Stocks Surging into Final Hour on Euro Bounce, Short-Covering, Window-Dressing, Better US Economic Data

Broad Market Tone:

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

Equity Investor Angst:

• VIX 23.01 -7.65%
  
• ISE Sentiment Index 106.0 +8.16%
  
• Total Put/Call .78 -9.30%
  
• NYSE Arms .19 -92.97%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 126.61 -3.34%
  
• European Financial Sector CDS Index 291.71 -1.03%
  
• Western Europe Sovereign Debt CDS Index 365.50 -3.45%
  
• Emerging Market CDS Index 313.07 -1.99%
  
• 2-Year Swap Spread 48.0 -2 bps
  
• TED Spread 56.0 -1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -116.50 +1.25 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 167.0 +9 bps
  
• China Import Iron Ore Spot $132.0/Metric Tonne +.53%
  
• Citi US Economic Surprise Index 73.90 +.5 point
  
• 10-Year TIPS Spread 2.04 +11 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +139 open in Japan
• DAX Futures: Indicating +32 open in Germany

Portfolio:

• Higher: On gains in my Tech, Medical, Biotech and Retail sector longs
  
• Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added some back
  
• Market Exposure: Moved to 75% Net Long

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 moves back above its 50-day moving average and trades to session highs, despite Eurozone debt angst, rising global growth fears, higher energy prices and US tax hike concerns. On the positive side, Coal, Alt Energy, Oil Service, Steel, Semi, Networking, Bank, I-Bank, Construction and Homebuilding shares are especially strong, rising more than +4.0%. Small-cap and cyclical shares are outperforming. (XLF) has outperformed throughout the day. Lumber is up +2.2% and Copper is gaining +2.1%. The 10-year yield is surging +12 bps to 1.93%. Weekly retail sales rose +3.2% this week versus a +3.0% gain the prior week. While this is still decent, it is a notable deceleration from Oct.’s 4.6% avg. weekly gain. Major European equity indices rose 1-3.0% today. The Bloomberg Europe Bank/Financial Services Index rose 3.3%. The Spain sovereign cds is down -3.39% to 397.5 bps, the Germany sovereign cds is falling -1.95% to 104.67 bps, the France sovereign cds is declining -2.6% to 223.33 bps, the Italy sovereign cds is falling -4.34% to 512.50 bps and the Belgium sovereign cds is down -3.4% to 315.17 bps. Moreover, the Europe Investment Grade CDS Index is down -4.3% to 174.79 bps. On the negative side, Drug and Telecom shares are underperforming, rising less than +2.0%. The UBS-Bloomberg Ag Spot Index is up +1.0%, Oil is jumping +3.8% and Gold is rising +1.3%. The China sovereign cds is jumping +3.85% to 154.79 bps(+9.5% in 5 days), the Japan sovereign cds is surging +3.98% to 142.50 bps, the Russia sovereign cds is gaining +.4% to 276.0 bps and the UK sovereign cds is rising +2.66% to 98.0 bps. Moreover, the Asia-Pacific Sovereign CDS Index is rising +.53% to 157.89 bps. The Western Europe Sovereign CDS Index is still very near its all-time high. The TED spread continues to trend higher and is very near 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 falling -.96% to -115.40 bps, which is back to mid-Nov. 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 -31.2% since February 16th and -27.1% since Sept. 7th. The China Corporate Blended Spread Index remains very close to another technical breakout. The Citi Asia-Pacific Economic Surprise Index is falling another -.1 point today to -27.80, which is the lowest level since April 2009. Asian equity indices were mostly lower overnight. India’s Sensex fell another -1.33% to the lowest since Aug. 2009. This index is now down -26.0% ytd. Fears over the possibility of hard landings in some key emerging market economies appear to be intensifying again. Moreover, 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. While year-end performance-chasing, short-covering, better US economic data and seasonal strength should lead to further short-term gains, I am not yet seeing signs that a sustainable advance has begun. Credit gauges are still at highly stressed levels(and in many cases worsening), today’s advance is led by many of this year’s worst-performing stocks, concerns over Asia are intensifying and volume remains light. I expect US stocks to trade modestly higher into the close from current levels on a bounce in the euro, better US economic data, short-covering, bargain-hunting, year-end window dressing, seasonal strength and technical buying.

