Wednesday, December 28, 2011

Wednesday Watch

Evening Headlines

  • Euro Maintains Three-Day Decline Against Yen Before Italy Auctions Bonds. The euro held a three-day decline against the yen amid concern Europe’s sovereign-debt crisis will push up borrowing costs and damp economic growth in the region. The 17-nation currency is set to drop against 15 of its 16 most-traded peers this month before Italy auctions securities today. A report tomorrow may show Italian business confidence dipped to the lowest level in almost two years. Demand for the dollar as a refuge was limited as U.S. data signaled a recovery in the world’s biggest economy is gaining momentum. South Korea’s won traded near a one-week low as confidence among the nation’s manufacturers dropped to the least in 30 months. “You can’t be optimistic about the Italian debt sales and I don’t expect very good results to come out,” said Toshiya Yamauchi, a senior currency analyst in Tokyo at Ueda Harlow Ltd., which provides foreign-exchange margin-trading services. “The euro continues to face downward pressure.”
  • U.K. Seen Facing Toughest Employment Market in Two Decades, Forecast Says. Britain faces the “toughest” job market in two decades with the number of working people likely to fall by 120,000 in 2012, the Chartered Institute of Personnel and Development said. “The U.K. jobs market will be weaker than at any time since the recession of the early 1990s,” John Philpott, chief economic adviser at the CIPD, an association for human-resource professionals, said in a statement. “The combination of worsening job shortages for people without work, mounting job insecurity and a further fall in real earnings for those in work may test the resilience and resolve of the U.K. workforce far more than it did in the recession of 2008-9.” The number of people out of work will reach 2.85 million by the end of 2012, with the unemployment rate rising to 8.8 percent, the CIPD said.
  • BRIC Decade Ends With Record Stock Fund Outflows as Growth Slows. In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor's 500 Index and the economies grew four times faster than America's. Now Goldman Sachs Group Inc., which coined the term BRICs, says the best is over for the largest emerging markets. BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 23 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050. "In emerging markets, we're waiting for things to get worse before they get better," said Michael Shaoul, the chairman of Marketfield Asset Management in New York who predicted in February that developing-nation stocks would fall this year. The $845 million Marketfield Fund has topped 97 percent of peers in 2011, data compiled by Bloomberg show. BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe's sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview.
  • Morgan Stanley(MS) May Eliminate 580 Jobs in New York City. Morgan Stanley, the bank whose shares have declined 44 percent this year, said in a filing today that 580 of the 1,600 job cuts announced earlier this month will come from New York City. “Rolling layoffs” began Dec. 15, the New York-based firm said in a submission to the state’s Labor Department. Affected locations include 1221 Avenue of the Americas, 1 New York Plaza, 1585 Broadway and 750 Seventh Ave., the filing shows.
  • China's Stocks Slide to Lowest in 2 Years on Cash Crunch, Slumping Orders. China’s stocks fell, extending the benchmark index’s losses to a third day, as a jump in money market rates signaled small companies will have difficulty borrowing money as the economic slowdown hurts materials demand. Aluminum Corp. of China Ltd. (601600) dropped for a third day after Sing Tao Daily reported its parent company will suffer from declining orders in the first half. China CNR Corp. slid to a record low after China Economic Times said the railway ministry may order fewer train cars next year. China Vanke Co. led a decline for developers after Caijing reported Shanghai home prices are set to decline this year. Zhejiang Honglei Copper Co. and Zhejiang Satellite Petrochemical Co. paced declines for small-caps as they fell on their first day of trading. “There won’t be an immediate and aggressive policy easing to counter the economic slowdown and investors are turning more pessimistic,” said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Small-caps are facing the risk of cuts in earnings forecasts and a cash crunch.” The Shanghai Composite Index slid 14.2 points, or 0.7 percent, to 2,151.97 at the 11:30 a.m. local-time break, set for the lowest close since March 2009. The Shanghai Composite has fallen 7.8 percent in December as concern about an economic slowdown overshadowed the first cut in reserve requirement ratios since 2008 last month. For the year, the measure is down 23 percent after the central bank raised interest rates three times to cool inflation and exports to Europe slowed because of the region’s debt crisis.
  • Berkowitz Loses Again as Sears Drop Adds to Failed Bank Bets. Bruce Berkowitz, whose $8 billion Fairholme Fund is suffering its worst year on record because of wrong-way bets on financial firms, may have lost $203 million today on Sears Holdings Corp., the third-largest investment of his flagship fund. Sears, the retailer controlled by hedge-fund manager Edward Lampert, fell 27 percent after saying it will close as many as 120 stores after reporting a deeper-than-expected sales decline during the holiday-shopping period. Berkowitz's funds owned 16.3 million shares, or 15 percent of the company, as of Sept. 30, according to data compiled by Bloomberg. Berkowitz, named Morningstar's domestic stock manager of the decade in 2010 for returning an average of 13 percent over that period, is trailing 99 percent of peers this year after betting that financial stocks would rebound with the economy. Sears, based in Hoffman Estates, Illinois, has declined 55 percent since the start of the year.
