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

Broad Market Tone:

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

Equity Investor Angst:

• VIX 22.90 -2.64%
  
• ISE Sentiment Index 151.0 +106.85%
  
• Total Put/Call 1.07 +15.05%
  
• NYSE Arms .49 -89.59%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 121.30 -.21%
  
• European Financial Sector CDS Index 279.81 +7.05%
  
• Western Europe Sovereign Debt CDS Index 369.06 +.22%
  
• Emerging Market CDS Index 307.48 -.53%
  
• 2-Year Swap Spread 49.0 -2 basis points
  
• TED Spread 58.0 +1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -118.50 +7.5 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 163.0 -2 bps
  
• China Import Iron Ore Spot $138.40/Metric Tonne +1.17%
  
• Citi US Economic Surprise Index 69.40 -.1 point
  
• 10-Year TIPS Spread 1.96 -3 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +47 open in Japan
• DAX Futures: Indicating +13 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 trades slightly above its 200-day moving average despite rising Eurozone debt angst, rising global growth fears, technical resistance and high energy prices. On the positive side, Homebuilding, I-Banking, Bank Disk Drive and Steel shares are especially strong, rising more than 1.5%. Small-cap and cyclical shares are relatively strong and (XLF) has traded well throughout the day. Gold is falling -.46% and Copper is rising +.34%. On the negative side, Coal shares are under pressure, falling more than -.75%. Lumber is falling -1.74%. The 10-year yield is at session lows, falling -2 bps to 1.89%. The Germany sovereign cds is rising +.77% to 103.38 bps, the Italy sovereign cds is jumping +4.18% to 499.67 bps, the Ireland sovereign cds is rising +.89% to 723.04 bps, the Japan sovereign cds is gaining +2.4% to 143.87 bps and the UK sovereign cds is rising +1.2% to 97.67 bps. The Italian/German 10Y Yield Spread is rising +1.54% to 518.28 bps(near the highest since Dec. 1995). The Western Europe Sovereign CDS Index is still approaching 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 rising +5.96% to -118.50 bps, which is back to mid-Nov. levels. The Libor-OIS spread is now at the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -27.90% since February 16th and -23.53% since Sept. 7th. The China Corporate Blended Spread Index remains close to another technical breakout. The Citi Asia Economic Surprise Index fell another -1.9 points today to -37.90, the lowest since April 2009. Asian equities were mixed overnight, however India’s Sensex fell another -1.2% and is down -24.2% ytd. Despite the decoupling this year, slowing economic growth and weak equity markets in the region are also red flags for US equity investors. Major European indices were modestly higher with the Bloomberg European Bank/Financial Services Index rising +1.01% today. 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. Given the recent improvement in US economic data, stock rally off the lows and European debt crisis can-kicking, the 10Y T-Note continues to trade well, which is another red flag. The AAII % Bulls jumped to 40.60 this week, while the % Bears rose to 30.83. Overall, I still believe that bullish sentiment is too high given the average stock, as measured by the Value Line Geometric Growth Index(VGY), is down -17.7% from its April peak(-11.2% ytd) and the still-developing significant headwinds emanating from overseas. The reversal in the euro, gains in European equities and better US housing data are helping to boost US equities today. The quality of today’s rally is lacking, however, as many of this year’s worst-performers are leading as this year’s leaders lag and volume remains anemic. For a sustainable equity advance into the new year, I would expect to see meaningful European credit gauge improvement, subsiding hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices and higher-quality stock market leadership. I expect US stocks to trade mixed-to-higher into the close from current levels on a bounce in the euro, short-covering, better US economic data, technical buying, seasonal strength and window-dressing.

