Monday Watch

Weekend Headlines
Bloomberg:

• Merkel: EU Must Move Toward Closer Union. German Chancellor Angela Merkel said it’s time to move toward closer political union in Europe to send a message to bondholders that euro-area leaders are serious about ending the sovereign debt crisis. Speaking on the eve of her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig, Merkel said that she wants to preserve the euro with all current 17 members. “But that requires a fundamental change in our whole policy,” she said. “I believe this is important for those who buy government bonds: that we make it clear that we want more Europe step by step, that is that the European Union, and the euro area in particular, grows together,” Merkel said in an interview with ZDF television late yesterday. “Otherwise people won’t believe that we can really get a handle on the problems.” Merkel will address her party at about 11 a.m. today after weeks of crisis fighting during which she raised the prospect of ejecting Greece from the euro and joined with French President Nicolas Sarkozy to call on Italy to hold to its budget pledges. After leadership changes in Italy and Greece, the chancellor is turning her attention to shaping the euro and EU’s future.
• Mario Monti to Lead New Italy Government. Former European Union Competition Commissioner Mario Monti will head a new government as Italy reaches outside the political arena for a leader to restore confidence in its ability to cut the euro region’s second- biggest debt. President Giorgio Napolitano offered Monti, 68, the post last night in Rome, less than 24 hours after Prime Minister Silvio Berlusconi resigned. Berlusconi’s government unraveled after defections ended his parliamentary majority and the country’s 10-year bond yield surged over the 7 percent threshold that prompted Greece, Ireland and Portugal to seek EU bailouts. “In a particularly difficult moment for Italy, in a very turbulent European and international landscape, the country must prevail in the challenge of redemption,” Monti said last night after meeting Napolitano in Rome. “Italy must once again be an element of strength, not of weakness, in the European Union, which we helped found and in which we must be protagonists.”
• Germany Deems Greek Exit Positive for Euro Zone, Spiegel Says. The German government assumes that the consequences of an exit of Greece from the euro area can strengthen the single-currency region in the long term, Spiegel magazine reported, without saying where it got the information. Lawmakers are preparing for Greece’s departure from the common currency in case the debt-strapped country’s new government doesn’t commit to carry forward reforms that have already been agreed to, the magazine said. In the government’s baseline scenario, the euro region would become more stable after initial turbulence, while in a very-worst-case scenario, Greece would suffer from increasing debt and recession for decades, Spiegel said.
• Spain Risks Italy's Fate as Euro Flirts With Abyss: Euro Credit. Spain risks seeing its borrowing costs rise closer to those of Italy as ECB buying fails to cap yields and slowing growth threatens to make its deficit-reduction targets unachievable. The gap between 10-year Spanish and Italian yields rose to more than 150 basis points early last week as Spain's borrowing costs held below 6%, while investors drove Italy's to a euro-era record of more than 7.48%. Since Nov. 9, the spread has narrowed to about 60 basis points, with Italian securities rallying to yield 6.5% and Spain paying 5.9%, up from as low as 5% five weeks ago. "There's a high probability of Spain following Italy," said Phyllis Reed, head of fixed-income research at Kleinwort Benson Bank in London. "In the very short term, the trigger is just the fact that we're getting close to the edge of the abyss with the euro."
  
