Wednesday Watch

Evening Headlines
Bloomberg:

• Banks Best Basel as Regulators Dilute or Delay Capital Rules. More than 500 representatives from 27 nations, including top regulators and central bankers, met dozens of times this year to hammer out 440 pages of new rules to govern the world’s banks. What’s not in the documents published by the Basel Committee on Banking Supervision, and the escape hatches that are, may have more impact on how financial institutions will operate following a global credit crisis that led to $1.8 trillion in bank losses and writedowns. The committee’s most significant achievement, members say, an agreement to increase the amount of capital banks need to hold, won’t go into full effect for eight years. Other measures that regulators had hoped would prevent future crises -- liquidity standards, a capital surcharge on the biggest lenders and a global resolution mechanism for failing firms -- were postponed, allowing banks to escape the toughest rules that would force them to change the way they do business.
• Japan's Export Growth Accelerated in November. Japan’s export growth accelerated for the first time in nine months as a rebound in global demand helped the nation’s economy withstand the yen’s advance to a 15- year high. Overseas shipments rose 9.1 percent in November from a year earlier, from October’s 7.8 percent gain, the Finance Ministry said in Tokyo today.
• Spain Power Debt Infects Enel With Sovereign Bond Market Woes: Euro Credit. Europe’s spreading sovereign debt crisis is making it tougher for Spain to pay electricity bills, and that’s infecting corporate bonds beyond its borders. Enel SpA, the Italian owner of Spanish power company Endesa SA, was put under review for a possible downgrade last week by Moody’s Investors Service because the Spanish government’s surging financing costs led it to freeze plans to repay 14.6 billion euros ($19.2 billion) owed to its utilities. Enel bonds were the worst performers this month among the 50 biggest non- financial issuers in Bank of America’s EMU Corporate Index. “The contagion between corporate and sovereign is already happening,” said Tom Sartain, a fund manager at London-based Schroders Plc, which oversees $245 billion of assets. “The instability of the sovereign is filtering through.”
• North Korea Deployed Missiles on West Coast Dec. 20, Chosun Ilbo Reports. North Korea deployed more missiles on its west coast on Dec. 20, when South Korea conducted artillery drills on an island in waters along the two nation’s western sea border, the Chosun Ilbo newspaper reported, citing an unidentified government official.
• Energy Put Trades to Double Average After Single Bet. Trading of bearish options on U.S. energy companies jumped to 2.6 times the four-week average, boosted by a single bet that an exchange-traded fund tracking 40 companies including Exxon Mobil Corp. and Chevron Corp. will retreat by February. Almost 56,000 puts to sell the Energy Select Sector SPDR Fund changed hands as of 4 p.m. in New York, nine times the number of calls to buy. The ETF rose to the highest since September 2008, climbing 1 percent to $66.99. Most of the volume was concentrated in a single trade in which an investor initiating a new position bought 20,000 February $66 puts and sold 10,000 February $69 puts in a spread strategy, options strategists at Susquehanna International Group LLP wrote in a report. Using a spread strategy caps potential gains while cutting the cost of the trade. “This investor is likely positioning for substantial weakness in shares heading into February expiration,” the Bala Cynwyd, Pennsylvania-based strategists wrote. Those contracts expire Feb. 18.
• Fuel-Oil Loss in Asia Set to Jump to Two-year High on Glut: Energy Markets. Refining losses from producing fuel oil in Asia may widen 30 percent to the most in two years in the next month as an increase in crude processing leads to a glut. The loss from turning crude into the fuel, the so-called crack spread, may rise to $13 a barrel by the end of January from about $10 this month, a Bloomberg News survey of four traders showed. The last time it was at that level was in November 2008, when crude traded below $60 a barrel, compared with almost $90 today, according to data compiled by Bloomberg.
• Bloomberg Sues ECB to Force Disclosure of How Greece's Swaps Hid Deficit. Bloomberg News filed a lawsuit against the European Central Bank, seeking to make it disclose documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis.
• China Raises Gasoline Prices for Third Time This Year as Global Costs Jump. China raised gasoline and diesel prices today by less than half of what crude oil has gained in the past month as the world’s fastest-growing major economy seeks to contain inflation. The price of gasoline will rise by as much as 4 percent to 310 yuan ($47) a metric ton and diesel by 300 yuan a ton, the National Development and Reform Commission said in a statement on its website yesterday, the third increase this year in the world’s second-largest oil consumer.
• China's Risk-Weighting Rule May Cut Banks' Capital, Profits, Barclays Says. China’s higher risk-weighting requirements on $1.2 trillion of loans to local governments will cut banks’ capital adequacy ratios and profits, according to Barclays Capital. The China Banking Regulatory Commission may require lenders to assign 100 percent risk weightings for loans fully covered by cash flows, up from the current 50 percent, and as much as a 300 percent for uncovered loans, Barclays said in a note today, citing a China Business News report published yesterday. The risk-weighting rule has already been made official, the note said, citing unidentified banks.

Wall Street Journal:

• Trader Holds $3 Billion of Copper in London. As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion. The report coincided with copper prices soaring to new records on Tuesday.
• Confidentiality Cloaks Medicare Abuse.
• The Net Neutrality Coup. The campaign to regulate the Internet was funded by a who's who of left-liberal foundations. The Federal Communications Commission's new "net neutrality" rules, passed on a partisan 3-2 vote yesterday, represent a huge win for a slick lobbying campaign run by liberal activist groups and foundations. The losers are likely to be consumers who will see innovation and investment chilled by regulations that treat the Internet like a public utility.

