Today's Headlines

Bloomberg:

• U.S. Manufacturing Expands at Fastest Pace in 7 Months. Manufacturing in the U.S. expanded in December at the fastest pace in seven months, reinforcing signs the expansion is gaining momentum. The Institute for Supply Management’s index climbed to 57 last month from 56.6 in November, the Tempe, Arizona-based group said today. “The factory sector is growing at a brisk pace, and it’s getting fueled by both U.S. demand and growth in exports,” said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, who correctly forecast the ISM figure. “The economic recovery will get help from manufacturing.” Former Federal Reserve Governor Frederic Mishkin today said that while the central bank will complete its $600 billion bond- purchase program to help fuel the economy, a third round of so- called quantitative easing is unlikely. In the U.S., factories reported faster rates of orders and production. The ISM’s bookings measure rose in December to a seven-month high. “Manufacturers are carrying a good bit of momentum into January,” Norbert Ore, chairman of the ISM factory survey, said today on a conference call with reporters. There is “good balance between new orders and production,” and “there’s still some room” for inventory replenishment, he said. Further gains in manufacturing may come from a pickup in consumer spending, which accounts for about 70 percent of the U.S. economy. Retailers’ 2010 holiday sales jumped 5.5 percent for the best performance since 2005, according to MasterCard Advisors’ SpendingPulse, which measures sales by all payment forms. The gain was 4.1 percent a year earlier. The numbers include Internet sales and exclude automobile purchases.
• Credit Swaps Fall by Most in a Month After Manufacturing Data. The cost of protecting corporate bonds from default in the U.S. fell by the most in a month after a report showed manufacturing is improving. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.3 basis points to a mid-price of 82.8 basis points as of 10:59 a.m. in New York, according to index administrator Markit Group Ltd.
• Australia's 'Biblical' Floods to Worsen as Waters Cut Off Queensland City. Flooding is set to worsen in the Australian state of Queensland in the next 48 hours, cutting off tens of thousands of people as the military is mobilized and cabinet recalled.
• Wheat Rises to Five-Month High as Australia Flood, U.S. Cold Threaten Crop. Wheat futures rose to the highest in almost five months as floods may hamper grain shipments in Australia and cold temperatures threatened U.S. crops. In the Australian state of Queensland, floods spread across an area the size of France and Germany, swamping roads. In the southern U.S. Great Plains, “intense cold” forecast in the next 11 to 15 days “poses a 50 percent risk of damage” for winter crops, according to Commodity Weather Group. Parts of Kansas and Oklahoma had less than half of normal rainfall in the past 30 days, according to the National Weather Service.
• Technology Takeovers May Accelerate in 2011 as IBM(IBM), HP(HPQ) Push Into the Cloud. Technology companies that fueled more than $100 billion in acquisitions last year are likely to spend more in 2011 in a race to harness surging demand for cloud computing and security services. Intel Corp., Hewlett-Packard Co. and International Business Machines Corp. led purchases of more than 2,700 companies and still spent only a fraction of the cash piles they accumulated during the recession. The dollar amount of announced tech deals gained 12 percent, lagging behind a 26 percent jump in worldwide mergers, according to data compiled by Bloomberg. “I’m bullish” on 2011, said Larry Sonsini, chairman and co-founder of Wilson, Sonsini, Goodrich & Rosati, the Palo Alto, California-based law firm that worked with security-software maker McAfee Inc. on its $7.7 billion agreed sale to Intel. “When I look at enterprise clients, I see they are poised to invest in growth on a global basis.” Buyers aim to capture the $3.4 trillion in information- technology spending projected by researcher Gartner Inc. for 2011, a 3.5 percent increase from 2010.
• Russell 2000 Doubling S&P 500 Return Signals Economy Will Drive 2011 Rally. Smaller U.S. companies are rallying the most since 2003 relative to the Standard & Poor’s 500 Index, a sign to BlackRock Inc. and JPMorgan Funds that the economy will strengthen and spur a third year of gains for investors. The Russell 2000 Index, comprised of stocks with a median market value of $528.5 million, rose 25 percent in 2010, beating the S&P 500 by 13 percentage points. The return left the benchmark gauge for American equity at the lowest valuation ever compared with the small-cap measure, according to data compiled by Bloomberg. Increases in smaller companies that are more dependent on U.S. demand have preceded faster economic growth and the biggest equity rallies of the last two decades, data compiled by Bloomberg show.
