Friday, December 09, 2011

Friday Watch

Evening Headlines

  • EU States to Send IMF $267 Billion in New Crisis Fight. European leaders added 200 billion euros ($267 billion) to their crisis-fighting warchest and tightened anti-deficit rules, seeking to lure the European Central Bank into stepping up its rescue operations. In an accord hailed by ECB President Mario Draghi, the leaders laid out a new “fiscal compact” to prevent future debt runups, accelerated the startup of a planned 500 billion-euro rescue fund and scaled back bondholder loss-sharing provisions. “It’s a very good outcome for euro-area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro-area countries,” Draghi told reporters after 12 hours of overnight talks in Brussels. European leaders navigated a labyrinth of political, legal and economic constraints amid unrelenting pressure from financial markets to craft a new approach to fighting the crisis, which now threatens to engulf Italy and Spain. At the same time, the leaders ventured into untested legal territory by plotting to anchor the tougher budget rules in a separate euro-area treaty after Britain and Hungary balked at amending the existing treaty covering all 27 European Union countries. The euro was little changed in reaction to the measures, the fifth wide-ranging crisis-containment package since the unprecedented 110 billion-euro bailout of Greece and was followed by the setup of a 440 billion-euro rescue fund in May 2010.
  • Draghi Answers Bond Market Prayers by Saying 'No': Euro Credit. Bruce Richards, co-founder of Marathon Asset Management LP, wants the European Central Bank to spend 100 billion euros ($133 billion) a month to backstop euro- region government debt. ECB President Mario Draghi isn't buying. The central bank's bond purchase program is "neither eternal nor infinite," Draghi said at a press conference yesterday. He was explaining the ECB's decision to extend the range and maturity of loans it offers to banks and cut its key interest rate by a quarter-point to 1 percent, which came after "a lively discussion that did not lead to unanimity." Italian 10-year government bonds fell the most in four weeks after he spoke, the euro slid to a two-week low and German bunds rallied, as investors decided the ECB was prioritizing bank lending over supporting bonds. "There were some expectations that the ECB might hint that bond purchases would be increased and those were disappointed," said Werner Fey, a fund manager at Frankfurt Trust Investment GmbH in Frankfurt, which oversees the equivalent of 6.5 billion euros of fixed-income assets. "If Spain and Italian bond yields escalate again, the ECB will be forced to increase its role. At the moment, there is no commitment." The ECB's statutes prohibit monetary financing of its member governments, Draghi said. "We shouldn't try to circumvent the spirit of the treaty, no matter what the legal trick is," he said.
  • European Banks Told Not to Cut Lending, Change Capital Definitions by EBA. European regulators warned banks not to cut lending or inflate capital levels artificially as they ordered the region’s financial firms to raise 114.7 billion euros ($153 billion). The European Banking Authority told lenders yesterday to bolster their Core Tier 1 capital ratios to more than 9 percent of risk-weighted assets by the middle of next year to reassure investors the region’s banks can withstand the debt crisis. The EBA told banks to raise the money from investors, retained earnings and lower bonuses. Failing that, companies may sell assets, provided the disposals don’t limit overall lending to the “real” economy, the EBA said in a statement. The measure sets up a clash between lenders and regulators trying to avert a potential credit crunch. The Bloomberg Europe Banks and Financial Services Index (BEBANKS) has slumped 33 percent this year, leaving bank shares trading at an average discount to book value of 39 percent. That makes it more attractive for banks to sell assets than stock. “Who is going to pump money into banks in the euro zone in its darkest hour when their shares are already trading at a huge discount to book value?” said Bob Penn, a partner at Allen & Overy LLP in London. “Banks will deleverage because they feel that they have no other choice.” Bankers and lawyers question whether the EBA will be able to enforce its lending rules and halt a process by which European banks may shrink their assets by 2.5 trillion euros over the next 18 months, according to estimates by Morgan Stanley analysts led by Huw van Steenis in London.
  • U.S. Company Borrowing Reached Slowest Since '10: Credit Markets. Corporate borrowing grew at the slowest pace this year in the U.S. in the third quarter as Europe's sovereign-debt crisis roiled financial markets, according to the most recent data from the Federal Reserve. Credit-market debt of nonfinancial companies, from commercial paper to bonds and bank loans, rose at an annual pace of 4.5%, compared with 6.9% in the prior three months and 4.9% a year earlier, the central bank said yesterday in its flow of funds report. The outstanding amount reached a record $7.63 trillion.
  • Beware of ETFs on Steroids. New versions of exchange-traded funds give investors triple the action. The tools traders use to play the market are getting more powerful—and potentially dangerous. Investors have long been able to buy leveraged ETFs, exchange-traded funds that aim to magnify the daily returns of the indexes they follow. On Dec. 1, Direxion Funds upped the ante by converting its “two-times” funds to provide triple the return of the indexes they track. Supersizing has been good business for Newton (Mass.)-based Direxion, which offers more than 40 leveraged ETFs, up from eight three years ago, according to Chief Marketing Officer Andy O’Rourke. Yet some critics say the pumped-up investment vehicles are adding to daily volatility and scaring off general investors from the market. Laurence D. Fink, chairman of BlackRock (BLK), the world’s largest asset manager, has called leveraged ETFs “toxic.”
  • Corzine, MF Global Executives Sued by Commodity Traders. Jon Corzine and four other former executives of bankrupt MF Global Holdings Ltd. were sued for damages by a group of commodity traders. Henning-Carey Proprietary Trading LLC, a clearing firm and member of CME Group Inc., joined with eight traders in seeking recovery of an unaccounted-for $1.2 billion in customer funds at the brokerage unit MF Global Inc. “Defendants were responsible for insuring that the plaintiffs’ property was properly segregated and accounted for,” the traders said in the complaint filed today in federal court in Chicago. The suit is one of several filed by brokerage customers and former employees against Corzine, MF Global executives or the company since it filed for bankruptcy protection on Oct. 31. Corzine told the House Agriculture Committee at a hearing in Washington today that he “would never have intended” transfers from segregated accounts and had teams in place at the firm to ensure they didn’t occur. He wouldn’t say if he and other executives were willing to share customers’ losses.