CNBC:

• Nike(NKE) Results Beat Street, but Future Orders Disappoint.
• Pro Traders: Market Has Every Reason to Melt-Up.
  

MarketWatch:

• China Banks May Face Higher Reserve Ratios in 2011. Leading Chinese banks could be required to set aside 23% of their deposits as reserves next year, as authorities seek to increase administrative measures to drain excess cash from the financial system, according to a China Daily report Wednesday, citing a leading economist's comments. The reserve-ratio hike will elevate the rate to the highest on record for any central bank, the state-run newspaper reported Industrial Bank Co.'s chief economist Lu Zhengwei as saying Tuesday.

Business Insider:

• Confirmed: Bank of America(BAC) is the WikiLeaks Target.
• Here Come More Secret Recordings That Could Break Apart The UK Government.
  

Zero Hedge:

• As ETFs Pass $1 Trillion in AUM, What Next?

IBD:

• Vast Database Helps Amateur Sleuths Probe Their Family Trees. Provo, Utah-based Ancestry.com (ACOM) is doing just that. And to this point, it's doing very well.

CNN Money:

• 10 Fastest Growing States.
• $305 on Gas This Month - Bah! Humbug! Holiday shoppers will need to bump up their budget for one purchase this year, and they can't even put it under the tree: gasoline. The price of fuel is up 13.6% from last December and 76% higher from December 2008, according to a new study from the Oil Price Information Service. Nationwide, drivers are estimated to spend $305 on gasoline in December.
• Verizon(VZ) iPhone Won't be AT&T's Doomsday.
  

Washington Post:

• Obama Administration Readies Indefinite Detention Order for Guantanamo Detainees.

Politico:

• EPA to Double Down on Climate. The Obama administration is expected to roll out a major greenhouse gas policy for power plants and refineries as soon as Wednesday, signaling it won’t back off its push to fight climate change in the face of mounting opposition on Capitol Hill. The Environmental Protection Agency has agreed to a schedule for setting greenhouse gas emission limits, known as “performance standards,” for the nation’s two biggest carbon-emitting industries, POLITICO has learned.

Reuters:

• Red Hat(RHT) Outlook Beats Wall Street View. Business software maker Red Hat Inc issued an outlook for profit and revenue above Wall Street projections on Tuesday, echoing optimism about the technology spending climate shown by bigger industry companies last week. Red Hat Chief Executive Jim Whitehurst said that market demand for his company's products was "strong" as revenue exceeded Wall Street projections. "We are seeing expansion of green shoots," he said in an interview.
• Tibco Software(TIBX) Forecasts Strong Q1. Business software maker Tibco Software Inc forecast first-quarter revenue above analysts' estimates and reiterated its fiscal 2011 earnings growth forecast.
• Xilinx(XLNX) Sees Larger Rev Drop in Q3, Shares Fall. n">Programmable chipmaker Xilinx Inc said it expects a sequential decline in third-quarter revenue due to weaker sales to a few large communications customers, sending its shares down 6 percent after the bell. The company now expects a 7-9 percent sequential decline in quarterly revenue, which is greater than the flat to 4 percent fall it had forecast earlier.

Telegraph:

• New START Treaty: The Obama Administration is Dancing to Moscow's Tune. Moscow has every reason to like it. As I noted in a previous post, the treaty fundamentally undercuts US national security by giving Russia a huge say over American plans for a global missile defense system:

South China Morning Post:

• Lai Fung Says China Property Sales May Decline 20%. Lai Fung Holdings expects property sales on the mainland to slow down next year as the impact of wider macroeconomic curbs are beginning to be felt in the real estate market.

Evening Recommendations
Citigroup:

• Reiterated Buy on (FINL), target $21.
• Reiterated Buy on (CCL), boosted target to $56.

Night Trading

• Asian equity indices are unch. to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 104.5 -1.5 basis points.
  
• Asia Pacific Sovereign CDS Index 105.25 -1.5 basis points.
  
• S&P 500 futures -.09%
  
• NASDAQ 100 futures -.16%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (WAG)/.54
• (AM)/.69
• (BBBY)/.65
• (MU)/.27
• (NAV)/.59
• (PPC)/.19

Economic Releases
8:30 am EST

• Revised 3Q GDP is estimated to rise +2.8% versus a prior estimate of a +2.5% gain.
• Revised 3Q Personal Consumption is estimated to rise +2.9% versus a prior estimate of a +2.8% gain.
• Revised 3Q GDP Price Index is estimated to rise +2.3% versus a prior estimate of a +2.3% increase.
• Revised 3Q Core PCE is estimated to rise +.8% versus a prior estimate of a +.8% gain.

10:00 am EST

• Existing Home Sales for November are estimated to rise to 4.75M versus 4.43M in October.
• The House Price Index for October is estimated to fall -.2% versus a -.7% decline in September.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -3,400,000 barrels versus a -9,854,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +1,500,000 barrels versus a +809,000 barrel gain the prior week. Distillate inventories are expected unch. versus a +1,094,000 barrel gain the prior week. Finally, Refinery Utilization is estimated unch. versus a +.5% gain the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly MBA mortgage applications report could also impact trading today.
  

