable discounts in order to replenish their capital," said Tang Zhengwei, a Soufun analyst. "That could help explain the monthly rebound in sales recorded in some cities though sales in the majority were still very sluggish mainly due to the stringent enforcement of home purchase restrictions." Last weekend, the Ministry of Housing and Urban-Rural Development emphasized the need to maintain property restrictions as it ordered local governments to extend curbs, some of which will expire soon. The average home price fell in nearly 60 percent of the 47 cities from a month earlier, according to Soufun research.
  

Bear Radar

Style Underperformer:

• Mid-Cap Growth (-.71%)

Sector Underperformers:

• 1) Road & Rail -1.81% 2) Networking -1.60% 3) Oil Service -1.49%

Stocks Falling on Unusual Volume:

• STI, HAL, BAP, SPRD, SAVE, TLEO, SQI, LULU, CTRP, ZIP, ANDE, ADTN, OTEX, DRI, GTY and RNE
  

Stocks With Unusual Put Option Activity:

• 1) XHB 2) CMED 3) NBR 4) HL 5) HRB
  

Stocks With Most Negative News Mentions:

• 1) TSO 2) ADS 3) HUN 4) IR 5) DRI
  

Charts:

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

Tuesday Watch

Evening Headlines

Bloomberg:

• S&P Puts 15 Euro Nations on Watch for Downgrade Amid Sovereign-Debt Crisis. Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade. The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks. “Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement. The downgrade warnings come as German Chancellor Angela Merkel and French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year. “The S&P move is yet another signal that euro area countries must take decisive action to deal with the crisis or else the problems will spread from Greece and others with the most acute fiscal problems to the rest of the euro zone,” said Phillip Swagel, a professor of economics at the University of Maryland’s School of Public Policy who was an assistant Treasury secretary for economic policy in the George W. Bush administration. “It is time for Germany and France to act -- either to save Greece and the others or to let them fail.” The firm said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments. The other countries warned were Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, according to S&P. The company said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.” Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations. Yields on EFSF 3.375 percent bonds due in July 2021 2 basis points, snapping a five-day rally, to 3.6 percent, according to Bloomberg prices.
• AAA Nations Held Hostage as Debt Crisis Amplifies Volatility: Euro Credit. Bonds from AAA rated Austria, the Netherlands and Finland are suffering as Europe’s debt crisis increases volatility and erodes their haven status. Sixty-day volatility on 10-year government debt from the three nations reached euro-era records in November, as investors increased bets the currency bloc may unravel and as yields on Italian and Spanish securities surged. The countries were among 15 put on watch for a downgrade by Standard & Poor’s yesterday. Europe’s leaders will try again to fashion a solution to the turmoil this week after the failure of their fourth rescue blueprint sparked concern that the crisis will infect all 17 euro nations. “Volatility clearly has increased and it makes life a lot tougher for investors,” said Alex Johnson, who helps oversee $47 billion as London-based head of portfolio management at Fischer Francis Trees & Watts. “If you are invested in countries like the Netherlands you can find that what were safe- haven positions have become correlated with what’s going on in the periphery, when actually the economic fundamentals are still very good.” The extra interest the Netherlands has to pay investors to hold its 10-year bonds instead of Germany’s rose to a two-year high of 68 basis points on Nov. 17 and stood at 37 basis points yesterday, almost triple this year’s low of 13 basis points reached in March. A measure of 60-day volatility on the so- called spread has more than doubled to 103 percent from 49 percent six months ago.
• Basel Rules Face Change With No-Risk Sovereign Debt Major Focus. Regulators may diminish the central role of government bonds in planned banking rules designed to make the financial system safer. The Basel Committee on Banking Supervision, which coordinates regulations for 27 countries, may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards, said two people with direct knowledge of the plans who requested anonymity because the talks are private. The move could reduce demand for European government securities, making it harder for nations on the brink of insolvency to fund themselves. “One of the central pillars of the Basel III framework is the notion of a risk-free asset class,” said Matthew Czepliewicz, a banking analyst at Collins Stewart Hawkpoint Plc in London. “That central pillar is disintegrating. Basel is quite clearly going to have to be revised.”
