Wednesday, December 14, 2011

Wednesday Watch

Evening Headlines

  • Euro Crisis Shows Dutch Converge With Germany at French Expense. When it comes to fighting the European crisis, the Netherlands may as well be a part of Germany. “The Dutch are often a mainstay for the Germans, and as such, play a bigger role then justified by their economy,” said Sylvester Eijffinger, a professor of financial economics at Tilburg University, 69 miles south of Amsterdam. It’s good for Germany because “it never wants to be accused of going it alone,” he said. As European leaders have struggled for more than two years to tame their financial crisis, the Dutch government has sided with neighboring Germany in pushing austerity and central bank independence, underscoring differences between northern and southern Europe in seeking solutions.
  • Crook: EU Pact Could Be Germany's Nightmare. The remedy for the European Union’s financial crisis, EU leaders have decided, is “fiscal union.” But if the agreement they reached last week ultimately leads, in the fullness of time, to a real fiscal union, the country most likely to be unhappy is Germany, its original leading proponent.
  • Save Europe by Saying No to Bank Borrowing: Laurence Kottlikoff. The euro crisis threatening the global economy is not about countries going broke. It’s not even about saving the euro. It’s about saving the banks, for the second time in three years. The banks need saving not because they bought toxic assets such as subprime mortgages or the government debts of Greece, Ireland, Italy, Portugal or Spain, and not because they are too large, overrated or under-regulated. They are in trouble because they bought risky securities with other people’s money, and they have to pay it back. They borrowed to gamble, lost yet another fortune and are facing a massive run. A run in, say, Italy would force the Italian government to bail out banks. The country can’t print euros, so it would have to go back to its own money to do so -- that is, abandon the common currency. Why not let the banks fail? Because they control the financial highways that connect borrowers and lenders, savers and investors. Consider the analogy of actual highways: If gas stations had to close down because of gambling losses, the economy would shut down, too. The longer-term solution is for the government to prohibit gambling by systemically important facilitators of trade, whether they are gas stations or banks. But how? Simple: Tell banks they can no longer borrow to invest in risky assets while promising creditors full -- and often immediate -- repayment. Nor can they borrow to invest in “safe” assets, such as government bonds. In fact, they can’t borrow in any way, shape or form. Instead, limit them to their sole legitimate purpose: intermediation.
  • Risk Rising of Deeper China Slowdown, Conference Board Says. A Chinese leading indicator fell, fueling concern that the world’s second-biggest economy faces a deeper slowdown as Europe’s debt crisis hits exports and home sales slide. The index declined 0.1 percent to 160.1 in October, The Conference Board said in a statement today, citing a preliminary reading. The gauge captures prospects for the next six months, the New York-based research organization says. In September, it rose 0.4 percent. “The risk of a more substantive slowdown in China’s economic growth than anticipated so far is rising,” Andrew Polk, an economist at The Conference Board, said in the statement. “Targeted loosening of credit markets” should give some help to companies “but the pass through from previous policy tightening measures will continue to act as a brake on the economy,” he said. First published in May 2010, the gauge has successfully signaled turning points in China’s economic cycle if plotted back to 1986, The Conference Board says.
  • JPMorgan(JPM) Actions as MF Global Lender Likely to Be Probed. The liquidator of the MF Global Inc. brokerage said that “certain” actions of JPMorgan Chase & Co., a lender to the broker-dealer’s parent, “are likely to be the subject of investigation.” The trustee, James Giddens, said he would “act with the respect to” those actions to recover money for brokerage customers if necessary. If the bank received so-called preferential payments before the brokerage went into liquidation, or other payments, he would deal “appropriately” with the transfers or other issues, he said. “HHR may threaten or bring an action against JPM in the context of a potential dispute between” the bank and the brokerage, he said in a court filing yesterday.
  • California Revenue Shortfall to Trigger $1 Billion of Cuts. California Governor Jerry Brown will cut $1 billion in spending from the current budget, saying the economy won’t produce revenue he built into the plan in June, triggering automatic reductions. Brown said he will eliminate a $250 million busing subsidy, take $230 million from aid to public universities, trim $200 million in programs that help the elderly and disabled, and make smaller cuts in child care, library and prison spending. “These cuts to the universities, in-home supportive services, to schools, to prosecution -- they’re not good,” Brown said at a press conference in Sacramento. “This is not how we want to run California.” Brown took action as his finance office predicted revenue for the fiscal year that began in July will fall $2.2 billion below budgeted levels. The governor is seeking a ballot measure to raise income taxes on individuals making more than $250,000 a year and boost the sales levy.
