Today's Headlines

Bloomberg:

• Italian One-Year Yield Slides to 2.735% as Bill Sale Matches Target Amount. Italy sold 12 billion euros ($15.3 billion) of Treasury bills, meeting its maximum target for the auction, and its borrowing costs plunged in the country’s first debt sale of the year. The Rome-based Treasury sold 8.5 billion euros of one-year bills at a rate of 2.735 percent. That was the lowest rate paid on one-year debt at an auction since June and less than half the 5.952 percent offered at the last sale on Dec. 12. Italy also sold 3.5 billion euros of 136-day bills at 1.644 percent. Italian bonds extended gains after the sale, with the yield on the country’s benchmark two-year note falling 69 basis points to 4.02 percent at 11:42 a.m. Rome time, the lowest since September. The 10-year yield declined 40 basis points to 6.57 percent, narrowing the difference with similar-maturity German debt to 473 basis points. The result may help ease investor concern about Italy’s ability to finance Europe’s second-biggest debt, which pushed the country’s 10-year bond yield above the 7 percent level that prompted Greece, Ireland and Portugal to seek bailouts. Italy’s auction came after Spain sold 9.98 billion euros of bonds maturing in 2015 and 2016, twice the maximum target of 5 billion euros set for the sale.
  
• European Stocks Decline, Led by Tesco, Delhaize, WM Morrizon, J Sainsbury. European stocks declined after reports that showed U.S. retail sales and initial jobless claims missed economists’ forecasts outweighed lower borrowing costs at Spanish and Italian debt auctions.
• Draghi Says Europe Credit Crunch Averted as Signs of Stabilization Emerge. European Central Bank President Mario Draghi said the bank has averted a serious credit shortage and there are signs the economy is stabilizing, signaling policy makers may resist cutting interest rates further for now. “According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1 percent following two straight reductions. While the debt crisis poses “substantial downside risks” to the economic outlook and the ECB remains “ready to act,” Draghi gave no indication that another rate cut is imminent.
• Credit Risk Falls in Europe After Spanish, Italian Debt Sales. The cost of insuring against default on European sovereign and corporate debt fell after Spain sold almost twice the amount of bonds planned and Italy’s borrowing costs declined at auctions today. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments dropped 14 basis points to 354 at 12 p.m. in London. Contracts on Italy tumbled 32 basis points to 484 and Spain declined 23 to 390, according to CMA. Spain sold 10 billion euros ($13 billion) of bonds while Italy issued 12 billion euros of bills, easing concerns the countries will struggle to finance their debts. The Italian Treasury sold one-year bills at 2.735 percent, less than half the 5.952 percent paid on similar securities on Dec. 12. “It’s good news,” said Elisabeth Afseth, an analyst at Evolution Securities Ltd. in London, “Especially the Spanish auction with double the target amount issued, which is a good start to covering overall issuance requirement for the quarter.” The Markit iTraxx Crossover Index of credit-default swaps linked to 50 companies with mostly high-yield credit ratings decreased 23 basis points to 712, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 5.75 basis points to 170.25 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers decreased 12 basis points to 266.5 and the subordinated index dropped 19 basis points to 481.
• Spanish Banks Hit Recovery With Discriminatory Loans: Mortgages. Spain's banks, saddled with 329,000 foreclosed homes, are still willing to provide mortgages, as long as the borrower wants to buy one of their properties, according to a consumer-rights group. That's no help to homeowners and developers seeking to sell.
• Ore-Ship Rents Fall, Extend 2012 Plunge to 64%, as Glut Worsens. Rents for capesize ships that haul iron ore and coal fell for a 13th session, extending this year's plunge to 64%, as port disruptions and closings worsened an oversupply of the vessels. Rates slid 18% to $9,959 a day, the first time since Aug. 9 they dropped below $10,000, citing the Baltic Exchange.
• U.S. Jobless Claims Rise More Than Forecast. More Americans than forecast filed applications for unemployment benefits last week, raising the possibility that a greater-than-usual increase in temporary holiday hiring boosted December payrolls. Jobless claims climbed by 24,000 to 399,000 in the week ended Jan. 7, Labor Department figures showed today in Washington. The median forecast of 46 economists in a Bloomberg News survey projected 375,000. Hiring by package delivery companies and retailers during the holidays to meet demand for gifts may now be giving way to an increase in dismissals. The four-week moving average, a less volatile measure than the weekly figures, increased to 381,750 last week from 374,000. The number of people continuing to receive jobless benefits rose by 19,000 in the week ended Dec. 31 to 3.63 million. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at to 2.9 percent, today’s report showed.
• Retail Sales in U.S. Rose Less Than Forecast. Sales (RSTAMOM) at U.S. retailers rose less than projected in December, confirming forecasts for a slowdown in consumer spending at the start of 2012. The 0.1 percent gain in purchases last month followed a 0.4 percent increase in November, according to figures from the Commerce Department released today in Washington. The median estimate in a Bloomberg News survey called for a 0.3 percent rise.
• Corn, Wheat, Soybeans Plunge Most in Three Months on Bigger World Supplies. Corn and wheat prices plunged the most in three months, while soybeans slid, after an increase in stockpile forecasts by the U.S. government eased concern that shortages will inflate prices for food and biofuels. Inventories of corn in the U.S., the world’s top grower and exporter, may total 846 million bushels before this year’s harvest, 12 percent more than analysts expected, a U.S. Department of Agriculture report showed today. The 2011 crop totaled 12.358 billion bushels, above a December forecast, while global output in the year ending Aug. 31 will be a record for a fifth straight year. World food prices fell 2.4 percent in December, led by declines in grains, sugar and oilseeds, the United Nations Food and Agriculture Organization said today. Global wheat supplies may total 210.02 million metric tons, the most since 2000, as countries from Australia to Russia raised output, the USDA said. U.S. soybean stockpiles may reach 275 million bushels, 20 percent more than forecast last month, as exports slowed. “There is plenty of supply right now, especially wheat on a global basis,” said Alex Bos, a grain strategist at Macquarie Group Ltd. in New York. “Usage for corn and soybeans in the last quarter was much slower than expected by most people.” Corn futures for March delivery tumbled the 40-cent limit, or 6.1 percent, to $6.115 a bushel on the Chicago Board of Trade as of 11:46 a.m. Prices headed for the biggest drop since Sept. 30. Soybean futures for March delivery fell 2 percent to $11.795 a bushel, after touching $11.50, the lowest since Dec. 21. Prices were up 7.3 percent from mid-December.
• China's Auto-Sales Growth Trails U.S. for First Time in At Least 14 Years. China’s auto sales slowed last year, trailing growth in the U.S. for the first time in at least 14 years, after the government ended stimulus measures and as the nation’s economic expansion showed signs of easing. Total vehicle sales, which include cars, trucks and buses, rose 2.5 percent to 18.5 million, according to data released by the China Association of Automobile Manufacturers today, compared with the 3 percent median estimate of five analysts surveyed by Bloomberg.
• Tesco Lowers Profit Outlook After Holiday Sales Disappoint. Tesco Plc, the U.K.’s largest supermarket chain, reported Christmas sales that missed analyst estimates and reined back profit expectations after competitors’ promotions proved more popular than its Big Price Drop campaign. Tesco fell 16 percent, the most since at least 1988, after saying profit will be at the “low end of the current consensus range,” while next year will see “minimal” growth in earnings.
• Mortgage Rates for 30-Year U.S. Loans Fall to Record-Low 3.89%. Rates for 30-year U.S. mortgages fell to the lowest level on record after Federal Reserve Chairman Ben S. Bernanke urged lawmakers to do more to revive housing. The average rate for a 30-year fixed loan decreased to 3.89 percent in the week ended today, the lowest in records dating to 1971, from 3.91 percent, Freddie Mac said in a statement. The average 15-year rate dropped to 3.16 percent from 3.23 percent, according to the McLean, Virginia-based mortgage-finance company.
• Sears(SHLD) Supplier Loans Are Said to Be Halted by CIT Starting Today. Sears Holdings Corp. (SHLD) declined after two people familiar with the situation said suppliers will no longer be able to get loans or payment guarantees from CIT (CIT) Group Inc. for their shipments to the retailer. Sears fell 4.8 percent to $31.33 at 11:54 a.m. in New York.
• Williams-Sonoma(WSM) Falls After Cutting Forecast. Williams-Sonoma Inc. (WSM), the owner of the namesake, Pottery Barn and West Elm home-goods chains, fell the most in more than three years after saying profit may be less than it previously forecast because of holiday discounts. The shares dropped 12 percent to $34.58 at 9:49 a.m. in New York, after earlier falling 15 percent for the biggest intraday drop since Nov. 14, 2008.
• China Gets Cheap Iran Oil as U.S. Picks Up Tab for Hormuz Strait Patrols. China stands to be the biggest beneficiary of U.S. and European plans for sanctions on Iran’s oil sales in an effort to pressure the regime to abandon its nuclear program.

