Tuesday Watch

Evening Headlines
Bloomberg:

• Pimco, Loomis Favor Convertible Bonds as Stocks Rise. Pacific Investment Management Co. and Loomis Sayles & Co. are betting convertible debt will rally further this year as stocks rise and Treasuries fall. Bonds that may be exchanged for shares returned 16.8 percent last year, beating Treasuries, benchmark U.S. stock indexes, high-yield and investment-grade corporate notes and municipal debt, Bank of America Merrill Lynch index data show. Fixed-income investors are turning to convertibles amid signs the U.S. economy is improving.
  
• U.S. Treasury Said to Plan Sale of $2.5 Billion in Ally TruPS This Month. The U.S. Treasury Department may sell as much as $2.5 billion of Ally Financial Inc. trust-preferred securities this month as it looks to recoup bailout funds for taxpayers, a person with direct knowledge of the plan said. Treasury will look to sell at least $1 billion of the securities to investors in January or “shortly after” fourth- quarter earnings are announced in February, said the person, who asked not be named because the plans are private. Timing of a sale depends on the state of capital markets, the person said.
• Hedge Funds Increase Bullish Crude Bets to Four-Year High: Energy Markets. Hedge funds raised bullish bets on crude oil to the highest level in more than four years on speculation that futures will climb as the U.S. recovers from the deepest recession since the 1930s. The funds and other large speculators increased net-long positions, or wagers on rising prices, by 4.6 percent in the seven days ended Dec. 28, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the top total in records going back to June 2006.
• Australia Predicts More Rains as Floods Cut Off Towns. Flooding is set to worsen in the Australian state of Queensland in the next 48 hours, cutting off tens of thousands of people as the military is mobilized to airlift supplies and the U.S. offers assistance. Rockhampton, home to 75,000 people about 500 kilometers (300 miles) north of the state capital, Brisbane, will lose its last road access as the Fitzroy river peaks, according to the state government. Towns across Queensland have been evacuated, at least two people have died and about 73 percent of the state’s coal output is disrupted as flooding spreads over an area the size of France and Germany.
• CIC Backs Carlyle-Owned Manhattan Tower in U.S. Property Push. China Investment Corp. helped refinance a Manhattan office tower co-owned by Carlyle Group last year, another sign that the $300 billion sovereign wealth fund is stepping up its U.S. real estate investments. The fund, known as CIC, joined forces with AREA Real Estate Finance Corp. of New York to buy an unspecified preferred equity stake in 650 Madison Ave., the 27-story building that is headquarters to Polo Ralph Lauren Corp., said Bradford Wildauer, AREA’s president. CIC also owns 35 percent of Industrial & Commercial Bank of China Ltd., one of two lenders that provided Carlyle with a new first mortgage on the property in June. “CIC is very bullish on investing in real estate in the U.S.,” as are major Chinese banks, Jeffrey Lenobel, chairman of the real estate group at the New York law firm Schulte Roth & Zabel LLP, said in a telephone interview. “There is every reason to think you will see them together more often.” Chinese purchases jumped to $127 million last year from $18 million in 2009, Real Capital says, including a $46 million deal by SouFun Holdings Ltd. of Beijing to buy a Lower Manhattan building once owned by insurer American International Group Inc. The report doesn’t include purchases through property funds, a route that Chinese buyers prefer, said Ben Carlos Thypin, a senior market analyst at Real Capital. “They are investing through conduits a lot of the time,” Thypin said. “The fund investment market is much more opaque.” CIC acquired a 7.6 percent stake in General Growth Properties Inc. in November through a fund manager that participated in the bankruptcy reorganization for the second- largest U.S. mall owner. A CIC subsidiary holds a controlling stake in Beijing’s Bank of China Ltd., which agreed in November to lend investors $800 million to refinance an office building on Manhattan’s Park Avenue. The Madison Avenue property may represent CIC’s first publicly disclosed direct investment in a North American office building, according to Thypin.
• Goldman(GS) Investment in Facebook May Draw SEC Scrutiny. Goldman Sachs Group Inc.’s plan to offer clients up to $1.5 billion in Facebook Inc. equity may invite U.S. regulators to take a closer look at whether the owner of the world’s most popular social-networking site is circumventing disclosure rules, securities lawyers said. The Securities and Exchange Commission, whose rules require any company with more than 499 investors to disclose financial information, is already scrutinizing the market for trading shares of closely held companies including Facebook, according to a person familiar with the inquiry, who declined to be identified because the matter isn’t public. Goldman Sachs invested $450 million in Facebook and is planning to create a special purpose vehicle for its clients to make additional investments worth as much as $1.5 billion, according to two people familiar with the matter who spoke on condition of anonymity because the deal is private. Some private companies avoid crossing the disclosure threshold when investors’ funds are channeled through a single entity, such as a private equity firm or hedge fund.
• Obama Said to Consider William Daley for Top White House Post. President Barack Obama is considering naming William Daley, a JPMorgan Chase & Co. executive and former U.S. Commerce secretary, to a high-level White House post, possibly as his chief of staff, people familiar with the matter said. Such a move, which is still under discussion and which White House officials wouldn’t confirm, would bring a Washington veteran -- and someone with strong business ties -- into the administration as Obama enters the second half of his term.
• Coptic Pope Says Egypt Must Address Christians' Complaints, Ease Tensions. Pope Shenouda III, the leader of Egypt’s Coptic Church, pleaded for calm among his followers as riots raged for the third straight day after a bomb attack outside a church killed 21 people. The pope, in an interview with Egypt’s state-run television late yesterday, also called on the government of the Muslim- dominated country to address the grievances of Copts, the largest religious minority in the Middle East. Thousands of Copts have taken to the streets of Egypt in the aftermath of the Jan. 1 attack in the Mediterranean city of Alexandria, demanding government protection and protesting what they describe as the state’s negligence of their rights.
• Moynihan Fights Fires at Bank of America(BAC) Amid Investor Doubt in Book Value.
• Bank of America(BAC) Deal on Loan-Repurchase Demands Sets 'Template' for Banks. Bank of America Corp.’s agreement to settle Fannie Mae and Freddie Mac’s demands it buy back billions of dollars in faulty loans may pave the way for U.S. lenders to resolve similar disputes with the government-sponsored entities, easing investors’ concerns that costs may surge.

