Today's Headlines

Bloomberg: 

• Fitch Says Top AAA Sovereign Ratings Under Pressure in 2013. Fitch Ratings said its AAA credit rankings on France, the U.S. and the U.K. are likely to come under pressure this year due to slow economic growth and high debt levels. The three nations, which all have a negative outlook from the company, have seen gross domestic product struggle to recover from the global financial crisis while debt levels have increased amid efforts to spur growth. A failure of U.S. lawmakers to raise the nation’s debt ceiling would prompt a “formal review” of its credit rating, Fitch said in a press release today. “Triple A sovereigns are under threat,” Ian Linnell, Fitch’s analytical group manager, said at a briefing in London as the company published its European Credit Outlook. “Debt-to- GDP ratios are significantly high,” compared with previous periods, he said. “In particular the U.S., France and the U.K. all have negative outlooks, reflecting a combination of a challenging fiscal position and low-to-negligible growth." 
• Euro Extends Losses as Juncker Says Currency ‘Dangerously High’. The euro extended losses against the dollar and yen as Luxembourg Prime Minister Jean-Claude Juncker said the shared currency’s foreign-exchange rate is “dangerously high.” Juncker, who leads the group of euro-area finance ministers, spoke at an event in Luxembourg. Japan’s currency gained earlier for the first time in five days against the dollar and the yen on bets its drops were excessive. The Swiss franc slid to a 13-month low versus the euro as signs Europe’s debt crisis is easing cut demand for the currency as a haven. “If the exchange rate is very high, that’s going to hurt trade and weigh on growth in the euro zone through trade channels,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. 
• German Economy Probably Contracted 0.5% in Fourth Quarter. Germany’s economy, Europe’s largest, probably shrank in the final quarter of 2012 as the sovereign debt crisis and weaker global growth damped exports and company investment. Gross domestic product may have dropped as much as 0.5 percent from the third quarter, the Federal Statistics Office in Wiesbaden said today in a preliminary estimate.
• Renault to Cut 17% of French Jobs on European Car Market. Renault SA (RNO), the automaker whose sales in Europe dropped the most in 2012, will cut 17 percent of its French workforce in the next four years to reduce costs as the region’s market sinks for a sixth straight year in 2013.
• Manufacturing in New York Region Contracts for Sixth Month. Manufacturing in the New York region contracted in January for the sixth straight month as the industry continued to face the effects of fiscal uncertainty in the U.S. and lackluster demand overseas. The Federal Reserve Bank of New York’s general economic index fell to minus 7.8 from a revised minus 7.3 in December. The median forecast of 54 economists in a Bloomberg survey called for a reading of zero, which signals no change in conditions.
• Copper Falls to 2-Week Low After Rio’s Beats Forecasts. Copper dropped to a two-week low as Germany’s economy slowed and U.S. lawmakers struggled to reach an agreement to raise the nation’s borrowing limit. Manufacturing in the New York region contracted for a sixth straight month in January and German growth slowed more than expected last year, separate reports today showed. President Barack Obama said at a White House news conference yesterday that he won’t negotiate over raising the debt ceiling, warning of economic calamity if Congress fails to increase the $16.4 trillion limit. 
• Lennar(LEN) Earnings Beat Analysts’ Estimates as Revenue Jumps. Lennar Corp. (LEN), the largest U.S. homebuilder by market value, reported fiscal fourth-quarter earnings that beat analysts’ estimates as revenue jumped 42 percent and profit margins climbed. Net income for the three months through Nov. 30 rose to $124.3 million, or 56 cents a share, from $30.3 million, or 16 cents, a year earlier, the Miami-based company said today in a statement.
• Intel(INTC) to GE(GE) Stuck in Earnings Slump as U.S. Rebound Stalls. U.S. companies from Intel Corp. to General Electric Co. are caught in an earnings slump that shows few signs of improving until midyear as a weak global economy and gridlock in Congress weigh on profits. Intel, the world’s largest semiconductor maker, is poised to report its biggest quarterly earnings drop in 3 1/2 years this week, based on analysts’ estimates compiled by Bloomberg. GE, the maker of jet engines and electrical generation equipment, may post its slowest profit growth in three quarters.
• India Says ‘No Business as Usual’ With Pakistan After Clash. Indian Foreign Minister Salman Khurshid said Pakistan’s failure to investigate the killing of Indian troops in Kashmir meant an end to “business as usual,” sharpening the country’s diplomatic offensive against its long- time rival. The two governments and their militaries have for more than a week traded accusations of deadly raids across the de facto frontier in the disputed Himalayan region, skirmishes that have become the biggest threat to normalizing ties since peace talks resumed two years ago.
• China Will ‘Gradually’ Implement Property Tax System, Wen Says. China should “gradually” establish a property taxation system that covers trading and ownership, Premier Wen Jiabao said during a visit to the finance ministry today. The comments were published in a statement posted on the central government’s website. In its more than two-year effort to curb the property market, the government has raised down- payment and mortgage requirements, imposed a property tax for the first time in Shanghai and Chongqing, increased building of low-cost social housing, and placed home-purchase restrictions in about 40 cities. Many Chinese cities are preparing to introduce property tax trials, the China Securities Journal reported on Nov. 16, citing unidentified people.