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

Stocks Rising into Final Hour on Less Financial Sector Pessimism, Diminishing Economic Fear, Seasonal Strength, Investor Performance Angst

Broad Market Tone:

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

Equity Investor Angst:

• VIX 15.36 -.30%
  
• ISE Sentiment Index 136.0 +7.09%
  
• Total Put/Call .73 +1.39%
  
• NYSE Arms .60 +7.29%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 85.25 -1.17%
  
• European Financial Sector CDS Index 159.94 bps +3.73%
  
• Western Europe Sovereign Debt CDS Index 192.50 bps -.69%
  
• Emerging Market CDS Index 209.12 bps -.76%
  
• 2-Year Swap Spread 21.0 -2 bps
  
• TED Spread 18.0 -2 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .12% +2 bps
  
• Yield Curve 271.0 -3 bps
  
• China Import Iron Ore Spot $169.90/Metric Tonne +.18%
  
• Citi US Economic Surprise Index +17.60 +.2 point
  
• 10-Year TIPS Spread 2.28% unch.
  

Overseas Futures:

• Nikkei Futures: Indicating +45 open in Japan
• DAX Futures: Indicating +18 open in Germany

Portfolio:

• Higher: On gains in my Tech, Ag, Biotech and Retail long positions
  
• Disclosed Trades: Covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short
  
• Market Exposure: Moved to 100% Net Long

BOTTOM LINE: Today's overall market action is bullish as the S&P 500 trades higher despite recent stock gains, US muni debt worries and rising eurozone sovereign debt angst. On the positive side, Airline, Road & Rail, REIT, Homebuilding, Construction, Insurance, I-Banking, Bank, Disk Drive, Computer, Software, Coal, Alt Energy, Oil Tanker, Energy, Ag and Steel shares are especially strong, rising more than 1.0%. Cyclicals and small-caps are relatively strong. (IYR)/(XLF) have outperformed throughout the day. Copper is jumping another +1.8% despite euro weakness. The 10-year yield is stable again. On the negative side, Medical Equipment, Restaurant and Education shares are down today. The Greece sovereign cds is climbing +3.23% to 1,005.91 bps, the Russia sovereign cds is gaining +4.81% to 151.83 bps, the Portugal sovereign cds is climbing +3.44% to 483.97 bps and the Italy sovereign cds is rising +6.03% to 220.55 bps. The Euro Financial Sector CDS Index is jumping to the highest level since mid-June and the Western Europe Sovereign CDS Index remains very near its record high set last month, which is also a big negative. Moreover, the Illinois muni cds is rising +4.03% to 330 bps, which is 40 bps away from its record set in late June. US stocks remain extremely resilient as the S&P 500 breaks out of its recent range to a new 52-week high despite these headwinds. Seasonality, diminishing attacks from Washington on business and better US economic data continue to trump these concerns. I expect US stocks to trade mixed-to-higher into the close from current levels on seasonal strength, less economic fear, diminishing financial sector pessimism, short-covering, technical buying and investment manager performance angst.

Today's Headlines

Bloomberg:

• Retail Sales Growth Accelerated to 4.2% Last Week. Same-store sales at a selection of U.S. retailers posted last week the biggest jump of this holiday season, rising 4.2 percent as more consumers finished shopping, according to a survey of retailers. Almost 74 percent of shoppers completed gift buying in the week ended Dec. 18, spurring faster sales growth than the previous three weeks. That compared with 56.6 percent a week earlier, according to a chain-store sales index released today by New York-based International Council of Shopping Centers and Goldman Sachs Group Inc. The 4.2 percent gain compared to a year earlier.
• Portugal's Bond Rating May Be Cut by Moody's on Economic Growth Concern. Portugal’s bond rating may be downgraded one or two levels by Moody’s Investors Service because of concerns that budget cuts will worsen the country’s “sluggish” economic growth. “Portugal’s solvency is not in question,” Anthony Thomas, Moody’s London-based lead analyst for Portugal, said in a statement today. “But the likely deterioration in debt affordability over the medium term and ongoing concerns about the economy’s ability to withstand fiscal consolidation and private-sector deleveraging mean its outlook may no longer be consistent with an A1 rating.”
• Bond Returns Worst in Asia as Inflation Hits Two-Year High: China Credit. China’s bonds are Asia’s worst performers for the second time in four years, reflecting concern the central bank will have to be more aggressive in raising interest rates as it seeks to rein in inflation.
• Greece Has Ratings Put on Rating Watch Negative by Fitch. Greece had its ‘BBB-’ long term foreign and local currency Issuer Default Ratings placed on Rating Watch Negative by Fitch Ratings. The move to RWN is pending the outcome of a rating review by Fitch, expected to be completed in January, “which will focus on an assessment of Greece’s fiscal sustainability in the wake of the measures that the authorities have taken this year under the IMF-EU program,” as well as the outlook for the economy and the “political will and capacity” of Greece to carry out the reforms, Fitch said in a statement.
• NYSE Tweaks Trading Prices to Appeal to High-Frequency Firms. The New York Stock Exchange is changing prices for transactions on its market for the first time since May as it seeks to lure more business from high- frequency trading firms, according to an exchange notice. Brokers and traders will pay 23 cents per 100 shares starting in January to execute against bids and offers at the exchange, 2 cents higher than the current charge. Those placing orders that wait for executions at the Big Board, the largest U.S. equities venue, will get a rebate of 15 cents, up from 13 cents.
• Amazon(AMZN) Said to Exceed Kindle Sales Estimates by 60%. Amazon.com Inc. is likely to sell more than 8 million Kindle electronic-book readers this year, at least 60 percent more than analysts have predicted, according to two people who are aware of the company’s sales projections.