Wall Street Journal:

• Fresh Signs of Life in Office Market. The amount of occupied U.S. office space increased for the first time in nearly three years during the fourth quarter of 2010 as more companies that had been postponing real-estate decisions got back into the leasing market. Average office rents also rose by 0.2%, to $22.09 per square foot, registering their first uptick since the second quarter of 2008, according to property-research firm Reis Inc. While the 79 metropolitan areas tracked by Reis vary greatly, the national trend means that in many regions the balance of power is shifting to landlords from tenants.
• Fed Likely to Add New Dealers for Treasury Market. After a hiatus of more than one year, the Federal Reserve is likely to expand a select group of dealers to help with hefty Treasury debt sales and the central bank’s monetary-policy operations, according to traders and dealers familiar with the matter. Demand for safe-haven Treasurys has eased over the past couple of months as optimism over the economic outlook sparked more buying interest in riskier assets such as stocks. That means dealers need to play a bigger role in underwriting Treasury sales to avoid the risks of weak auctions. Lackluster participation by primary dealers could force the government to pay higher interest rates to issue debt, which in turn would hurt the broader economy by raising rates for consumers and companies.
• Goldman(GS) Clients Jockey for Shot at Facebook Shares. Wealthy clients of Goldman Sachs Group Inc. began jockeying for a piece of the deal struck by the securities firm to invest in social-networking company Facebook Inc., according to people familiar with the situation. The agreement by Goldman to invest $500 million in Facebook along with Digital Sky Technologies of Russia ignited a frenzy of phone calls and email by clients in the private wealth-management division at Goldman. Those clients got a memo from Goldman offering them the opportunity to buy equity in Facebook, with a minimum investment of $2 million, these people said.
• Cuomo Targeting Medicaid Spending. Gov. Andrew Cuomo is aiming to reduce the state's Medicaid spending by billions of dollars, exceeding the size of cuts to the program proposed in past years, according to individuals with knowledge of his budget. The Cuomo administration is considering a cut of about $2.1 billion out of the state's projected spending on Medicaid in the upcoming fiscal year. With federal matching funds, the cut comes to more than $4 billion. That's close to twice the reduction in spending proposed by Gov. Eliot Spitzer in 2007. Such a cut would effectively freeze Medicaid spending at the current year's level. But because the state is set to receive far less in federal funds, as the stimulus expires, its share of Medicaid costs would still grow by more than $3 billion, a 30% increase. To further alleviate the burden, the Cuomo administration is likely to lobby for more federal aid, possibly through a waiver agreement, according to an individual familiar with the governor's health-care agenda.
• Lenders Shift Some Loan Costs to Big Borrowers. Banks feeling squeezed by rising regulatory costs are trying to pass along the pain to big corporate borrowers. In the past several weeks, lenders such as J.P. Morgan Chase & Co. and Bank of America Corp. have begun including in loan documents language that will help banks shift to their large borrowers additional costs triggered by the Dodd-Frank financial-overhaul law. The changes, disclosed in securities filings by companies from insurer American International Group Inc. to refinery and convenience-store owner Western Refining Inc., reflect guidelines by a trade group of banks and loan investors called the Loan Syndications and Trading Association that might be finalized by February but already are appearing in deal documents. Under the guidelines, likely to be followed by most banks making corporate loans, lenders can require borrowers to take a financial hit for costs resulting from the Dodd-Frank law "regardless of the date" when the cost-triggering change occurs. The clause doesn't specify whether the new costs would be passed along as a fee or added interest costs, but it says borrowers would pay the lender "such additional amount" to "compensate" that institution.
• Illinois Attempts to Link Teacher Tenure to Results. Illinois lawmakers are considering sweeping legislation that would link teacher tenure to student test scores, make it easier to fire ineffective teachers and curb teachers' right to strike. The measure, debated during a Senate panel hearing Monday, moves Illinois to the forefront of states' efforts to hold teachers more accountable for student performance, while taking on the powerful teacher unions, which often oppose such changes.
• Auto-Bailout Planner in Line for Post. President Barack Obama is considering naming one of the architects of the Detroit auto industry bailout, Ron Bloom, to a new manufacturing policy post at the White House. The position would report to the White House chief of staff and to the director of the National Economic Council, according to people familiar with the deliberations. The creation of the post will likely be announced soon, possibly when Mr. Obama names his next NEC director.
• New Investment Fund Values Twitter At $4.1 Billion.
• Mining Firms Dig Deeper As Worker Costs Escalate. Demand for commodities has boosted demand for miners around the world, prompting warnings from companies that a shortage could slow growth and increase costs.
• New Speaker Vows to Share Power - a Tricky Proposition. When John Boehner takes over one of the most powerful jobs in Washington this week, he says his first order of business is to make himself less powerful.
• Labor's Coming Class War. Private-sector union workers begin to notice that their job prospects are at risk from public-employee union contracts.
• Congress Rediscovers the Constitution. The House Republican majority has said it will require members to cite the specific authority for any bill they introduce.

CNBC:

• Cramer: Dow to Climb 15% in 2011.
• Obama Eyes Ex-Clinton Aide as Top Economic Adviser. A trusted aide with first-hand experience negotiating with Republicans has emerged as the favorite to become President Barack Obama's new top economic policy adviser, Democratic sources said on Monday. Several sources close to the deliberations said Gene Sperling, a Clinton administration veteran, has gained traction in the last few weeks as a potential successor to Larry Summers, who is departing as director of the National Economic Council.

