Stocks Slightly Higher into Final Hour on Better US Economic Data, Short-Covering, Seasonality, Euro Bounce

Broad Market Tone:

• Advance/Decline Line: Higher
  
• Sector Performance: Most Sectors Rising
  
• Volume: Light
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 25.22 -3.15%
  
• ISE Sentiment Index 106.0 +30.86%
  
• Total Put/Call 1.24 +14.81%
  
• NYSE Arms .94 -32.76%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 127.97 -2.31%
  
• European Financial Sector CDS Index 305.25 -3.23%
  
• Western Europe Sovereign Debt CDS Index 382.68 -1.65%
  
• Emerging Market CDS Index 314.24 -1.20%
  
• 2-Year Swap Spread 48.0 unch.
  
• TED Spread 56.0 +1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -140.0 +7.0 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 167.0 +1 bp
  
• China Import Iron Ore Spot $133.80/Metric Tonne -.74%
  
• Citi US Economic Surprise Index 71.90 -3.1 points
  
• 10-Year TIPS Spread 1.93 -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +25 open in Japan
• DAX Futures: Indicating -11 open in Germany

Portfolio:

• Slightly Higher: On gains in my Medical, Retail and Biotech sector longs
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added them back
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 bounces back right near its 50-day moving average this morning despite Eurozone debt angst, rising global growth fears and tech sector pessimism. On the positive side, Utility, Drug, Hospital, HMO, Homebuilding, REIT, Education and Airline shares are especially strong, rising more than +1.25%. Small-caps are outperforming. Gold is down -.4%, Lumber is rising +2.6% and Oil is dropping -1.4%. Oil traded very poorly again today as it failed to bounce with the market on some good economic news and is at session lows below its 50 and 200-day moving averages. The Germany sovereign cds is falling -3.2% to 102.50, the France sovereign cds is falling - 5.09% to 225.0 bps, the Italy sovereign cds is falling -2.09% to 561.50 bps and the Spain sovereign cds is down -2.7% to 435.17 bps. On the negative side, Coal, Oil Service and Software shares are under pressure, falling more than -.5%. (XLK) has traded poorly again throughout the day. Copper is falling -.5%. The 10-year yield is flat at 1.91% despite some better economic data and today's stock bounce. The China sovereign cds is climbing +1.8% to 148.61 bps and the Brazil sovereign cds is up +1.0% to 160.0 bps. Moreover, the Asia-Pacific Sovereign CDS Index is up +2.0% to 159.0 bps. The Western Europe Sovereign CDS Index is still very near its all-time high. The TED spread continues to trend higher and is at the highest since May 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is very near the highest since February 2009. The 3M EUR/USD Cross-Currency Basis Swap is rising +4.8% to -140.0 bps, which is back to Nov. 24th levels. The Libor-OIS spread is rising to the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -30.3% since February 16th and -26.1% since Sept. 7th. The China Corporate Blended Spread Index is rising +1.4% today to 792.0 bps, which is very close to another technical breakout. The Citi Asia-Pacific Economic Surprise Index is at -25.4, which is right at the worst since April 2009. Asian equities continue to trade very poorly. The Shanghai Composite fell another -2.1% overnight and is down -22.3% ytd(lowest since March 2009). Taiwan shares fell -2.3% and are down -24.6% ytd(testing late Nov. lows). Brazil's Bovespa fell -.6% today and is down -18.7% ytd. European credit gauges are still performing very poorly given that the European debt crisis “can-kicking” solution is supposedly at hand, which remains a large red flag. The AAAII % Bulls rose to 40.2 this week, while the % Bears fell to 33.6%, which is a negative given the still developing significant macro headwinds. Trading still has an overall complacent feel as volume remains poor, leadership is lacking and each push lower is met by sloppy dip-buying. The market still appears to want to go lower short-term before any year-end rally materializes. I am still very cautious on the intermediate-term. This is likely due to year-end window-dressing and seasonality. I expect US stocks to trade mixed-to-lower into the close from current levels on Eurozone debt angst, rising global growth fears, tech sector pessimism, technical selling and more shorting.

Today's Headlines

Bloomberg:

• Draghi Says Short-Term Contraction in Euro Area Unavoidable Amid Austerity. European Central Bank President Mario Draghi said the euro area may not be able to escape a recession due to governments’ austerity measures. “The unavoidable short-term contraction may be mitigated by the return of confidence,” Draghi said during a speech in Berlin today. “But in the medium term, sustainable growth can be achieved only by undertaking deep structural reforms that have been procrastinated for too long.”
  