• Asia Faces 'Much Greater' Risks From Global Slowdown, ADB Says. Asian economies are facing “much greater downside risks” now because of the possibility of a recession in the U.S. and Europe and the threat of destabilizing capital flows, the Asian Development Bank said. The biggest challenge for policy makers in emerging East Asian nations is to safeguard growth against the threat of another global economic crisis, the Manila-based lender said in its Asia Economic Monitor report today. Uncertainty over the world economy means officials in the region must have “sufficient flexibility” to adjust policies quickly, it said. “The cautiously optimistic outlook for emerging East Asia is subject to much greater downside risks now than just a few months ago,” the ADB said. “The global economic recovery could flounder if the euro zone and the US fall back into recession, causing another global financial crisis. Large and destabilizing capital flows could complicate the region’s macroeconomic management and jeopardize economic growth.” Emerging East Asian economies may grow 7.2 percent next year after expanding 7.5 percent in 2011, according to the report today. That’s lower than the lender’s September forecast for 7.6 percent growth this year and 7.5 percent in 2012, it said. The MSCI Asia-Pacific Index fell about 16 percent last quarter, the biggest drop since the last three months of 2008. “The lingering eurozone debt crisis could boost risk aversion among investors, with rapid swings in risk appetite boosting capital flow volatility beyond the spurts and stops seen in the third quarter this year,” the ADB said. “Consequently, exchange rate volatility would follow from large but fickle capital movements.” Emerging East Asia won’t be immune to a “major” slowdown in advanced economies, which would hurt the region’s economic growth and pose “significant” policy challenges, the ADB said. “With the euro zone’s sovereign debt crisis unfolding and risks of faltering global recovery rising, macroeconomic policy must remain cautious and prudent,” it said.
• Paulson Fund Loses 46% in 2011 Through November. John Paulson, the billionaire money manager having his worst year, has lost 46 percent in 2011 through November in one of his largest hedge funds, according to an investor update obtained by Bloomberg News. Paulson’s Advantage Plus Fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, declined 3.6 percent last month. Paulson & Co., which is based in New York and manages $28 billion, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp., the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. Paulson, 55, cut the so-called net exposure in his main hedge funds to 30 percent last month and reduced bullish bets across all his funds. Paulson’s biggest funds, Advantage Plus and Advantage, employ similar strategies and have $11 billion in combined assets. The dollar-denominated Advantage Fund fell 3.3 percent in November and 32 percent this year. The Recovery Fund, which invests in assets Paulson believes will benefit from a long-term economic upturn, fell 4 percent in November and 28 percent this year. The Paulson Partners Enhanced Fund, which invests in the shares of merging companies, decreased 0.6 percent last month and 18 percent this year. Paulson’s Credit Opportunities Fund slumped 3.6 percent last month and 18 percent this year.
• More 'Mancession' Fathers Caring for Kids While Mothers at Work. One-third of fathers with working wives are now the regular caregivers for their children, the result of the depressed economy and large numbers of out-of-work men, the U.S. Census Bureau reported today. The number of such dads caring for children under age 15 increased to 32 percent in 2010 from 26 percent in 2002. Among those fathers with preschool-age children, one in five served as the adult who spends the most time with the child, the census found. The recession has spurred the number of fathers with an active role in child care, which has been increasing since at least 1988, said Lynda Laughlin, a family demographer at the Census Bureau. “The economy hasn’t completely rebounded, particularly for men,” Laughlin said. “What did they label it, a ‘mancession’?”
• Women CEOs Say Debt Uncertainty and Regulation Hurt Job Growth. Women business leaders meeting with Republican lawmakers said tax burdens, duplicative government rules, an unskilled workforce and congressional deadlock on the deficit are hurting job creation and the economy. “Like everyone else, we need certainty when we get up in the morning and go into the office and worry about how many people we are going to hire,” said Lisa Hook, chief executive officer of Neustar Inc., a provider of telephone and Internet directories based in Sterling, Virginia, at a panel discussion today in Washington.
• Australia Cuts Key Rate, Citing Europe Risk. Australia’s central bank reduced its benchmark interest rate today for a second straight month as Europe’s fiscal crisis threatens to slow the nation’s commodity exports, sending the nation’s currency lower. Reserve Bank Governor Glenn Stevens and his board cut the overnight cash-rate target by a quarter percentage point to 4.25 percent, saying in a statement that “financing conditions have become much more difficult, especially in Europe.” “This, together with precautionary behavior by firms and households, means that the likelihood of a further material slowing in global growth has increased,” Stevens said in the statement.