Business Insider:

• David Einhorn's Greenlight Capital L.P. Returned 15.9% in 2010.
• Brazil Is About to Take Washington's Side in the Currency War. Despite the symbiotic relationship between China and Brazil (the latter being a major exporter to the former), the matter of currency intervention is creating a rift.
• Why This Breakout in Financial Stocks is Huge.
  

Zero Hedge:

• Sovereign Man's 2010 Look Back And 2011 Predictions.

IBD:

• Department Store Excess Inventory Good News For Value Retailer. All of this is good news for off-price retailer Ross Stores (ROST).

New York Times:

• Iran Invites Some Nations, Not U.S., for Nuclear Tour. Iran has invited Russia, China and several European Union members to visit its nuclear facilities this month, but pointedly snubbed the United States, European diplomats said on Monday. The invitation — which seemed calculated to divide the alliance of nations opposed to Iran’s nuclear ambitions before the next round of negotiations over the program — was swiftly dismissed by the United States. “It’s a clever ploy, but it’s not a substitute for Iran’s responsibilities to the I.A.E.A.,” said the State Department spokesman, Philip J. Crowley, referring to the International Atomic Energy Agency, which has been locked in an increasingly tense standoff with the Iranian government over its enrichment of uranium. “It won’t draw international attention away from the issues regarding Iran’s nuclear program,” Mr. Crowley added, noting that its enrichment activities violated six United Nations Security Council resolutions. The European diplomats said the invitation was not likely to be accepted, if at all, until after the next round of negotiations, expected to be held in Istanbul at the end of this month.

CNN Money:

• GroupMe Hopes Group Texting Will Be The Next Breakout Hit.

Detroit Free Press:

• UAW Reveals Ideas to Try to Level Playing Field. The UAW released a set of principles today that it plans to use as it renews its effort to organize assembly plants in the U.S. operated by Asian and German automakers. The document, called “UAW Principles for Fair Union Elections,” outlines 11 ideals that are designed to level the playing field between the UAW and an employer during a union campaign and election. By signing the principles, both the union and the employer would “demonstrate their openness to change by agreeing to the framework established in these principles,” the UAW said in the document released today. The principles include an agreement that the ability to join a union is a “fundamental human right.” In addition, they say that during a campaign both the union and the employer would agree to refrain from intimidation or threats and commit the employer to allowing equal access to employees to discuss union representation.

The Detroit News:

• House GOP Seeks Ford(F), Toyotal Input on Cutting Red Tape. The incoming chairman of the House Oversight and the Government Reform committee wants help from two automakers in cutting government red tape. Rep. Darrell Issa, R-Calif., sent a letter to more than 150 companies, trade associations and think tanks, asking for their help in looking at "proposed regulations that negatively impact the economy and jobs."The issue is of particular interest to the auto industry.
  

Politico:

• House GOP to Vote on Health Repeal Next Week. The House will vote next week to repeal the new health care law, making good on a top-tier GOP campaign promise and setting up a showdown with President Barack Obama over his signature domestic policy achievement.Majority Leader-elect Eric Cantor (R-Va.) announced Monday the timeline for considering the repeal legislation: The bill posted Monday, the Rules Committee will meet Thursday, and the rule for the debate will be considered on the House floor Friday. The repeal vote will follow on Wednesday, Jan 12. The GOP repeal bill is only two pages long – a stark contrast to the 2,000-plus pages in the final health care legislation, a number that was cited repeatedly by Republicans as evidence the bill amounted to a massive government overreach. Aiming to link the rollback effort to job creation, Republicans named the bill “Repealing the Job-Killing Health Care Law Act.”