Today's Headlines

Bloomberg:

• Merkel Takes Vacation as Debt Crisis, Domestic Woes Fester. Chancellor Angela Merkel presided over her final Cabinet meeting of 2011 before she takes a winter break, leaving behind the simmering debt crisis and a political ally whose job as German president is on the line. Merkel discussed minimum wages, changes to a stocks law and a bill on energy-efficiency labeling with ministers in Berlin today, her last publicly scheduled meeting before she goes on vacation tomorrow. Her spokesman declined to say where she is going, saying only that her next official appearance is not until Jan. 5. As she takes time out, the German leader leaves the threat of a credit-rating downgrade hanging over Europe’s biggest economy and the wider euro area, as rating companies join investors in questioning the impact of Merkel’s Dec. 9 European summit push for closer fiscal ties to combat the crisis. The euro fell to an 11-month low against the dollar on Dec. 14. “They haven’t solved the crisis,” Christian Schulz, an economist at Joh. Berenberg Gossler & Co in London, said by phone. “If the whole thing blows up, it’s going to cost Merkel a lot. Her future rests on the future of the euro.”
• Spain, Italy Lead Drop in Government Default Swaps in Europe. Spain and Italy led a decline in the cost of insuring against default on government debt before the European Central Bank starts offering three-year loans tomorrow. Credit-default swaps on Spain dropped 21 basis points to 387 and Italy tumbled 31 to 504, according to CMA prices at 4 p.m. in London. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 11 basis points to 359. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 31.5 basis points to 772.5, according to JPMorgan Chase & Co. A decline signals improvement in perceptions of credit quality. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 7.5 basis points to 179.25 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers decreased 17 basis points to 298 and the subordinated index dropped 15 to 540.
• IMF Urges European Firewall Around Ireland as Prospects Fragile. Ireland's European benefactors should take steps to create a firewall around the nation, as its prospects remain “fragile” amid the escalating euro-region debt crisis, the International Monetary Fund said. The crisis may hamper Irish economic growth, increase the cost of re-entering bond markets and make it harder for the country's banks to sell off assets, the Washington-based fund said today in its fourth review of Ireland's bailout program.
• Europe Dragging Down U.S. in Record Correlation: Credit Markets. For all the evidence that the U.S. economy is expanding, the nation's credit markets are unable to decouple from Europe as everything from junk bonds to interest- rate swaps move increasingly in lockstep with the euro region. Correlation between the 17-nation currency and prices of a credit-default swaps index tied to U.S. junk bonds is at about the highest on record, Bloomberg and London-based Markit data show. Interest-rate swap spreads in the U.S., a gauge of fear in credit markets, are trading the most in tandem with European corporate credit since 2007. "You're living in fairyland if you think the U.S. won't be impacted by Europe," MacDonald, head of research at Aladdin, a Stamford, Connecticut-based investment firm, said yesterday in a telephone interview. Investors are speculating "Europe is going to get worse before it gets better," he said, and they "don't feel the U.S. can easily sidestep it." Correlation between the euro-dollar exchange rate and the price of the Markit CDX North America High Yield Index reached a record 0.76 on Dec. 2, when measured over 60-day periods, and held at 0.74 yesterday, data compiled by Bloomberg and London- based Markit show. The measure has climbed from 0.1 on April 7.
• U.S. Housing Starts Jump 9.3%, to Highest in Year. Builders broke ground in November on more houses than at any time in the past 19 months, led by a surge in multifamily units, signaling the market is stabilizing heading into 2012. Starts increased 9.3 percent to a 685,000 annual rate, exceeding the highest estimate of economists surveyed by Bloomberg News and the most since April 2010, Commerce Department figures showed today in Washington. Building permits, a proxy for future construction, also climbed to a more than one-year high. Work on multifamily units like apartments and townhouses is growing as the rental market improves. Applications for the construction of single- family homes climbed 1.6 percent, and those for multifamily units jumped 14 percent. New construction of single-family houses rose 2.3 percent from the prior month to a 447,000 annual rate, the most since June. The category is heading for a record low this year at around 423,000, about 10 percent less than in 2010, according to Bloomberg News calculations. Three of four regions had a November increase in starts, led by a 54 percent jump in the Northeast and a 23 percent gain in the West. Starts fell 18 percent in the Midwest.
• Canada Is 'Very Serious' About Selling Oil to Asian Markets, Harper Says. Canadian Prime Minister Stephen Harper said he is ‘very serious’ about the idea of selling the country’s oil to markets in Asia, and that Canada no longer wants to export its energy only to the United States. “I am very serious about selling our oil off this continent, selling our energy products off to Asia,” Harper said in an interview with CTV National News broadcast last night. He said that when “senior Americans” told him U.S. lawmakers would approve TransCanada Corp. (TRP)’s Keystone XL pipeline, allowing Canada to sell all its oil to the U.S., he replied, “We’d love to, but I think the problem is now that we’re on a different track.”
• Paulson-Backed Lender Grows by Buying Failed Banks. (video)
• Gold Climbs Most This Month as IMF Pledge Boosts Euro Against U.S. Dollar. Gold rose, heading for the biggest gain this month, as the weakening dollar boosted demand for the metal as an alternative asset. The euro rose against the U.S. currency after Europe pledged 150 billion euros ($196 billion) to the International Monetary Fund to help stem the region’s debt crisis, and as the European Central Bank widened its support for bond markets.

