Friday Watch

Evening Headlines 

Bloomberg:  

• China Banks Enter Eye of Storm Adding Risky Debt to Wealth Funds. The wealth-management products that banks sell at branches across China are often considered as safe as deposits by customers. There are growing reasons to question that faith. The ability of Chinese lenders’ $2.4 trillion of WMPs to generate the returns they promise is being undermined as monetary easing has pushed corporate bond yields to a five-year low. Loath to lose market share by advertising weaker performance, managers of the funds have been adding leverage, extending maturities and buying higher-yielding notes that are rarely traded, according to consultancy CNBenefit and HSBC Holdings Plc. "A large number of WMP funds have entered the bond market and used maturity mismatches and leverage to raise yields," said Gao Shanwen, chief economist at Essence Securities Co. in Beijing. "If you add the implicit guarantee to that, along with a general lack of transparency and regulation, the bond market really could be the next eye of the storm in financial markets." Banks are piling into riskier debt despite warnings of a leverage-fueled bubble from local brokerages, at least five bond defaults this year and the weakest economic growth in a quarter century.

• Are Global Growth Forecasts Too Optimistic? (video)

• Taiwan Economy Shrinks for First Time Since 2009 on Export Slump. Taiwan’s economy contracted on a yearly basis for the first time since the global financial crisis as a slump in exports amid an uneven global recovery dragged on consumption. Gross domestic product fell 1.01 percent in the three months through September from a year earlier, according to preliminary data released by the statistics bureau Friday. That compares with 0.52 percent growth originally reported in the previous quarter and the 0.5 percent drop projected by the median estimate in a Bloomberg survey of economists. Taiwan’s exports are sliding as economic growth in the top destination of China slowed further to a six-year low last quarter.  

• Asian Stocks Poised for Monthly Advance as Investors Await BOJ. Asian stocks stayed on track for their biggest monthly gain in five years as investors awaited a Bank of Japan decision on monetary policy. The MSCI Asia Pacific Index was little changed at 133.85 as of 9:05 a.m. in Tokyo, with Australian banks dragging on the gauge while Samsung Electronics Co. jumped.

• Oil Companies Have Cut Back Everything Except Crude Production. A year after the bear market in crude began, oil companies have cut workers, use fewer rigs and have less money to spend. But they’re still pumping more oil.

• Fed Sparks Dash for Cheap Debt With December Hike Back on Table. The Federal Reserve has lit a fire under corporate borrowers who are again faced with the prospect of an interest-rate increase this year. Companies from Microsoft Corp. to American Express Co. and Norfolk Southern Corp. rushed back to the bond market to lock in cheap borrowing costs before the central bank ends its unprecedented zero-rate era. Fed Chair Janet Yellen and policy makers signaled this week they remain prepared to raise their key rate as soon as their next meeting starting Dec. 15, causing pushing the perceived odds of a rate increase to 50 percent. "The message has been sent that if you have issuance planned, it might be a good idea to go now," said Hans Mikkelsen, head of U.S. investment-grade credit strategy at Bank of America Corp. in New York. "You can’t be sure what the market will look like when the Fed starts to raise rates."

• Philidor Said to Modify Prescriptions to Boost Valeant(VRX) Sales. A specialty pharmacy that fills prescriptions for Valeant Pharmaceuticals International Inc. has altered doctors’ orders to wring more reimbursements out of insurers, according to former employees and an internal document. Workers at the mail-order pharmacy, Philidor RX Services LLC, were given written instructions to change codes on prescriptions in some cases so it would appear that physicians required or patients desired Valeant’s brand-name drugs -- not less expensive generic versions -- be dispensed, the former employees said. Typically, pharmacists will sell a generic version if not precisely told to do otherwise by a “dispense as written” indication on a script. The more "dispense as written" orders, the more sales for the brand-name drugmaker.

• Why the U.S. Stock Market Rally Has Stalled. (video) 

Wall Street Journal: 

• Iranian-American Executive Arrested in Iran. Move adds to signs that hard-liners are trying to block foreign investors in wake of nuclear deal. Iranian security forces have arrested an Iranian-American businessman who had promoted improved ties between the two countries, adding to signs that hard-liners in Tehran are trying to block foreign investors from entering the Islamic Republic in the wake of the historic nuclear deal.

• U.S. Backs Off Hard Line on Syrian President’s Future. White House signals it would allow Bashar al-Assad to take part in political transition. The Obama administration entered a crucial round of international talks on Syria’s war prepared to accept a deal that leaves President Bashar al-Assad in place for several months or more during the transition to a new government.

• CVS(CVS), Express Scripts(ESRX) Cut Off Philidor, Pharmacy Used by Valeant(VRX). Move comes after audits found the pharmacy wasn’t complying with the terms of its agreement.  

• Baidu(BIDU) Profit Falls 27% as Costs Surge.

• Clinton’s ‘A’ Economy. Slow business investment means another growth slump. Hillary Clinton told the Boston Globe the other day that she’d give President Obama “an A” grade for his handling of the economy. “I don’t think he gets the credit he deserves for saving our economy from falling into a Great Depression,” she said, listing a variety of his policies. The likely Democratic nominee is running for Mr. Obama’s third term, so we wonder if that means taking credit for the likes of Thursday’s third quarter GDP report of 1.5% growth. The report validated the disparate evidence that the economy hit...

