Wednesday Watch

Late-Night Headlines
Bloomberg:

- New York state’s pension, the third- largest in the U.S., invested $300 million with hedge funds in November, including one run by Perella Weinberg Partners focused on distressed credit, according to state Comptroller Thomas DiNapoli. The pension, which posted an 18.3 percent return for the six months through Sept. 30, invested $100 million each with New York-based Perella’s Xerion Fund, the Brigade Leveraged Capital Structures Fund and Level Global’s long-short fund. New York’s $126 billion pension closed seven deals in November for a total of $591.4 million. The state also placed $250 million with a fund that buys distressed mortgages and $40 million in private equity funds.

- On what remains of Wall Street these days, the past year was filled with one opportunity after another to fix the myriad fundamental structural deficiencies -- revealed all too painfully by the financial crisis -- that continue to plague the country’s large securities firms. At year’s end, not a single one had been adequately addressed, let alone resolved. This ongoing failure to act in the face of the worst economic downturn since the Great Depression is especially disappointing since President Barack Obama was elected, in part, on a promise to bring constructive and lasting change to the canyons of Wall Street.

- Citrus growers in Florida fought to protect their crops and ranchers in the U.S. Midwest watched for more snow as wintry weather sent futures prices higher for orange juice, cattle and hogs. Cold and storms, the worst in decades, have disrupted travel from China to Europe to the U.S. South. London’s Gatwick airport closed late yesterday for snow removal. At least four deaths on American highways have been blamed on the weather, according to the Associated Press, while seven people were killed in an avalanche in Switzerland. AccuWeather.com, based in State College, Pennsylvania, predicted the worst U.S. winter in 25 years. Overnight temperatures were forecast to be 15 to 35 degrees below average, dropping into the teens, in some areas along the U.S. Gulf Coast, said Jim Rouiller, a senior energy meteorologist for Planalytics of Wayne, Pennsylvania. The northern Great Plains and upper Midwest may receive 4 to 8 inches (10 to 20 centimeters) of snow through today, said Mike Tannura, the president of T-Storm Weather in Chicago. Omaha, Nebraska, has received 27 inches since Dec. 1, he said. Another “big Arctic blast” may occur from Jan. 8 to Jan. 9, sending temperatures as low as minus-30 degrees Fahrenheit (minus-34 Celsius), Tannura said. Joe Bastardi, the chief meteorologist for AccuWeather, said in a Jan. 4 statement that “upcoming days” will see the coldest readings since 1985, when temperatures below zero Fahrenheit were seen from Chicago to Georgia. The U.K. is suffering its longest period of widespread snow and cold since December 1981, Sarah Holland, a spokeswoman for the government weather service, said in a telephone interview yesterday. The cold has lasted 18 days and could last “for the next couple of weeks,” she said, with as much as a foot of snow expected in parts of southern England overnight. In China, air traffic and coal deliveries were hampered by heavy snows and the lowest temperatures in 50 years. Beijing readings were forecast to drop as low as minus 16 degrees Celsius overnight, according to the China Meteorological Administration. Average steer weights at slaughter fell 2.3 percent in the past three weeks as animals used more energy to keep warm. Temperatures in New York City and Boston are forecast to be as much as 12 degrees below average by Jan. 10, according to MDA Federal Inc.’s EarthSat Energy Weather of Rockville, Maryland. The U.S. Northeast is responsible for about four-fifths of the country’s heating oil use. In the central U.S., temperatures will be 25 degrees below average in Houston on Jan. 8 and 16 degrees below normal in Cincinnati on Jan. 9, according to EarthSat. About 72 percent of households in the Midwest use natural gas for heat.

- China was accused of piracy in a lawsuit filed by a California software maker, which said the Green Dam Youth Escort filtering software installed on personal computers in the country infringes its copyright. Cybersitter LLC, a closely held company, seeks $2.2 billion in damages in a complaint filed today in federal court in Los Angeles. The company accuses China and computer manufacturers whose products include the Green Dam program of stealing its trade secrets, unfair competition, copyright infringement and civil conspiracy. “This lawsuit aims to strike a blow against the all-too- common practices of foreign software manufacturers and distributors who believe that they can violate the intellectual property rights of small American companies with impunity without being brought to justice in U.S. courts,” Greg Fayer, a lawyer representing Cybersitter, said in a statement.

- Petroleos Mexicanos, the state-owned oil company, may produce more crude in 2011 as new discoveries come on line, arresting seven years of plunging output. Pemex, as the Mexico City-based company is known, may produce 2.55 million barrels a day next year, up 50,000 barrels from the forecast for 2010, Carlos Morales, head of exploration and production, said in a presentation on the company’s Web site dated Dec. 1 and released at year-end. Oil production may rise to 2.69 million barrels a day in 2012, Morales said in the presentation. The company expects to add production from new fields that are part of its Crudo Ligero Marino project as well as fields in the Campeche sound, the location of Cantarell, the world’s third-largest field when it was discovered in the 1970s. Production at the $11.1 million Chicontepec onshore field and additional onshore projects may also climb next year.

- Iran barred its citizens from contact with 60 foreign organizations, including universities, pro- democracy groups and broadcasters, after accusing the entities of waging a “soft war” against the country. U.S.- and U.K.-based organizations dominate the list.

- Treasury two-year futures contracts are poised to rally in January as their slide to their worst month on record in December is likely to reverse, said DZ Bank AG, citing trading patterns.