USA Today:

• Companies Stash More Cash as Profits Increase. Companies are doing everything they can do to get rid of cash — short of hiring people — but the moola just keeps mounting. The typical ways companies burn off excess cash, such as boosting dividends, buying back their own stock and buying other companies, are rising. But none of these standard uses of cash are keeping up with swelling corporate earnings, resulting in an ever-increasing pile of cash. The largest U.S. companies in the Standard & Poor's 500 index are sitting on a record $902.4 billion in cash, up 10% from a year earlier, S&P says. That's expected to rise to another record when the sum is tallied for the end of 2010.
• Web and Other Options Are Shaking Up How We Watch TV. If you gave or got a TV set, game console, Blu-ray player or DVR for the holidays, you might become the kind of person who scares executives who run movie and television production studios, broadcast and cable channels, and cable and satellite systems. Many of these devices now make it easy for people with home broadband networks to feed content from the Internet, including Hollywood movies and TV shows, onto their TVs.

Reuters:

• U.S. to Detail Pentagon Savings, Cuts: Sources. Defense Secretary Robert Gates is expected to announce as early as Thursday about $100 billion in savings for the Pentagon and cuts to some weapons programs, sources said on Monday.

China Securities Journal:

• Some southern Chinese cities including Fuzhou, Xiamen, Haikou and Wenzhou have extended limits on home purchases beyond the end of 2010. The cities had previously limited the number of homes residents could buy until the end of last year after the central government stepped up measures to cool prices, without saying when the measures might end.
  

Century Weekly:

• China may delay a property tax because because of disputes among government departments, citing an unidentified official close to the Ministry of Finance and state tax bureau.

Evening Recommendations
Citigroup:

• Reiterated Buy on (DO), target $80.

Janney Montgomery:

• Rated (DKS) Buy, target $44.

Morgan Keegan:

• Rated (FIRE) Outperform, target $35.
• Rated (FTNT) Outperform, target $40.
  

Night Trading

• Asian equity indices are unch. to +1.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 99.0 -3.0 basis points.
  
• Asia Pacific Sovereign CDS Index 99.5 -3.5 basis points.
  
• S&P 500 futures +.06%
  
• NASDAQ 100 futures +.10%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (NEOG)/.26
• (MOS)/.92

Economic Releases
10:00 am EST

• Factory Orders for November are estimated to fall -.1% versus a -.9% decline in October.

2:00 pm EST

• Minutes of FOMC Meeting

Afternoon:

• Total Vehicle Sales for December are estimated to rise to 12.3M versus 12.26M in November.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports, weekly ABC consumer confidence reading and the Citi Entertainment/Media/Telecom Conference could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and technology shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Surging into Final Hour on More Economic Optimism, Less Financial Sector Pessimism, Short-Covering, Fund Inflows

Broad Market Tone:

• Advance/Decline Line: Substantially Higher
  
• Sector Performance: Almost Every Sector Rising
  
• Volume: Around Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 17.44 -1.75%
  
• ISE Sentiment Index 175.0 +73.27%
  
• Total Put/Call .62 -36.73%
  
• NYSE Arms .55 -48.59%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 82.78 -2.82%
  
• European Financial Sector CDS Index 152.10 bps -.32%
  
• Western Europe Sovereign Debt CDS Index 206.50 bps +.81%
  
• Emerging Market CDS Index 194.81 -3.37%
  
• 2-Year Swap Spread 19.0 -1 bp
  
• TED Spread 18.0 unch.
  

Economic Gauges:

• 3-Month T-Bill Yield .12% unch.
  
• Yield Curve 273.0 +3 bps
  
• China Import Iron Ore Spot $170.10/Metric Tonne n/a
  
• Citi US Economic Surprise Index +14.60 unch.
  
