Stocks Rebounding into Final Hour on Less Financial Sector Pessimism, Short-Covering, Seaonal Strength, Window Dressing

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Mixed
  
• Volume: Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 22.2 -4.39%
  
• ISE Sentiment Index 178.0 +60.36%
  
• Total Put/Call 1.14 -9.30%
  
• NYSE Arms .78 +358.23%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 126.99 +.3%
  
• European Financial Sector CDS Index 286.54 +.84%
  
• Western Europe Sovereign Debt CDS Index 371.92 +1.7%
  
• Emerging Market CDS Index 310.30 -.62%
  
• 2-Year Swap Spread 47.0 -1 bp
  
• TED Spread 57.0 +1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -127.50 -11.0 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 170.0 +3 bps
  
• China Import Iron Ore Spot $134.80/Metric Tonne +2.12%
  
• Citi US Economic Surprise Index 70.50 -3.4 points
  
• 10-Year TIPS Spread 2.05 +1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating -9 open in Japan
• DAX Futures: Indicating +32 open in Germany

Portfolio:

• Slightly Lower: On losses in my Tech and Retail sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and then covered some of them
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 moves back to the flatline and trades to session highs, despite rising Eurozone debt angst, rising global growth fears, higher energy prices, more tech sector pessimism and US tax hike concerns. On the positive side, Energy, Utility, Hospital and Education shares are especially strong, rising more than +1.0%. (XLF) has outperformed throughout the day. Copper is gaining +.67%. The 10-year yield is rising +5 bps to 1.97%. The Europe Investment Grade CDS Index is down -1.73% to 171.56 bps. On the negative side, Internet, Software, Disk Drive, Networking, Computer Service and Airline shares are under meaningful pressure, falling more than -1.5%. The UBS-Bloomberg Ag Spot Index is up +.58%, Oil is up +1.5% and Lumber is falling -1.7%. The Germany sovereign cds is gaining +.74% to 105.5 bps, the UK sovereign cds is gaining +.91% to 97.83 bps, the Brazil sovereign cds is jumping +3.8% to 167.21 bps, the France sovereign cds is rising +.95% to 224.67 bps and the Belgium sovereign cds is rising +1.05% to 319.33 bps. The Italian/German 10Y Yield Spread is rising +4.2% to 485.37 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 plunging -9.5% to -127.50 bps, which is back to late-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 -29.8% since February 16th and -25.5% since Sept. 7th. The China Corporate Blended Spread Index remains very close to another technical breakout. The Citi Asia Economic Surprise Index is unch. today at -27.80, the lowest since April 2009. Major Asian indices surged 2-4% overnight, however the Shanghai Composite reversed opening gains and closed near session lows, down -1.12%. This index is back near a multi-year low, 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, which remains a large red flag. According to SentimenTrader.com, this would be only the 2nd time in the past decade that the S&P 500 rose on a day in which the Nasdaq 100 fell over -1.5%. The other day this happened was 7/18/08. Moreover, given the tech sector's importance to the overall economy and (ORCL)'s very disappointing earnings report, a positive day for the S&P 500 is even more surprising. Year-end window-dressing, short-covering, better US economic data and seasonal strength continue to help out short-term. Credit gauges are still at highly stressed levels(and in many cases worsening), today’s rally was led again by many of this year’s worst-performing stocks, concerns over Asia are still intensifying and volume remains light, which does not bode well for a sustainable advance. I expect US stocks to trade modestly higher into the close from current levels on better US economic data, short-covering, bargain-hunting, less financial sector pessimism, year-end window dressing, seasonal strength and technical buying.

Today's Headlines

Bloomberg:

