Friday Watch

Evening Headlines
Bloomberg:

• EU Agrees to Create Post-2013 Crisis Tool as Bloc Spars Over Current Steps. European Union leaders agreed to amend the bloc’s treaties to create a permanent crisis- management mechanism in 2013, while divisions flared over steps to prevent concern over debts from engulfing Portugal and Spain. Germany, the biggest contributor to Europe’s bailouts of Greece and Ireland, pushed through an accord to set up a system that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues. “Our task now is to hold the course, walk not talk, and prove those wrong who predicted the demise of our common currency,” European Commission President Jose Barroso told reporters after the first session of an EU summit in Brussels late yesterday. The summit is slated to end around 1 p.m. today.
• Portugal May Get Frozen Out by Bond-Sale 'Avalanche' in 2011: Euro Credit. Portugal risks being frozen out of the bond markets next year amid a wave of auctions from higher- rated governments and agencies that threaten to force the nation into seeking a bailout to pay its debts. “It has become the market consensus that Portugal’s ability to fund on a standalone basis is fairly constrained,” said Jamie Stuttard, head of European and U.K. fixed income at London-based Schroders Plc, which has $286 billion under management. “People have investment alternatives.”
  
• Democrats Pull 'Omnibus' Budget Bill Amid Republican Opposition. The Senate’s top Democrat said he won’t try to pass a $1.2 trillion “omnibus” spending bill for the government loaded with thousands of lawmakers’ pet projects because Republicans withdrew their support for the measure. Senate Majority Leader Harry Reid, a Nevada Democrat, said tonight lawmakers will instead approve a stopgap funding measure of an as yet undetermined length. A so-called continuing resolution currently funding the government expires Dec. 18.
• Hedging Gas Tumbles to 30% of Production as Prices Slump: Energy Markets. Natural gas companies are slashing their hedging of future output as prices tumble, raising the prospect of declines in drilling and production.
• Mexico Drug War Death Toll Climbs to 30,196 Since 2006, Government Says. Mexican Attorney General Arturo Chavez said that 30,196 people have been killed in drug-related violence nationwide since President Felipe Calderon took office four years ago. The number of deaths from January to November this year was 12,456, Chavez said today in Mexico City.
• Google(GOOG) Aims Twins Daggers at Microsoft's(MSFT) Heart: Tech by Rich Jaroslovsky. Forget about Google Inc.’s struggle with Facebook for eyeballs and programmers. Pay no attention to its fight with Apple Inc. over smartphones, or to any other tech rivalry. The search giant’s war with Microsoft Corp. is The Big One, the confrontation that will determine what kind of future Microsoft has, and maybe if it even has a future. And the two new weapons Google unsheathed last week carry an unmistakable message of mortal peril.
• Visa(V), MasterCard(MA) Plunge as Federal Reserve Moves to Lower Debit-Card Fees. Visa Inc. and MasterCard Inc. plunged more than 10 percent in New York trading after the Federal Reserve Board proposed rules that could slash debit-card interchange fees by 90 percent.
• Kynikos's Chanos Says China Real Estate Boom Goes 'Unabated'. China’s property boom hasn’t slowed even after the government announced policy tightening measures, Jim Chanos, founder of Kynikos Associates LP, said today. The real estate market has picked up, said Chanos in an interview with Carol Massar and Matt Miller on Bloomberg Television’s Street Smart program. Millions of Chinese apartments have gone empty, he said. China is “on a treadmill to hell,” Chanos said in the interview, repeating his view in January.
• U.S. House Debates Obama's $858 Billion Tax-Cut Agreement With Republicans. The U.S. House debated President Barack Obama’s $858 billion tax-cut agreement, with Republicans saying the measure would aid job creation and most Democrats saying it provides too many tax breaks to the wealthy.

Wall Street Journal:

• Fairholme's Berkowitz, Fernandez to Join St. Joe(JOE) Board. Florida developer St. Joe (JOE) is expected to name Fairholme's Bruce Berkowitz and Charlie Fernandez to its board, according to a source familiar with the matter.
• U.S. Weighs Curbs on Biocrops. The U.S. Department of Agriculture is considering imposing restrictions for the first time on where and how a genetically modified crop may be grown, in a move that could eventually affect a wide swath of the farm industry.
• California Asks Bond Underwriters To Detail Credit Default Swap Activity. Bill Lockyer, California's state treasurer, has amended a quarterly questionnaire for all 86 of the state's bond underwriters, forcing them to disclose what credit default swaps they have traded on the state's bonds, either for customers or for their own accounts. The disclosure forms could be sent to underwriters as soon as this week.
• Republicans Kick the Spending Dope. The GOP passes its first big spending test—barely.

Business Insider:

• Gasparino: There's A Mole Inside Raided Hedge Fund Level Global.
• Check Out Photos of the English Mansion Where Julian Assange Will Be Spending His Holidays.
  

LA Times:

• Hedge Fund Cases Point to a Maze of Alleged Insider Trading. The federal government is waging a full-scale offensive against one of the most elite bastions on Wall Street.
• California's Housing Market Slows in November. The median home price falls 2.3% from a year earlier to $255,000. Statewide sales decline 3.9% from October and 12.4% from November 2009. California's housing market slowed in November, with both sales and prices falling. Some economists predict further declines next year if more foreclosures hit the market and the job engine remains sluggish. That year-over-year drop was the second consecutive decline in the median price after 11 months of improvement.

Institutional Investor:

• Medallion Poised For One of Its 'Worst' Years. Jim Simons’ Medallion Fund is poised to post one of its worst years in its 23-year history. However, this just underscores how astoundingly the fund has performed over the years. Through November, Medallion, which for years has only been open to partners, employees and friends, is said to be up around 25 percent or so, net of its 5 percent management fee and 44 percent performance fee, according to knowledgeable sources. However, it could actually be a little higher than this. At the very least, this works out to around 50 percent gross, which would still make it one of the year’s best performing hedge funds again. However, Medallion's net return has ranged between 40.5 percent and 84.1 percent in each of the past four years. Incredible.