• Brazil Inflation to Quicken With Rates, Barclays Says. Brazilian inflation may accelerate along with interest rates until President Dilma Rousseff makes clear her fiscal policy, said Marcelo Salomon, a Barclays Plc economist. “We are quite concerned with inflation,” Salomon, the bank’s economist for the South American country, said in an interview on Bloomberg TV’s “In Business With Margaret Brennan.” “The big question mark is what the new administration is going to be doing with the monetary and fiscal policy mix.’” Brazil’s 2011 inflation expectations rose for a fourth straight week, according to a Dec. 31 central bank survey of about 100 economists published today. Consumer prices will rise 5.32 percent this year from a week earlier forecast of 5.31 percent, the survey found. Rousseff pledged to contain consumer prices in her Jan. 1 inaugural speech. While early signs of Rousseff’s economic plans are “positive,” her efforts won’t be enough to prevent monetary tightening in the short term, Salomon said. Salomon forecasts Brazil policy makers will raise interest rates 50 basis points, or 0.50 percentage point, to 11.25 percent at the bank’s Jan. 18-19 meeting, and continue to increase borrowing costs by a total 150 basis points by the end of April.
• Bank of America(BAC) Sees $2 Billion Charge on Home Loans. Bank of America Corp., the biggest U.S. lender by assets, paid $2.8 billion to Freddie Mac and Fannie Mae after the U.S.-owned firms demanded the company buy back mortgages they said were based on faulty data. The bank rose as much as 5.6 percent in New York trading. Resolving the disputes cost Bank of America about $3 billion in the fourth quarter, including additions to loss reserves for loans that weren’t a part of the deals announced today, the Charlotte, North Carolina-based lender said in a statement. The agreements “largely addressed” liabilities from Fannie Mae and Freddie Mac, Bank of America Chief Financial Officer Charles H. Noski said on a conference call.
• Citadel's Investment-Banking Unit Loses Executives Boas, Kurtzman, Mayer. Chris Boas, Brad Kurtzman and Carl Mayer, senior executives at the investment banking unit of Ken Griffin’s Citadel LLC, have left the firm. Boas was head of credit markets for Citadel Securities. Mayer was head of leveraged finance and Kurtzman ran equity derivatives sales and trading.
• Sector Snap: Some Casino Cos. Up on Macau Data. Shares of casino operators with properties in Macau climbed Monday as a government report indicated that gaming revenue increased 66 percent in December.
• Retail Stocks Climb to 3-Year High as Analysts Recommend Shares. U.S. retail stocks rallied to a three-year high after analysts said that companies whose prospects are most tied to growth will gain. Target Corp., Macy’s Inc., J.C. Penney Co. and Family Dollar Stores Inc. advanced today after Citigroup Inc. recommended the shares as the economy continues to improve. Staples Inc. jumped to the highest since May after Janney Montgomery Scott LLC advised buying the world’s largest office- supply retailer. “There are hopeful signs in the employment outlook as non- farm jobs ramped up in recent months, and business confidence is improving,” David Strasser, an analyst at Janney in New York, wrote in a report today.
• Bank Stocks Rise After Bank of America(BAC) Settles Mortgage-Putback Claims. Bank of America Corp. and JPMorgan Chase & Co. carried financial stocks higher after Fannie Mae and Freddie Mac agreed to settle claims on at least $4.1 billion in faulty loans they bought from Countrywide Financial Corp. The agreement sent Bank of America, which owns Countrywide, up 6.5 percent to $14.20 in New York Stock Exchange composite trading, the biggest increase in almost eight months. New York- based JPMorgan rose 3.5 percent to $43.89 at 2:08 p.m. The KBW Bank Index of 24 stocks gained 2.3 percent to its highest level since last May.
• Illinois Has Days to Plug $13 Billion Budget Gap. Illinois lawmakers will try this week to accomplish in a few days what they have been unable to do in the past two years -- resolve the state’s worst financial crisis. The legislative session that begins today will take aim at a budget deficit of at least $13 billion, including a backlog of more than $6 billion in unpaid bills and almost $4 billion in missed payments to underfunded state pensions.