Wall Street Journal:

• IEA Head: Decline in Crude Production Unlikely. The head of the International Energy Agency Maria Van der Hoeven said Monday she doesn't see a further decline in global crude production in 2013, after top oil exporter Saudi Arabia made its deepest cut in almost three years. Saudi Arabia cut its oil production by close to 5% to 9.025 million barrels a day in December in response to lower demand chiefly from Asian customers, and comes amid expectations for lower demand for crude oil from the Organization of the Petroleum Exporting Countries this year. Asked by Dow Jones Newswires in an interview if the market is likely to see further production cuts this year, Mrs. Van der Hoeven said: "I don't think so." 
• Fed’s Plosser Thinks Policy Will Need to Be Curtailed Sooner Than Anticipated. Federal Reserve Bank of Philadelphia President Charles Plosser held firm in his view that the central bank’s loose monetary policy will need to be reined in sooner than anticipated to prevent an acceleration of inflation in the coming years. Mr. Plosser maintained his view that inflation would remain close to the Fed’s 2% target over the medium to long term, but added that “this expectation is based on my assessment that the appropriate monetary policy is likely to tighten more quickly” than the Federal Reserve Open Market Committee indicated in its latest statement.

MarketWatch.com: 

• Facebook(FB) loses 1.4 million active users in U.S. The social network may be reaching a saturation point. 
• ‘Animal spirits’ in full stride: investor appetite for risk rises to 9-year high, survey finds.

CNBC: 

• Why Debt Ceiling Is Far Scarier Than the 'Fiscal Cliff'. 
• First Shots Are Fired in Global 'Currency War'.

Zero Hedge: 

• Core Retail Sales Beat Despite Electronics And Appliance Sales Drop.
• Bridgewater AUM Rises To $142 Billion: Best And Worst Firm Trades Revealed. 
• Forget Previous Bubbles, This Is The Big Lebowski. 
• The Golden Age Of US Corporations Is Ending: S&P 500 Cash Has Peaked And Is Now Declining. (graph)
• Pictet's Four Horsemen Of The Euro-pocalypse. (graphs)

Business Insider: 

• LIVE: Facebook's Big Announcement. 
• REPORT: Obama Will Announce His New Gun Control Proposals Wednesday, And He Already Has A Plan To Get Around Congress. 
• Flailing French Government Is 'Wagging The Dog' In Mali. Normally, the media would have given it priority: French President François Hollande and Prime Minister Jean-Marc Ayrault have become more unpopular than ever before. But the poll was shoved into the background by France’s bombing campaign in Mali—which released an avalanche of positive comments and support from all sides, at least in France.
• America Is Being Directed By Self-Absorbed Single People Who Don't Care About The Next Generation.
• Facebook(FB) Isn't Cool Anymore (And That's What It Has To Fix Today).

