Monday, December 09, 2013

Monday Watch

Weekend Headlines 
  • Abe Calls for China Talks Citing 2006 Trip as Tensions Rise. Japanese Prime Minister Shinzo Abe called for a summit with Chinese President Xi Jinping to reset relations after an escalation in bilateral tensions, invoking a 2006 visit to Beijing during his first administration. “Since there are issues, it is all the more important to have a leaders’ meeting,” Abe said in an interview in the prime minister’s official residence in Tokyo. “I visited China as prime minister and met with Hu Jintao and we shared the view that we should develop our ties based on a strategic, mutually beneficial relationship. Now is the time to go back to that starting point.” 
  • Japan Posts Slower Growth, Surprise Current-Account Deficit. Japan’s growth slowed more than an initial estimate in the third quarter while the country posted an unexpected deficit in its broadest trade gauge in October, underscoring headwinds to Prime Minister Shinzo Abe’s efforts to cement a recovery. Gross domestic product expanded an annualized 1.1 percent from the previous quarter when it rose 3.6 percent, the Cabinet Office said today in Tokyo, lower than a preliminary reading of 1.9 percent. Japan’s current account registered a 128 billion yen ($1.2 billion) shortfall, the first deficit since January, according to the finance ministry. The median forecast was for a surplus of 149 billion yen.  
  • China State Firms to Lead $11 Billion IPO Revival as Freeze Ends. China’s decision to end a 15-month freeze on initial public offerings may unleash at least $11 billion of share sales in next year’s first half. More than 760 mainland Chinese companies are waiting to go public, their plans halted when regulators imposed the moratorium in September 2012 as they drafted rules aimed at curbing price manipulation
  • First Default Seen as Record $427 Billion Debt Due: China Credit. Chinese company debt twice the size of Ireland’s economy will come due in 2014, spurring concern the nation is on the cusp of its first corporate bond default. A record 2.6 trillion yuan ($427 billion) of interest and principal on securities issued by non-financial companies must be repaid next year, 19 percent more than this year and the most since China International Capital Corp. began compiling the data in 2008. Ten-year AAA corporate bond yields surged 89 basis points since Dec. 31 to 6.18 percent, touching a record 6.23 percent on Nov. 27. That compares with a 70 basis-point rise to 2.68 percent for similar-rated notes globally.
  • Rebar Extends Three-Week Rally as Stronger Economy Lifts Demand. Steel reinforcement-bar futures in Shanghai rose, extending a third weekly gain, on optimism that a strengthening economy may support demand from the world’s biggest consumer of the material used in housing and railroads. Rebar for May delivery, the most-active contract on the Shanghai Futures Exchange, rose as much as 0.7 percent to 3,726 yuan ($614) a metric ton, and traded at 3,720 yuan at 9:54 a.m. local time
  • Hedge Fund Gold Wagers Slump to Lowest Since 2007: Commodities. Hedge funds are the least bullish on gold since 2007 as signs of faster U.S. economic growth bolster the case for the Federal Reserve to trim stimulus and cut demand for haven assets. The net-long position in gold fell 16 percent to 26,774 futures and options in the week ended Dec. 3, the lowest since June 2007, U.S. Commodity Futures Trading Commission data show. Short bets rose 6.2 percent to 79,631, within 0.6 percent of the record reached in July. Net-bullish wagers across 18 U.S.-traded commodities climbed to a four-week high. The Standard & Poor’s GSCI Spot Index of 24 raw materials capped the biggest weekly gain since August as faster economic growth boosted prospects for energy, metals and grains consumption. 
  • Italy’s Bonds Drop With Spain’s on Concern ECB to Limit Support. Italian 10-year bonds fell, with yields rising the most in more than two months, on speculation the European Central Bank will prevent lenders using future loans it provides to buy sovereign debt. Spanish 10-year securities dropped for a third week. German 10-year yields climbed by the most since August as a report yesterday showed U.S. employers added more workers in November than analysts forecast and the jobless rate dropped, boosting the case for the Federal Reserve to cut stimulus. The ECB wants to ensure any future offerings of long-term cash find their way into the economy, and not hoarded by banks, President Mario Draghi said after a policy meeting in Frankfurt. 
  • BIS Sounds Alarm Over Record Sales of Payment-in-Kind Junk Bonds. Record sales of high-yield payment-in-kind bonds are triggering uneasiness among international regulators concerned that investors may suffer losses when central banks tighten monetary policy. Issuance of the notes, which give borrowers the option to repay interest with more debt, more than doubled this year to $16.5 billion from $6.5 billion in 2012, according to data compiled by Bloomberg. About 30 percent of issuers before the 2008 financial crisis have since defaulted, the Bank for International Settlements said in its quarterly review. Companies are taking advantage of investor demand for riskier debt as central bank stimulus measures suppress interest rates and defaults approach historic lows. The average yield on junk-rated corporate bonds fell to a record 5.94 percent worldwide in May, Bank of America Merrill Lynch index data show.