• Europe Stocks Drop as ECB Loans Fail to Ease Debt-Crisis Concern. European stocks fell for the first time in three days as lenders sought more funds from the European Central Bank than economists had predicted, reducing optimism that the debt crisis will be contained. The Frankfurt-based ECB awarded 489 billion euros ($640 billion) in 1,134-day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the funds, which it will lend at the average of its benchmark rate over the term of the loans. “The added liquidity is being seen as just another quick shot in the arm rather than anything more meaningful,” Yusuf Heusen, a sales trader at IG Index in London, wrote in e-mailed comments. “As a result hopes of an upbeat run to Christmas seem to be waning.” UniCredit, Italy’s biggest bank, dropped 4.4 percent to 70.8 euro cents and France’s Societe Generale (GLE) SA slid 3.4 percent to 16.63 euros. A gauge of banks in the Stoxx 600 slipped 0.7 percent.
• Italian GDP Contracts as Nation Enters New Recession: Economy. The Italian economy contracted in the third quarter, signaling the country may have entered its fifth recession since 2001 as the government adopts new austerity measures that will further weigh on growth. Gross domestic product declined 0.2 percent from the second quarter, when it expanded 0.3 percent, national statistics institute Istat said in Rome today. It was the first contraction since the final three months of 2009 and matched the median forecast in a survey of 23 economists by Bloomberg News. Consumer spending declined 0.2 percent from the second quarter, with investment contracting 0.6 percent. Exports grew 1.6 percent in the quarter, while imports fell 1.1 percent.
• French Banks Struggling to Raise $48 Billion for First-Quarter Debt Needs. BNP Paribas SA, Societe Generale SA (GLE), Credit Agricole SA and Groupe BPCE, France’s biggest banks, are struggling to fund about 37 billion euros ($48 billion) of debt payments due in the first quarter. As their access to U.S. dollar short-term funds dries and they face soaring costs in the bond market, French lenders are raising money by selling their debt through structured products and issuing bonds backed by mortgages on properties in Paris and regions including Cote-d’Azur, the French Riviera playground of the rich. The European Central Bank is also offering them three- year loans through a facility, which opened today. “It’s gotten harder and harder to get refinancing on the markets, and as time goes by rating agencies are taking negative actions, pushing up already high funding costs,” said Jacques- Pascal Porta, who helps manage 500 million euros at Ofi Gestion Privee in Paris and owns BNP Paribas shares.
• Fitch to Cut Hungary Sovereign Credit by Two Steps to Junk, Origo Reports. Fitch Ratings has notified the Hungarian government of its intention to cut the country’s sovereign credit grade by two steps to junk, Origo news website reported, citing two “market sources independent of each other.” Hungary is currently rated BBB-, the lowest investment grade, with a negative outlook at Fitch.
• The ECB's lending operation may buy the EU politicians more time to create a more comprehensive solution, though it won't increase "external demand" for peripheral sovereign debt, Nomura strategist Guy Mandy wrote in a note today. There were 523 bidders, which was less than the 1,121 participants in 2009, which indicates tehre wan't a wholesale take-up in operations for carry purposes.
• The 3M EUR/USD Cross Currency Basis Swap is falling -11 bps to -128 bps, which is the lowest since Dec. 15 on a closing basis, after 523 banks borrowed EU489B at the ECB's 3-year LTRO.
  