Wall Street Journal:

• US Demands Airlines CO2 Emissions Data As Spat With EU Drags On. The U.S. government has demanded aviation-emissions data from nine European airlines two weeks before the European Union's emissions trading system is set to include air-travel despite strong opposition from the U.S. and many other countries. The U.S. Department of Transportation on Friday told seven U.S. carriers and the EU airlines to provide data about how the EU plan affects them. The DoT letters, reviewed by The Wall Street Journal, said the department "will now seek certain information related to ETS."
• Egyptian Women March Against Abuse by Military. Thousands of Egyptian women have taken to the streets of Cairo in a mass demonstration against the military's brutality against women during a crackdown on protesters that shocked many in the largely conservative society. Ringed by a protective chain of male protesters, women from different social classes and religious background gathered in Tahrir Square Tuesday and marched through the streets of Cairo. Many carried signs with images of soldiers dragging protesters by the hair and kicking and stomping on them on the ground. One image was particularly shocking.
• Fitch Puts European Banks on Watch. Fitch Ratings placed banks in multiple European nations on watch for possible downgrade following the placement of the their home country's sovereign ratings under a similar review recently. The watch status applied to banking groups in France, Spain, Italy, Belgium, Ireland and Cyprus.
• Fitch Warns on Bailout Fund's Rating. The triple-A debt rating of Europe's temporary bailout fund largely depends on France and Germany retaining their triple-A status, ratings agency Fitch warned Tuesday, adding that the agency's revision last week of its outlook on France to negative implies that the fund is at a greater risk of a downgrade. "We affirmed France's triple-A status but warned that there is a slightly greater than 50% chance of a downgrade within the next year or two.
• Goldman(GS) Sees More Cuts in China Aluminum Output. The decline in aluminum prices has already led to production cutbacks in China and will likely lead to more, providing a mildly bullish boost to the metal, Goldman Sachs said. The bank on Tuesday lowered its 12-month aluminum price forecast by 9.4% to $2,400 a metric ton from $2,650/ton previously, and kept its three-month outlook unchanged at $2,300/ton. The price of aluminum, used in the automotive, aerospace and construction industries, has tumbled along with other commodity prices in recent weeks and is trading at 2011 lows.
• NJ Recycling Company Told to Pay $570,000 for Dumping Asbestos-Contaminated Debris. A New Jersey recycling company has been sentenced to pay a $500,000 criminal fine and more than $70,000 in restitution and cleanup costs for its role in dumping thousands of tons of asbestos-contaminated construction debris on farmland near the Mohawk River in central New York in 2006.
• Portrait of New North Korea Leader Takes Shape. U.S. Officials Describe Kim Jong Eun, Elusive Inheritor of the Kim Family's Dictatorship, as Sadistic and Unpredictable.
• Long-Short Equities Fund Managers Roiled By Market Volatility. Hedge funds that try to beat the market through buying and selling individual stocks have had such a rough go of things this year that a number of them are cutting back on their allocations. Long/short equity managers recorded the heaviest withdrawal among various hedge fund strategies so far this year, accounting for $5 billion of the $9.4 billion outflows through November, according to Eurekhedge. On a return basis, these funds lost 7.10% for the first 11 months of the year--a steeper decline than the 4.37% drop for the industry as a whole, or the flat S&P 500 index.

CNBC.com:

• Hopes For Crisis Relief Ride on ECB Loans to Banks. Demand for the European Central Bank's first ever offer of three-year loans to banks on Wednesday is likely to go a long way to determining whether countries embroiled in the debt crisis receive some relief or have to endure yet more pain. The ECB hopes the limit-free, ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and most of all, tempting banks to buy Italian and Spanish debt.
• Subprime Buyers Pushing Late Auto Sales. As auto sales have surged in recent months, I’m hearing from more and more dealers about the renewed strength of the subprime and deep subprime buyer. You know the folks I’m talking about. Those who have a checkered (avg. score 550-620) credit record. The same folks who were either shut out or chose not to buy a new or used car when the economy tanked three years ago. The return of the subprime auto buyer is confirmed with the latest data from CNW Research and Experian.

Business Insider:

• Two Wall Street Execs and Family Killed in New Jersey Plane Crash.
• Check Out These Twisted North Korean Propaganda Posters.
• IBM Just Made 5 Wild Predictions About The Future.
• Investors Pulled Tons of Money Out of the BRICS This Year. (graph)
  

Zero Hedge:

• EFSF at 5-Day Low Despite Sovereign Strength. (graph)
• Deus Ex LTRO. I think we have already seen the initial impact. Now we will wait to see rates do well, but will be disappointed. The big banks with risk management departments will decide to decline. The risk/reward just won’t be attractive to them. We will find out that places like DB don’t participate and that small weak banks do. That will actually start another spiral on those weak banks, as people will sell the shares and they won’t find lenders outside of the ECB as no one will trust their discipline. In the end, this won’t do much for the sovereign debt market, but will shine a spotlight on which banks should be shorted and will possibly expedite their default.
• Fed Issues Update On Dodd-Frank Framework, Director Responsibility and Annual Stress Tests.
  