  • Analysts Cut JPMorgan(JPM) Earnings Estimates on Revenue Forecast. JPMorgan Chase & Co.'s earnings estimates were reduced by analysts after Chief Executive Officer Jamie Dimon forecast "flat" investment-banking revenue and a "moderate" loss at the private-equity unit. Analysts including Richard Bove at Rochdale Securities LLC cut fourth-quarter outlooks for the largest and most profitable U.S. bank yesterday, even as Dimon touted its long-term prospects. Bove cut his profit estimate 13 percent to 88 cents a share as International Strategy & Investment Group Inc. analysts led by Ed Najarian pared their forecast 11 percent to 85 cents. "Dimon's outlook for the fourth quarter is not positive," Lutz, Florida-based Bove said in a note. "His view of the next two years is subdued." Dimon is restructuring the business to adjust to new regulatory and economic realities, and "the result may be lackluster earnings for some time," Bove said.
  • Climate Talks Closer to Deal on $100B Aid Plan. Envoys at United Nations talks are near an agreement that would set up a fund channeling a portion of the $100 billion a year in pledged climate aid to developing nations, part of a package to keep a lid on global warming. Delegates from more than 190 nations are scheduled to finish two weeks of talks today in Durban, South Africa, where they’ve also considered how to extend the Kyoto Protocol’s limits on fossil fuel emissions, which expire next year. “Things are starting to move,” said Alden Meyer, who has followed the annual gatherings for more than a decade for the Union of Concerned Scientists, a Washington-based lobby group. “We’re likely to get an agreement. The question is how ambitious it will be, whether we can get the higher level of ambition needed to save the planet.”
  • Russia Futures Slide as Mass Anti-Putin Rally Planned: Russia Overnight. Russian stock futures slid and U.S.- traded shares (SNGSP) retreated after oil fell and concern grew that anti-government protests in Moscow will fan political unrest. Futures expiring in December on the dollar-denominated RTS index tumbled 2.4 percent to 143,170 yesterday in U.S. trading, while the Bloomberg Russia-US 14 Index of Russian companies listed in New York dropped 2.5 percent to 93.48, a two-week low. Thousands of people have taken to Moscow streets to protest the result of the Dec. 4 parliamentary election, which was marred by complaints of violations and ballot-stuffing. The Solidarity movement, an umbrella opposition group, has planned a rally tomorrow near the Kremlin. Prime Minister Vladimir Putin’s United Russia party lost 12 million votes, or more than a quarter of the support it garnered four years ago. Urals crude, Russia’s chief export blend, hit a two-week low. “Russian politics has become an issue, and for investors, that’s something new, and for some people, it does create uncertainty,” Martin Diggle, director of the $70 million Vulpes Russian Opportunities Fund, said in a phone interview from Geneva. “Europe remains a drag on stocks, and oil is also down.”
  • S&P's Adelson Steps Down as Jacob Leaves Amid Ratings Scrutiny. Standard & Poor’s is replacing its chief credit officer, Mark Adelson, as the world’s largest ratings company winds down a year in which its grades of governments have faced growing scrutiny. Adelson, 51, who oversaw an overhaul of S&P’s methodologies that was designed to address their failures during the collapse of the mortgage-bond market, will become a “senior research fellow,” the New York-based unit of McGraw-Hill Cos. said yesterday in a statement. Also, David Jacob, global head of structured finance, will depart at the end of the month. The changes come three months after Douglas Peterson left Citigroup Inc. to become S&P’s president, following its decision to strip the U.S. of its top AAA ranking. This week, the firm warned it may downgrade Germany, France and 13 other European countries. Even as S&P’s moves roil credit markets, McGraw-Hill is planning to separate its financial businesses from its textbook publishing unit under pressure from hedge fund Jana Partners LLC.
  • Pakistan will deploy air defense weapons along its border with Afghanistan after last month's NATO airstrike that killed 24 soldiers, the Dawn newspaper reported citing the country's head of military operations.
Wall Street Journal:
  • Crisis Live Blog: High-Stakes Summit.
  • EU Still Far Apart On ESM, EFSF - Source. European Union leaders are still apart early Friday on the future role of the euro-zone's bailout fund mechanisms with Germany ruling out provisions in a draft by the European Council to turn them into a credit institution which could be funded by the European Central bank to help counties in distress. "They are still far apart on the EFSF and the ESM," a person present at the talks said. According to the draft conclusions, the transitional rescue fund -- the European Financial Stability Facility -- and the permanent rescue fund -- the European Stability Mechanism -- would run alongside each other. Under original arrangements, the EFSF would lapse once the ESM became operational. "Germany is against the two funds running together and combining their funds," the person said. "They left the issue hanging and will come back to it later," he added. The draft, reviewed by Dow Jones Newswires, had said that the ESM would be allowed to have a total endowment of EUR500 billion ($667 billion) on top of funds in the EFSF. "The ESM will have a maximum lending volume of EUR500 billion, irrespective of the EFSF commitments," the document said. There did seem to be agreement among the 17 leaders of euro-area countries that the ESM start date also should be moved one year sooner, to July 2012. "They're only agreeing on the date being brought forward," a second EU source said. EU leaders, under severe pressure to reach agreement over the tools to deal with the ongoing debt crisis, were discussing proposals for closer fiscal integration over a dinner Thursday ahead the formal EU summit Friday.
