Friday Watch

Evening Headlines 
Bloomberg:   

• Putin Paints a Besieged Russia, Says U.S. Wants to 'Rip Out Its Teeth and Claws'. Vladimir Putin is digging in. Blaming the U.S. and Europe for an economic crisis gripping his country of 144 million and warning the slump could drag on for two years,Putin today signaled a sustained standoff over Ukraine. “He believes that the economy is capable of withstanding the shock,” said Alexei Makarkin, deputy director of the Moscow-based Center for Political Technologies. “Putin’s psychology is very simple. From his point of view Russia has made concessions for years and to no effect.” Putin held his annual press conference, speaking to hundreds of reporters for more than three hours. The event took on heightened importance as a 40-percent plunge in the ruble evoked memories of the country’s 1998 default and talk of hoarding staples.

• U.S. Weighs ‘Proportional Response’ to Hack of Sony Pictures. The Obama administration is weighing a “proportional response” to the cyber-attack on Sony Pictures Entertainment computers and is wary that the intrusion may have been designed to provoke a large-scale U.S. reaction, White House spokesman Josh Earnest said. Earnest refused to say whether the U.S. had concluded that North Korea was behind the attack, which crippled Sony’s computers and forced the studio to pull its movie “The Interview” from its planned released. The attack was “initiated by a sophisticated actor” and the U.S. investigation is making progress, he said. The character of the intrusion makes it a national security matter, not just an economic one, he said.

• BOJ Keeps Record Easing as Oil’s Fall Challenges Kuroda. The Bank of Japan maintained unprecedented stimulus, as Governor Haruhiko Kuroda’s bid to stoke inflation faces increasing challenges from the tumble in oil prices. The central bank will boost the monetary base at an annual pace of 80 trillion yen ($671 billion), it said in a statement, as forecast by all 33 economists surveyed by Bloomberg News. Exports have shown signs of picking up, while production has started to bottom out, the BOJ said, striking a more upbeat tone in its view of the world’s third-largest economy. Oil has lost more than a quarter of its value since the central bank boosted easing on Oct. 31 to end a “deflationary mindset.” 

• China’s Shandong Province First to Step Up Curbs on LGFV Debt. Authorities in Shandong said they won’t bail out the borrowings of cities or counties in the region, becoming the first province in China to follow the central government’s campaign to curb regional debt. Shandong province, on the country’s east coast, banned all new debt raisings by local government financing vehicles, according to a statement dated Dec. 10 and posted on its website yesterday. Local governments should reasonably control financing demand for projects under construction, it said.

• China Money Rate Jumps Most Since 2013 Cash Crunch on New Shares. The seven-day repurchase rate, a gauge of interbank funding availability in the banking system, surged 154 basis points, or 1.54 percentage points, today and 213 basis points this week to 5.94 percent, according to a fixing released by the National Interbank Funding Center at 11 a.m. in Shanghai. That’s the biggest increase since June 20, 2013, when the rate touched a record 10.77 percent.

• Yuan Forwards Sink to Biggest Discount to PBOC Fixing Since 2008. Yuan forwards are trading at the biggest discount to the official exchange rate in six years as China’s economic growth slows and the dollar surges amid expectations for higher U.S. interest rates. Twelve-month non-deliverable forwards dropped 0.5 percent, the most since March 10, to 6.3482 a dollar on Thursday in New York, according to data compiled by Bloomberg. The contracts, which traders use to speculate on or hedge against moves in the yuan, are 3.6 percent weaker than the central bank’s reference rate, the most since December 2008. 

• China Stocks Fall Most in Week as Smallcaps Slump on IPO Concern. China’s stocks fell, trimming a weekly gain, amid concern recent gains have been excessive as new share offerings may divert funds from existing equities. Citic Securities Co. (600030) and China Merchants Securities Co. led declines for brokerages with losses of more than 3 percent after more than doubling over the past month. The ChiNext index of smaller companies dropped 3.3 percent as money-market rates rose on the biggest initial public offering sales this year. BYD Co. rebounded 18 percent in Hong Kong after the electric carmaker said it confirmed with shareholder Berkshire Hathaway Inc. that it has no intention to reduce its stake. The Shanghai Composite Index (SHCOMP) retreated 0.8 percent to 3,033.49 at 1:07 p.m.

• Asian Stocks Extend Global Rally on Fed as Oil Pares Drop. Asian stocks rose, extending a global surge in equities as the regional index headed for its steepest two-day advance in 13 months. Crude oil pared a fourth weekly decline, the euro traded near a two-year low and wheat fell. The MSCI Asia Pacific Index jumped 1.7 percent by 11:44 a.m. in Tokyo, after a 0.7 percent gain yesterday. Japan’s Topix index (TPX) climbed 1.9 percent as the yen traded near a one-week low.