Wall Street Journal:

• Venture Investors Cluster Around Storage Start-Ups. Virtualization is pushing traditional data-storage systems past their breaking point, and venture capitalists are betting that so-called clustered storage technologies will finally have their day.
• Congress Targets Spending. The Republican majority that takes over the House this week plans an ambitious drive to slash government spending by tens of billions of dollars in the next few months, a strategy that ensures that the capital soon will be consumed by intense debate over how and where to reduce the size of government.
• Manufacturers Turn to Smart TV After 3-D Disappoints. After 3-D TV failed to excite consumers last year, manufacturers are betting that following the app-laden path of smartphones and tablet computers will fatten up what have been ultraslim profit margins.

CNBC:

• Fed Unlikely to Raise Rates Until 2013: Goldman's(GS) Hatzius. The Federal Reserve likely won't add any more stimulus to the economy this year but will probably hold off on raising interest rates until 2013, Jan Hatzius, chief US economist for Goldman Sachs, told CNBC Monday.
• Why Oil Stocks Are Better Investment Than Crude Futures.
  

Business Insider:

• John Paulson Is About to Become a Billionaire for the Second Time Over.

New York Times:

• Why Facebook Is Such a Crucial Friend for Goldman Sachs(GS). The news that Goldman has taken a stake in Facebook, the white-hot social networking giant, has tongues wagging from Wall Street to Silicon Valley. As first reported by DealBook, Goldman has invested $450 million in a deal that values Facebook at $50 billion. As part of the deal, Goldman is looking to raise as much as $1.5 billion from its wealthy clients to invest in Facebook alongside the firm.

Mineweb:

• Japanese Scientists Develop 1st Artificial Rare Metal-Palladium-Type Alloy. Scientists say they have developed nanoprocessing technology which may lead to the production of other artificial rare metals.

Dallas Fed:

• Slide Show on U.S. Economy.

Boston Globe:

• Medicaid Cost Crisis Looms for Massachusetts. The money, it seems, is never enough. Governor Deval Patrick approved a record $9.6 billion last July for the state’s health insurance program for the poor — sufficient, he assumed, to last a year. But the program’s costs quickly outpaced expectations, forcing the governor to approve an additional $329 million in October and then seek $258 million more, which lawmakers approved last week. And even that may not last, with six months remaining in the budget year. The ballooning cost of Medicaid is one of the biggest challenges facing Massachusetts and other states, which have seen demand for the program jump during the recession as increasing numbers of unemployed residents enroll in the subsidized insurance plan.

Sacramento Bee:

• Brown to Propose Broad List of Budget Cuts. The broad set of budget cuts that Gov.-elect Jerry Brown will propose in the coming days would touch nearly all Californians, eliminating local redevelopment agencies, shrinking social service benefits, shuttering parks and reducing library hours, according to a source familiar with his budget proposal. Brown, to be sworn in this morning, wants to slash virtually every state-funded program to help balance California's massive deficit, in many cases resurrecting cuts sought by Gov. Arnold Schwarzenegger but rejected by lawmakers. Brown would restrict Medi-Cal access, divert low-level offenders to county jails and cut deeply into California State University and the University of California. The Democrat is counting on lawmakers to approve the cuts to encourage voters to also provide revenue. A June ballot measure would extend higher tax rates on income, vehicles and sales set to expire this year, as well as eliminate a new corporate tax benefit.

TradingMarkets:

• Byron Wien Announces The Ten Surprises for 2011.

gigaom:

• Apple(AAPL) Holds Smartphone Lead, But Android is Gaining. While Android surges among new smartphone buyers, Apple’s iOS continues to hold on to the overall marketshare lead, although it remains within spitting distance of a fading BlackBerry OS and a hard-charging Android OS, according to the latest figures from the Nielsen Company. According to November 2010 data, Apple holds 28.6 percent of the U.S. smartphone market, up slightly from 27.9 percent in October. BlackBerry OS slipped again in November to 26.1 percent, down from 27.4 percent in October and 33.9 percent in June. Android OS, meanwhile, closed the distance on Apple — reaching 25.8 percent in November, compared to 22.7 percent in October and 15 percent in June. The big winner in all this is the smartphone market as a whole, which is growing rapidly: Nielsen said that 45 percent of recent phone buyers chose a smartphone in November, up from 34 percent in June, which suggests that we’re not too far off from a time when one out of every two handsets sold in the U.S. is a smartphone.

Politico:

• White House Hires Veteran Environmental Economist. The Obama administration has hired a seasoned environmental economist from the Environmental Defense Fund as the White House prepares to battle congressional Republicans over climate and air pollution regulations.
• Darrell Issa Reveals List of Investigations. Rep. Darrell Issa is aiming to launch investigations on everything from WikiLeaks to Fannie Mae to corruption in Afghanistan in the first few months of what promises to be a high-profile chairmanship of the top oversight committee in Congress. According to an outline of hearing topics obtained by POLITICO, the House Oversight and Government Reform Committee is also planning to investigate how regulation impacts job creation, the role of Fannie Mae and Freddie Mac in the foreclosure crisis, recalls at the Food and Drug Administration and the failure of the Financial Crisis Inquiry Commission to agree on the causes of the market meltdown.
• 6 States to Watch on Health Reform. Health reform repeal efforts will generate a lot of noise in the opening weeks of the 112th Congress – but the real action on health reform is going to ramp up outside the Beltway in state capitals. “Unless states move forward as fast and as hard as they can this year, they will be lost in 2014 when the bulk of health reform hits,” says Stan Dorn, a senior health policy researcher at the Urban Institute. “The pressure is just enormous on state policy makers.”

