Stocks Lower into Final Hour on Rising Eurozone Debt Angst, Rising Global Growth Fears, Earnings Jitters, Rising Energy Prices

Broad Market Tone:

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

Equity Investor Angst:

• VIX 21.78 +6.40%
  
• ISE Sentiment Index 96.0 -29.41%
  
• Total Put/Call .71 -14.46%
  
• NYSE Arms 1.74 +65.06%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 116.31 +1.12%
  
• European Financial Sector CDS Index 251.50 +1.80%
  
• Western Europe Sovereign Debt CDS Index 374.02 +1.35%
  
• Emerging Market CDS Index 311.65 +2.77%
  
• 2-Year Swap Spread 36.0 +1 bp
  
• TED Spread 55.0 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -86.0 -6 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .02% unch.
  
• Yield Curve 164.0 -5 bps
  
• China Import Iron Ore Spot $142.20/Metric Tonne unch.
  
• Citi US Economic Surprise Index 72.40 -5.0 points
  
• 10-Year TIPS Spread 2.02 -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating -60 open in Japan
• DAX Futures: Indicating -10 open in Germany

Portfolio:

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

BOTTOM LINE: Today's overall market action is bearish, as the S&P 500 pulls back near its late-Oct. high on rising Eurozone debt angst, tech/financial sector pessimism, some earnings disappointments, rising global growth fears and rising energy prices. On the positive side, Ag, Gaming and Education shares are higher on the day. The UBS-Bloomberg Ag Spot Index is falling -.88%, Gold is down -.74% and Lumber is surging +4.2%. Major European indices were down around -.75%. However, Spanish equities, Europe’s worst-performers ytd rose +.28%. As well, the Bloomberg European Bank/Financial Services Index was +1.1% higher on the day. The Japan sovereign cds fell -5.93% to 143.25 bps and the Israel sovereign cds is down -1.54% to 208.44 bps. On the negative side, Coal, Alt Energy, Steel, Semi, Homebuilding, Road&Rail and Networking shares are under meaningful pressure, falling more than -1.5%. Oil is gaining +.3%. The 10Y T-Note Yield is falling -6 bps to 1.87%, which remains a concern. Major Asian indices were mostly higher overnight, led by a +1.4% catch-up move in the Nikkei. However, the Shanghai Composite fell -1.34% on diminished easing expectations and profit worries. Moreover, China’s ChiNext Index(China’s Nasdaq) plunged -6.1% last night and is now down -.44% ytd. The Germany sovereign cds is rising +3.4% to 104.17 bps, the France sovereign cds is gaining +4.64% to 219.33 bps, the Spain sovereign cds is gaining +3.51% to 408.33 bps, the Italy sovereign cds is gaining +2.02% to 504.17 bps, the UK sovereign cds is rising +2.2% to 93.50 bps and the Russia sovereign cds is rising +2.97% to 257.83 bps. The Italian/German 10Y Spread is rising +1.67% to 487.59 bps(still 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 falling -6.8% to -85.87 bps, which is back to mid-Oct. levels. The Libor-OIS spread is still very near 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 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. Shanghai Copper Inventories are up +124.3% in 5 days to the highest level since April of last year. Some of today’s weakness is related to JPMorgan’s(JPM) disappointing report, China’s weakness and a breakdown in the Greece debt talks. However, news of imminent European sovereign downgrades is having a substantial impact, which is surprising given how well-telegraphed this has been. The reaction in the 10-year is especially concerning. The yield never broke out during the big equity rally off the lows/improving economic data and is now close to a technical breakdown. I think overall equity investor complacency regarding the health of the global economy is still fairly high. The total put/call hit a low .56 into this morning's weakness, which is also noteworthy. 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. I expect US stocks to trade mixed-to-lower into the close on rising Eurozone debt angst, rising global growth fears, more shorting, earnings jitters, technical resistance and profit-taking.

Today's Headlines

Bloomberg:

• Greece Creditors Break Off Debt Talks. Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default. Proposals put forward by a committee representing financial firms have “not produced a constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement today. “Discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.” The government said the two sides will reconvene discussions in five days. Greek officials and the nation’s creditors agreed in October to implement a 50 percent cut in the face value of Greek debt, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. More than two months after the accord was announced, the two sides still need to agree on the coupon and maturity of the new bonds to determine the total losses for investors. “The current rescue program doesn’t work and requires a rethink that needs to be done very quickly to keep Greece from defaulting,” said Christian Schulz, a senior economist in London at Berenberg Bank. “The risk is high and the stakes are high: that Greece will be let go from the euro.”
  
• France Loses AAA as Greek Talks Break Down in Crisis Blow. France was stripped of its top credit rating by Standard & Poor’s and banks suspended talks with Greece over debt restructuring, the first blows this year to efforts aimed at stemming Europe’s fiscal turmoil. France’s AAA rating will fall by one level at S&P, Finance Minister Francois Baroin told France 2 television today. Slovakia, Italy and Austria are among other countries to be downgraded, European officials said. Germany will keep its top rating, a person familiar with the matter said. S&P may release its report at about 9 p.m. Brussels time.
  