Reuters:

• Exclusive: Morgan Stanley to defer bonuses for top earners - sources. Morgan Stanley is deferring 100 percent of bonuses for top-earning employees, according to three sources familiar with the situation. The deferral applies to all employees, except for financial advisers, making more than $350,000 and whose bonuses are at least $50,000 over a three-year period, one source said.
• SAP(SAP) falls short of expectations as Oracle makes running. Quarterly earnings from SAP AG fell short of expectations on Tuesday, showing the German business software maker failed to keep up with arch-rival Oracle Corp and sending its shares sharply lower. SAP's results, released more than a week before they had been scheduled, showed group revenue rose 12 percent to 5.06 billion euros ($6.8 billion), below an average analyst forecast of 5.17 billion, according to Reuters data. Operating profit rose more slowly than revenue, gaining 10 percent to 1.96 billion euros, resulting in SAP's operating margin narrowing by 0.8 percentage points to 38.8 percent in the three months through December.  
• U.S. taxes will rise for more than just the ultra-wealthy. The big numbers under discussion following the American Taxpayer Relief Act of 2012 have been $400,000, the income level where new marginal rates kick in for singles, and $450,000, for married couples filing jointly. But two limitations on tax breaks for high-income earners are returning at much lower income thresholds, amounting to something of a stealth increase. And there are few ways to get around them.
• US condemns comments by Egypt's Mursi in 2010 as Islamist leader. White House spokesman Jay Carney told reporters that the language Mursi had used was "deeply offensive" and that U.S. officials raised concerns with the Egyptian government on the matter. Nearly three years ago, Mursi, as an Islamist political leader, delivered a speech urging Egyptians to "nurse our children and our grandchildren on hatred" for Jews and Zionists, the New York Times reported. In a television interview months later, he described Zionists as "these bloodsuckers who attack the Palestinians, these warmongers, the descendants of apes and pigs," the newspaper said.

Telegraph:

• Fiat boss warns European car industry could 'unravel' unless EU co-ordinates capacity cuts. The boss of Italian carmaker Fiat has warned that Europe's embattled car industry will 'unravel' unless the European Union steps into co-ordinate urgent cuts in capacity across the continent.

DigiTimes: 

• Entry-level iPhone reportedly may adopt plastic chassis. Apple's(AAPL) rumored entry-level iPhone reportedly may adopt plastic for its chassis instead of reinforced glass or unibody metal as in the company's standard iPhone models, to save cost, according to sources from the upstream supply chain.

Bear Radar

Style Underperformer:

• Large-Cap Growth -.40%

Sector Underperformers:

• 1) Computer Hardware -.70% 2) Papers -.61% 3) Semis -.60%
  

Stocks Falling on Unusual Volume:

• LEAP, BBCN, CBSH, BODY, SYA, MFC, HL, GIVN, GMAN, LULU, ARMH, FISV, SAP, PSMI, LEN, LPL, NILE, WCG, MX, HTHT, INFY, HDB, SSL, AAPL, IMOS, SYA, AAWW, ED, ISRG and ALNY

Stocks With Unusual Put Option Activity:

• 1) XLB 2) XLI 3) KBH 4) USB 5) GT
  

Stocks With Most Negative News Mentions:

• 1) ALTR 2) AFL 3) REGN 4) MS 5) MFLX
  

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value -.01%

Sector Outperformers:

• 1) Education +1.29% 2) Gold & Silver +.64% 3) Hospitals +.34%
  

Stocks Rising on Unusual Volume:

• EXPR, SNTS, QLGC and SPLK

Stocks With Unusual Call Option Activity:

• 1) EXPR 2) FXY 3) DELL 4) DLTR 5) CMCSK
  

Stocks With Most Positive News Mentions:

• 1) M 2) LMT 3) JEC 4) UPS 5) CVX

Charts:

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

Tuesday Watch

Evening Headlines 
Bloomberg: 