Reuters:

• China Property Tightening Effective: Vanke. Beijing's measures to cool "ridiculous" property prices have made some progress, but the risks of a bubble mean the tightening campaign is unlikely to ease up in the year ahead, the chairman of China's largest property developer said. Skyrocketing property prices in China's top cities have stocked public discontent, prompting the government to step in. China risked a Japanese-style real estate bubble if the government doesn't control what Wang described as ridiculous property price moves in its top-tier cities such as Beijing and Shanghai. "It could be really, really bad without the government stepping in," said the soft-spoken Wang, who was dressed in a minimalist style, with an open-collared white shirt and black jacket. "If the bubble bursts, Japan's past will be China's present." Although Wang worries about the risks of a bubble in China's property sector, he brushed aside talk that the country may end up worse than Dubai where a property price bubble imploded during the global financial crisis after years of heedless expansion. Among the loudest critics, legendary short-seller Jim Chanos has said he is shorting China because he expects the economy to implode in a real estate bust. China is "on an economic treadmill to hell" and the country's real estate-fueled bubble is "Dubai times 1,000," said Chanos. "It's not comparable. These are very different markets," said Wang, referring to Chanos' Dubai analogy.
• Goldman(GS) Seeks to Expand Wealth Arm By a Third. Goldman Sachs Group Inc (GS) on Thursday said it is expanding its wealth management business worldwide and intends to boost its ranks of advisers by a third over the next few years.
• BlackBerry Torch Lights Up RIM(RIMM) Results.
• Oracle(ORCL) Software Sales Surge, Shares Rise.
  

Financial Times:

• The U.K., France and Germany are in talks aimed at freezing the European Union budget until 2020. While German Chancellor Angela Merkel and French President Nicolas Sarkozy support the letter, they want to keep it secret to avoid diplomatic problems with other EU countries.
  

The Guardian:

• Greece Can Only Recover If Its Debt is Restructured, Say Economists. Experts say a default on Greece's €110bn EU and IMF-sponsored rescue package is inevitable.

Irish Examiner:

• Cost of Insuring Against Ireland Default Rises. THE cost of insuring Irish bank bonds against default increased after legislators approved a burden-sharing bill analysts said was harsher than expected. The new law compels junior bondholders to share the cost of rescuing lenders after the Government was forced to accept a €85 billion aid package. The Credit Institutions (Stablisation) Bill 2010, gives the finance minister the power to change bondholders’ rights, including interest and principal payments, as well as impose debt-for-equity swaps and asset transfers. It’s "a harsh bill," Eleonore Lamberty, an analyst at ING Bank in Amsterdam, wrote in a client note. The measure "will intensify the burden-sharing fear and will cause further pressure on subordinated bonds of pan-European banks which have received state aid," she wrote.
  

21st Century Business Herald:

• Shanghai may impose a property tax on areas of new homes that exceed 200 square meters.
• China aims to cut energy consumption per unit of gross domestic product by 16% in five years by 2015, citing people helping draft the five-year energy-reduction targets starting from 2011.
  

Evening Recommendations
Citigroup:

• Reiterated Buy on (ABC), target $38.
• Rated (ACOM) Buy, target $40.

Needham:

• Rated (JNPR) Buy, target $42.

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 104.0 -1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 105.50 unch.
  
• S&P 500 futures -.07%
  
• NASDAQ 100 futures -.01%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
10:00 am EST

• Leading Indicators for November are estimated to rise +1.1% versus a +.5% gain in October.
  

Upcoming Splits

• (AME) 3-for-2
  

Other Potential Market Movers

• None of note
  

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate 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 75% net long heading into the day.

Stocks Rising into Final Hour on Less Economic Fear, Short-Covering, Lower Long-Term Rates, Seasonal Strength

Broad Market Tone:

• Advance/Decline Line: Higher
  
• Sector Performance: Almost Every Sector Rising
  
• Volume: Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 17.59 -1.95%
  
• ISE Sentiment Index 190.0 +55.74%
  
• Total Put/Call .83 +22.08%
  
• NYSE Arms 1.17 -26.53%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 88.03 bps +2.08%
  
• European Financial Sector CDS Index 146.11 bps +7.77%
  
• Western Europe Sovereign Debt CDS Index 182.67 bps +.92%
  
• Emerging Market CDS Index 215.43 bps +.57%
  
• 2-Year Swap Spread 24.0 -1 bp
  
• TED Spread 18.0 +1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .13% unch.
  
• Yield Curve 281.0 -4 bps
  
• China Import Iron Ore Spot $168.80/Metric Tonne +.18%
  
• Citi US Economic Surprise Index +17.80 +3.5 points
  
• 10-Year TIPS Spread 2.31% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +79 open in Japan
• DAX Futures: Indicating +3 open in Germany

Portfolio:

• Higher: On gains in my Tech, Retail, Ag, Biotech and Medical long positions
  
• Disclosed Trades: None
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is bullish as the S&P 500 trades higher despite recent stock gains, rising eurozone sovereign debt angst, weakness in some key overseas markets and a plunge in (MA)/(V) shares. On the positive side, Gaming, Retail, Construction, Hospital, Biotech, Medical and Networking shares are especially strong, rising more than 1.0%. Healthcare-related stocks continue to trade very well. Lumber is rising another +1.97%. The -8 basis point decline in the 10-year yield in spite of today's mostly strong economic data may indicate yields are getting close to a tradable top. Gold is -.8% lower on the day. On the negative side, Homebuilding, Bank and Paper shares are lower on the day. (XLF)/(IYR) have underperformed again throughout the day. Copper is falling -.79%. Shanghai copper inventories are jumping another +5.61% and have risen +28.11% over the last 5 days. The Greece sovereign cds is climbing +4.49% to 973.55 bps, the Portugal sovereign CDS is rising +2.5% to 449.54 bps, the Italy sovereign cds is gaining +2.3% to 201.69 bps, the Belgium sovereign cds is increasing +2.36% to 207.06 bps and the Ireland sovereign cds is jumping 3.81% to 561.08 bps. The ongoing surge in the Euro Financial Sector CDS Index remains a big negative. Short/intermediate-term gauges of investor sentiment remain overly bullish, which is also a big negative. The AAII % Bulls fell to 50.23 this week, while the % Bears rose to 27.15. The Hang Seng Index and Spain's IBEX 35 continue to display technical weakness. US stocks remain extremely resilient, which is a large positive. If the S&P 500 can convincingly break above recent highs I will cover some of my hedges. I expect US stocks to trade modestly lower into the close from current levels on China inflation worries, profit-taking, more shorting and rising eurozone debt fears.