• Euro Tumbles to Lowest in 16 Months Versus Dollar on S&P Downgrade Concern. The euro dropped, reaching a 16- month low versus the greenback, amid speculation Standard & Poor’s will downgrade the credit ratings of several countries in the 17-nation currency region today. The shared currency slid against 14 of its 16 most-traded peers tracked by Bloomberg, erasing weekly gains versus the dollar and yen. The euro tumbled to its weakest versus the yen since 2000 as talks between Greece and its creditor banks were put on hold. The Dollar Index (DXY) climbed as U.S. stocks fell after JPMorgan Chase & Co. said profit declined. “Coming into the weekend, people are going to be concerned that in the absence of the ability to trade, they are going to be stuck with something from Europe,” said Thomas Molloy, chief dealer at FX Solutions, an online currency-trading company in Saddle River, New Jersey. The euro weakened 1.2 percent to $1.2659 at 1:20 p.m. in New York. It touched $1.2624, the lowest level since Aug. 25, 2010, and was headed for a 0.5 percent weekly decline. The shared currency sank 1 percent to 97.35 yen and touched 97.20 yen, the weakest level since December 2000. The Japanese currency declined 0.2 percent to 76.90 per dollar.
• 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 increased eight basis points to 362.5 basis points at 5 p.m. in London. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings was 11 basis points higher at 727, after rising as much as 21 basis points, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 0.75 basis point to 171.75 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers was up 4.5 basis points at 270.5, after rising as much as 13 basis points, and the subordinated index climbed five to 485.
• Greece Planning Law That Could Force Investor Bond Swap. Greece plans to submit legislation on so-called collective-action clauses that could force holders of the nation’s debt to take part in a bond swap. “I don’t think today, but of course the information that such an adjustment will be submitted stands,” Pantelis Kapsis, a government spokesman, said in an interview with Athens-based radio station 9.84 today, according to an e-mailed transcript of his comments from his Athens office today. “This is a part of the discussions on the deal. It gives the legal ability to add these clauses.”
• Hungarian Bonds Drop Most in Week as IMF Demands 'Tangible Steps' on Debt. Hungary’s bonds fell the most in more than a week and the forint dropped after the International Monetary Fund said the country needs to take “tangible steps” on resolving policy issues before aid talks can be resumed. The currency depreciated 0.9 percent to 310.7 per euro by 4:50 p.m. in Budapest, paring its weekly gain to 1.2 percent. The government’s 10-year bonds slumped, lifting yields 12 basis points to 9.673 percent, the biggest rise since Jan. 4.
• European Stocks May Drop 10% in Next 3 Months, Goldman(GS) Strategist Says. European stocks may drop as much as 10 percent amid concern the region’s sovereign-debt crisis will harm the economy, before recovering in the second half of 2012, according to Goldman Sachs Group Inc. (GS) The Stoxx Europe 600 Index might decline to 225 in the next three months, Gerald Moser, Goldman Sachs’s London-based equity strategist, said at the bank’s Global Strategy conference in Zurich today. He expects the gauge to recover in the second half of the year to close at 250 to 270, a gain of as much as 20 percent from the trough. The index fell 0.6 percent to 247.97 at 3:09 p.m. in London today. “It will be a difficult year to navigate,” Moser said. “Investors are worried as there is a lot of uncertainty regarding the short-term outcome of the crisis, but we would expect equities to move higher on some resolution and a narrowing of spreads on a sustainable basis.”
• JPMorgan(JPM) Profit Falls on Trading, Investment Bank Revenue. JPMorgan Chase & Co., the largest U.S. bank by assets, said fourth-quarter profit fell 23 percent as trading revenue and investment-banking fees declined. Net income dropped to $3.73 billion, or 90 cents a share, from $4.83 billion, or $1.12, in the same period a year earlier, the New York-based company said today in a statement. Earnings matched the average estimate of 28 analysts surveyed by Bloomberg. Revenue in every investment-banking business fell from a year earlier, including an 18 percent drop in trading. The division’s total revenue fell 30 percent to $4.36 billion as corporate clients stayed on the sidelines on concern Europe’s debt crisis would lead to an economic slowdown. The drop was larger than Chief Executive Officer Jamie Dimon forecast in December, when he said investment-banking revenue would be “essentially flat” from the third quarter’s $6.37 billion.
• Import Prices in U.S. Fall in December. Prices of goods imported into the U.S. fell in December for the fourth time in the past five months as slowing global growth held down commodity costs. The 0.1 percent decrease in the import-price index followed a 0.8 percent gain in November, Labor Department figures showed today in Washington. Prices excluding fuel climbed 0.1 percent, the first increase in three months. For all of 2011, import prices climbed 8.5 percent, compared with a 5.3 percent increase the previous year. The cost of imported cars climbed 0.1 percent in December, and was up 3.7 percent in 2011, the biggest calendar year gain since 1993. Excluding autos, the cost of imported consumer goods rose 0.2 percent last month and was up 3.2 percent for the year, the most since 1990. Today’s report showed the cost of goods from China rose 0.1 percent in December, and was up 3.6 percent for the full year, the biggest gain since records began in 2003.
• Oil Declines to Three-Week Low. Oil dropped to a three-week low after two European Union officials said an embargo on Iranian crude imports may be postponed for six months. Crude fell as much as 1.4 percent after the officials said that the ban would be delayed to allow nations to find other supplies. International Atomic Energy Agency inspectors will go to Tehran to discuss Iran’s nuclear program, two diplomats with knowledge of the talks said. Oil also declined on a report that Standard & Poor’s is stripping France of its AAA credit rating. “Some of the geopolitical premium has come out of the price during the last two days,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The announcement that the EU sanctions would be delayed has had a major impact on the market.” Members of the Organization of Petroleum Exporting Countries including Saudi Arabia would be able to make up for a drop in Iranian supplies to Europe, former OPEC President Chakib Khelil said today on Bloomberg Television’s “On the Move.”
• China's Wen to Juggle Iran Oil Need With Saudi Ties on Persian Gulf Trip. China’s Wen Jiabao must balance his country’s need for Iranian crude with its budding energy partnership with Saudi Arabia on his first visit to the Gulf kingdom, a U.S.-based specialist in Middle East security said. The Chinese premier’s trip starting tomorrow comes amid signs that tighter economic sanctions may stop Iran, OPEC’s second-largest producer after Saudi Arabia, from selling its oil. Wen will also visit Qatar and the United Arab Emirates, fellow members of the Organization of Petroleum Exporting Countries, during the Persian Gulf tour ending Jan. 19. “China seems quite reluctant to get on the wrong side of Iran given the tensions existing in the region and Iran’s importance for its oil,” Paul Sullivan, a political scientist specializing in Middle East security at Georgetown University in Washington, said in a Jan. 11 e-mail.
• Apple Opens Suppliers' Doors to Labor Group. Apple Inc. (APPL) agreed to let outside monitors into factories of suppliers such as Foxconn Technology Group (2317) following at least 15 deaths at its Chinese parts makers. The world’s most valuable technology company joins Nike Inc. (NKE), Nestle SA (NESN) and Syngenta AG (SYNN) in turning to the Fair Labor Association, set up in 1999 to monitor workplace conditions globally in an initiative by former U.S. President Bill Clinton. Apple is the first technology business to sign up to the FLA as a participating company, the Washington-based body said today in a press release. Apple’s affiliation with the FLA highlights the risk to multinational companies’ brands due to difficulties in policing suppliers as they outsource manufacturing to cut costs.