• IMF's Lagarde: Europe Crisis 'Escalating'. The European debt crisis is growing to the point that it won’t be solved by one group of countries, Christine Lagarde, the managing director of the International Monetary Fund said today. Lagarde said that if countries don’t work together, the world will face a situation similar to the 1930s, before the world slid into World War II. “There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super- advanced economies that will be immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do,” Lagarde said. If the international community doesn’t work together, “the risk from an economic point of view is that of retraction, rising protectionism, isolation,” Lagarde said. “This is exactly the description of what happened in the ‘30s and what followed is not something we are looking forward to.” Lagarde said the world economic outlook “is quite gloomy” with pervasive downside risk, downward revisions, slower growth than expected, higher deficits than predicted and public finances in shaky condition. “And that is pretty much true the world over,” Lagarde said.
• BlackRock(BLK) Says Euro Area Headed for 'Full-Fledged' Recession. BlackRock Inc. (BLK), the world’s biggest asset manager, said European nations including France and Germany are headed for a recession as the prolonged debt crisis has prompted companies to cut spending and stop hiring. “We now believe that we’re in for a full-fledged recession, including one in France and Germany, that could cut GDP by 1 percent to 2 percent,” according to a note published today by New York-based BlackRock’s investment institute. “Short-term austerity measures could worsen the recession, defeating their very purpose of closing budget gaps.”
• Peripheral Europe May Face a Run on Banks in Coming Months, Kyle Bass. Kyle Bass, the Dallas-based hedge fund manager who said in 2009 that governments would default within three years, said Greek, Portuguese and Spanish depositors will withdraw money from banks in the coming months. “Just as Latvians ran to the ATMs this weekend, so will depositors all over peripheral Europe in the months ahead,” Bass, who runs Hayman Capital Management LP, said in an investor letter. “Deposits are now declining at an accelerated pace. What’s surprising is that it hasn’t happened much sooner.”
• BlueCrest's Platt Says European Banks Insolvent. Michael Platt, the founder of the $30 billion hedge fund BlueCrest Capital Management LLP, said most of the banks in Europe are insolvent and the situation will worsen in 2012 as the region’s debt crisis accelerates. “I do not take any exposure to banks at all if I can avoid it,” Platt, 43, said today in an interview on Bloomberg Television’s “Inside Track With Erik Schatzker.” If European lenders had to mark their books to markets every day in the same way hedge funds do, most would be proven “insolvent,” he said.
• East Europe Confidence Falls More On Euro Crisis, ZEW Says. Central and eastern Europe’s economic outlook worsened further in December as the euro-area debt crisis undermined growth prospects, the ZEW Center for European Economic Research and Erste Group Bank AG (EBS) said. The economic-sentiment indicator, a measure of investor confidence in the region, fell 4.6 points to minus 41.4 points, ZEW and Erste Bank said today in an e-mailed statement.
• Jobless Claims in U.S. Drop to Three-Year Low. The fewest workers in three years filed claims for U.S. jobless benefits last week, indicating the world’s largest economy is strengthening heading into 2012. The number of applications for unemployment payments dropped by 19,000 to 366,000 in the week ended Dec. 10, less than the lowest forecast of economists surveyed by Bloomberg News and the least since May 2008, according to Labor Department figures issued today in Washington. Other reports showed manufacturing accelerated this month after pausing in November. “The U.S. economy, unlike the rest of the world, is gathering momentum as we head toward year-end,” said Eric Green, chief market economist at TD Securities Inc. in New York.
• China Halts Project as Protests Erupt Over Death of Villager, Land Sales. China’s Communist Party halted a real estate project and are investigating local officials in a village in Guangdong province where protests have led to it being cordoned off, state media reported. Authorities in Wukan village will be questioned and the property construction plan will be stopped, China News Service said. Future land development will be undertaken only with the approval of a majority of villagers, the report said, citing Wu Zili, the mayor of Shanwei, which has jurisdiction over Wukan.
• India's Bond Yields at This Week's High on Inflation Concern. India’s 10-year bonds were little changed, holding yields at this week’s highest level, on concern an accelerated slide in the rupee will boost the cost of imports and spur inflation. The rupee slid 8.3 percent this quarter, the biggest drop among Asian currencies, and touched a record low of 54.3050 per dollar today. The benchmark wholesale-price index rose 9.11 percent in November from a year earlier, government data showed yesterday. The Reserve Bank of India will keep the repurchase rate unchanged at 8.50 percent at a policy review tomorrow, according to all 14 economists in a Bloomberg survey. “The central bank can’t afford to ease its policy stance as inflation continues to be a worry,” said N.S. Venkatesh, head of treasury at Mumbai-based IDBI Bank Ltd. “The rupee’s drop will also push prices higher.”
• Manufacturing May Shrink From China to Europe as Demand Weakens: Economy. Manufacturing may contract this month from China to the euro region as global demand slows and Europe’s leaders struggle to contain the worsening debt crisis. Chinese factory output may decline for a second month in December as Europe’s fiscal woes weigh on exports and home sales slide, preliminary results from a Markit Economics survey indicate. In the euro area, manufacturers may face a fifth straight month of contraction as the region endures its worst quarter for 2 1/2 years, a separate report showed. Ripples from Europe’s debt turmoil have dented confidence among companies and consumers and hit global demand. The Organization for Economic Cooperation and Development said last month that trade in goods stalled in most major economies in the third quarter and it cut its growth forecast. The slowdown is spilling over into unemployment, with Nokia Siemens Networks announcing last month that it plans to eliminate 17,000 jobs worldwide. “The near-term outlook is still bleak” in Europe, said Stella Wang, an economist at Nomura International Plc in London. “With the uncertainty about the sovereign debt crisis and slowing momentum of the euro area’s main trading partners, both businesses and consumers look set to continue holding back their investment and consumption decisions going into 2012.”
• Chinese Cut Back on London Luxury Home Buying as Stock Market Losses Bite. Chinese investors’ share of prime London home purchases in the city’s most expensive neighborhoods fell by more than half in the third quarter as stock market declines hurt spending power, Hamptons International said. Buyers from the world’s second-largest economy accounted for 4.9 percent of sales in Chelsea, Kensington, Knightsbridge and Belgravia in the three months through September, down from 12.6 percent in the previous quarter, said Adam Challis, head of residential research the London-based property broker. They represented 10.6 percent of the purchases in the three months through March. “A lot of Asian wealth that’s spent on property is tied to the performance of equity markets,” Challis said in an interview. “When they wobble, there’s less money to spend.” The Hong Kong Hang Seng Index fell 22 percent and Japan’s Nikkei 225 Stock Average retreated 15 percent in the two months through September, as Europe’s sovereign debt crisis damped global investor confidence.
• Crude Oil Decreases for Second Day as U.S. Industrial Production Falls. Oil fell to the lowest level in more than five weeks as U.S. industrial production declined for the first time in seven months, indicating a pause in manufacturing in the world’s largest oil-consuming country. Prices dropped as much as 1.1 percent after Federal Reserve data showed output at factories, mines and utilities fell 0.2 percent in November. “The industrial demand number is weighing on the oil market,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas. “People are concerned that oil demand from factories will be weaker.” Crude for January delivery fell 86 cents, or 0.9 percent, to $94.09 a barrel at 1:15 p.m. on the New York Mercantile Exchange. Earlier, it touched $93.87 a barrel, the lowest intraday level since Nov. 7.
• Obama's Support Among Young People Slips. Thirty-six percent of Americans age 18 to 29 predict that Obama will lose the election next year, while 30 percent say he will win. College students, who gave Obama some of his strongest support in 2008, now give the president a 48 percent approval rating, down from 60 percent in February, according to the poll.
• Morgan Stanley(MS) to Eliminate About 1,600 Jobs.
  