• Oil Crash Exposes New Risks for U.S. Shale Drillers. Tumbling oil prices have exposed a weakness in the insurance that some U.S. shale drillers bought to protect themselves against a crash. At least six companies, including Pioneer Natural Resources Co. (PXD) and Noble Energy Inc. (NBL), used a strategy known as a three-way collar that doesn’t guarantee a minimum price if crude falls below a certain level, according to company filings. While three-ways can be cheaper than other hedges, they can leave drillers exposed to steep declines.

• OPEC’s Loss of Control Creates Contagion Fears, Mitsui Says. OPEC has lost control of the oil market, casting a shadow over the world economy, Japan’s top crude trader says. It could take oil company bankruptcies, production stoppages at higher-cost OPEC members, or a widespread shutdown of shale output in the U.S. to stabilize prices, said Joji Okada, chief financial officer at trading house Mitsui & Co., which has $107 billion in assets spanning 66 countries. Oil’s plunge is hitting hardest in Russia, the world’s biggest energy producer, which has seen the government sell foreign exchange reserves in an attempt to stem a ruble collapse. The big risk now is contagion, said Okada. “I’m really concerned for the global economy,” Okada said in an interview at the company’s Tokyo headquarters this week. Russia’s woes alone wouldn’t hurt Mitsui’s profits “but a spillover from the Russian economy will impact other countries and that’ll come back to us. That, I am afraid of.”  

• MetLife(MET) Gets Risk Tag From U.S. Panel, Weighs Options. MetLife Inc. (MET), the biggest U.S. life insurer by assets, was labeled a systemically important financial institution by a council of regulators and said it will consider whether to sue the government over the decision. The Financial Stability Oversight Council voted to designate New York-based MetLife a SIFI, the insurer said today in a statement. The ruling subjects MetLife to stricter Federal Reserve oversight that could include tougher capital, leverage and liquidity requirements. The company can appeal in U.S. district court within 30 days.

Wall Street Journal:

• U.S. Struggles for Response to Sony Hack. White House Walks Fine Line to Find Way to Retaliate for North Korea’s Apparent Attack. The U.S. government is looking for ways to retaliate for North Korea’s apparent hacking of Sony Pictures but is struggling for an appropriate solution, according to people familiar with the discussions.

• Oil’s Drop Hits Big Investors Hard. Icahn, Paulson Suffer Large Losses as Energy-Related Bets Sour.

Fox News:

• Suspected Boko Haram militants kidnap at least 185 in Nigeria, witnesses say. Suspected Islamic militants -- believed to be Boko Haram -- stormed a village in Nigeria and captured at least 185 young men, women and children, witnesses revealed Thursday.

CNBC:

• Nike(NKE) posts earnings of 74 cents a share on revenue of $7.38B.

• What I'm shorting: Jim Chanos.

Zero Hedge: 

• "It's A Huge Crisis" - The UK Oil Industry Is "Close To Collapse, People Are Being Laid Off".

• Fed Cat Bounce: Stocks Soar Most In 3 Years As Crude Crash Continues. (graph)

• Further Proof That Abenomics Is A Total Disaster: Japan Car Lobby Admits "Sense Of Panic".

• More To Ruble's Collapse Than Meets The Eye? (graph)

• 3 Things Worth Thinking About. (graph)

• Berserk Rampathon Algo Just Bought The S&P At 2,130. (graph)

• World Awaits Russian Response As Obama Makes "Lethal Aid" To Ukraine Legal.

• United States Of Newspeak – Obama Spins Executive Orders As "Presidential Memoranda" To Avoid Scrutiny. 

Business Insider:

• Chaos Ensues As Instagram Deletes Millions Of Accounts.

• The EU Is Putting The Screws To Putin.

Reuters: 

• Security experts fear Sony attack to fuel more company extortion. Sony Pictures' decision to shelve the film "The Interview" in the face of cyberattacks has set a worrying precedent and is sending companies scrambling to guard sensitive data, security experts said on Thursday. Sony's capitulation could mean that more businesses will be targeted for cyberwarfare and extortion, they said.

• INSIGHT-China tightens grip on Macau as dissent rises in gambling hub.

• U.S.-based emerging market stock funds see $831 mln outflows in week -Lipper.

• Apple's(AAPL) Cook makes 'substantial' donation for gay rights in U.S. South. Apple Inc Chief Executive Tim Cook, the highest-profile U.S. business leader to publicly acknowledge being gay, has made a "substantial" donation to a gay rights effort in his native Alabama and two other southern U.S. states, activists said on Thursday.