  • Egypt's Salafis Shun Extremist Label as Vote Enters Second Round. Campaigning in the towns and villages of Menoufiya in Egypt’s Nile Delta, Salafi preacher Salah Abdel Maboud says he regularly confronts voter fears about Islamization of the country, answering questions such as: Will your party force women to cover their faces, or stay at home? These concerns were spurred by the success of Abdel Maboud’s bloc in the first phase of parliamentary elections, as well as comments by some prominent Salafi Islamists. One accused the novels of Egypt’s Nobel laureate Naguib Mahfouz of encouraging vice, and said Pharaonic statues should be covered with wax because they are un-Islamic. The Nour party of the Salafis still won 24 percent of votes, to place second behind the more moderate Muslim Brotherhood as the contest enters its next round in Menoufiya and eight other provinces today. Abdel Maboud blames local media for spreading the idea that “Salafis in parliament will impose all sort of things, from veils for women to beards for men, so the people are afraid.” He says he replies by telling voters: “We cannot impose religion by force. We have to direct people to what’s right through persuasion.”
  • Hollywood Said to Court Amazon(AMZN) in Bid for Online Film Sales. Hollywood studios, working to spur purchases of films and TV shows, are in talks to bring Inc. back into their online system called UltraViolet, people with knowledge of the situation said. Discussions between Amazon and studios including Sony Corp. and Time Warner Inc.’s Warner Bros. center on plans to roll out the shared method for storing and watching films on products such as the Kindle Fire tablet and Blu-ray players, said one of the people, who wasn’t authorized to speak publicly.
  • Corzine Knew MF Used Client Accounts: Duffy. MF Global Holdings Ltd. Chief Executive Officer Jon Corzine knew that the company made a loan out of segregated customer accounts before it went bankrupt, CME Group Inc. chairman Terrence Duffy told the Senate today. Duffy, whose company is MF Global’s regulator and principal exchange, faced questions about a shortfall of some $1.2 billion in missing customer funds. CME and Commodity Futures Trading Commission staff had been told a discrepancy existed in the customer funds, which by law are required to be kept separate from company funds. On Oct. 31, the day MF Global filed the eighth-largest bankruptcy in U.S. history, “a CME auditor also participated in a phone call with senior MF Global employees, wherein one employee indicated that Mr. Corzine knew about the loans that it had made for the customer -- from the customer segregated accounts,” Duffy said today.
  • Oil Trades Near One-Week High as OPEC Said to Leave Production Unchanged. Oil traded near a one-week high in New York on signs the Organization of Petroleum Exporting Countries may set an output ceiling similar to current levels at its meeting in Vienna today. Futures were little changed after climbing the most in almost four weeks yesterday. OPEC members agreed they should set a limit for the first half of next year of 30 million barrels a day, said a delegate who declined to be identified. Gasoline inventories slipped 12,000 barrels, the API data shows. They are likely to rise 1.2 million barrels, according to the median of 12 analyst estimates in the Bloomberg survey before the Energy Department report. Distillate supplies, including diesel and heating fuel, gained 1.2 million to 142 million barrels, the API said. Gasoline implied demand fell 2.1 percent last week to the lowest since August while distillates products supplied slumped 6.8 percent to the least since September, API data showed.
  • Goldman(GS) Loses at Least 37 Partners in Weakest Year Since 2008.
Wall Street Journal:
  • Legal Uncertainty Imperils EU Agreement. Senior European officials said on Tuesday that it could be difficult to convert last week's summit accord for tougher budget discipline among euro-zone governments into a watertight legal pact, emphasizing the agreement's path to fruition could be tough. As the reassessment continued of the results of last week's summit of European Union leaders, the euro sank further against the dollar, following Monday's sharp declines. Stock markets reversed early gains, amid continued nervousness that Standard & Poor's would deliver its verdict on the summit with a downgrading of some top-rated governments, including France.
  • Five Indicted in German Money-Laundering Case. German prosecutors indicted five men, including four German banking executives, on charges of laundering $150 million for a former Russian telecommunications minister in one of the highest-level criminal probes of a Russian official outside Russia. The indictments follow a six-year investigation into allegations that four current or former Commerzbank AG executives and a Danish lawyer assisted former Russian telecommunications minister Leonid Reiman in selling telecommunications assets he allegedly secretly controlled in offshore companies, while concealing who the true owner was.