• Mortgage Bonds Miss Out on Rally as Europe Bank Sales Loom: Credit Markets. U.S. mortgage bonds that lack government backing are trading at about the lowest prices in more than a year, even as riskier assets from high-yield company bonds to stocks rally, with investors bracing for sales of home- loan debt by European banks. A group of prime jumbo-mortgage securities tracked by JPMorgan Chase & Co. as a benchmark fell to 93.3 cents on the dollar this month, the lowest level since August 2010. A set of subprime bonds tumbled to a two-year low of 28.1 cents. Banks across Europe have pledged to cut more than 950 billion euros ($1.2 trillion) of assets during the next two years, after regulators made them increase core capital to 9 percent by June instead of in 2019, according to data compiled by Bloomberg. Combined with the greater difficulty of trading in the $1.1 trillion market of non-agency mortgage bonds and concern that the U.S. housing market has yet to bottom, the threat of the region’s banks unloading their holdings is helping to depress values. “The European banks are scrambling for capital and the traditional route” of selling shares isn’t available as investors shun their equity securities, said Reza Ali, who heads Prosiris Capital Management LLC, a New York-based hedge fund that’s gained 10.7 percent since starting in July. “There are big question marks that don’t exist to the same degree for corporate bonds” and structured debt in the U.S. including collateralized loan obligations, aircraft-backed notes and commercial-mortgage securities.
• China Stocks Drop for Third Day on Cash Crunch, Ping An's Fundraising Plan. China’s stocks fell for a third day as a cash crunch weighed on equities after banks hoarded cash to meet year-end reserve-ratio requirements and Ping An Insurance (Group) Co. (601318) plunged on fundraising plans. Ping An, China’s second-biggest insurer, slid 5.2 percent on a plan to sell as much as 26 billion yuan ($4.1 billion) of bonds after business expansion brought down its capital adequacy. China Vanke Co. led a decline for developers as cities including Shanghai extended the period limiting home purchases. “The economy and the capital markets are still facing a credit crunch as a result of two years of monetary tightening,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “The economy is experiencing a down cycle. Stocks are not a place to put money until economic growth picks up again.” The Shanghai Composite Index (SHCOMP) fell 1.1 percent to 2,191.15 at the close. The Shanghai Composite has fallen 6.1 percent in December as concern about an economic slowdown overshadowed the first cut in reserve requirement ratios in three years on Nov. 30. For the year, the measure is down 22 percent after the central bank raised interest rates three times to curb inflation and exports to Europe slowed because of the region’s debt crisis.
• Wen Says China's Slowing Growth, Elevated Prices Add to Policy Challenge. Chinese PremierWen Jiabao said slowing growth and elevated prices are adding to the difficulties the government faces in helping manage the world’s second-biggest economy. The nation will keep its export policies such as tax rebates “basically stable” next year and the government will mainly use fiscal spending to support “structural tax cuts” and to improve people’s lives, Wen was cited as saying in a statement posted on the central government’s website yesterday. “The current economic growth momentum is generally sound, but we are also facing many new situations and problems,” Wen said. China will maintain prudent monetary and proactive fiscal policy next year and policies will be fine-tuned as needed in accordance with the changing situation, the ruling Communist Party said after an economic work meeting last week. Export growth slowed to the weakest pace since 2009 in November, a development that Wen said reflects a “grim” situation facing China.
• Shale Boom Heralds Fifth Year of Gas Declines: Energy Markets. Booming U.S. natural gas production from shale formations and slowing demand from households, factories and power plants are poised to send prices down for an unprecedented fifth year in 2012. Gas may tumble 8.2 percent from its 2011 average next year, as output rises 2.8 percent to a record 67.72 billion cubic feet a day, according to the Energy Department. Demand will probably climb 1.7 percent, after a 1.8 percent increase this year, the department said in its Dec. 6 Short-Term Energy Outlook. "It's been practically impossible to turn off the shale- gas tap," Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, said in a telephone interview Dec. 14. "Industrial demand has been rising, but it's not enough." Natural gas has dropped 28 percent on the New York Mercantile Exchange this year, the most since 2006, as improved drilling technology and profits from selling gas liquids encouraged producers to pump record amounts of the fuel from shale formations from Texas to Pennsylvania. Futures have dropped in each of the past three years, the longest stretch of declines since the contracts began trading on the Nymex in 1991.
• Crude Futures Rise for Third Day as Inventories Decline Most in a Decade. Oil rose for a third day as U.S. inventories declined the most in a decade. Futures gained as much as 2.1 percent after the Energy Department reported supplies fell 10.6 million barrels to 323.6 million last week. It was the largest decline in barrels since Feb. 16, 2001, and almost five times the 2.13 million-barrel drop that was the median of 12 analyst estimates in a Bloomberg News survey. “Refiners are trying to reduce inventories to minimize their ad valorem taxes” in Texas, Andy Lipow, president of Lipow Oil Associates LLC in Houston, said in a telephone interview before the report. “This is accomplished by increasing exports of product and minimizing imports of crude oil to reduce inventories.”
• Airlines Lose Fight Against EU Carbon Caps. International airlines lost a challenge to the European Union’s planned expansion of its carbon cap-and-trade system, the region’s highest court said. The EU Court of Justice “confirms the validity of the directive that includes aviation” in the emissions-trading program, the Luxembourg court ruled today.
• Brazil CPI Accelerated for Second Month in Mid-December. Consumer prices, as measured by the IPCA-15 index, rose 0.56 percent in the month, compared with an increase of 0.46 percent in mid-November, the national statistics agency said today. The increase was in line with the median estimate of 43 analysts surveyed by Bloomberg. Annual inflation slowed to 6.56 percent, still above the 6.5 percent upper limit of the central bank’s target range.
• Existing Homes Sold Since '07 Revised Down. Sales of existing homes in the U.S. rose in November to a 10-month high, showing demand may be starting to stabilize following a plunge over the past four years that was steeper than previously calculated. Purchases climbed 4 percent to a 4.42 million annual pace, the most since January, the National Association of Realtors said today in Washington. The group revised down figures going back to 2007 by an average 14 percent, putting them more in line with other measures of demand.