• 10-Year TIPS Spread 2.30% +2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +127 open in Japan
• DAX Futures: Indicating unch. open in Germany

Portfolio:

• Higher: On gains in my Medical, Tech, Biotech, Retail and Ag long positions
  
• Disclosed Trades: Added slightly to my (TFM) long, took profits in another long
  
• Market Exposure: 100% Net Long

BOTTOM LINE: Today's overall market action is very bullish as the S&P 500 trades substantially higher despite recent stock gains, China inflation worries and euro sovereign/US municipal debt concerns. On the positive side, Airline, Homebuilding, HMO, Hospital, Bank, Disk Drive, Internet, Paper, Steel, Alt Energy and Coal shares are especially strong, rising more than 2.0%. Cyclicals and small-caps are strongly outperforming. Lumber is surging +3.1%. The Citi Asia Economic Surprise Index is jumping +10.3 points today to 25.0, which is the best level since mid-October. The 10-year yield is rising +4 bps, but is near session lows at 3.33%, despite recent positive economic data, the equity rally, the rise in commodities and "hot" prices paid readings. The euro currency is trading poorly today given the rise in equities and better manufacturing data out of Europe. On the negative side, Semi and Oil service shares are down slightly on the day. The Belgium sovereign cds is climbing +2.2% to 222.73 bps and the UK sovereign cds is jumping +5.53% to 76.41 bps. The Euro Financial Sector CDS Index remains near its highest level since mid-June and the Western Europe Sovereign CDS Index is right at a record high, despite the recent bounce in the euro currency. The broad market continues to trade very well as it slowly grinds higher. I suspect it can run further in the short-run before a meaningful pullback commences later this quarter. I expect US stocks to trade mixed-to-higher into the close from current levels on equity fund inflows, short-covering, technical buying, stable long-term rates, less financial sector pessimism, more economic optimism and buyout speculation.

Today's Headlines

Bloomberg:

• U.S. Manufacturing Expands at Fastest Pace in 7 Months. Manufacturing in the U.S. expanded in December at the fastest pace in seven months, reinforcing signs the expansion is gaining momentum. The Institute for Supply Management’s index climbed to 57 last month from 56.6 in November, the Tempe, Arizona-based group said today. “The factory sector is growing at a brisk pace, and it’s getting fueled by both U.S. demand and growth in exports,” said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, who correctly forecast the ISM figure. “The economic recovery will get help from manufacturing.” Former Federal Reserve Governor Frederic Mishkin today said that while the central bank will complete its $600 billion bond- purchase program to help fuel the economy, a third round of so- called quantitative easing is unlikely. In the U.S., factories reported faster rates of orders and production. The ISM’s bookings measure rose in December to a seven-month high. “Manufacturers are carrying a good bit of momentum into January,” Norbert Ore, chairman of the ISM factory survey, said today on a conference call with reporters. There is “good balance between new orders and production,” and “there’s still some room” for inventory replenishment, he said. Further gains in manufacturing may come from a pickup in consumer spending, which accounts for about 70 percent of the U.S. economy. Retailers’ 2010 holiday sales jumped 5.5 percent for the best performance since 2005, according to MasterCard Advisors’ SpendingPulse, which measures sales by all payment forms. The gain was 4.1 percent a year earlier. The numbers include Internet sales and exclude automobile purchases.
• Credit Swaps Fall by Most in a Month After Manufacturing Data. The cost of protecting corporate bonds from default in the U.S. fell by the most in a month after a report showed manufacturing is improving. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.3 basis points to a mid-price of 82.8 basis points as of 10:59 a.m. in New York, according to index administrator Markit Group Ltd.
• Australia's 'Biblical' Floods to Worsen as Waters Cut Off Queensland City. Flooding is set to worsen in the Australian state of Queensland in the next 48 hours, cutting off tens of thousands of people as the military is mobilized and cabinet recalled.
• Wheat Rises to Five-Month High as Australia Flood, U.S. Cold Threaten Crop. Wheat futures rose to the highest in almost five months as floods may hamper grain shipments in Australia and cold temperatures threatened U.S. crops. In the Australian state of Queensland, floods spread across an area the size of France and Germany, swamping roads. In the southern U.S. Great Plains, “intense cold” forecast in the next 11 to 15 days “poses a 50 percent risk of damage” for winter crops, according to Commodity Weather Group. Parts of Kansas and Oklahoma had less than half of normal rainfall in the past 30 days, according to the National Weather Service.
• Technology Takeovers May Accelerate in 2011 as IBM(IBM), HP(HPQ) Push Into the Cloud. Technology companies that fueled more than $100 billion in acquisitions last year are likely to spend more in 2011 in a race to harness surging demand for cloud computing and security services. Intel Corp., Hewlett-Packard Co. and International Business Machines Corp. led purchases of more than 2,700 companies and still spent only a fraction of the cash piles they accumulated during the recession. The dollar amount of announced tech deals gained 12 percent, lagging behind a 26 percent jump in worldwide mergers, according to data compiled by Bloomberg. “I’m bullish” on 2011, said Larry Sonsini, chairman and co-founder of Wilson, Sonsini, Goodrich & Rosati, the Palo Alto, California-based law firm that worked with security-software maker McAfee Inc. on its $7.7 billion agreed sale to Intel. “When I look at enterprise clients, I see they are poised to invest in growth on a global basis.” Buyers aim to capture the $3.4 trillion in information- technology spending projected by researcher Gartner Inc. for 2011, a 3.5 percent increase from 2010.
• Russell 2000 Doubling S&P 500 Return Signals Economy Will Drive 2011 Rally. Smaller U.S. companies are rallying the most since 2003 relative to the Standard & Poor’s 500 Index, a sign to BlackRock Inc. and JPMorgan Funds that the economy will strengthen and spur a third year of gains for investors. The Russell 2000 Index, comprised of stocks with a median market value of $528.5 million, rose 25 percent in 2010, beating the S&P 500 by 13 percentage points. The return left the benchmark gauge for American equity at the lowest valuation ever compared with the small-cap measure, according to data compiled by Bloomberg. Increases in smaller companies that are more dependent on U.S. demand have preceded faster economic growth and the biggest equity rallies of the last two decades, data compiled by Bloomberg show.
