Friday, December 23, 2011

Friday Watch

Evening Headlines

  • King Says Crisis Threatens Europe’s Economy as Stability Outlook Worsens. Mervyn King, vice chairman of the European Systemic Risk Board, said Europe’s sovereign debt crisis is threatening to hurt the real economy and the outlook for financial stability has worsened. Growth prospects “have deteriorated” since September, King, who is also governor of the Bank of England, said at a briefing hosted by the European Central Bank in Frankfurt yesterday. “Investors lack confidence to continue to provide normal levels of funding. Dependence on central banks has risen.” The ECB loaned banks a record 489 billion euros ($636 billion) for three years on Dec. 21 to avert a credit crunch from the sovereign debt crisis. The central bank said earlier this week that the turmoil has taken on systemic proportions not seen since the 2008 collapse of Lehman Brothers Holdings Inc. King said the outlook for financial stability has “worsened” since the last ESRB meeting in September, and while intervention by the ECB is expected to “assuage funding problems in the near term, in the longer term private funding markets must be revitalized.” Bank shares have suffered this year as borrowing costs surged in the euro region. The Stoxx 600 Banks Index has fallen 28 percent since the end of June, compared with a 12 percent decline by the Stoxx Europe 600.
  • 'Monti Effect' Fizzles Before $574 Billion New Year: Euro Credit. Prime Minister Mario Monti's market honeymoon is ending as Italian bond yields near 7% signal mounting concern his government may struggle to sell $574 billion of debt next year. Monti took just five weeks in office to push through a 30 billion-euro emergency budget package aimed at taming surging borrowing costs. Investors reacted to the plan's final approval by the Senate yesterday by driving up the yield on Italy's 10-year benchmark bond by 12 basis points to 6.91%, near the 7% level that prompted Greece, Ireland and Portugal to seek bailouts.
  • Slovenia’s Debt Rating Cut by Moody’s on Banking Industry Risk. Slovenia had its credit rating lowered one step to A1 by Moody’s Investors Service on the potential need for the government to support its banking system amid Europe’s debt crisis. The euro-area nation’s banking industry has assets that are about 136 percent of gross-domestic product, which is “relatively large when compared to other systems in Eastern Europe,” Moody’s said yesterday in a statement. It assigned a negative outlook to Slovenia’s credit grade, the fifth-highest. Standard & Poor’s ranks the nation AA-, one level higher. Slovenia was downgraded at Moody’s for the second time in three months as the euro area struggles to resolve its sovereign-debt crisis, prompting ratings companies step up scrutiny of the region.
  • North Korea Warns Lee Government Over Condolences, Yonhap Says. North Korea said its relationship with South Korea is at a crossroads and could break down completely depending on the Lee Myung Bak administration’s attitude to condolences to the late Kim Jong Il, Yonhap News reported, citing a North Korean website. North Korea is open to all condolence messages and visits from South Korea following Kim’s death and took steps to open air routes and a land corridor via the Gaeseong joint industrial zone, Yonhap said, citing Uriminzokkiri, a website run by the North’s state-run Committee for the Peaceful Reunification of Korea. South Korea’s government on Dec. 20 expressed “sympathy” to the people of North Korea while stopping short of sending an official delegation to offer its communist neighbor condolences. It said it would allow private visits by the wife of late President Kim Dae Jung and family members of the late founder of the Hyundai Group, Chung Ju Yung.
  • China May Halt Buying of Corn Until Price Falls to $5 a Bushel, Yigu Says. China, the second-biggest corn consumer, may import more of the grain if global prices fall 19 percent to about $5 a bushel, a level that is significantly below domestic prices, said Yigu Information Consulting Ltd. China’s corn supply is sufficient after a record harvest and the government may import to boost stockpiles only if there is a “clear price advantage,” said Feng Lichen, general manager of Yigu, China’s largest corn information portal. Corn, used as an ingredient in feed and in ethanol, has plunged 20 percent since Aug. 31 on high global grain supplies and concerns that Europe’s deepening debt crisis and a slowing global economy may sap demand. Morgan Stanley on Dec. 13 lowered its price forecasts for agricultural commodities including corn because of rising supplies.
  • Mongolia Spending Risks Commodities Bust: IMF. Mongolia’s economy, which grew 20.8 percent last quarter, risks contraction along with a global downturn in commodity prices partly due to a surge in state spending, according to the International Monetary Fund. Government spending jumped 50 percent in real terms to 6.3 trillion tugrik ($4.6 billion) this year, pushing inflation in the $8.4-billion-economy to 14 percent, Steven Bennett, IMF’s head of Mongolia coverage, said in an interview in Tokyo. That may drive up borrowing costs and cut the profitability of mining projects, Mongolia’s biggest industry, he said. “The global economy is in a dangerous phase and what that means for Mongolia is a higher-than-normal chance that commodity prices fall,” Bennett said. “Their spending plans could not be realistically financed if there was a repeat of the 2008 shock. They’d have to cut spending. This is ‘boom-bust’ policy- making.”