Wall Street Journal:

• U.S. Debt Nears $15.194 Trillion Ceiling. The Treasury Department has begun maneuvers to avoid hitting the debt ceiling, as the Obama administration waits for Congress to return from the holiday break before it can raise the federal borrowing limit.
• Fed 2006 Transcript Highlights: Riding Housing Roller Coaster With Eyes Shut. Federal Reserve Chairman Ben Bernanke and most of his colleagues showed little concern when house prices started to decline in 2006, predicting “a soft landing” in the then-strong U.S. economy, transcripts from the central bank released Thursday show.
• Gingrich Demands Accounting of Aid to Wall Street. Newt Gingrich struck a populist note at a South Carolina campaign event Thursday, saying that as president he would demand an accounting of federal funds that went to Wall Street during the financial crisis.
• Delta(DAL), TPG Assessing Bids for American Airlines Parent. Delta Air Lines Inc. and private equity firm TPG Capital are separately assessing possible bids for American Airlines parent AMR Corp., with hopes that AMR's troubles present another opportunity for airline consolidation, people familiar with the matter said.
• Credit Agricole Sells Loans At Deep Discounts. Credit Agricole is trying to unload millions of dollars in Asian loans held on its books at deep discounts, potentially driving up borrowing costs for some of the region's companies. Like many other European lenders, the major French bank is under pressure to shrink its balance sheet as funding has dried up. The banks have already scaled back on lending, squeezing some companies in Asia, and are now selling loans to further shrink their assets.

MarketWatch:

• Gold Extends Gains After ECB, Lower Dollar. Gold futures rose Thursday, on track for a third session of gains as a trickle of safe-haven flows returned to the market after the European Central Bank warned of “substantial” downside risks for the euro zone’s outlook and the dollar traded lower. Gold for February delivery GC2G +0.76% added $19.40, or 1.2%, to $1,659 an ounce on the Comex division of the New York Mercantile Exchange. A close around these levels would be gold’s highest since Dec. 13.

CNBC.com:

• MF Global May Not Be Able to Pay Clients Back: Trustee.
• Bulk Foreclosure Sales Could Cause Bigger Bank Write-Downs.
  

Business Insider:

• The 10 Most Massive Hedge Funds In The World.
• Embargo On Iranian Oil Delayed By Six Months.
• Here's Why Melissa Francis Left CNBC For Fox Business.
• If This Is The 'Dark Side' Of Mitt Romney, He Is One Of The Squeakiest Clean Politicians Ever.

Zero Hedge:

• Art Cashin Explains Why The One Key Indicator That Matters For Italy Is Flashing Red.
• Merkel Party Lawmaker Says Greece Must Leave Eurozone.
• NYSE Short Interest Plunged at End of December. (graph)
  

NY Post:

• Eat Your Salary. So much for being the smartest folks in the room. The move by Wall Street’s top brass to juice bankers’ base salaries to offset a withering tax on bonuses that was being whispered about in Washington back in 2009 is coming back to bite their firms in the rear. While the bonus tax never materialized, banking powerhouses Goldman Sachs and Morgan Stanley, as well as investment banking units at Citigroup, Bank of America and others, have been stuck with the higher salaries. And now, as business has cooled, the firms have been raining down pink slips to cut down on expenses they are guilty of increasing.

NBCWashington:

• New Swine Flu Concerns in West Virginia. There is new concern about a new strain of Swine Flu, which has sickened at least 12 Americans. The new strand, called H3N2v, is a mutated version of the original H1N1 Swine Flu virus. The CDC is now investigating whether the virus can be transmitted from human to human.

TechCrunch:

• eBay(EBAY) Forecasts $8B In Mobile Commerce Volume In 2012; PayPal Will Reach $7B.
  