Today's Headlines

Bloomberg:

• Euro Falls to a 15-Month Low Versus Dollar on ECB Moves, Italy's Auction. The euro fell to a 15-month low against the dollar as Italian bond yields rose after the nation sold less than its maximum target at an auction, highlighting funding difficulties amid the region’s sovereign-debt crisis. The 17-nation currency dropped to a decade low versus the yen as concern increased that the European Central Bank will inject more cash into the financial system to avoid a credit crunch from the region’s debt crisis. The yen and dollar strengthened against most of their major counterparts as demand increased for safer assets. “The Italian debt auction was a little bit underwhelming,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “The fact that the 10-year yield didn’t come down and they sold a bit less than that maximum target amount, that spurred further euro selling.” The euro was little changed at $1.2945 at 1:38 p.m. in New York after falling to $1.2858, the weakest level since Sept. 14, 2010.
• ECB Has More Scope to Cut Rates as Prices Wane. The European Central Bank has more room to cut interest rates to a record low early next year after reports showed the sovereign debt crisis is damping inflation pressures. The rate of growth in M3 money supply, which the ECB uses as a gauge of future inflation, fell to 2 percent in November from 2.6 percent in October, the Frankfurt-based central bank said today. Growth in loans to households and companies across the 17-nation euro area also slowed, while inflation in Germany, the region’s largest economy, decelerated in December. The data reinforce the view “that underlying inflationary pressures are easing and that the ECB has ample scope to cut interest rates again in the early months of 2012,” said Howard Archer, chief European economist at IHS Global Insight in London. “Euro-zone inflation is poised to retreat markedly over the coming months.”
• Libor Gap Hints at Debt Crisis Money-Market Freeze: Euro Credit. The gap between the highest and the lowest rates that banks say they can borrow from each other in dollars is close to a 2 1/2 year high, a sign Europe's failure to end the debt crisis is straining the financial industry. The divergence from reported fixings by the 18 banks contributing to the three-month London interbank offered rate reached 28 basis points yesterday, within two basis points of the widest since May 2009. Libor for three-month loans climbed to .579 percent yesterday, the most since July 2009, even as central banks injected cash into the market.
• Sovereign, Corporate Bond Risk Rises, Credit-Default Swaps Show. The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed three basis points to 355 at 11:30 a.m. in London. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 15 basis points to 770, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3.5 basis points to 177 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased nine basis points to 283 and the subordinated index was 12 higher at 519.
• Most Germans believe the sovereign-debt crisis in the euro area isn't over, AWD Holding AG said, citing a survey the financial-services broker commissioned from polling company Forsa. Some 90% of Germans expect other euro-area countries will require a bailout in the "near future," according to the survey of 1,000 people for Hanover, Germany-based AWD.
• U.S. Lawmakers Backtrack on Pledges by Expanding Federal role in Mortgages. Washington lawmakers, who began 2011 with sweeping plans to shrink the U.S. government’s role in mortgage finance, are heading into 2012 after enacting policies that expand it. An 11th-hour payroll tax cut extension signed into law last week will for the first time divert funds directly from Fannie Mae (FNMA) and Freddie Mac, the two mortgage-finance companies under U.S. conservatorship, to pay for general government expenses. That move came after two others that also could increase government involvement: Lawmakers allowed a tax break on private mortgage insurance to expire and raised loan limits for mortgages insured by the Federal Housing Administration. Advocates of private mortgage finance say they are concerned that using fees from Fannie Mae and Freddie Mac is setting a precedent that will keep the government in the mortgage business for a decade or more.
• Bond Ratings Show Credit Quality May Have Peaked: Credit Markets. Credit-ratings firms are growing less optimistic about U.S. corporate borrowers, downgrading more companies as they forecast defaults will rise. The ratio of upgrades to downgrades fell to 1.08 this year from 1.4 in 2010, according to data from Moody's Capital Markets Group.
• China Industrial Corn Consumption May Slow. Industrial use of corn in China, the second-biggest consumer, may grow at the slowest pace in at least five years as the economy cools, curbing the need for imports, said state-affiliated researcher Cngrain.com.
• Home Sales in U.S. Beat Forecasts. The number of Americans signing contracts to buy previously owned homes rose more than forecast in November as falling prices and low borrowing costs boosted demand. The index of pending home sales (USPHTMOM) increased 7.3 percent to the highest level since April 2010 after climbing 10.4 percent the prior month, figures from the National Association of Realtors showed today in Washington. Economists forecast a 1.5 percent gain, according to the median estimate in a Bloomberg News survey.
• U.S. Business Activity Grows Faster Than Forecast Despite Europe Slowdown. The Institute for Supply Management-Chicago Inc. said today its business barometer (CHPMINDX) was little changed at 62.5 from a seven- month high of 62.6 in November.
• China Stops Encouraging Foreign Investment in Auto-Industry Manufacturing. China will stop encouraging foreign investment in car manufacturing to allow for “healthy development” of a market that saw sales growth plummet to a tenth of last year’s pace. The change ends seven years of foreign-investor benefits including reduced tariffs on imported plant equipment, said Jenny Gu, a senior market analyst at LMC Automotive in Shanghai. Foreign investment in more fuel-efficient vehicles will still be encouraged, the National Development and Reform Commission and the Ministry of Commerce said in a statement.

