Sunday, December 22, 2013

Monday Watch

Weekend Headlines 
  • Russia ’98 Crisis Haunts Deutsche Bank’s Smith Seeing China Bust. When the Deutsche Bank AG equity strategist looks at the country, he says he detects some of the same signs of a financial meltdown that led him to predict Russia’s 1998 stock market crash months in advance. China’s expansion is being fueled by soaring corporate borrowing, a high-risk model that needs to be replaced by the kind of free-market measures and budget cuts that fed Russia’s growth in the aftermath of the country’s default and subsequent 44 percent monthly tumble in the Micex Index (INDEXCF), Smith said. “There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year,” Smith said in an interview from London on Dec. 12, a day after he issued a report predicting China’s slowdown will lead to a 10 percent decline in emerging-market stocks next year. “If I am wrong on China, I am wrong on everything.” 
  • Japan Unveils Record 2014 Budget Draft as Debt Burden Mounts. Japan unveiled a record budget for the next fiscal year, as Prime Minister Shinzo Abe boosts spending on social security, defense and public works while trying to contain the growth of the world’s biggest debt burden. “The government needs to show that it’s moving in the right direction on fiscal discipline but this budget lacks punch,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “The government must cut spending to reach the planned target of a surplus in 2020.” 
  • Australia Sets Higher Capital Buffer for Four Biggest Banks. Australia’s four largest banks will need to carry an extra 1 percent of core tier 1 capital from Jan. 1, 2016, due to their systemically important status, according to the country’s banking regulator. Australia & New Zealand Banking Group Ltd. (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Ltd. and Westpac Banking Corp. (WBC) need to have a greater capacity to absorb losses, the Australian Prudential Regulation Authority said in a statement today.
  • Thailand’s Baht Declines to a Three-Year Low on Political Unrest. Thailand’s baht fell to the weakest level in more than three years on concern prolonged political unrest will damp investment and hurt the economy. Bonds gained. More than 1,000 anti-government protesters have surrounded Prime Minister Yingluck Shinawatra’s home in Bangkok, as she criticized the opposition’s plan to boycott a Feb. 2 election. Suthep Thaugsuban, leader of the opposition Democrat party, has vowed to thwart the polls, which were announced after Yingluck dissolved the parliament on Dec. 9 amid mass protests. The Thai currency has lost 4.9 percent in the past two months as the main stock index dropped 7.9 percent.
  • Asia Stocks Rise as IMF Bullish After U.S. Growth Data. Asian stocks outside Japan rose after data showed faster-than-estimated economic growth in the U.S. and the International Monetary Fund said it’s raising its outlook for the world’s largest economy. Hyundai Merchant Marine Co. (011200), Korea’s second-largest shipping company, surged 15 percent in Seoul after Hyundai Group said it plans to sell assets including financial units and its hotel business for at least 3.3 trillion won ($3.1 billion). Echo Entertainment Group Ltd. (EGP) advanced 3.7 percent in Sydney after a managing director of its Star casino resigned. China Mobile Ltd. added 1.1 percent in Hong Kong after striking a deal with Apple Inc. to sell the iPhone in the world’s largest wireless market. The MSCI Asia Pacific excluding Japan Index climbed 0.4 percent to 461.33 as of 9:40 a.m. in Hong Kong, as all 10 industry groups advanced. Japanese markets are closed today.
  • Rebar in Shanghai Falls to Four-Week Low as Ore Price Declines. Steel reinforcement-bar futures dropped for an eight straight day, slipping to the lowest level in more than four weeks as iron ore prices fell and traders’ inventory in China increased. Rebar for May delivery on the Shanghai Futures Exchange retreated as much as 0.4 percent to 3,611 yuan ($595) a metric ton, the lowest since Nov. 22, and was at 3,618 yuan at 10:42 a.m. local time. The most-active contract lost 1.3 percent last week, the biggest such drop since the period ended Nov. 15.
  • Hedge Funds Cut Gold Bull Bets Amid Record Outflows: Commodities. Money managers reduced their net-long position by 2.8 percent to 32,524 futures and options in the week ended Dec. 17, U.S. Commodity Futures Trading Commission data show. Short holdings climbed 1.2 percent to 75,199, within 6 percent of the record reached in July. Net-bullish holdings across 18 U.S.- traded commodities rose 8.5 percent to a seven-week high, led by soybeans, natural gas and cotton
  • Solo French Startups Face Curbs as Hollande Heeds Lobbies. Now the Socialist government of Francois Hollande is pushing to restrict use of the status and the tax breaks it brings. The curbs may limit the designation to two years and cut the maximum allowed annual income in half to 19,000 euros ($26,000). The government, backed by France’s established small business lobby, says the rules have been abused. Supporters of the current system say Hollande is killing one of the few dynamic corners of the French economy.