Today's Headlines

Bloomberg:

• Philadelphia Factory Index Rises to Highest Since April 2005. Manufacturing in the Philadelphia region expanded in December at the fastest pace since April 2005 as orders and the factory workweek increased. The Federal Reserve Bank of Philadelphia’s general economic index unexpectedly rose to 24.3 from 22.5 last month. The gauge was forecast to decrease to 15, according to the median estimate in a Bloomberg News survey. The Philadelphia Fed bank’s new orders measure climbed to 14.6, the highest since February, from 10.4 in November. A measure of the average workweek increased to 19.3 in December, the highest since March 2004, indicating hiring may soon pick up. The shipments gauge decreased to 7.3 from 16.8 last month. The employment index fell to 5.1 from 13.3 last month, which was the highest since August 2007. The index of prices paid jumped to 51.2, the highest since July 2008, from 34 the prior month, while its gauge of prices received increased to a two-year high of 10.7 from minus 2.1.
• Debt Contagion Threat Splits EU Leaders Seeking Rules to Stem Euro Crisis. European Union divisions widened over how to contain the debt contagion that threatens the euro, limiting a summit that began today to an agreement on a crisis- management mechanism that takes effect in 2013. German Chancellor Angela Merkel balked at boosting or making more flexible use of the EU’s 750 billion-euro ($1 trillion) emergency fund, as leaders neared an accord on the tool to contain future debt shocks and the European Central Bank armed itself with more capital. Strife among Merkel, the ECB, Luxembourg Prime Minister Jean-Claude Juncker, and the German domestic opposition intensified on the eve of the Brussels summit, marring confidence in Europe’s handling of the fiscal woes that forced Greece and Ireland to fall back on financial handouts. “There is a situation of European gridlock again with Germany blocking actions to make progress,” said Nick Kounis, chief euro-region economist at ABN Amro NV in Amsterdam and a former U.K. Treasury official. “There is a high risk of the crisis re-escalating and maybe now it’s the quiet before the storm in markets.”
• Europe Services, Manufacturing Growth Slows More Than Forecast. Europe’s services and manufacturing industries slowed more than economists forecast in December, as smaller euro members failed to keep up with Germany’s export-led expansion. A composite index based on a survey of euro-area purchasing managers in both industries fell to 55 from 55.5 in November, the lowest in two months, London-based Markit Economics said today.
• Greece's Debt Ratings are Put on Review for Possible Downgrade by Moody's.
• Investors should buy interest-rate swap spreads on two-year Treasuries as worsening sovereign debt woes in Europe drive up the cost of insuring the region's bonds, according to ICAP Plc.
• OPEC Export Increase Slows as Winder Fuels Demand Ebbs, Oil Movements Says. The Organization of Petroleum Exporting Countries will increase crude loadings by the smallest amount since October as demand for winter fuels passes its peak, according to tanker-tracker Oil Movements. Shipments will rise 0.3 percent to 23.46 million barrels a day in the four weeks to Jan. 1 from 23.39 million barrels in the period to Dec. 4, Oil Movements said today in a report. That’s the smallest gain since Oct. 2. “We’ve certainly past the peak of the winter,” said Roy Mason, Oil Movements’ founder, in a telephone interview from Halifax, England. “In terms of products other than for distillates in Europe, stocks are still quite high. The tanker market will be quiet until mid-January.”
• LME Copper Stockpiles to Climb on China Re-Routing, Sucden's Goldwyn Says. Copper stockpiles in London Metal Exchange warehouses may gain as traders in China re-route metal previously intended for imports because of ample local supplies and slow seasonal demand, according to Sucden Financial Ltd.
• Gold Declines to Two-Week Low on Investor Sales After 26% Rally in 2010. Gold fell to a two-week low on investors sales following a 26 percent rally this year. Silver, palladium and platinum also dropped. The metal headed for a 10th straight annual gain amid record investment in exchange-traded funds backed by bullion. The price reached an all-time high of $1,432.50 an ounce on Dec. 7, partly on demand for a store of value amid escalating debt in the U.S. and Europe.
• No More Bears for Emerging Markets Unsettles Investors Shunning Conformity. Individual investors are pouring money into emerging-market stocks at the fastest pace since 2007 as the biggest rally in 16 years spurs three of the world’s largest banks to predict shares will hit record highs next year. The last time investors were this bullish, the MSCI Emerging Markets Index sank 11 percent in three months, data compiled by EPFR Global and Bloomberg show. The gauge trades for 2 times net assets, within 4 percent of the most expensive level on record versus the MSCI World Index of developed-nation shares, according to MSCI Inc. “After all this money has flooded in, with everyone in love with them and all the euphoria surrounding them, it’s hard to find fundamental value,” said Harris Associates LP’s David Herro, who was named international stock fund manager of the decade this year by Morningstar Inc. “Growth in emerging markets is greatly helping the world, but you can overpay for it and that’s what’s happening.”
• Shale-Gas Output May Double by 2035, Reducing Energy Imports, U.S. Says. Production forecasts for natural gas locked in shale have doubled, which will help the U.S. become less reliant on imported energy, according to a federal agency. The Energy Information Administration’s annual long-term forecast shows gas from shale will play a bigger role in meeting U.S. demand, Richard Newell, agency administrator, said today in Washington. Production in 2035 is “twice the level that we had in last year’s outlook,” he said.
• WikiLeaks Founder Assange Released on Bail, Says He Will Continue His Work. WikiLeaks founder Julian Assange said he would continue his work and “protest my innocence” after being released from a London prison on bail today. “During my time in a Victorian prison, I had time to reflect on the conditions of those people around the world also in solitary confinement in conditions that are more difficult than those faced by me,” Assange, 39, said outside the High Court in London today, while thanking supporters who helped him post bail. “Those people also need your attention and support.” Assange has been in jail since Dec. 7, when the Australian turned himself in to U.K. police after Swedish authorities issued a European arrest warrant. Assange is wanted for questioning over claims of rape and molestation in Sweden.
• Sehgal Plans to Buy Apple(AAPL), Procter & Gamble Amid Forecast S&P 500 to Surge. Rohit Sehgal, a money manager whose Canadian growth fund has outperformed 92 percent of its peers over the past five years, said he is building his U.S. holdings in anticipation of a surge in American stocks next year. The manager of the Dynamic Power Canadian Growth Fund said he plans to increase the fund’s stakes in companies including Apple Inc., Procter & Gamble Co. and U.S. industrial companies, estimating the Standard & Poor’s 500 Index will gain as much as 20 percent in 2011 as the economy grows faster than forecast.
• Goldman Sachs(GS) Withdraws From Massachusetts Underwriting Teams. Goldman Sachs Group Inc. asked to be removed from two state underwriting teams in Massachusetts after Neil Morrison, the firm’s Boston-based public-finance banker, helped Treasurer Tim Cahill’s failed run for governor.