Wall Street Journal:

• Crisis Live Blog: S&P to Cut France One Notch.
• Obama Proposes Merging Agencies. President Barack Obama on Friday proposed merging six agencies that focus on trade and commerce into one new department, following through on a promise he made a year ago.
• India OKs Prosecuting Web Firms for 'Unacceptable' Content. India's communications ministry Friday sanctioned the prosecution of Microsoft Corp.(MSFT), Google Inc.(GOOG), Yahoo Inc.(YHOO) and Facebook as well as 17 other companies over a complaint that their websites carry "unacceptable" content that could incite communal violence.
• Clifford Chance Highlights Euro Exit Perils For Derivatives. If any country were to leave the euro, holders of derivative contracts based in that country should submit claims in English or New York courts as soon as possible to avoid lengthy wrangling over jurisdiction issues.
• ECRI Leading Economic Index Still Rolling Over. (graph) Since this is Bad News Friday, let’s get this out of the way: The ECRI’s weekly leading index is falling again. The ECRI actually rose a tick this week to 121.2, but its four-week rolling growth rate, which smooths out weekly fluctuations, fell to -8.4%, the lowest since early November.

MarketWatch:

• Videogame Stocks Fall On Weak December Sales. Videogame stocks slipped across the board Friday as investors digested data showing the sector rang up a disappointing level of sales in December despite the typically strong holiday shopping season. Late Thursday, NPD Group reportedsales of game software through traditional retail outlets in the U.S. fell by 14% during the month, compared to the same period at the end of 2010.

CNBC.com:

• Apple(AAPL) Finds Environmental Violations in China Suppliers. Apple released a comprehensive audit of its major suppliers on Friday, saying it discovered a number of environmental violations in plants in China. The Cupertino, Calif.-based company, notorious for keeping its supply chain a secret, also for the first time released a list of its major suppliers.
• Consumer Sentiment Jumps to Highest Since May.
• Jamie Dimon: Regulators Undermining Economic Objectives. Regulatory policies are badly undermining the economic objectives of governments around the globe by hampering bank activity, JPMorgan Chase chief executive Jamie Dimon said in a conference call discussing fourth-quarter earnings Friday morning. “Regulatory policy is completely contradictory to government objectives,” Dimon said, citing restrictions on trading and new capital regulations as regulatory sources of slower economic growth. Dimon said that although regulators have provided additional clarity on new capital rules, the clarifications are have demonstrated that the capital rules are “bad.”

Business Insider:

• Dozens Of Industrial Plants Expected To Close Each Month In 2012. (graph)
• Suddenly, People Are Talking About This Great US Treasury Conundrum. (graph)
  

Zero Hedge:

• Toscafund: "Greece Exit Would Provoke European Social Unrest, Hyperinflation, And A Military Coup".
• Thawing The Cold War: Russia Found To Be Supplying Syria With Weapons.
• ECB Buying Saves Europe From Cliff's Edge For Now.
  