Wall Street Journal:

• Japan Orders Citi(C) to Suspend Fund Sales, Rate Operations. Citigroup Inc. has been ordered by regulators to temporarily suspend its Japanese mutual-fund sales and interest-rate trading businesses as a result of regulatory sanctions, people familiar with the situation said. As a result of the sanctions, which are expected to be announced Friday by Japan's Financial Services Agency, Citigroup will be required to close its mutual-fund business for 30 days and its interest-rate trading operations for 10 days.
• Businesses Preparing for Higher Costs in 2012. Business executives are expecting their costs to increase again next year. But they may not be able to pass those costs along to their customers.
• ECB Chief Plays Down Hopes For Bigger Bond Purchases. European Central Bank President Mario Draghi praised the results of the European Union's latest summit as a "breakthrough" Thursday, and once more poured cold water on hopes that the ECB might ramp up its government bond purchases to end the debt crisis.

CNBC.com:

• FedEX(FDX) Shares Jump as Profit Beats Forecasts.

Business Insider:

• Watch The Super Tense Moment When Jon Corzine Was Served Papers During His Hearing Recess. (video)
• Dwolla, The Iowa Startup That's Killing Credit Cards, Is Now Killing ATMs.
• White House Approves of Bill Allowing The Military To Imprison Americans Without Trial. Despite his promise to veto amendments within the National Defense Authorization Act (NDAA) President Obama said Wednesday he will approve the law allowing the U.S. military to arrest and hold anyone it deems a terrorist, even on American soil.
• The Shanghai Tower And Its Aftermath.
  