Wall Street Journal:

• Italian Bond Risk Bubbles Away. While 10-year yields below 7% are more palatable than above, they are still two percentage points above where they started the year. That is despite ECB rate cuts and a plunge in German yields of more than a percentage point. Italy has no choice but to push on with its gargantuan funding program. It can sustain high yields for some time thanks to its long average debt maturity of seven years which means the higher rates take time to feed through. But 2012 still carries a serious risk that investors again feel the heat, and leap for the exit.
• Canadian Household Debt Levels Merit Monitoring: CMHC. Canadians' record level of household debt is a "serious issue" that merits closer monitoring by authorities in the years ahead, Canada Mortgage and Housing Corp. (CMH.YY) said. In a year-end publication released Thursday, CMHC - the government-owned provider of mortgage insurance in Canada - said mortgage debt accounts for 68% of total household debt, by far the largest contributor.
• Egyptian Forces Storm NGOs. Egyptian soldiers and police stormed nongovernmental organization offices throughout the country Thursday, banning employees inside from leaving while they interrogated them and searched through computer files, an activist and security official said. Egyptian state television reported at least 18 offices were targeted in the raid.
• Turkish Air Strike Kills 35 Kurds. Thirty-five people were killed on Turkey's border with northern Iraq late Wednesday, in what Kurdish politicians say was a Turkish air strike against civilian Kurds, mistaken for members of the outlawed Kurdistan Workers Party, or PKK. Deputy Chairman of Turkey's governing Justice and Development Party, or AK Party, Huseyin Celik, confirmed late Thursday that the 35 dead were smugglers, all under 30 years of age, but stopped short of calling them "civilians". If the dead are confirmed to be civilians, Mr. Celik said, the incident was "an operational accident."
• Goldman Sachs(GS) + Warren Buffett = Not Many Jobs.
  

MarketWatch:

• Gold ETF(GLD) Is Almost A Buy.

Business Insider:

• Princeton Students Disrupt A JPMorgan(JPM) Recruiting Session With A Devastating Chant.
• A Rare Look Inside The Fukushima Evacuation Zone. (pics)
• These 10 Dates Are Crucial For The Future Of Europe.
• The White House Just Agreed To Sell Saudi Arabia The Largest US Overseas Arms Package Ever.
• MF Global Client Attorney On Closing His JPMorgan(JPM) Account: 'Don't Worry Jamie, Mine Won't Be The Only One.'
• China Is Steadily Buying Up The US Auto Industry.
• US Gasoline Sales Show No Sign Of Economic Recovery. (graph)
  

Zero Hedge:

• Will "Tax the Rich" Solve Our Deficit/Spending Crisis? If we look at tax revenues and income in a practical way, we find "tax the rich" will not close the widening $1.5 trillion gap between Federal revenues and spending.
• New Fiscal Compact, Or More Of The Same For Europe?
  

Seeking Alpha:

• Healthcare Stocks Hedge Fund Managers Are Crazy About.

Wall Street All-Stars:

• Congress Sics The IRS On The AARP.
  

Rasmussen Reports:

• Election 2012: Romney 45%, Obama 39%.