Seeking Alpha:

• 15 Medical Stocks Hedge Funds Are Bullish About.

Wall Street All-Stars:

• What the Market Are Missing About Europe's Crisis Right Now.

Reuters:

• PBOC Branches Ask Banks Not To Front-Load Lending - Sources. China central bank regional branches have asked banks to refrain from lending too much in the early part of the year -- a time when banks typically boost loans to lay a foundation for good operational results for the year, banking sources said on Friday. The Shanghai headquarters of the People's Bank of China, for example, has asked banks in the city not to let first quarter new loans exceed 40 percent of total new loans they extended in 2011, the sources told Reuters.
• GE(GE) Ordered to Defend Lawsuit Tied to 2008 Financial Crisis. A federal judge refused on Thursday to throw out a lawsuit accusing General Electric Co and its chief executive of misleading investors about the conglomerate's financial health and exposure to risky debt during the 2008 financial crisis. The decision by District Judge Richard Holwell in Manhattan keeps alive litigation seeking to hold the company responsible for investor losses during a six-month period when its stock price fell to about $10 from about $26, causing its market value to tumble by more than $150 billion. Investors claimed that GE withheld information regarding its health and the health of its GE Capital finance arm, including exposures to subprime and other low-quality loans. They also said GE misleadingly touted itself as being safer than rivals, despite the effects of the financial crisis. Holwell also let stand some claims accusing bank underwriters of omitting statements from offering documents for a $12.2 billion GE stock offering in October 2008.
• Patriot Coal(PCX) to Idle Mines as Met Coal Demand Dips. Patriot Coal Corp said it will idle two production units and three contractor-operated mines in West Virginia as export demand for metallurgical coal wanes amid a weak global economy. St. Louis, Missouri-based Patriot Coal's shares fell 11 percent in morning trade Friday on the New York Stock Exchange. The stock was one of the biggest percentage losers on the exchange.

Financial Times:

• Clients Spotted in the CDS Market. That’s Niall Cameron, the global head of credit trading at HSBC, being quoted by Chris Whittall of IFR. The article provides anecdotal evidence that actual clients (non-dealers) might be getting more involved in the market lately. Like so:

Telegraph:

• Expect European Bank Bailouts. (video) Martin Gray, manager of the £723m Miton Special Situations Fund, which has made a 287pc return since launch in 1997, tells Robert Miller that some European Union's banks will need to be nationalised.
• S&P Downgrade and Debt Crisis: Live.
  

Les Echos:

• France debt rating will be cut 1 level by S&P, while Spain, Italy and Portugal will see their ratings cut by 2 levels. S&P will make the announcements after the U.S. market close.

Yonhap News Agency:

• South Korea, U.S. Stand Firm Against North Korea's 'Provocation': Foreign Minister. South Korean Foreign Minister Kim Sung-hwan said Friday the country's alliance with the United States is more firm than ever to help deter any "provocation" from North Korea, amid concerns over stability in the North after the death of Kim Jong-il.

Bear Radar

Style Underperformer:

• Small-Cap Value (-1.25%)

Sector Underperformers:

• 1) Coal -7.30% 2) Steel -2.30% 3) Road & Rail -2.21%

Stocks Falling on Unusual Volume:

• GCO, C, JPM, IMO, CPNO, OTEX, JDAS, MDSO, RDEA, VOD, EA, ICFI, SFLY, GLNG, CARB, CRUS, AMTD, DMND, CHKP, UTHR, BMRN, SGEN, SBAC, FARO, RPV, FTE, VOD, JXI, ACI, XES, CNX, NRT, USG and CVD
  

Stocks With Unusual Put Option Activity:

• 1) LINE 2) ESV 3) CNX 4) NTAP 5) NUE
  

Stocks With Most Negative News Mentions:

• 1) DMND 2) VMW 3) SCHW 4) BHI 5) MS
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Growth -.90%

Sector Outperformers:

• 1) Gaming +.44% 2) Restaurants -.30% 3) Tobacco -.31%

Stocks Rising on Unusual Volume:

• PLCE, ACHN, ROVI, CTRP, NFLX, IDIX, SODA, GGC and CVI
  

Stocks With Unusual Call Option Activity:

• 1) HCA 2) HUM 3) LINE 4) VOD 5) IVN
  

Stocks With Most Positive News Mentions:

• 1) GD 2) NUAN 3) SWY 4) CLB 5) CTXS
  

Charts:

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

Friday Watch

Evening Headlines

Bloomberg:

• Greek Euro Exit Weighed by German Lawmakers as Process Seen as Manageable. Lawmakers from Chancellor Angela Merkel’s party are stepping up pressure on Greece as it struggles to meet the terms of its second bailout, saying that a Greek exit from the euro region would be manageable. The comments by senior members of Merkel’s Christian Democratic Union, made before a meeting of the CDU leadership that begins today, keep the focus on the Greek government as it strives to reach a debt-swap deal with private creditors that Merkel has said must be struck to win more aid. They are also a challenge to the chancellor’s public stance as she steers European efforts to keep the 17-member single euro area intact. Such “threats” should be taken seriously, said Moritz Schularick, an economy professor at the John F Kennedy Institute of Berlin’s Free University. “The costs of rescuing the euro are so outrageous it’s no surprise that Merkel’s lawmakers are beating the drum on what’s at stake,” he said by phone. “At some point, a euro exit may become a real option. That wasn’t the case before.” Michael Meister and Michael Fuchs, both Christian Democratic Union deputy parliamentary caucus leaders, called into question Greece’s future in the euro zone in separate interviews, saying that crisis-fighting bulwarks introduced since Greece tapped aid in 2010 have made contagion “significantly” less likely.
• China Stocks Drop Most in a Month as Monetary Easing Hopes Wane. China’s stocks fell, dragging the benchmark index to its biggest loss in four weeks, as speculation the government would loosen monetary policies waned. Gemdale Corp. paced losses by developers after the China Daily said Beijing will restrict home purchases. CSR Corp. and China CNR Corp., the nation’s biggest train makers, declined more than 2 percent as the China Business News said the railway ministry may spend less on new locomotives. Changjiang Securities Co. and Huatai Securities Co. fell after net income slumped last year. “An immediate reserve-ratio cut probably won’t come soon given policy makers’ concern about a possible rebound in inflation,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “The tight liquidity condition won’t change soon. Earnings risks have yet to be fully exposed with the reporting season kicking off.” The Shanghai Composite Index dropped 40.20 points, or 1.8 percent, to 2,234.81 at the 11:30 a.m. local-time break. The CSI 300 Index declined 2 percent to 2,387.30. The ChiNext index of Shenzhen-listed start-up companies tumbled 5.6 percent. A gauge tracking property stocks on the Shanghai Composite lost 2.2 percent. Gemdale slipped 3.5 percent to 5.02 yuan. Poly Real Estate Group Co., China’s second-largest developer by market value, fell 2 percent to 10.18 yuan.
  
• Obama Sends Notices to Raise Debt Ceiling. President Barack Obama formally notified Congress today that that the government needs another $1.2 trillion in borrowing authority. The written certification to raise the debt ceiling to $16.394 trillion, part of an August agreement between the White House and Congress to raise the limit in three steps, starts a 15-day clock for lawmakers to consider and vote on a joint resolution disapproving of the increase. Obama has veto power over any disapproval resolution that clears both chambers. The U.S. House is expected to vote on a resolution of disapproval on Jan. 18, said Laena Fallon, a spokeswoman for Majority Leader Eric Cantor, a Virginia Republican. The Senate is scheduled to return the following week. The law calls for Obama to notify Congress when the debt came within $100 billion of the current $15.194 trillion limit. While the threshold was reached Dec. 30, when the president was in Hawaii and Congress was on holiday break, Obama agreed to a request from congressional leaders to delay the notification request, ensuring the deadline for congressional action didn’t lapse before lawmakers returned to Washington. A spokesman for House Speaker John Boehner used the request to criticize Obama on the budget and the deficit. “This request is another reminder that the president has consistently punted on the tough choices needed to rein in the deficit and protect important programs for American seniors from going bankrupt,” Brendan Buck said in an e-mail. The deficit in fiscal 2011 was $1.3 trillion and the White House budget office in September forecast it will be $956 billion in the current fiscal year.
• Oil Set for Biggest Weekly Drop in a Month on Iran Embargo Delay. Oil headed for the biggest weekly decline in four in New York after a proposed European Union embargo of Iranian crude imports against the nation’s nuclear program was said to be facing a delay of six months. Futures were little changed after sliding the most in two weeks yesterday to the lowest settlement this year. The embargo postponement will allow countries such as Greece, Italy and Spain to find alternative supplies, according to an EU official with knowledge of the talks. Oil also fell after a report showed U.S. retail sales rose less than forecast in December, signaling an economic slowdown in the world’s biggest crude consumer. “Oil is probably moving downward to $95 to $90 in the short-term” after news of the delay, said Tetsu Emori, a commodity fund manager at Astmax Ltd. in Tokyo. An embargo will be hard to put in place “as it is quite difficult for countries to shift and find alternatives even from other Middle Eastern countries,” he said. Crude shipments from OPEC will reach the highest level in almost a year amid rising exports from Libya, according to tanker-tracker Oil Movements. The Organization of Petroleum Exporting Countries will export 23.66 million barrels a day in the four weeks to Jan. 28, the most since Feb. 12, 2011, the Halifax, England-based researcher said yesterday in an e-mailed report.
• China's Forex Reserves Drop for First Quarter Since 1998. China’s foreign-exchange reserves posted the first quarterly decline in more than a decade, as foreign investment moderated, the trade surplus narrowed and investors withdrew capital amid the global financial crisis. The holdings, the world’s biggest, fell to $3.18 trillion at the end of December from $3.2 trillion at the end of September, according to People’s Bank of China data released in Beijing today. That was the first quarterly contraction since the second quarter of 1998, according to data compiled by Bloomberg.