Wall Street Journal:

- Worries about unsustainable debt levels in the U.S. and the U.K. have dominated the headlines recently, but at least one influential economist thinks the concerns are exaggerated and that Japan faces greater risks to its economy. Concerns over sovereign credit ratings and fiscal problems in the U.S. and the U.K. are "overdone," Goldman Sachs's Chief Economist Jim O'Neill told Dow Jones Newswires in a telephone interview Tuesday. He doesn't expect a "disaster" in the Treasury or the U.K. government bond market this year, nor does he buy into the hype about the dollar's demise. Even sterling -- the market's favorite punching bag -- should be a big winner this year, according to Mr. O'Neill. Instead, he said, it's Japan and the yen that investors should keep an eye on. Japan's problems are "much, much worse" than those of the U.K and the U.S. That's why he expects the yen to be the "big loser" among major currencies in 2010. No surprise, then, that one of his favorite personal trades this year is to buy the pound against the yen. In the U.S., he noted that "the risk of [a] double dip [recession] in the economy this year has declined significantly. The bigger risk is the economy is stronger than we and others think and therefore the Fed may have to change its mind." As for the dollar, Mr. O'Neill made it clear that he doesn't buy into the doomsday scenario painted by some for the U.S. currency. In fact, according to Goldman's models, the dollar remains undervalued, despite its recent recovery. "My experience tells me that sometime over the next two years or longer the dollar would go to $1.20 against the euro," said Mr. O'Neill, a level it last traded at in March 2006. Tuesday, the dollar was trading at $1.4356 against the euro. "The dollar's long-term problem has in the past been the current account deficit and that is now improving. It is very hard to be so bearish on the dollar," he said. Mr. O'Neill expects stock markets to outperform other asset classes this year, followed by commodities, while credit markets, including government debt, are likely to be the laggards. "It is a fantastic environment for global equities because you've got very strong earnings recovery and very strong liquidity from the central banks," he said.

- Warren Buffett famously described complex financial instruments such as credit-default swaps as “weapons of mass destruction.” YRC Worldwide, a trucking company best known for its Yellow and Roadway-branded big rigs, would agree with that assessment. CDSs nearly proved to be the company’s undoing. And the fact that YRC almost went bust because of CDSs shows how little has changed on Wall Street. WSJ’s Dennis Berman sits down with Evan Newmark to discuss YRC’s struggle for survival.

- Interior Secretary Ken Salazar is expected to announce Wednesday that his agency will require oil and natural-gas companies to clear more regulatory hurdles before they are allowed to drill on federal lands. Mr. Salazar's action is likely to make it more difficult for the U.S. Bureau of Land Management to fast-track the permitting of oil and gas projects on federal land. BLM field staffers would be required to seek additional approvals from their supervisors and to undertake more visits to areas where energy companies are seeking access, according to people familiar with the matter. The BLM manages more than 260 million acres of federal land, and with it, a significant chunk of U.S. energy supplies. Domestic production from federal onshore oil and gas wells accounts for 11% of U.S. natural-gas supplies and 5% of the nation's oil. The Obama administration is already locked in a bitter fight with the oil and gas industry over proposals to raise billions of dollars in additional taxes from energy companies, and to cap the emissions of gases caused by burning fossil fuels, which have been linked to global warming.

- New signs emerged that Chinese health authorities suspected a Shanghai dairy was producing milk tainted with deadly melamine well before the first public announcements last week that it had been shut. State media announced on New Year's Eve that Shanghai Panda Dairy Co. had been closed, its milk products recalled from around the country and three top executives arrested. Tuesday, local media reports and remarks by industry executives suggested that authorities were aware of problem milk at Shanghai Panda weeks or months before the recall.

- Japanese game giant Nintendo Co. Ltd. (NTDOY) said U.S. sales of its popular Wii game console rebounded in December and will likely exceed three million units, even as industry analysts maintain more muted expectations.

- President Barack Obama, in his harshest remarks yet on the terrorism threat facing the nation, said U.S. intelligence agencies knew that al Qaeda in Yemen was targeting the U.S., but "failed to connect those dots" to thwart a Christmas Day bombing attempt. The remarks capped a day in which the president, facing heat from Republicans over what they paint as a lackluster initial response, summoned most of his cabinet and security team to meetings on counterterrorism in an effort to show his administration's engagement on the issue.

- Big-name investors have swooped in on two high-profile commercial real-estate assets in a sign that activity is returning to the investment-property market.

- Terrorism will continue to provide its hardening education, though not entirely from terrorists themselves. We have before us now the spectacle of Jihadi Abdulmutallab, lawyered up, with full rights as though a U.S. criminal defendant. The impossibly expensive, dangerous, and unavoidably chaotic trial of Khalid Sheikh Mohammed and associates still lies ahead, slated for a Manhattan courtroom. Even now a majority of Americans can't fathom the reason for their government's insistence that the agents chiefly responsible for the 9/11 attack be tried under the U.S. criminal justice system with all due rights and constitutional privileges, instead of in a military court. That insistence itself is answer enough—an unforgettable testament to the ideological drives and related evasions of reality that shape this administration's view of the world.

- AQR Capital Management LLC, which was among the first big hedge funds to launch a line of mutual funds for mom-and-pop investors, has raised more than $1 billion in assets in less than a year, a potential challenge to the struggling mutual-fund industry. AQR is set to launch Wednesday its seventh mutual fund, a managed-futures portfolio that seeks to take advantage of trends in commodities, bonds and other markets.