Financial Times:

• Land Prices Surge in US Shale Oilfields. The cost of drilling rights in US shale oilfields surged during 2011 as large US energy groups and state-owned oil companies embarked on a “resource grab”, according to data provided to the Financial Times. Oil extracted in the US by “fracking” – drilling through dense rock, then fracturing it with high-pressure fluids – has grown fivefold since 2006 to 500,000 barrels a day.
  

Telegraph:

• Eurozone Credit Crunch Fears on M3 Money Contraction. Europe is at mounting risk of a fresh credit crunch after the eurozone money supply contracted for a second month in November and the volume of private loans began to shrink. Data released by the European Central Bank shows that M3 money figures tracked by experts as a leading indicator for the economy have turned negative since August, signalling almost certain recession over coming months for the region as a whole. "The message of these numbers is that the eurozone faces a bleak 2012, with inflation falling rapidly," said Tim Congdon from International Monetary Research. "There is a desperate need to restore growth to the banking system and boost the quantity of money."
• Italian Bond Auction Highlights Eurozone Nation's Woes. Signs that Italy faces a tough start to 2012 were evident on Thursday as the country's final bond sale of the year saw nervous investors demand close to 7pc to hold the ailing nation's 10-year debt.

Bild Zeitung:

• The euro currency area may break up in 2012, as steps taken to preserve it remain inadequate, Beatrice Weder di Mauro, a member of German Chancellor Angela Merkel's council of economic advisers, said in an interview. The German economy may shrink as much as .5% next year if the crisis holds back growth in global trade, Weder di Mauro said.

Cinco Dias:

• Spanish banks are preparing to sell so-called contingent convertible bonds as a means to cover extra provisioning costs from a cleanup of real estate assets planned by the government. The government's latest idea is to apply a new discount of about 20% on real estate assets on their books.

DigiTimes:

• Apple(AAPL) to Unveil Two Versions of Next-Generation iPad in January, Sources Claim.
  

Bear Radar

Style Underperformer:

• Large-Cap Growth (+.69%)

Sector Underperformers:

• 1) Coal -.40% 2) Oil Tankers +.09% 3) Retail +28%

Stocks Falling on Unusual Volume:

• DECK, HMIN, GNI, DNP and NL
  

Stocks With Unusual Put Option Activity:

• 1) TC 2) BX 3) DECK 4) REE 5) LOW
  

Stocks With Most Negative News Mentions:

• 1) UTX 2) BAC 3) BHI 4) JPM 5) HPQ
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value (+1.15%)

Sector Outperformers:

• 1) Homebuilders +2.41% 2) Banks +1.67% 3) I-Banks +1.49%

Stocks Rising on Unusual Volume:

• DMND, CIX and CHKM
  

Stocks With Unusual Call Option Activity:

• 1) XCO 2) HL 3) BKS 4) GDX 5) ABX
  

Stocks With Most Positive News Mentions:

• 1) RTN 2) LMT 3) T 4) BA 5) MOS
  

Charts:

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

Thursday Watch

Evening Headlines

Bloomberg:

• Italy to Tap Markets With $11 Billion Sale of Bonds as Monti Eyes Growth. Italy will sell as much as 8.5 billion euros ($11 billion) in bonds today, one day after borrowing costs plunged at an auction of shorter-maturity debt. The Treasury in Rome will sell bonds maturing in 2014, 2018, 2021 and 2022. Italy yesterday sold 9 billion euros of 179-day bills to yield 3.251 percent, down from 6.504 percent at the last auction on Nov. 25, after the European Central Bank offered unlimited three-year loans to euro-area banks last week. Today’s auction results are expected shortly after 11 a.m. in Rome. Prime Minister Mario Monti convened a Cabinet meeting yesterday to outline his government’s next measures to boost economic growth and may offer details at a press conference scheduled for noon in Rome today. The economy contracted 0.2 percent in the third quarter and probably also shrank in the three months through December, meaning Italy may have entered its fourth recession since 2001.
• Libor Gap Hints at Debt Crisis Money-Market Freeze: Euro Credit. The gap between the highest and the lowest rates that banks say they can borrow from each other in dollars is close to a 2 1/2 year high, a sign Europe's failure to end the debt crisis is straining the financial industry. The divergence from reported fixings by the 18 banks contributing to the three-month London interbank offered rate reached 28 basis points yesterday, within two basis points of the widest since May 2009. Libor for three-month loans climbed to .579 percent yesterday, the most since July 2009, even as central banks injected cash into the market.
  
