Today's Headlines

Bloomberg:

• ECB Balance Sheet Increases to a Record $3.55 Trillion on Loans to Banks. The European Central Bank’s balance sheet soared to a record 2.73 trillion euros ($3.55 trillion) after it lent financial institutions more money last week to keep credit flowing to the economy during the debt crisis. Lending to euro-area banks jumped 214 billion euros to 879 billion euros in the week ended Dec. 23, the Frankfurt-based ECB said in a statement today. The balance sheet increased by 239 billion euros in the week and was 553 billion euros higher than three months ago. The euro weakened and stocks fell, halting a five-day advance in the Standard & Poor’s 500 Index, as the announcement highlighted risks from Europe’s debt crisis. “The market reaction is slightly incomprehensible,” said Jens Kramer, an economist NordLB in Hanover. “After that record liquidity injection it would follow that the balance sheet would swell. Seeing the figure in black and white, and the fear of what would happen to the ECB if a country defaulted, may have spooked the market.” The ECB last week awarded 523 banks three-year loans totaling a record 489 billion euros to encourage lending to companies and households and prevent a credit shortage. Barclays Capital estimates the loans injected 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. So far, banks are parking the money back at the ECB. Overnight deposits at the central bank increased to an all- time high of 452 billion euros yesterday.
• Euro Falls to 10-Year Low Against Yen as ECB Balance Sheet Reaches Record. The euro dropped against the yen to the lowest level since 2001 as the European Central Bank’s balance sheet soared to a record after it lent regional banks more money last week to keep credit flowing. The 17-nation currency fell against the dollar to the least since January as concern increased that the region’s sovereign- debt crisis will curb growth, even as rates fell at an Italian bill sale. The dollar gained as stocks dropped, boosting demand for haven assets. The yen strengthened after a U.S. Treasury report criticized Japan for intervening in the currency market and as economic reports signaled slowing economic growth. “We’re still so far from being out of the woods that even on a day of being positive, people decided that the euro should continue to fall,” said David Mann, regional head of research for the Americas at Standard Chartered Plc. in New York. “It’s quite a sharp rise in the ECB balance sheet. It’s concern about monetization already on the way in Europe.” The euro dropped 0.9 percent to 100.91 yen at 12:57 p.m. in New York. It touched 100.73 yen, the lowest level since 2001. The shared currency fell 1 percent to $1.2937, touching $1.2912, the least since Jan. 11. The dollar rose 0.2 percent to 78 yen.
• Greek Bank Recapitalization Plan Being Discussed, Imerisia Says. Greek bank recapitalization plans being examined include the issuance of preference and common shares, following the completion of a voluntary debt swap and the release of a review of Greek bank loans, Imerisia said.
  
• Oil Falls for First Time in Seven Days. Oil declined for the first time in seven days as a surge in the European Central Bank’s balance sheet to a record highlighted the growing risks of the region’s debt crisis. Futures dropped as much as 2.2 percent after the ECB lent financial institutions more money last week in an attempt to keep credit flowing. The euro tumbled to the lowest level since January against the dollar, curbing investor demand for commodities. Oil also decreased on reduced concern that Iran will block the Strait of Hormuz. Crude oil for February delivery declined $1.72, or 1.7 percent, to $99.62 a barrel at 1:18 p.m. on the New York Mercantile Exchange. Earlier, prices touched $99.11 a barrel. Futures have climbed 9 percent this year, extending last year’s advance of 15 percent. Brent oil for February settlement fell $1.61, or 1.5 percent, to $107.66 a barrel on the London-based ICE Futures Europe exchange.
• Worst-Rated Illinois May Lose Market-Beating Return: Muni Credit.
• U.S. State, Local Pensions Drop 8.5%. U.S. public pension-fund assets fell in the third quarter by the most since 2008 as stocks sank amid concern that Europe’s debt crisis would curb economic growth, Census Bureau data showed. Assets of the 100 largest public-worker plans decreased $237 billion, or 8.5 percent, from the prior quarter to $2.53 trillion by Sept. 30, the bureau said today in a report. It marks the first decline since the second quarter of 2010 and the biggest since the last three months of 2008, when holdings slid 13 percent during Wall Street’s credit crisis. The setback may strain state and local governments that have set aside more money to cover retirement benefits. That’s pressured governments already coping with diminished tax collections and has propelled efforts to reduce benefit costs. The asset decline was driven by losses in stock holdings, which slipped $134.7 billion to $769.6 billion, the Census Bureau said. The value of holdings of corporate bonds, U.S. treasuries, and international securities also fell.
• Retail Sales Climb 4.5% Week Before Christmas, ICSC Says. Sales at U.S. retailers rose 4.5 percent last week from a year earlier, as shoppers snapped up last-minute purchases for Christmas and took advantage of some chains extending hours. Sales for the week ending Dec. 24 increased 0.9 percent from the previous week, according to a chain-store sales index released today by New York-based International Council of Shopping Centers and Goldman Sachs Group Inc. That compared with a 3.4 percent gain a week earlier. Retailers benefited from Christmas Eve falling on a Saturday, with Family Dollar Stores Inc., Toys “R” Us Inc. and Macy’s Inc. among chains extending hours to lure bargain-hunting shoppers.