• Brazil Inflation to Quicken With Rates, Barclays Says. Brazilian inflation may accelerate along with interest rates until President Dilma Rousseff makes clear her fiscal policy, said Marcelo Salomon, a Barclays Plc economist. “We are quite concerned with inflation,” Salomon, the bank’s economist for the South American country, said in an interview on Bloomberg TV’s “In Business With Margaret Brennan.” “The big question mark is what the new administration is going to be doing with the monetary and fiscal policy mix.’” Brazil’s 2011 inflation expectations rose for a fourth straight week, according to a Dec. 31 central bank survey of about 100 economists published today. Consumer prices will rise 5.32 percent this year from a week earlier forecast of 5.31 percent, the survey found. Rousseff pledged to contain consumer prices in her Jan. 1 inaugural speech. While early signs of Rousseff’s economic plans are “positive,” her efforts won’t be enough to prevent monetary tightening in the short term, Salomon said. Salomon forecasts Brazil policy makers will raise interest rates 50 basis points, or 0.50 percentage point, to 11.25 percent at the bank’s Jan. 18-19 meeting, and continue to increase borrowing costs by a total 150 basis points by the end of April.
• Bank of America(BAC) Sees $2 Billion Charge on Home Loans. Bank of America Corp., the biggest U.S. lender by assets, paid $2.8 billion to Freddie Mac and Fannie Mae after the U.S.-owned firms demanded the company buy back mortgages they said were based on faulty data. The bank rose as much as 5.6 percent in New York trading. Resolving the disputes cost Bank of America about $3 billion in the fourth quarter, including additions to loss reserves for loans that weren’t a part of the deals announced today, the Charlotte, North Carolina-based lender said in a statement. The agreements “largely addressed” liabilities from Fannie Mae and Freddie Mac, Bank of America Chief Financial Officer Charles H. Noski said on a conference call.
• Citadel's Investment-Banking Unit Loses Executives Boas, Kurtzman, Mayer. Chris Boas, Brad Kurtzman and Carl Mayer, senior executives at the investment banking unit of Ken Griffin’s Citadel LLC, have left the firm. Boas was head of credit markets for Citadel Securities. Mayer was head of leveraged finance and Kurtzman ran equity derivatives sales and trading.
• Sector Snap: Some Casino Cos. Up on Macau Data. Shares of casino operators with properties in Macau climbed Monday as a government report indicated that gaming revenue increased 66 percent in December.
• Retail Stocks Climb to 3-Year High as Analysts Recommend Shares. U.S. retail stocks rallied to a three-year high after analysts said that companies whose prospects are most tied to growth will gain. Target Corp., Macy’s Inc., J.C. Penney Co. and Family Dollar Stores Inc. advanced today after Citigroup Inc. recommended the shares as the economy continues to improve. Staples Inc. jumped to the highest since May after Janney Montgomery Scott LLC advised buying the world’s largest office- supply retailer. “There are hopeful signs in the employment outlook as non- farm jobs ramped up in recent months, and business confidence is improving,” David Strasser, an analyst at Janney in New York, wrote in a report today.
• Bank Stocks Rise After Bank of America(BAC) Settles Mortgage-Putback Claims. Bank of America Corp. and JPMorgan Chase & Co. carried financial stocks higher after Fannie Mae and Freddie Mac agreed to settle claims on at least $4.1 billion in faulty loans they bought from Countrywide Financial Corp. The agreement sent Bank of America, which owns Countrywide, up 6.5 percent to $14.20 in New York Stock Exchange composite trading, the biggest increase in almost eight months. New York- based JPMorgan rose 3.5 percent to $43.89 at 2:08 p.m. The KBW Bank Index of 24 stocks gained 2.3 percent to its highest level since last May.
• Illinois Has Days to Plug $13 Billion Budget Gap. Illinois lawmakers will try this week to accomplish in a few days what they have been unable to do in the past two years -- resolve the state’s worst financial crisis. The legislative session that begins today will take aim at a budget deficit of at least $13 billion, including a backlog of more than $6 billion in unpaid bills and almost $4 billion in missed payments to underfunded state pensions.