Zero Hedge:

• UK Vs France: You Decide Who Is Worse. (graphs)
• Cashin On The Coordinated Commodity Collapse.
  

Reuters:

• Greek Unemployment at Record High, Seen Rising Further. Unemployment jumped to 17.7 percent in the third quarter from 16.3 percent in the previous three-month period, the Greek statistics service said -- the highest quarterly unemployment rate recorded since the series started in 1998.

Telegraph:

• Christian Noyer Is Wrong - What France Lacks Is Credibility. French central bank governor Christian Noyer has lashed out against credit rating agencies for threatening to axe the country’s AAA status, claiming if any nation should be downgraded it’s the UK.

Bear Radar

Style Underperformer:

• Large-Cap Growth (+.07%)

Sector Underperformers:

• 1) Coal -1.20% 2) Oil Service -1.10% 3) Software -.73%

Stocks Falling on Unusual Volume:

• HMY, WTI, MFN, QSII, ORCL, ITMN, PGN, LRCX, NDSN, DECK, VPHM, FSLR, ARBA, DMND, ATHN, NICE, BIDU, DTV, USEI, PAAS, NUVA, GMCR, HMIN, GOLD, VRA and PAY
  

Stocks With Unusual Put Option Activity:

• 1) CBS 2) ADBE 3) ARMH 4) XLP 5) EWJ
  

Stocks With Most Negative News Mentions:

• 1) DECK 2) FSLR 3) MS 4) JCP 5) ATHN
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Bull Radar

Style Outperformer:

• Mid-Cap Value (+.79%)

Sector Outperformers:

• 1) Homebuilders +1.64% 2) Semis +1.44% 3) Drugs +1.39%

Stocks Rising on Unusual Volume:

• ARIA, ELN, NVS, SNCR, SONO, NVLS, FDX and ANV
  

Stocks With Unusual Call Option Activity:

• 1) WLP 2) CS 3) PFE 4) DECK 5) TEVA
  

Stocks With Most Positive News Mentions:

• 1) KO 2) CCE 3) BRCM 4) PCS 5) DFS
  

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume
  

Thursday Watch

Evening Headlines

Bloomberg:

• Merkel Buffeted by Domestic Disputes That May Sidetrack Her Crisis Efforts. German Chancellor Angela Merkel is being buffeted by domestic political turbulence, threatening to distract her efforts to follow through on a European summit agreement last week to tackle the euro debt crisis. Christian Lindner, the general secretary of Merkel’s Free Democratic coalition partner, unexpectedly quit yesterday amid a party tussle over bailouts. Separately, Merkel’s spokesman said the chancellor had full confidence in Christian Wulff, Germany’s president, after a Bild report that he misled lawmakers over a 500,000 euro ($649,000) home loan. The political turmoil engulfed Merkel’s administration five days after she secured what she called a “breakthrough” European deal to enforce stricter budget rules and to stem the financial contagion now in its third year. That uncertainty may disrupt her efforts to restore market confidence by pushing the steps agreed on in Brussels through parliament in Berlin. “The FDP and Wulff are a distraction in many ways,” Joerg Forbrig, an analyst at German Marshall Fund of the United States, said by phone. “The FDP is basically in the process of dismantling itself as a party while serving in government.” It’s “the last thing Merkel needs right now.” The disruptions came as Bundesbank President Jens Weidmann, her former economic adviser, hinted the central bank may not provide its share of loans to the International Monetary Fund that was part of last week’s summit agreement.
• Euro Region Faces Recession as Breakup Risk Remains, E&Y Says. The euro-area economy is likely to slip back into a recession and its leaders’ new plan to end the debt crisis hasn’t completely eliminated the risk of a breakup of the currency region, according to Ernst & Young LLP. The economy of the 17 nations using the euro will probably shrink in the current and next quarters, the group said in a report published in London today. The economy will barely grow in 2012, with E&Y forecasting expansion of just 0.1 percent. “The latest developments in Greece, Italy and Spain and the European agreement lower the risk of a breakup of the euro zone,” said Marie Diron, an economist at Oxford Economics and adviser on the report. “This risk remains, however, especially since in 2012 very large amounts of sovereign debt require refinancing which could cause tensions.”
  