MarketWatch.com:

- Time for Fed to disprove PPT conspiracy theory. The massive stock-market rally in the past nine months is mostly due to secret government buying of stock-index futures, a respected stock-market analyst said Tuesday. Charles Biderman, chief executive of TrimTabs Investment Research, is the latest and most credible person to charge that the Federal Reserve and the Treasury (in league with top Wall Street firms) is rigging the stock market on a daily basis. In a special report released Tuesday, Biderman said the $6 trillion increase in U.S. stock-market capitalization since March can't be explained by the usual sources of funds flowing into the market -- such as mutual funds, direct retail investment, pension funds, hedge funds or foreign purchases. Read more about Biderman's theory.

CNBC.com:
- Unlimited Credit for Fannie, Freddie: A Backdoor Bailout?

- Buying music, movies, books—how passé. Consumers are demanding a world of infinite media choices available on demand.

- U.S. economic growth as measured by real GDP will top 5 percent in 2010, and the unemployment rate will fall below 9 percent, said Byron Wien, vice president of Blackstone Advisory Services, who shared his annual top 10 surprises with CNBC Tuesday:

IBD:
- Instant coffee and subway sandwiches don't usually come to mind when you think of Starbucks. (SBUX) But they figure largely in the specialty coffee chain's next act.

NY Times:

- Television Begins a Push Into the 3rd Dimension.

Lloyd's List:

- Atlantic tanker routes were the most popular forward freight derivatives contracts sold this week as traders expect cold weather in North America to prompt a surge in demand for suezmax and medium range product tankers, writes Martyn Wingrove, Brokers expect the cold weather in US will lead to higher crude and oil product imports.

- Panamax Atlantic rates have climbed to a seven-week high as an influx of cargoes built up over the western hemisphere’s holiday season caused a surge in activity. A sudden rush of fresh cargo inquiry combined with a lack of available tonnage has given owners room to push up prices. “Rates are going up pretty quickly at the moment.

FoxNews:

- Tuesday night's matchup between Iowa and Georgia Tech is the coldest Orange Bowl ever, with the kickoff temperature 49 degrees and a northwest wind making it feel seven degrees cooler. Forecasters at the National Weather Service say wind chills across South Florida will be in the 30s by game's end, part of the region's worst cold snap in a decade. Temperatures across the region have been about 20 degrees colder than normal for several days. The previous Orange Bowl low was 57 degrees, set two years ago for the matchup between Kansas and Virginia Tech.

CNNMoney.com:

- Top picks from top pros.

- 2010: Year of the dollar?

- GMAC, the troubled finance company that last week scored a third government bailout, said Tuesday it expects to post a record fourth-quarter loss of $5 billion.

- Brace yourself! 3-D entertainment is coming to a television set near you. Both ESPN and Discovery Communications(DISCA) announced Tuesday that they will launch 3-D TV networks. ESPN will start airing its 3-D sports network in June, while Discovery Communications did not specify when it would begin airing 3-D content.

Business Insider:

- The New York City Health Department has released a 16-page guide on injecting drugs. It cost city taxpayers around $35,000 to produce some 700,000 copies of the 'Take Change, Take Care' pamphlet – also dubbed 'Heroin for Dummies.'

- Chart Of The Day: How The Government Payroll Replaced Goods-Producing Jobs.

- Chart Of The Day: Internet Advertising Ready To Take More Money Away From Newspapers.

Business Week:

- China’s government said it will curb credit for home purchases to reduce speculation and rein in surging real-estate prices. The nation will “further restrict credit for the purchase of second homes and curb speculative housing investments,” Jiang Weixin, the housing minister, said in a statement on the ministry’s Web site today.

Politico:

- Sen. Byron Dorgan (D-N.D.) announced Tuesday night that he would retire rather than run for re-election this year, a surprise move that imperils the Democrats' 60-seat majority next year. Dorgan wasn't facing any serious opposition in what would have been a campaign for his fourth term, but North Dakota’s popular Republican Gov. John Hoeven is considering a bid and was leading in early polls.

- House Speaker Nancy Pelosi, piqued with White House pressure to accept the Senate health reform bill, threw a rare rhetorical elbow at President Barack Obama Tuesday, questioning his commitment to his 2008 campaign promises. A leadership aide said it was no accident. Pelosi emerged from a meeting with her leadership team and committee chairs in the Capitol to face an aggressive throng of reporters who immediately hit her with C-SPAN’s request that she permit closed-door final talks on the bill to be televised. A reporter reminded the San Francisco Democrat that in 2008, then-candidate Obama opined that all such negotiations be open to C-SPAN cameras. “There are a number of things he was for on the campaign trail,” quipped Pelosi, who has no intention of making the deliberations public. People familiar with Pelosi's thinking wasted little time in explaining precisely what she meant by a “number of things” – saying it reflected weeks of simmering tension on health care between two Democratic power players who have functioned largely in lock-step during Obama’s first year in office. Senior House Democratic leadership aides say Pelosi was pointedly referring to Obama’s ’08 pledge not to raise taxes on the middle class, which she interprets to include a tax on so-called “Cadillac” health care plans that offer lavish benefit packages to many union members. The House aides, speaking on condition of anonymity, said Pelosi has been miffed with Obama’s tilt toward the Senate plan and his expectation the House will simply go along with the Senate bill out of political necessity.