  • Deflation's Grip Returns in Japan as Factory Production Declines: Economy. Japan’s rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the nation’s return to the deflation that first took hold a decade ago. Industrial output slumped 2.6 percent from October, more than all the forecasts in a Bloomberg News survey of 29 economists, a government report showed today in Tokyo. Retail sales slid 2.1 percent. Consumer prices excluding fresh food fell 0.2 percent from a year earlier after a 0.1 percent decline the previous month. The weakening economy, hurt by Europe’s debt crisis and plans by companies from Panasonic Corp. to Nissan Motor Co. to shift production abroad, may undermine Prime Minister Yoshihiko Noda’s plan to raise taxes and cut the world’s largest debt burden. Noda’s party today is scheduled to propose boosting the sales levy, which polls show a majority of the public oppose. “Fundamentally, Japan’s economy is on a downward slope,” said Yoshimasa Maruyama, chief economist at Itochu Corp. “Exports are falling and negatively impacting Japan’s economy due to the global slowdown.”
  • China’s Wen Urges Protection for Farmer Rights. Chinese Premier Wen Jiabao called on officials to better protect the rights of farmers and ensure they receive a bigger share of profits from the conversion of their land to industrial and residential use. “We can no longer sacrifice farmers’ land ownership rights to reduce urbanization and industrialization costs,” the official Xinhua News Agency reported Wen as saying at an annual national work conference on rural affairs yesterday. “It’s both necessary and possible for us to significantly increase farmers’ gains from the increase in land value.” Wen’s comments follow a victory by residents of a southern Chinese village this month who staged a two-week protest that forced authorities to back down in a dispute over land. Strikes, demonstrations and other protests in China doubled to at least 180,000 in 2010 from four years earlier, according to Sun Liping, a sociology professor at Beijing’s Tsinghua University. Wen also said rural residents shouldn’t be forced to give up their rights to land even if they move to cities. “No one is empowered to take away such rights,” Wen was quoted as saying by the state-run news agency. About 40 percent of local government revenue came from land sales last year, according to China Real Estate Information Corp., a property data and consulting firm.
  • Oil Trades Near Six-Week High on Iran Threat to Strait of Hormuz Shipping. Oil traded near the highest level in six weeks after Iran threatened to block crude transportation through the Strait of Hormuz, increasing concern that global supplies will be curbed amid shrinking U.S. stockpiles.
Wall Street Journal:
  • Jobless Tap Disability Fund. The prolonged economic slump has fueled a surge in applications for Social Security disability benefits, with many desperate Americans seeking refuge in the program as a last resort after their unemployment insurance and savings run out. Two new studies, one of them co-authored by the White House's top economist, show a correlation between when people seek Social Security disability payments and when their unemployment benefits are exhausted. Some economists say that connection shows many people now view the system as an extended unemployment program.
  • Internal BNY Mellon Documents Show Panic. An informant in a state fraud case against Bank of New York Mellon Corp. has provided prosecutors a rare inside peek into how the bank allegedly scrambled to contain the fallout from a fast-growing government investigation, according to hundreds of pages of confidential documents.
  • An Early Christmas for These Lawyers. $300 Million in Fees for Shareholder Case Sets Off Debate.
  • Higher Rates in Offing for Commercial Owners. Interest rates are at the lowest levels in decades, but commercial property owners looking to refinance shouldn't expect to lock in those rates any longer.
  • ObamaCare's Latest Casualty. Senator Ben Nelson bows out in Nebraska.
Business Insider:
Zero Hedge:
Rasmussen Reports:
  • Cavium(CAVM) Cuts Q4 Revenue Outlook. Chipmaker Cavium Inc cut its fourth-quarter sales outlook, citing weak demand from corporate customers, sending its shares down 6 percent in after-market trade.
  • Italian Debt Under Pressure Before Year-End Auction. Italian government bond yields edged higher on Tuesday and were expected to rise further this week with investors growing nervous that thin liquidity may complicate Rome's plans to sell 8.5 billion euros worth of debt. In choppy trade, 10-year Italian bond yields rose as much as 11 basis points on the day to 7.13 percent, before recovering some ground, with more pressure seen likely ahead of three- and 10-year debt auctions on Thursday.
Financial Times:
  • Record Use Made of ECB Deposit Facility. Eurozone banks have deposited record amounts of cash at the European Central Bank, just days after it provided unprecedented levels of liquidity in an effort to reduce tension in the financial system. Banks placed almost €412bn ($539bn) over the Christmas holiday in the ECB’s deposit facility, which attracts a low rate of interest and in normal times is typically used by banks only to park excess cash, often at a loss.
Sing Tao Daily:
  • Chinalco says 1H to be hit by price, order declines, citing Xiong Weiping, general manager of Aluminum Corp. of China. Chinalco plans to develop other mining businesses including copper, rare earth, iron ore and coking coal, Xiong said.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -1.0% to -.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 206.0 -1.0 basis point.
  • Asia Pacific Sovereign CDS Index 162.0 +4.0 basis points.
  • FTSE-100 futures +.20%.
  • S&P 500 futures -.25%.
  • NASDAQ 100 futures -.22%.
Morning Preview Links

Earnings of Note
  • None of note
Economic Releases
  • None of note

Upcoming Splits

  • None of note
Other Potential Market Movers
  • The Italian bond auction and weekly retail sales reports could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by real estate and technology shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the day.

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