• Euro Is Near 11-Month Low Before Spain Bond Sales, German PMI. The euro traded 0.3 percent from the weakest level in 11 months as Spain prepares to sell bonds amid concern Europe’s policy makers are struggling to stem the region’s debt crisis. The 17-nation euro was near the lowest level in 10 weeks against the yen before a report forecast to show Germany’s manufacturing industry contracted for a third-straight month, spurring concern that Europe’s fiscal problems will hamper growth in the region’s biggest economy. The dollar maintained gains against most major peers as Asian stocks dropped for a third day, extending a global decline in shares and bolstering demand for the world’s reserve currency as a refuge. “We’ve got a very negative view on growth for Europe next year,” said Robert Rennie, Sydney-based chief currency strategist at Westpac Banking Corp., Australia’s second-largest lender. Fiscal austerity and tightening financial conditions “will develop into a fully blown recession,” he said.
• Foreign Direct Investment in China Falls on Global Turmoil. Foreign direct investment in China fell last month from a year earlier, the first decline since 2009, amid global financial turmoil and diminished prospects for gains in the yuan. Investment slid 9.8 percent to $8.76 billion, after expanding 8.8 percent in October, the Ministry of Commerce said in a statement today. The previous decline was in July 2009. Communist Party leaders yesterday described the global outlook as “very grim.”
• Record Big Ship Deliveries to Hit Asia Lines as Europeans Team Up: Freight. Container lines are losing money on Asia-Europe routes after slashing rates more than 50 percent this year because of a price war and excess capacity. In 2012, 42 of the biggest ships ever built will join the competition. The record number of ships able to hold more than 13,000 containers entering service will be almost double this year’s tally of 22, according to Alphaliner and Clarkson Plc data. They will boost the total fleet to about 100.
• Wall Street Traders Confounded as Volatility Extends Record Run. Duke Buchan III’s $1 billion hedge fund beat U.S. stocks by 46 percent in the decade through March, a period that included the steepest equity-market losses since the 1930s. Then came the selloff in August when global stocks suffered their worst nine-day drop since the 2008 financial crisis. For four days, The Dow Jones Industrial Average (INDU) alternated between gains and losses of more than 400 points, the longest streak ever, and its intraday swings have averaged twice the level seen during the first seven months of the year. Last week, Buchan told clients he is shutting his firm Hunter Global Investors LP. “Markets seem to be driven more by the latest news out of Europe than by a company’s earnings prospects,” Buchan, 48, said in a Dec. 8 investor letter. “We have not weathered the ensuing volatility well.”
• Japan's Tankan Sentiment Slides as Pessimism Reigns on Yen. Sentiment among Japan’s largest manufacturers deteriorated from three months ago, underscoring the fragility of a post-quake recovery threatened by Europe’s debt crisis and a strengthening yen. The Tankan large manufacturer index fell to minus 4 from 2, the Bank of Japan said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a reading of minus 2.
• Bernanke Tells Senators Fed Plans No Aid to European Banks. Federal Reserve Chairman Ben S. Bernanke told Republican senators the Fed plans no additional aid to European banks amid the region’s sovereign debt crisis, according to two lawmakers who attended the meeting. Senator Bob Corker, a Republican from Tennessee, said Bernanke made it “very clear” in closed-door comments today the central bank doesn’t intend to rescue European financial institutions. Lindsey Graham, a South Carolina Republican, said Bernanke told lawmakers that “he doesn’t have the intention or the authority” to bail out countries or banks. Both senators spoke to reporters after leaving the one-hour session at the Capitol in Washington. “People walk away knowing he has no intentions whatsoever of furthering U.S. involvement in the crisis,” Corker said. The Fed chairman also said he doesn’t foresee the U.S. providing any more money to the International Monetary Fund to combat Europe’s debt turmoil, Corker told reporters. Corker cited Bernanke as saying that “he doesn’t have the legal authority to loan money to European banks.”
• Lam Research(LRCX) to Buy Novellus Systems(NVLS) for $3.3 Billion. Lam Research Corp (LRCX.O), a supplier of wafer fabrication equipment, agreed to buy smaller rival Novellus Systems Inc (NVLS.O) for $3.3 billion in stock as it looks to gain cutting-edge technology and become more efficient. The deal is the latest acquisition in the semiconductor industry as manufacturers and chip-gear makers wrestle with cutthroat competition, waning PC sales growth and a weak economy. Under agreement's terms, Novellus stockholders will receive 1.125 shares of Lam Research common stock for each Novellus share held, or a 28 percent premium to the stock's close on Wednesday on Nasdaq.
• Paulson's Bright Spot Amid Slump May Fade as Gold Drops to Five-Month Low. John Paulson, the hedge-fund manager enduring the worst year in his career, may be facing a final blow from this month’s selloff in gold, an investment that mitigated losses at his $28 billion firm earlier in 2011. The SPDR Gold Trust (GLD) exchange-traded fund, of which Paulson was the largest shareholder as of Sept. 30, fell 10 percent from the end of last month, and all eight of his gold stocks slumped with a 9.6 percent decline for bullion. The declines would translate into a $672.1 million paper loss on those securities for Paulson & Co., assuming his holdings haven’t changed since the end of the third quarter, when the firm reported its equity stakes in a regulatory filing. Until this month, gold had been the bright spot for Paulson & Co. clients, who can choose to invest in gold-denominated shares of the hedge funds. Gains in bullion had alleviated losses of 46 percent, in the dollar share class, for one of the firm’s biggest funds this year through November. Paulson also offers a dedicated Gold Fund, its best performer this year.