Wall Street Journal:

• R&I Lowers Japan Sovereign Debt Rating. The Japanese credit-rating company Rating and Investment Information Inc. lowered Japan's sovereign debt rating to AA+, the first time a domestic firm has said the country's debt is not of triple-A caliber. While Japan isn't considered in immediate danger of default, the European debt crisis has brought more attention to its massive fiscal deficits and growing debt load. The government relies on fresh borrowing for 50% of its annual spending which has helped push the gross debt level to 200% of annual economic output. The debt load is by far the highest among major industrialized countries, outpacing even troubled economies such as Greece. In making the announcement, R&I said that even if a planned increase in the sales tax goes ahead, the added revenue won't be enough to halt the rise in Japan's debt load. The firm forecasts that the debt will continue to rise for "an extensive period of time." The government of Prime Minister Yoshihiko Noda is trying to push through a major increase in the national sales tax to help close the budget deficit.
• CEO of TheStreet Inc. Stepping Down.
  

CNBC.com:

• More Easing in China Risks Hard Landing in 2013. (video)
• US Asks Journals to Censor Articles on Flu Virus. For the first time ever, a government advisory board is asking scientific journals not to publish details of certain biomedical experiments, for fear that the information could be used by terrorists to create deadly viruses and touch off epidemics.

Business Insider:

• North Korean State News: Jimmy Carter Expressed Condolences On The Death Of Kim Jong Il.
• Taibbi: Obama and Geithner are Acting Like Lehman Executives Before The Crash.
• Short Term Yields On Spanish And Italian Bonds Are Shooting Back Up. (graph)
  

Zero Hedge:

• ECB's FX Swap Line With Fed Soars To $85 Billion Total. (graph)
• Chart of European Emergency Liquidity Back at Record Levels, And Why Bank of America(BAC) Is Long French CDS.
• Citigroup(C) Analyzes The Failure Of The LTRO, Muses On The Upcoming French Downgrade.
  

FINalternatives:

• Hedge Funds Fall -.59% In Early Dec. Hedge funds aren't getting the help this month they need to avoid a losing year. As things stood at the end of November, the industry would have needed a major rally to get into the black for 2011. But hedge funds haven't gotten any kind of rally, and instead lost further ground in the first half of November, according to Hedge Fund Research. The HFRX Global Hedge Fund Index lost 0.59% through Friday. The benchmark is down just over 9% on the year, with two weeks to go before New Years Day. Over the same period, the Standard & Poor's 500 Index was down about 2.2%. Fundamental growth funds fell an average of 2.57% (down 15.01% YTD),equity hedge funds 1.61% (down 19.69% YTD), market directional funds 1.57% (down 18.98% YTD), fundamental value funds 1.14% (down 23.61% YTD), special situations funds 0.73% (down 3.74% YTD), event-driven funds 0.69% (down 5.03% YTD), North American funds 0.53% (down 3.8% YTD), distressed restructuring funds 0.49% (down 7.69% YTD) and multi-regional funds 0.49% (down 15.21% YTD).

FXStreet:

• French Downgrade Would Cut EFSF Capacity By A Third: S&P Director Says.

Reuters:

• Italy bank assn-ECB loans won't prompt banks to buy state bonds. Banks won't increase their exposure to sovereign debt even after the European Central Bank's massive three-year funding operation because European Bank Authority (EBA) rules discourage it, Italy's banking association (ABI) said on Wednesday."The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB's important liquidity injection -- of almost 500 billion euros -- can be used to support sovereign debt," ABI director general Giovanni Sabatini told reporters. "The EBA created this problem by making the new toxic assets, in the eyes of the markets, sovereign bonds," Sabatini said. In new rules announced by the EBA earlier this month, banks will be required to mark to market their sovereign bond holdings, which has prompted ABI to threaten legal action. "Banks not only will not increase their exposure, but they will probably cut it, and this creates a potential problem for refinancing sovereign debt," he said.
• Egypt Sees Clinton Remarks as "Interference" - Agency. The Egyptian foreign minister said on Wednesday that Egypt would not accept any interference in its internal affairs, in response to criticism by U.S. Secretary of State Hillary Clinton on the way security forces dealt with women protesters. In a speech on Monday, Clinton criticised the actions of Egyptian security forces as showing the "systematic degradation" of women that "disgraces the state", some of the strongest U.S. language used against Egypt's new rulers. Footage showed Egyptian soldiers beating protesters with batons, often after they had fallen to the ground, in what activists described as a forcible attempt to clear a sit-in demanding a swifter transfer to civilian rule. The clashes since Friday have left at least 13 dead and hundreds wounded. "Egypt does not accept any interference in its internal affairs and conducts communications and clarifications concerning statements made by foreign officials," the state news agency quoted Foreign Minister Mohame d Kamel Amr as saying. "Matters like that are not taken lightly," he was quoted as saying, in his response to a question about Clinton's remarks.