• Draghi’s Bond Rally Masks Debt Doom Loop Trapping Spain. The bond rally that has sent Spanish borrowing costs to 10-month lows has distracted attention from the nation’s growing debt pile. Spain’s budget deficit probably exceeded 9 percent for a fourth year in 2012 as Europe’s highest unemployment rate, a third recession in four years and the cost of bailing out its banks offset almost all of the government’s 62 billion euros ($83 billion) of spending cuts and tax increases, according to economists at Societe Generale SA (GLE), Lombard Street Research and the Madrid-based Applied Economic Research Foundation. Total debt will reach 97 percent of gross domestic product this year, the International Monetary Fund forecasts. “This is a classic example of the doom loop,” Societe Generale’s London-based chief European economist, James Nixon, said in a Jan. 10 telephone interview. “They just aren’t making any progress.” 
• Berlusconi Gains in Polls as Italians Swayed by Media Blitz. Public support for Berlusconi’s coalition rose to 27.9 percent from 25.3 percent a month ago, according to a poll by EMG released by television station La 7 late yesterday. Front- runner Pier Luigi Bersani’s coalition of center-left parties slipped to 37.4 percent from 40.3 percent.
• RBS Said to Face $800 Million Libor Fine as Early as Next Week. Royal Bank of Scotland Group Plc may pay as much as 500 million pounds ($804 million) in fines next week to settle allegations traders tried to rig interest rates, two people with knowledge of the matter said.
• KeyBanc Cuts 2013 U.S. Steel-Scrap Forecast on Lower Demand. Scrap-price outlook lowered to $360 a long ton, from $410-$415, KeyBanc Capital Markets analysts led by Cleveland-based Mark Parr said today. Lower prices for seaborne iron ore and "tepid" demand for scrap exports signal lower prices, KeyBanc said. 
• Bernanke to Scrutinize QE Costs as Fed Assets Near Record. Federal Reserve Chairman Ben S. Bernanke indicated he will closely scrutinize the potential costs of asset purchases aimed at spurring economic growth as the Fed’s balance sheet approaches $3 trillion. “So far, we think we are getting some effect, it is kind of early,” Bernanke said today at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor. “We are going to continue to assess how effective” the program is “because it is possible that as you move through time and the situation changes that the impact of these tools could vary.”
• Bernanke Sees ’No Completely New’ Stimulus Method for Fed. Federal Reserve Chairman Ben S. Bernanke said he isn’t aware of any new stimulus tool for the central bank to use to try to boost growth. “As far as I’m aware, there’s no completely new method that we haven’t” already tapped, Bernanke said today in Ann Arbor, Michigan. The Fed lowered its benchmark interest rate to near zero in December 2008. Since doing so, its two main approaches for further easing have been communications about the outlook for interest rates and asset-purchase programs, both of which the central bank has used, Bernanke said. 
• IMF’s Zhu Says Japanese Debt Overhang Is Getting More Serious. International Monetary Fund official Zhu Min said Japan’s debt burden is becoming “more serious” as the government takes extra steps to stimulate growth in the world’s third-biggest economy. “The debt overhang is becoming more serious so they need to go further in fiscal consolidation,” Zhu, a deputy managing director at the IMF, said in an interview in Hong Kong today, where he’s attending the Asian Financial Forum. Japan announced 10.3 trillion yen ($115 billion) in fiscal stimulus last week as Prime Minister Shinzo Abe followed through on election pledges to weaken the yen, counter deflation and spur economic growth. The risk is that the nation’s debt burden, estimated by the IMF at 237 percent of gross domestic product last year, will lead to a surge in government bond yields.
• Yen Rallies as Japan Official Amari Comments on Currency. The yen rose against its major peers after comments by Japan’s economy minister stoked speculation the nation won’t try to spur further weakness in its currency. The yen ended four days of declines against the dollar after Akira Amari said an excessively weak currency has negative effects on livelihoods. The dollar traded near a 10-month low against the euro as Treasury Secretary Timothy F. Geithner warned that failure to raise the debt ceiling by early March would “impose severe economic hardship.” “The world has gone massively short yen on the idea that Japan is going to be more aggressive with its stimulus under the new prime minister,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp. (WBC) “Comments like Amari’s are likely to spook those holding yen shorts.”
• Morgan Stanley(MS) Said to Pare Asia Investment Bank Jobs by 15%.
• Blavatnik Says JPMorgan(JPM) ‘Stuffed’ Fund With Risky Mortgages. JPMorgan Chase & Co. filled a fund started by billionaire Leonard Blavatnik with risky mortgage securities instead of the conservative investments it was told to make, lawyers for Blavatnik told a New York state judge today. Blavatnik, 55, sued New York-based JPMorgan in New York state Supreme Court in June 2009, accusing the biggest U.S. bank by assets of putting more money into mortgage securities than his investment guidelines allowed.
• Lululemon(LULU) Drops as Quarterly Outlook Trails Analysts’ Estimates. Lululemon Athletica Inc. slid by as much as 10 percent after the Canadian yoga-wear retailer forecast fourth-quarter sales that trailed analysts’ estimates. The shares fell 7.7 percent to $66.70 at 4:38 p.m. in New York after earlier dropping to $65. The Vancouver-based company, which gained 63 percent in 2012, closed at $72.30 today.
• Apple(AAPL) IPhone Suppliers Decline on Report Orders Cut by 50%.