• Bond Ratings Show Credit Quality May Have Peaked: Credit Markets. Credit-ratings firms are growing less optimistic about U.S. corporate borrowers, downgrading more companies as they forecast defaults will rise. The ratio of upgrades to downgrades fell to 1.08 this year from 1.4 in 2010, according to data from Moody's Capital Markets Group. A two-year rise in U.S. companies' creditworthiness may be drawing to a close as Europe's sovereign-debt crisis roils capital markets around the world, reducing the ability of riskier borrowers to raise money from investors to finance their operations. Moody's cut more grades that it raised in the second half of the year as yields on speculative-grade debt reached a two-year high in October.
• Li Ka-Shing’s Cheung Kong Loses S&P Credit Rating. Cheung Kong (Holdings) Ltd. (1), controlled by billionaire Li Ka-shing, had its long-term corporate credit rating withdrawn by Standard & Poor’s, which said it hasn’t been able to “accurately assess” the credit quality of the Hong Kong developer. The ratings company withdrew the A- “unsolicited” rating, which was based on publicly available information because it had “no access to the company management for the past three years,” S&P said in a statement yesterday. “We can’t evaluate Cheung Kong’s liquidity accurately due to recent revisions to our liquidity criteria as the company has made material acquisitions in the past 12 months and continues to be active on the acquisition trail,” analysts Christopher Lee and Bei Fu wrote in the statement.
• Oil Trades Near One-Week Low on U.S. Stockpile Gain, European Debt Crisis. Oil traded near the lowest level in a week in New York after a report showed U.S. crude stockpiles surged, indicating fuel demand may be weakening as Europe’s debt crisis threatens to slow the global economy. Futures were little changed after sliding 2 percent yesterday, the first decline in seven days, as record European Central Bank lending signaled the growing risk of the region’s crisis. The euro slid to the lowest level since January against the dollar, curbing investor demand for commodities priced in the U.S. currency. Crude inventories rose 9.57 million barrels last week, according to the industry-funded American Petroleum Institute.
• Takeovers Slump to Lowest in Year as Debt Crisis Saps Confidence. The value of global takeovers dropped to the lowest level in more than a year this quarter, and dealmakers say Europe’s debt crisis may hamper a recovery in 2012 as cash-rich companies hold off on major purchases. Mergers and acquisitions have slumped 16 percent from the previous three months to $457.1 billion, putting the fourth quarter on course to be the slowest since at least mid-2010, according to data compiled by Bloomberg. For the year to date, announced takeover volume has risen less than 3 percent to $2.25 trillion after regulatory hurdles scuttled AT&T Inc.’s bid for T-Mobile USA, which would have been 2011’s biggest deal. Tightening credit markets, the risk of a euro-zone collapse and stock-market swings (MXWO) have deterred companies from pursuing transformational deals that would spur sales growth, M&A bankers said.

Wall Street Journal:

• Dithering at the Top Turned EU Crisis to Global Threat. At a closed-door meeting in Washington on April 14, Europe's effort to contain its debt crisis began to unravel. Inside the French ambassador's 19-bedroom mansion, finance ministers and central bankers from the world's largest economies heard Dominique Strauss-Kahn, then-head of the International Monetary Fund, deliver an ultimatum. Greece, the country that triggered the euro-zone debt crisis, would need a much bigger bailout than planned, Mr. Strauss-Kahn said. Unless Europe coughed up extra cash, the IMF, which a year earlier had agreed to share the burden with European countries, wouldn't release any more aid for Athens.
  