Wall Street Journal:

• BIS: Big Banks Need 577 Billion Euros to Meet 7% Capital Ratio. The world's largest banks need to raise around EUR577 billion in capital to comply with new global regulatory standards, the Bank for International Settlements said Thursday.
• Q&A: Ron Paul on His New Perch to Fight the Fed.
  

CNBC:

• Citi(C) Investors May Need to Wait Another Year: Pandit. While Citigroup has managed to rebuild itself from the ruins of the financial crisis, investors likely will have to wait until 2012 to reap the rewards, CEO Vikram Pandit told CNBC.
• FedEx(FDX) Profit Falls Below Forecasts, Raises Outlook.
• Foreclosure Freeze to Chill Spring Housing.
  

Business Insider:

• Watch Out Maryland, Your CDS Just Went Vertical. (graph) The U.S. muni bond market continues to trouble investors, and while there are some stand out worries (California, Illinois, New York), others are starting to crop up. Maryland might be a serious concern if the spike in its CDS price is any sign.

New York Post:

• Boffo Year for Wall Street $$. This year could be the second most profitable for New York City's securities industry, and the average bonus may top last year's because so many bankers and brokers have been laid off. "Wall Street earned $21.4 billion during the first three quarters of 2010," state Comptroller Tom DiNapoli said in a report yesterday. "While much less than last year's record of $61.4 billion, which was fueled by federal assistance, the securities industry is on track for the second-highest level of profitability on record," he said. Meanwhile, at Goldman Sachs, Chief Executive Lloyd Blankfein is expected to receive about $24.3 million in stock next month -- part of a 2007 pay package that was restricted for three years.
• Aeropostale(ARO) Girding for Buyout Buzzards. Aeropostale has a message for any buyout firms that may be circling: Buzz off! The New York-based teen apparel retailer -- whose shares got hammered last week by a disappointing fourth-quarter outlook and a management shuffle -- has hired Barclays Capital as a strategic adviser, The Post has learned. But rather than using Barclays to explore options including a possible sale, Aeropostale is doing the opposite: preparing for a defense in case it's approached by private-equity firms, according to a person close to the situation.
• Fed to Slash Debit Card Swipe Fees. The Federal Reserve is expected to announce a proposal as soon as today to slash debit-card swipe fees by 50 to 60 percent, The Post has learned. The proposed cut, while steep, may be seen as a victory for the banks as financial institutions were bracing for a drop of as much as 80 percent in swipe fees, the money banks charge merchants for using debit cards.
  

New York Times:

• 4 Arrested in Insider Trading Investigation. The FBI has arrested four people in connection with a long-term insider trading investigation it is conducting along with federal prosecutors in Manhattan. The defendants were identified as Walter Shimoon, Mark Longoria, Manosha Karunatilaka and James Fleishman. They are accused of conspiring to provide confidential information to investors.

Boston Globe:

• Massachusetts Has $213 Million Stake in Earmark Fight. A $1.1 trillion spending bill now under review in the Senate includes at least $213 million for 174 earmarked projects for Massachusetts in what amounts to a last-ditch effort to approve items that have come under attack as wasteful pork by many Republicans and President Obama. The bill includes $400,000 for the Paul Revere House in Boston’s North End, $8 million for the Edward M. Kennedy Institute for the United States Senate, and dozens of other earmarks that would be peppered throughout the Bay State.

Big Government:

• Exclusive: Sources Confirm FDA Moving Ahead With Rationing. Sources on Capitol Hill have informed Capitol Confidential that the Food and Drug Administration (FDA) will indeed begin rationing late-stage cancer drugs. The FDA will make an 11am (EDT) announcement that it will begin denying Avastin to breast cancer patients but will graciously offer the creator of the drug a final show trial of a hearing in 60 days. The FDA will be judge, jury and executioner. Unfortunately, the victims of breast cancer will be the ones punished and harmed. The FDA has never before limited access to a drug based upon cost considerations. Yet there are some within the agency that are intent on breaking new ground to justify a rationing regime designed to drive down the cost of health care. Avastin is the test case. There is no evidence that the pending show trial will temper their enthusiasm for thier rationing scheme. In essence, the Avastin decision is the first battle in ObamaCare. Opponents of ObamaCare warned of the implications of a government take-over of our health care system — first and foremost was rationing. And that is what has happened.