Wall Street Journal: 

• Obama Escalates Debt Fight. President Warns Congress He Won't Pay 'Ransom'; GOP Insists on Spending Cuts. President Barack Obama, facing a battle over raising the U.S. borrowing limit, made clear Monday that he sees no alternative to Congress voting for an increase and said that not doing so would be "irresponsible" and "absurd." Mr. Obama's confrontational message—that a debate over the debt limit was already harming the economy and could push the U.S. into a recession—was primarily aimed at Republicans, who plan to use the debt-limit vote as leverage to extract cuts in federal spending. But it also served as a warning to Democrats who have pressed him to increase the borrowing limit unilaterally by invoking executive powers.
• Wall Street Pay Gets Tougher Look. Hedge-Fund Manager Loeb Takes Aim at Morgan Stanley(MS) Compensation Levels.
• Hedge Funds' Manhattan Migration. Hedge-fund managers have long viewed New York as a prime location for business because of its appeal to employees and its status as one of the world's financial centers. It doesn't hurt that many managers call the island home. But in a difficult fundraising environment that favors funds that already oversee billions of dollars, startup managers have had to work harder to get noticed. More are betting they can catch the eye of potential investors by helping them avoid the journey up the New England Thruway.
• CBOE Revamping Board to Drop Traders. The biggest U.S. stock-options exchange is cutting ties between its board and traders on its markets following a federal probe into the exchange's regulation of its members, according to people close to the situation. CBOE Holdings Inc. plans to revamp its 15-member board by replacing three directors who also run trading firms with existing board members that have no direct ties to the options business, while adding several new directors.
• Behind Lance Armstrong's Decision to Talk. Last month, Lance Armstrong boarded a plane for Denver to do something several of his lawyers had advised against: sitting down for a private conversation with the head of the U.S. Anti-Doping Agency. 
• The Next Tax Increase. The new tax hike is barely law and Obama already wants more. In case you missed it, President Obama held a press conference Monday to make essentially two points: He won't negotiate with Republicans over raising the federal debt limit, and if Republicans want any spending cuts at any time in the next four years they'll have to raise taxes along with it. He won, so get used to it, chumps.

Fox News:

• CFTC Follows SEC in Permitting Offsets for Cleared CDS at ICE. A federal regulator gave the green light Monday for investors clearing credit derivatives trades with a unit of IntercontinentalExchange Inc. (ICE) to offset certain positions in the clearinghouse, a move that is expected to lead to savings for traders.

CNBC:

• JPMorgan(JPM) Ordered to Bolster Risk Management After London Whale. JPMorgan Chase has been ordered to take steps to correct poor risk management that led to a surprise trading loss last year of more than $6 billion. Federal regulators are also citing the nation's largest bank for lapses in control that allowed the bank to be used for money laundering.
• New York Has Gun Deal, With Focus on Mental Ills. Gov. Andrew M. Cuomo and legislative leaders tentatively agreed on Monday on a broad package of changes to gun laws that would expand the state’s ban on assault weapons and would include new measures to keep guns away from the mentally ill.
• Payroll Tax Hike Will Affect Your Paycheck and the Economy. (video)

Zero Hedge: 

• Geithner Unleashed: Sends Letter To Boehner, Warns Even Brief Default Would Be "Terribly Damaging", Channels Reagan.
• It Begins: Bundesbank To Commence Repatriating Gold From New York Fed.
• Despite Sanctions, Iran's Economy Limps Along.

Business Insider: 

• These Photos Show Why China's Smog Problem Is Completely Out Of Control.
• ANALYST: At This Point, We Have To Assume That The Government Is Going To Shut Down.
• HUSSMAN: The Current Syndrome Of Market Conditions Has A Long History Of Being Hostile For Stocks.
• The Winners And Losers Of The 2013 Consumer Electronics Show.
• An Eye-Popping Number Of People Support The NRA's Plan To Put Armed Officers In Schools.
• 'Sugar Daddy' Dating Website Says A Lot More College Girls Are Signing Up To Help Pay For School.