• Prodi Calls for EU-Treaty Change to Allow Euro Exit, Focus Says. Former Italian Prime Minister Romano Prodi said European Union treaties must be changed to allow a member country to exit the 17-nation euro region, Germany’s Focus magazine reported, citing an interview. “Nobody has an interest in a collapse of the euro zone,” Prodi told Focus. “But in the long term, we need more cooperation in Europe. That requires two things: an end of the principle of unanimity and a potential way out of the union,” he was quoted as saying.
• Europe's Banks Should Keep Dumping Italian Bonds, Clausen Says. Europe’s banks need to keep dumping Italian bonds and other assets tainted by the region’s debt woes to avoid being sucked into the epicenter of the crisis, said Christian Clausen, president of the European Banking Federation. “The banks are doing exactly what they should be doing: they are reducing their risk toward this event. We can see that clearly as now Italian bonds are being sold off,” Clausen, who is also the chief executive officer of Nordea Bank AB, said in an interview in Stockholm.
• German Lawmakers Study Reducing Solar Subsidies, Focus Reports. Germany’s coalition government is considering a reduction of solar subsidies, Focus magazine reported, without saying where it got the information. The economy and environment ministries are investigating ways to limit the construction of solar collectors to 1,000 megawatts a year, Focus said. Power generation from newly installed sun panels declined to 5,200 megawatts last year from 7,800 megawatts in 2009, according to the magazine.
• Hungary May Be Pushed to Junk Grade This Month on S&P Move. Hungary’s sovereign credit grade may be cut to junk this month after Standard & Poor’s Ratings Services placed the country’s lowest investment grade on “CreditWatch with negative implications.” S&P is likely to make a decision this month on Hungary’s credit grade, currently at BBB-, the rating company said in a statement today. Fitch Ratings yesterday cut the outlook on Hungary’s lowest investment grade to negative from stable, joining S&P and Moody’s Investors Service. Hungary’s “unpredictable” policies, including the dismantling of checks on policies, levying of extraordinary industry taxes and forcing lenders to swallow exchange-rate losses on loans, are harming investment and growth at a time when the economic environment is deteriorating, S&P said. “A more unpredictable policy environment, stemming from a weakening of oversight institutions and some budgetary revenue decisions, will have a negative effect on economic growth and government finances,” S&P said. “Downside risks to Hungary’s creditworthiness are increasing as the external financial and economic environment is weakening.”
• Buybacks Surging to Four-Year High With S&P Valuations 15% Lower. U.S. companies are buying back the most stock in four years, taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15 percent cheaper than when the credit crisis began. Corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third- highest annual total behind 2006 and 2007, data compiled by Birinyi Associates Inc. show. Warren Buffett’s Berkshire Hathaway Inc. bought shares for the first time, and Amgen Inc. sold debt to fund its buyback. U.S. companies spent 70 percent more on their stock last quarter than a year ago, according to financial filings as of Nov. 11. Market bulls say the rise shows executives are confident the U.S. economy will avoid a recession. While the Standard & Poor’s 500 Index peaked the last time buybacks were this high, companies in the gauge are generating three times as much cash, price-earnings ratios are lower and 10-year Treasury yields are around 2 percent, data compiled by Bloomberg show. Bears say the increase means companies lack better uses for capital.
• Former Obama Adviser Predicted Solyndra Furor, Sought Chu Ouster. A former campaign adviser to President Barack Obama urged that Energy Secretary Steven Chu be replaced and warned of Republican attacks over "inside" deals including Solyndra LLC that went to Obama supporters. In a February e-mail circulated among administration officials, Dan Carol, who was an issues adviser in Obama’s 2008 presidential campaign, wrote that Obama’s clean-energy agenda was stalled because of ineffective management.
• Obama Told Hu U.S. Is 'Impatient' With China, White House Official Says. President Barack Obama told Chinese President Hu Jintao today that the U.S. public and businesses are growing “increasingly impatient and frustrated” with the pace of progress in relations between the two nations, a White House official said. Obama “made it very clear” that the U.S. wants to see greater cooperation from China on trade, currency and protecting intellectual property rights, Michael Froman, White House deputy national security adviser, told reporters.

Wall Street Journal:

• Euro Risks Hit Banks. Questions About Hedges Fester as Firms Detail Exposure. Mounting concerns over the euro-zone crisis are prompting some of the world's largest banks, including U.S. banks, to release more information about their exposure. Even so, the flow of new data has so far failed to put worries to rest, partly because of investor doubts about how well banks' hedging strategies might work in the event of a euro-zone financial shock. J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., in regulatory filings this month, published tables detailing their exposures to Portugal, Ireland, Italy, Greece and Spain—figures they didn't include in previous quarterly filings.
• SEC Targets Derivatives Use. The Securities and Exchange Commission is weighing new limits and disclosure requirements on the use of derivatives in mutual funds and exchange-traded funds, and the fund industry is pushing back. Investment companies, including Vanguard Group, T. Rowe Price Group, State Street Global Advisors, and industry groups this past week submitted formal comments to the SEC in response to a request from the agency. Many of the firms defended the use of derivatives as necessary tools to manage risk in their funds, though some are amenable to broader disclosure. Vanguard executives, for example, wrote that the company's funds use derivatives to "achieve a number of benefits for our investors including hedging portfolio risk, lowering transaction costs, and achieving more favorable execution compared to traditional investments."
• Cities Hit as Funds From Bonds Pay Other Bills. Cities and states across the country are using money designated for specific purposes—such as fixing roads or sewers—in order to fill financial holes elsewhere, according to public officials and records. The moves are exposing municipalities to controversy, as federal regulators and local auditors are more heavily scrutinizing their finances to protect bond buyers and taxpayers.
• Obama's Oil Abdication. Cuba, Mexico, the Bahamas, Canada and Russia are all moving ahead on projects adjacent to our borders.

Business Insider:

• JPMorgan's(JPM) Huge Call: Italy Will Need The IMF, And A 'Big Bang' Economic Shock.
• A Brilliant Overview Of Where The Markets And The Economy Are Right Now.
• John Taylor On The Coming 'Cold And Hungary Winter In Athens' And The Inevitable Failure Of The Euro.
• Obama's Health Care Taxes Just Cost A Bunch Of Jobs At Stryker(SYK). Obama’s Affordable Health Care Act of 2010 was paid for (in part) with an excise tax on implanted medical devices. The 2.3% excise tax goes into effect in 2013. It’s already causing some of those “unintended consequences” that we keep hearing about:
• Here's One Example Of Regulations Killing A Small Business.
• Before Monday Comes, You Must Read This Interview With The Head Of The Bundesbank.
• Gingrich Shines, While Romney Plays It Safe On Foreign Policy.
• Obama To Super Committee: Get It Done, But I'm Outta Here. The president has largely steered clear of the committee since putting forward his recommendations to the committee in September — and he will be out of Washington for the next week and a half as he heads to Hawai'i, Australia, and Indonesia. The underlying strategy is simple — if an agreement can't be had, Obama wants to be far removed enough from the process to blame Congress for its failures.
  

Zero Hedge:

• Sovereign CDS, EFSF, And The IIF. We earlier discussed the desperate actions that occurred surrounding the EFSF self-aggrandizement this week and Peter Tchir, of TF Market Advisors, notes that the whole situation was bizarre and is becoming more and more Enronesque every day.
• Congressional Insider Trading Gone Wild. Back in May we penned, "Why A Hedge Fund Comprised Of Junior Congressional Democrats Should Outperform The Market By 9%" in which the simple conclusion was that insider trading is not only rampant in Congress, but completely unregulated, as it is perfectly legal for Congressional staffers to trade at their leisure on inside information.

NY Post:

• Occupy Wall Street Costs Local Businesses $479,400! It makes no cents. The Occupy Wall Street movement has cost surrounding businesses $479,400 so far, store owners said. A Post survey of a dozen restaurants, jewelry shops, beauty salons, a chain store and mom-and-pop establishments tallied almost a half-million dollars lost in the 53 days since the Zuccotti Park siege began on Sept. 17.
  

Seeking Alpha:

• Insiders And Hedge Funds Are Crazy About These Tech Stocks.

Wall Street All-Stars:

• Indicator Update 11/13/11: Big-Time Volatility. Do You Have A Plan?

Boston Herald:

• 'Cash for Clunkers' A Lemon, Studies Say. The $3 billion “Cash forClunkers” program that tried to boost the economy and improve air quality by encouraging motorists to replace older gas guzzlers with new fuel-efficient cars was an expensive fiasco that drove up the price of used cars and failed to boost sales, according to a pair of new studies. “Hundreds of thousands of clunkers were removed from the market and that caused used car prices to surge dramatically,” said Paul Bachman, research director at the Beacon Hill Institute at Suffolk University who studied the give-away. “That hurt consumers, especially young and low-income people who typically buy older vehicles.” Launched in July of 2009 by the Obama administration to help the auto industry and the environment, “Cash for Clunkers” offered consumers up to $4,500 to trade in old cars for new fuel-efficient ones.