  • Graduates in 'Weird Limbo' Work for Free While Hunting for Jobs.
Wall Street Journal:
  • Agreement Reached to Extend Tax Break. House Speaker John Boehner, bowing to heavy pressure from fellow Republicans, agreed Thursday to a two-month extension of a payroll-tax break, ending a stalemate that had created a wedge within the party.
  • Canada Finance Minister: Euro Zone May Enter 'Serious' Crisis. Canada's Finance Minister Jim Flaherty said the euro zone sits on the brink of a "very serious crisis," and may require European leaders to use taxpayers' cash to recapitalize the region's banks and stabilize financial markets. During a taped interview with the Canadian Broadcasting Corp., Flaherty said the world's big economies, including Canada, wouldn't turn a "blind eye" to the euro-zone's problems, and are prepared to act under certain conditions. "Europeans have taken some steps, but it is belated and incremental," said Flaherty, the longest-serving finance minister among the Group of Seven industrialized countries. "This is not a good picture." He added euro-zone leaders have been inconsistent in their messaging, by stating that they want to keep the euro area together but at the same time indicating they are unwilling to use taxpayers' cash to bailout weaker peripheral countries. "You can't have it both ways, so something has to give, and it has not given yet," Flaherty said. "I think ultimately the large euro-zone countries will have to make an important decision. Are they going to save the euro zone or not? And, if they are, then they have to recapitalize their banks, and they are going to have to use taxpayers' money."
  • Risk Is Out, and Goldman Sachs(GS) Cuts Ties With Brokers. Goldman Sachs Group Inc. has cut ties with more than a dozen brokers that once steered hedge-fund trades its way amid greater scrutiny of Wall Street’s interactions with customers. Since the beginning of last year, Goldman has cut these broker relationships to roughly six from more than two dozen, people familiar with the matter said. At the same time, Goldman’s prime brokerage division has continued to drop smaller fund clients that aren’t generating enough profits, people familiar with the matter said, in some cases directing them to the brokers Goldman continues to use. The moves come amid increased scrutiny. Last week, Goldman Sachs Execution Clearing LP agreed to pay nearly $10 million to the receiver in a Florida Ponzi scheme that lost $168 million for investors. Goldman hasn’t been accused of wrongdoing, but is connected to the case through Shoreline Trading Group LLC, the “introducing” broker for funds run by Arthur Nadel that cleared trades through Goldman.
  • Pyongyang Myth-Builders Step It Up. Kim's Death Forces Propaganda Department to Work Quickly to Bolster New Leader's Legitimacy.
  • BMW, Mercedes Duel in U.S. BMW AG and Mercedes-Benz are locked in an expensive race for bragging rights as this year's top-selling luxury car in the U.S. market, and customers are benefiting.
  • Fed May Signal Low Rates Into 2014. The Federal Reserve could signal it is likely to keep short-term interest rates near zero into 2014 or beyond, to bolster the fragile economic recovery. Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013. Some believe low inflation and high unemployment could warrant low rates for longer. Updating the view on rates has become an important part of Fed discussions about how the central bank explains its goals and policies to the public.
  • Interview: China Economist: Beijing Unlikely To Abandon Housing Curbs. Despite slower economic growth, China's central government won't abandon controls on the property market as that would undermine its credibility, a prominent Chinese economist long associated with the country's market-oriented reforms said. Lu Mai--secretary general of the China Development Research Foundation, a Beijing think-tank that studies development issues and whose reports circulate in China's governing State Council--conceded.
Dow Jones:
  • NY Fed: New Dollar Swap Facility Borrowings Total $9.891 Billion. New borrowings at the Federal Reserve's dollar swap facility continued to rise in the week ending on Wednesday. Total new borrowing for the week was $9.891 billion, led by $5.122 billion in borrowing from the European Central Bank and $4.769 billion in borrowing from the Bank of Japan. Total outstanding borrowing stood at $62.599 billion, compared to $54.335 billion the week before. Last week, borrowing jumped on a surge in drawings from the ECB.
Zero Hedge:
NY Post:
Huffington Post:
  • MF Global Collapse Spotlights Practice That Heightens Systemic Financial Risk. The swift implosion of MF Global highlights a common practice used by aggressive speculators, one that experts say makes the broader financial system vulnerable to another crisis. It's called rehypothecation, and it allows a firm to essentially pledge the same limited collateral to arrange fresh loans. MF Global is believed to have used client funds as collateral to borrow money to make bets on the risky sovereign debt of Portugal, Spain and Italy, leading to a daisy chain of securitization, Thomson Reuters Business Law Currents reported. It's akin to using a single home as collateral for several loans and then investing that money to earn dividends before payments are due on the loans.
CBS News:
  • U.N. Pay Tribute to North Korea's Kim Jong Il. The U.N. General Assembly paid tribute to North Korea's late leader Kim Jong Il on Thursday by observing a minute of silence in his memory. At the start of Thursday afternoon's meeting, Assembly President Nassir Abdulaziz Al-Nasser told diplomats it was his "sad duty" to report that Kim died on Saturday. He asked North Korea's ambassador "to convey condolences" to his country's government and people and then invited diplomats "to stand and observe a minute of silence in tribute to the memory of the late leader of the Democratic People's Republic of Korea." All diplomats then rose, and North Korea's Ambassador Sin Son Ho and several others bowed their heads. Al-Nasser said North Korea's U.N. Mission asked for the General Assembly tribute, which is customary for leaders who die in office. U.N. Deputy Secretary-General Asha-Rose Migiro went to North Korea's U.N. Mission on Tuesday and signed the condolence book for Kim on behalf of the United Nations system.
Chicago Tribune:
  • Exclusive: Oil Fund BlueGold Loses Focus, Sinks Deep Into Red. Respected commodities hedge fund BlueGold has veered from its energy-focused strategy, betting half its money on equities and other trades that are worrying investors as it turns in its first down year. The London-based fund, founded by former Vitol oil traders Dennis Crema and Pierre Andurand, is heading for a negative annual return, losing 34 percent through mid-December. Its asset base is down to $1.2 billion from $2 billion about a year ago. The change in fortunes has raised concerns among some investors who question an increase in exposure to equities, as well as "macro-hedges" which investors say is unfamiliar territory for the fund that made its name in crude derivatives.
  • Paulson Funds Down Again In December: Source. There will be no holiday cheer for hedge fund manager John Paulson this month, as his dismal performance in 2011 is capped off by another miserable performance so far in December. The Paulson & Co.'s Advantage Plus fund, which has been the firm's worst performer all year, is down another 9 percent through December 16, sending yearly losses to about 52 percent, according to a person familiar with the numbers. The Paulson Advantage fund, the firm's largest portfolio, is also hurting again this month, declining about 6 percent. The fund is down about 36 percent year-to-date. The Standard and Poor's 500 stock index has been flat so far in December. The average hedge fund was down about 4.37 percent through November, according to Hedge Fund Research's broadest industry index. Meanwhile, the gold fund that earned Paulson billions in 2010, is off about 7 percent for the year, according to an investor. The once safe-haven commodity has slumped 18 percent since September, when it hit $1,920 an ounce. At the end of the third quarter, Paulson was the largest shareholder of the SPDR Gold Trust (GLD) exchange-traded fund with about 20 million shares, according to quarterly regulatory filing.
The Daily Mail:
  • UK Business Backs PM Over Euro Veto Row: Clegg proved wrong as 77% call for looser relationship with EU. Britain's business leaders have overwhelmingly backed David Cameron’s decision to veto a new EU treaty. A poll of members of the Institute of Directors found that 77 per cent support the defiant stand he took at a Brussels summit earlier this month. In a further boost for the Prime Minister, business bosses said they want the UK to loosen ties with Brussels. The revelations came as Mr Cameron told his MPs that he was right to veto the plans and would ‘do so again tomorrow’. The findings of the survey dramatically undercut claims by the Liberal Democrats that business is concerned Mr Cameron has left the UK isolated in Europe.
  • China will spend less on railway construction next year than it did in 2011.
China Securities Journal:
  • Beijing's 2011 land sales may fall 30% from a year earlier to 110 billion yuan, citing Centaline Property Agency Ltd. The city's sales of land for residential housing development may fall to a three-year low of 46 billion yuan this year. Guangzhou's land sales may drop 36% to 29 billion yuan this year from a year earlier, citing Guangzhou Financial Bureau. Land sales in Shanghai have declined 16% to 115 billion yuan in the year to Nov. 20, compared with a year earlier, China Real Estate Information Corp. said.
Evening Recommendations
  • None of note

Night Trading

  • Asian equity indices are +.25% to +1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 207.0 +.5 basis point.
  • Asia Pacific Sovereign CDS Index 158.0 unch.
  • FTSE-100 futures +.65%.
  • S&P 500 futures +.53%.
  • NASDAQ 100 futures +.48%.
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
8:30 am EST
  • Durable Goods Orders for November are estimated to rise +2.2% versus a -.7% decline in October.
  • Durables Ex Transports for November are estimated to rise +.4% versus a +.7% gain in October.
  • Cap Goods Orders Nondef Ex Air for November are estimated to rise +1.0% versus a -1.8% decline in October.
  • Personal Income for November is estimated to rise +.2% versus a +.4% gain in October.
  • Personal Spending for November is estimated to rise +.3% versus a +.1% gain in October.
  • The PCE Core for November is estimated to rise +.1% versus a +.1% gain in October.

10:00 am EST

  • New Home Sales for November are estimated to rise to 315K versus 307K in October.

Upcoming Splits

  • None of note
Other Potential Market Movers
  • None of note
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 maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

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