Reuters:

• Japan-China tension weighs on Nissan investments. Nissan Motor Co. will remain cautious about future Chinese investments including Infiniti brand production until the country's relations with Japan improve, Chief Executive Carlos Ghosn said on Monday. Ghosn was speaking at the Detroit auto show after the three main Japanese automakers all said an anti-Japan consumer backlash continued to depress their Chinese sales by between 16 and 30 percent. "Unless there's a complete normalization between the two countries, every single investment decision is going to have to be weighed" against the risk of further disruption, the Nissan chief told Reuters in an interview.
• Bremmer: Nasty economic battle looms for China & Japan. (video) Risk expert and Eurasia Group President Ian Bremmer says Japan and China have switched places as the world’s second and third largest economies and “ hate each other.” Bremmer adds with growing nationalism in each country and Japan’s position as a key U.S. alley, it’s one of the biggest financial risks of 2013.

Financial Times:

• EU berates China over steel subsidies. The European Commission has concluded that China is providing illegal subsidies to its steel manufacturers, paving the way for European companies to seek higher import tariffs on a wide range of Chinese products. The EU executive arm said Beijing was helping makers of organic coated steel – used in construction and to make household appliances – to obtain materials at below market prices, according to a report obtained by the Financial Times.

Telegraph: 

• When it comes to Europe, David Cameron represents the silent majority. Remember "Business for Sterling"? 

Evening Recommendations 
CSFB:

• Rated (INFI) Outperform, target $42.

Night Trading

• Asian equity indices are -.75% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 104.0 -2.0 basis points.

• Asia Pacific Sovereign CDS Index 83.50 -1.25 basis points.

• FTSE-100 futures -.21%.

• S&P 500 futures -.16%.

• NASDAQ 100 futures -.11%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (LEN)/.45
• (CBSH)/.72
• (FRX)/-.08
• (IBKR)/.21
• (LLTC)/.39 

Economic Releases
8:30 am EST

• Empire Manufacturing for January is estimated to rise to 0.0 versus -8.1 in December.
• Advance Retail Sales for December are estimated to rise +.2% versus a +.3% gain in November.
• Retail Sales Less Autos for December are estimated to rise +.2% versus unch. in November.
• Retail Sales Ex Autos & Gas for December are estimated to rise +.4% versus a +.7% gain in November.
• The Producer Price Index for December is estimated to fall -.1% versus a -.8% decline in November.
• The PPI Ex Food & Energy for December is estimated to rise +.2% versus a +.1% gain in November.

 10:00 am EST

• Business Inventories for November are estimated to rise +.3% versus a +.4% gain in October.

Upcoming Splits

• (HEP) 2-for-1
• (SGA) 4-for-3
  

Other Potential Market Movers

• The Fed's Plosser speaking, Fed's Kocherlakota speaking, Fed's Rosengren speaking, Eurozone trade data, Eurozone inflation data, weekly retail sales reports, Needham Growth Conference, Deutsche Bank Auto Industry Conference and the (FB) speak event could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and technology shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Slightly Lower into Final Hour on Rising Debt Ceiling Concerns, Eurozone Debt Angst, Profit-Taking, Consumer Discretionary/Financial Sector Weakness

Today's Market Take:

Broad Market Tone:

• Advance/Decline Line: Modestly Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• VIX 13.49 +.97%

• ISE Sentiment Index 98.0 -7.55%

• Total Put/Call .80 +12.68%

• NYSE Arms 1.05 -27.29%

Credit Investor Angst:

• North American Investment Grade CDS Index 89.16 +2.25%

• European Financial Sector CDS Index 131.58 +3.15%

• Western Europe Sovereign Debt CDS Index 98.90 +1.0%

• Emerging Market CDS Index 215.81 +.14%

• 2-Year Swap Spread 13.25 -.5 bp

• TED Spread 23.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -17.025 -.25 bp

Economic Gauges:

• 3-Month T-Bill Yield .06% unch.