Wall Street Journal:

• European Bank Worry: Collateral. Even after the European Central Bank doled out nearly half a trillion euros of loans to cash-strapped banks last week, fears about potential financial problems are still stalking the sector. One big reason: concerns about collateral. The only way European banks can now convince anyone—institutional investors, fellow banks or the ECB—to lend them money is if they pledge high-quality assets as collateral. Now some regulators and bankers are becoming nervous that some lenders' supplies of such assets, which include European government bonds and investment-grade non-government debt, are running low. If banks exhaust their stockpiles of assets that are eligible to serve as collateral, they potentially could encounter liquidity problems. That is what happened this fall to Franco-Belgian lender Dexia SA, which ran out of money and required a government bailout. "Over time it is certainly a risk," said Graham Neilson, chief investment strategist for Cairn Capital Ltd. in London. "If banks don't have assets good enough to pledge as collateral, they will not be able to tap as much liquidity...and this could be the end-game path for a weaker bank."
  
• CareerBuilder: Hiring To Be Cautious, Improve Slowly In 2012. Hiring should remain cautious through 2012, as one in four employers expect to bring on new full-time workers next year, same as in 2011, according to employment company CareerBuilder's annual survey.
• Tough Markets: Punishing Hedge Funds Since 2003. Much has been made about hedge funds’ failure to keep up with the major stock market benchmarks this year. But 2011 is merely the latest disappointment in a string of misses that stretches back nine years, according to one analysis of the hedge fund industry.
• Shutting Up Business. Now unions are turning to shareholder proposals to limit political speech.
  

MarketWatch:

• China Real Estate Prices Must Fall Further: AgBank. Chinese lender says up to 25% drop needed to stabilize prices. Government adjustments to housing prices should aim for an up-to-25% downward revision, according to a report by Agricultural Bank of China, one of China’s big four state banks. Official statements made at the recently concluded central economic work conference indicated that urban housing prices should return to “reasonable levels.”

CNBC.com:

• Small Business Trends to Watch in 2012.
• Online Merchants Home in on Drunk Shoppers.
  

Business Insider:

• The Big China Fraud Is About To Become Apparent To Everyone.
• US Fifth Fleet: Disruptions In The Strait Of Hormuz Will Not Be Tolerated.
• The North Dakota Oil Boom Is Making Half The Residents Rich And Half The Residents Jealous.
• Insane Pictures From The Funeral Of Kim Jong-Il.
• This Bill Maher Joke About Time Tebow Has People Boycotting HBO.
  

Zero Hedge:

• The Italian Yield Curve Vs The Euro Basis Swap. (graphs)
• Abysmal Spanish Housing Market Gets Even Worse In October.
• Former Fed VP Accuses Bernanke of Bailing Out Europe Via Currency Swaps.
  