Wall Street Journal:

• The Pitfalls of Merkozy's Third Way. What the French and German leaders appear to be cooking up at the start of the most critical week in the euro crisis appears well short of the comprehensive solution needed.
  
• Euro-Zone Economy Falls Short on Growth. Europe has a glut of grand plans but a shortage of growth. The euro-zone economy has already slowed markedly this year, from a 3.1% annualized growth pace in the first quarter to just 0.8% in the third, as revised government figures due Tuesday are likely to show. And the going will only get tougher; it appears Europe is slipping into a recession in the current fourth quarter.
• Search Begins for Next CEO at Ford(F). Ford Motor Co. has begun a broad search for candidates to replace current Chief Executive Officer Alan Mulally, who is expected to leave the company within two years, people familiar with the matter said. Candidates for the position include at least two former Ford executives as well as two internal candidates, those people said. The internal candidates are Americas President Mark Fields, 50, and Joe Hinrichs, 45, the chief of Asian operations.
• Corzine Rebuffed Internal Warnings on Risks. MF Global Holdings Ltd.'s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said. The board allowed the company's exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March.

Business Insider:

• We've Just Witnessed A Major Turning Point In The Euro Crisis. The death of the EFSF means EU leaders no longer have any credible short-term backstop to prevent the crisis from spreading in the short-term.

Zero Hedge:

• Full Text Of S&P Warning On FrAAAnce.

CNBC:

• France Rules Out Further Austerity After S&P Move. France will not impose a new round of austerity despite ratings agency Standard & Poor's warning on Monday it could downgrade the country by two notches from its triple-A rating.
• Rein: China Easing Could Trigger Property Bubble.
  

Rasmussen Reports:

• Generic Congressional Ballot. Generic Congressional Ballot: Republicans 43%, Democrats 38%.

Reuters:

• US Senators Call For Full Review Of Pakistani Ties. Two senior Republican senators called on Monday for a thorough review of U.S. relations with Pakistan, declaring that all security and economic aid to Islamabad must be reconsidered. John McCain and Lindsey Graham -- influential members of the Senate Armed Services committee -- said Washington had to be realistic about the deteriorating relationship. They said actions of Pakistan's military, such as its support for militant groups, were harming U.S. forces and threatening American security. "The time has come for the United States to fully review its relations with Pakistan," McCain and Graham said in a statement. "In particular, all options regarding U.S. security and economic assistance to Pakistan must be on the table, including substantial reductions and stricter standards for performance."
• Monti Warns of Greek-Style Risk to Italy. Italy risked a Greek-style economic collapse which could threaten the future of the euro without the austerity package approved by the government, Prime Minister Mario Monti said on Monday, calling on European partners to do their part.

Telegraph:

• Euro Enters The Last Chance Saloon. Ever since central banks agreed to provide additional liquidity support to Europe's stricken banks, stock markets have been surging in anticipation of an eventual, much wider ranging deal to save the euro. Are they right to do so?

BusinessWorld:

• Philippine Electronics Exporters See Steeper 2011 Fall. ELECTRONICS EXPORTS could plunge by as much as 25% this year as manufacturers expect last quarter results to hit new lows, an industry official yesterday said. The even more dismal outlook for 2011 -- the -25% figure is worse than -18% estimate held as of October -- was discussed last Friday by the Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI). The group, however, tentatively expects a recovery to 10% growth next year as shipments improve in the second quarter, SEIPI President Ernesto B. Santiago told BusinessWorld. “The prognosis for the fourth quarter is bad. The second biggest retail performance already happened in the first week of October ... and there is no more expectation of more buying,” Mr. Santiago said. “We could drop by 25% to $23 billion [this year]. Given this, most companies are focusing on cost reduction and rightsizing,” he continued. The plans do not include laying off workers, Mr. Santiago claimed. Electronic exports contracted by 47.9% to $1.813 billion in September based on latest data. The result brought nine-month sales to $18.778 billion, down 20.1% from a year earlier.
  

Economic Daily News:

• China Steel, Baoshan Ask Iron-Ore Firms to Cut Prices, Edn Says. China Steel Corp. and Baoshan Iron & Steel Co. have asked iron ore producers, including Vale SA, BHP Billiton Ltd. and Rio Tinto Group, to cut iron ore prices by 23% to lower costs. The steelmakers also asked iron ore supplies to cut deliveries by 20%.