Risk.net:

• Irish Bail-Out Fails to Quell Bank Worries. The cost of insuring against a default of Ireland's major banks went up today, despite yesterday's aid package agreed by parliament. Five-year upfront credit default swaps (CDS) on Irish banks rose again today, despite the Irish parliament's approval yesterday of an €85 billion European Union/International Monetary Fund bail-out, including €35 billion to support Ireland's banking sector. CDSs on Bank of Ireland rose steeply from 13.5% up front at 1.00pm UK time yesterday to 14.5% at 1.00pm today, an all-time high for the bank. The upfront cost of protection against Allied Irish defaulting rose from 18.5% yesterday to 22.5% today. CDSs on Anglo Irish Bank reached 28%, up from 27% two days ago. Meanwhile eurozone peripheral sovereigns experienced a rough day, with only Greece seeing falling risk perceptions. Five-year credit default swaps on Portugal rose from 442 basis points at close of play yesterday to 456bp at 1.00pm today. CDSs on Ireland rose from 546bp to 561bp over the same time period, while CDSs on Italy's debt increased from 195bp to 201bp. Spain's CDSs rose from 319bp to 327bp, while CDSs on Hungary inched up from 377bp yesterday to 379bp at 1.00pm today. The cost of protection against a Greek state default fell from 955bp yesterday to 930bp today, according to data provider Markit. Germany continued to hover under its November 30 six-month high of 56bp, today moving up one basis point to 53bp.

Politico:

• Tax Deal Hits Speed Bump in House. House Democratic leaders hit a speed bump en route to passing President Barack Obama's tax deal Thursday amid rekindled liberal fury over an estate tax provision the party finds too generous. Progressives were miffed that they would be forced to vote on the Senate-passed tax bill if they wanted to vote to replace the estate tax alteration with one authored by Rep. Earl Pomeroy (D-N.D.).

Reuters:

• CFTC Holds Off on Releasing Commodity Limits Rule.

Telegraph:

• Spain Debt Auction Pushes Borrowing Costs to Decade High. Spain had to pay a high price to get it last bond sale of the year away, with borrowing costs hitting a ten-year high as investors stayed on the sidelines until EU authorities clarified their approach to the Spanish crisis.

The Guardian:

• U.K. About to Sack 100,000 Public-Service Workers. The U.K. government's austerity measures mean at least 100,000 public-service workers will lose their jobs by April.
  

Bild:

• German Chancellor Angela Merkel said the creation of euro bonds might discourage indebted European countries from reducing excessive deficits quickly, citing an interview. "With so-called euro bonds, weaknesses in Europe wouldn't be eliminated but only distributed to everybody," Merkel said. "Indebted countries wouldn't have the pressure to fix their budgets."

Euro2day:

• Fitch Ratings will reassess its credit rating for Greece in the next few days. The reassessment will be announced within the next five days and contain both positive and negative elements that will mainly focus on public debt and refinancing.

Manila Bulletin:

• Dry-Bulk Shipping Income to Fall in 2 Years. Shipowners will earn less next year and in 2012 from renting out vessels to haul goods such as coal and iron ore as the fleet expands, Arctic Securities said. The Baltic Dry Index, a measure of commodity-shipping costs, has slid 26 percent this year, according to the Baltic Exchange in London. At the same time, the fleet of dry-bulk vessels has swelled by 12 percent, Oslo-based investment bank Arctic said in a report dated today. Expansion will come to 8.8 percent next year and 6.1 percent in 2012, it estimated.

Bear Radar

Style Underperformer:

• Large-Cap Value (+.59%)

Sector Underperformers:

• 1) Paper -1.53% 2) Gold -1.51% 3) Homebuilders -.35%

Stocks Falling on Unusual Volume:

• RGC, RGS, AEM, NG, CTRP, SRCL, PGR, AIXG, DLLR, BRLI, SCHL, VECO, LPHI, MAKO, BLKB, CLDA, AVAV, DRIV, OFIX, AMSC, TRS, MBLX, BIDU, CBPO, MIPS, SOHU, MSB and CRK
  

Stocks With Unusual Put Option Activity:

• 1) PDE 2) IAG 3) ECA 4) XHB 5) FDX
  

Stocks With Most Negative News Mentions:

• 1) HRS 2) ALV 3) JOYG 4) PLCE 5) FBIZ
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (+.62%)

Sector Outperformers:

• 1) Gaming +2.19% 2) Hospitals +1.43% 3) Networking +1.16%

Stocks Rising on Unusual Volume:

• ERIC, MOTR, MLHR, NDAQ, CCME, CIEN, WYNN, WGO and KND
  

Stocks With Unusual Call Option Activity:

• 1) CBG 2) NVS 3) IVN 4) FIG 5) XRX
  

Stocks With Most Positive News Mentions:

• 1) HRS 2) WM 3) ENSG 4) ALV 5) MNBT
  

Thursday Watch

Evening Headlines
Bloomberg:

• Merkel Channeling Antony Comes to Praise Euro While Burying It. Every time German Chancellor Angela Merkel talks about how investors will have to swallow losses in future debt crises, financial markets shudder. Irish 10-year bond yields climbed to a record on Nov. 2 after Merkel said the European Union was drafting plans to force investors to cover losses in a repeat of the sovereign debt slump that started earlier this year in Greece. Her comment in a Nov. 23 speech that the euro’s condition is “exceptionally serious” helped drive the currency down 1.6 percent that day. With EU leaders meeting in Brussels today as the region’s debt woes threaten Portugal and Spain, Merkel’s statements may raise financing costs for the euro area that she says she’s defending, said Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin. Her outbursts may also derail efforts by other EU states and the European Central Bank to fend off bondholders who are betting on a default. At stake are European efforts to contain weakness in the bond markets that threatens to blow the euro region apart. The single currency dropped 6.7 percent against the dollar this year and the extra yield investors demand to hold 10-year bonds of Italy, Spain and Portugal over German equivalents rose last month to euro-era records. “The shape of the euro zone is going be driven by Germany’s political attitude and willingness to underwrite the debt of the peripheral countries,” Marshall said. “That’s why the market is reacting so much to what she said.” Merkel, who faces seven regional elections next year, has said her aim is to put Germany’s stamp on the euro area by getting all countries to reduce budget deficits, thus shielding German taxpayers from the cost of any future bailouts.
  