Telegraph: 

• Fed calls time on $5.7 trillion of emerging market dollar debt. World finance is rotating on its axis. The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar. 

• Nine charts showing why Greece has to leave the euro. The Greek tragedy has yet to morph into a recovery. Here are the numbers that prove it remains shackled by monetary union.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are +.75% to +1.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 105.0 -1.0 basis point.

• Asia Pacific Sovereign CDS Index 68.5 -30 basis points.

• S&P 500 futures +.42%.

• NASDAQ 100 futures  +.62%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (BBRY)/-.06

• (KMX)/.54

• (CCL)/.21

• (FINL)/.01

• (PAYX)/.46

Economic Releases
11:00 am EST

• The Kansas City Fed Manufacturing Activity Index for December is estimated to remain at 7.0 versus 7.0 in November.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Evans speaking, Fed's Lacker speaking and the German Consumer Confidence Index could also impact trading today.

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

Stocks Rising into Final Hour on Less Eurozone/Emerging Markets/US High-Yield Debt Angst, Central Bank Hopes, Short-Covering, Tech/Healthcare Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Higher
  

• Sector Performance: Almost Every Sector Rising
  

• Volume: Slightly Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 17.61 -9.41%

• Euro/Yen Carry Return Index 152.36 -.39%

• Emerging Markets Currency Volatility(VXY) 11.15 unch.

• S&P 500 Implied Correlation 63.92 +.55%

• ISE Sentiment Index 145.0 +35.51%

• Total Put/Call .78 -37.10%

• NYSE Arms .90 +145.15% 

Credit Investor Angst:

• North American Investment Grade CDS Index 66.43 -4.67% 
• America Energy Sector High-Yield CDS Index 622.0 -4.41%

• European Financial Sector CDS Index 65.68 -3.94%

• Western Europe Sovereign Debt CDS Index 30.10 -7.47%
• Asia Pacific Sovereign Debt CDS Index 69.12 -3.26%

• Emerging Market CDS Index 352.74 -6.10%

• China Blended Corporate Spread Index 348.30 -1.99%
• 2-Year Swap Spread 21.75 -.25 basis point

• TED Spread 22.25 +1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -14.5 -1.75 basis points

Economic Gauges:

• 3-Month T-Bill Yield .04% +2.0 basis points

• Yield Curve 157.0 +3.0 basis points

• China Import Iron Ore Spot $68.42/Metric Tonne +.54%

• Citi US Economic Surprise Index 31.60 +.4 point
• Citi Eurozone Economic Surprise Index -2.10 +.4 point

• Citi Emerging Markets Economic Surprise Index -12.90 +.8 point

• 10-Year TIPS Spread 1.65 -1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating +350 open in Japan

• DAX Futures: Indicating +13 open in Germany

Portfolio: 

• Higher: On gains in my retail/tech/biotech/medical sector longs

• Disclosed Trades: None

• Market Exposure: 50% Net Long

Bear Radar

Style Underperformer:

• Small-Cap Value +1.02%

Sector Underperformers:

• 1) Oil Service -.45% 2) Coal -.20% 3) Energy +.36%

Stocks Falling on Unusual Volume:

• DNKN, KEX, MLHR, CAF, ATU, STLD, SJT, LINE, APOG, SM, JONE, CAG, ASPS, RRC, CIVI, SAFM, CP, PTR, LNCO, ANET, DK, AMZN, STLD, LNCO, LINE, KEX, WGO and WOR

Stocks With Unusual Put Option Activity:

• 1) MYL 2) EWG 3) MDR 4) BHI 5) JOY

Stocks With Most Negative News Mentions:

• 1) XL 2) SD 3) HGR 4) ABMBC 5) LGCY
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth +1.43%

Sector Outperformers:

• 1) Software +3.35% 2) Gold & Silver +2.88% 3) Hospitals +2.86%
  

Stocks Rising on Unusual Volume:

• OVAS, MGNX, EXAM, ACN, ORCL, GRUB, KRFT, BTE, TTPH, CPHD, FSLR, NAV, LNG, MEMP, EMES, MGM and ARCC

Stocks With Unusual Call Option Activity:

• 1) ZQK 2) KRFT 3) RAD 4) OCR 5) GNC
  

Stocks With Most Positive News Mentions:

• 1) WDR 2) ORCL 3) RAD 4) OCR 5) 
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Thursday Watch

Evening Headlines 
Bloomberg:

• U.S. Said to Conclude North Korea Is Behind Sony Hack. U.S. investigators have concluded North Korea is responsible for the cyber-attack that crippled Sony Pictures Entertainment computers and forced the studio to pull “The Interview,” a person with knowledge of the situation said. An announcement could come as soon as Thursday, CNN reported. The person wasn’t authorized to speak publicly on the matter and asked not to be named. Sony Corp. (6758)’s Culver City, California-based studio today canceled the planned Dec. 25 release, after several major theater chains said they wouldn’t show the picture. 