China Daily:

• China Inflation May Rise in 2012 on Labor, Energy Costs. China may have "moderate inflation" for a long time, citing Sheng Laiyun, a spokesman for the National Bureau of Statistics.
• China Researcher Says Buying Bonds Won't Help Europe. The European debt crisis needs to be solved by enhancing the repayment ability of European countries, citing Wang Yiming, a deputy head of China's National Development and Reform Commission's macroeconomic research academy.
  

Shanghai Securities News:

• China to extend property control measures into 2012, citing Zhao Luxing, real estate department head at the Ministry of Housing and Rural Development's policy research center. Policy makers have other measures in reserve to control property prices, including speeding up the implementation of property tax and loan restrictions, according to the report.
  

China Securities Journal:

• China property prices may see a downward trend develop in 2012, citing Qin Hong, head of the policy research center under the Ministry of Housing and Urban-Rural Development.
• Some companies in the Chinese eastern city of Wenzhou may still face difficulties in repaying loans to private lenders at year end, citing a report for the city's government.
  

Evening Recommendations
Barclays:

• Rated (INTU) Overweight, target $62.
• Rated (ORCL) Overweight, target $37.
• Rated (LOGM) Overweight, target $52.
• Rated (N) Overweight, target $50.
• Rated (CTS) Overweight, target $87.
• Rated (CSOD) Overweight, target $21.
• Rated (ARBA) Overweight, target $37.
• Rated (VMW) Overweight, target $115.
• Rated (INFA) Overweight, target $60.
• Rated (QLIK) Overweight, target $33.
• Rated (SAP) Overweight, target $70.
• Rated (CRM) Overweight, target $143.
  

Night Trading

• Asian equity indices are -2.0% to -1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 194.50 -.5 basis point.
  
• Asia Pacific Sovereign CDS Index 153.25 -5.0 basis points.
• FTSE-100 futures -1.19%.
  
• S&P 500 futures -.70%.
  
• NASDAQ 100 futures -.47%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (TOL)/.06
• (AZO)/4.43
• (TTC)/.09
• (MW)/.65
• (CASY)/.98
• (SAI)/.34
• (AVAV)/.20

Economic Releases.

• None of note

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Tarullo speaking, Fed's Raskin speaking, ECB's Coene speaking, Bank of Canada rate decision, weekly retail sales reports, IBD/TIPP Economic Optimism Index for December, (LOW) Investor Conference, William Blair Services Conference, Goldman Sachs Financial Services Conference and the BofA Merrill Industrials Conference could also impact trading today.
  

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

Stocks Rising into Final Hour on Falling Eurozone Debt Angst, Less Financial Sector Pessimism, Short-Covering, Seasonality

Broad Market Tone:

• Advance/Decline Line: Higher
  
• Sector Performance: Most Rising
  
• Volume: Light
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 27.76 +.87%
  
• ISE Sentiment Index 99.0 +25.32%
  
• Total Put/Call 1.0 +2.04%
  
• NYSE Arms .57 -47.49%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 120.69 -2.85%
  
• European Financial Sector CDS Index 250.68 -7.30%
  
• Western Europe Sovereign Debt CDS Index 325.17 -4.22%
  
• Emerging Market CDS Index 288.60 -3.17%
  
• 2-Year Swap Spread 43.0 -2 bps
  
• TED Spread 54.0 +1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -122.0 +4 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 177.0 -2 bps
  
• China Import Iron Ore Spot $139.80/Metric Tonne +.72%
  
• Citi US Economic Surprise Index 77.20 -8.5 points
  
• 10-Year TIPS Spread 2.07 +2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -55 open in Japan
• DAX Futures: Indicating -40 open in Germany

Portfolio:

• Higher: On gains in my tech, retail and medical sector longs
  
• Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges, then added them back
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is just mildly bullish, as the S&P 500 reverses sharp morning gains near its 200-day moving average again and moves near session lows on Eurozone debt angst, rising global growth fears, technical selling, profit-taking, more shorting and high energy prices. On the positive side, Oil Service, Steel, Software, Bank, I-Banking, Hospital, Homebuilding and Airline shares are especially strong, rising more than +1.75%. Small-caps and cyclicals are outperforming. (XLF) has outperformed throughout the day. Lumber is gaining +1.5% and Gold is falling -1.4%. The France sovereign cds is falling -7.2% to 179.67 bps, the Spain sovereign cds is falling -8.58% to 351.17 bps, the Belgium sovereign cds is falling -7.8% to 270.0 bps and the Italy sovereign cds is falling -5.75% to 429.83 bps. On the negative side, Ag, Biotech, Drug, HMO and Education shares are lower on the day. Copper is falling -.96%. The 10-year yield is flat on the day at 2.02%, despite today's equity advance. The TED spread continues to trend higher and is at the highest since June 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is very near the highest since March 2009. The 3M EUR/USD Cross-Currency Basis Swap is still near the worst since November 2008. The Libor-OIS spread is the widest since June 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -27.1% since February 16th and -22.8% since Sept. 7th. The Shanghai Composite fell another -1.2% overnight and is down -17.0% ytd. As well, India and Russia shares fell -.25% and -.4% today, respectively. Volume remains poor and leadership is of fairly low-quality again. Breadth is decent. The S&P 500 is right near its 200-day moving average and near the high-end of its recent range. The market is coming under pressure this afternoon for the 2nd consecutive day mainly on more negative headlines out of Europe. I still believe investors will need to see some concrete evidence that the “kick-the-can” Euro crisis solution that is currently being priced into equities has more support from key Eurozone officials before any further meaningful stock surge into year-end. I expect US stocks to trade mixed-to-lower into the close from current levels on Eurozone debt angst, global growth fears, profit-taking, technical selling and more shorting.

Today's Headlines

Bloomberg:

• Euro Erases Gain Against Dollar on Reports of S&P Moves on Credit Ratings. The euro erased gains against the dollar after a report that Standard & Poor’s plans to put Germany, France and other European nations on “creditwatch negative.” The 17-nation currency rose earlier after France and Germany said they want a rewrite of the European Union’s governing treaties to tighten economic cooperation in the region. The Financial Times reported the credit ratings company would release a statement later today. “The S&P warning is having an impact,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “This all speaks to the ultimate truth that the European policy makers are unwilling to recognize that the only way to solve this crisis is federal euro-bonds.”
• Monti's Austerity Debut Risks Rousing Italian Wrath: Euro Credit. Prime Minister Mario Monti is asking Italians to swallow 30 billion euros ($40 billion) in additional emergency economic measures even as the nation’s fifth recession in the last decade looms next year. Monti, whose Cabinet approved the package yesterday, is due to present the plan to the legislature at 4 p.m. in Rome, with Parliament voting on it in the coming weeks. The premier has vowed “shared sacrifices” to cut the euro area’s second- biggest debt and regain investor confidence after Italian borrowing costs topped the 7 percent that led Greece, Ireland and Portugal to seek aid. Italy’s 10-year yield declined 52 basis points to 6.16 percent, its biggest drop in four months. “The huge public debt of Italy isn’t the fault of Europe, it’s the fault of Italians,” Monti, who took over last month after former Premier Silvio Berlusconi resigned, told a news conference as he detailed the package yesterday. “Together, we will make it.” Italian bonds have snapped a seven-week decline amid optimism that European policy makers may take steps to ease the crisis summits this week, with the 10-year yield difference to German bunds down by a percentage point in the past week to 3.94 points. Italy is still paying the highest rates in more than a decade on its debt, and offered more than 7 percent on new bonds for the third time in a week on Nov. 29. Monti’s plan ties pensions to contributions rather than a worker’s last salary, resurrects property taxes and includes a levy on luxury goods. Monti’s task in pushing through Italy’s third austerity package since July may be complicated by a recession next year and road bumps in Parliament and in the streets as protesters rally over a perceived lack of fairness.
• Euro Bonds Are 'In No Case' a Crisis Solution, Sarkozy Says. Bonds issued jointly by all members of the euro zone are “in no case” a solution to the euro zone’s crisis, French President Nicolas Sarkozy said. “Germany and France are not going to pay the debts of other without being able to control the debt issues of others,” Sarkozy said at a joint press conference with German Chancellor Angela Merkel.
• Sovereign, Financial Bond Risk Falls on Crisis Resolution Bets. The cost of insuring European sovereign and financial debt fell to the lowest levels in a month, extending the biggest-ever weekly decline, on speculation leaders are closer to resolving the region’s crisis. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments declined eight basis points to 318 at 2:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers dropped for a sixth day, falling 31.5 basis points to 255, according to JPMorgan Chase & Co. A measure of subordinated financial debt risk tumbled 45 basis points to 460, JPMorgan prices show. Swaps on Belgium dropped 18 basis points to 272, according to CMA. The country will get a full-time government as soon as today, ending 540 days of post-election brinksmanship between the Dutch-speaking north and French south. France fell 12 basis points to 184, Germany was five lower at 92, Italy tumbled 20 to 428 and Spain fell 34 to 348. The cost of insuring corporate debt also dropped to the lowest in a month. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined for an eighth day, dropping 12.25 basis points to 166.75, JPMorgan prices show. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 36.5 basis points to 708.5.
• Bank of Canada Governor Carney Says ECB Shouldn't Use 'Magical Printing Press'. Carney said European politicians must fix the region's debt crisis themselves, and the European Central Bank can't be used as a "magical printing press" at the expense of its inflation mandate. "It's absolutely guided in our opinion by that mandate, not some magical printing press that the ECB should just run and solve this issue because it's too inconvenient for the political class to solve it," Carney said in a Maclean's magazine interview published online today. "No, the political class has to make these decisions."
• Short Sellers Place Record Place Record Molycorp(MCP) Bet as Rare Earths Sink. Investors’ bets against Molycorp Inc. stock are at their highest since the rare-earth producer’s July 2010 initial public offering on speculation prices for the minerals will keep falling.
• Commodities Signaling Economic 'Trouble Ahead': Chart of the Day. Diverging commodity indexes may signal "more trouble ahead" for the world economy as they repeat a pattern seen in the slump of 2008, Commerzbank AG said. The Commodity Research Bureau/Reuters U.S. Spot Raw Materials index fell 1.5% in the past two months, as the S&P GSCI index of 24 exchange-traded items rose 11%. The CRB index covers 13 goods from steel scrap to burlap and wool that aren't exchange traded and so less likely to be affected by financial investors.
• India Fertilizer Demand May Drop on High Prices, Cutting Imports. Fertilizer consumption in India, the world's third-largest potash importer, may tumble for a second year as rising prices of the soil nutrients deter farmers, cutting overseas purchases. Consumption of di-ammonium phosphate and potash may drop as much as 35% in the year starting April 1, compared with normal use of about 15 million metric tons, said U.S. Awasthi, managing director of the Indian Farmers Fertiliser Cooperative Ltd., which represents 55 million farmers. Demand this year is seen falling as much as 25%, he said.
  