Rasmussen Reports:

- Republican candidates start the year by opening a nine-point lead over Democrats, the GOP's biggest in several years, in the latest edition of the Generic Congressional Ballot. The new Rasmussen Reports national telephone survey shows that 44% would vote for their district’s Republican congressional candidate while 35% would opt for his or her Democratic opponent.

Seattle Post-Intelligencer:

- In a move that could see Washington inmates voting from prison, a federal appeals court has thrown out the state's restrictions on felon voting. Under state law, residents convicted of a felony currently lose the right to vote until they are released from custody and off of Department of Corrections supervision. Tuesday's split ruling by a 9th U.S. Circuit Court of Appeals panel puts those restrictions in doubt, as two of three judges reviewing the voting rights lawsuit found that the state restrictions unfairly penalize minorities. Attorneys for six Washington state prisoners, Circuit Court Judge A. Wallace Tashima wrote, "have demonstrated that police practices, searches, arrests, detention practices, and plea bargaining practices lead to a greater burden on minorities that cannot be explained in race-neutral ways." Joined by Judge Stephen Reinhardt in the majority opinion, Tashima found that black and Latino Washingtonians faced arrest and prosecution at rates far higher than could be explained simply by increased criminal activity. Finding no "race neutral" explanation for the higher incarceration rates, the majority reversed a U.S. District Court decision and ruled in favor of the inmates. "Although (the state) criticized the experts' studies and the conclusions, the (plaintiffs') reports, when objectively viewed, support a finding of racial discrimination in Washington's criminal justice system," Tashima said in the ruling. "Given that uncontroverted showing," he added, "in the words of the district court, there can be 'no doubt that members of racial minorities have experienced discrimination in Washington's criminal justice system.'" Speaking on the ruling, Washington Secretary of State Sam Reed said the court's decision came as a surprise, in part because three circuit court panels elsewhere in the country came to opposite conclusions while reviewing similar cases. Reed said he believes the state prohibition against prisoner voting remains appropriate. "That's part of the penalty," Reed said. "A person loses their rights when they violate the rights of others by perpetrating a felony. … As long as when they get out they get a chance to rejoin society, that's the important part."

FinancialNewsOnline:

- Financial News launches new page on global short-selling. Financial News has today launched a new page of data and insight into short-selling and securities financing, in conjunction with Data Explorers, a specialist in analyzing trends from stock lending. The new page includes the Data Explorers DXI, a set of indices that track changes in the amount of stock on loan, a proxy for short-selling, in five regions: US, UK, Europe excluding the UK, Japan, and Asia excluding Japan.

Seeking Alpha:

- The United States and United Kingdom have apparently backed away from previous commitments to forcing most OTC derivatives transactions onto centralised exchanges, Oxford Analytica notes. Given the high importance of the US and UK capital markets globally, this climb-down essentially guts a regulatory aim flagged by the G20 as a rhetorical priority. Ineffective regulation of over-the-counter derivatives, particularly credit default swaps (CDSs), were cited among the causes of the credit crunch, most prominently in a June 17 speech by US President Barack Obama announcing his administration’s plan for financial reform.

Forbes:

- Obama On Small Business: A Year Later.

- Chip investors are going to have a most rewarding 2010. There's just not enough capacity to produce the supply of semiconductors required, meaning chipmakers will change prices across their mix of products to see higher profit margins on rising revenues. A combination of upward-inflecting economic expansion and new tech product cycles will produce record quarterly earnings by year-end, setting the stage for new highs in 2011 profits. This will drive shares markedly above current levels, in many cases back toward 2000 all-time highs. Just about no one expects this, so the ensuing chip rally could really get carried away.

Atlanta Business Chronicle:

- A stock analyst with Robert W. Baird & Co. estimates that Plexus Corp.'s(PLXS) development of a new beverage dispensing machine for The Coca-Cola Co.(KO) could lead to an additional $200 million in annual revenue for the Neenah company. The contract electronics products manufacturer announced last June that it was awarded a contract by Atlanta-based Coca-Cola to make a proprietary fountain dispenser called Coca-Cola Freestyle capable of dispensing more than 100 different types of soft drinks.

USAToday:

- The cost of filling up the car is rising in the wake of soaring crude and by this weekend, pump prices may race past the highs for all of 2009. Tracing the ascension of crude, up 14% since mid-December, energy prices across the board are catching up. Falling supplies in recent weeks have contributed to prices driven higher by the falling dollar. "Some back of the envelope arithmetic puts the current U.S. fuel bill at about $1.066 billion each day," Kloza wrote. "A year ago, that daily outlay was about $625 million." Already, gas costs $1 more a gallon than a year ago, and that's costing a typical motorist about $50 more a month.

Detroit Free Press:

- Ford(F) roars amid strong December auto sales. The worst year in decades for the auto industry ended on a surprisingly positive note in December with sales increasing 15.1% — suggesting that the long-awaited rebound for the industry might really take hold in 2010. Ford Motor was among a half dozen automakers — and the only domestic one — that posted a sales spike of more than 30% during the final month of the year. Ken Czubay, Ford’s vice president of U.S. marketing sales, said the final week of the year exceeded expectations. Most impressive: The sales were achieved even while total incentive spending decreased. While General Motors’ sales fell 5.7% in December compared with a year ago, GM noted that sales of its four core brands — Chevrolet, Cadillac, GMC and Buick — continue to gain momentum. Chrysler’s sales, meanwhile, declined 3.7% in December to 86,523 new cars and trucks.