Reuters:

• ECB's Draghi Says "Very Concerned" Over Hungary.

Handelsblatt:

• Germany will reduce its 2012 growth forecast to about .75% next week, citing government officials.

Globe and Mail:

• Canada Won't Recognize Same-Sex Marriages of Foreigners. The Harper government has served notice that thousands of same-sex couples who flocked to Canada from abroad since 2004 to get married are not legally wed.

Bear Radar

Style Underperformer:

• Large-Cap Value (-.30%)

Sector Underperformers:

• 1) Hospitals -2.0% 2) REITs -1.22% 3) Computer Services -1.30%

Stocks Falling on Unusual Volume:

• PTEN, BAS, RDS/A, CVX, IBM, CVD, CMC, BVSN, QCOR, LINE, INFY, SHLD, FARO, WYNN, REXX, JAZZ, IPCM, PRXL, BBBY, CTSH, GEOY, MAKO, SXCI, ITMN, FSLR, DECK, WSM, CPT, COG, RJF, ONE, OCR, PMC and REXX
  

Stocks With Unusual Put Option Activity:

• 1) WFM 2) FAST 3) SYMC 4) HBC 5) WYNN
  

Stocks With Most Negative News Mentions:

• 1) BXP 2) STP 3) JNPR 4) F 5) CIT
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Growth -.05%

Sector Outperformers:

• 1) Oil Tankers +1.81% 2) Gold & Silver +.86% 3) Construction +.58%

Stocks Rising on Unusual Volume:

• WLK, SWC, AUY, QLIK, MANT, TSCO, FOSL, VVUS, CA, QLIK, CLNE, DKS, SAFM, PPO, UAM and CBOU
  

Stocks With Unusual Call Option Activity:

• 1) LNG 2) CROX 3) QCOR 4) CIM 5) UPL
  

Stocks With Most Positive News Mentions:

• 1) DKS 2) AIR 3) KIM 4) EOG 5) TSCO
  

Charts:

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

Thursday Watch

Evening Headlines

Bloomberg:

• Italy, Spain Offer $21.5 Billion of Debt in First Auctions of the New Year. Italy and Spain will seek to sell as much as 17 billion euros ($21.5 billion) in debt today as Prime Minister Mario Monti urges investors to reward Italian austerity efforts. In their first auctions of 2012, Spain will sell as much as 5 billion euros of bonds, including a new three-year benchmark security. Italy, which needs to repay more than 50 billion euros in bonds in the first quarter, will sell as much as 12 billion euros of bills today and 4.75 billion euros of bonds tomorrow. “Spain is going to place plenty of paper and the Italians will have a more modest result, but good enough to keep liquidity going,” Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London, said in a phone interview. “This has been the trend and I have no reason to think this is going to change.” Monti and Spanish Prime Minister Mariano Rajoy are both struggling to convince investors they can put their nations’ finances in order and tame surging borrowing costs amid Europe’s sovereign debt crisis. Yesterday, Spain’s Parliament approved Rajoy’s 15 billion-euro austerity package, while Monti called on investors to recognize his efforts to cut Italy’s 1.9 trillion- euro debt following a meeting with Germany’s Angela Merkel.
  
• French AAA Ratings Focus Shifts to Size of Cut: Euro Credit. After weeks of handwringing about a possible loss of France’s top credit rating, President Nicolas Sarkozy now gives a Gallic shrug. Investors are interpreting the insouciance -- with Sarkozy saying that losing the AAA rating isn’t “insurmountable” -- to mean that France has accepted the inevitable. The question now is whether Standard & Poor’s will follow through with a threat of a two-level cut. Sarkozy’s shift, intended to ready voters for the blow ahead of April’s presidential elections, contributed to the increase in the premium France pays over Germany to borrow for 10 years. Since Dec. 5, when S&P said that it may downgrade 15 euro nations amid a deepening regional debt crisis, the spread has widened by more than 40 percent to 133 basis points. “They’re preparing the ground for something they see as inevitable,” said Nicola Marinelli, who manages $150 million at Glendevon King Asset Management in London. “The market is expecting France to be a strong AA; expecting it to be AA+. If any rating change goes lower than that the spread with Germany can widen further.” France, Europe’s second-largest economy and the No. 2 backer of the region’s rescue fund after Germany, was singled out among the six euro-region holders of the top AAA rating by S&P as the one that risked a two-level lowering of its credit rating. The country’s downgrade would affect the rating of the European Financial Stability Fund, making the bailout of the region’s troubled economies more expensive.
• Loan Sales in Europe to Fall 48% as Margins Soar: Credit Market. Sales of new leveraged loans in Europe are poised to decline by almost half this year as the region's debt crisis stymies buyout activity and drives up borrowing costs amid new capital regulations for banks. Credit strategists at Deutsche Bank AG and Barclays Capital forecast 25 billion euros to 30 billion euros of new leveraged loans in 2012, a drop of as much as 48% from the 48 billion euros last year, according to data compiled by Bloomberg. Interest margins may expand by as much as a third, Intermediate Capital Group Plc estimates, as lenders pass on higher funding costs to borrowers.
  
• China Regulator Halts Commercial Bill Trusts, Securities Says. China’s banking regulator told domestic trust companies to halt the sale of products that invest in commercial bills, the Shanghai Securities News reported today, citing a person it didn’t identify. The China Banking Regulatory Commission (CBRZ) notified trust companies about the suspension by phone yesterday and hasn’t issued a formal notice, the Chinese-language newspaper reported on its website. The practice may be a way of skirting the government’s lending curbs, the report said. Chinese banks, constrained by the government’s loan quotas, have been helping their clients to raise funds by arranging trust plans that buy commercial bills from them, according to the report.
• Pakistan Army Warns Clash With Gilani Government May See 'Grievous' End. Pakistan’s government fired its defense secretary as the army warned of “grievous consequences” from the sharpest civilian-military power struggle since army rule ended in 2008.
• Illinois Bond Spread Triples After Cut to Lowest-Rated State. Illinois's cost to borrow relative to top-rated issuers tripled from 2009 when it sold $800 million of bonds today, after its credit rating was cut by Moody's Investors Service to the lowest among U.S. states. The $525 million tax-exempt part of today's sale included 10-year general-obligation bonds priced to yield 3.1 percent, according to data compiled by Bloomberg. That's 110 basis points more than the 2 percent yield of top-rated 10-year debt.
• Brevan Howard Proves Master of Hedge Funds With Four in Top 100.
• Goldman(GS) Trading Chiefs Join Partner Exodus as Profit Sags. Goldman Sachs Group Inc. said two leaders of its biggest division are leaving the company a week before it reports what some analysts predict will be the lowest annual profit since the firm went public.