New York Times:

• U.S. Declines to Say China Manipulates Its Currency. The Obama administration on Tuesday declined to label China a currency manipulator after seeing recent increases in the value of the renminbi compared with the dollar. The decision angered some manufacturing groups, which have accused China of artificially holding down the value of its currency, the renminbi, to gain trade advantages. A cheaper renminbi makes Chinese goods less expensive when they are shipped to the United States. It also makes American goods more expensive in China. Both could increase America’s trade deficit with China, which is on pace to reach a record high this year.

AppleInsider:

• Apple(AAPL) Wants to Offer Television Subscribers Customized Channel Lineups. Apple's anticipated full-fledged television set could offer Internet-based content subscriptions with customized channel lineups, if the company has its way.

Wall Street All-Stars:

• 2012 - Things That Will Happen. Significant economic and political changes will make 2012 a historical year. The globe has experienced relative calm for the past 24 months. That stability won’t last much longer. Events that are not on anyone’s radar screen will matter the most. The following are the things that I think might happen, but it’s the surprises that worry me.

CBS News:

• FEMA Seeks to Recover $385 Million in Improper Katrina Payments.

Reuters:

• Athabasca Oil Sands Gets Regulatory Nod For Key Alberta Project. Canada's Athabasca Oil Sands Corp said it received regulatory approval for its 150,000 barrels per day MacKay River project in Alberta and is on track to start production from 2014.

AP:

• Gulf Arab countries are prepared to make up for any loss of Iranian crude from the world market, citing a Saudi oil official.
• US Police Fatalities Up 13% in 2011 to 173. Across the nation, 173 officers died in the line of duty, up 13 percent from 153 the year before, according to numbers as of Wednesday compiled by the National Law Enforcement Officers Memorial Fund.

Expansion:

• Spanish Prime Minister Mariano Rajoy may instruct the country's banks to cut the value of their real-estate assets by an average of 20% as part of a plan to make them declare potential losses and rebuild their credibility, citing people with knowledge of the matter.

Bear Radar

Style Underperformer:

• Small-Cap Value (-1.70%)

Sector Underperformers:

• 1) Gold & Silver -3.40% 2) Steel -2.71% 3) Oil Service -2.32%

Stocks Falling on Unusual Volume:

• PBR, XES, NYC, GNI, CH, EWD, WBK, RZV, RVT, VDE, HGIC, ZIGO, EZCH, SCHN, PAAS, RAIL and IFN
  

Stocks With Unusual Put Option Activity:

• 1) ARMH 2) SHLD 3) NYX 4) TGT 5) MON
  

Stocks With Most Negative News Mentions:

• 1) CSC 2) MCP 3) MA 4) CAVM 5) WHR
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value (-.80%)

Sector Outperformers:

• 1) Telecom -.20% 2) Retail -.40% 3) Utilities -.50%

Stocks Rising on Unusual Volume:

• ACAT, ENOC, CIX
  

Stocks With Unusual Call Option Activity:

• 1) SHLD 2) SIRI 3) ESRX 4) GG 5) TWX
  

Stocks With Most Positive News Mentions:

• 1) ACAT 2) KBR 3) SBUX 4) MCP 5) LMT
  

Charts:

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

Wednesday Watch

Evening Headlines

Bloomberg:

• Euro Maintains Three-Day Decline Against Yen Before Italy Auctions Bonds. The euro held a three-day decline against the yen amid concern Europe’s sovereign-debt crisis will push up borrowing costs and damp economic growth in the region. The 17-nation currency is set to drop against 15 of its 16 most-traded peers this month before Italy auctions securities today. A report tomorrow may show Italian business confidence dipped to the lowest level in almost two years. Demand for the dollar as a refuge was limited as U.S. data signaled a recovery in the world’s biggest economy is gaining momentum. South Korea’s won traded near a one-week low as confidence among the nation’s manufacturers dropped to the least in 30 months. “You can’t be optimistic about the Italian debt sales and I don’t expect very good results to come out,” said Toshiya Yamauchi, a senior currency analyst in Tokyo at Ueda Harlow Ltd., which provides foreign-exchange margin-trading services. “The euro continues to face downward pressure.”
• U.K. Seen Facing Toughest Employment Market in Two Decades, Forecast Says. Britain faces the “toughest” job market in two decades with the number of working people likely to fall by 120,000 in 2012, the Chartered Institute of Personnel and Development said. “The U.K. jobs market will be weaker than at any time since the recession of the early 1990s,” John Philpott, chief economic adviser at the CIPD, an association for human-resource professionals, said in a statement. “The combination of worsening job shortages for people without work, mounting job insecurity and a further fall in real earnings for those in work may test the resilience and resolve of the U.K. workforce far more than it did in the recession of 2008-9.” The number of people out of work will reach 2.85 million by the end of 2012, with the unemployment rate rising to 8.8 percent, the CIPD said.
• BRIC Decade Ends With Record Stock Fund Outflows as Growth Slows. In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor's 500 Index and the economies grew four times faster than America's. Now Goldman Sachs Group Inc., which coined the term BRICs, says the best is over for the largest emerging markets. BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 23 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050. "In emerging markets, we're waiting for things to get worse before they get better," said Michael Shaoul, the chairman of Marketfield Asset Management in New York who predicted in February that developing-nation stocks would fall this year. The $845 million Marketfield Fund has topped 97 percent of peers in 2011, data compiled by Bloomberg show. BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe's sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview.
• Morgan Stanley(MS) May Eliminate 580 Jobs in New York City. Morgan Stanley, the bank whose shares have declined 44 percent this year, said in a filing today that 580 of the 1,600 job cuts announced earlier this month will come from New York City. “Rolling layoffs” began Dec. 15, the New York-based firm said in a submission to the state’s Labor Department. Affected locations include 1221 Avenue of the Americas, 1 New York Plaza, 1585 Broadway and 750 Seventh Ave., the filing shows.
• China's Stocks Slide to Lowest in 2 Years on Cash Crunch, Slumping Orders. China’s stocks fell, extending the benchmark index’s losses to a third day, as a jump in money market rates signaled small companies will have difficulty borrowing money as the economic slowdown hurts materials demand. Aluminum Corp. of China Ltd. (601600) dropped for a third day after Sing Tao Daily reported its parent company will suffer from declining orders in the first half. China CNR Corp. slid to a record low after China Economic Times said the railway ministry may order fewer train cars next year. China Vanke Co. led a decline for developers after Caijing reported Shanghai home prices are set to decline this year. Zhejiang Honglei Copper Co. and Zhejiang Satellite Petrochemical Co. paced declines for small-caps as they fell on their first day of trading. “There won’t be an immediate and aggressive policy easing to counter the economic slowdown and investors are turning more pessimistic,” said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Small-caps are facing the risk of cuts in earnings forecasts and a cash crunch.” The Shanghai Composite Index slid 14.2 points, or 0.7 percent, to 2,151.97 at the 11:30 a.m. local-time break, set for the lowest close since March 2009. The Shanghai Composite has fallen 7.8 percent in December as concern about an economic slowdown overshadowed the first cut in reserve requirement ratios since 2008 last month. For the year, the measure is down 23 percent after the central bank raised interest rates three times to cool inflation and exports to Europe slowed because of the region’s debt crisis.
• Berkowitz Loses Again as Sears Drop Adds to Failed Bank Bets. Bruce Berkowitz, whose $8 billion Fairholme Fund is suffering its worst year on record because of wrong-way bets on financial firms, may have lost $203 million today on Sears Holdings Corp., the third-largest investment of his flagship fund. Sears, the retailer controlled by hedge-fund manager Edward Lampert, fell 27 percent after saying it will close as many as 120 stores after reporting a deeper-than-expected sales decline during the holiday-shopping period. Berkowitz's funds owned 16.3 million shares, or 15 percent of the company, as of Sept. 30, according to data compiled by Bloomberg. Berkowitz, named Morningstar's domestic stock manager of the decade in 2010 for returning an average of 13 percent over that period, is trailing 99 percent of peers this year after betting that financial stocks would rebound with the economy. Sears, based in Hoffman Estates, Illinois, has declined 55 percent since the start of the year.
• Deflation's Grip Returns in Japan as Factory Production Declines: Economy. Japan’s rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the nation’s return to the deflation that first took hold a decade ago. Industrial output slumped 2.6 percent from October, more than all the forecasts in a Bloomberg News survey of 29 economists, a government report showed today in Tokyo. Retail sales slid 2.1 percent. Consumer prices excluding fresh food fell 0.2 percent from a year earlier after a 0.1 percent decline the previous month. The weakening economy, hurt by Europe’s debt crisis and plans by companies from Panasonic Corp. to Nissan Motor Co. to shift production abroad, may undermine Prime Minister Yoshihiko Noda’s plan to raise taxes and cut the world’s largest debt burden. Noda’s party today is scheduled to propose boosting the sales levy, which polls show a majority of the public oppose. “Fundamentally, Japan’s economy is on a downward slope,” said Yoshimasa Maruyama, chief economist at Itochu Corp. “Exports are falling and negatively impacting Japan’s economy due to the global slowdown.”
• China’s Wen Urges Protection for Farmer Rights. Chinese Premier Wen Jiabao called on officials to better protect the rights of farmers and ensure they receive a bigger share of profits from the conversion of their land to industrial and residential use. “We can no longer sacrifice farmers’ land ownership rights to reduce urbanization and industrialization costs,” the official Xinhua News Agency reported Wen as saying at an annual national work conference on rural affairs yesterday. “It’s both necessary and possible for us to significantly increase farmers’ gains from the increase in land value.” Wen’s comments follow a victory by residents of a southern Chinese village this month who staged a two-week protest that forced authorities to back down in a dispute over land. Strikes, demonstrations and other protests in China doubled to at least 180,000 in 2010 from four years earlier, according to Sun Liping, a sociology professor at Beijing’s Tsinghua University. Wen also said rural residents shouldn’t be forced to give up their rights to land even if they move to cities. “No one is empowered to take away such rights,” Wen was quoted as saying by the state-run news agency. About 40 percent of local government revenue came from land sales last year, according to China Real Estate Information Corp., a property data and consulting firm.
• Oil Trades Near Six-Week High on Iran Threat to Strait of Hormuz Shipping. Oil traded near the highest level in six weeks after Iran threatened to block crude transportation through the Strait of Hormuz, increasing concern that global supplies will be curbed amid shrinking U.S. stockpiles.