Reuters:

- U.S. securities regulators will meet on Jan. 13 on whether to publish a concept paper soliciting comment on a range of equity market issues, including high frequency trading and "dark" liquidity, the Securities and Exchange Commission said on Tuesday. The SEC posted the agenda to its website and said it will also consider whether to propose a new rule regarding risk management at brokers or dealers that provide market access.

- Inventory days at semiconductor companies are expected to remain below 70 percent in 2010, as companies remain profitable amid uncertain economic conditions, research firm iSuppli said in a report. The low number of inventory days could lead to shortages of certain chip types such as NAND flash memory as demand climbs, iSuppli said.

- Indicted Galleon hedge fund founder Raj Rajaratnam faces expanded charges of insider trading and allegations that he earned $36 million in illicit profits, double the amount previously alleged, U.S. prosecutors said on Tuesday.

- A measure of U.S. consumer confidence rose in the latest week to its best reading in 16 months, though it was still far below its historic average, a survey showed on Tuesday. The ABC News Consumer Comfort Index rose to -41 in the week ended Jan. 3 from -44 the prior week.

Financial Times:

- Prince Alwaleed bin Talal al-Saud, the Saudi investor, revealed on Tuesday that he plans to shore up the balance sheet of his investment vehicle by “donating” SR2.24bn (€416m) of shares in Citigroup(C) into it. Prince Alwaleed said the initiative would help lead Kingdom Holding, which floated 5 per cent of its shares on the Saudi stock exchange in 2007, to profitability and enable it to distribute dividends to shareholders.

Evening Recommendations

Citigroup:

- Upgraded (MAN) to Buy, target $69.

- Upgraded (RHI) to Buy, target $36.

- Reiterated Buy on (SII), target $35.

Thomas Weisel:

- Raised (FNSR) to Overweight, target $13.

- Rated (ATLS) Overweight, target $40.

Night Trading
Asian indices are +.25% to +1.0% on avg.

Asia Ex-Japan Inv Grade CDS Index 88.0 -3.50 basis points.
S&P 500 futures -.24%.
NASDAQ 100 futures -.19%.

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Earnings of Note
Company/Estimate
- (WOR)/.07

- (RPM)/.34

- (AYI)/.50

- (FDO)/.47

- (MON)/.00

- (SHAW)/.45

- (RT)/-.01

- (BLUD)/.26

- (BBBY)/.43

- (RECN)/.02

- (CBK)/.20

- (SMSC)/.22

Economic Releases

8:15 am EST

- The ADP Employment Change for December is estimated at -75K versus -169K in November.

10:00 am EST

- ISM Non-Manufacturing for December is estimated to rise to 50.5 versus a reading of 48.7 in November.

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,000,000 barrels versus a -1,538,000 barrel decline the prior week. Gasoline supplies are expected to rise by +800,000 barrels versus a -366,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,850,000 barrels versus a -2,055,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.4% versus a +.23% gain the prior week.

2:00 pm EST

- Minutes of FOMC Meeting

Upcoming Splits

- None of note

Other Potential Market Movers
- The Challenger Job Cuts report, Citi Entertainment/Media/Telecom Conference, weekly MBA mortgage applications report, monthly retail same-store-sales reports and the Consumer Electronics Show could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker stocks in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs, Boosted by Airline, Bank, Commodity and Gaming Shares

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Stocks Slightly Higher into Final Hour on Less Financial Sector Pessimism, Lower Long-Term Rates, Declining Sovereign Default Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Financial longs, Biotech longs, Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is mildly lower, most sectors are rising and volume is above average. Investor anxiety is high. Today’s overall market action is mildly bullish. The VIX is falling -1.9% and is above average at 19.67. The ISE Sentiment Index is slightly above average at 156.0 and the total put/call is below average at .70. Finally, the NYSE Arms has been running below average most of the day, hitting .4 at its intraday trough, and is currently .67. The Euro Financial Sector Credit Default Swap Index is falling -3.63% to 61.81 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is falling -2.43% to 80.75 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is down -1 basis point to 19 basis points. The TED spread is now down 444 basis points since its all-time high of 463 basis points on October 10^th, 2008. The 2-year swap spread is rising +1.89% to 28.13 basis points. The Libor-OIS spread is up +1 basis point to 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down -4 basis points to 2.37%, which is down -28 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .06%, which is up +1 basis point today. There are an unusual number of stocks rising on heavy volume today for a flat broad market. Broad market volume is much better today, as well. Airline, Gaming, Bank, Paper, Ag, Oil Service, Coal and Oil Tanker shares are especially strong, rising 1.5%+. (XLF) is trading well again today, which is a large positive. Moreover, (IYR), which has been a recent underperformer, is putting in an intraday reversal and is trading at session highs. The Western European Sovereign Debt Credit Default Swap Index is dropping 6.05% to 66.21 basis points, which is the largest one-day drop since the instrument began trading in early Oct. and also a large positive. Oil tanker rates are jumping 27% to 47.50 worldscale, which is boosting the group. Finally, it is a big positive to see long-term rates dropping despite less economic fear and tremendous supply. On the negative side, select tech leaders are relatively weak and oil continues to grind higher. Nikkei futures indicate an +135 open in Japan and DAX futures indicate an +8 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less economic fear, technical buying, lower long-term rates, buyout speculation and less financial sector pessimism.