Wall Street Journal:

• S&P: China Bank Loss Deferal Hurts Confidence. China's authorities are likely to allow local banks to postpone their recognition of losses on some local-government loans, but such a move would be damaging to the sector's reputation and could result in greater losses ultimately, Standard & Poor's Ratings Services said on Thursday. In a report, S&P credit analyst Ryan Tsang said that regulatory forbearance could lower local banks' credit losses by as much as 80 billion yuan (US$12.7 billion) to 100 billion yuan per year for the next three years, assuming that loans worth as much as 3 trillion yuan are eligible for such treatment. But he cautioned that doing so would be a "backward step" for the country's banking sector. S&P estimates that around 30% of loans made to Chinese local-government financing platforms could go bad over the next three years in the absence of public support. "In the short term, extending the debt maturities to facilitate payments would...reduce investment volatility and avoid a surge in nonperforming loans," Mr. Tsang said. "But it is also likely to undermine investors' confidence for some time to come, underscore the developing nature of the regulatory framework, and highlight the [China Banking Regulatory Commission's] lack of independence from the government."
  
• Cordray Agrees to Testify at House Hearing. Consumer Financial Protection Bureau Director Richard Cordray has accepted an invitation to testify before a U.S. House oversight panel later this month, where he is likely to face tough questions about the president’s decision last week to bypass the Senate and install him as director. Rep. Patrick McHenry (R., N.C.), along with other congressional Republicans, were infuriated by the president’s Jan. 4 move. Mr. McHenry said the “unprecedented appointment of Mr. Cordray runs counter to the constitutional requirements for a recess appointment and Obama’s own campaign pledge to run ‘the most transparent administration in history.’”
• Buffett's Berkshire Unit Finds It Broke Canada Trade Laws Over Prison Labor. Shaw Industries Group Inc., a carpet and wood-flooring maker owned by Warren Buffett's Berkshire Hathaway Inc., has quietly acknowledged that it broke Canadian trade laws by exporting hardwood flooring to Canada that was partly made by prison inmates.
• Bolton to Back Romney. Former U.N Ambassador John Bolton is set to endorse Mitt Romney and will join his top team of foreign-policy advisers, according to people close to the campaign.
• Industry Challenges Texas Pipeline Ruling. Pipeline companies are asking the Texas Supreme Court to overturn a ruling they say jeopardizes new projects, escalating the battle over the costs of transporting oil and natural gas produced by the energy boom in South Texas.
• RBS Set to Reveal Job Cuts. Royal Bank of Scotland Group PLC, the government-controlled U.K. bank, is preparing to unveil a restructuring Thursday that is expected to shed thousands of jobs and reshape the bank as a largely retail-focused operation.
• Glut Hits Natural-Gas Prices. U.S. energy companies are pumping so much natural gas out of the ground that prices are plummeting, and the cheap gas isn't likely to evaporate anytime soon. Natural-gas prices fell 5.7% Wednesday to their lowest level in over two years—good news for people who use gas to heat homes and for companies that use it to power factories. For U.S. energy companies, however, the domestic natural-gas market is looking increasingly out of whack. Despite a 32% drop in prices last year, onshore production rose 10%, and it is expected to rise another 4% this year, according to Barclays Capital.

MarketWatch:

• There Are Reasons To Be Concerned About China's Internet Industry.

Business Insider:

• Here Are The 17 Hottest, Craziest Cars We Saw At CES In Las Vegas.
• Presenting: The Skyscraper Index. The hot new indicator for predicting collapse.
  

Zero Hedge:

• China Enters The Danger Zone, SocGen Presents The Four Critical Themes. (graphs) As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency. Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names. They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.

CNBC:

• China December Inflation at 4.1%. The December figures was the closest that inflation came in 2011 to hitting the official target of 4 percent for the year, leaving the average rate above 5 percent. That's still too hot for China's conservative policymakers, who are reluctant to shift policy settings too quickly towards all-out growth mode and argue that fine-tuning is all that is required to keep the economy on a stable expansion path. But evidence of slower economic growth is mounting, even while inflation is still not yet as tame as Beijing might like.
• PC Shipments Declined 1.4% in Fourth Quarter: Gartner. Global PC shipments declined 1.4 percent in the last quarter of 2011 mainly due to weak demand in Western Europe and the United States, according to research firm Gartner.

NY Times:

• New Rules on Swaps Will Protect Big Traders. Wall Street investors will receive significant new protections under a plan adopted by federal regulators on Wednesday, an overhaul that comes in the wake of the collapse of MF Global.

Seeking Alpha:

• U.S. Bank and Broker Default Risk. (graphs)

Reuters:

• Broadcom(BRCM) on Track to Launch High-End Phone Chips. Wireless chipmaker Broadcom is gearing up to launch new application processors for the lucrative and growing higher-end smartphone segment by the end of the year, co-founder and Chief Technology Officer Henry Samueli said on Wednesday.
  