Wall Street Journal:

• Jobless Tap Disability Fund. The prolonged economic slump has fueled a surge in applications for Social Security disability benefits, with many desperate Americans seeking refuge in the program as a last resort after their unemployment insurance and savings run out. Two new studies, one of them co-authored by the White House's top economist, show a correlation between when people seek Social Security disability payments and when their unemployment benefits are exhausted. Some economists say that connection shows many people now view the system as an extended unemployment program.
• Internal BNY Mellon Documents Show Panic. An informant in a state fraud case against Bank of New York Mellon Corp. has provided prosecutors a rare inside peek into how the bank allegedly scrambled to contain the fallout from a fast-growing government investigation, according to hundreds of pages of confidential documents.
• An Early Christmas for These Lawyers. $300 Million in Fees for Shareholder Case Sets Off Debate.
• Higher Rates in Offing for Commercial Owners. Interest rates are at the lowest levels in decades, but commercial property owners looking to refinance shouldn't expect to lock in those rates any longer.
• ObamaCare's Latest Casualty. Senator Ben Nelson bows out in Nebraska.

Business Insider:

• Google+(GOOG) Is Adding More Than 600,000 New Users EACH DAY*.
• 11 Huge Gadget Releases Coming In 2012.
• Mexican Drug Cartels Have Built Their Own National Radio System To Communicate With Members.

Zero Hedge:

• Why ECB's LTRO Won't Stop Collateral Contagion.

CNBC:

• North Korea Closer to Nuclear-Tipped Missile, Says Expert. North Korea likely is closer to mounting nuclear warheads on its ballistic missiles than generally reported, possibly only one or two years away, the U.S. Congress's former top expert on the issue has concluded.