Today's Headlines

Bloomberg:

- Ford Motor Co.(F) and Nissan Motor Co. posted U.S. sales gains in December that beat analysts’ estimates as the industry showed signs of stabilizing after the worst year in almost three decades. Ford’s deliveries jumped 33 percent to 184,655, the Dearborn, Michigan-based company said today in a statement. Nissan’s sales rose 18 percent to 73,404. Chrysler Group LLC said sales fell 3.7 percent to 86,523. “People are waking up and realizing the world didn’t end and are starting to return to showrooms,” said Aaron Bragman, a forecaster at IHS Global Insight in Troy, Michigan. “It’s way too early to say the trend is pointing north, but if it continues this quarter, it’s a positive sign.” An industrywide increase for December would cap automakers’ first quarterly improvement since the last three months of 2006, after October and November totals were little changed. Ford, spurred by an 83 percent gain for the Fusion and a doubling of Taurus sales, said the December results gave the second-largest U.S. automaker an estimated 15 percent of 2009 domestic sales for the first full-year increase in its home market since 1995. Ford said 2008’s total was about 14 percent. The shares rose 74 cents, or 7.2 percent, to $11.02 at 12:48 p.m. in New York Stock Exchange composite trading, after touching $11.21 for the highest intraday price since June 2005.

- The cost to protect against defaults on U.S. corporate bonds fell to the lowest in two years as factory orders in November rose more than twice as much as economists anticipated. A benchmark credit-default swaps index that allows investors to speculate on investment-grade corporate debt and typically falls as demand for corporate bonds rises, declined to the lowest since January 2008. A swaps index tied to North American high-yield, high-risk corporate loans reached its highest level since it was created in April. The Markit LCDX Index Series 12, which is linked to the senior secured loans of 90 companies with below-investment-grade ratings and rises as the cost of debt protection falls, climbed 0.35 percentage point to 105.25 percent of face value today, according to Goldman Sachs Group Inc. That’s up from 79.5 percent when Series 12 started trading April 15. The price of the Markit CDX North America High Yield Index, a credit swaps index linked to non-investment grade bonds, also climbed, gaining 0.2 percentage point to about 100.6 percent of face value as of 11:30 a.m. in New York, CMA DataVision prices show.

- Treasuries rose for a second day as investors bet the biggest monthly increase in 10-year note yields in almost six years was overdone and pending sales of existing U.S. homes fell more than forecast in November. Ten-year note yields touched the lowest levels in almost two weeks after rising 64 basis points in December, the most since April 2004.

- Copper, which more than doubled last year, is “breaking higher” after passing through a so-called Fibonacci retracement level, according to technical analysis by Dan Smith, an analyst at Standard Chartered Plc.

- Cold weather from China across Europe and the U.K. reaching to the U.S. is disrupting travel and pushing up fuel prices.

- The lowest-rated corporate bonds rallied above so-called distressed trading levels for the first time since January 2008 on optimism the economy is recovering. The average yield on U.S. bonds rated CCC or lower tightened to 9.82 percentage points more than similar-maturity Treasuries, from as much as 36.7 percentage points in March, according to Merrill Lynch & Co. index data. The debt has been distressed, or trading at a spread of at least 10 percentage points, since Jan. 8, 2008, the data show.

- Bruce Berkowitz, head of the $9.99 billion Fairholme Fund, was named the top U.S. stock fund manager for 2009 by research firm Morningstar Inc., which cited his winning bets on drug and defense companies. The group that oversees American Funds’ $98.2 billion EuroPacific Growth Fund won in the international stock fund category, Chicago-based Morningstar said today in a statement. The team that runs the $18.8 billion Loomis Sayles Bond Fund was selected best fixed-income manager.

- Continental Airlines Inc.(CAL) rose to its highest in almost a year in New York trading and led a rise in shares of major U.S. carriers after reporting that December unit revenue fell the least in 11 months. In its main jetliner operations, revenue for each seat flown a mile dropped as much as 5.5 percent from a year earlier, the smallest decline since January 2009, the Houston-based airline said in a statement yesterday. Its passenger traffic last month increased 6.3 percent, the largest gain since September.

- U.S.-China ties will likely deteriorate this year as trade tensions rise between the two countries, posing the biggest geopolitical risk this year, according to a report by a political risk consulting group.

- General Electric’s(GE) share of the Dow Jones Industrial Average shrunk to the smallest of any company for the first time since at least 1992 after a rally in financial stocks lifted banks at a faster rate.

- U.S. retail sales in December probably rose more than projected as shoppers visited stores after Christmas to redeem gift cards, according to a trade group. December retail sales at stores open at least a year probably increased about 2.5 percent from a year earlier, the International Council of Shopping Centers and Goldman Sachs Group Inc. said today in a statement. The ICSC had previously projected a gain of 2 percent. Sales in the week ended Jan. 2 climbed 2.5 percent, the New York-based group said. “Holiday sales were late in coming, but showed healthy gains as the season wrapped up,” Michael Niemira, the ICSC’s chief economist, said in the statement.