  • Fed December Taper Odds Double in Survey as Jobs Beat Estimate. The share of economists predicting the Federal Reserve will reduce bond buying in December doubled after a government report showed back-to-back monthly payroll gains of 200,000 or more for the first time in almost a year. The Federal Open Market Committee will probably begin reducing $85 billion in monthly bond purchases at a Dec. 17-18 meeting, according to 34 percent of economists surveyed yesterday by Bloomberg, an increase from 17 percent in a Nov. 8 survey. In November, 53 percent predicted a tapering in March, compared with 40 percent in yesterday’s poll of 35 economists.
  • Volcker Rule to Force Banks to Comply With Five Regimes. U.S. banks that must comply with the proprietary-trading ban known as the Volcker rule are facing inconsistent future demands from the five agencies responsible for enforcing it. Even before the final version is released next week, current and former regulators and bank lawyers predict an uneven approach on enforcement because of differences in style and jurisdiction between the three U.S. regulators that police banks and the two agencies that monitor markets. For many banks, how enforcement is handled could wind up being more important than the language in the 1,000-page text.
Wall Street Journal: 
  • Fed Closes In on Bond Exit. Strong Jobs Report Moves Central Bank Nearer to Paring Purchases; Dow Soars. Federal Reserve officials are closer to winding down their controversial $85 billion-a-month bond-purchase program, possibly as early as December, in the wake of Friday's encouraging jobs report. Fed Chairman Ben Bernanke will have to build consensus among officials about how soon to pull back on a program that has been the center of market attention for months and whose effectiveness isn't wholly clear. Many are getting more comfortable with starting a delicate process of winding the program down, though disagreements about timing and strategy could emerge, according to public comments and interviews with officials.
  • High Deductibles Fuel New Worries of Health-Law Sticker Shock. Some Lower-Cost Plans Carry Steep Deductibles, Posing Financial Challenge. As enrollment picks up on the website, many people with modest incomes are encountering a troubling element of the federal health law: deductibles so steep they may not be able to afford the portion of medical expenses that insurance doesn't cover. The average individual deductible for what is called a bronze plan on the exchange—the lowest-priced coverage—is $5,081 a year, according to a new report on insurance offerings in 34 of the 36 states that rely on the federally run online marketplace. That is 42% higher than the average deductible of $3,589 for an individually purchased plan in 2013 before much of the federal law took effect, according to HealthPocket Inc., a company that compares health-insurance plans for consumers.
  • Congress Readies a Year-End Dash. Action on Budget, Other Fronts Is Possible in Final Weeks of Session. A Congress stymied by partisan divides, blown deadlines and intraparty squabbling gets a late chance this week to end the year with an elusive budget deal and to make headway on other fronts. In the final week of 2013 that the Senate and House are scheduled to be in Washington at the same time, lawmakers and aides are optimistic that negotiators can reach a budget accord and continue to make progress on a farm bill and other measures.
  • Global R&D Spending Growth Is Expected to Slow This Year. Report Cites Weak U.S. and European Economies for Likely Faltering. Global growth in spending on research and development is expected to falter this year as a result of the weak U.S. and European economies, though it will likely pick up again next year, according to a new forecast. Global R&D spending by governments and corporations is expected to rise 2.7% to $1.558 trillion in 2013 from $1.517 trillion in 2012 in current dollars. By comparison, the growth rate was 7.6% in 2012 and is forecast to be about 3.8% next year, according to the study by the Battelle Memorial Institute, a nonprofit organization that does scientific research for government and industry. "Europe and the U.S. are still wrestling with global economic conditions," said Martin Grueber, a Battelle senior researcher and co-author of the report. "R&D spending decisions are often based on profit and profit margins, so R&D budgets always get a bit tentative" in slow economies. The study is to be released in R&D Magazine on Monday.
  • Bradley A. Smith: The Latest IRS Power Grab. The left wants the disclosure of private information about conservative donors. Six months after the Internal Revenue Service's inspector general revealed that the tax-collection agency had been targeting conservative organizations for added scrutiny and delaying their applications for tax-exempt status, the IRS has proposed new rules for handling political activity by nonprofits. The proposed rules would plunge the agency deeper into political regulation. 