• Yield Curve 1612.0 +1 bp

• China Import Iron Ore Spot $154.60/Metric Tonne -.19%

• Citi US Economic Surprise Index 8.90 -2.0 points

• 10-Year TIPS Spread 2.53 +2 bps

Overseas Futures:

• Nikkei Futures: Indicating +209 open in Japan

• DAX Futures: Indicating +9 open in Germany

Portfolio:

• Slightly Lower: On losses in my tech sector longs and emerging markets shorts

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Today's Headlines

Bloomberg:

• Euro-Area Industrial Output Unexpectedly Declined in Nov.Euro-area industrial production unexpectedly fell in November as declines in Italy and Spain offset a return to growth in Germany. Output in the 17-nation euro area dropped 0.3 percent from October, when it declined a revised 1 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast an increase of 0.2 percent, according to the median of 37 estimates in a Bloomberg News survey. Output fell 3.7 percent from the year-earlier period. Industrial output in Germany, Europe’s largest economy, increased 0.1 percent after a 2 percent decline in October, today’s report showed. French production rose 0.5 percent, while Italy and Spain reported declines of 1 percent and 2.5 percent, respectively. Energy production dropped 1.6 percent after a 0.3 percent decline in October, according to today’s report. Output of durable and non-durable consumer goods fell 1.1 percent and 1.2 percent, respectively, while production of capital goods rose 0.7 percent.
• Italy to Sell First New 15-Year Benchmark Bond in Two Years. Italy will sell a new 15-year benchmark bond for the first time in more than two years as the Treasury takes advantage of a plunge in borrowing costs to extend the life of the country’s debt. The Rome-based Treasury will place the new benchmark security via banks “in the near future and in relation to market conditions,” according to an e-mailed statement today. The Treasury hired Banca IMI SpA, Barclays Bank Plc, Credit Agricole SA (ACA), Goldman Sachs Group Inc., JPMorgan Chase & Co. for the sale.
• European Stocks Decline for Third Day; TNT Express Drops. European stocks declined for a third day as investors watched the U.S. financial-reporting season amid concern that recent gains in share prices have overshot the earnings potential. TNT Express NV (TNTE) plunged 41 percent after United Parcel Service Inc. abandoned its bid to take over the company. Electricite de France SA jumped the most in 13 months after France agreed to compensate EDF for the deficits from its mandatory public-service investments. The Stoxx Europe 600 Index fell 0.4 percent to 286.01 at the close in London, for the longest stretch of losses in four weeks.
• French Strikes in Mali Continue as Islamists Vow Revenge. French forces battled Islamist militants in Mali for a fourth day as a rebel spokesman said the intervention had opened the “gates of hell.” The insurgents are in retreat after French air strikes on the eastern edge of the front line between government- and rebel-controlled territory, France’s defense minister, Jean-Yves Le Drian, told reporters after a meeting of the inner “war Cabinet.” The situation is “evolving favorably,” he said, adding that the Islamist militants are “extremely well armed.”
• Lockhart Says Fed Balance Sheet Expansion Raises Concern. Federal Reserve Bank of Atlanta President Dennis Lockhart said while he’s supported the central bank’s open-ended bond purchases so far, further expansion of a record stimulus could complicate the eventual shrinking of the balance sheet. “Open-ended does not mean without bound,” Lockhart said in a speech in Atlanta. “I do think the growth of the Fed’s balance sheet could have longer-term consequences that are worrisome. While I’ve supported these policy decisions to date, I acknowledge legitimate concerns.”
• Small Firms to Remain Missing Link in U.S. Expansion: Economy. Small companies will probably remain a missing element of the current U.S. expansion as their role in driving growth continues to wane, according to economists at Citigroup Inc. (C) Payrolls at firms with fewer than 500 employees accounted for less than 50 percent of the total workforce for the first time in 2008 during the recession and have barely recovered, according to their research. After hovering close to 50 percent, small businesses’ share of gross domestic product began dropping in 2001 to reach about 45 percent in the latest available data. In contrast to the gains in confidence for their larger counterparts, sentiment among smaller companies remains at recessionary levels.
• China Shuts Factories in Latest Bid to Ease Hazardous Pollution. China shut dozens of factories and pulled government cars off the road to limit pollution that hit hazardous levels for a third day, as state media said Beijing was becoming more famous for its smog than its culture or food. China Daily said yesterday the city was becoming better know for “Beijing Cough” afflicting its residents than it was for Peking Duck or Peking Opera. With hospitals reporting more patients who complained of heart and respiratory ailments, the government orders were part of expanding efforts to tackle the pollution. The reaction reflects a growing awareness within the Communist Party that pollution is becoming a main instigator for social unrest, environmentalist Dai Qing said in an interview.
• JPMorgan(JPM) Seen Facing U.S., U.K. Actions on Whale Trades. JPMorgan Chase & Co. (JPM) is set to face new actions from U.S. and U.K. bank regulators as early as today for botched trades that cost the company more than $6.2 billion last year, according to two people familiar with the matter.