- Discovery Communications Inc.(DISCA), Sony Corp. and Imax Corp.(IMAX) plan to start a 3-D cable-television channel in 2011, following recent 3-D success with films such as “Avatar.” The joint venture, which doesn’t have a name yet, will air 3-D shows 24 hours a day, seven days a week in the U.S., the companies said today in a statement. Discovery, based in Silver Spring, Maryland, Sony and Imax will own equal stakes in the channel, according to the statement.

- Students in New York City charter schools outperformed their public school counterparts in reading and math, according to a Stanford University study. Fifty-one percent of charter school students showed gains in math that are “statistically larger” than they would have achieved in conventional public schools, according to the report released today by the Center for Research on Education Outcomes, which is based at Stanford, near Palo Alto, California. The study, which analyzed six years of data at 49 charter schools from 2003 through 2009, also found that 29 percent of charter schools students showed greater gains than their public-school counterparts in reading.

- Trading in bullish Ciena Corp.(CIEN) options reached a four-month high and the shares climbed on speculation that businesses including Nokia Siemens Networks may bid for the maker of fiber-optic gear for phone companies.

Wall Street Journal:

- Copenhagen’s Dodged Bullet. Modern men have lived through 20 sudden global warmings. Al Gore said the other week that climate change is "a principle in physics. It's like gravity. It exists." Sarah Palin agreed that "climate change is like gravity," but added a better conclusion: Each is "a naturally occurring phenomenon that existed long before, and will exist long after, any governmental attempts to affect it." Over time climates do change. As author Howard Bloom wrote in The Wall Street Journal last month, in the past two million years there have been 60 ice ages, and in the 120,000 years since the development of modern man, "we've lived through 20 sudden global warmings," and of course this was before--long before--"smokestacks and tail pipes." In truth, the world dodged a bullet in Copenhagen. There could have been significant damage to many nations' economies if the warming alarmists' full agenda had been adopted. But of course the game has not ended. Here in America, Mr. Obama, Congress and the Environmental Protection Agency all seem committed to regulating our behavior and consumption under the guise of addressing a crisis that is not a crisis. They will do so in a way that will not meaningfully reduce global temperatures, but will substantially hurt the economies and opportunities of the world's people.

- The U.K. government faces an 80% chance of a credit-rating downgrade if its deficit reduction plans remain as they are, according to Scott Mather, Pacific Investment Management Co.'s head of global portfolio management.

- Google(GOOG) this week is taking two dramatic steps to try to catapult devices using its Android mobile operating system into stronger competition with Apple's iPhone and Research in Motion's BlackBerry in the battle for supremacy in the super-smartphone category.

MarketWatch.com:

- CME Group Inc.(CME) closed 2009 year strongly, improving upon November's turnaround to growth with a 13% daily volume increase in December from a year ago, although its performance again fell short of smaller rival IntercontinentalExchange Inc.(ICE). ICE has been picking up market share in recent months, gaining as trading slowed at CME and then outpacing CME's growth since CME's turnaround.

CNBC:

- Apple(AAPL) announced that more than three billion applications—or apps—have been downloaded from its App Store by iPhone and iPod touch users worldwide.

- If the stock market holds to a pattern it has followed for most of the past 40 years, 2010 could be a big year for investors. Since 1973, a big advance on the first trading day of January has been a strong sign stocks will post robust gains for the rest of the year.

The Business Insider:

- David Tepper is one of the recovery's biggest success stories. His hedge fund, Apaloosa, has made $6.5 billion this year, a 120% gain after betting big on bank stocks and debt. In BusinessWeek today, he gets a glowing profile. "I don't think Warren Buffet holds a candle to him," says Alan Fournier, a former Appaloosa co-worker and founder of Pennant Capital Management LLC. From 1993 to this year, Tepper's average return is 38 percent, 30.7 percent net of fees. Warren Buffet's returns for that same time period average 12.3%.

- Securities-fraud class-action lawsuits fell 24 percent in 2009 as litigation related to the credit crunch, and especially subprime-mortgage losses, began to dry up, according to a study.

- Economists Don’t Know Jack: This Is Going to Be A Barburner Of a Recovery.

- David Rosenberg: Government Handouts Are Now 1/5^th Of The National Income. (graph)

LATimes:

- Democrats Reid, Pelosi ponder crafting Obama’s final healthcare bill behind closed doors. Since it's basically one-party rule in Washington nowadays, Democratic leaders including Harry Reid and Nancy Pelosi are seriously considering pushing President Obama's beloved healthcare legislation through Congress without the normal conference committee work involving both party's members from both houses. Such a select conference committee is normally charged with reconciling differing House and Senate bills on the same issue before final votes in each house on the compromise version. But since American voters collectively wanted so much change so badly in 2008, they handed over the White House, House of Representatives and Senate to Democrats with such lopsided majorities that, much as in Chicago, the ruling party doesn't really need any Republican help driving the differing bills through a blender to produce a final version, possibly by early February.

ABCNews:

- C-SPAN CEO Brian Lamb last week wrote to Congressional leaders asking that they "open all important negotiations, including any conference committee meetings, to electronic media coverage" as the House and Senate work to reconcile the differences between the House and Senate health care reform bills. "The C-SPAN networks will commit the necessary resources to covering all of these sessions LIVE and in their entirety," Lamb wrote. "We will also, as we willingly do each day, provide C-SPAN’s multi-camera coverage to any interested member of the Capitol Hill broadcast pool."

Gizmodo:

- Google(GOOG) Nexus One Liveblog.

