Tuesday, December 20, 2011

Tuesday Watch

Evening Headlines

  • U.K. Shuns Crisis Aid as Europe Channels $195 Billion to IMF. Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to the International Monetary Fund as the European Central Bank widened its support for sagging bond markets. Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, in a sign of the difficulty of attracting outside cash to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a Brussels statement after a conference call yesterday. The IMF track is “obviously a small-scale solution,” former UBS AG Chairman Peter Kurer told Maryam Nemazee on Bloomberg Television’s “The Pulse” program. Germany continued to oppose an early decision to raise the limit of 500 billion euros on overall emergency aid. European leaders plan to tackle that question by March.
  • Europe Dragging Down U.S. in Record Correlation: Credit Markets. For all the evidence that the U.S.economy is expanding, the nation's credit markets are unable to decouple from Europe as everything from junk bonds to interest-rate swaps move increasingly in lockstep with the euro region. Correlation between the 17-nation currency and prices of a credit-default swaps index tied to U.S. junk bonds is at about the highest on record, Bloomberg data show. Interest-rate swap spreads in the U.S., a gauge of fear in credit markets, are trading the most in tandem with European corporate credit since 2007. Correlation between the euro-dollar exchange rate and the price of the Markit CDX North America High Yield Index reached a record .76 on Dec. 2, when measured over 60-day periods, and held at .74 yesterday, Bloomberg data show. The measure has climbed from .1 on April 7.
  • German Debt Sales Set to Swell as Economy Falters: Euro Credit. Germany is poised to overshoot its 2012 borrowing target as the growth outlook in Europe's largest economy worsens and the cost of bailing out banks and troubled neighbors increases. As the euro region's debt crisis enters its third year, the German economy is buckling. S&P said Dec. 5 it may strip the nation of its AAA rating and demand at a bund auction last month fell to its lowest since 1995. The debt agency is scheduled to reveal next year's funding plans this week.
  • Default Swaps Jump Most in BRICs as Gandhi Subsidizes Food: India Credit. India’s plan to boost food subsidies by 50 percent is threatening efforts to cut the budget deficit, extending the biggest jump in bond risk among the largest developing nations. The cost to protect the debt of State Bank of India, seen as a proxy for the nation, against non-payment rose 234 basis points in 2011 to 395 basis points, the most in three years, according to data provider CMA. Credit-default swaps on China’s government bonds increased 78 to 146, while those for Russia climbed 124 to 270 and Brazil’s added 53 to 164. Indian Prime Minister Manmohan Singh is tapping public finances to boost assistance as the economy of the nation, where the World Bank says more than 75 percent of the people live on less than $2 a day, slows.
  • Hedge-Fund Refuge Sought by Traders Amid Bank Cuts: Commodities. Damien Bombell left JPMorgan Chase & Co. a year ago after the largest and most profitable U.S. bank shut its group trading commodities for the company's own account. Now chief investment officer of his own hedge fund, he's hiring four people before accepting money from investors next month. “I can't say there's anything I miss about banking,” said Bombell, who turned 40 last week and plans to have at least $200 million under management at the Strand Global Macro Fund in Zug, Switzerland. “I have more freedom.”
  • Hainan Home Bubble Pops as Curbs Deflate Prices. Zhu Lei, a property agent for the Serenity Coast luxury residential and hotel complex in Sanya on China’s Hainan island, recalls clients carrying suitcases of cash to shop for holiday apartments last year. “We didn’t even have time for toilet breaks because there were just too many clients,” Zhu said. Today, sales in the second-biggest city on the tropical island compared to Hawaii for its sandy beaches and weather, are “bleak,” he said. A two-year lending binge and the government’s plan to transform Hainan, in the South China Sea, into an international tourism destination helped fuel a 48 percent surge in Sanya’s home prices last year, making it the nation’s best-performing property market. As China in 2011 switched gears with policies such as increased deposit requirements designed to curb speculation, Sanya’s home prices have dropped 28 percent since last December. “It was really no different to what was driving prices in other cities in China, which was an explosion of liquidity that caused asset inflation across the country,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing. China spent 4 trillion yuan ($628 billion) to shield its economy as credit markets froze when Lehman Brothers Holdings Inc. collapsed in September 2008. It also encouraged banks to lend out a record $2.7 trillion in 2009 and 2010, fueling a surge in home prices and construction that it’s now battling to restrain after warning of an asset bubble.
Wall Street Journal:
  • Just Don't Call It a 'Bailout'. European Governments Devise Unusual Measures to Prop Up Their Ailing Banks. Governments in Europe are tying themselves in knots to prop up their banks, desperate to blunt the cost and embarrassment of a fresh wave of taxpayer-funded bailouts. In Italy, for example, the government is encouraging banks to buy public properties that the banks then can use to borrow money. As part of a broader deficit-reduction program in Portugal, the government essentially is borrowing money from bank pension funds and could use some of the funds to help state-owned companies repay bank loans. Governments in Germany and Spain also are using unorthodox measures to support their ailing banks.
  • Dictator's Death Stokes Fears. U.S. officials aggressively lobbied China, Russia and Japan and suspended a food-aid plan for North Korea following the death of the country's leader, aiming to gain a diplomatic foothold as control over the authoritarian, nuclear-armed country appeared to pass to Kim Jong Il's untested young son. North Korea officially returned to its customary silence on Monday after announcing the death of its supreme leader early in the day, underscoring the world's anxiety over its trajectory under Kim Jong Eun, the former ruler's youngest son, whom state media says will now lead the isolated country.
  • The World's Most Repressive State. A few minutes after the news of the death of North Korean dictator Kim Jong Il flashed across computer screens on Sunday night—Monday morning on the Korean Peninsula—I received an email from a North Korean defector. The man, who is now living in Seoul and is a Christian, was exultant: "God blesses all of us," he wrote. The defector's sentiments will be shared by many, especially his long-suffering countrymen.
  • China Governments in Hole as Land Sales Plummet. Property market slowdown is chilling China’s local governments. The development-ready land market, long a reliable revenue source for local governments across China, has suddenly turned cold. And city halls are shivering. Government-sponsored land auctions in cities nationwide have slowed dramatically in recent months, reflecting shrinking consumer demand and what one executive called a “winter mode” strategy among major developers. Nominal land values have fallen, and some auctions have been canceled due to a lack of bidders. “The land market is basically deadlocked,” said Chen Xiaotian, president of China Real Estate Information Corp. (CIRC), a market research firm.
Business Insider:
Zero Hedge:
NY Times:
  • Weaker Euro to hurt Red Hat Q4 revenue, shares fall. Business software maker Red Hat Inc forecast fourth-quarter revenue largely below analysts' expectations hurt mainly by a weaker euro, sending its shares down 7 percent in after-market trade. The company forecast current-quarter earnings of 26-27 cents a share on revenue of $289-$292 million. Analysts on average had expected a profit of 26 cents a share on revenue of $292.5 million, according to Thomson Reuters I/B/E/S.
Financial Times:
  • Clinton Urges EU to Drop Carbon Levy Plan for Airlines. U.S. Secretary of State Hillary Clinton wrote to EU Foreign Policy Chief Catherine Ashton on Dec. 16 to "strongly urge" the bloc to abandon its plan to start charging any airline flying into the region for its carbon pollution, citing the letter. If the EU doesn't drop the plan "we will be compelled to take appropriate action," Clinton wrote. If the EU doesn't drop the plan "we will be compelled to take appropriate action," Clinton wrote.
  • Hedge Fund Alarm Bells Are Ringing Over China. The past few weeks have seen China loom large in the nightmares of many hedge fund managers still smarting from a less-than glory-filled 2011. Concerns are rising for the global outlook over the increasingly negative economic signals emanating from the country. As the Emerging Sovereign Group, a $1bn hedge fund backed by Julian Robertson and half owned by Carlyle, one of the world’s biggest private equity groups, told its clients in a recent note: “[we have a] gathering sense that the next act of this rolling global debt crisis may well play out in the East.”
  • ECB Says Eurozone Leaders Created 'Cycle of Risk'. Protracted indecision among political leaders has created a "cycle of risk" with "systemic crisis proportions not witnessed since the collapse of Lehman Brothers", the European Central Bank (ECB) has warned.
  • Spain Grits Teeth Yet Again As Austerity Deepens. Spain's new premier Mariano Rajoy has launched a fresh blast of fiscal austerity at his inauguration, describing the national outlook as "desolate" and his task like that of a father feeding four hungry mouths with bread for two.
Die Welt:
  • Nagel Doesn't See End to EU Financial Crisis in 2012. Bundesbank's Nagel also spoke against a possible solution involving large purchases of state securities by the ECB, saying markets would soon raise concerns that it may overwhelm Germany. The "bazooka solution" wouldn't work, he said.