Reuters:

• U.S. Consumer Bankruptcies Rose 9% in 2010.
• Republicans May Starve US Financial Reform of Cash.
• Barnes & Noble Says Nook Boosts Holiday Sales. Barnes & Noble Inc (BKS) reported strong preliminary holiday results at its superstores, led by the popularity of its Nook e-readers, and shares rose more than 5 percent.

The Age:

• Cashed-Up BHP(BHP) Ready to Splurge. There are about 20 exploration companies in the US market on its watch list, writes Barry FitzGerald. BHP Billiton petroleum chief executive Mike Yeager is rightly proud of the division's top-of-industry performance in achieving an average 11 per cent growth rate in production since the 2007 financial year. But the outlook for the next four years is not so rosy. If anything, BHP's annual oil production could well flatline at its current 160 million barrels of oil equivalent until at least 2015, according to some analysts' forecasts. That could all change should BHP do what is expected by devoting a chunk of its growing pile of cash to a meaningful oil and gas acquisition, with more than 20 independent exploration and production (E&P) companies in the US market on its watch list.

Bear Radar

Style Underperformer:

• Large-Cap Growth (+1.32%)

Sector Underperformers:

• 1) Gold +.03% 2) Foods +.04% 3) Oil Service +.10%

Stocks Falling on Unusual Volume:

• SCOK, MAKO, CLX and HAE
  

Stocks With Unusual Put Option Activity:

• 1) SFI 2) NOV 3) UNG 4) MELA 5) TCK
  

Stocks With Most Negative News Mentions:

• 1) CTRP 2) DVN 3) HES 4) IART 5) WEC
  

Bull Radar

Style Outperformer:

• Small-Cap Value (+2.07%)

Sector Outperformers:

• 1) Coal +3.67% 2) Steel +2.68% 3) Disk Drives +2.67%

Stocks Rising on Unusual Volume:

• DLLR, GNCMA, ZION, BAC, TWTC, TLEO, BP, PZE, AFOP, RLOC, FTEK, UFPT, ASIA, HSIC, STEC, SATS, NNBR, FORR, CENX, ASMI, CRMT, MKSI, MASI, VRSK, IBOC, NEOG, VSAT, BCH, IGN, PXQ, SHI, MOD, ROG, BTH and VFH
  

Stocks With Unusual Call Option Activity:

• 1) LYB 2) NVDA 3) KBH 4) STEC 5) PAYX
  

Stocks With Most Positive News Mentions:

• 1) LOW 2) RT 3) ISRG 4) LNCR 5) WSO
  

Monday Watch

Weekend Headlines
Bloomberg:

• Vigilantes Sidelined as Treasury Swaps Show Growth Tops Deficit. The worst performance by Treasuries since the second quarter of 2009 reflects prospects for faster U.S. economic growth rather than concern that rising budget deficits will drive investors away from government debt. While the average yield on Treasuries rose to 1.89 percent from 1.42 percent at the end of September, according to the Bank of America Merrill Lynch Treasury Master index, the price of credit-default swaps tied to U.S. debt declined to 41.5 basis points from 48.4 basis points at the end of September, according to Bloomberg data. The dollar rose 1.5 percent against an index of currencies of six major U.S. trading partners. The drop in swap prices and the greenback’s strength shows bond vigilantes aren’t ready to punish the U.S. for its spending. Pacific Investment Management Co. and JPMorgan Chase & Co. raised their growth forecasts after President Barack Obama agreed to extend George W. Bush-era tax cuts as reports show gains in retail sales, manufacturing and consumer confidence.
• U.S. Yield Spreads Fall Below Rest of the World. For the first time on record, investors are demanding a smaller premium to own U.S. corporate bonds than global company debt. Bondholders require 166 basis points more yield to hold U.S. investment-grade company debt instead of Treasuries, compared with an average 169 basis-point spread worldwide, according to Bank of America Merrill Lynch data. At the height of the credit crisis in December 2008, companies had the disadvantage of having to pay about 150 basis points more to lure U.S. investors to their bonds than borrowers seeking buyers elsewhere in the world. The shift highlights confidence in North America’s economic recovery as companies across the Atlantic in Europe contend with bailing out Greece and Ireland while waiting to see whether the fiscal crisis ensnares more countries. The U.S. economy is forecast to grow faster this year than either the euro region or Japan, according to Bloomberg surveys. “In the U.S. you have a little more optimism while in Europe you have more concerns about the sovereigns,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London. “The sovereign issues are holding back spreads in Europe.”
• Dollar Rises Versus Euro as Data Shows Slower China Manufacturing Growth. The dollar rose against the euro for the first time in four days after a Chinese report showed manufacturing expanded at a slower-than-forecast pace in December, boosting demand for safer assets. The U.S. currency gained versus 13 of 16 major counterparts after China’s logistics federation and statistics bureau said on Jan. 1 its purchasing managers’ index fell to 53.9 from 55.2 in November. The euro fell by the most in more than two weeks against the dollar as concern Europe’s sovereign debt crisis will linger damped demand for securities in the region, which added Estonia as the 17th member nation on Jan. 1.
• Copper Gains to Record For Third Straight Session on Tight Supply Concern. Copper jumped to a record in New York, extending a second annual advance, on speculation that supply will lag behind demand as the global economic recovery gathers pace. Copper for March-delivery on the Comex in New York gained as much as 0.7 percent to $4.4795 a pound, the highest ever for a most-active contract, before trading at $4.46 a pound. The metal surged 33 percent in 2010, a second annual increase, as the global economy recovered from the worst recession since World War II. The London Metal Exchange and Shanghai Futures Exchange are closed today for holidays. “We’re expecting the Chinese come back into the market in early 2011, leading to a rebound in demand and driving a deficit in the global market balance,” said Xin Yi Chen, a Singapore- based analyst at Barclays Capital.
• Feinberg Says Half of $20 Billion Fund Should Cover BP(BP) Oil-Spillage Claims. Kenneth Feinberg, the lawyer paying victims of BP Plc’s Gulf of Mexico oil spill, said he anticipates about half the $20 billion fund set up by the company should be adequate to cover claims for economic losses.
• Russian Oil Output Hits Post-Soviet Record in 2010. Russia, the world’s largest oil producer, set a post-Soviet record for yearly crude output in 2010, even as the country’s production in December slipped from the previous month. Russian output last year rose 2.2 percent to 10.15 million barrels a day, the highest annual average since the collapse of the Soviet Union in 1991, the Energy Ministry’s CDU-TEK statistics unit said in a statement today. Russia produced 9.93 million barrels a day in 2009.
• Snowplow Slowdowns Might Become American Way: Kevin Hassett. Europeans have grown accustomed to seeing government workers shut down their countries when provoked. At this time of huge deficits from Washington to the smallest towns, government workers in the U.S. also face significant cutbacks. Americans may have had their first taste of what that will mean. New York City Mayor Michael Bloomberg and New York Governor David Paterson are both calling for an investigation of allegations that city workers intentionally dragged out the cleanup of the Dec. 26 blizzard as a way to protest cuts in the city budget. The New York Post, citing City Councilman Dan Halloran, reported that some snow-plow drivers skipped streets on their routes or kept their plows too high to clear streets.

Wall Street Journal:

• Insurers Sued Over Death Bets. Scrutiny on Secondary-Market Policies That Paid Investors When Others Died. New investor lawsuits are emerging amid the wreckage of an investment boom in life-insurance policies that spectacularly collapsed. The suits involve the secondary market in life policies, which boomed from 2004 to 2008 as thousands of old people sought to make fast cash by taking out multimillion-dollar policies on their own lives to sell to investors. Tens of billions of dollars worth of insurance changed hands. Under the deals, the investors pay the premiums until the insured person dies, at which point they collect the death benefit.
• Drilling Is Stalled Even After Ban Is Lifted. More than two months after the Obama administration lifted its ban on drilling in the deep-water Gulf of Mexico, oil companies are still waiting for approval to drill the first new oil well there. Experts now expect the wait to continue until the second half of 2011, and perhaps into 2012. The delay is hurting big oil companies such as Chevron Corp. and Royal Dutch Shell PLC, which have billions of dollars in investments tied up in Gulf projects that are on hold and are paying hundreds of thousands of dollars a day for rigs that aren't allowed to drill. Smaller operators such as ATP Oil & Gas Corp., which have less flexibility to focus on projects in other regions, have been even harder hit. The impact of the delays goes beyond the oil industry. The Gulf coast economy has been hit hard by the slowdown in drilling activity, especially because the oil spill also hurt the region's fishing and tourism industries. The Obama administration in September estimated that 8,000 to 12,000 workers could lose their jobs temporarily as a result of the moratorium; some independent estimates have been much higher. The slowdown also has long-term implications for U.S. oil production. The Energy Information Administration, the research arm of the Department of Energy, last month predicted that domestic offshore oil production will fall 13% this year from 2010 due to the moratorium and the slow return to drilling; a year ago, the agency predicted offshore production would rise 6% in 2011. The difference: a loss of about 220,000 barrels of oil a day. Drilling in waters of less than 500 feet also has been snared by the government's increased scrutiny. Regulators requested modifications to 101 shallow-water drilling plans in 2010, compared with 59 such requests in 2009 and just 31 in 2008. Rig operators say drilling permits once approved in a matter of weeks have taken up to five months to process as the government introduced new rules. Some companies are shifting investments out of the Gulf. Erik Milito, a senior official at the American Petroleum Institute, the oil industry's main lobbying group, said more rigs will leave soon if drilling isn't allowed to resume. "They're doing everything they can to keep the contracted rigs in the Gulf," said Mr. Milito. "But they're idle, they're not able to do the work they intended to be out there doing, and that can only go on so long." ATP Oil & Gas, one of the smallest deep-water operators in the Gulf, has seen its share price fall 27% since the Deepwater Horizon exploded, a sign investors are concerned about lost revenue from its delayed wells. ATP's chairman, Paul Bulmahn, has said the company is now looking for projects in other countries. In a letter to President Barack Obama last month, Mr. Bulmahn pleaded for a drilling permit. The slow pace of permitting has drawn fire even from some Congressional Democrats, especially Louisiana Sen. Mary Landrieu, who has said the policy is hurting the region's economy. Louisiana Department of Natural Resources Secretary Scott Angelle pushed for a return to drilling last month. "It's time to get the men and women of this industry back to work, as well as the other industries that are dependent upon drilling activity for survival—the welders, the boat captains, the pipefitters and caterers," he said. "There is a multitude of individuals on the coast who want to get back to work finding the fuel to energize America."
• Hedge Funds Extend Gains, but Insider Probe Swirls. Hedge funds notched another run of gains in 2010. But as the year closed, a wide-ranging insider-trading investigation spooked the industry and cast a cloud that will loom in the months ahead. In 2010, hedge funds on average returned 7.11% through November, according to the latest data from Hedge Fund Research Inc. The Dow Jones Industrial Average climbed 11% in 2010, with December being particularly strong.
• Cooking Oil's Surge Shows How Inflation Hits Chinese. These days, Liu Chuansheng nervously scouts five locations before he buys cooking oil, illustrating how a sudden spike in the price of the Chinese kitchen's most vital ingredient has become close to a national crisis.
• Investors' Forecast: Sunny With Chance of Overheating. Investor optimism is almost as much of a New Year's tradition as hangovers and resolutions: This January, like last, forecasters see the U.S. economy growing at a rate that is neither too hot nor too cold. For many Americans, with unemployment hovering near 10%, it's hard to feel optimistic in the midst of the current recovery, but investors see things differently: They believe the economy has more to fear from growing too quickly rather than too slowly.
• Big Firms Poised to Spend Again. Big U.S. companies have cleaned up their balance sheets and, flush with cash, appear open to using it in 2011 on factories, stores and even hiring. "We preserved cash" over the past few years, said Jim Flaws, chief financial officer of Corning Inc. "Now we're turning around and feeling comfortable about our outlook and spending it."
• The EPA's War on Texas. The Environmental Protection Agency's carbon regulation putsch continues, but apparently abusing the clean-air laws of the 1970s to achieve goals Congress rejected isn't enough. Late last week, the EPA made an unprecedented move to punish Texas for being the one state with the temerity to challenge its methods.
• New York Real Estate 'Green Shoots' Cheer Developers.
  

IBD:

• No. 2 U.S. Automaker's Engine Revved By Positive Consumer View. Ford(F), also benefiting from increasing U.S. auto sales, isn't ready to let GM outshine it.

NY Times:

• Boomers Hit New Self-Absorption Milestone: Age 65. In keeping with a generation’s fascination with itself, the time has come to note the passing of another milestone: On New Year’s Day, the oldest members of the Baby Boom Generation will turn 65, the age once linked to retirement, early bird specials and gray Velcro shoes that go with everything.
• Public Workers Face Outrage as Budget Crises Grow. “The mantra is that the problem is the unions, the unions, the unions.” Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules. It is an angry conversation.
• Real Estate Developers Prosper Despite Defaults. Industry lore has it that New York is one of the toughest, most unforgiving real estate markets in the world. The costs are so high, the unions so ornery, the politicians so demanding and the rivalries so fierce, that one false move invites financial disaster. But the truth is that there have been surprisingly few career fatalities among New York developers, even though they have lost billions of investor dollars on overpriced real estate and have littered the city with unfinished apartment buildings. While a homeowner who lost a house to foreclosure would find it difficult to borrow for years, developers who defaulted on enormous loans have still been able to attract money. The reasons, experts say, are that there is still plenty of money floating around and that the market has a very short memory.
• Computers That See You and Keep Watch Over You.
• Europe's Young Grow Agitated Over Future Prospects.
• The New Speed of Money Reshaping Markets. A SUBSTANTIAL part of all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike. Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, nearly the size of three football fields, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light. Countless metal cages contain racks of computers that perform all kinds of trades for Wall Street banks, hedge funds, brokerage firms and other institutions. And within just one of these cages — a tight space measuring 40 feet by 45 feet and festooned with blue and white wires — is an array of servers that together form the mechanized heart of one of the top four stock exchanges in the United States. The exchange is called Direct Edge, hardly a household name. But as the lights pulse on its servers, you can almost see the holdings in your 401(k) zip by. “This,” says Steven Bonanno, the chief technology officer of the exchange, looking on proudly, “is where everyone does their magic.”
• Goldman(GS) Invests in Facebook at $50 Billion Valuation. Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.