Wall Street Journal:

• Iran to Let In U.N. Atomic Inspectors. Iran agreed to host a high-level team of United Nation's nuclear inspectors later this month, Western diplomats said, a surprise development that could help to curb building tensions with the West. The diplomats on Thursday said Iran had tentatively agreed to receive a delegation from the United Nation's International Atomic Energy Agency headed by the agency's chief weapons inspector, Herman Nackaerts. The diplomats, who are based in Vienna, said the visit was tentatively set for Jan. 28.
  
• You Might Just Get Another Chance to Buy Some of Those AIG Mortgage Bonds. The Federal Reserve Bank of New York is likely to resume selling the risky mortgage bonds taken on from American International Group at the height of the financial crisis as early as next week, according to investors who have been briefed by dealers.
• Video Poker Giant Bets $500 Million on Facebook Game Maker Double Down. Seattle-based Double Down Interactive (DDI) has been acquired by video poker giant International Game Technology(IGT) for $500 million.
• U.S. Opens Diamond Foods(DMND) Inquiry. Federal prosecutors have opened an inquiry into whether financial practices at Diamond Foods Inc. involved criminal fraud, people familiar with the matter said, a development that raises the stakes for the snack maker and could jeopardize its acquisition of Pringles from Procter & Gamble Co.
• Economists Split Over Additional Fed Action. Economists are split on whether the Federal Reserve will take further action this year, as they forecast slow but steady improvement in economic growth and employment through 2012. In the latest Wall Street Journal survey, 30 of the 54 participating economists, not all of whom answer every question, say the central bank will refrain from another round of large-scale bond buying in 2012. "The economy is on firmer ground," says Allen Sinai of Decision Economics."The unemployment rate declining suggests the Fed will just stay on hold."
• Is Tennis Getting Too Soft? Tennis has a new ball and it's making a lot of kids, parents and coaches angry. The ball is the same size as a regular tennis ball, but it's half yellow, half green and softer, and doesn't bounce as high. It's tough to hit winners with it or put spin on it. At a 10-and-under tournament in Lakewood, Calif., last weekend, it made kids swing, swing and swing some more until their arms were sore and they wanted to throw their rackets and scream. Another thing about the green ball: It's part of an international plan to save tennis, which has struggled to compete with sports like soccer, football and basketball. As of Jan. 1, the green ball is required for all 9-and 10-year-old tournaments throughout the world, as legislated by the International Tennis Federation in Appendix VI of the rules of tennis. The ITF also recommends, but does not require, that children eight and under use an even softer ball that is orange, as well as smaller rackets and smaller courts. There's a large red foam ball for 6-year-olds.
• Corporate Pensions Are in Trouble Too. Accounting analyst David Zion at Credit Suisse, in his latest report, points to yet another kind of havoc wrought by low interest rates: Corporate pension plans have hit their lowest year-end funding levels on record. When interest rates are low, companies—like all other savers—have to set more money aside in order to meet their future spending needs. At year-end 2008, reports Zion, pension plans for companies in the Standard & Poor’s 500-stock index were only 79% funded, meaning they were $279 billion short of what they needed to cover the liabilities of paying future pensions to their workers. With rates having dropped even lower thanks to the Federal Reserve’s policy of “quantitative easing,” the shortfall has hit $458 billion; the pension liabilities of companies in the S&P 500 are only 74% funded, Zion estimates.
• Bank of America(BAC) Ponders Retreat. Bank of America Corp. has told U.S. regulators that it is willing to retreat from some parts of the country if its financial problems deepen, according to people familiar with the situation. Executives at the Charlotte, N.C., financial giant put the potential move on a list of emergency scenarios submitted to the Federal Reserve last year, these people said. While people close to Bank of America insist that no retreat is imminent, even the possibility of selling branches and losing customers it spent huge sums to lure underscores the depth of its problems.
• Bank Cuts Reflect New, Leaner Era. The investment-banking industry, notoriously prone to cyclical hiring and firing during booms and busts, is in the midst of a retrenchment that may be more far-reaching. Thursday's announcement that Royal Bank of Scotland Group PLC will eliminate thousands of jobs and exit a handful of business lines in its investment bank highlights the significant reversal under way at some banks in Europe that, until recently, aspired to compete on the same level as traditional heavyweights like Goldman Sachs Group Inc.
• Bloomberg Aims at Teacher Union. Mayor Proposes Salary Increases for Educators Who Meet Standards, Prompting Immediate Resistance From the UFT. New York City Mayor Michael Bloomberg aimed squarely at the teachers union on Thursday in an address that proposed rewarding the best educators with a $20,000 salary boost and bypassing labor in a continuing battle over how to measure teacher performance.

Barron's:

• JDA Software(JDAS) Drops 12%: U.S. Retailers Cutting Back On Spending. Shares of JDA Software Group (JDAS) are down $3.76, or almost 12%, at $29.04 in late trading after the company this afternoon warned that its expects Q4 revenue to come in below analysts’ expectations. The company now sees revenue in the three months that ended in December of about $173 million, below the consensus $181.6 million.