China Business News:
  • China Should Stick to Property Tax as Control Measure. China should continue to levy property taxes and increase transaction taxes as a control measure against real-estate market speculation, citing Yin Zhongqing, deputy director of the National People's Congress Finance and Economic Affairs Committee. Property taxes may reduce the local government's reliance on revenue from land sales, Yin says. Government worries society-wide credit is not developed and data are not reliable, Yin said.
  • Clinton Blasts Egypt's 'Shocking' Treatment of Women. US Secretary of State Hillary Clinton denounced Egypt's treatment of women as "shocking" and a "disgrace" to the state after troops were shown ripping off a female protester's clothes. In unusually strong remarks, Clinton accused Egyptian authorities of failing the country's women since the revolution that overthrew president Hosni Mubarak, both by excluding them from power and humiliating them in the streets. "This systematic degradation of Egyptian women dishonors the revolution, disgraces the state and its uniform and is not worthy of a great people," Clinton said in a speech at Georgetown University. In images widely seen over YouTube, helmeted troops were shown beating a veiled woman after having ripped her clothes off to reveal her bra and stomach. Other pictures circulating on social media networks that have enraged protesters include one of a military policeman looming over a sobbing elderly woman with his truncheon.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 214.50 +3.5 basis points.
  • Asia Pacific Sovereign CDS Index 158.0 +1.0 basis point.
  • FTSE-100 futures -.13%.
  • S&P 500 futures +.49%.
  • NASDAQ 100 futures +.49%.
Morning Preview Links

Earnings of Note
  • (GIS)/.79
  • (SAFM)/-.60
  • (CAG)/.42
  • (JEF)/.14
  • (PAYX)/.38
  • (JBL)/.65
  • (NKE)/.97
  • (CTAS)/.48
  • (ORCL)/.57
  • (NAV)/3.12
  • (CCL)/.29
Economic Releases
8:30 am EST
  • Housing Starts for November are estimated at 635K versus 628K in October.
  • Building Permits for November are estimated at 635K versus 653K in October.

Upcoming Splits

  • None of note
Other Potential Market Movers
  • The Spain/Greece auctions, 5-Year Treasury Note Auction, weekly retail sales reports, (BCR) Investor Conference and the (CVS) Analyst Day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity 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.

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