• Russia Bailout Talk Absent as Pariah Putin No Latter-Day Yeltsin. Here’s what is happening with Russia: Its currency has lost half its value and investors have pulled out tens of billions of dollars amid a plunge in oil, its biggest export. Here’s what isn’t happening: any public discussion among world leaders of a rescue package. Russia, desperate to stem the ruble’s collapse, has been a diplomatic pariah since it annexed Crimea in March, prompting the U.S. and European Union to impose sanctions on Vladimir Putin’s government and setting the stage for its worst economic crisis since the 1998 default. Back then, Boris Yeltsin’s fledgling democracy was opening its financial markets and had a reservoir of goodwill with the U.S. and Europe, which assembled a $22.6 billion bailout from the International Monetary Fund and World Bank. 

• Putin’s Secret Gamble on Reserves Backfires Into Currency Crisis. Kremlin insiders gathered in secret last February to answer a crucial question for Vladimir Putin: Could Russia afford the economic blowback from taking over Crimea? Moscow said yes. Markets aren’t so sure.

• Draghi Counts Cost of Outflanking ECB’s Home Nation in QE Battle. As Mario Draghi prepares to push the European Central Bank into quantitative easing, he’s counting the cost of alienating its home nation. With the ECB president signaling that he’ll override German-led concerns on government bond purchases if needed, his institution is under attack in the country whose DNA inspired it. The outrage reflects concern that the Frankfurt-based central bank, which is modeled on the Bundesbank, is taking risks that its forerunner would never tolerate.

• Asia Isn't Ready for a China Crash.

• China Fault Lines: Where a Hard Landing Could Be Exposed in 2015. China’s leaders are seeking to deleverage the economy without a hard landing. Six fault lines will be closely watched next year to gauge their success. Risks to a soft-landing scenario include a credit crunch sparked by a shadow bank default or capital outflows, an external shock that undermines business confidence, a further slump in home sales, or rising U.S. interest rates, said economists and analysts interviewed by Bloomberg. While they don’t expect such outcomes, these are the areas identified that could trigger a plunge in growth or systemic risk in the financial industry.

• China Said to Plan Sweeping Shift From Foreign Technology to Own. China is aiming to purge most foreign technology from banks, the military, state-owned enterprises and key government agencies by 2020, stepping up efforts to shift to Chinese suppliers, according to people familiar with the effort. The push comes after a test of domestic alternatives in the northeastern city of Siping that was deemed a success, said the people, who asked not to be named because the details aren’t public. Workers there replaced Microsoft Corp.’s (MSFT) Windows with a homegrown operating system called NeoKylin and swapped foreign servers for ones made by China’s Inspur Group Ltd., they said.

• Greece Fails to Gather Support to Elect New President. Greece moved a step closer to early elections after Prime Minister Antonis Samaras failed to gather enough support for his nominee in a parliamentary vote for a new head of state.

• Asian Stocks Rise After S&P 500 Surges on Fed; Oil Swings. Asian stocks climbed, with the regional benchmark index rebounding from an almost nine-month low, after a Federal Reserve pledge to be patient on interest-rate increases sent U.S. equities up the most since 2013. Metals advanced and oil swung between gains and losses. The MSCI Asia Pacific Index advanced 0.9 percent by 11:27 a.m. in Tokyo, as Hong Kong’s Hang Seng Index (HSI) climbed from its lowest since May and Japan’s Topix index headed for its biggest gain in six weeks. 

• Iron Ore Shipping Rates, Prices Slump to 5-Year Low on China. Iron ore prices and shipping costs fell to the lowest levels in five years amid signs China’s slowing growth is sapping demand for cargoes just as the world’s largest mining companies press on with raising output and spur a glut. The rate to ship the steel-making commodity on a Capesize vessel to Qingdao, China from Tubarao, Brazil fell 4.4 percent to $12.47 a ton yesterday, the lowest since Jan. 9, 2009, data from the Baltic Exchange in London show. Iron ore delivered to Qingdao declined 0.8 percent to $68.05 a ton yesterday, the lowest since June 3, 2009, according to Metal Bulletin Ltd.