Reuters:

• EFSF Denies Report That It Bought Its Own Bonds. The euro zone's bailout fund said on Sunday that it did not buy its own bonds last week, denying a British newspaper report that it spent more than 100 million euros ($137 million) to cover a shortfall of demand. Britain's Sunday Telegraph said that the EFSF had to step in after banks leading the deal were only able to find about 2.7 billion euros of outside demand. The 10-year bond sale raised 3 billion euros last Monday. "The EFSF did not buy its own bonds and the book was 3 billion euros," an EFSF spokesman said, referring to the 3 billion euros raised in last Monday's 10-year bond issue. Top officials of the EFSF have said the modest 3 billion euro issue was a reflection of the unstable market conditions. EFSF head Klaus Regling told the Financial Times on Friday that market upheaval had made it difficult to leverage the fund to the planned 1 trillion euros.
• UniCredit to Announce Cap Hike, Equity Unit Cuts. UniCredit (CRDI.MI), Italy's largest bank by assets, is set to announce a 7.5 bln euro rights issue, thousands of job cuts and the exit from its London-based equity sales and trading business to substantially shore up its capital, sources close to the operation said.
• APEC Countries Brace For Prolonged European Strain. Europe's economic troubles won't be solved quickly, so Asia-Pacific countries need to plan their own policy response over the medium term, a top World Bank official said on Thursday. Unlike the sudden shock of the Lehman Brothers bankruptcy in 2008, Europe's debt crisis is moving relatively slowly, and the remedies will take time, World Bank Managing Director Sri Mulyani Indrawati said. "Everybody expects this weakening of the European economy is going to be quite long because the adjustment is going to be quite severe and significant," she said in a Reuters interview on the sidelines of the Asia-Pacific Economic Cooperation summit in Honolulu. "That's why they're not just making sure that the policy response is going to be short term, six or 12 months, they're thinking more medium term."

Guardian:

• Chinese Ratings Agency Threatens US With New Debt Downgrade. The head of China's biggest ratings agency, Dagong Global Credit Rating, is warning that it may downgrade the US's sovereign debt rating again because of Washington's failure to tackle the federal budget deficit. The remarks by Dagong's chairman, Guan Jianzhong, to be broadcast in an interview with al-Jazeera on Saturday morning, come at the end of another week of deep turmoil for the world economy. Dagong, which has maintained a pessimistic outlook on US fiscal policy, has been leading the charge to downgrade US debt over the last 12 months, lowering the US rating from AA to A+ a year ago.

Times:

• U.K. Deputy Prime Minister Nick Clegg said consumer demand in Britain is dwindling. The economic divide between the nation's northern and southern regions is growing.

Der Spiegel:

• A majority of European Central Bank Governing Council members "could come to terms" with a potential Greek exit from the 17-nation euro region.

Welt am Sonntag:

• Soros Says Europe Should Rescue Banks, Not States. George Soros said European governments should concentrate on rescuing the region’s banks instead of debt-strapped euro-member countries, Germany’s Welt am Sonntag reported. Europe’s aid resources would be adequate to end the acute phase of the fiscal crisis and to provide sufficient guarantees for the banking system if deployed properly, the billionaire investor was cited as saying in an interview. Governments’ insistence that banks raise capital is “a fundamental mistake,” the newspaper cited him as saying.
• Robert Bosch GmbH is experiencing a "slight" drop in orders from southern European nations and the United States, citing an interview with CEO Franz Fehrenbach.
  

Handelsblatt:

• Germany called on Greece to offer additional guarantees such as government assets as collateral to receive the next tranche of financial help, citing an interview with Hans Michelbach, a finance spokesman for Chancellor Angela Merkel's Christian Democrats.