Telegraph:

• Herr Draghi or Signor Draghi, and the ECB's Santa Rally (technical). Enjoy Mario Draghi's Santa Rally while it lasts. The euphoria is likely to dissipate once markets remember the sheer scale of the task at hand.

Bear Radar

Style Underperformer:

• Small-Cap Growth (-1.40%)

Sector Underperformers:

• 1) Software -5.50% 2) Computer Services -4.14% 3) Disk Drives -3.19%

Stocks Falling on Unusual Volume:

• ORCL, CVLT, RVBD, MLNX, IBM, TIBX, CPTS, FTNT, INFA, NEOG, ICFI, MLNX, MKTX, TEVA, TLEO, UTEK, CHKP, CTXS, IPAR, CSGP, BSFT, INFY, TSLA, XSD, SAP, SEE, RHT, CRM, TDC and VMW
  

Stocks With Unusual Put Option Activity:

• 1) KMX 2) ORCL 3) EMR 4) NKE 5) EBAY
  

Stocks With Most Negative News Mentions:

• 1) ORCL 2) JEF 3) JPM 4) TDC 5) BCR
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value (+.09%)

Sector Outperformers:

• 1) Education +.97% 2) Hospitals +.93% 3) Utilities +.79%

Stocks Rising on Unusual Volume:

• DRIV, SHFL, RIMM, CTAS, ATU, DFG, SHAW and CIE
  

Stocks With Unusual Call Option Activity:

• 1) JAG 2) ORCL 3) HGSI 4) CROX 5) ALXA
  

Stocks With Most Positive News Mentions:

• 1) RIMM 2) KO 3) ACN 4) FWLT 5) JBL
  

Charts:

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

Wednesday Watch

Evening Headlines

Bloomberg:

• Banks May Flock to 'Free Money' as ECB Awards Three-Year Loans. The European Central Bank is set to flood euro-area banks with cheap cash as they flock to its offer of three-year loans today. Banks will ask the ECB for 293 billion euros ($384 billion) of the 1,134-day funds, according to the median of 14 forecasts in a Bloomberg News survey of economists. Estimates range from 150 billion euros to as much as 600 billion euros. The money will be lent at the average of the ECB’s benchmark rate -- currently 1 percent -- over the period of the loan. Results are due at 11:15 a.m. in Frankfurt and the loans start tomorrow. “This is basically free money,” said Jens-Oliver Niklasch, a strategist at Landesbank Baden-Wuerttemberg in Stuttgart. “The conditions are unbeatable. Everybody who can will try to get a piece of this cake.” Europe’s debt crisis has increased the risk of government and bank defaults, making institutions wary of lending to each other and driving up the cost of credit. The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds. Italian and Spanish government bond yields have dropped since the ECB announced the loans on Dec. 8 as banks buy the securities to use them for collateral. French President Nicolas Sarkozy has suggested banks could use the loans to buy even more government debt.
  