• Spain Goes Into Last Bond Sale With Sovereign Rating at Risk: Euro Credit. Spain goes into its final bond sale of the year with the threat of a credit rating downgrade, undermining the government’s efforts to convince investors the nation and its lenders can meet their refinancing needs in 2011. Today’s auction of 10-year and 15-year bonds aims to raise as much as 3 billion euros ($4 billion), after a surge in borrowing costs led the Treasury to reduce the habitual goal of as much as 4 billion euros, Finance Minister Elena Salgado said. The yield on 10-year bonds approached a decade-high yesterday, rising to 5.56 percent, before closing at 5.50 percent. Moody’s Investors Service said yesterday it may lower the country’s Aa1 rating less than three months after the previous cut. Spain’s central government, regional administrations and banks collectively require 290 billion euros of financing next year, leaving the country “susceptible to further episodes of funding stress,” the company said.
• China May Lift Rates 6 Times Next Year on Inflation, Mizuho's Suzuki Says. China may raise interest rates up to six times by the end of next year as inflation becomes more entrenched in the economy, according to Mizuho Research Institute Ltd. China’s central bank has relied on reserve-requirement ratios to help control liquidity, and with levels near 20 percent there’s little room for increases, said Takamoto Suzuki, a senior economist at the unit of Japan’s third-largest bank. “A rate hike will be inevitable,” Tokyo-based Suzuki said. “It wouldn’t be surprising if the central bank lifts interest rates by about 1.5 percentage points by the end of next year.” Consumer prices climbed 5.1 percent in November from a year earlier, the fastest since July 2008, the statistics bureau said on Dec. 11. The People’s Bank of China this month announced its sixth increase in reserve-requirement ratios, making major banks to set aside 18.5 percent of deposits. The PBOC raised borrowing costs in October for the first time since December 2007, increasing the one-year deposit rate to 2.5 percent and the lending rate to 5.56 percent.
• Commodity Assets Expand to Record $345 Billion in November, Barclays Says. Commodity assets under management rose $11 billion last month to a record $354 billion, led by demand for index-linked investments, Barclays Capital said. Investment flows into products linked to commodity indexes reached $3 billion in November, Suki Cooper, Roxana Mohammadian Molina, Kevin Norrish and Amrita Sen, Barclays analysts based in London, said today in a report. Total inflows into indexes, medium-term notes and exchange-traded products were $6.1 billion. New investments in 2010 are poised to reach $60 billion, trailing only $76 billion in 2009, Barclays said. The Federal Reserve has kept its benchmark interest rate close to zero percent since December 2008, and the U.S. central bank plans to pump an additional $600 billion into the economy through June by buying government bonds. The Fed purchased $1.7 trillion of securities in a phase that ended in March.
  
• Gregoire Proposes 'Devastating' Cuts in Budget Plan. Governor Christine Gregoire of Washington, one of seven states without an individual income tax, proposed cuts she called “devastating” to bridge a $4.6 billion deficit in a two-year budget that takes effect in July. Gregoire, 63, a Democrat in her second term, is asking the Legislature for about $3 billion in spending cuts and $1.1 billion in savings by suspending pay raises for teachers and a program that provides smaller class sizes, according to a statement from her office. It said fund transfers, pension reforms and use of reserves will also help cover the deficit. The proposal “is not a budget I ever expected to see in the state of Washington, and the choices in it are the most difficult ones I’ve ever faced,” Gregoire said in a message included in the spending plan. “The result is a 2011-13 budget that contains devastating reductions,” she said.
• Taxable Bond Funds Have First Net Withdrawals by Investors in Two Years. U.S. investors pulled $401 million from taxable bond mutual funds in the week ending Dec. 8, the first net withdrawals in two years. Municipal bond funds lost $1.3 billion to redemptions, according to data released today by the Investment Company Institute, a Washington-based trade group for the mutual funds industry. Investors took out $2.7 billion from domestic stock funds, their 32nd straight week of withdrawals, while stock funds that invest outside the U.S. attracted $1.3 billion.
• S&P May Downgrade More Than 1,000 'Incorrectly Analyzed' Mortgage Bonds. Standard & Poor’s said it may downgrade 1,196 securities tied to U.S. residential mortgages after it “incorrectly analyzed” the bonds because of the way interest payments on the debt are structured. The securities were created mostly this year in 129 transactions called re-remics, which are formed by repackaging existing bonds backed by home loans, New York-based S&P said today in a statement. “An admission of guilt by a rating agency: How refreshing, and also what a wonderful Christmas-time present,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press. “What I want to know is, is anyone going to get fired over this?”
• Crisis Panel's Split on Blaming Wall Street May Limit Impact of Findings. The partisan split on the federal panel exploring the origins of the financial crisis may undermine the impact of its findings on the banks, bond-rating firms and regulators it investigated, legal scholars and former national commission members said.
• Pakistani Nuclear Weapons Program's Aid From UN Shows Weakness of Watchdog. The United Nations agency tasked with curbing nuclear proliferation may have unwittingly helped Pakistan develop its atomic-weapons program because of weak internal oversight, according to documents and interviews with three former UN scientists. The UN’s International Atomic Energy Agency provided financial and technical aid to develop Pakistan’s uranium mines and improve plutonium-producing reactors even after the country tested a nuclear weapon in 1998 in defiance of a non- proliferation treaty, IAEA documents show.
• Big Oil Sells Assets at Record $49 Billion Pace as China Inflates Prices. The world’s largest oil companies sold assets at a record pace this year, finding buyers at higher prices as China and other emerging economies vie for reserves. BP Plc, Royal Dutch Shell Plc and ConocoPhillips led 95 sales in 2010 valued at $49.5 billion, the most in at least 12 years, data compiled by Bloomberg show. The pace of disposals has picked up through the year -- deals in the fourth quarter topped $20 billion -- signalling momentum may carry into 2011. China’s state-controlled oil companies were the biggest buyers. Cnooc Ltd. and Bridas Corp’s $7.06 billion purchase of BP’s 60 percent interest in Argentina’s Pan American Energy was the largest acquisition of an energy asset from a major. Last week, Occidental Petroleum Corp. agreed to sell its fields in Argentina to Sinopec Group for $2.45 billion.
• U.S. Afghanistan War Study Notes Military Progress, Questions Transition. The Obama administration’s Afghanistan war review concludes that while sending more troops and civilian resources has yielded gains, it’s too soon to say when a full transition to Afghan control will be feasible, according to a U.S. official who worked on the report.
• Goldman Sachs's(GS) Sze Said to Plan Asia-Focused Global Hedge Fund. Morgan Sze, global head of Goldman Sachs Group Inc.’s principal strategies proprietary trading desk, plans to start a global hedge fund that will be 75 percent invested in Asia, said two people with knowledge of the matter.
• Copper Drops For a Third Day as Global Inventories Expand. Copper declined for a third day as stockpiles expanded and renewed concern that Europe’s debt crisis may hamper the global economic recovery hurt the outlook for demand. Futures in Shanghai and New York also fell. Three-month-delivery copper on the London Metal Exchange dropped as much as 0.9 percent to $9,018 a metric ton, and traded at $9,034.75 at 11 a.m. in Singapore. Inventories of copper tallied by the London Metal Exchange rose for a third day yesterday by 7,050 tons, the largest one- day tonnage increase since January, to 357,950 tons. Of that amount, 6,700 tons entered LME warehouses in South Korea, the nearest location to China, the world’s largest metal user. “It’s probably metal being re-routed from China because importers can’t make money bringing it in,” said Zhu Lin, an analyst at Shanghai Metals Market. The metal for March-delivery on the Shanghai Futures Exchange lost as much as 1.1 percent to 67,140 yuan ($10,080) a ton, while futures on the Comex in New York dropped as much as 0.9 percent to $4.0960 a pound. “The potential for further tightening in China” was also weighing on investors, said Li at Sinolink Futures. Policy makers in China have said they may curb lending and raise interest rates to stem accelerating inflation.