  • Junk Loans Top '08 Record as Safeguards Stripped: Credit Markets. The amount of loans to the riskiest U.S. companies ballooned to a record this year, propelled by unprecedented demand for floating-rate debt that offers protection from rising interest rates. The market for junk-rated loans increased to $683 billion, exceeding the 2008 peak of $596 billion, according to S&P's Capital IQ Leveraged Commentary and Data. The $130 billion surge this year was fueled by borrowings that don't include typical lender protections such as limits on leverage. Loans, which suffered the biggest losses in the fixed-income market during the financial crisis, staged a comeback as investors funneled a record $64.4 billion into funds that buy the debt in anticipation the Federal Reserve would start unwinding its bond buying that's suppressed borrowing costs. The demand has enabled companies take on more debt for shareholder rewards, prompting regulators to warn that the excesses which contributed to the credit crisis may be creeping back.
Wall Street Journal: 
  • South Sudan Refugees Swell As Americans Are Evacuated. Country the U.S. Helped Create Might Be Spiraling Toward Civil War. The U.S. military on Sunday rushed to evacuate American citizens from a rebel-held town in South Sudan, the latest sign that a country the U.S. helped create might be spiraling toward civil war. About 15 Americans were evacuated on Sunday from the town of Bor in helicopters, according to a State Department spokeswoman. The flights were part of a broader exodus of international workers and South Sudanese from fighting between factions of South Sudan's army. The U.S. has evacuated about 380 U.S. officials and private citizens, said the spokeswoman, Jen Psaki.
  • Goldman(GS) Real-Estate Play Skirts Volcker Rule. The Volcker rule prohibits banks from owning more than 3% of a hedge fund or private-equity portfolio. So why did Goldman Sachs Group Inc. tell would-be investors that it would contribute up to 20% in a new fund that makes loans backed by office buildings, hotels, shopping centers and other properties? Because regulators excluded many real-estate loans from the tough restrictions on investment funds, allowing Wall Street firms to continue making concentrated bets—sometimes risky ones—with their own capital.
  • Rule Change on Health Insurance Rattles Industry. Consumers Rush to Sign Up for Coverage to Take Effect in New Year. Monday is the final day for consumers to get new health coverage that takes effect when the new year arrives, leaving thousands of people racing to sign up in time—and health insurers trying to figure out whether the federal health law will work in the way they had hoped. The number of Americans enrolling continues to fall short of the goals the Obama administration has laid out, which is a problem for the White House.
Fox News:
  • Arab League rejects US proposal in Mideast deal. The Arab League says it rejects a continued Israeli troop presence on the eastern border of a future state of Palestine, a proposal Palestinians say was floated by the U.S. earlier this month. Arab League chief Nabil Elaraby said Saturday no peace deal would work with Israeli presence in a Palestinian state.
  • Goldman(GS): Cut your emerging markets exposure by a third. Goldman Sachs has a clear warning for investors: Emerging markets will continue to disappoint. In a December report, the bank's investment management division predicted "the strong possibility of significant underperformance and heightened volatility over the next five to 10 years." The client note, titled "Emerging Markets: As the Tide Goes Out," recommended that investors with a "moderate" tolerance for risk reduce their exposure by one-third, from 9 percent to 6 percent of overall portfolios. 
  • Democratic senator warns of Obamacare 'meltdown'. President Barack Obama's healthcare law could have a "meltdown" and make it difficult for his Democratic Party to keep control of the U.S. Senate next year if ongoing problems with the program are not resolved, a Democratic senator said on Sunday. Senator Joe Manchin of West Virginia, who has urged delaying a penalty for people who do not enroll for health insurance in 2014 under the law, told CNN that a transitional year was needed for the complex healthcare program, commonly known as Obamacare, to work. "If it's so much more expensive than what we anticipated and if the coverage is not as good as what we had, you've got a complete meltdown at that time," Manchin told CNN's "State of the Union" program.
Zero Hedge:
Business Insider:
Wall Street All-Stars:
 Automotive News:
  • GM(GM), Ford(F) extend holiday shutdowns at several North American plants.  General Motors and Ford Motor Co. are extending holiday downtime at several North American assembly plants to keep car inventories in check. GM and its dealers had a 148-day supply of LaCrosse models on Dec. 1, up from 98 days a month earlier, according to the Automotive News Data Center. Supply of the Malibu was 71 days, up from 60 on Nov. 1. There was a 99-day supply of Regal on Dec. 1, up from 88 days on Nov. 1. Camaro inventory swelled to a 167-day supply, from 135 days on Nov. 1.
Seeking Alpha:
The Blaze:
  • ‘How Is This Affordable?’: Experts Warn of Looming Obamacare ‘Sticker Shock’. As a key enrollment deadline hits Monday, many without health insurance have been comparing policies on the new government health care marketplace and doing what you might expect: They’re picking the cheapest plans, the Associated Press reported. But health insurance experts are concerned that many of these consumers will be in for a shock when they get medical care in 2014 and discover they’re paying for most of their plans’ initial costs.