Wall Street Journal:

• Europe Strains World's Banks. The world's financial system showed new signs of strain on Wednesday as banks and investors clamored for U.S. dollars and two European banks took emergency measures to address the deepening crisis. Stresses rippled through debt and stock markets despite measures taken by European leaders last week to help restore investor confidence. Reflecting the tension, rates that banks charge each other for short-term borrowing in dollars continued to climb, hitting their highest level since July 2009. Long-term Italian government bond yields jumped back above 7%, a level that would crimp Italy's ability to borrow in the future.
• U.S. Shoppers Foot Bill for Soaring Pay in China. One of the things that's showing up in Christmas stockings this year: higher prices, courtesy of China. After decades as America's go-to destination for low-cost consumer goods, China is undergoing a profound shift. Rapid economic development and a smaller supply of young migrant workers are pushing up labor costs. Tack on rising raw-materials prices, driven largely by Chinese demand, and a strengthening currency, and China-made goods aren't the bargains they used to be. In the past year, labor costs have risen 15% to 20% at Michaels Stores Inc.'s Chinese suppliers, says John Menzer, chief executive of the arts-and-crafts retailer.
• Hospitals Cut Doses Amid Drug Shortage. Hospitals are grappling with a shortage of nutrition drugs and disinfectant products that has led doctors to cut doses and ration supplies, prompting patients at a handful of facilities to get sick. The crunch is part of a broader drug shortage that has federal health officials rethinking how they monitor the nation's pharmaceutical supply. On Thursday, a Senate committee is slated to consider legislation requiring companies to notify the Food and Drug Administration of problems that might result in a shortage so the agency can help prevent them.
• Loan Costs Hit Asian Firms. Airlines, Shippers Turn to Bond Market as Banks Pull Back, Imperiling Spending. Asian airlines and shipping companies, already battling a slowdown in cargo traffic, are facing significantly higher borrowing costs as European banks pull back from lending. The companies are turning to the bond market and government export agencies and seeking out new banks to fill the lending gap, but industry executives worry that if credit remains tight, it could force companies to scale back spending. "It's manageable at the moment, but the credit pullback is going to have a pricing effect," said Robert Martin, chief executive of BOC Aviation, the leasing arm of China's Bank of China.
• The Euro Zone's Double Failure by Martin Feldstein. Europe needs country-by-country fiscal reforms, not a renewed push for political integration. The recent euro-zone summit was a double failure. It failed to achieve the increased European political integration that was the primary goal of German Chancellor Angela Merkel and the other European political leaders. And it failed to improve the outlook for euro-zone sovereign bonds because those politicians continued to insist that only a fiscal union and political integration could limit the interest rates on sovereign debt.

Zero Hedge:

• David Stockman's Thoughts on the Coming European Train Wreck.
• Germany Preparing Plans For Commerzbank Bail Out.
• Fitch Downgrades Credit Agricole To A+, Outlook Stable.
• Game Theory Over: Bank Of France's Noyer Says Britain Should Be Downgraded, Not France.

CNBC:

• Investors Still Reluctant to Buy Euro Zone Bank Debt. Investors are not likely to open their wallets to European banks any time soon despite the efforts of central banks to protect global funding markets from the euro zone debt crisis.
• China December Flash PMI at 49; Factory Output Shrinks. China's factory output shrank again in December after new orders fell, a preliminary purchasing managers' survey showed, entrenching expectations that manufacturers are struggling with waning global demand and tight domestic credit conditions. The HSBC flash manufacturing purchasing managers' index (PMI), the earliest indicator of China's industrial activity, stood at 49 in December, a modest rise from November's 47.7 but pointing to a monthly contraction in activity nonetheless.

IBD:

• Fortinet(FTNT) Finds Secure Footing In Unsecure Networks.

NY Times:

• Euro Zone Deal Runs Into Second Thoughts. The deal reached at the emergency European summit meeting in Brussels last Friday was supposed to cement a consensus for better fiscal discipline and reassure the financial markets about the European Union’s resolve. By Wednesday, it was clearly not convincing investors.