Wall Street Journal:

• Bank of America(BAC) in Settlement Talks Over Mortgages. Bank of America Corp., after vowing to fight requests that it repurchase certain loans, has begun potential settlement discussions with some of its largest mortgage investors. The 17-member group now in talks with the nation's largest bank as measured by assets includes the Federal Reserve Bank of New York, government-owned mortgage company Freddie Mac, BlackRock Inc., and Allianz SE's Pacific Investment Management Co., or Pimco. The bank's approach with this group appears to signal a change in tone for Chief Executive Brian Moynihan, who in November pledged to engage in "day-to-day, hand-to-hand combat" on investor requests to repurchase flawed mortgages made before the U.S. housing collapse.
• Unions Take Fight With Pulte(PHM) to Congress. Unions are pressing Congress to assess how home builder Pulte Group Inc. spent about $900 million in government tax breaks meant to help spur job creation and avoid layoffs. Unions say Pulte has laid off workers and question whether the Michigan-based giant has created new jobs. The unions’ real beef: Pulte’s use of contractors that don’t hire unionized workers, a practice that hurts union members and makes it harder for union organizers to justify why other workers need to join their ranks.
• Officials Warn U.S., Europe of Terror Plot. Iraqi authorities have obtained confessions from captured insurgents who claim al Qaeda is planning suicide attacks in the U.S. and Europe during the Christmas season, two senior Iraqi officials said Wednesday. A U.S. official familiar with the matter confirmed the threat as credible. "People are looking at this very closely," the U.S. official said. "We take it very seriously."
• The 111th Congress's Final Insult. The 111th Congress began with an $814 billion stimulus that blew out the federal balance sheet, so we suppose it's only fitting that the Members want to exit by passing a 1,924-page, $1.2 trillion omnibus spending bill.

MarketWatch:

• Insiders Betting That Rally Will Soon Reverse Course. Corporate insiders evidently believe that the stock market’s rally will soon run out of steam. That’s because they recently have been selling the shares of their companies’ stock at a pace last seen since early 2007.
• U.S. Stock Watchers Optimistic on 2011. The U.S. stock market -- at its loftiest perch since before Lehman Brothers collapsed two years ago -- can rise further in 2011 as long as there are signs the economic recovery is strengthening. That’s the view of many stock strategists.
• Housing is The Forgotten Crisis. Falling prices once again threaten economy.

Business Insider:

• 15 Examples of Government Pork That Are Driving John McCain Crazy.
• Here Are the 10 'Dumbest' U.S. News Websites According to Google(GOOG). Google has launched a new search filter to its "advanced search page" that allows people to sort content based on...reading level - basic, intermediate, or advanced. It also allows you to chart how 'smart' or 'dumb' any website is by using the search function.
  
• Twitter is Now Worth Almost TWICE as Much as The New York Times(NYT).

Zero Hedge:

• Contrary to Rumors, New York Comptroller Sees an Increase in Banker Bonuses in 2011, as Rick's Cabaret Prepares to Add Locations.
• Nic Lenoir of ICAP On Why the Euro is About to Crash and Burn, And Why His Concern for the "New Normal" is Not Slow Growth But Civil War.
  

NY Times:

• Europe Staggers as Critical Summit Looms. Europe’s smoldering financial crisis flared up on Wednesday, with riots over austerity spending in Greece, new signs of troubles in Spain and little indication that European leaders were moving any closer to agreement on a systemic approach to long-term stability. The day’s events emphasized the complex social, political and economic challenges facing government leaders at a European Union summit meeting on Thursday and Friday in Brussels. The meeting is expected to focus on the financial crisis, but there was no sign of the emergence of the sort of comprehensive plan that financial experts say is needed to beat back the unfolding turmoil.
• Bloomberg to Publish Editorials. The mayor’s company, Bloomberg L.P., said on Wednesday that it would begin publishing editorials across its vast media enterprise in an effort to broaden the company’s influence on national affairs. And though Mr. Bloomberg has an agreement with the city to have no involvement in the “day-to-day operations” of his company, the endeavor, called Bloomberg View, is intended to channel his personal philosophy and worldview. “I think it’s very important that everyone understands that our editorial page is going to be, for sure, consistent with the values and beliefs of the founder — even if he happens to be mayor of New York City,” said Matthew Winkler, the editor in chief of Bloomberg News. “I fully expect us in our Bloomberg View always to reflect those values. In fact, I want people to come away from reading the Bloomberg View infused with those beliefs and values.”
• China's Push Into Wind Worries U.S. Industry. “These are very sophisticated machines,” he said. They are also the only three Chinese-made wind turbines operating in the United States. That could soon change, though, as Goldwind and other Chinese-owned companies plan a big push into the American wind power market in coming months.