  • Official Says Air Quality In Beijing Is at 'Crisis' Level. Beijing is facing its third air-pollution crisis of recent years and needs to crank up its efforts to cut emissions, a city environmental official said, acknowledging a big metaphorical cloud hanging over the city. Beijing faced air-quality crises in 1998 and ahead of the 2008 Olympics, and it now faces another that it needs to address by cutting emissions, said Du Shaozhong, deputy head of the Beijing Environmental Protection Bureau.
  • Euro at 11-Month Low. The euro tumbled to its lowest level against the dollar in nearly a year Tuesday amid mounting concerns about Europe's economy and doubts about the latest government efforts to contain the continent's debt crisis. In the past two days the currency has dropped 2.6% to $1.3037, a level not seen since January. The euro is down 12% from its 2011 high in May.
  • GE(GE) Braces for European Chill. General Electric Co. is gearing up for a tougher 2012 in Europe, a weak spot in a year when the company expects to see double-digit profit growth on the strength of sales to emerging markets. The conglomerate plans to restructure some of its industrial operations to prepare for a European recession that could hit a number of its business lines, like health care and lighting.
  • Regulation for Dummies. The White House says its rule-making isn't costly or unusual. The evidence shows otherwise. The White House is on the political offensive, and one of its chief claims is that it isn't the overregulator of business and Republican lore. This line has been picked up by impressionable columnists, so it's a good time to consider the evidence in some detail.
  • Westpac Says Credit Availability May Reduce. Westpac Banking Corp. warned Wednesday that Europe's debt woes will continue to impact the price and possibly even the availability of credit to Australia's banking sector.
Business Insider:
Zero Hedge:
  • Was The "Collapse" of MF Global Premeditated? A Conspiracy Theory Thought Experiment. If Corzine and a few of his buddies set up a sting as noted above, as far as they are concerned, they did not loose 1. something billion dollars for MFG and MFG's clients, what they did was they transferred 1. something billion dollars to themselves through a shell global trading company(s). In most cases when a sting like this plays out it is not just one shell company used to play the other side of the coin, usually it is spreed out between ten or more shell trading companies. A government and media cover up would just focus on MFG's loss. A true and open investigation would be focused on "who" took the other side of the coin; the profit.
  • "To Have And Have Not" - Complete Jeff Gundlach Presentation.
  • More Young People Are Shunning Facebook.
  • Limited Policy Options May Prolong India's Slowdown. If Indian policymakers are hoping the country's slowing economy can rebound largely the same way it did from the 2008 global financial crisis, they are dreaming. The reason is the government cannot wield some of the tools it could the last time the world picture was gloomy. This time, India's strained government finances and high inflation leave little room for the strong doses of fiscal and monetary stimulus that supported consumer demand and shielded the economy three years ago.
  • Realtors: We Overcounted Home Sales for Five Years. Data on sales of previously owned U.S. homes from 2007 through October this year will be revised down next week because of double counting, indicating a much weaker housing market than previously thought.
  • Most Economists Now Expect Another Global Recession. So acute are the risks that few economists are now willing to bet heavily against another global recession in 2012. By common consent, the world economic outlook is much darker today than it appeared in the early autumn.
Boston Herald:
  • Around France, Unions Hold Anti-Austerity Protests. France’s leading unions are staging nearly 200 protests nationwide against austerity measures aimed at reducing huge debts amid Europe’s worsening economic troubles. Five unions organizing the protests say in a statement that the austerity measures, notably reductions in social benefits, will lead to recession and "deepen inequalities and plunge thousands of families in economic difficulty."
The Hill:
  • Dem Lawmaker Blasts 'Professor Obama' as Arrogant, Alienating. After observing President Obama for the last three years, it has become obvious to me that the president might prefer to be a university professor rather than do the job he holds today. While he might not realize that he feels this way, the evidence is very clear to those who work with or watch him closely.
Rasmussen Reports:
  • State Medicaid Spending Soars. Spending by U.S. states on Medicaid, the healthcare program for the poor, soared last year and will likely continue growing despite measures to contain costs, according to a report released on Tuesday. Total Medicaid spending, excluding administrative costs, likely reached $398.6 billion in fiscal 2011, which ended in June for most states. That was up 10.1 percent from the year before, when spending rose 6 percent, the National Association of State Budget Officers reported. Medicaid was nearly one-quarter of all state expenditures in fiscal 2011, compared to elementary and secondary education, which accounted for 20 percent of all spending.