TechCrunch:

• The iPhone 4S is Finally Cleared for Launch in Mainland China.

Rasmussen Reports:

• Election 2012: Generic Republican 45%, Obama 44%.

Reuters:

• Cavium(CAVM) Cuts Q4 Revenue Outlook. Chipmaker Cavium Inc cut its fourth-quarter sales outlook, citing weak demand from corporate customers, sending its shares down 6 percent in after-market trade.
• Italian Debt Under Pressure Before Year-End Auction. Italian government bond yields edged higher on Tuesday and were expected to rise further this week with investors growing nervous that thin liquidity may complicate Rome's plans to sell 8.5 billion euros worth of debt. In choppy trade, 10-year Italian bond yields rose as much as 11 basis points on the day to 7.13 percent, before recovering some ground, with more pressure seen likely ahead of three- and 10-year debt auctions on Thursday.

Financial Times:

• Record Use Made of ECB Deposit Facility. Eurozone banks have deposited record amounts of cash at the European Central Bank, just days after it provided unprecedented levels of liquidity in an effort to reduce tension in the financial system. Banks placed almost €412bn ($539bn) over the Christmas holiday in the ECB’s deposit facility, which attracts a low rate of interest and in normal times is typically used by banks only to park excess cash, often at a loss.
  

Sing Tao Daily:

• Chinalco says 1H to be hit by price, order declines, citing Xiong Weiping, general manager of Aluminum Corp. of China. Chinalco plans to develop other mining businesses including copper, rare earth, iron ore and coking coal, Xiong said.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 206.0 -1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 162.0 +4.0 basis points.
• FTSE-100 futures +.20%.
  
• S&P 500 futures -.25%.
  
• NASDAQ 100 futures -.22%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases

• None of note

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Italian bond auction and weekly retail sales reports could also impact trading today.
  

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

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

Broad Market Tone:

• Advance/Decline Line: About Even
  
• Sector Performance: Mixed
  
• Volume: Light
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 21.89 +5.60%
  
• ISE Sentiment Index 140.0 +35.92%
  
• Total Put/Call .90 +4.65%
  
• NYSE Arms 1.10 +73.07%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 120.60 -.65%
  
• European Financial Sector CDS Index 277.85 +6.06%
  
• Western Europe Sovereign Debt CDS Index 357.85 -1.43%
  
• Emerging Market CDS Index 308.58 -.26%
  
• 2-Year Swap Spread 49.0 +1 bp
  
• TED Spread 57.0 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -127.0 +2.0 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 171.0 +3 bps
  
• China Import Iron Ore Spot $135.20/Metric Tonne n/a
  
• Citi US Economic Surprise Index 71.20 n/a
  
• 10-Year TIPS Spread 2.04 +1 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +35 open in Japan
• DAX Futures: Indicating +9 open in Germany

Portfolio:

• Higher: On gains in my Tech, Medical and Biotech sector longs
  
• Disclosed Trades: None
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 trades right above its 200-day moving average, despite Eurozone debt angst, financial sector pessimism, rising global growth fears, technical resistance and rising energy prices. On the positive side, Utility, Biotech, Gaming and Education shares are especially strong, rising more than +.75%. "Growth" stocks are outperforming "value" shares. Small-caps are also relatively strong. Gold is falling -.88% and Lumber is gaining +2.64%. On the negative side, Coal, Disk Drive, Computer Service, Bank, I-Bank and Airline shares are under pressure, falling more than -.75%. (XLF) has underperformed throughout the day. Cyclicals are also relatively weak. Oil is up +1.38% and Copper is falling -1.6%. The Italian/German 10Y Yield Spread is rising +1.12% to 507.66 bps. The Western Europe Sovereign CDS Index is still very near its all-time high. The TED spread continues to trend higher and is very near the highest since May 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is very near the highest since February 2009. The 3M EUR/USD Cross-Currency Basis Swap is falling +1.09% to -127.0 bps, which is back to late-Nov. levels. The Libor-OIS spread is very near the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -29.5% since February 16th and -25.3% since Sept. 7th. The China Corporate Blended Spread Index remains close to another technical breakout. The Citi Asia Economic Surprise Index is fell another -.1 point today to -31.80, the lowest since April 2009. Asian shares continue to trade poorly. The Shanghai Composite fell another -1.09% overnight and is hovering right off multi-year lows, falling -22.86% ytd. As well, India’s Sensex fell -.61% and is down -22.6% ytd. Despite the decoupling this year, slowing economic growth and weak equity markets in the region are also red flags for US equity investors. European shares are mildly weaker today, led lower by Italian equities’ -1.04% decline. European credit gauges are still performing very poorly given that the European debt crisis “can-kicking” solution is supposedly at hand, which remains a large red flag. Cyclicals are weighing on the major averages today with the MS Cyclical Index dropping -1.36%. This index is down -14.0% ytd and I expect it to continue to underpeform next year. Year-end window-dressing, short-covering, better US economic data and seasonal strength continue to help out US stocks short-term. The S&P 500 has entered significant technical resistance. For a sustainable equity advance into the new year, I would expect to see meaningful European credit gauge improvement, subsiding hard-landing fears in key emerging markets, better volume and higher-quality leadership. I expect US stocks to trade mixed-to-higher into the close from current levels on better US economic data, short-covering, a bounce in the euro, year-end window dressing and seasonal strength.

Today's Headlines

Bloomberg:

• German Government Notes Climb, Italian Benchmark Bonds Fall Before Auction. German notes rose, pushing the rate on two-year notes to less than 0.2 percent for the first time, as investors sought the safest assets before Italy auctions as much as 20 billion euros ($26.2 billion) of debt. Italian benchmark debt held three days of declines. German bonds snapped a two-day drop after International Monetary Fund Managing Director Christine Lagarde said the world economy is in danger because of Europe’s financial woes. Dutch and Finnish note yields also fell. Italy plans to sell 9 billion euros of 179-day bills and as much as 2.5 billion euros of zero-coupon notes due in 2013 tomorrow. It will offer bonds due between 2014 and 2022 on Dec. 29. “The auction will be quite a big event,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “It will continue to drive Italian yields higher and will have an effect on bunds with a flight to quality.” The yield on two-year German notes dropped six basis points to 0.17 percent at 4:50 p.m. London time, after reaching 0.158 percent, the least since Bloomberg began collecting the data in 1990. The 0.25 percent security due December 2013 rose 0.115, or 1.15 euros per 1,000-euro face amount, to 100.16. Italian 10-year note yields were two basis points higher at 7 percent. The additional yield investors demand to hold the benchmark securities instead of German bunds widened to as much as 520 basis points, or 5.2 percentage points, the most since Nov. 17.
• Italy Retailers in Worst Christmas in 10 Years. Italian retailers had the worst Christmas in 10 years, consumer group Codacons said, as austerity measures to combat the sovereign debt crisis prompted households to cut spending. Italians spent 48 euros ($62.75) less per person this holiday season than the average of the past five years, Rome- based Codacons said in a statement on its website. The shoe and clothing sector was hit the most, with sales dropping 30 percent from previous years, it said, adding retailers won’t recover the decline during seasonal promotions that start in January. The discount period “will be a flop,” with sales declining as much as 40 percent compared with 2010, Carlo Rienzi, the head of Codacons, said in the statement.
• Will the Euro Survive in 2012? (video)
  