TheStreet.com:

• Bank of America(BAC) Risks Capital Shortfall: Creditsights. Bank of America is "at risk" of failing to keep up with a Federal Reserve timetable for strengthening its balance sheet, according to research published Tuesday by Creditsights, a credit research firm.

National Terror Alert Response Center:

• Alarm as Dutch Lab Creates Highly Contagious Killer Flu. The UK’s Independent reports that a deadly strain of bird flu with the potential to infect and kill millions of people has been created in a laboratory by European scientists – who now want to publish full details of how they did it. The discovery has prompted fears within the US Government that the knowledge will fall into the hands of terrorists wanting to use it as a bio-weapon of mass destruction.

Reuters:

• Hedge Fund Walks Out On Greek Debt Swap Talks -Sources. Vega Asset Management has resigned from a group of private creditors leading talks with Greece and its international lenders over a restructuring of its debt, two sources said, amid differences over how to proceed with the voluntary bond swap.

Financial Times:

• US Oil Boom Town Prompts Fears Of Crude Glut. The boom in North American oil production has triggered a race to expand the US’s main oil storage centre, raising concerns among some industry executives of potential glut in capacity. By next year, the capacity of tanks around Cushing, an Oklahoma town that calls itself the pipeline crossroads of the world, will equal to nearly a day’s of global oil production as refineries, trading houses, Wall Street banks and pipeline companies build or lease hundreds of thousands of barrels of new tanks.

Telegraph:

• Don't Ask The ECB to Intervene. Is it possible that the European Central Bank (ECB) doesn't want to intervene to end the debt crisis is because, whisper it quietly - it can’t afford to?
• Britain, the IMF, and the World's Richest Beggar. Euro rage is reaching new heights over Britain's latest outrage. Our refusal to pony up a further €31bn we cannot afford, to prop up a monetary union that was created against our wishes and better judgment, and launched with the malevolent purpose of accelerating the great leap forward to a European state that is inherently undemocratic. It is being presented as treachery, Anglo-Saxon perfidy, and the naked pursuit of national self-interest. Let me just point out:
• Debt Crisis: Live. Moody's warns that UK could face a downgrade as "formidable and rising challenges" such as the deficit increase since 2008 have eroded ability to absorb further fiscal shocks.

Die Welt:

• Germany's Bundesbank doesn't think the conditions for providing aid to the IMF have been fulfilled until the Bundestag, Germany's lower house, explicitly backs the measure, citing people close to the central bank.

Finanz und Wirtschaft:

• Clariant AG sees demand weakening in various areas of the chemicals market, CEO Hariolf Kottmann said in an interview.

The Moscow Times:

• Clashes in Oil Region Threaten Kazakhstan Leader. Riots by oil workers in western Kazakhstan suggest that pressure is mounting for President Nursultan Nazarbayev to relax the rigid authoritarian system he has built in a nation that is fast losing its veneer of stability. Officials say 14 people were killed in Friday’s clashes following the dismissal of oil workers in Zhanaozen in western Kazakhstan and another person was killed when violence spread to a nearby village on Saturday. It was a local crisis that had long been simmering and local authorities had failed to master. “People want to be heard, but there are no mechanisms that would allow people to be heard. … This results in such brutal methods,” Kazakh political analyst Aidos Sarym said. “Zhanaozen actually threatened the unity of our nation. “In general, there is a need to slacken the reins. Public mechanisms are needed. There are things that should be discussed in parliament,” he said. “There must be modernization of society, of the political system.”

Globe and Mail:

• Merrill: 'Classic Bubble' Signs in Canadian Housing Market. Canada’s housing market shows the “classic signs of over valuation, speculation and over supply,” but Bank of America Merrill Lynch says that’s no reason to think that there will be an epic crash of American proportions. In a report issued Monday, the bank’s Canadian analysts said record Canadian household debt and increased joblessness are cause for concern over the next year. There will likely be fewer sales, and prices could slip as much as 5 per cent in the next year. “Canadian home prices set new highs in 2011 and are now showing many of the signs of a classic bubble,” they wrote. “We estimate the housing market nationwide is about 10 per cent over valued. Even so, the only way these valuations can be explained is by the record low mortgage rates. Under more normalized interest rates, home prices would actually look 25 per cent overvalued based on current prices.”