• Exclusive: Republicans Move to Control Keystone Approval. Congressional Republicans, who are urging President Barack Obama to back the Canada-to-Texas Keystone XL oil pipeline, are now working on plans to take the reins of approval from the hands of the president should the White House say no. North Dakota Senator John Hoeven, whose state is counting on the pipeline to help move its newfound bounty of shale oil, is drafting legislation that would see Congress give the green light to the project by using its constitutional powers to regulate commerce with foreign nations, an aide told Reuters. After delaying the project past the November 2012 election, Obama was compelled by Congress to decide by February 21 on whether to approve the pipeline that would sharply boost the flow of oil from Canada's oil sands. Should Obama reject the project, Senate Republicans would look at a bill that would force the go-ahead so work could begin on the $7 billion pipeline, save for a portion going through Nebraska, where the state government continues work on an alternate route, said Ryan Bernstein, an energy adviser to Hoeven. He said Hoeven is working on the new approach with other key Republican senators, including Senate Minority Leader Mitch McConnell, Richard Lugar, David Vitter, Lisa Murkowski and Mike Johanns. TransCanada Corp's oil sands pipeline has put Obama in a political bind at the start of what is expected to be a difficult re-election campaign, and has become a useful tool for Republicans seeking to portray Obama as dithering on a project that they say would create 20,000 jobs. Environmental groups, an important part of Obama's political base, have made defeating the line a top priority.
• IMF funds for Greece not assured; EU, bondholders under pressure. IMF chief Christine Lagarde is warning Europe that Greece's economic prospects are deteriorating and the European Union will either have to pony up more money to rescue Athens or debt holders will have to stomach steeper losses. Unless the private sector or the EU contribute more to Greece's rescue, the International Monetary Fund will view the nation's debt load as unsustainable and may be unwilling to deliver more funds, IMF sources told Reuters as Lagarde met with Germany's and France's leaders in Europe. Although the prospect of EU paymaster Germany coming up with more money seems remote, analysts believe European politicians and international lenders will eventually find a way to avoid a messy Greek default that would destabilize the continent and potentially undermine the global recovery. But crafting a solution is growing increasingly difficult because IMF members, and in particular the United States and emerging countries, are reluctant to throw more money at Greece unless it is firmly back-stopped by fellow euro-zone members. The sense of urgency has grown in recent weeks. Sources said the IMF now believes the economic slowdown under way in Greece and the euro zone as a whole is proving deeper than it expected when the latest bailout was approved in principle in October. The projected cost then was already a hefty 130 billion euros. IMF officials acknowledge privately that Greece is already stretched to the limit by austerity programs, making further belt-tightening untenable and pressuring official lenders or bondholders to bear a greater burden. Talks aimed at getting private-sector creditors to shoulder a bigger part of a new Greek bailout are going badly, senior European bankers said on Wednesday, raising the prospect that euro-zone governments will have to increase their contribution. Another senior IMF board member told Reuters time is running out. "The longer everyone delays tough decision, the more difficult it is becoming to pull Greece from the brink. We need to know that its debt is sustainable," the board member said. Officials have made clear that if the deal with private bondholders does not help reduce Greece's debt-to-GDP-ratio, Europeans would have to make up the financing gap. If bondholders refuse to take larger losses and the EU does not agree to provide more aid, it is unlikely the IMF would come in to save the day, a senior diplomatic source said. "If both the banks and the EU partners will not do it, then there is a problem," the diplomat said. Ben May, an analyst at London-based Capital Economics, said the risk of a disorderly default when the 14.5 billion euros in bonds come due was "small but not insignificant." "It is a risk," May said. "Concerns will arise when we get nearer to the March bond redemption if something does not seem to be falling into place. "There is a whole stack of things that could go wrong, perhaps because Greece won't agree to things that are demanded of it," he added.
• Raymond James(RJF) to Buy Brokerage Morgan Keegan. Raymond James Financial Inc (RJF.N) said on Wednesday it agreed to acquire Southeast investment bank and brokerage Morgan Keegan from Regions Financial Corp (RF.N) for $930 million in stock, concluding a drawn-out auction for the unit.
• Chevron's(CVX) Q4 Profit Squeezed by Repairs. Chevron Corp. (CVX), the second-largest U.S. energy company, said fourth-quarter profit was “significantly below” third-quarter results after maintenance work at a California refinery and the sale of a U.K. plant curbed fuel output. The shares fell more than 2 percent.
• Infosys Cuts Fiscal 2012 Growth Forecast on Europe. Infosys Ltd cut its full-year revenue outlook because of the debt crisis in Europe, sending down the shares of the No.2 Indian software services exporter by as much as 7.7 percent to their lowest in more than a month.
• Tractor Supply(TSCO) Q4 Revenue Beats Street. Tractor Supply Co reported fourth-quarter revenue that beat market estimates, helped by the company's consumables and service revenue, prompting the U.S. farm products retailer to raise its full-year earnings outlook.
• PVH(PVH) 2012 Profit Outlook Disappoints, Shares Slip. Clothing maker PVH Corp forecast a 2012 profit mostly below analysts' expectations, due to a weak euro and higher pension expenses, sending its shares down 6 percent in after-hours trading. The company, which owns the Calvin Klein and Tommy Hilfiger brands, also said its gross margins would be pressured by high product costs in the first half of the next fiscal year.

Financial Times:

• Asia to Europe Container Traffic Down 5%. Container shipping lines that are already incurring big losses due to ship oversupply could suffer further from falling demand, after the latest figures for volumes on the most important trade route showed a sharp fall. Figures published on Wednesday by Container Trades Statistics, the body that compiles data on container trades into and out of Europe, showed that traffic from Asia to Europe fell 5.33 per cent between November 2011 and the previous year to 1.04m twenty-foot equivalent units (TEUs). European container imports from all sources fell 3.75 per cent compared with November 2010.
• Swiss Bank Offers Trades for Eurozone Shorting. Credit Suisse is offering its hedge fund clients off-the-shelf products that allow traders to replicate hypothetical gains made by betting against European stock indices that include equities covered by eurozone short selling bans. The bank has made five shortable baskets “optimised” to track leading European indices as closely as possible, based on replacing restricted stocks – mostly banks and other financial companies – with correlated assets.

Telegraph:

• Eurozone Waters Down Its Tough Fiscal Rules Plan. European countries will be allowed to ignore new fiscal rules in difficult economic times, according to a draft of the region's new treaty which appears to water down plans for a tough pact. A leaked draft shows that members will have to commit to keeping their deficits below 0.5pc of GDP or face the European Court of Justice (ECJ). But they will also be allowed to "temporarily deviate" from the rules "in case of an usual event" or in "periods of severe economic downturn." The role of the ECJ has also been weakened in the draft. Rather than having the power to judge if countries are breaking the rules, the ECJ will be restricted to receiving complaints from other member states and imposing deadlines for nations to get their budgets back in line. Open Europe argued that Germany had evidently "caved in" on its original demands, which could rattle markets. The London-based think tank said: "From the eurozone's point of view, the draft may actually be worse news than the previous version, as the markets could judge the watering down of the enforcement mechanisms through the EU institutions as a weakness similar to those haunting the original Stability & Growth Pact."

Handelsblatt:

• The large number of new requirements on banks could lead to a credit crunch, Michael Meister, vice chairman of Chancellor Angela Merkel's Christian Democratic Union-led caucus in parliament, is cited as saying in an interview. New rules such as capital requirements under Basel III and stricter liquidity requirements could increase the cost of loans for small and mid-sized borrowers, Meister said in the interview.
  