CNNMoney:

• Congress Preps for War Over Spending.
• Verizon(VZ) Snaps Up iPhone Domains.
  

Business Insider:

• 100 Shocking Predictions for 2011.

LA Times:

• When Will Housing Come Back in California? Five Experts Offer Their Views.
• An Unlikely Duo's Auto Safety Quest. A college professor and a former federal transportation official team up to seek standard installation of black boxes in cars — a system they hoped would do for traffic safety what it's done for aviation.
• Rep. Darrell Issa Pledged to Find $200 Billion in Government Waste. As the new head of the House oversight committee, Republican Darrell Issa of Vista says the Obama administration has 'played fast and loose with the money Congress gave them.'

Boston Herald.com:

• Feds Wind Plan May Zap Massachusetts. Massachusetts electric ratepayers could get jolted by plans to open up huge swaths of federal waters south of Martha’s Vineyard and Nantucket for more offshore wind farms. About a million National Grid ratepayers are already expected to get hit with a 2 percent hike in their electric bills due to the planned Cape Wind project in Nantucket Sound. But if 3,000 square miles of additional federal waters are fully developed, as envisioned by the U.S. Interior Department and the Patrick administration, then ratepayers could see double-digit rate hikes valued at tens of billions of dollars, business and industry experts warn.

gigaom:

• Amazon.com(AMZN) in Talks to Buy Out UK's Lovefilm. Amazon is reportedly looking to buy U.K.-based video rental firm Lovefilm in a deal that would value it at £200 million ($312 million), according to a report in the Sunday Times (cited by Reuters). Buying Lovefilm could give Amazon a stronger position in the U.K. and also give it some expertise to go up against Netflix’s(NFLX) subscription DVD-by-mail and video rental business.

Washington Post:

• U.S. Dangerously Silent on Human Rights.

Politico:

• House GOP Plans Two-Pronged Assault on Health Law. The new Republican-controlled House plans to schedule a vote to repeal the sweeping health care overhaul before President Barack Obama delivers his annual State of the Union address late this month, incoming House Energy and Commerce Chairman Fred Upton (R-Mich.) said Sunday. “We have 242 Republicans,” he said on “Fox News Sunday.” He added, “There will be a significant number of Democrats, I think, that will join us. You will remember when that vote passed in the House last March, it only passed by seven votes.” Upton, whose committee will play a key role in the GOP's effort to roll back the law, said that he believes the House may be near the two-thirds majority required to override a presidential veto. “If we pass this bill with a sizeable vote, and I think that we will, it will put enormous pressure on the Senate to do perhaps the same thing,” he said. “But then, after that, we're going to go after this bill piece by piece.”

USA Today:

• Experts: Gas Could Climb to $3.75 Per Gallon. Drivers in the USA could be paying as much as $3.75 a gallon for gas this spring, oil experts predict. Prices at the gas pump have inched up all year as the cost of crude oil neared $100 a barrel. On Christmas Day, the average nationwide price of self-serve regular hit $3, a record for that day. By year's end, the average price reached $3.06. Prices creeping toward $4 a gallon could have dire consequences for some industries and slow the economic recovery, analysts say. The record price is $4.11 a gallon on July 17, 2008. "We learned in 2008 that $4-a-gallon gas is a deal-breaker for the economy," says Joel Naroff, president of Naroff Economic Advisors. "If it happens, it's not sustainable. There's only so much the consumer will bear." He says drivers who need gas to get to work will buy it, but they'll cut spending elsewhere, sucking money out of the recovering economy. Consumers react when the price reaches $3.50, says Tom Kloza, chief oil analyst for the Oil Price Information Service. People living paycheck to paycheck will cut back on other spending to compensate for higher gas prices, he says, and gas at $4 a gallon "throws us into a consumer slowdown." "Oil prices ripple through every part of the economy," Kloza says. "I think it'll be the second highest year for oil prices on record." He predicts the price of a gallon of gas will range from $3.25 to $3.75 in the spring and crude oil will exceed $100 a barrel for a short time. He attributes much of the increase to speculation in oil futures. Last week, former Shell CEO John Hofmeister caused a stir when he predicted $5-a-gallon gas in 2012 as worldwide demand for oil grows while U.S. production shrinks. Developing wind, solar and biofuel alternatives will not generate enough power to meet the demand, Hofmeister says.
  