• Criminal Charges Are Prepared in BP(BP) Spill. U.S. prosecutors are preparing what would be the first criminal charges against BP PLC employees stemming from the 2010 Deepwater Horizon accident, which killed 11 workers and caused the worst offshore oil spill in U.S. history, said people familiar with the matter. Prosecutors are focused on several Houston-based engineers and at least one of their supervisors at the British oil company, though the breadth of the investigation isn't known.
  
• Merkel, Sarkozy Could Meet Jan 9 In Berlin On Euro, Fiscal Pact - EU Source. German Chancellor Angela Merkel and French President Nicolas Sarkozy could meet Jan. 9 in Berlin as they resume efforts in the new year to wrap up negotiations over a pact to more closely align economic policies among the countries that share the euro currency, a European Union official familiar with the situation told Dow Jones.
  
• Big Funds Build Case for Housing. Big money is starting to wager on housing. Hedge funds run by Caxton Associates LP, SAC Capital Advisors LP, Avenue Capital and Blackstone Group LP have been buying housing-related investments, betting on a rebound. And formerly bearish research firm Zelman & Associates now predicts a housing pickup, as does Goldman Sachs Group Inc. Other investors seem to be making the same bet. Shares of home builders are up 30% since the end of the third quarter, as measured by the Dow Jones index tracking those shares, topping a nearly 10.5% gain for the Standard & Poor's 500.
• Banks Sweat as Tax Net Tightens. New Rules Target U.S. Citizens With Accounts Abroad and Noncitizens With Deposits at U.S. Banks.
• South Korea Flags Dimmer 2012 Outlook. The South Korean government on Thursday reiterated a warning about the uncertain economic outlook while the Bank of Korea flagged weaker domestic consumer consumption, highlighting increasing headwinds for the export-dependent country against the backdrop of an unexpected decline in November's industrial output. According to Statistics Korea, the country's industrial output fell by 0.4% in November from the previous month in seasonally adjusted terms following a 0.6% fall in October, missing market expectations for a 0.4% rise.
• Political Predictions for 2012.
  

MarketWatch:

• Look for 2012 to be the Year of the Dollar.

Business Insider:

• JPMorgan(JPM) Just Told The MF Global Clients' Lawyer To Close His Bank Account.
• A Jail Term Is Now A Badge Of Honor For Putin's Critics.
• While Iran Baits The US - Russia's Beefing Up Its Nukes.
• The Greek Healthcare System Is Breaking Down Under The Weight Of Austerity.
• Today's Euro Swan Dive Has Us Asking 2 Questions. We have two questions: 1) Has the ECB shot its wad as the lender of last resort providing massive liquidity to the banking system and leaving little ammunition for the distressed sovereigns; 2) Will money demand remain stable in the eurozone as the monetary base explodes? That is, will the Germans keep their money in Europe?

Zero Hedge:

• Things That Make You Go Hmm, Such As Looking Back At The Key Events Of... 2012.

CNBC:

• Funds Expect Surge of Bad Loans in China. Foreign and domestic distressed debt funds expect a big supply of bad loans to come on to the market in China after at least five years in which banks largely sat on their portfolios of troubled loans. Executives at Clearwater Capital, a Hong Kong-based fund, and at Guangzhou-based Shoreline Capital say Chinese lenders must dispose of existing bad loans to prepare for a new batch of non-performing debt, stemming from the credit binge Beijing encouraged following the global financial crisis. “Now that there is a new flow of bad loans, the banks have to dispose of their legacy loan problem,” says Ben Fanger, co-founder of Shoreline. “Deals being offered to Shoreline are at prices that are lower, on average, than in recent years. We are now having meaningful dialogues again.”

Forbes:

• Even the Warmists Don't Believe In Global Warming.

CNN:

• Afghanistan Signs First Oil Deal -- With China.

LA Times:

• Pakistani Death Squads Go After Informants To U.S. Drone Program. The militant group known as Khorasan Mujahedin terrorizes villages near the Afghan border. Tribal elders say most of those killed are innocent.