Wall Street Journal:

• Banks Look to Profit on Muni-Bond Fears. Some of the world's biggest banks are lining up to profit from worries about the declining finances of U.S. cities and states. For the first time in two years, Switzerland's UBS AG(UBS) has begun making markets in derivatives tied to municipal bonds and other securities. The credit-default swaps obligate swap sellers to compensate buyers if a municipal issuer misses an interest payment or restructures its debt. Separately, five large derivatives dealers—Bank of America Corp.'s Bank of America Merrill Lynch, Inc., CitigroupGoldman Sachs Group Inc., J.P. Morgan Chase & Co., and Morgan Stanley—met last month in New York to discuss standardizing the paperwork for "muni CDSs" in an effort to attract more buyers and sellers. The issue is politically explosive. States and cities are suspicious of CDSs, saying they encourage speculators to bet on, and at times worsen, states' financial distress. California is about to require all 86 of its underwriting banks to disclose what CDSs they have traded on the state's debt, either for customers or for their own accounts. But just as states grow fearful of more muni CDS trading, federal regulators are trying to streamline and bring more transparency to the derivatives market, which may have the effect of expanding the number of muni CDS contracts outstanding. "There is no evidence that CDS trading has provided any benefits to the municipal-bond market, and further we have seen little evidence that it serves much purpose beyond allowing speculators to get rich," said Tom Dresslar, spokesman for the California state treasurer's office. Muni CDSs are still thinly traded because the contracts are highly customized and difficult to unwind. Two-thirds of muni-bond buyers are households and individuals investing through mutual funds, who don't use derivatives. Hedge funds, meanwhile, are muni CDS buyers. "In the spring, when we saw muni CDS costs start rising, we found out it was hedge funds trying to profit from a muni disaster," said Jeffrey Cleveland, senior economist at Los Angeles money manager Payden & Rygel. "They're looking for the next subprime." After 17 consecutive weeks of inflows into U.S. muni-bond funds, including exchange-traded funds, the last five weeks saw $9.1 billion of outflows, according to data from Lipper, a Thomson Reuters unit. Risk premiums on triple-A-rated corporate debt over risk-free government debt have declined by 1.22% over the past month, according to Bank of America Merrill Lynch index data, but risk premiums have climbed 14.3% in the case of triple-A muni debt. Likewise, insurance on a default from California and Illinois, two of the most commonly quoted CDS contracts, has become more expensive. As of Monday, the cost of protection against a California default was 295 basis points, or hundredths of a percentage point, equivalent to $295,000 a year for 10 years of insurance on $10 million of bonds, according to Markit. A year ago, the same protection was $253,000. The cost of protecting that much Illinois debt was around $318,000 a year, compared with $161,000 a year ago.
• Extended Fed Currency Swaps Not Sign of Fresh Concern. The Federal Reserve’s extension of it currency swap arrangements with other major central bank reflects continued unease around the state of European financial markets. That said, the decision to maintain the swap lines with the Bank of Canada, Bank of England, the European Central Bank, the Bank of Japan and Swiss National Bank, should be viewed more as a protective action on the part of American officials. It is not, most economists reckon, a sign that some new problem is about to arise, even as it’s true investors remain worried by news out of Europe.
• Iraqi Parliament Approves Unity Government After Nine Months of Wrangling. Iraq’s parliament approved the government of Prime Minister Nuri al-Maliki, who vowed to pursue national reconciliation, after nine months of post-election wrangling.
• Business Roundtable Names John Engler of NAM as New President. The Business Roundtable, the association of major U.S. companies’ chief executives, today named John Engler, head of the National Association of Manufacturers, as its new president. Engler, who will take over the Washington-based roundtable next month, said his priority would be to spur economic growth. The U.S. unemployment rate was 9.8 percent in November.
• Toshiba Aims to Release Larger Glasses-Free 3-D TV.
• Nuclear Pact Moves Closer to Passage. A new nuclear-arms treaty with Russia appears headed for ratification after three additional Republican senators announced their support Tuesday morning.
• FCC Gives Government Power to Regulate Web Traffic. Federal telecommunications regulators approved new rules Tuesday that would for the first time give the federal government formal authority to regulate Internet traffic, although how much or for how long remained unclear.

CNBC:

• Goldman's(GS) O'Neill Sees 2011 as 'Year of USA'. Improving growth, falling unemployment and a sense that the U.S. is returning to "normal" could fuel a 20 percent stock market gain and make 2011 the "Year of the USA," according to Goldman Sachs economist Jim O'Neill.
• Student Loan Reform Puts Taxpayers on the Hook. The landmark healthcare reform law signed by President Obama last March included a relatively little-noticed provision that overhauled the federal student loan program. Previously, private companies made the loans, which were subsidized and guaranteed by the federal government. Under the reforms, the government now lends the money directly to students. The change means the government fronts the money and instantly bears all the risk.

Business Insider:

• Now That Apple(AAPL) is Passing 1 Million Apple TVs Sold, You Can Bet There Will Be An App Store.
• 16 US Cities Facing Bankruptcy if They Don't Make Deep Cuts in 2011.
• A Deep Look at the Winners and Losers of the 2010 Census.
• The SEC is Conducting a Wide Investigation of Possible Chinese Stock Fraud.
• Huge Photos of the Massive Snow Mess Ruining the Holidays in Europe.
  