Reuters:

• Iraq OKs Shell Plan to Build Its Own Dock. Royal Dutch Shell may build its own dock in Iraq's Shatt al-Arab waterway to speed up delivery of heavy equipment to the supergiant Majnoon oilfield which the oil major is developing with a Malaysian partner.
• BofA(BAC) Reviews Documents Amid WikiLeaks Threat. A team of up to 20 Bank of America Corp officials, led by the chief risk officer, Bruce Thompson, have been reviewing thousands of documents amid a threat that it may be a target of WikiLeaks, The New York Times reported on Sunday.

Telegraph:

• European Debt Markets 'Face Second Credit Crisis'. European debt markets could be hit by a second credit crisis within months as fears grow over the huge volume of new bonds that must be sold by governments and banks in 2011. Banks alone must refinance about €400bn (£343bn) of debt in the first half of the year, but add in the more than €500bn European governments must replace over the same period, as well as further hundreds of billions of euros of mortgage-backed debt maturing and there is the potential for chaos in the credit markets. "What we are looking at here clearly has the potential to become a second credit crunch. However, this time it would be much worse than before," said Celestino Amore, founder of IlliquidX, which specialises in trading hard-to-price debt. "Governments have been able to slow down the process, but the problems did not go away. There remains trillions of dollars of debt that must be refinanced or sold."
• World on Red Alert Over China's Inflation. China could be hit by inflation of 7pc to 8pc over the next two months, panicking Beijing's policy-makers into dramatically raising interest rates, economists have warned. The prospect of at least four further interest rate rises in the world's second-largest economy is likely to alarm global markets, which tumbled in shock at China's decision to raise rates on Christmas Day.

Der Sonntag:

• There is mounting evidence that the economic recovery is sustainable, Swiss Reinsurance Co. Chairman Walter Kielholz said. The situation in the U.S. has improved recently, Kielholz said in an interview. The risk of a double dip is "very small," he said.

CBCNews:

• Egyptian Church Bomb Victims Mourned. Dozens of grieving Christians attended mass at the Saints Church in Egypt's Mediterranean port city of Alexandria on Sunday, the day after 21 worshippers were killed there in an apparent suicide bombing. The service was marked by the grief and anger felt by a congregation devastated by the attack, which took place outside the church's door about 30 minutes into the new year as churchgoers were leaving. Many sobbed while others cried hysterically and screamed in anger. Some lamented that attacks on Christians and churches often happen during usually happy occasions like Christmas. Others complained that the government was not doing enough to protect churches. Riot police backed by armoured vehicles were deployed outside the church on Sunday, however many felt it was too little, too late. "There is a lack of security in Egypt. The Interior minister must be removed," said one man who had lost a relative in the attack. Rev. Maqar, who led the service, did not give a sermon, preferring to express his grief with silence. "Is it possible that what happened is even remotely human? We were carrying dead bodies, but in pieces. Who can fathom such a thing? Who can tolerate it?" he said on Sunday. Saturday's attack, which left nearly 100 people injured, was the worst violence against Egypt's Christian minority in a decade. The Interior ministry blamed the bombing on "foreign elements." The Alexandria governor has accused al-Qaeda, pointing to the network's branch in Iraq, which has attacked Christians there and threatened Egypt's Coptic Orthodox Christian community.

Sydney Morning Herald:

• Two Dead as Flood Chaos Hits 22 Queensland Towns. Two people are dead and one other is feared drowned in Queensland as northern Australia's devastating flood emergency continues to wreak havoc. More than 1000 people were sheltering in evacuation centres across Queensland last night. Twenty-two towns in the state's centre are either under water or isolated and 900 houses have been abandoned.

Weekend Recommendations
Barron's:

• Made negative comments on (AIG).

Citigroup:

• Rated (WR) Buy, target $27.
• Rated (ANAC) Buy, target $9.
  
• Reiterated Buy on (AMD), raised estimates, boosted target to $12.50, added to Top Picks Live list.

Night Trading

• Asian indices are +.50% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 102.0 -1.0 basis point.
• Asia Pacific Sovereign CDS Index 103.0 unch.
• S&P 500 futures +.21%.
• NASDAQ 100 futures +.53%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
10:00 am EST

• ISM Manufacturing for December is estimated to rise to 57.0 versus a reading of 56.6 in November.
• ISM Prices Paid for December is estimated to rise to 71.3 versus a reading of 69.5 in November.
• Construction Spending for November is estimated to rise +.2% versus a +.7% gain in October.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

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

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as more economic optimism, equity fund inflows, seasonal strength, buyout speculation and short-covering offsets profit-taking, rising sovereign debt angst and China inflation worries. My intermediate-term trading indicators are giving mostly bullish signals and the Portfolio is 100% net long heading into the week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as US debt ceiling concerns, global growth worries and emerging market inflation fears offset short-covering, less financial sector pessimism and technical buying. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 100% net long heading into the week.