Wall Street Journal:

• Italy Union Says Dec 16 Strike Is Against Budget Measures. Italian metalworkers' union Fiom-CGIL will ask to extend a strike planned for December 16 to eight hours from four, in protest of Italy's latest round of austerity measures, Fiom-CGIL leader Maurizio Landini said Monday.
• MF Global Workers Sue Jon Corzine. Two former employees of MF Global have filed a class-action lawsuit against the firm’s former CEO Jon Corzine, other senior executives and directors. Fins.com’s Julie Steinberg reports the employee are suing on behalf of themselves and other MF Global employees, in part because they say they were forced to take compensation in company shares that are now worthless.
• SEC Delays Call on Accounting Rules. A recommendation on whether U.S. companies should switch to international accounting rules will take a few more months, the Securities and Exchange Commission's chief accountant said Monday. The SEC's staff had been expected to make a recommendation by year-end on whether U.S. companies should adopt the global rules, known as International Financial Reporting Standards.
• Greece's Samaras Sees Deep Recession Lingering. The head of Greece's opposition New Democracy party—the man most likely the country's next prime minister—expects Greece's economy to shrink by more than 6% this year and the recession to linger through 2013. In an interview, Antonis Samaras said that the country was also unlikely to meet its upwardly revised deficit target in 2011, underscoring Greece's difficulty in meeting the fiscal goals the country has promised its international creditors. "This year again you will have a 10% deficit... and the recession will be greater than 6%," he said. "We are entering into a fifth year of recession and very possibly it will extend to a sixth year, that is a European record." Despite almost two years of austerity measures and tough oversight from a troika of international inspectors from the European Commission, the International Monetary Fund and the European Central Bank, Greece has already admitted it won't meet its original deficit targets this year. Those targets were for a budget deficit of around 8.5% of GDP, or about €17.1 billion in 2011, but which the government now sees settling closer to 9% of GDP and €19.68 billion—a forecast shared by the troika. Some government officials have warned that the deficit could exceed even the new target. But all agree that those austerity measures have also pushed Greece deep into recession and many private sector economists fear that the economy will contract by more than an officially forecast 6% this year. A deeper recession will also mean a bigger deficit because of weaker revenue collections and greater social spending.