Washington Post:

• Iran Unlikely to Block Oil Shipments Through Straight of Hormuz, Analysts Say. The latest in a series of Iranian threats to block the vital Strait of Hormuz triggered a sharp response Wednesday from the U.S. Navy, although there appeared to be little chance that Tehran would make good on its warnings. Despite threats to close the narrow waterway if Western nations tighten sanctions on Iran by imposing an oil embargo, the Islamic republic needs the strait at least as much as its adversaries do, Iranian and foreign analysts said.
  

nielsenwire:

• Google(GOOG) 2011 Top Internet Brand.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 23% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-one percent (41%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -18 (see trends).

Reuters:

• Mosaic(MOS) to Cut Phosphate Production on Excess Supply. Fertiliser producer Mosaic Co said it will cut phosphate production by 250,000 tonnes over the next three months as excess supply weighs on spot prices. "As dealers and distributors focus on the macroeconomic uncertainty and delay purchases for the North American Spring season, near-term supply of phosphate barges on the Mississippi River has exceeded near-term demand," Chief Executive Jim Prokopanko said. Shares of the company were trading down 2 percent after the bell.

Financial Times:

• Traditional Lenders Shiver as Shadow Banking Grows. The banking system, as measured by total assets, has slowly reduced in scale since the 2008 crisis. But the so-called shadow banking system has recovered to its pre-crisis peak, rising to $60tn worth of assets in 2010. The shadow banking system includes any number of financial entities such as money market funds, hedge funds and private equity groups, according to the Financial Stability Board, the international financial watchdog set up by the Group of Seven nations.
• A Market-Based Plan to Regulate Banks. The Volcker rule is the part of the Dodd-Frank Bill that forbids large banks from proprietary trading. The rule cannot be implemented in its current form because legislators and regulators cannot even define precisely what a proprietary trade is.

Telegraph:

• Martin Feldstein: French 'don't get' problems at euro's heart. The French government should concentrate on its own financial problems rather than lashing out at Britain, according to leading US economist Martin Feldstein.
• Bond Sale Puts Italy to the Test. Italy faces a crucial test tomorrow as the technocrat government of Mario Monti launches its first big auction of long-term bonds since a disastrous upset a month ago. The outcome will set the tone for a string of debt sales through early 2012 that risk stretching the eurozone bond markets to breaking point.

China Daily:

• China will shift the focus of its economic policy to the real economy next year and away from financial markets, Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, wrote in a commentary. Money will be diverted to projects like irrigation and away from the real estate sector, Yi, wrote. Regulation of the realty market will continue to ensure that "unendurably high" property prices return to a "reasonable level," he said.

Financial News:

• China's weak agricultural foundation may lead to consumer price rise, citing Yao Jingyuan, former chief economist at the National Bureau of Statistics

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 205.0 -1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 162.0 unch.
• FTSE-100 futures -.03%.
  
• S&P 500 futures +.47%.
  
• NASDAQ 100 futures +.41%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• Initial Jobless Claims for this week are estimated to rise to 375K versus 364K the prior week.
• Continuing Claims are estimated to rise to 3600K versus 3546K prior.

9:45 am EST

• Chicago Purchasing Manager for December is estimated to fall to 61.0 versus 62.6 in November.

10:00 am EST

• Pending Home Sales for November are estimated to rise +1.5% versus a +10.4% gain in October.

11:00 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,500,000 barrels versus a -10,570,000 barrel decline the prior week. Distillate supplies are estimated to fall by -650,000 barrels versus a -2,353,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -500,000 barrels versus a -412,000 barrel decline the prior week. Finally, Refinery Utilization is estimated unch. versus a -.2% decline the prior week.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Italian debt auction, Kansas City Fed Manufacturing Activity Index, weekly EIA natural gas inventory report and the weekly Bloomberg Consumer Comfort Index could also impact trading today.
  

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

Stocks Falling into Final Hour on Rising Eurozone Debt Angst, Rising Global Growth Fears, Technical Resistance, High Energy Prices

Broad Market Tone:

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

Equity Investor Angst:

• VIX 23.36 +6.62%
  
• ISE Sentiment Index 69.0 -51.06%
  
• Total Put/Call .93 unch.
  