Dagens Naeringsliv:

• Europe's crisis is the result of "large imbalances" building up over time, Norway's premier wrote in an opinion piece today. Several countries have borrowed too much and financial stability has been jeopardized, according to Stoltenberg. This crisis is not only economic in nature, but also political, he said. Norway doesn't have a "free ticket" to low unemployment or a stable economy, and thus both authorities and businesses have to reduce the danger of a "strong backlash," he said.

CBC News:

• Ex-Ambassador Calls U.S. Pipeline Delay 'Catastrophic'. U.S. decision to put off pipeline decision could kill project, Flaherty says. The U.S. decision to delay approval of the Keystone XL pipeline is a "catastrophic" cop-out by the Obama administration, former U.S. ambassador to Canada David Wilkins said Friday. Wilkins, who lobbied for the project on behalf of the Canadian oil industry, told CBC's Power & Politics with Evan Solomon that the delay was politics at its worst. “This route has been studied and studied and studied," he said. "It’s the longest permitting process in the history of the world, I think. It sends a bad message that we’re not open for business.” Finance Minister Jim Flaherty said Friday that the delay may kill project and could add momentum to efforts to open up the Asian market for Canadian oil. “The decision to delay it that long is actually quite a crucial decision,” Flaherty told Bloomberg News at the Asia-Pacific Economic Cooperation summit in Honolulu. “I’m not sure this project would survive that kind of delay."

Yonhap News:

• Source: Hundreds of North Korean Nuclear and Missile Experts Working In Iran. Hundreds of North Korean nuclear and missile experts have been collaborating with their Iranian counterparts in more than 10 locations across the Islamic state, a diplomatic source said Sunday. The revelation lends credence to long-held suspicions that North Korea was helping Iran with a secret nuclear and missile program.

Xinhua:

• China fired rail officials after parts of a 2.3 billion yuan construction project were illegally subcontracted to unqualified builders including a former cook. Two bridges and 16 pillars at a site in Jilin province, northeast China, will also be demolished because they were build with shoddy materials, citing the Ministry of Railways.

Economic Observer:

• China's local government debt may be almost $473 billion higher than the figure given by the nation's audit office, if loans taken out by township governments are included, citing Beijing Fost Economic Consulting Company. Local authorities in China, barred from directly selling bonds or taking bank loans, set up at least 6,576 companies to raise money for roads, sewage plants and subways, according to the audit office's report. Duyang, a township in Yunfu city in the southern province of Guangdong, has more than 200 million yuan worth of debt while its annual fiscal revenue is only 500,000 yuan, citing Wu Zhanjiang, a deputy head of the township government. Some townships in Yunfu can't even afford to pay the phone bills of some of their offices and some have failed to pay some workers' salaries.

China Securities Journal:

• China has no reason to change it monetary and fiscal policy stance, citing Jia Kang, head of the Chinese Ministry of Finance's research institute for fiscal science. If problems with Italian sovereign debt continue, the euro zone will become more volatile and could push the global economy into a double-dip recession, Jia said.
• China's economic growth will likely continue to decline, hitting a bottom in 2013, citing Wang Jian, secretary general of the China Society of Macroeconomics. 2012 and 2013 GDP growth may be about 8% and 7%, respectively, Wang said.
  

Weekend Recommendations
Barron's:

• Made positive comments on (GLW), (DRI) and (KFN).
• Made negative comments on (VMC).
  

Night Trading

• Asian indices are +.25% to +2.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 190.50 -14.0 basis points.
• Asia Pacific Sovereign CDS Index 151.25 -.5 basis point.
• FTSE-100 futures +.34%.
  
• S&P 500 futures +.41%.
• NASDAQ 100 futures +.29%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LOW)/.33
• (JCP)/.11
• (URBN)/.31

Economic Releases

• None of note

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Italy 5-year Bond Sale, Barclays Automotive Conference, BofA Merrill Energy Conference, (RAI) Investor Day and the (BK) Investor Day could also impact trading today.
  

BOTTOM LINE: Asian indices are higher, boosted by industrial 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 75% net long heading into the week.