  • Should Hedge Funds Hedge Against Asia? A piece of advice for all the hedge funds flocking to Asia: think twice when investing here. According to data just released by Chicago-based Hedge Fund Research, hedge fund investments in Asia ex-Japan posted the worst year-to-date performance in 2011, dropping nearly 16%. Energy and basic materials are the second worst performer at a drop of 13.6%.
  • Corzine's Loss May Be Soros's Gain. Investor George Soros's family fund bought about $2 billion of European bonds formerly owned by MF Global Holdings Ltd., the very debt that helped force the securities firm to file for bankruptcy protection Oct. 31, according to people close to the matter.
  • How The U.S. Can Help Europe: Just Say No. The greatest threat to our economy is not the debt crisis across the pond, but the one right here on American soil. If the United States wants to help Europe find a way out of its current debt crisis, we must be a strong, world economic leader, not merely the lender of last resort. American taxpayers sent $40 billion to Greece last year, through the International Monetary Fund, to stave off an economic collapse. But the bailout did not prevent Greece's day of fiscal reckoning. It only delayed it. Austerity measures are still needed throughout Europe's socialized economy and the debt contagion has not been stopped. Financial chaos has spread from Greece to Ireland, Portugal, Italy and Spain, and it now threatens the very future of the 17-member euro zone. Undeterred, President Obama last month told the press after breaking from a closed-door meeting with European leaders, "the United States stands ready to do our part to help them resolve this issue." He would do better to focus his attention stateside. The most dangerous threat to the U.S. economy is not across the pond. It's in the swampland of Washington, D.C.
  • China's November Inflation Eases. The monthly consumer price index rose 4.2% from the year-ago period, reflecting a huge easing from October’s 5.5% increase. The producer price index, which reflects wholesale prices, eased even more steeply to 2.7% from a 5% increase in October.
Business Insider:
  • There's About To Be A Massive Real Estate Decline In Central Europe. Banks with big exposure to Central European real estate are essentially insolvent, but this is masked because they have not revalued the underlying assets, industry sources say. However, with many loans issued in the boom years ahead of the crisis coming up for refinancing and a pullback in funding of regional subsidiaries, these banks could finally be forced to act.
Zero Hedge:
  • EU Leaders Agree Fiscal Pact, Falter on Treaty Change. European Union leaders sealed a new fiscal pact ensuring tougher budget discipline but failed to agree on a treaty change to enshrine the rules, meaning a deal may now involve the 17 euro zone nations plus any others that want to join, diplomats said. An agreement involving all 27 EU members fell through - raising the prospect of a two-speed Europe - after British Prime Minister David Cameron demanded concessions that Germany and France were not willing to give, one of the officials said. "We've always said we would do it at 17 if it didn't work at 27. That's what happened," one senior EU diplomat told Reuters.
  • China Alarms Go Off - Time to Hedge Bets. I'm concerned with what's possibly a massive bubble in China. The real-estate market is signaling alarms and may eventually fall into a worse situation than we had in the U.S.
  • Hedge Funds Braced for Worst Year Since 2008. Hedge funds are set to rack up their second-worst year in two decades after taking a beating from the eurozone crisis and an unexpected slowing in global economic growth. The average hedge fund manager has lost 4.37 percent in the year to the end of November, according to data just released by Hedge Fund Research — losing money in six of the past seven months. Only in 2008, following the collapse of Lehman Brothers, did the industry fare worse. High volatility and correlation have wrongfooted even the most skilled of traders.
  • Texas Instruments(TXN) Cuts Revenue Outlook; Shares Slump. Texas Instruments cut its outlook for the current quarter and warned demand was broadly lower as customers reduce their inventories, sending the No. 3 chipmaker's shares down sharply. Weak economies in the United States and Europe have sapped demand for microchips and investors have been looking for signs of when the industry will bottom out and begin to improve. Adding to negative sentiment in the electronics industry on Thursday, Altera(ALTR) cut its fourth-quarter revenue due to lower demand for its programmable chips. "Even with an earlier Chinese New Year and excitement over Black Friday sales, you're not seeing an inflection in demand and that's reflected both in TI and Altera," Evercore Partners analyst Patrick Wang said.
  • MF Global Was Leveraged 30 Times Measly Capital. John Corzine paid absolutely no attention to the main cause of the 2008 meltdown; LEVERAGE. TOO MUCH DEBT IN RELATION TO CAPITAL. So, he let MF Global operate with leverage of 30 to 1– precisely the ratio of debt to equity that sank Lehman Brothers, Bear Stearns, and required a $1.5 Trillion money massage of all the other banks. That’s right. The risk Corzine took was that if his gambling cost MF Global 4% on the securities it owned, it was in effect out of business. Moreover, from, my reading of Corzine’s prepared testimony MF Global owned a gross amount of $14.5 billion of French, Italian, Portugal, Irish and Belgian debt– of which only 52.6% was collateralized.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 22% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-one percent (41%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -19 (see trends).
This Is Money:
  • Tesco Plans For Collapse of Eurozone As It Posts Sales Fall. Tesco said it was making contingency plans for the collapse of the eurozone as it posted its fourth quarterly sales fall in a row. Finance director Laurie McIlwee said the grocer wouldn’t enter into long-term contracts with suppliers to reduce its exposure to the crisis. Britain’s biggest retailer added to the gloom sweeping the High Street warning that the economic headwinds are not making it easy for anyone, and that consumers remain under pressure from ‘rising unemployment, falling real wages and increasing living costs’.
Sueddeutsche Zeitung:
  • The European Union sees nuclear energy as "an important factor" and forecasts that as many as 40 new plants will be built in Europe between now and 2030, even as Germany has decided to exit nuclear power, citing a draft document by EU Energy Commissioner Guenther Oettinger.