  • Significant warning on China reform roadblock: WSJ. The extensive reform blueprint the Communist Party released last month has unleashed a sense of optimism about Beijing's ability to steer the country away from the potholes that have brought other fast-growing economies to a halt. But at least one high-profile government adviser is worried that the road ahead is still strewn with major roadblocks. Wu Jinglian, a major intellectual force behind China's economic reforms since the 1980s and someone described as "the conscience of China's economic circles", said in a widely distributed interview ( in Chinese) broadcast on Chinese Central Television on Thursday evening that he was "worried that vested interests are the biggest obstacle to reform and a market economy."
Fox News:
  • Afghanistan agrees to pact with Iran, while resisting US accord. Afghan President Hamid Karzai agreed on a cooperation pact with Iran, despite continuing to resist signing a security agreement with the U.S., Reuters reported. Karzai made the deal with Iranian President Hassan Rouhani in Tehran Sunday. "Afghanistan agreed on a long-term friendship and cooperation pact with Iran," Karzai's spokesman Aimal Faizi said, according to Reuters. "The pact will be for long-term political, security, economic and cultural cooperation, regional peace and security."
Zero Hedge:
  • Hedge Funds Go Long-Only On Clients’ Demand. Going beyond the traditional long/short hedging strategy, managers are now all-in on the bull market. The survey further noted that the the most popular non-traditional product that these hedge funds were offering was the long-only strategy.
Business Insider:
New York Times:
  • Bank Charted Business Linked to China Hiring. Federal authorities have obtained confidential documents that shed new light on JPMorgan Chase’s decision to hire the children of China’s ruling elite, securing emails that show how the bank linked one prominent hire to “existing and potential business opportunities” from a Chinese government-run company.
  • A Public Works Boom in Japan Has Echoes From the Lost Decade. The bulldozers started up with a rumble this year in this bucolic corner of southern Japan, unleashing a construction frenzy — and a sinking feeling of déjà vu. The traffic cones and “under construction” signs alongside Saga’s roads and waterways are about the only visible change brought about by “Abenomics,” Prime Minister Shinzo Abe’s much-lauded plan to put Japan back on the path to growth. Residents here say the building boom is a throwback to Japan’s troubled 1990s, when far-flung regions across the country tried to build their way back to prosperity. And they worry that, like previous attempts, growth will not last.
The Blaze:
Real Clear Politics:
  • Merkel Party Industry Wing Rejects Coalition Aims. The Economic Council, a group of companies affiliated with Chancellor Angela Merkel's Christian Democrats, rejected proposals from the country's prospective coalition, citing the groups. Planned national minimum hourly wage, widened pension benefits, power price increases linked to energy proposals and tax cuts canceled in program are unacceptable to the group, citing Council President Kurt Lauk.
El Pais:
  • Spanish PM Rajoy Says Biggest Worry Is Europe. Says what "worries" him most is Europe, "that is to say, that all the governments, and particularly the German government - which is very important because of its GDP and population - should be clear on where we are headed."
  • Japan Abe Cabinet Support Rate Falls 3 Ppt to 46%. Approval rating for Japanese Prime Minister Shinzo Abe's Cabinet falls from 49% in previous poll. Disapproval rating rises 4 ppt to 34%.
Daily Telegraph:
  • Carbon Tax Reduced Emissions By Less Than .1%. LABOR'S $6 billion carbon tax reduced Australia's greenhouse gas emissions by less than 0.1 per cent. As PM Tony Abbott ratchets up the pressure on Labor's Bill Shorten to axe the carbon tax by Christmas, the new figures will be released this week by Australia's National Greenhouse Gas Inventory.
Weekend Recommendations
  • Bullish commentary on (IGT), (TTWO), (M), (BBY), (WYNN), (LUV), (COH), (AF), (BRKL), (NFBK), (AGN) and (LVS).
Night Trading
  • Asian indices are -.25% to +1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 134.50 -2.5 basis points.
  • Asia Pacific Sovereign CDS Index 106.25 -3.75 basis points.
  • FTSE-100 futures +.50%.
  • S&P 500 futures +.14%.
  • NASDAQ 100 futures +.20%.
Morning Preview Links

Earnings of Note

  • (CASY)/1.15
  • (PVH)/2.25
Economic Releases
  • None of note
Upcoming Splits
  • (GRC) 5-for-4
  • (SHI) 3-for-2
Other Potential Market Movers
  • The Fed's Bernanke speaking, Fed's Bullard speaking, Fed's Fisher speaking, 3Q Household Change in Net Worth, Eurogroup Meetings, Germany Trade Balance Report, China New Loan Data, Wells Fargo Pipeline/MLP/Energy Symposium, KeyBanc Engineering/Construction/Utilities Conference, Raymond James Semi/Software/Supply Chain Conference, UBS Media/Communications Conference, (TXN) Mid-Quarter Update, (BDC) analyst meeting and the (SLG) investor conference 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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