Politico:

• House Democrats Resigned to Tax Bill's Passage. For House Democrats, reality finally set in. Just one week ago, Democrats were furious over President Barack Obama’s tax compromise with Republicans, hollering “no, we can’t” in a basement room in the Capitol, and eventually approving a resolution to try to block the bill from coming to the floor. But now, after several late-night gripe sessions and a flurry of calls from the administration, House Democrats are resigned to the fact that one of their final votes of this Congress – and for some, their careers – will be to extend the very tax cuts they railed against for the last decade.
  

Reuters:

• U.S. Says Chavez Subverting Will of Venezuelans. Venezuelan President Hugo Chavez is using autocratic powers to subvert the will of the people, the U.S. State Department said on Wednesday after the socialist leader said he would rule by decree for a year. On Thursday, Venezuela's National Assembly is due to grant Chavez the authority to fast-track laws in a move that undermines a bloc of opposition lawmakers who join parliament next month.
• NYC Faces $17 Billion of Budget Gaps in FY2011-'14- Report. New York City might have to close $17 billion of budget gaps from fiscal 2011 through 2014, the city comptroller said in a report on Wednesday, despite a series of spending reductions and service cuts. Though last month Bloomberg announced 6,000 layoffs over 18 months and $1.5 billion of budget cuts, Comptroller John Liu said the biggest danger with the city's forecasts was its reliance on teachers and school administrators agreeing to no wage increases for the first two years of the next contract. And New York state could, by the actions it takes on taxes and school and health programs, drive the city's budget gaps $1 billion higher each year, Liu said.
• U.S. State Dependence on Federal Funds Grows - NASBO. Despite an historic collapse in revenue, U.S. states were able to modestly increase their spending for two years after the federal government sent them aid through the economic stimulus plan, according to a report released on Wednesday. State leaders have warned that their budgets have become so dependent on federal money that they risk new budget holes or possibly another recession next year as the final stimulus funding dries up. "Looking beyond fiscal 2010, states are very concerned that state revenues will not have recovered to pre-recession levels by the time the additional federal funds begin winding down in fiscal 2011," the report from the National Association of State Budget Officers said, adding states are likely to face increased demands for healthcare and public assistance. State general funds declined 3.3 percent in fiscal 2009 and an additional 5.9 percent in fiscal 2010, which ended for most states in June, according to the group. "At the same time general fund spending was rapidly declining, federal fund spending experienced sizable increases," the report said. The $814 billion economic stimulus plan included the largest transfer of federal funds to states in U.S. history. State spending of federal money shot up 17.7 percent in fiscal 2009 and 23.4 percent in fiscal 2010, the association said.

Telegraph:

• The New START Treaty: President Obama is Pushing for a Monumental Surrender to Russia. The Obama administration has an impeccable track record of caving in to Russian demands, as part of its controversial “reset” policy. Last year, it threw key US allies Poland and the Czech Republic under the bus, ditching plans for Third Site missile defences in deference to Russian opposition. It is now planning another surrender to Moscow, by pressing for Senate ratification of the new START Treaty in the lame duck session of Congress. Instead of allowing the newly elected Congress to vote on the treaty, the Obama administration is trying to ram New START through without proper debate. No major treaty has ever been forced through Congress in a lame duck session. There is mounting opposition in Washington to the New START Treaty, which would significantly weaken US security by undermining America’s ability to deploy an effective global missile defence system.

Irish Times:

• Irish support for the ruling Fianna Fail party fell 7 percentage points to 17%, according to a poll carried out for the Irish Times. Backing for Fine Gael rose 6 percentage points to 30%. Support for the Labour party fell 8 percentage points to 25%.

Oriental Morning Post:

• China Banking Regulatory Commission's Shanghai branch ordered halts on lending to companies for the purchase of fixed assets until the end of the year.

Shanghai Securities News:

• Chinese central bank governor Zhou Xiaochuan urged the use of a "pool" to absorb hot money inflows to the nation.

WSJ China:

• China Construction Bank Corp. Chairman Guo Shuqing said the nation's central bank should raise benchmark interest rates because beative real rates aren't good for China's economic growth.

People's Bank of China Financial News:

• A large movement in the yuan exchange rate would have a "relatively large" impact on China's economic and financial stability next year.

Evening Recommendations
Citigroup:

• Reiterated Buy on (VFC), target $100.
• Reiterated Buy on (AVT), target $39.
• Rated (DRI) Buy, target $60.
• Rated (SBUX) Buy, target $40.
• Reiterated Buy on (DHR), target $53.

Night Trading

• Asian equity indices are -1.0% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 105.0 +2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 105.50 +2.5 basis points.
  
• S&P 500 futures -.09%
  
• NASDAQ 100 futures -.07%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ATU)/.34
• (DFS)/.43
• (FDX)/1.31
• (GIS)/.78
• (SCHL)/2.19
• (WGO)/.02
• (ACN)/.75
• (ORCL)/.46
• (ZQK)/.07
• (RIMM)/1.64
• (SCS)/.14
• (TTWO)/.31
  

Economic Releases
8:30 am EST

• Housing Starts for November are estimated to rise to 550K versus 519K in October.
• Building Permits for November are estimated to rise to 560K versus 550K in October.
• The 3Q Current Account Deficit is estimated to widen to -$126.0B versus -$123.3B in 2Q.
• Initial Jobless Claims for last week are estimated to rise to 425K versus 421K the prior week.
• Continuing Claims are estimated to rise to 4115K versus 4086K prior.
  

10:00 am EST

• Philly Fed for December is estimated to fall to 15.0 versus a reading of 22.5 in November.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Geithner testimony to Congressional Oversight Panel, weekly EIA natural gas inventory report, BofA Merrill Healthcare Conference, BofA Merrill Industrial Conference, (CNC) investor meeting, (PG) analyst meeting, (LUV) analyst day, (ABC) investor day and the (GPRO) analyst day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.