New York Post:

• Verigy(VRGY), Advantest(ATE) in Talks. Advantest is in merger talks with rival semiconductor test systems maker Verigy, The Post has learned. The suitor is trying to break up a proposed Verigy merger with LTX-Credence and is engaged in talks, two sources close to the situation said. "They (Verigy) are not shutting out Advantest," one of the sources said. "I wouldn't categorize the talks, though, as going well," the source added.
• UK Released Lockerbie Bomber to Save Oil Deal, Report Says. Fear of "commercial warfare" from Libya led the British government to pressure Scotland to free the convicted Lockerbie bomber last year, according to a report set to be released Tuesday by four US senators. The lengthy report, which calls on the British and Scottish governments to apologize for Abdel Baset al Megrahi's release, concludes that a $900 million oil deal with Libya ultimately paved the way for the Scottish justice system to free Megrahi in August 2009. The report asserts that faulty medical analysis was used to justify his release on "compassionate" grounds, a decision described as a crass component of a complicated trade relationship between the United Kingdom and Libya.

New York Times:

• For Activist Funds, A Long-Term Approach to Investing. Cevian Capital isn’t exactly a hedge fund, though it classifies itself that way in public filings. It takes significant ownership stakes in companies for three to five years, but it isn’t really private equity, either. Cevian, a $3.5 billion firm that is based in Europe with mostly American investors — Carl C. Icahn and the Florida Teachers Pension Fund among them — calls itself an “operational activist fund.” It is among a growing body of investors who eschew the limelight and push for longer-term operational changes at companies.

CBS News:

• Latest Terror Threat in U.S. Aimed to Poison Food. Exclusive: The Dept. of Homeland Security Uncovered a Plot to Attack Hotels and Restaurants Over a Single Weekend.

ABC News:

• Attorney General's Blunt Warning on Terror Attacks. (video) In a rare and wide-ranging interview, the attorney general disclosed chilling, new details about the evolving threat of homegrown terror, and touched on topics ranging from Wikileaks to the prisoners at Guantanamo Bay.

Women's Wear Daily:

• VF(VFC) to Acquire Rock & Republic for $57 Million. VF Corp. has inked a deal to acquire bankrupt premium denim maker Rock & Republic for $57 million, WWD has learned. An official announcement is expected as soon as today.

Miami Herald:

• Employers' Burden Could Surge. In Florida, minimum unemployment taxes paid by employers could double or triple next year. As U.S. employers brace for higher state unemployment insurance taxes next year, business groups are urging Congress to delay interest penalties on $42 billion states have borrowed to continue paying jobless benefits during the recession. Thirty states and the Virgin Islands, including Florida, have exhausted their unemployment insurance trust fund reserves and are using U.S. treasury funds to maintain benefit checks for millions of workers who lost jobs through no fault of their own. So far, only Maryland, New Hampshire, South Dakota and Tennessee have paid back their loans in full, according to the National Conference of State Legislatures. California, with an unemployment rate of 12.4 percent, leads all borrowers with more than $9.1 billion owed. Hard-hit Michigan is a distant second and owes more than $3.8 billion. A provision of the stimulus bill waived interest on the loans for the past two years, but that respite expires on Dec. 31 and interest begins accruing on the outstanding loans in 2011. Unless Congress intercedes, states that don't pay off their loans by Sept. 30, must either pay interest on their average daily loan balance for the first nine months of 2011 -- or give back their federal grant that is used to administer their state programs. The federal government estimates the collective interest on the outstanding loans will total about $2 billion in 2011, while continued state borrowing is expected to stretch the outstanding loan amount to $65 billion by fiscal year 2013.

MobileBeat:

• Survey: 1 in 5 Americans Will Own a Tablet, And a Third Will Use It for Business. More than 1 in 5 Americans will own a tablet by 2014, and 37 percent of them will own them for business use, according to the survey. About half of all tablet owners plan to use the devices for social networking. Enterprise applications continue their charge into the mobile market and are set to take over about a third of all tablets in the next few years, according to a new survey conducted by Harris Interactive and sponsored by Fuze Box.
  

Politico:

• Census Shows Power Shifting Westward.

Reuters:

• U.S. Healthcare Sector Ripe for More Deals in 2011.
• Holdings in Physical Copper ETP Up About 850.5 Tons.
  

Telegraph:

• Citigroup Warns of Fresh Wave of Bank Defaults in Europe. Citigroup has warned of a fresh wave of bank failures and sovereign defaults in Europe unless EU leaders come up with a credible response to the crisis.

IrishTimes.com:

• ECB Wants Changes to Bill Tackling Banking Crisis. THE EUROPEAN Central Bank (ECB) wants the Government to change legislation that gives the Minister for Finance broad powers to intervene in the banking sector. The ECB, one of the three institutions backing the €85 billion bailout agreed with the Government last month, has criticised the Credit Institutions (Stabilisation) Bill, which is designed to give the Government the powers it needs to tackle the two-year-old banking crisis. The ECB has published a legal opinion which states that it fears the law as it stands could usurp its rights over collateral given as security for liquidity it has provided to Irish banks, which owe it €136 billion.