Welt:

• Europe's interbank market is frozen and the continent's banks are only lending to each other through the ECB due to a lack of confidence within the financial industry, World Bank President Robert Zoellick was quoted as saying. If European banks don't lend to each other, how can others in the U.S. or in China be expected to do it, Zoellick said.

Market News International:

• China Advisor: Geithner Said No Tools Left For QE3. U.S. Treasury Secretary Timothy Geithner told Li Yang, vice director of the Chinese Academy of Social Sciences, that the Federal Reserve doesn't have tools left for another round of quantitative easing, citing Li. Li said Geithner told him that recent coordinated action by global central banks amounted to a form of quantitative easing.

China Daily:

• China won't stop purchasing Iranian oil, Mei Xinyu, a researcher with the Ministry of Commerce, wrote in a commentary on the front page. China has no reason to join with the U.S. on sanctions against Iran, Mei said.
  

Shanghai Securities News:

• Chinese investors opened 10.8m accounts in 2011, the fewest since 2007, citing its own calculations.

Evening Recommendations
Citigroup Global Markets:

• Reiterated Buy on (TER), target $20.

Night Trading

• Asian equity indices are -.75% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 207.5 +.5 basis point.
  
• Asia Pacific Sovereign CDS Index 159.0 -1.0 basis point.
• FTSE-100 futures +.45%.
  
• S&P 500 futures -.10%.
  
• NASDAQ 100 futures -.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SJR)/.47
• (ZZ)/.02
  

Economic Releases
8:30 am EST

• Advance Retail Sales for December are estimated to rise +.3% versus a +.2% gain in November.
• Retail Sales Less Autos for December are estimated to rise +.3% versus a +.2% gain in November.
• Retail Sales Ex Auto & Gas for December are estimated to rise +.4% versus a +.2% gain in November.
• Initial Jobless Claims are estimated to rise to 375K versus 372K the prior week.
• Continuing Claims are estimated at 3595K versus 3595K prior.
  

10:00 am EST

• Business Inventories for November are estimated to rise +.4% versus a +.8% gain in October.

2:00 pm EST

• The Monthly Budget Deficit for December is estimated to widen to -$83.7B versus -$78.1B.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The ECB Rate Decision, BoE Rate Decision, Italian EUR6B Bond Auction, 30-Year T-Bond Auction, USDA Crop Report, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index and the (SIMG) Analyst Meeting could also impact trading today.
  

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

Stocks Slighly Higher into Final Hour on Less Financial/Tech Sector Pessimism, Short-Covering, Falling Energy Prices, Earnings Optimism

Broad Market Tone:

• Advance/Decline Line: Higher
  
• Sector Performance: Most Sectors Rising
  
• Volume: Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 21.14 +2.17%
  
• ISE Sentiment Index 105.0 -22.22%
  
• Total Put/Call .80 unch.
  
• NYSE Arms .72 -15.89%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 117.70 +.34%
  
• European Financial Sector CDS Index 258.33 +.20%
  
• Western Europe Sovereign Debt CDS Index 379.50 +.34%
  
• Emerging Market CDS Index 311.33 +1.69%
  
• 2-Year Swap Spread 38.0 -2 bps
  
• TED Spread 56.0 -1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -87.0 +6 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .01% unch.
  
• Yield Curve 168.0 -5 bps
  
• China Import Iron Ore Spot $142.20/Metric Tonne -.07%
  
• Citi US Economic Surprise Index 87.80 -1.0 point
  
• 10-Year TIPS Spread 2.02 -4 bps
  

Overseas Futures:

• Nikkei Futures: Indicating -9 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 all of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added them back
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 maintains recent gains near its late-Oct. high, despite Eurozone debt angst, global growth fears and high energy prices. On the positive side, Coal, Alt Energy, Oil Tanker, Steel, Networking, Hospital and Homebuilding shares are especially strong, rising more than +1.25%. Cyclical and small-cap shares are outperforming again. Copper is rising +.91% and Oil is falling -1.2%. It is noteworthy that oil is weak today despite threats of a complete Nigerian output shutdown and the killing of an Iranian nuclear scientist. Major Asian indices finished mostly higher overnight after a weak start, however the Shanghai Composite was unable to build on its gains over the last 2 days as it fell -.42%. European shares were modestly lower, led down by the UK(-.45%) and Spain(-.54%). However, the Bloomberg European Bank/Financial Services Index was +.3% on the day.The Spain sovereign cds is down -2.41% to 413.67 bps, the Italy sovereign cds is falling -2.26% to 516.83 bps and the China sovereign cds is falling -2.78% to 146.43 bps. On the negative side, Energy and Oil Service shares are under pressure, falling more than -1.25%. Gold is gaining +.6% and Lumber is falling -2.2%. Moreover, the 10Y T-Note Yield is at session lows, falling -6 bps to 1.90%, which is another concern. The Portugal sovereign cds is rising +.77% to 1,085.0 bps, the Ireland sovereign cds is gaining +.87% to 693.33 bps, the Hungary sovereign cds is gaining +2.86% to 680.33 bps, the Brazil sovereign cds is gaining +2.66% to 160.32 bps and the Israel sovereign cds is gaining +3.75% to 210.54 bps. The Italian/German 10Y Spread is falling -1.23% to 517.07 bps(still very near highest since Dec. 1995). The Western Europe Sovereign CDS Index is still very near its Jan. 9th all-time high. The TED spread is near the highest since May 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is near the highest since February 2009. The 3M EUR/USD Cross-Currency Basis Swap is rising +6.55% to -86.87 bps, which is back to mid-Oct. 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. Overall, while improving, European credit gauges are still at very stressed levels despite the fact that the European debt crisis “can-kicking” solution is supposedly at hand. China Iron Ore Spot has plunged -21.4% since Sept. 7th of last year. Last year's worst-performers are leading again today and volume remains poor. The market still has a "tired" feel, despite recent gains. For a sustainable equity advance from current levels, I would still expect to see further 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. However, a convincingly break above the late-Oct. S&P 500 high would likely lead to further short-term gains. One of my longs, (GOOG), is finding support around its 50-day moving average, after its recent pullback. I still think the stock will outperform over the intermediate-term. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, short-covering, lower energy prices and less tech sector pessimism.