Wall Street Journal:

• Dell(DELL) Shares Jump On Buyout Chatter.

Fox News: 

• Obama demands debt ceiling hike, rejects negotiating cuts with GOP. President Obama used the final press conference of his first term to again warn congressional Republicans that he will not negotiate with them over the debt ceiling, saying that Washington must increase the limit to pay its bills and such brinksmanship would be “absurd” and “irresponsible.”

CNBC: 

• Obama’s ‘Crazy’ Spending Must Be Stopped: Norquist. (video)
• Americans Start Year With Less In Paycheck - Change Ahead? Your paycheck just got smaller. Will it change your spending habits?

Zero Hedge:

• Boehner Responds: "The American People Do Not Support Raising Debt Ceiling Without Reducing Spending".
• Hedge Funds Most Levered And Long Since 2004. 
• French Military Embarrassments Continue As Insurgents Grab More Territory In Mali. 
• The Geopolitical Hotspots Of 2013. 
• JP Morgan(JPM) Mortgage Bank Fires 529.

Business Insider:

• How To Protect Your PC From The Big Hacker Attack That's Going On Right Now. 
• The S&P 5-Day Rule That Traders Swear By Is Baloney.  
• MAP: The Geopolitical Hot-Spots In 2013.
• Bank Of America(BAC) Says These 17 Stocks Could Beat Expectations This Earnings Season. 
• Obama Really Wishes He Never Gave This Speech About The Debt Ceiling. 
• Suddenly, There's A Flood Of Concern From Investors That Britain Could Leave The EU.

NY Post:

• JCPenny(JCP) Stock Plunges After Bad Holiday. The flailing department store’s stock opened down about 8 percent after a Wall Street analyst recommended investors sell their holdings — although it recovered a bit in the afternoon to close down 4.7 percent, at $18.26. Penney’s sales at stores open at least a year plummeted more than 30 percent through most of the crucial holiday season, sources close to the company told The Post this week.

Reuters:

• TNT slumps as UPS pulls bid on EU veto. UPS (UPS) is dropping its $7-billion bid for Dutch delivery firm TNT Express (TNTE.AS) after European anti-trust regulators said they would veto it, leaving TNT's future in doubt and almost halving the value of its shares. Shares in U.S.-based United Parcel Service Inc gained 1.2 percent on Monday after the world leader in the sector said in a statement that European Union officials told it the EU executive Commission would veto the deal. An EU source confirmed that and said the decision could be made public as early as next week. 
• Hedge funds nurse heavy losses after UPS-TNT deal collapses. United Parcel Service's decision to abandon its 5.2 billion euro ($6.9 billion) bid for TNT Express has left hedge funds nursing potential losses of more than $700 million, as the Dutch delivery firm's shares slid. So-called merger arbitrage funds - which make money betting on the outcomes of corporate events including takeovers - are estimated to have owned around 30 percent of TNT shares before Monday's news European anti-trust regulators would veto it, several sources familiar with the sector said.  
• EURO GOVT-Spanish yields rise as dealers prepare for auctions.

Telegraph:

• Detroit motor show: Ford economist warns on America's finances. America must return its public finances to long-term health or risk the burgeoning recovery in the country's car industry, Ford's top economist has warned. The looming stand-off in Washington over lifting America's $16.4trillion (10.2trillion pound) debt ceiling was the chief shadow as the car industry gathered for its first show of the year in Detroit on Monday. "Today we don't have fiscal sustainability," said Ellen Hughes-Cromwick, chief economist at Ford. Failure to fix America's long-term debt problem "will generate a very weak period of economic growth."

Die Welt:

• EU Climate Rules Will Make Cars More Expensive. The planned limitation of cars' carbon dioxide emissions will increase the unit cost of building new vehicles by almost EU1,000, citing a study by ICCT.