MarketWatch:

• Dire Straits in China's Pearl River Delta. Lack of financing has some small Guangdong factories in death grip. More than three years since the onset of the global financial crisis, small and medium-sized enterprises in the Pearl River Delta are finding themselves in tough times. With a new model for the “world’s factory” yet to materialize, many are struggling to survive and others have gone out of business. Pessimists say the economic model that served the region in South China’s Guangdong Province so well for the past three decades is at death’s door.
• China State-Run Firms: Stifling Nation's Vitality. In recent years, the enormous profits of state-owned enterprises (SOEs), once widely considered a good thing, have come under public scrutiny. The core of the problem is monopoly. SOE bigwigs are rapidly expanding their monopolies, relying on growing scale and rising prices to extract huge profits. But these companies bring little technical or organizational innovation to the table.

Business Insider:

• Why Bill Gross Is A Treasury Bull These Days.
• A Russian Ship Just Delivered 35 Tons Of Arms To Syria.
• WOW: Total Collapse In Rail Traffic To Start The Year. (graph)
• This Mother Of An Anti-Trust Lawsuit Could Slam Bank Of America(BAC), Major Banks, Credit Card Companies.

Zero Hedge:

• Why Do Zombie Banks Hate Writing Off Bad Loans? Jonathan Weil Explains.
• Why QE3 Won't Help "Average Joe".
  

CNBC:

• SEC Tightens Leash on Exchanges Post 'Flash Crash'.
• India to Buy Iran Oil Despite US Sanctions: Minister. India will keep doing business with Tehran and sees no reason to seek a waiver from the United States that would protect buyers of Iranian oil from a fresh round of sanctions, a senior Indian cabinet minister said on Thursday. "Why should we seek waiver from the U.S.? We have done business with Iran earlier and will continue to do business," the minister, who has knowledge of the matter but did not want to be named as the issue is confidential, told Reuters.

LA Times:

• Another ATF Weapons Operation Comes Under Scrutiny. Members of Congress want to see whether White Gun, like Fast and Furious, lost track of firearms that ended up with Mexican criminals. "Apparently guns got away again," said one source close to the investigation, led by Rep. Darrell Issa (R-Vista) and Sen. Charles E. Grassley (R-Iowa). "How many got into Mexico, who knows?"

Washington Post:

• Fed's Image Tarnished by Newly Released Documents.

InsiderMonkey:

• Hedge Fund Outflows Rose to 4.84%, Inflows Rose to 3.96%.

Rasmussen Reports:

• 37% Give Obama Positive Ratings on Economy.

Reuters:

• U.S. Slaps Sanctions On China State Oil Trader Over Iran. The United States on Thursday imposed sanctions on China's state-run Zhuhai Zhenrong Corp, which it said was Iran's largest supplier of refined petroleum products, as it sought to impress on Beijing and Tehran its resolve to increase economic pressure over Iran's nuclear program.
• Apple(AAPL) to Halt Sales of Latest iPhone in China Retail Stores. Apple Inc said on Friday it will stop selling its latest iPhone in its retail stores in Beijing and Shanghai to ensure the safety of its customers and employees. The iPhone 4S, which went on sale early Friday, caused a near-riot in one of Apple's Beijing retail stores. "The demand for iPhone 4S has been incredible and our stores in China have already sold out," an Apple spokeswoman said. "Unfortunately, we were unable to open our store at Sanlitun due to the large crowd. And to ensure the safety of our customers and our employees, iPhones will not be available in our retails stores in Beijing and Shanghai for the time being," she said. Customers will still be able to order the smartphone online or purchase it through Apple's partner in China, China Unicom .
• Italian Bond Sale to Test Shift in Market Mood. Troubled borrower Italy tests investor appetite for its longer-term debt for the first time this year on Friday, seeking to sell up to 4.75 billion euros of bonds and match the success of Thursday's Spanish bond sale. Domestic demand fuelled by cheap European Central Bank funds, which helped Spain sell twice the planned amount of bonds on Thursday at lower rates, is expected to drive Italian three-year costs down at the sale. "All eyes will be on the BTP auction to see if the strong demand evident at the Spanish auction can be repeated," Citi analysts said in a note. Citi said the market would digest the sale relatively easily but that demand was unlikely to be as strong as for Spain.

Passauer Neue Presse:

• Economic developments in the euro region will be "very unfavorable" this year, citing an interview with Peter Bofinger, a member of Chancellor Angela Merkel's council of economic advisers. Greece needs further financial help to avoid a "disorderly" insolvency and a chain reaction, Bofinger is cited as saying.

Antaranews.com

• Indonesian Automobile Market to Grow 5% in 2012. The Indonesian automobile market is estimated to grow by three to five percent in 2012 after a 17 percent increase in 2011, Astra Daihatsu Motor President Director Sudirman MR, said here Thursday. The estimate was made after considering two factors, namely the European crisis that had an impact on liquidity, and gasoline restriction and conversion in April 2012. "We have several considerations, especially the effect of gasoline restriction and conversion which is still unclear and we will feel the impact after the policy has been applied," Sudirman said.
  

liveMint.com:

• Nomura Puts $500M India Infrastructure Fund On Hold. The uncertain macroeconomic environment has triggered the decision, said the two officials, who spoke on condition of anonymity. The firm had planned to go on roadshows in October, but it is yet to start talks with potential investors, said one of the officials.