China Daily:
  • China Should Maintain Property Controls. China should maintain property curbs because the results of the policies haven't been solidified, Ren Xingzhou, a director at the market economy research department of the State Council's Development Research Center, wrote in an article, along with Deng Yusong and Xu Wei from the same department. Housing prices in Chinese cities are still relatively high, they wrote.
Shanghai Securities News:
  • China Shouldn't Relax Property Control Measures, Wang Says. Shanghai Securities News cites Wang Juelin, deputy director of the Ministry of Housing and Urban Rural Development's policy research department. Housing prices will rebound should China start to relax controls now because buying demand remains large, the report cites Wang.
China Securities Journal:
  • Risks of a depreciation in the Chinese currency are rising in the short-term, triggered by "large scale" capital outflows, Zhang Monan, a researcher with the State Information Center, writes in a commentary.
Evening Recommendations
Wells Fargo:
  • Rated (APKT) Outperform.
Night Trading
  • Asian equity indices are -2.25% to -1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 205.0 +14.0 basis points.
  • Asia Pacific Sovereign CDS Index 154.0 +3.0 basis points.
  • FTSE-100 futures -.82%.
  • S&P 500 futures -.09%.
  • NASDAQ 100 futures -.23%.
Morning Preview Links

Earnings of Note
  • (TITN)/.50
Economic Releases
8:30 am EST
  • The Trade Deficit for October is estimated to widen to -$44.0B versus -$43.1B in September.
9:55 am EST
  • The Preliminary Univ. of Mich. Consumer Confidence for December is estimated to rise to 65.8 versus 64.1 in November.

Upcoming Splits

  • (HBNC) 3-for-2
Other Potential Market Movers
  • The USDA Crop report and (EW) Investor Conference could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by financial and technology shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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