Bear Radar

Style Underperformer:

• Large-Cap Growth (+.45%)

Sector Underperformers:

• 1) Education -.85% 2) Medical Equipment -.72% 3) Gold -.37%

Stocks Falling on Unusual Volume:

• GOLD, ITMN, HMIN, LBTYA, CPY, ROC, KMX, DRI and RDY
  

Stocks With Unusual Put Option Activity:

• 1) MCP 2) GRMN 3) PXP 4) SKX 5) DRI
  

Stocks With Most Negative News Mentions:

• 1) URBN 2) SKX 3) ATML 4) HIW 5) MD
  

Bull Radar

Style Outperformer:

• Small-Cap Value (+.71%)

Sector Outperformers:

• 1) Coal +1.83% 2) Banks +1.55% 3) Steel +1.28%

Stocks Rising on Unusual Volume:

• FMBI, BCS, BBL, SNP, LAD, CMED, RRGB, MATK, INCY, AMED, ADBE, MAPP, MYRG, MOTR, SPRD, BOOM, QLIK, ASMI, SINA, HANS, ATNI, MKTX, UBSI, FWLT, EWBC, BIDU, JBL, RCL and CYD
  

Stocks With Unusual Call Option Activity:

• 1) RY 2) STLD 3) ADBE 4) DAL 5) JBL
  

Stocks With Most Positive News Mentions:

• 1) OSIS 2) SWY 3) HRS 4) FWLT 5) MYRG
  

Tuesday Watch

Evening Headlines
Bloomberg:

• China Needs to Prepare for Long-Term Inflation Fight, CCTV Says. China needs to prepare for a long- term fight against inflation, state broadcaster China Central Television reported today, citing Peng Sen, vice chairman of the National Development and Reform Commission, as saying today at a meeting on prices. The effect of government policies on prices is just beginning to take hold and won’t be long lasting, CCTV cited Peng as saying. Consumer price gains have been caused by factors including the supply of goods, global commodity prices and excessive liquidity, CCTV cited Peng as saying. The root causes of price gains has not yet been resolved, Peng was cited as saying.
  
• Oil Imports to China Set to Slow in 2011 as Economy Cools: Energy Markets. China’s appetite for oil, which helped drive crude to the highest level since October 2008, may ease next year as the government takes steps to tackle inflation and work on expanding refineries slows. China’s inflation accelerated to the fastest pace in 28 months in November, fueling speculation the government will raise interest rates next year. Higher borrowing costs may reduce the country’s sway over global commodity markets, according to Goldman Sachs Group Inc.
• Scottish Investors Say No to Spanish Bonds Even at 5.5%: Euro Credit. Spanish bond yields, approaching their highest level in eight years, still don’t offer enough reward to tempt fund managers 1,000 miles north in Scotland. The yield on 10-year Spanish debt rose 1.52 percentage points to 5.52 percent in the past two months as investors speculated Spain might follow Greece and Ireland in needing a rescue package to avoid default. “You should ask if any of us would buy Spanish government bonds yielding five-and-a-half percent,” Bill Dinning, head of strategy at Aegon Asset Management, said during a discussion among three investors overseeing 360 billion pounds ($557 billion) at Bloomberg’s Edinburgh office. “Probably not.” “It’s too risky,” said Andrew Milligan, who holds the same post at Standard Life Investments. Spanish debt prices slumped last week after borrowing costs rose at the government’s final bond sale of the year. The 10- year yield climbed more in November than in any month since at least 1993, according to data compiled by Bloomberg. Moody’s said on Dec. 15 it might cut the nation’s Aa1 credit rating, citing “substantial funding requirements, not only for the sovereign but also for the regional governments and the banks.” The cost of insuring Spanish government debt climbed to a three-week high yesterday, with five-year contracts protecting $10 million of debt up $12,000 to $344,000 a year. “Spreads remain high by historical standards, emphasizing the need for Spain to strengthen financial-market confidence in the sustainability of government finances,” the Organization for Economic Cooperation and Development said yesterday. “If the high sovereign spreads persist, funding conditions in the private sector could be affected.”
• CFTC Swap Plan May Save Billions in Bank Revenue. A revised proposal by the Commodity Futures Trading Commission for how private swaps can be traded will prevent dealers from losing billions of dollars in revenue, according to Moody’s Investors Service analyst Alexander Yavorsky. The commission rewrote a prior attempt at the rule last week after Chairman Gary Gensler pulled the proposal from consideration at a Dec. 9 meeting. The original rule would have required dealers to provide executable prices to all market users of credit-default, interest-rate and other swaps prior to any trade being done on an electronic system that mimics how futures exchanges operate. The revised rule proposal, passed by the CFTC in a 4-to-1 vote on Dec. 16, allows banks to show negotiable prices on a request-for-quote, or RFQ, system that can be limited to a select number of trading partners. This more flexible model will limit competition among swap-execution facilities and allow volumes to grow, New York-based Yavorsky said in a report today. “The RFQ model will reduce pressure on market-making revenues - billions of dollars per dealer,” Yavorsky said. A key question is how much the per-trade profit reduction is offset by an increase in the number of trades, he said.
• BofA(BAC), Lenders Face Possible N.J. Foreclosure Freeze. Bank of America Corp., JPMorgan Chase & Co.(JPM) and four other mortgage lenders and service providers face a possible suspension of foreclosures in New Jersey by Jan. 19, under a judge’s order. The action, announced today by New Jersey Supreme Court Chief Justice Stuart Rabner, also covers Citigroup Inc.’s mortgage unit, Ally Financial Inc.’s GMAC mortgage unit, OneWest Bank and Wells Fargo & Co. The lenders were implicated in “robo-signing,” the submission of hundreds or thousands of foreclosure claims without personal knowledge of their contents, Rabner said.
• Sugar Rises to 29-Year High on Shortfall; Cocoa Gains on Ivorian Dispute. Raw sugar rose to a 29-year high in New York on speculation that supplies from India and Brazil, the world’s largest growers, won’t be enough to meet demand for a third straight year.
• Cotton Jumps Daily Limit to Record as Demand Outlook Improves. Cotton prices jumped the most allowed by ICE Futures U.S., rising to a record on speculation that demand will rise as the U.S. economy strengthens. “It appears everybody wants to own commodities, and cotton is involved in that,” said Sid Love, the president of Joe Kropf & Sid Love Consulting Services LLC in Overland Park, Kansas. Prices are up “on a combination of people trying to do business and speculative buying,” he said.
• Warner, Chambliss to Push Debate on Debt in Next Congress. Senators Mark Warner and Saxby Chambliss will seek to put the U.S. debt atop the agenda in next year’s Congress by offering measures to cut government spending, reduce popular tax breaks and trim entitlement programs. Warner, a Virginia Democrat, and Chambliss, a Georgia Republican, have been working over the past six months to court a group of 25 senators from both sides of the political aisle in a bid to gather support for their bill, Warner said today in an interview.
• FCC's Copps Says He Won't Block Net-Neutrality Rules. Michael Copps, a member of the Federal Communications Commission, said he won’t vote against rules for Internet-service providers to be considered by the agency tomorrow. “While I cannot vote wholeheartedly to approve the item, I will not block it by voting against it,” Copps, a Democrat, said in an e-mailed statement today. Copps, who had argued for more stringent rules, said he would vote to “concur so that we may move forward.” Copps, 70, is part of the three-Democrat majority at the FCC, and has been considered a swing vote since the agency’s two Republicans have said they oppose the rules.
• Gold Climbs as European Sovereign-Debt Concerns Drive Record Fund Holdings. Gold advanced for a third day as European sovereign-debt concerns increased demand for the precious metal as an investment haven, with holdings in exchange-traded products climbing to an all-time high. Immediate-delivery bullion rose 0.2 percent to $1,387.28 an ounce at 1:12 p.m. in Melbourne. The price gained as much as 0.9 percent yesterday after dropping 0.8 percent last week. Gold assets in exchange-traded products, or ETPs, reached a record 2,114.6 metric tons as of yesterday, according to data collected by Bloomberg from 10 providers. Holdings have gained 18 percent this year.
• China Money Rate Jumps to 2-Year High After Banks' Reserve Ratios Raised. China’s money-market rate rose to the highest level in over two years, reflecting reduced availability of cash after lenders were ordered to set aside more capital as reserves. The amount of cash major banks must set aside as reserves rose by half a percentage point to 18.5 percent from yesterday, the sixth increase this year. The central bank will inject up to 27 billion yuan ($4 billion) of funds through open-market operations this week, about half of the average 56 billion yuan pumped in during each of the last five weeks, said Frances Cheung, a senior strategist at Credit Agricole CIB. “Market liquidity is tightening after the reserve hike,” said Hong Kong-based Cheung. “The cash injection for this week won’t be a lot. Some banks are also more reluctant to lend cash as we approach year-end; come early next year there may be some loosening.” The seven-day repurchase rate, which measures lending costs between banks, jumped 54 basis points to 4.075 percent, according to a daily fixing published at 11 a.m. by the National Interbank Funding Center in Shanghai. That’s the highest level since June 2008.