• Consumer Confidence Rose More Than Forecast. The Conference Board’s index increased to 64.5, exceeding all estimates in a Bloomberg News survey and the highest since April, from a revised 55.2 reading in November, figures from the New York-based private research group showed today. Another report showed home prices fell more than projected in October.
• Oil Extends Longest Rally Since 2010. Crude advanced as much as 1.9 percent after Iran’s official Islamic Republic News Agency cited Vice President Mohammad Reza Rahimi as saying the country would bar shipments through the strait if sanctions are imposed on its oil exports. “The Iranian threats are getting increasingly bold,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. Crude oil for February delivery rose $1.78, or 1.8 percent, to $101.46 a barrel at 2:01 p.m. on the New York Mercantile Exchange. The contract reached $101.53, the highest level since Dec. 8. Futures have climbed 11 percent this year after increasing 15 percent in 2010. Brent oil for February settlement gained $1.45, or 1.3 percent, to $109.41 a barrel on the London-based ICE Futures Europe exchange.
• Sears(SHLD) Plunges on Plans to Close Stores. Sears Holdings Corp. tumbled the most in 8 1/2 years after saying it will close as many as 120 stores, with a deeper-than-expected sales decline casting doubt on Chairman Edward Lampert’sefforts to turn around the chain.
• S&P Index in 2011 Moves Least Since 1970. Stock swings that reached twice the five-decade average left the Standard & Poor’s 500 Index (SPX) with the smallest price change in 41 years and utilities, soapmakers and health-care providers at the highest valuations since 2008. The S&P 500 rose 3.7 percent last week, sending the measure to a gain of 0.6 percent for the year. The last time it moved less on an annual basis was in 1970, when it fell 0.1 percent.

Wall Street Journal:

• 2011 Year in Photos.

CNBC.com:

• Obama to Nominate Powell, Stein as Fed Governors. U.S. President Barack Obama will nominate Harvard economist Jeremy Stein and Jerome Powell, an investment banker and former Treasury official, to the two empty seats on the Federal Reserve's policy-setting board of governors.
• Recession? Not If You Are a Member of Congress. When Representative Ed Pastor was first elected to Congress two decades ago, he was comfortably ensconced in the middle class. Mr. Pastor, a Democrat from Arizona, held $100,000 or so in savings accounts in the mid-1990s and had a retirement pension, but like many Americans, he also owed the banks nearly as much in loans. Today, Mr. Pastor, a miner’s son and a former high school teacher, is a member of a not-so-exclusive club: Capitol Hill millionaires.
• White House to Raise Borrowing Limit by $1.2 Trillion. The Obama administration will ask Congress to raise the nation's borrowing limit by $1.2 trillion this week, marking the third and final increase from a deal negotiated over summer. Treasury officials said Tuesday that the increase is necessary because the government will be within $100 billion of its current limit by Friday. The debt limit is the amount the government can borrow to finance its operations. The latest increase will boost that limit to $16.4 trillion. Officials say that should be enough to allow the government to keep borrowing until the end of 2012 — just after the presidential election.

Business Insider:

• The Sad Reason Why This Indian Billionaire Refuses To Invest In India.
• Zing! The GOP's Hysterical New Year's Resolution Suggestions For Obama.
• Reports Are That The U.S. Just Lost Another Drone, This Time It's In Afghanistan.
  

Zero Hedge:

• LTRO "Bazooka" Is Epic Disaster As Banks Scramble To Redeposit "Free Carry" Cash With ECB, Lose Money On "Inverse Carry".

iSuppli:

• Wireless Infrastructure Market Rebounds in 2011 as Carriers Upgrade Networks for Data Services.

AppleInsider:

• iOS, Android Activations Surge 353% On Record Setting Christmas Day.
• Suppliers Rumored to Prepare for 32", 37" Apple Televisions in Early 2012.
  

Politico:

• Ben Nelson Retiring From Senate. Democratic Sen. Ben Nelson of Nebraska will announce today that he is retiring after two terms, a serious blow to Democratic efforts to hold on to their majority in the chamber next November.

Bild:

• Wolfgang Bosbach, a German politician from Chancellor Angela Merkel's Christian Democratic Union, said continued aid payments to Greece depend on the country's meeting its commitments, citing an interview. "As long as it's entirely unclear where Greece is going politically, the country can't expect that further billion-euro aid is paid all the time," citing Bosbach.

Diario Economico:

• Retail sales in December through Christmas, in Portugal, dropped about 15% from a year earlier, citing Joao Vieira Lopes, the chairman of the country's Commerce and Services Confederation.