Reuters:

• Exclusive - Regulators Know Where MF Global Funds Went. U.S. regulators now have a more complete picture of money transfers in the final days of bankrupt brokerage MF Global (MFGLQ.PK), but must sort out which transactions were legitimate before more money can be released to customers, a top official told Reuters on Wednesday. Jill Sommers, who is heading the Commodity Futures Trading Commission's review of MF Global, said regulators "are far enough along the trail" that they know where the money went. "Now it's just finding out which ones of those transactions are legitimate and which ones of them are illegitimate," Sommers said.
• Michael Kors upsizes IPO, prices above range-underwriter. Luxury lifestyle company Michael Kors Holdings Ltd raised the size of its initial public offering and priced it above the expected range, according to an underwriter. In all, 47.2 million shares were sold at $20 each, generating proceeds of $944 million. At that price, the company is valued at about $3.82 billion.
• More Pain For Euro As Growth Fades, Crisis Endures. The euro is likely to stay under pressure until early next year as investors grow bearish about euro zone growth prospects and policymakers' ability to bring a rapid conclusion to the region's debt crisis. The single currency has shed more than 3 percent against the dollar so far this week, equivalent to all its losses for 2011, as a European Union summit last week fell short of investor expectations for decisive steps to stem the bloc's debt crisis.

Financial Times:

• European Banks May Need Further EU200 Bln for Basel Rules. European banks may have to raise almost EU200 bln in new capital or reduce their assets and liabilities by around 20% in order to meet Basel III rules, citing a study by the Boston Consulting Group. Boston Consulting Group reviewed 145 large banks worldwide, found they need to raise EU354 bln or cut risk-weighted assets by 17%. Banks in the U.S. and Asia each face collective shortfalls of about EU70 bln, citing the study.

Telegraph:

• China's Epic Hangover Begins. China's credit bubble has finally popped. The property market is swinging wildly from boom to bust, the cautionary exhibit of a BRIC's dream that is at last coming down to earth with a thud. It is hard to obtain good data in China, but something is wrong when the country's Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control. The growth of the M2 money supply slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains. The question is whether the People's Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble. Chinese stocks are flashing warning signs. The Shanghai index has fallen 30pc since May. It is off 60pc from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933. "Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)... a 'Bloody Ridiculous Investment Concept' in my view," said Albert Edwards at Societe Generale.

Sky News:

• Goldman Sachs Asset Management Chairman Jim O'Neill said the euro are won't fall apart in the next 12 months, though some countries may not be able to "stick with the program." European leaders have "failed with this summit, but they'll be back again and try with something else," O'Neill said in an interview.

Financial Times Deutschland:

• Bundesbank President Jens Weidmann was refused a meeting with the German Parliament's budget committee to discuss boosting contributions to the IMF. The government put pressue on the committee not to meet with Weidmann, who had called on parliament to share responsibility for agreeing to an increase of up to 45 billion euro in IMF contributions.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -2.0% to -1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 215.0 +3.0 basis points.
  
• Asia Pacific Sovereign CDS Index 158.50 +2.75 basis points.
• FTSE-100 futures -.25%.
  
• S&P 500 futures -.22%.
  
• NASDAQ 100 futures -.24%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (PIR)/.20
• (SCHL)/2.32
• (WGO)/.06
• (FDX)/1.52
• (DFS)/.92
• (ADBE)/.60
• (HOV)/-.38
• (HEI)/.42
• (MLHR)/.41

Economic Releases
8:30 am EST

• The Producer Price Index for November is estimated to rise +.2% versus a -.3% decline in October.
• The PPI Ex Food & Energy for November is estimated to rise +.2% versus unch. in October.
• The 3Q Current Account Deficit is estimated at -$108.4B versus -$118.0B in 2Q.
• Empire Manufacturing for December is estimated to rise to 3.0 versus .61 in November.
• Initial Jobless Claims are estimated to rise to 390K versus 381K the prior week.
• Continuing Claims are estimated to rise to 390K versus 381K prior.
  

9:00 am EST

• Net Long-Term TIC Flows for October are estimated to fall to $62.5B versus $68.6B in September.

9:15 am EST

• Industrial Production for November is estimated to rise +.1% versus a +.7% gain in October.
• Capacity Utilization for November is estimated at 77.8% versus 77.8% in October.

10:00 am EST

• The Philadelphia Fed for December is estimated to rise to 5.0 versus 3.6 in November.
  