Wall Street Journal:

• SEC Probes Hurd Exit From H-P(HPQ). Federal regulators are investigating Mark Hurd's departure from Hewlett-Packard Co., in a broad inquiry that includes claims the former chief executive shared inside information, people familiar with the matter said.
• Odds Skew Against Investors in Bets on Strangers' Lives. In the summer of 2005, a firm called Life Partners Holdings Inc. said Marvin Aslett, an Idaho rancher 79 years old, had two to four years to live. It didn't make this estimate on his behalf but for its customers. The company arranges to buy life-insurance policies from people like Mr. Aslett and sells fractional interests to investors, who collect the death benefits when the insured people die. The investors in a $2 million policy on Mr. Aslett's life would have made a tidy return had he died as projected. But more than five years later, the rancher, now 84, says he runs on a treadmill, lifts weights and chops wood, adding that all of his grandparents lived well into their 90s. "I'm healthy as a horse," he says. "There's going to be a lot of disappointed investors."
• U.S. Mulls New Push to Shape Bank Pay. U.S. regulators are considering whether to require large financial firms to hold onto a chunk of executive pay to discourage the excessive risk-taking that contributed to the financial crisis, according to people familiar with the situation. Giant companies such as Bank of America Corp., J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley that are considered critical to the U.S. economy, could be forced to award half or more of their executives' pay in the form stock or other deferred compensation, instead of up-front cash. The discussions by the Federal Reserve, Securities and Exchange Commission and other federal banking agencies are the result of a provision in the Dodd-Frank financial-overhaul law that instructs regulators to prohibit any bonus plan that "encourages inappropriate risks" at financial firms with more than $1 billion in assets.
• Funding Deal Snags Health Law. A Senate deal to fund the federal government until early March doesn't include money to enact the health-care overhaul or stepped up regulation of Wall Street, boosting Republican efforts to curb key elements of President Barack Obama's domestic agenda.
• Blacksonte(BX) Raises Fund of $15 Billion for Buyouts. Blackstone Group is finalizing a new $15 billion fund, the largest fund for buyout deals since the financial crisis erupted and one of the largest on record. The big sum is the latest sign of improving interest in private equity and of the power of some well-known firms to attract investors, despite some high-profile losses in the industry over the last few years. The fund will be the sixth largest on record, based on information from data tracker Preqin.
• H-P(HPQ) Amps Up Cisco(CSCO) Sales Rivalry, Offering Big Discounts on Switches. Hewlett-Packard Co. and Cisco Systems Inc. were once close-knit partners, filling complementary niches in the hardware companies use to run their businesses. Just how much that situation has changed became clearer Monday. H-P, a computing giant that has branched into networking, disclosed a sales promotion giving customers 20% off the list price of certain switching systems if they shift away from comparable gear sold by networking rival Cisco, which has branched into server computers. "Cisco has never seen this level of competition before," boasted Marius Haas, H-P's senior vice president and general manager for networking.
  