China Daily:

• Beijing Mayor Guo Jinlong pledged to restrict property purchases and build more government subsidized housing this year to cool the real estate market.
• China's Communist Party is facing a more complicated international and domestic environment, the People's Daily said in a front-page commentary today. Societal views are "profoundly" changing, the commentary said. Party officials must keep a "pure mind," according to the commentary.
  

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -.50% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 203.0 -4.5 basis points.
  
• Asia Pacific Sovereign CDS Index 159.50 +.5 basis point.
• FTSE-100 futures +.58%.
  
• S&P 500 futures +.11%.
  
• NASDAQ 100 futures +.19%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (JPM)/.91

Economic Releases
8:30 am EST

• The Import Price Index for December is estimated to fall -.1% versus a +.7% gain in November.
  
• The Trade Deficit for November is estimated to widen to -$45.0B versus -$43.5B in October.
  

9:55 am EST

• The Preliminary Univ. of Mich. Consumer Confidence reading for January is estimated to rise to 71.5 versus 69.9 in December.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lacker speaking, Fed's Evans speaking and the Fed's Bullard speaking could also impact trading today.
  

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

Stocks Rising into Final Hour on Less Eurozone Debt Angst, Less Financial/Tech Sector Pessimism, Short-Covering, Lower Energy Prices

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 20.87 -.86%
  
• ISE Sentiment Index 116.0 +3.57%
  
• Total Put/Call .83 +5.06%
  
• NYSE Arms 1.14 +55.77%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 115.02 -2.28%
  
• European Financial Sector CDS Index 246.66 -3.77%
  
• Western Europe Sovereign Debt CDS Index 370.50 -1.49%
  
• Emerging Market CDS Index 304.98 -1.92%
  
• 2-Year Swap Spread 35.0 -3 bps
  
• TED Spread 55.0 -1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -80.0 +7 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .02% +1 bp
  
• Yield Curve 169.0 +1 bp
  
• China Import Iron Ore Spot $142.20/Metric Tonne unch.
  
• Citi US Economic Surprise Index 77.40 -10.4 points
  
• 10-Year TIPS Spread 2.03 +1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +19 open in Japan
• DAX Futures: Indicating +31 open in Germany

Portfolio:

• Slightly Higher: On gains in my Tech and Biotech sector longs
  
• Disclosed Trades: Added to my (SCO) long, took profits in an Ag long
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 trades slightly above its late-Oct. high, despite Eurozone debt angst, some earnings disappointments, disappointing US economic data, rising global growth fears and high energy prices. On the positive side, Defense, Alt Energy, Oil Tanker, Disk Drive, Networking and Construction shares are especially strong, rising more than +1.0%. Cyclical shares are outperforming again. Copper is rising +2.8%, the UBS-Bloomberg Ag Spot Index is falling -2.4% and Oil is falling -2.2%. Major European stock indices were mostly higher today, led by Italy’s +2.1% gain. However, France and the UK were slightly lower. Spanish shares, the worst-performing in Europe ytd(-1.62%), were flat on the day. The Bloomberg European Bank/Financial Services Index rose +1.2%. Overall, given the improvement in credit gauges and bounce in the euro today, I am surprised European equities did not trade better. The Germany sovereign cds fell -4.92% to 100.67 bps, the France sovereign cds is falling -4.94% to 209.33 bps, the Spain sovereign cds is down -4.66% to 394.50 bps, the Italy sovereign cds is down -4.41% to 494.17 bps and the UK sovereign cds is down -3.32% to 91.33 bps. On the negative side, Energy, Hospital, REIT, Computer Service and Oil Service shares are under pressure, falling more than -.75%. Gold is gaining +.5% and Lumber is falling -1.8%. The 10Y T-Note Yield is rising +2 bps to 1.92%, but is still not confirming the recent equity rally and better US economic data, which remains a concern. Major Asian indices were mostly lower overnight despite a better CPI in China, led down by a -.74% drop in Japanese shares. The Nikkei has lagged the rest of Asia so far this year, falling -.82% ytd. The China sovereign cds is rising +1.98% today to 149.55 bps and has not improved with other cds over the last week. The Italian/German 10Y Spread is falling -7.24% to 479.64 bps(still 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 +11.0% to -80.37 bps, which is back to mid-Sept. levels. The Libor-OIS spread is still very near 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 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. The AAII % Bulls rose to 49.14 this week, while the % Bears rose to 17.18. Overall, investor sentiment remains too bullish given the macro backdrop, in my opinion. Leadership quality and volume remain poor. The surge in jobless claims, while only one week, is a big negative. Much of the recent market rally, led by homebuilders and financials, has been predicated on the notion of a meaningfully improving jobs market. It is also noteworthy that Lumber is breaking down technically to a new 52-week low and has declined -12.4% since Dec. 29. 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. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial/tech sector pessimism, short-covering, lower energy prices and declining Eurozone debt angst.