Today's Headlines

Bloomberg:

• Germany on Brink of Recession as Euro Debt Crisis Damps Exports: Economy. Germany may be on the brink of recession after the sovereign debt crisis caused the economy to contract in the final quarter of 2011. Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate. Economists such as Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter. A recession is defined as two consecutive quarters of declining GDP.
  
• Europe's $39 Trillion Pension Threat Grows as Regional Economies Sputter. State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.
• Spain's Rajoy May Need Back Door Bailout for Regional Rescues: Euro Credit. Prime Minister Mariano Rajoy may need to skirt Spanish law to backstop the nation’s indebted regions, mimicking the European Union’s dodging of its no- bailout rule to save Greece, Ireland and Portugal from default. “We consider the Spanish government should guarantee or take responsibility for the debt it has authorized the regions to issue,” said Albert Carreras de Odriozola, Catalonia’s deputy finance chief, in a telephone interview. “It must be possible to talk and find a mechanism.” Catalonia, Valencia, Andalusia and Madrid, which account for 60 percent of Spain’s economy, are shut out of markets as they brace to repay 9 billion euros ($11.5 billion) to lenders this year, according to data compiled by Bloomberg. Spain’s 10- year yield has risen to 5.3 percent from 5.09 percent on Dec. 30 when the government said its 2011 deficit had ballooned to a third larger than its target. Regional shortfalls drove Spain’s deficit to 8 percent of gross domestic product, breaching the 6 percent pledged to the EU. Spain’s Parliament today examines 15 billion euros of tax increases and spending cuts announced by Rajoy’s government on Dec. 30 to compensate the slippage.
• Oil Declines After U.S. Fuel Inventories Climb as German Economy Contracts. Oil fell as U.S. crude and fuel supplies climbed more than analysts estimated amid concern that a contracting German economy may drag Europe into recession. Futures dropped as much as 1.7 percent after a government report showed that crude inventories rose 4.96 million barrels last week, almost five times the gain projected in a Bloomberg News survey of analysts. Fuel stockpiles jumped as demand decreased. Oil also slipped as Germany’s Federal Statistics Office said Europe’s largest economy shrank last quarter. “The fundamentals are poor, with both today’s inventory report and the fourth-quarter contraction of the German economy pointing to lower prices,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Today’s numbers point to a poor demand period, which should be weighing on the market.” Gasoline supplies climbed 3.61 million barrels to 223.8 million in the week ended Jan. 6, the highest level since March, the report showed. Analysts projected a 2.25 million-barrel increase in stockpiles. Demand (DOEDMGAS) for the fuel tumbled 4.4 percent to 8.18 million barrels a day, the lowest level since February 2003.
• Apple(AAPL) Analyst Munster Raises Estimates for Quarterly iPhone Sales. Apple Inc. may have sold 30 million iPhones in the quarter that ended in December, according to an estimate by Gene Munster, an analyst at Piper Jaffray Cos., who raised an earlier projection for sales of 26 million iPhones. He said in a research note today that the new prediction is based on data from NPD Group that implies sales of 30 million to 34 million iPhones, “given several conservative assumptions.”
• Property Investors Bet on Rising Demand for U.S. Charter Schools. A warehouse where workers once shaped and cut steel on Milwaukee's north side is getting a second life. It's being transformed into a charter school that's scheduled to open in August. A joint venture of Canyon Capital Realty Advisors LLC and former tennis champion Andre Agassi's business partnerships is developing the property and will lease it to Lighthouse Academies of Wisconsin Inc. The Canyon-Agassi real estate fund has done one warehouse conversion in Philadelphia and is considering school projects in other U.S. cities, including New York and Houston.
• Bove: Financial Industry May Lose 150,000 Jobs. Banks and other financial firms may lose 150,000 jobs by the middle of 2013, said Richard Bove, an analyst at Rochdale Securities LLC. “The financial industry in my view is going to shrink by about 150,000 people over the next 12 to 18 months,” Bove said during an interview today with Tom Keene on “Bloomberg Surveillance.”
• California's $500K Earners Dwindle. California (STOCA1) Governor Jerry Brown’s plan to balance the state budget in part with higher taxes on the wealthy depends on a group of top earners that shrank by one-third from 2007 to 2009. Tax returns with adjusted gross incomes topping $500,000 fell to 98,610 in 2009, the latest year available, from a recent peak of 146,221 two years earlier, according to data from the Franchise Tax Board, the state agency that collects income and corporate taxes. Brown, a 73-year-old Democrat, faces a budget deficit of $9.2 billion. If voters reject his tax plan, Brown proposes to cut $4.8 billion from schools, the equivalent of taking three weeks from the academic year. California’s top individual tax rate of 10.3 percent is third-highest in the U.S., behind Hawaii (STOHI1) and Oregon (STOOR1), according to the Washington-based Tax Foundation. The new tax proposal might put California on top.
• FDA Halts All Orange Juice Imports. U.S. regulators have halted shipments of imported orange juice from all countries, and plan to destroy or ban products if tests find even low levels from a prohibited fungicide. Initial test results are due this week. The imports are being held while they are tested and may be sold if levels are below trace amounts, according to the U.S. Food and Drug Administration.
• Lennar(LEN) Rises as New-Home Orders Climb 20% From a Year Earlier. Lennar Corp., the third-largest U.S. homebuilder by revenue, rose in New York trading after reporting a 20 percent jump in new orders for the fourth quarter from a year earlier. Orders increased to 3,027 for the three months ended Nov. 30, the Miami-based company said in a statement today. The shares climbed 3.6 percent to $21.51 as of 11:20 a.m. after gaining as much as 5 percent.
• Citigroup(C) Lobbyist Casts Doubt on Obama's Recess Appointment. Citigroup Inc.’s lobbyist said President Barack Obama’s decision to make Richard Cordray head of the new financial watchdog agency wasn’t a “recess” appointment and may face a court challenge. Naming Cordray to run the Consumer Financial Protection Bureau while the Senate held “pro forma” sessions left the White House open to legal action, especially from financial firms facing new rules, Candida Wolff, Citigroup’s executive vice president for global government affairs, said in an interview today.

Wall Street Journal:

• Iran Scientist Killed in Bomb Blast. An Iranian scientist working for a key nuclear site was killed in Tehran with a magnetic bomb attached to his car, in what the government said was a plot by the U.S. and Israel to sow unrest and interfere with its nuclear program.
  