Financial Chronicle:

• India's Sensex, Nifty Plunge to 28-Month Low. FAST spreading negative sentiment on Indian equities pulled the benchmark indices Sensex and Nifty to a new 28-month low taking the market capitalisation of shares listed on the Bombay Stock Exchange to below the psychological $1 trillion mark. Most of Tuesday's 204-point fall in the Sensex to 15,175 came in the last hour of trading led by aggressive selling in the large cap stocks. Sensex closed just above the August 20, 2009 low of 15,035, making India the worst-performing stock market worldwide.

Xinhua:

• Property Sales See Declines in East China. Commercial property sales in booming Zhejiang province has seen further declines as the property sector continues to cool off with no signs of immediate loosening of tightening measures. The total area sold slumped 22.9 percent year-on-year to 30.7 million square meters in the January-November period, the provincial statistics bureau said in a statement. The sales declined 20 percent in the first 10 months and 15.3 percent in the first nine months, according to the statement. Meanwhile, sales revenue hit 308.8 billion yuan, down 16.4 percent from the same period a year ago. The decline was 12.6 percent in the first 10 months. China will unswervingly maintain its regulation policies on the property market next year intended to return housing prices to a reasonable level, according decisions made at the country's central economic work conference this month. With gloomy prospects for the next year, many cash-strapped property developers rolled out big discounts to promote sales, as they struggle to pay back debts at the year-end, the bureau said. Earlier several local developers were reported to be in liquidity crisis or unable to pay back debts, and many real estate agencies have closed stores due to the declines in existing home sales.

Shanghai Daily:

• Shanghai Keeping Curbs on Property Market. SHANGHAI is to further strengthen efforts to rein in housing speculation next year and continue to enforce home-purchase restrictions, the local government said yesterday. It is the latest in a number of Chinese cities to vow to stick to property tightening measures and extend restrictions on buyers which are due to expire at the end of the year. During last week's annual Central Economic Work Conference, China's top leaders vowed to maintain tightening in the property sector, including home purchase restrictions, curbs on onshore and offshore fundraising options for developers and higher downpayments for multiple home buyers. China will stick to property tightening policies, push home prices back to a reasonable level, and speed up construction of ordinary houses to increase supply, the conference concluded as it laid out its 2012 blueprint for the country. "The central government has repeatedly made it very clear over the past weeks that rein-in measures to curb housing speculation should be continuously implemented so the latest announcement by the Shanghai government came as no surprise," said Sky Xue, an analyst with China Real Estate Information Corporation. "In the short term, home prices will for sure continue to go through a downward trend."
  

Bear Radar

Style Underperformer:

• Large-Cap Value (+2.46%)

Sector Underperformers:

• 1) Drugs +1.14% 2) Airlines +1.89% 3) Software +2.04%

Stocks Falling on Unusual Volume:

• TEO, IPAR, ARGN, SAFM, RCL and RHT
  

Stocks With Unusual Put Option Activity:

• 1) WDC 2) LRCX 3) CBG 4) VZ 5) JEF
  

Stocks With Most Negative News Mentions:

• 1) OC 2) SCHN 3) MA 4) GMCR 5) XOM
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth (+3.49%)

Sector Outperformers:

• 1) Networking +5.69% 2) Oil Service +4.99% 3) I-Banks +4.65%

Stocks Rising on Unusual Volume:

• AIXG, SLXP, CHTR, LRCX, NVLS, ADTN, CIEN, CIE, JEF, FIO, KBR, NAV, CAG, MENT, DISH, PBH, IEO, SI, PUW and CVS
  

Stocks With Unusual Call Option Activity:

• 1) CROX 2) CI 3) VLO 4) UBS 5) TXT
  

Stocks With Most Positive News Mentions:

• 1) CCO 2) FFIV 3) IMGN 4) SLXP 5) EW
  

Charts:

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

Tuesday Watch

Evening Headlines

Bloomberg:

• U.K. Shuns Crisis Aid as Europe Channels $195 Billion to IMF. Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to the International Monetary Fund as the European Central Bank widened its support for sagging bond markets. Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, in a sign of the difficulty of attracting outside cash to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a Brussels statement after a conference call yesterday. The IMF track is “obviously a small-scale solution,” former UBS AG Chairman Peter Kurer told Maryam Nemazee on Bloomberg Television’s “The Pulse” program. Germany continued to oppose an early decision to raise the limit of 500 billion euros on overall emergency aid. European leaders plan to tackle that question by March.
  