  • Gunman Turns Belgian Christmas Market Into Bloodbath. A lone gunman brought carnage to the Belgian city of Liege on Tuesday, spraying bullets at Christmas shoppers and hurling a grenade at people waiting for a bus, killing four people including a girl of 17 months before shooting himself dead. The attack, in which another 125 people were wounded, paralysed the centre of Belgium's fifth city, with workers trapped in offices as police sealed off the area, helicopters circled, and ambulances poured in from as far away as the Netherlands. Witnesses said 33-year-old Nordine Amrani had begun his rampage at about 12:30 p.m. near a bus stop at Place Saint Lambert, site of Liege's bustling Christmas market and its main courthouse. Shoppers scattered to flee the bullets. Gaspard Grosjean, a journalist for a local newspaper, was in the square moments after the attack. "We saw people with bullet wounds in their shoulders, their hands," he said, adding that he had seen one body. "I see people completely scared, people are crying, everyone is on their phones." Police said the dead were two boys of 15 and 17, a 75-year-old woman, and a toddler of just 17 months whom hospital doctors fought for hours to save. By evening, Place Saint Lambert, whose Christmas market of around 200 stalls attracts over 1.5 million visitors each year, was still sealed off, covered with shattered glass and pools of blood, and there was still no indication of Amrani's motive. A spokesman for Belgium's crisis response centre also said there was no indication that it had been a terrorist attack. It was not clear whether Amrani was Belgian.
  • Italy Bond Costs Set to Mark New Record at Auction. Italy's five-year borrowing costs are expected to rise further above 6 percent on Wednesday, to mark a new euro lifetime high, at an auction that will provide a first test of bond market sentiment towards the euro zone after last weekend's EU summit.
Financial Times:
  • Study Finds Fund Managers See EU Company Profits Worsening. Seventy-two percent of fund managers expect euro-area corporate profitability to worsen, cites study by Bank of America Merrill Lynch. "Key indicators of market sentiment" measured in the poll show "parallels with the credit crunch months of early 2009," Bank of America Merrill Lynch says. Nearly two-thirds of those polled expected an additional downgrade of U.S. sovereign debt by 2013.
  • EU Treaty Hopes Come Under Strain. Franco-German hopes for a sweeping new treaty to bind the region’s economies more closely came under strain on Tuesday as several European Union leaders warned of difficulties pushing a far-reaching pact through their national parliaments. The pressure was particularly acute in non-eurozone countries, where at least four governments warned that the precise legal text would determine whether they could sign up to the treaty or otherwise join the UK on the sidelines.
  • Forget David Cameron's Veto, Another Eurozone Crisis Is Only Weeks Away. You wouldn’t believe it to listen to the fulminating indignation directed at the UK from across the Channel, but David Cameron did the eurozone’s political leaders a favour last weekend. By refusing to sign up, he managed to create a convenient Aunt Sally for Europeans to throw stones at, and divert attention from the summit’s failure to come up with anything remotely credible to address either the single currency’s existential crisis or the gathering economic slump. The latest in a long line of self-styled “make or break” summits, it was in truth no more momentous than any of the others. What was agreed was some minor strengthening of the Maastricht framework for governing monetary union, though some aspects of the original “stability and growth pact” have actually been watered down.
The Guardian:
  • Banks Use Accounting Loopholes to Inflate Profits and Bolster Bonuses. Banks use accounting loopholes to inflate their profits and bolster staff bonuses, according to a report published on Wednesday that calls for changes to the international accounting rules. According to the paper by the Adam Smith Institute, banks are able to use complex financial products such as credit default swaps to report profits that they might not otherwise be able to. Gordon Kerr, a former banker who wrote the report, said the blame lies with the International Financial Reporting Standards (IFRS) rules that allows banks to recognise their expectations of future income as current profits. "The accounting regulation system needs radical reform so that banks are not encouraged to invest in risky assets to make themselves seem more profitable than they really are. Honest balance sheets are the cornerstone of a healthy financial system – right now, we don't have the transparency we desperately need to avoid a repeat of 2008," Kerr said.
Passauer Neue Presse:
  • Germany's Economy Minister and Free Democrat leader Philipp Roesler said his party will remain a "stable partner and driving force" for crisis management of the euro-area's debt crisis while rejecting joint euro bonds, citing an interview.