CNBC:

• Results at Adobe(ADBE), Jabil(JBL) Top Targets; Shares Jump. Shares of Adobe and Jabil Circuit were both sharply higher in extended trade Monday after the two technology companies reported better-than-anticipated earnings.

MarketWatch:

• In Risk-On, Risk-Off Year, Hedge Funds Come Up Short. Negative bets suffer amid big market swings, huge monetary stimulus.

Business Insider:

• Chart of the Day: Surprise! The US Economy Is Now Everyone's "Surprise" Pick to Surge in 2011.
• George Soros Presents His Solution to the Eurozone Crisis.
  

Zero Hedge:

• Unmasking The Unintended Consequences of US Central Planning. (video)
  

IBD:

• Its Equipment Analyzes Water, Chemicals, Drugs and Materials. That's what Waters (WAT) is trying to do. It makes products used to analyze water, food, beverages, industrial chemicals and pharmaceuticals.

Politico:

• Boehner Referees GOP Spending Fight. Republican leaders are already refereeing a fight between tight-fisted budget hawks and business-as-usual spenders at the Appropriations Committee.
  

Reuters:

• Hedge Funds May Skirt Direct Fed Scrutiny: Source. The Federal Reserve does not believe any one hedge fund can topple the financial system and therefore the private pools of capital may escape direct supervision by the central bank, an industry source familiar with the Fed's position said. The newly created Financial Stability Oversight Council, which includes the Treasury secretary and 14 U.S. supervisors, including the Fed, are in the early stages of determining which non-bank firms pose a threat to the financial system. Firms labeled as "systemically important" will be subject to rigorous oversight by the Fed but will also have access to the central bank's emergency lending facilities. The indication that hedge funds might escape this designation is sure to send a huge sigh of relief through the $1.7 trillion industry, which has long avoided the tighter controls imposed on mutual funds, for example.
• Darden(DRI) Shares Down on Red Lobster Results. Darden Restaurants Inc's shares fell 3 percent after a promotional slip-up led to disappointing sales at its Red Lobster chain. The company, which also owns Olive Garden and LongHorn Steakhouse, narrowed its full-year target for same-restaurant sales growth at its "Big Three" brands to 2 percent, versus a prior target of growth between 2 percent and 3 percent.
• North Korea Backs Down Over South Korean Drill. North Korea stepped back from confrontation over "reckless" military drills by the South on Monday and reportedly issued a new offer on nuclear inspections, drawing a cautious response from Seoul and Washington.
• Michael Dell Snaps Up $100 Million of Company's Stock. Dell Inc founder and chief executive Michael Dell is spending $100 million to snap up more of his company's stock. Dell acquired 7.37 million of the company's shares for $13.57 each on Friday, according to filing with the U.S. Securities and Exchange Commission on Monday.
• U.S. Expects Foreclosure Probe Results Next Month. An Obama administration task force examining allegations of fraud in the mortgage foreclosure process will deliver its findings next month, two top officials said on Monday.

Telegraph:

• Pimco Says 'Untenable' Policies Will Lead to Eurozone Break-Up. Pimco, the world's largest bond fund, has called on Greece, Ireland and Portugal to step outside the eurozone temporarily and restructure their debts unless the currency bloc agrees to a radical change of course. Andrew Bosomworth, head of Pimco's portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro. "Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments," he told German newspaper Die Welt. Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013. "The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late," he said. The bond fund argues that the EU strategy of forcing heavily indebted countries to undergo draconian fiscal austerity without offsetting stimulus is unworkable. The austerity policies are stifling the growth needed to stabilise debt levels. Pimco also gave warning that the bond vigilantes have lost faith in the policy and are trying to liquidate their holdings of peripheral EMU faster than the European Central Bank (ECB) can buy the debt, causing a relentless rise in yields, and a vicious circle. The withering comments from the world's top investor in EMU sovereign debt is a blow for Portugal and Spain. Both nations are hoping bond spreads will start to narrow before they face a funding crunch in the first quarter of next year.

Evening Recommendations
Citigroup:

• Reiterated Buy on (STZ), target $25.

RBC Capital:

• Rated (STI) Outperform, target $31.

Night Trading

• Asian equity indices are +.50% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 106.0 unch.
  
• Asia Pacific Sovereign CDS Index 106.75 +1.75 basis points.
  
• S&P 500 futures +.31%
  
• NASDAQ 100 futures +.28%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KMX)/.34
• (CCL)/.32
• (CMC)/.01
• (CAG)/.45
• (CTAS)/.38
• (FINL)/.05
• (HOV)/-.66
• (NAV)/.60
• (NKE)/.88
• (RHT)/.20

Economic Releases

• None of note

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports and the weekly ABC consumer confidence reading could also impact trading today.
  

BOTTOM LINE: Asian indices are higher, boosted by real estate and technology shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.