• Yellen Makes It Clear That Fed’s Patience on Rates Has Limits. Federal Reserve Chair Janet Yellen restored clarity to the central bank’s monetary policy plans, saying it was on course to raise interest rates, though not right away, after officials issued a statement that some Fed-watchers found confusing. Yellen told reporters following a two-day meeting that the Fed is likely to hold rates near zero at least through the first quarter. She also laid out the economic parameters that would need to be met for liftoff to begin later in the year and said that rates probably would be raised gradually thereafter. They may not return to more normal levels until 2017, she added.

Wall Street Journal: 

• Port Delays Leave Retail Goods Stuck in Transit. Retailers Send Some Products by Air as West Coast Slowdown Disrupts Schedules Amid Holiday Season.

• Sony Pulls Korea Film ‘The Interview;’ U.S. Blames Pyongyang for Hack. Studio Scraps Dec. 25 Debut After Terrorist Threats Prompted Movie Chains to Skip Film.

• Fed Sets Stage for Rate Hikes in 2015. Central Bank Plans Patient Approach to Tightening Monetary Policy. The Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis.

Fox News:

• Radar ‘blimps’ to monitor Washington-area skies. The first of two radar-detecting blimps is slated to rise up over Aberdeen Proving Grounds in Maryland on Friday as part of a three-year exercise testing the integration of an Army air surveillance system with the North American Aerospace Defense Command.

• Congressional critics ready to block Obama push to normalize Cuban relations.

CNBC:

• How Russian crisis could be like 1998—but worse.

• Investors walking, not running out of Russia funds. Investors pulled just $55.9 million over Monday and Tuesday from the largest Russia-focused exchange-traded fund, Van Eck's Market Vectors Russia, according to data from ETF.com. The Russian stock-focused fund still manages $1.23 billion and has seen net inflows of $1.22 billion over 2014 despite losing more than 50 percent of its value (The net flow number reflects big swings over 2014; the fund started the year at $1.05 billion, with a high point of $2.1 billion and a low point of $719 million).

Zero Hedge: 

• The Fracturing Energy Bubble Is the New Housing Crash. (graph)

• Russian Food Suppliers Have Begun Halting Shipments.

• Mortgage Applications Tumble As Citi Warns Oil-Drop Risks Housing/Jobs Slum9p. (graph)

• The End Of Exuberance? (graph)

• The Terrorist Hackers Win: Sony Pulls Release Of "The Interview" Due To Fears Of "9/11-Style Retaliation".

• Veteran EM Fund Manager Warns "The Youngsters Are About To Be Schooled". (graph)

• The Secular Extinction Of Stock Market Bears. (graph)

Business Insider: 

• Hollywood Is Outraged That Sony Pulled 'The Interview'.

• Now That The US Government Thinks North Korea Hacked Sony, Here's How It Could Respond.

South China Morning Post:

• China's A-share investors deserve a bull market that's no bubble. Andy Xie says the surge in China's A-share market is, like many others before it, a bubble that won't last. Only structural reforms can bring about what retail investors deserve - a genuine bull market.

China Times:

• China to Cut Central SOE Executives' Pay by 30%. Central govt-administrated state-owned cos. will cut compensation for executives by an average 30%, while executives at monopolies will see a bigger cut, citing a person involved in plan drafting.

China Securities Journal:

• China TV Set Market Won't Likely Grow Next Year. Sales volume may remain at 42m units, a 6.7% decline from 2013, citing an industry report.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are unch. to +1.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 111.0 -8.0 basis points.

• Asia Pacific Sovereign CDS Index 71.5 -6.75 basis points.

• S&P 500 futures -.15%.

• NASDAQ 100 futures  -.19%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SAFM)/4.01

• (SCHL)/2.22

• (CAG)/.61

• (NKE)/.70

• (RHT)/.40

• (CTAS)/.78

• (SD)/.04

Economic Releases
8:30 pm EST

• Initial Jobless Claims are estimated to rise to 295K versus 294K the prior week.

• Continuing Claims are estimated to fall to 2436K versus 2514K prior.
  

9:45 am EST

• Preliminary US Markit Services PMI for December is estimated to rise to 56.3 versus 56.2 in November.
  

10:00 am EST

• Philly Fed Business Outlook for December is estimated to fall to 26.0 versus 40.8 in November.

• Leading Index for November is estimated to rise +.5% versus a +.9% gain in October.

Upcoming Splits

• None of note

Other Potential Market Movers

• The German IFO, Bloomberg Economic Expectations Index for December and the weekly Bloomberg Consumer Comfort Index could also impact trading today.

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