• Moody's Says Britain Isn't Immune to Debt Turmoil in Euro Area. Moody’s Investors Service said the U.K.’s “strengths” aren’t enough to completely shield its top credit rating from the euro-area debit crisis and the government must stick to its deficit-reduction program. “The U.K. sovereign faces rising challenges, which means that there’s a reduced ability to absorb further macroeconomic or fiscal shocks,” Sarah Carlson, an analyst at Moody’s in London, said in an interview after the company published a report on the U.K. late yesterday. The outlook on the Aaa rating “is stable, but certainly the amount of headroom that existed before has reduced.” Britain’s Office for Budget Responsibility cut its growth forecasts last month, prompting Chancellor of the Exchequer George Osborne in his autumn fiscal update to extend spending cuts by two years to trim the budget deficit. The U.K. recovery has lost traction as officials in Europe, Britain’s biggest trading partner, struggle to contain the region’s debt crisis. “The Autumn statement gave a pretty good indication that the government remains committed to the fiscal consolidation program,” Carlson said. “This commitment is an important contributor to the Aaa rating and that certainly supports the stable outlook.” Carlson also said the outlook on the rating “is going to be sensitive to future developments in the euro area.” While the U.K. “isn’t a member of the monetary union, it is certainly not immune to this crisis,” she said.
• Hungary May Raise EU’s Highest Rate Again as IMF Pressure Mounts. Hungary may need to raise the European Union’s highest benchmark interest rate next year as talks over a bailout stalled and the government and the central bank spar over monetary-policy independence. The Magyar Nemzeti Bank increased the two-week deposit rate by a half-point for a second month to 7 percent yesterday and said it would raise borrowing costs further if country risk worsens. Policy makers also considered a quarter-point increase. The European Commission and the International Monetary Fund suspended talks on a financial aid package to Hungary last week, citing objections to a draft law on the central bank that they say may undermine policy autonomy. The forint is the worst- performing currency in the world since June 30, data compiled by Bloomberg show. “With the government at loggerheads with the central bank, talks with the IMF seemingly having broken down and fresh signs of strains in the bond market, we think it would be premature to rule out further, more aggressive, tightening over the coming months,” William Jackson, a London-based economist at Capital Economics Ltd., said yesterday in an e-mailed note.
• Mortgage Bonds Miss Rally as Europe Sales Loom: Credit Markets. U.S. mortgage bonds that lack government backing are trading at about the lowest prices in more than a year, even as riskier assets from high-yield company bonds to stocks rally, with investors bracing for sales of home-loan debt by European banks. A group of prime jumbo-mortgage securities tracked by JPMorgan(JPM) as a benchmark fell to 93.3 cents on the dollar this month, the lowest level since August 201o. A set of subprime bonds tumbled to a two-year low of 28.1 cents.
• Emerging Stocks to Drop on Commodities 'Downside' Risk: Technical Analysis. Emerging-market stocks, especially Brazil and India, are poised to “significantly underperform” next year as commodity prices fall further, according to Bank of America Corp. (BAC) The Continuous Commodity Futures Price Index (CCI)’s drop below key Fibonacci support “points to additional downside risk,” Mary Ann Bartels, New York-based head of U.S. technical and market analysis at Bank of America, wrote in a Dec. 19 note. Emerging markets may be “negatively impacted by the break in commodities,” she said. The commodities index of 17 raw materials rose 0.4 percent to 549.98 on Dec. 19, paring this year’s slump to 13 percent.
• BOJ Cuts Economic View for Second Month. Japan’s central bank lowered its assessment for the nation’s economy for a second straight month while refraining from boosting monetary stimulus, citing easy domestic financial conditions.
• Oracle(ORCL) Misses Estimates as Clients Cut Spending. Oracle Corp. (ORCL), the world’s second- largest software maker, reported quarterly sales and profit that missed analysts’ estimates as customers held off on buying databases, applications software and computer systems. Profit before some costs in the fiscal second quarter, which ended Nov. 30, was 54 cents a share on revenue, excluding certain items, of $8.81 billion, the company said in a statement today. On average, analysts had projected profit of 57 cents on sales of $9.23 billion, according to data compiled by Bloomberg. Oracle’s shares fell as much as 11 percent in late trading. Oracle and other business-software companies are taking longer to close deals as companies gird for slow economic growth in the U.S. and the possibility of a recession in Europe next year, said Rick Sherlund, an analyst at Nomura Holdings Inc. New software licenses, an indicator of future revenue, rose less than Sherlund projected, and sales of hardware acquired through the Sun Microsystems deal fell more than expected. “There’s nothing I can find in here that’s a silver lining,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who has an “outperform” rating on Oracle shares. “Every metric in here is below where consensus was. I don’t know how to sugar-coat it.” Although sales of higher-priced hardware are accelerating, Barnicle said margins in the quarter were still below his estimate.
• Nike(NKE) Profit Tops Analysts' Estimates on North American Sales. Nike Inc., the world’s largest sporting-goods company, reported second-quarter profit that topped analysts’ estimates as sales of footwear and apparel surged in North America. Net income in the quarter ended Nov. 30 rose 2.6 percent to $469 million, or $1 a share, from $457 million, or 94 cents, a year earlier, Beaverton, Oregon-based Nike said today in a statement. Analysts projected 97 cents a share, the average of 18 estimates compiled by Bloomberg. Nike’s profit has surpassed analysts’ projections in 21 of the past 22 quarters. Chief Executive Officer Mark Parker has been trying to maintain profit growth amid higher raw-material and labor costs by increasing sales and raising prices. Total revenue rose 18 percent to $5.73 billion in the quarter. Orders for December to April, excluding currency changes, advanced 13 percent, surpassing analysts’ average projection for a 12.7 percent gain.
• Wall Street Trading Revenue to Decline as 'Year to Forget' Ends. Some of Wall Street's biggest firms signaled optimism in October after posting their worst trading and investment-banking period since the financial crisis. Now, analysts say the fourth quarter may have been worse. Fixed-income trading revenue at U.S. banks may fall 12 percent from the third quarter, minus accounting adjustments, while equities drop 10 percent and investment-bank revenue will probably be unchanged, David Trone, an analyst at JMP Securities, wrote in a Dec. 16 report. Some analysts had expected a rebound after the third quarter was the worst for trading and investment banking since 2008, when the collapse of real estate markets contributed to a worldwide credit crunch. Now many are looking ahead to 2012 after investors stayed on the sidelines amid concern that the European debt crisis would lead to a global slowdown.