Upcoming Splits

• (ROST) 2-for-1
  

Other Potential Market Movers

• The ECB's Mario Draghi speaking, 5-Year TIPS Auction, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, BofA Merrill Healthcare Conference, (AET) Investor Conference, (HANS) Business Update, (HON) Update and the (UTX) Analyst Meeting could also impact trading today.
  

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

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Global Growth Fears, Technical Selling, Tech Sector Pessimism

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  
• Sector Performance: Almost Every Sector Declining
  
• Volume: Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 26.37 +3.78%
  
• ISE Sentiment Index 75.0 -33.63%
  
• Total Put/Call 1.07 -8.55%
  
• NYSE Arms 1.23 -27.61%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 130.99 +5.06%
  
• European Financial Sector CDS Index 309.67 +7.58%
  
• Western Europe Sovereign Debt CDS Index 389.10 +1.68%
  
• Emerging Market CDS Index 316.72 +4.34%
  
• 2-Year Swap Spread 48.0 +2 bps
  
• TED Spread 55.0 +1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -147.0 -6.5 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 166.0 -6 bps
  
• China Import Iron Ore Spot $134.80/Metric Tonne -1.82%
  
• Citi US Economic Surprise Index 75.0 -.3 point
  
• 10-Year TIPS Spread 1.95 -6 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -80 open in Japan
• DAX Futures: Indicating +13 open in Germany

Portfolio:

• Slightly Higher: On gains in my index hedges and emerging markets shorts
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short, then covered some
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 breaks back below its 50-day moving average and trades near session lows on rising Eurozone debt angst, rising global growth fears, some earnings jitters, technical selling and more shorting. On the positive side, REIT and Airline shares are higher on the day. (XLF) is holding up relatively well. Gold is down -3.8%, the UBS-Bloomberg Ag Spot Index is dropping -2.3% and Oil is plunging -5.05%. On the negative side, Alt Energy, Energy, Oil Service, Internet, Networking, Road & Rail, Homebuilding, Construction, I-Banking, Disk Drive and Computer shares are under substantial pressure, falling more than -2.0%. (XLK) has traded poorly throughout the day. Cyclical and small-cap shares are substantially underperforming. Copper is falling -4.77% and Lumber is dropping -2.0%. The 10-year yield is falling -6 bps to 1.90%. The Italy sovereign cds is rising +.7% to 573.33 bps, the France sovereign cds is rising +1.28% to 236.83 bps, the Germany sovereign cds is gaining +2.5% to 106.17 bps, the Spain sovereign cds is rising +1.04% to 447.50 bps, the China sovereign cds is gaining +3.1% to 145.97 bps, the Russia sovereign cds is rising +3.5% to 275.0 bps, the Brazil sovereign cds is jumping +5.5% to 158.56 bps and the Japan sovereign cds is gaining +2.34% to 135.71 bps. Moreover, the European Investment Grade CDS Index is rising +1.69% to 180.62 bps. The Italian/German 10Y Yield Spread is surging +4.7% to 487.55 bps. The Western Europe Sovereign CDS Index is making another new all-time high today. The TED spread continues to trend higher and is at the highest since June 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is the highest since February 2009. The 3M EUR/USD Cross-Currency Basis Swap is falling -4.6% to -147.0 bps, which is now back to Nov. 28th levels. The FRA-OIS Spread is surging +8.3% to 60.0 bps. The Libor-OIS spread is very near the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -29.8% since February 16th and -25.5% since Sept. 7th. The Citi Asia-Pacific Economic Surprise Index fell another -.6 point today to -26.10, which is the worst since April 2009. Asian equities continue to trade very poorly. The Shanghai Composite fell another -.9% overnight to the lowest level since March 2009 and is now down -20.6% ytd. As well, India's Sensex fell another -.8% and is now down -22.6% ytd. Major European equity indices fell between 2-3% today. French shares dropped -3.33% and are now down -22.0% ytd. European credit gauges are still performing very poorly given that the European debt crisis “can-kicking” solution is supposedly at hand. Chinese officials' comments last night were very bearish for commodities. Oil has much more downside intermediate-term, in my opinion. I added to my (SCO) long today. Despite recent stock losses, trading still has an overall complacent feel as volume remains poor and each push lower is met by intense dip-buying. As well, most investor sentiment gauges are still registering too much bullishness given the deteriorating macro backdrop. This is likely due to year-end window-dressing and seasonality. The situation in Europe is reaching another point that risks spinning out of control. Unless a significant positive catalyst emerges over the coming weeks, further equity weakness in 1Q is becoming more likely. I expect US stocks to trade modestly lower into the close from current levels on rising Eurozone debt angst, earnings jitters, rising global growth fears, tech sector pessimism, technical selling and more shorting.