MarketWatch:

• How Goldman(GS) Played a Key Role in Solyndra's Rise. While government officials and venture investors who supported Solyndra LLC are being put through the wringer by House Republicans, a powerful force on Wall Street that brought these players together has largely stayed out of the spotlight. Goldman Sachs Group Inc., which Solyndra hired in 2008, helped propel the solar panel maker from Silicon Valley start-up to White House showcase. It solicited investors for the company with rosy valuation projections and helped Solyndra win a $535 million Department of Energy loan guarantee. And it positioned itself to earn underwriting fees if the company held an initial public offering.

CNBC.com:

• ISM Non-Manufacturing Index, Factory Orders Fall Slightly. The Institute for Supply Management said that its index of service sector activity dropped to 52 from 52.9 in October, as employment fell sharply. Any reading above 50 indicates expansion. The trade group of purchasing managers surveys a range of businesses from restaurants to hotels to financial services firms. Business activity and orders rose. But measure of employment dropped.
• Why the ECB Is Not Going to Ride to Europe's Rescue. Markets appear to have high hopes for this week’s summit meeting in Europe to begin putting an end to the financial crisis.
• Online Sales Reach $6 Billion in Week After Thanksgiving.
  

Business Insider:

• 15 Brilliant Insights From Hedge Fund Superstar Kyle Bass.
• India's Economic Decline Is One Of The Most Under-Reported Stories This Year.
• Ex-Countrywide Exec Blows The Lid Off The Systemic Fraud At The Company.
• Washington Doesn't Seem To Find Anything Wrong With Crony Capitalism.
  

Zero Hedge:

• Nomura Presents The Fair-Value Of European Currencies In A Euro Breakup Scenario.
• Over 46 Million Americans On Foodstamps For The First Time Ever. (graph)
• Euro Tumbles: S&P About To Put Europe's AAA Club(Including Germany, France and Austria) On "Creditwatch Negative".
  

Reuters:

• Prepare For A Different Financial Landscape by Mohamed El-Erian. Look for western banks to be less complex, less global, somewhat less inter-connected and, therefore, less systemic. With some banks teetering on the edge, certain European governments (e.g., Greece) will have no choice but to nationalize part of their financial system.

Financial Times:

• BNP Predicts 25% Fall in Commodities Financing. Lending to the commodities trading industry is set to drop by more than a quarter, according to the sector’s most senior banker, as the European banks that dominate the market rein in their activities. The comments by Jacques-Olivier Thomann, head of commodity trade finance at BNP Paribas and president of Geneva’s commodities industry association, underscore a potential credit crunch that some fear could exacerbate the economic downturn by hobbling trade in raw materials.

Telegraph:

• Debt Crisis: Live. German Chancellor and French President want new treaty, seek involvement of all EU nations, want monthly meetings of leaders, but continue to rule out eurobonds and use of central bank as lender of last resort.
• Zilch Again from Merkozy. No fiscal union, no Eurobonds, no ECB as lender of last resort – yet. Just the usual blather and a revamped Stability Pact (Fiskalunion). Yawn. Merkel seems to have backed off on demands that budget breaches will be justiciable before the European Court, so the Treaty chatter is mostly Quatsch, bêtises, and eyewash. This Merkel climb-down makes it less likely that she will give in on real rescue measures, so why the market exuberance in Italy? Beats me. Private investors will not have to face further haircuts after Greece (if you believe anything they say on this subject) but that was already the case. Nothing further to add at this stage.

Handelsblatt:

• Greece, Portugal, Italy and Spain will struggle to return to sustainable public debt, citing calculations by the Freiburg, Germany-based Centre for European Policy. CEP's default indexes for Greece, Portugal and Italy, which measure debt sustainability, fell in the first half while Spain's stagnated.

Kyodo News:

• Japan's government ordered a halt of rice shipments from Fukushima city's Watari district after detecting above-limit levels of radioactive cesium from grain produced in the region.