• NYSE Arms 3.10 +160.68%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 121.56 +.80%
  
• European Financial Sector CDS Index 260.58 -6.22%
  
• Western Europe Sovereign Debt CDS Index 368.22 +3.0%
  
• Emerging Market CDS Index 309.12 +.23%
  
• 2-Year Swap Spread 51.0 +2 basis points
  
• TED Spread 57.0 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -126.0 +1.0 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 165.0 -6 bps
  
• China Import Iron Ore Spot $136.80/Metric Tonne unch.
  
• Citi US Economic Surprise Index 69.50 -1.7 points
  
• 10-Year TIPS Spread 1.99 -5 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -53 open in Japan
• DAX Futures: Indicating +17 open in Germany

Portfolio:

• Slightly Lower: On losses in my Tech, Medical and Biotech sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and added to my (EEM) short, then covered some of them.
  
• Market Exposure: Moved to 50% Net Long

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 trades back below its 200-day moving average on rising Eurozone debt angst, financial sector pessimism, rising global growth fears, technical resistance and high energy prices. On the positive side, Retail, Telecom and Utility shares are holding up relatively well, falling less than -.5%. Gold is falling -2.3%, oil is declining -1.82% and Lumber is gaining +3.9%. Johnson Redbook weekly retail sales rose +3.5% this week versus a +3.2% gain the prior week. Sales have stabilized after their recent deceleration from avg. weekly gains of +4.6% during Oct. On the negative side, Coal, Alt Energy, Energy, Oil Service, Ag, Steel, Disk Drive, Networking, HMO, Construction, Homebuilding, Gaming, Airline and Education shares are under meaningful pressure, falling more than -2.0%. (XLF) has underperformed throughout the day. Cyclicals and small-caps are also relatively weak. Copper is falling -1.5% and the UBS-Bloomberg Ag Spot Index is rising +1.96%. The 10-year yield is at session lows, falling -9 bps to 1.91%. The Brazil sovereign cds is gaining +.93% to 161.66 bps. The Italian/German 10Y Yield Spread is rising +.55% to 510.44 bps(near the highest since Dec. 1995). The Western Europe Sovereign CDS Index is still approaching 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 rising +.89%% to -126.0 bps, which is back to late-Nov. levels. The Libor-OIS spread is now at the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -28.7% since February 16th and -24.4% since Sept. 7th. The China Corporate Blended Spread Index remains close to another technical breakout. The Citi Asia Economic Surprise Index fell another -4.2 points today to -36.0, the lowest since April 2009. Asian shares continue to trade poorly. India’s Sensex fell another -.92% and is now down -23.3% ytd. Despite the decoupling this year, slowing economic growth and weak equity markets in the region are also red flags for US equity investors. Major European Indices came under pressure today, led lower by Germany(-2.01%) and Spain(-2.01%). The Bloomberg Europe Bank/Financial Services Index fell -1.7%. As well, Brazil’s Bovespa is falling -2.54% and is now down -18.4% 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. Cyclicals are weighing on the major averages again today with the MS Cyclical Index dropping -2.0%. The MS Cyclical Index(CYC), which is down -15.9% ytd, has been making a series of higher lows and lower highs over the last 3 months. I suspect this pattern will resolve itself to the downside in 1Q unless the situation in Europe changes materially for the better. Given the recent improvement in US economic data and European debt crisis can-kicking, the 10Y T-Note continues to trade well, which is another red flag. The euro currency is testing its Jan. 10 low. While short euro is a crowded trade and the currency is technically oversold, I still see substantial weakness in the euro over the intermediate-term. Year-end window-dressing, short-covering, better US economic data and seasonal strength had been boosting US stocks. For a sustainable equity advance into the new year, I would expect to see meaningful European credit gauge improvement, subsiding hard-landing fears in key emerging markets, better volume, lower energy prices and higher-quality stock market leadership. I expect US stocks to trade mixed-to-lower into the close from current levels on rising Eurozone debt angst, rising global growth fears, technical resistance, profit-taking, financial sector pessimism, more shorting and high energy prices.