• Europe Dragging Down U.S. in Record Correlation: Credit Markets. For all the evidence that the U.S.economy is expanding, the nation's credit markets are unable to decouple from Europe as everything from junk bonds to interest-rate swaps move increasingly in lockstep with the euro region. Correlation between the 17-nation currency and prices of a credit-default swaps index tied to U.S. junk bonds is at about the highest on record, Bloomberg data show. Interest-rate swap spreads in the U.S., a gauge of fear in credit markets, are trading the most in tandem with European corporate credit since 2007. Correlation between the euro-dollar exchange rate and the price of the Markit CDX North America High Yield Index reached a record .76 on Dec. 2, when measured over 60-day periods, and held at .74 yesterday, Bloomberg data show. The measure has climbed from .1 on April 7.
• German Debt Sales Set to Swell as Economy Falters: Euro Credit. Germany is poised to overshoot its 2012 borrowing target as the growth outlook in Europe's largest economy worsens and the cost of bailing out banks and troubled neighbors increases. As the euro region's debt crisis enters its third year, the German economy is buckling. S&P said Dec. 5 it may strip the nation of its AAA rating and demand at a bund auction last month fell to its lowest since 1995. The debt agency is scheduled to reveal next year's funding plans this week.
  
• Default Swaps Jump Most in BRICs as Gandhi Subsidizes Food: India Credit. India’s plan to boost food subsidies by 50 percent is threatening efforts to cut the budget deficit, extending the biggest jump in bond risk among the largest developing nations. The cost to protect the debt of State Bank of India, seen as a proxy for the nation, against non-payment rose 234 basis points in 2011 to 395 basis points, the most in three years, according to data provider CMA. Credit-default swaps on China’s government bonds increased 78 to 146, while those for Russia climbed 124 to 270 and Brazil’s added 53 to 164. Indian Prime Minister Manmohan Singh is tapping public finances to boost assistance as the economy of the nation, where the World Bank says more than 75 percent of the people live on less than $2 a day, slows.
• Hedge-Fund Refuge Sought by Traders Amid Bank Cuts: Commodities. Damien Bombell left JPMorgan Chase & Co. a year ago after the largest and most profitable U.S. bank shut its group trading commodities for the company's own account. Now chief investment officer of his own hedge fund, he's hiring four people before accepting money from investors next month. “I can't say there's anything I miss about banking,” said Bombell, who turned 40 last week and plans to have at least $200 million under management at the Strand Global Macro Fund in Zug, Switzerland. “I have more freedom.”
• Hainan Home Bubble Pops as Curbs Deflate Prices. Zhu Lei, a property agent for the Serenity Coast luxury residential and hotel complex in Sanya on China’s Hainan island, recalls clients carrying suitcases of cash to shop for holiday apartments last year. “We didn’t even have time for toilet breaks because there were just too many clients,” Zhu said. Today, sales in the second-biggest city on the tropical island compared to Hawaii for its sandy beaches and weather, are “bleak,” he said. A two-year lending binge and the government’s plan to transform Hainan, in the South China Sea, into an international tourism destination helped fuel a 48 percent surge in Sanya’s home prices last year, making it the nation’s best-performing property market. As China in 2011 switched gears with policies such as increased deposit requirements designed to curb speculation, Sanya’s home prices have dropped 28 percent since last December. “It was really no different to what was driving prices in other cities in China, which was an explosion of liquidity that caused asset inflation across the country,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing. China spent 4 trillion yuan ($628 billion) to shield its economy as credit markets froze when Lehman Brothers Holdings Inc. collapsed in September 2008. It also encouraged banks to lend out a record $2.7 trillion in 2009 and 2010, fueling a surge in home prices and construction that it’s now battling to restrain after warning of an asset bubble.

Wall Street Journal:

• Just Don't Call It a 'Bailout'. European Governments Devise Unusual Measures to Prop Up Their Ailing Banks. Governments in Europe are tying themselves in knots to prop up their banks, desperate to blunt the cost and embarrassment of a fresh wave of taxpayer-funded bailouts. In Italy, for example, the government is encouraging banks to buy public properties that the banks then can use to borrow money. As part of a broader deficit-reduction program in Portugal, the government essentially is borrowing money from bank pension funds and could use some of the funds to help state-owned companies repay bank loans. Governments in Germany and Spain also are using unorthodox measures to support their ailing banks.
• Dictator's Death Stokes Fears. U.S. officials aggressively lobbied China, Russia and Japan and suspended a food-aid plan for North Korea following the death of the country's leader, aiming to gain a diplomatic foothold as control over the authoritarian, nuclear-armed country appeared to pass to Kim Jong Il's untested young son. North Korea officially returned to its customary silence on Monday after announcing the death of its supreme leader early in the day, underscoring the world's anxiety over its trajectory under Kim Jong Eun, the former ruler's youngest son, whom state media says will now lead the isolated country.
• The World's Most Repressive State. A few minutes after the news of the death of North Korean dictator Kim Jong Il flashed across computer screens on Sunday night—Monday morning on the Korean Peninsula—I received an email from a North Korean defector. The man, who is now living in Seoul and is a Christian, was exultant: "God blesses all of us," he wrote. The defector's sentiments will be shared by many, especially his long-suffering countrymen.