Dow Jones:

• There's wide agreement that a 50% haircut alone won't bring Greek debt to levels agreed to in Oct., citing people familiar with the matter. EU15B is a rough first estimate provided the haircut talks are successful. Precise figures will be determined after visits from the EU, IMF and ECB officials to Greece this month. Greece's 2012 budget deficit is expected to by 10% of GDP versus an initial target of 8.5%, citing officials.

CNBC.com:

• ECB Faces Criticism Over Greek Debt Purchase. Already mired in controversy about whether it should play a greater role in solving the European financial crisis, the European Central Bank is facing criticism over what they’ve already done to help — buying Greek debt.
• IRS Used 'Bait-And-Switch' on Tax Amnesty: Watchdog. The Internal Revenue Service has persuaded U.S. taxpayers to disclose hidden offshore bank accounts but then sometimes failed to cap the penalties, as promised, an agency watchdog said on Wednesday, accusing the IRS of "bait and switch."
• US Mortgage Applications Picked Up Last Week. Applications for U.S. home mortgages rose in the first week of the year as demand for both purchases and refinancing perked up, an industry group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 4.5 percent in the week ended Jan 6. The MBA's seasonally adjusted index of refinancing applications gained 3.3 percent, while the gauge of loan requests for home purchases climbed 8.1 percent.

Business Insider:

• Beige Book: Economy Expands at 'Modest to Moderate' Pace.

Zero Hedge:

• The US Debt Ceiling Theater Is Back: Think The Issue Is On Autopilot? Think Again.
• Any North Koreans Found Not To Have Cried Hystrically At Kim Jong-Il's Passing May Spend 6 Months In A Labor Camp.
• China's Debt Maturity Problem Has Arrived.
  

New York Times:

• China Balks as Geithner Presses on Iran Curbs. Timothy F. Geithner, the U.S. Treasury secretary, pressed Chinese senior leaders Wednesday to join an American-led campaign to put pressure Iran over its nuclear program by sharply reducing Tehran’s lucrative oil export business. And as they had before Mr. Geithner’s arrival here Tuesday, Chinese officials said publicly that they wanted no part of it.

Reuters:

• EU Fiscal Treaty to Include Escape Clause - Draft. A new EU fiscal treaty is set to include an escape clause that allows the suspension of a balanced-budget rule during a period of economic downturn or other exceptional event, according to a draft of the document obtained by Reuters on Wednesday. Referring to the balanced-budget rule, the document said: "Temporary deviation from the medium-term objective will only be allowed in cases of (an) unusual event outside the control of the contracting party with a major impact on the financial position of the general government or in periods of severe economic downturn for the euro area, the EU or the concerned contracting party."
  
• Greek bond swap talks going badly - banking sources. Talks about private sector participation in a Greek bailout are going badly, senior euro zone bankers said on Wednesday, raising the prospect that European Union governments will have to increase their contribution. "Governments are mulling an increase of their share of the burden," one of the bankers, who is familiar with the talks, said. Upon being asked whether governments will have to put up more cash to make up a shortfall from lower than expected private sector participation, another senior banker said: "Nothing is decided yet, but the bigger the imposed haircut the less appetite there is for voluntary conversion." A third senior banker, who was asked the same question said: "Private sector involvement is going badly."
• ECB Must Do More To Avert 'Cataclysmic' Euro Collapse: Fitch. The European Central Bank should ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro, David Riley, the head of sovereign ratings for Fitch, said on Wednesday. Speaking to investors as part of a European roadshow, Riley said a collapse of the euro would be disastrous for the global economy, and while it is not Fitch's baseline scenario, it could happen if Italy did not find a way out of its debt problems. "It is hard to believe the euro will survive if Italy does not make it through," he said, adding that while many saw Italy as too politically and economically important to be allowed to fail, "one might also argue that it is too big to rescue." The warning pushed the euro down towards a 16-month low versus the dollar. Fitch has warned that the economic outlook for the euro zone has darkened further in recent months and has said there is a high chance it will downgrade Italy, Spain, Belgium, Ireland, Slovenia and Cyprus by one or two notches by the end of this month.But unlike larger rival Standard & Poor's, which has all but Greece on a downgrade warning and said France risks a two notch cut, Fitch has said it does not expect to strip Paris of its triple-A status for this year at least.Still, Riley cautioned the euro zone's second-biggest economy was in a precarious position as the crisis rumbled on."France is the weakest AAA country in the euro zone," he said, adding it had the additional burden of being the main country alongside Germany underpinning the euro zone's bailout fund.
• The Great Hedge Fund Humbling of 2011. Some of the best-known hedge fund managers have offered lots of excuses for underperforming the major stock market indexes last year, with many large funds posting double-digit losses.
  

Stuttgarter Zeitung:

• German Finance Minister Wolfgang Schaeuble rejected joint euro-region bond sales as long as there are no rules in place to enforce coordinated economic policies in the area. The euro region mustn't create incentives for governments to abandon their deficit-reduction policies, Schaeuble said. Differences in the sovereign-bond yields of euro-area countries are indispensable to spur governments to limit their budget shortfalls and mustn't be leveled by the introduction of so-called euro bonds, he said.
  

Expansion:

• Spanish banks may be unable to generate more than 30 billion euros of the estimated 50 billion euros of extra provisions needed to clean up the banking system, citing people in the financial industry.

El Confidencial:

• Spain's new government will force banks to cut the values of foreclosed homes by as much as 50% as part of its plan to clean up lenders' balance sheets, citing people with knowledge of the matter. The banks, which will be given two years to make provisions for the losses, will also be required to cut the values of their urban land assets by 80% and value rural land on their books at virtually zero.

China Daily:

• Shanghai Housing Prices to Drop in 2012: Mayor. Mayor Han Zheng on Wednesday said the government will continue with its policies aiming to bring down the prices of the city's new residential apartments. Han told a municipal congressional meeting that Shanghai will carry on implementing the central government's package of policies, which include mortgage restrictions and limits on the numbers of homes people can own, to cool the property market while increasing land supply and deepening property tax reforms. The mayor also said Shanghai will build more affordable apartments and public rental houses for the city's low-income families. China's efforts to cool the red-hot property market paid off in 2011. Nearly 50 out of 70 major Chinese cities had reported monthly decline in the price of new apartments by November, the first decline in three years in the case of many cities.