Wall Street Journal:

• Virgin America Attendants Vote Against Unionization. The National Mediation Board said Tuesday that a majority of the Virgin America flight attendants who cast ballots in an election over whether to be represented by the Transport Workers Union voted against unionization. Of the 547 attendants at the San Francisco-based airline who voted, 324, or 59%, rejected the TWU, compared with 223, or 41%, who cast ballots for the union.
• MF Global Transfer Draws Scrutiny. Securities Firm Shifted $200 Million to Company Account at J.P. Morgan(JPM); Questions From the Bank. Investigators on the hunt for missing customer money from MF Global Holdings Ltd. are scrutinizing about $200 million moved to a company account at J.P. Morgan Chase & Co. three days before the securities firm filed for bankruptcy protection, according to people familiar with the matter. The transfer has drawn interest from investigators partly because J.P. Morgan asked MF Global in a letter the following day to attest that the Oct. 28 shift of funds didn't violate regulations designed to protect customer money.
• North Korea Seals Chinese Border.
• California Suing Fannie and Freddie. California Attorney General Kamala D. Harris filed suit against Fannie Mae and Freddie Mac on Tuesday, seeking to force the firms to answer a detailed list of questions after the firms' federal regulator sought to block an open-ended inquiry by the state. The lawsuits, filed in San Francisco County Superior Court, are the latest salvo by Ms. Harris against the mortgage-finance giants and their regulator, the Federal Housing Finance Agency.
• China Hackers Hit U.S. Chamber. A group of hackers in China breached the computer defenses of America's top business-lobbying group and gained access to everything stored on its systems, including information about its three million members, according to several people familiar with the matter. The break-in at the U.S. Chamber of Commerce is one of the boldest known infiltrations in what has become a regular confrontation between U.S. companies and Chinese hackers. The complex operation, which involved at least 300 Internet addresses, was discovered and quietly shut down in May 2010.
• Standoff Sets In as House Rejects Tax Bill.
• EU Debt Crisis: Six Families Share Their Stories.
• Doubts Arise in Euro's Birthplace. Netherlands' Support Weakens Amid Concern Over Bailouts. For the 20th anniversary of the treaty that led to the euro, Dutch officials have quashed a proposal to invite the graying architects of the currency back for a commemoration. Until a local university suggested an academic conference this coming February, there was nothing at all planned here for the historic event. Contrast that with five years ago, when the city marked the anniversary with a yearlong series of events called "Maastricht celebrates Europe." This time, "we had our doubts whether a celebration would be justified," says Jean Bruijnzeels, a city accounts manager.
• Inside Capitol, Investor Access Yields Rich Tips. When Senate Democrats finally brokered a compromise over the proposed health-care law, a group of hedge funds were let in on the deal, learning details hours before a public announcement on Dec. 8, 2009. The news was potentially worth millions of dollars to the investors, though none would publicly divulge how they used the information. They belong to a select group who pay for early, firsthand reports on Capitol Hill.

Business Insider:

• Fox News Thumbs Nose At Rivals In Awesome Christmas Card.

Zero Hedge:

• Carry, LTRO, Data, and VIX.

CNBC:

• Exclusive: Amazon(AMZN) Weighed Buying RIM(RIMM), Interest Cooled.

Forbes:

• The Ugly Realities Of Socialized Medicine Are Not Going Away. The worldwide recession has forced countries around the world to curb public spending — or risk defaulting on their debt. The United Kingdom is the latest to tighten its belt. The National Health Service (NHS) — the centralized public agency that runs Britain’s government healthcare system — is being forced to shave $31 billion from its budget by 2015. These cuts are leading to a precipitous drop in the quality of care patients receive. The NHS has been living well beyond its means for quite awhile. And now brutal government-enforced cost controls are exacting a heavy human toll. Thanks to Obamacare, America will soon face the same sort of reckoning.