MarketWatch:

• China Governments in Hole as Land Sales Plummet. Property market slowdown is chilling China’s local governments. The development-ready land market, long a reliable revenue source for local governments across China, has suddenly turned cold. And city halls are shivering. Government-sponsored land auctions in cities nationwide have slowed dramatically in recent months, reflecting shrinking consumer demand and what one executive called a “winter mode” strategy among major developers. Nominal land values have fallen, and some auctions have been canceled due to a lack of bidders. “The land market is basically deadlocked,” said Chen Xiaotian, president of China Real Estate Information Corp. (CIRC), a market research firm.

Business Insider:

• Here Are The 10 Hedge Funds With The Most Exposure To Bank Of America(BAC).
• Derivatives Exchange Looks To Offer Political Contracts.
• PwC: Shale Gas Will Generate Billions Of Dollars Of Savings And Create Over A Million Jobs.
• AT&T(T) Just Pulled Its Bid For T-Mobile USA.
  

Zero Hedge:

• Europe Is Now Officially Bazooko's Circus - Italy To Provide €23.5 Billion In IMF Cash To Bailout Italy.
• Why Oil Prices Are Killing the Economy.
• Bureau of Labor Statistics Caught Red Handed Leaking Confidential Employment Data.
  

NY Times:

• U.S. Backs Apple(AAPL) in Patent Ruling That Hits Google(GOOG). A federal agency ruled on Monday that a set of important features commonly found in smartphones are protected by an Apple patent, a decision that could force changes in how Google’s Android phones function.

Forbes:

• 5 Big Trends in Business Innovation in 2012.

Reuters:

• Weaker Euro to hurt Red Hat Q4 revenue, shares fall. Business software maker Red Hat Inc forecast fourth-quarter revenue largely below analysts' expectations hurt mainly by a weaker euro, sending its shares down 7 percent in after-market trade. The company forecast current-quarter earnings of 26-27 cents a share on revenue of $289-$292 million. Analysts on average had expected a profit of 26 cents a share on revenue of $292.5 million, according to Thomson Reuters I/B/E/S.

Financial Times:

• Clinton Urges EU to Drop Carbon Levy Plan for Airlines. U.S. Secretary of State Hillary Clinton wrote to EU Foreign Policy Chief Catherine Ashton on Dec. 16 to "strongly urge" the bloc to abandon its plan to start charging any airline flying into the region for its carbon pollution, citing the letter. If the EU doesn't drop the plan "we will be compelled to take appropriate action," Clinton wrote. If the EU doesn't drop the plan "we will be compelled to take appropriate action," Clinton wrote.
• Hedge Fund Alarm Bells Are Ringing Over China. The past few weeks have seen China loom large in the nightmares of many hedge fund managers still smarting from a less-than glory-filled 2011. Concerns are rising for the global outlook over the increasingly negative economic signals emanating from the country. As the Emerging Sovereign Group, a $1bn hedge fund backed by Julian Robertson and half owned by Carlyle, one of the world’s biggest private equity groups, told its clients in a recent note: “[we have a] gathering sense that the next act of this rolling global debt crisis may well play out in the East.”

Telegraph:

• ECB Says Eurozone Leaders Created 'Cycle of Risk'. Protracted indecision among political leaders has created a "cycle of risk" with "systemic crisis proportions not witnessed since the collapse of Lehman Brothers", the European Central Bank (ECB) has warned.
• Spain Grits Teeth Yet Again As Austerity Deepens. Spain's new premier Mariano Rajoy has launched a fresh blast of fiscal austerity at his inauguration, describing the national outlook as "desolate" and his task like that of a father feeding four hungry mouths with bread for two.

Die Welt:

• Nagel Doesn't See End to EU Financial Crisis in 2012. Bundesbank's Nagel also spoke against a possible solution involving large purchases of state securities by the ECB, saying markets would soon raise concerns that it may overwhelm Germany. The "bazooka solution" wouldn't work, he said.

China Business News:

• China Should Stick to Property Tax as Control Measure. China should continue to levy property taxes and increase transaction taxes as a control measure against real-estate market speculation, citing Yin Zhongqing, deputy director of the National People's Congress Finance and Economic Affairs Committee. Property taxes may reduce the local government's reliance on revenue from land sales, Yin says. Government worries society-wide credit is not developed and data are not reliable, Yin said.
  