  • ‘Big Brother Truly Is Watching You,’ Says Democratic Senator. ‘Big Brother Truly Is Watching You,’ Says Democratic Senator. Democratic Sen. (D-W.Va.) warned Sunday that we live in an era where, “Big Brother truly is watching you.” “You know, we always heard as a child growing up and in different phases of our life, that Big Brother is watching you,” Manchin told CNN’s Candy Crowley. “And now we found out that Big Brother is truly watching you.”
  • Thousands in anti-corruption protests; Erdogan defiant. Thousands took to the streets of Istanbul on Sunday to protest against the government over a corruption scandal that has led to multiple arrests and exposed a rift between Prime Minister Tayyip Erdogan and an influential U.S.-based Muslim cleric. Twenty-four people, including the sons of two ministers and the head of state-owned Halkbank, have been formally charged in connection with the corruption inquiry that Erdogan has called a "dirty operation" to undermine his rule. 
  • ECB's Praet says Italy must stay on path to lower debt- paper. Italy must keep its public accounts in check and stay on its planned path to lower debt as its economy shows signs of emerging from recession, European Central Bank Executive Board member Peter Praet said in interview on Sunday. Praet said there was still risk of another slowdown in the euro zone's third-biggest economy if economic reforms were not brought in.
USA Today:
  • Apple(AAPL) reaches iPhone deal with China Mobile. Apple has reached a long-awaited deal to bring iPhone to China Mobile, world's biggest phone carrier. The companies announced a multi-year deal, to begin selling the iPhone 5s and iPhone 5c in China on Jan. 17. Pricing was not announced.
Financial Times:
  • China Asks Media to Tone Down Cash Crunch Stories. China propaganda officials ordered financial journalists and media outlets to tone down their coverage of a liquidity crunch in the interbank market, citing two people with direct knowledge of the matter who asked not to be named. In some cases, Chinese censors forbid reporters using the use of Chinese words for "cash crunch" in stories.
Die Welt:
  • Fed Faces Taper Difficulty, Former ECB Executive Says. Former ECB Executive Board member Juergen Stark spoke in interview with Die Welt am Sontag. Stark says: Effect of US Federal Reserve asset purchases on real economy become less as time progressed. "Therefore it will be all the more difficult to get out of this extremely loose monetary policy, because the markets have become used to the flood of liquidity." "The Fed's tapering is just a baby step, when compared with the amount of excess liquidity that's in the markets". "That is exactly the problem with such ultra-expansive monetary policy. The interest-rate steering function disappears completely, and asset prices become distorted. New bubbles can appear easily". An ECB bond-buying program to avert deflation isn't needed as "in the euro area, there is no danger of deflation".
  • Japan Adds 3 Years to Fukushima Radiation Cleanup. Nuclear decontamination work had been scheduled for completion by March 31.
Global Times:
  • China confirms H5N2 bird flu outbreak in Hebei. An outbreak of H5N2 bird flu in poultry has been reported in north China's Hebei Province, the Ministry of Agriculture (MOA) announced on Saturday. The disease has killed 4,000 chickens raised by a farm in Baoding City after they showed symptoms of the suspected avian flu on Dec. 17, according to the MOA. The National Avian Influenza Reference Laboratory on Saturday confirmed the epidemic was H5N2 bird flu after testing samples collected at the farm.
Shanghai Securities News: 
  • China May Raise Benchmark Interest Rates in 1H. China may raise the benchmark deposit and lending interest rates in 1H if CPI growth is above 4%, citing Wang Guogang, head of the Institute of Finance and Banking under the Chinese Academy of Social Sciences.
Weekend Recommendations
  • Bullish commentary on (AMT), (PVH), (APA), (PNR) and (AMBC).
Night Trading
  • Asian indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 122.50 +.5 basis point.
  • Asia Pacific Sovereign CDS Index 101.75 unch.
  • FTSE-100 futures +.47%.
  • S&P 500 futures +.35%.
  • NASDAQ 100 futures +.47%.
Morning Preview Links

Earnings of Note

  • None of note
Economic Releases 
8:30 am EST 
  • Chicago Fed Nat Manufacturing Activity for Dec. is estimated to rise to .25 versus -.18 in October.
  • Personal Income for November is estimated to rise +.5% versus a -.1% decline in October.
  • Personal Spending for November is estimated to rise +.5% versus a +.3% gain in October.
  • The PCE Core for November is estimated to rise +.1% versus a +.1% gain in October.
9:55 am EST
  • Final Univ. of Mich. Consumer Confidence for December is estimated to rise to 83.0 versus a prior estimate of 82.5.
Upcoming Splits
  • (VFC) 4-for-1
Other Potential Market Movers
  • The Canadian GDP report could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and technology 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 week.

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