Boston Globe:

• National Guard at Border Cut to Fewer Than 300. The Obama administration will keep a reduced contingent of National Guard troops working along the Mexican border for the next year, the Defense Department said Tuesday. Starting in January, the force of 1,200 National Guard troops at the border will be reduced to fewer than 300 at a cost of about $60 million, said Paul Stockton, assistant secretary of defense for homeland defense.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 21% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Thirty-nine percent (39%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -18 (see trends).

Reuters:

• Jabil(JBL) sees Q2 largely below estimates, shares fall. Contract manufacturer Jabil Circuit Inc posted quarterly revenue below analysts' estimates as its large customers battled inventory pile-ups, and sees lower revenue in the second quarter from its high-velocity segment which services digital products. Shares of the company were down 4 percent at $19.17 in extended trade on Tuesday.
• Japan: to take 30-40 yrs to decomission Fukushima atomic plant.
• US Regulator Considers Mortgage Debt Reduction for Bankrupt. The regulator for Fannie Mae and Freddie Mac is actively considering a proposal that would allow for a reduction in the outstanding mortgage debt of homeowners in Chapter 13 bankruptcy, Financial Times reported on Tuesday.

Financial Times:

• Weaker Euro Will Help Solve Europe Deficit Woes by Martin Feldstein. The large current account deficits of Italy, Spain and France can be reduced without lowering their incomes or requiring Germany to accept inflationary increases in its domestic demand. The key is to expand the net exports of those trade deficit countries to the world outside the eurozone.
• Eurozone Crisis Hits US Mortgage Securities. Asset sales by banks under pressure in Europe have hit prices for securitised mortgages in the US, indicating that the effects of the eurozone crisis are widening. Rather than selling distressed assets in their home markets, there are increasing signs that European banks are selling assets outside the region, hitting prices for asset-backed paper.

Sky News:

• Former Italian Prime Minister Giuliano Amato told Sky News in an interview that expelling Greece from the euro area wouldn't be "a sound solution" to the bloc's crisis and would "give the markets the wrong signal." The euro area could consider instead "a sort of suspension" of member countries that fail to maintain the standards set by the Maastricht protocol after they join the bloc, Amato said to Sky. "Not necessarily the solution is throwing the country out forever but it might be a sort of temporary" condition, Amato said. The idea was proposed by Germany a year ago, and "deserves attention," he said. While the euro-area agreement last week "is not so useful" in stabilizing the markets because the signing and implementation isn't imminent, the European Central Bank's "promise" to pump liquidity into financial institutions is "keeping hopes high and alive," Amato said. Markets are expecting "huge transfers" of money to be passed "from the region's AAA countries to the weaker ones, north-south-bound," Amato said, adding he's "not so convinced this is needed for other countries beyond Greece."
  

China Daily:

• Factors that lead to inflation still exist at the moment, Chen Jiagui, a researcher from the Chinese Academy of Social Sciences, writes in a commentary. Some producers of goods and services may adjust prices higher next year after previous price increase plans were halted by the government, Chen said. Imported inflationary pressures remain large, he said.

Economic Information Daily:

• China should stop giving U.S. low-cost financing, Zhang Monan, a researcher with the State Information Center wrote in a front-page commentary. China should make a fundamental change to investment direction of its reserve assets, a large portion of which was invested in U.S. debts, he said.

Shanghai Securities News:

• Shanghai and Qingdao will continue to limit home purchases in 2012, joining Guangzhou, Shenzhen and other Chinese cities in doing so to curb the property market, citing local authorities.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +.25% to +3.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 210.0 -4.5 basis points.
  
• Asia Pacific Sovereign CDS Index 158.0 unch.
• FTSE-100 futures +.49%.
  
• S&P 500 futures +.06%.
  
• NASDAQ 100 futures +.21%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LNN)/.43
• (KMX)/.38
• (WAG)/.67
• (ATU)/.43
• (SHAW)/.44
• (KBH)/.03
• (BBBY)/.88
• (FINL)/.11
• (SCS)/.19
• (TIBX)/.35
• (MU)/-.08
  

Economic Releases
10:00 am EST

• Existing Home Sales for November are estimated to rise to 5.05M versus 4.97M in October.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,125,000 barrels versus a -1,932,000 barrel decline the prior week. Distillate supplies are estimated to fall by -750,000 barrels versus a +480,000 barrel gain the prior week. Gasoline inventories are estimated to rise by +1,500,000 barrels versus a +3,824,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.38% versus a -2.6% decline the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The first 36-month ECB tender, 7-Year Treasury Note Auction and the weekly MBA mortgage applications report could also impact trading today.
  

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

Stocks 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.