Fox News: 

• CNBC moderators get bipartisan drubbing for debate performance. Analysts across the political spectrum may be at odds over who won the third Republican presidential debate, but they seem to agree on one thing: the CNBC moderators had a very bad night. The negative reaction to the debate questions and other factors has become a story unto itself, almost overshadowing the actual policy debates that broke out in between the candidate-moderator rancor Wednesday night. The Republican candidates and observers complained the questions were demeaning, silly, and designed to provoke confrontation rather than genuine policy discussion. Others took aim at the debate format, and wondered about the moderators’ professionalism. On several sites aggregating Twitter reaction, the moderators were declared the losers, “hands down.” The Washington Post declared it “CNBC’s really bad debate night.” “The moderators had a worse night than the New York Mets … this was a trainwreck,” Fox News' Howard Kurtz charged Thursday, referring to Game 2 of the World Series, and calling the debate questions “condescending, snide, hostile and borderline insulting.”

CNBC: 

• 3 stocks to watch on semiconductor drubbing.

• Stocks could fade after best month in four years.

Zero Hedge: 

• AsiaPac Calm Before BoJ Storm, Japanese Household Spending 'Unexpectedly' Drops As China Releveraging Continues. (graph)

• The Ghost Cities Finally Died: For China's Steel Industry "The Outlook Is The Worst Ever Amid Unprecedented Losses". (graph)

• This Is What The "Invasion Of Europe" Looks Like. (pic)

• Europe's Next Refugee Crisis: Thousands Of Migrants Freezing To Death.

• The US Spends $35 Billion In Global Economic Aid (But Where Does All This Money Really Go?).

• The 'Bernwashing' Of America.

• Housing Bubble 2.0: Flipping A Home In These 20 Cities Results In A 102% Average Return.

• The Debate: GOP Candidates Elevated, CNBC Eviscerated. (graph)

• Valeant(VRX) Tumbles After Hours As More Bad News Emerges. (graph)

• US Threatens UK With Trade Barriers If It Leaves The European Union. (graph)

• Yellen's Hawkish Hangover Leaves Bonds & Bullion Bruised & Stocks Steady. (graph)

Business Insider:

• SolarCity(SCTY) is getting nuked.

• A legendary car executive thinks Tesla(TSLA) is facing the 'trifecta of doom'.

• LinkedIn(LNKD) earnings smash expectations, stock goes nuts.

• An industry-sponsored report claims the US is woefully underprepared for bioterrorism threats, and it’s probably right.

• Justice Scalia warns that the Supreme Court is causing the 'destruction of our democratic system'. Supreme Court Justice Antonin Scalia was extra fiery during a talk at Santa Clara University in California this week, saying in no uncertain terms that the court had been making a lot of bad decisions. In his speech, Scalia said he believes the "liberal" Supreme Court is heralding the "destruction of our democratic system," according to an account from the SF Gate. According to Scalia, the court is giving citizens rights the Constitution doesn't specifically guarantee, like gay marriage and federally subsidized health insurance.

• Starbucks(SBUX) reports earnings in line with expectations, but weak guidance.

• Almost half of 'Obamacare' co-ops are closing by the end of the year.

Reuters: 

• U.S. stock ETFs posted $8.2 bln inflows over weekly period -Lipper.

Telegraph:

• It is already too late to scrap China's one-child policy. The IMF warns that China's workforce is going into drastic decline. There will be a labour shortage of 140m people by the early 2030s.

Economic Information Daily:

• China to Reduce Focus on Growth in Next 5-Year Period. China will reduce focus on economic growth and place priority on preventing "external financial impacts" during 2016-2020 of its next 5-year plan, citing Zhang Ping, researcher at Chinese Academy of Social Sciences.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.50% to unch. on average.

• Asia Ex-Japan Investment Grade CDS Index 130.75 +1.0 basis point.

• Asia Pacific Sovereign CDS Index 74.5 +2.0 basis points.

• Bloomberg Emerging Markets Currency Index 71.71 +.02%. 

• S&P 500 futures +.32%.

• NASDAQ 100 futures +.35%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (AAN)/.48

• (ABBV)/1.08

• (AXL)/.68

• (BUD)/1.26

• (CBOE)/.73

• (CVX)/.76

• (CL)/.72

• (CVS)/1.29

• (ETN)/.98

• (XOM)/.90

• (ITT)/.59

• (LM)/.99

• (MCO)/1.07

• (MYL)/1.37

• (PSX)/2.24

• (COL)/1.40

• (STX)/.57

• (WY)/.27

• (CCJ)/.30

Economic Releases

8:30 am EST

• 3Q Employment Cost Index is estimated to rise +.6% versus a +.2% gain in 2Q.

• Personal Income for September is estimated to rise +.2% versus a +.3% gain in August.

• Personal Spending for September is estimated to rise +.2% versus a +.4% gain in August.

• Real Personal Spending for September is estimated to rise +.2% versus a +.4% gain in August.

• PCE Core for September is estimated to rise +.2% versus a +.1% gain in August.

9:00 am EST

• ISM Milwaukee for October is estimated to rise to 44.0 versus 39.44 in September.

9:45 am EST

• Chicago Purchasing Manager for October is estimated to rise to 49.4 versus 48.7 in September.

10:00 am EST

• Final Univ. of Mich. Consumer Sentiment for October is estimated to rise to 92.5 versus a prior estimate of 92.1.
  

Upcoming Splits

• (GPN) 2-for-1

Other Potential Market Movers

• The Fed's Williams speaking, Eurozone CPI/German Unemployment reports, BoJ rate decision and the (F) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.