AfricaAsia.com:

• Clinton Blasts Egypt's 'Shocking' Treatment of Women. US Secretary of State Hillary Clinton denounced Egypt's treatment of women as "shocking" and a "disgrace" to the state after troops were shown ripping off a female protester's clothes. In unusually strong remarks, Clinton accused Egyptian authorities of failing the country's women since the revolution that overthrew president Hosni Mubarak, both by excluding them from power and humiliating them in the streets. "This systematic degradation of Egyptian women dishonors the revolution, disgraces the state and its uniform and is not worthy of a great people," Clinton said in a speech at Georgetown University. In images widely seen over YouTube, helmeted troops were shown beating a veiled woman after having ripped her clothes off to reveal her bra and stomach. Other pictures circulating on social media networks that have enraged protesters include one of a military policeman looming over a sobbing elderly woman with his truncheon.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.50% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 214.50 +3.5 basis points.
  
• Asia Pacific Sovereign CDS Index 158.0 +1.0 basis point.
• FTSE-100 futures -.13%.
  
• S&P 500 futures +.49%.
  
• NASDAQ 100 futures +.49%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GIS)/.79
• (SAFM)/-.60
• (CAG)/.42
• (JEF)/.14
• (PAYX)/.38
• (JBL)/.65
• (NKE)/.97
• (CTAS)/.48
• (ORCL)/.57
• (NAV)/3.12
• (CCL)/.29

Economic Releases
8:30 am EST

• Housing Starts for November are estimated at 635K versus 628K in October.
• Building Permits for November are estimated at 635K versus 653K in October.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Spain/Greece auctions, 5-Year Treasury Note Auction, weekly retail sales reports, (BCR) Investor Conference and the (CVS) Analyst Day could also impact trading today.
  

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

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

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Most Sectors Declining
  
• Volume: Light
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 24.53 +.99%
  
• ISE Sentiment Index 123.0 +12.84%
  
• Total Put/Call .86 -28.33%
  
• NYSE Arms 1.88 +128.67%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 130.98 +1.78%
  
• European Financial Sector CDS Index 303.43 +1.33%
  
• Western Europe Sovereign Debt CDS Index 378.20 -.22%
  
• Emerging Market CDS Index 317.70 +1.51%
  
• 2-Year Swap Spread 50.0 +1 bp
  
• TED Spread 57.0 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -115.25 +6.5 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 158.0 -4 bps
  
• China Import Iron Ore Spot $131.30/Metric Tonne -.61%
  
• Citi US Economic Surprise Index 73.40 -2.1 points
  
• 10-Year TIPS Spread 1.93 +2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -9 open in Japan
• DAX Futures: Indicating -39 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 then covered some of them
  
• Market Exposure: 50% Net Long

BOTTOM LINE: Today's overall market action is very bearish, as the S&P 500 moves further below its 50-day moving average and trades to session lows on rising Eurozone debt angst, rising global growth fears, technical selling and tech/financial sector pessimism. On the positive side, Drug and Tobacco shares are slightly higher today. Lumber is up +1.9% and Oil is falling -.39%. The Spain sovereign cds is down -2.04% to 411.17 bps. On the negative side, Coal, Alt Energy, Oil Tanker, Oil Service, Steel, Software, Semi, Disk Drive, Networking, Bank, I-Bank, Construction, Homebuilding and Airline shares are under meaningful pressure, falling more than -2.0%. (XLK) and (XLF) have traded poorly throughout the day. The UBS-Bloomberg Ag Spot Index is up +1.1%. The 10-year yield is falling -4 bps to 1.81% despite recent better economic data and equity strength. The Brazil sovereign cds is jumping +2.78% to 164.0 bps, the Belgium sovereign cds is gaining +1.33% to 325.83 bps, the Japan sovereign cds is rising +1.73% to 137.05 bps, the France sovereign cds is gaining +.74% to 229.33 bps and the Germany sovereign cds is rising +.6% to 106.83 bps. The Italian/German 10Y Yield Spread is surging +4.55% to 495.60 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 +5.25% to -11535 bps, which is back to mid-Nov. 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 -31.6% since February 16th and -27.5% since Sept. 7th. The China Corporate Blended Spread Index remains very close to another technical breakout. The Citi Asia-Pacific Economic Surprise Index is falling another -2.6 points today to -27.70, which is the lowest level since April 2009. Asian equities continue to trade very poorly with most down around -2% before the North Korea news last night. Their averages cut losses into the closes after the initial swoon on the news. Taiwan shares closed down another -2.2%(down -26.07% ytd) and are at the lowest levels since July 2009. Brazil's Bovespa fell another -1.42% today and is down -20.2% ytd. Fears over the possibility of hard landings in some key emerging market economies appear to be intensifying again. Moreover, 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. Tech share technical action is also troubling as the MS Tech Index is now down -12.63% ytd. Equity trading still maintains an overall complacent feel, given the still developing significant macro headwinds. This is likely due to year-end window-dressing and seasonality. A significant positive catalyst needs to emerge very soon to prevent more equity weakness during 1Q, in my opinion. I expect US stocks to trade modestly lower into the close from current levels on rising Eurozone debt angst, rising global growth fears, tech/financial sector pessimism, technical selling and more shorting.