SeekingAlpha:

- Smallcap Nanotech Company NVE(NVEC) Is Wade Slome’s Highest Conviction Holding – Here’s Why. Wade W. Slome, CFA, CFP is President and Founder of Newport Beach, California based Sidoxia Capital Management, LLC. He managed one of the ten largest growth funds in the country ($20 billion in assets under management) at American Century Investments, and currently manages a hedge fund in addition to separate customized accounts for a selective client base at his firm.

Politico:

- The top Republican on the Senate Judiciary Committee is pushing Attorney General Eric Holder to explore links between a jihadist rehabilitation program in Saudi Arabia and Yemeni extremists linked to the failed Christmas Day terror plot. Sen. Jeff Sessions (R-Ala.) on Tuesday rereleased a letter he sent last month to Holder demanding that the Department of Justice suspend a program that sends select Guantanamo detainees to Saudi Arabia to shed their extremist tendencies. The program has not been successful, Sessions contends, and his letter alleges that 11 of Saudi Arabia’s 85 most-wanted terrorists are “graduates of the Saudi program.”

InvestmentNews:

- In an effort to get its advisers to focus on snagging more of their existing clients’ assets, along with new clients, Wells Fargo Advisors LLC has introduced a new rewards program in its deferred-compensation plan.

HedgeFund.Net:

- There’s a new sheriff in town at the New York office of the Securities and Exchange Commission and he wants the hedge fund industry to listen up. “We have planned a number of significant sweeps of investment advisors,” George Canellos, the N.Y. SEC Regional Director tells HedgeFund.net. “In the last few months -- really in the last year or two -- we have tried to orient our program, especially the investment management program, more toward cause- and risk-based exams.” The Bernard Madoff $65 billion Ponzi scam, and more recently, an alleged $20 million insider trading scheme at hedge fund firm Galleon Group, has trained the SEC’s sights on the private investment industry. “Investment management, and especially hedge funds, is a big area of emphasis,” Canellos acknowledges.w sheriff in town at the New York office of the Securities and Exchange Commission and he wants the hedge fund industry to listen up

USA Today:

- ESPN is going 3D. The venerable sports network will launch ESPN 3D on June 11 with a World Cup soccer match, creating what it says will be the first all three-dimensional television network to the home. ESPN 3D expects to showcase at least 85 live sporting events during the first year. There'll be no reruns initially, so the network will be dark when there's no 3D event. Among other events planned for 3D broadcast: the Summer X Games (extreme sports), NBA games, college basketball and college football. ESPN is committing to the 3D network through June 2011.

Reuters:

- The number of financial advisers defecting from the biggest brokerage firms picked up in December after a recent lull, suggesting Wall Street's revolving door has not yet stopped spinning.

- Standard & Poor's on Tuesday said the U.S. speculative-grade default rate decreased to 10.9 percent in December, the first monthly decline since October 2007.

- The Federal Reserve is discussing re-entering the mortgage-backed securities market later this year if its buying power is needed to hold down interest rates, Market News said on Tuesday in a story citing Fed officials.

theInquirer:

- Intel(INTC) has taken the wraps off its upcoming series of Westmere processors, the 32nm version of the Nehalem architecture, with chips dubbed Clarkdale for the desktop version and Arrandale for mobile. Hitting the 'Tock' on Intel's TickTock process schedule, these LGA1156 Core i3 and i5 dual core processors can have a graphics unit and DDR3 memory controller integrated in the package, lowering production costs and system footprint as well as opening up a host of enhanced power management features and minimizing latency between the CPU, GPU and memory controller.

TimesOnline:

- Freed Guantanamo Inmates are Heading for Yemen to Join al-Qaeda Fight. At least a dozen former Guantánamo Bay inmates have rejoined al-Qaeda to fight in Yemen, The Times has learnt, amid growing concern over the ability of the country’s Government to accept almost 100 more former inmates from the detention centre. The Obama Administration promised to close the Guantánamo facility by January 22, a deadline that it will be unable to meet. The 91 Yemeni prisoners in Guantánamo make up the largest national contingent among the 198 being held. Six prisoners were returned to Yemen last month. After the Christmas Day bomb plot in Detroit, US officials are increasingly concerned that the country is becoming a hot-bed of terrorism. Eleven of the former inmates known to have rejoined al-Qaeda in Yemen were born in Saudi Arabia. The organisation merged its Saudi and Yemeni offshoots last year.

Guardian:

- Powerful American banks spending lavishly on lobbying are more likely to engage in high-risk lending and their shares have performed less well than others, a groundbreaking study by the International Monetary Fund has found. The in-depth research will prompt calls for a wholesale clean-up of Capitol Hill by the Obama administration. Lobbying by the finance, insurance and real estate (Fire) sector outstrips any other in the US economy. The study, entitled A Fistful of Dollars: Lobbying and the Financial Crisis, published by the IMF, reveals a stark correlation between lobbying by lenders and high loan-to-income loans.

MailOnline:

- Goldman Sachs(GS) is being widely blamed within the financial industry for igniting a war with the government over its bonus supertax. Rivals are privately incensed at the scale of the rewards the Wall Street giant is preparing to dole out in the forthcoming annual bonus round. The firm's largesse has forced many competitors to follow suit.

JerusalemPost:

- The Shin Bet (Israel Security Agency) is considering beefing up its teams of security guards stationed at Ben-Gurion Airport and on Israeli commercial flights, The Jerusalem Post has learned.