  • China will fine-tune and take preemptive monetary policy, according to the statement released by the official Xinhua News Agency after China's economic work conference. China will take measures to prevent prices from rebounding, the report says.
  • China's growth faces downward pressure, according to a statement released by officials after China's economic work conference. China faces upward pressure on consumer prices, the report said. China faces an extremely complex world economy next year, it said.
Economic Information Daily:
  • The China Banking Regulatory Commission will postpone the implementation of new rules on banks, citing an unidentified official from the regulator. The new rules were scheduled to start from Jan. 1, 2012. Banks' pressure for capital may be eased if the new rules are postponed, the report said, citing Zong Liang, a deputy head at Bank of China's financial research institute.
Shanghai Securities News:
  • Zhang Xiaopu, a deputy director at the China Banking Regulatory Commission's research department, says that China needs to take more measures to strengthen risk supervision and control of shadow banking and off-balance sheet businesses.
  • China's economy is shifting away from its traditional dependence on money supply as part of its economic transition, Yang Chengzhang, chief economist at Shenyin & Wangguo Securities Co., says in a commentary published today. China has been relying on the fast pace of money supply growth to push economic growth and this leads to asset bubbles and inflation, Yang says.
Al Alam:
  • Closing the Strait of Hormuz to shipping is not on Iran's agenda, the country's state-run news channel reported, citing the Iranian Foreign Ministry.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.50% to +.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 212.0 +6.0 basis points.
  • Asia Pacific Sovereign CDS Index 155.75 +.75 basis point.
  • FTSE-100 futures -.50%.
  • S&P 500 futures +.24%.
  • NASDAQ 100 futures +.19%.
Morning Preview Links

Earnings of Note
  • (JOYG)/1.86
  • (PAY)/.51
  • (NDSN)/.81
Economic Releases
8:30 am EST
  • The Import Price Index for November is estimated to rise +1.0% versus a -.6% decline in October.

10:30 am EST

  • Weekly crude oil inventories are estimated to fall by -2,500,000 barrels versus a +1,336,000 barrel increase the prior week. Distillate supplies are estimated to rise by +1,000,000 barrels versus a +2,533,000 barrel gain the prior week. Gasoline inventories are estimated to rise by +1,200,000 barrels versus a +5,147,000 gain the prior week. Finally, Refinery Utilization is estimated unch. versus a +3.1% gain the prior week.

Upcoming Splits

  • (ROST) 2-for-1
Other Potential Market Movers
  • The Fed's Lockhart speaking, 30-Year Treasury Bond Auction, China HSBC Manufacturing PMI, weekly MBA mortgage applications report, (ABC) investor day, (BRCM) analyst day, (AVT) analyst day and the (FSLR) update could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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