Wall Street Journal:

• Venture Investors Cluster Around Storage Start-Ups. Virtualization is pushing traditional data-storage systems past their breaking point, and venture capitalists are betting that so-called clustered storage technologies will finally have their day.
• Congress Targets Spending. The Republican majority that takes over the House this week plans an ambitious drive to slash government spending by tens of billions of dollars in the next few months, a strategy that ensures that the capital soon will be consumed by intense debate over how and where to reduce the size of government.
• Manufacturers Turn to Smart TV After 3-D Disappoints. After 3-D TV failed to excite consumers last year, manufacturers are betting that following the app-laden path of smartphones and tablet computers will fatten up what have been ultraslim profit margins.

CNBC:

• Fed Unlikely to Raise Rates Until 2013: Goldman's(GS) Hatzius. The Federal Reserve likely won't add any more stimulus to the economy this year but will probably hold off on raising interest rates until 2013, Jan Hatzius, chief US economist for Goldman Sachs, told CNBC Monday.
• Why Oil Stocks Are Better Investment Than Crude Futures.
  

Business Insider:

• John Paulson Is About to Become a Billionaire for the Second Time Over.

New York Times:

• Why Facebook Is Such a Crucial Friend for Goldman Sachs(GS). The news that Goldman has taken a stake in Facebook, the white-hot social networking giant, has tongues wagging from Wall Street to Silicon Valley. As first reported by DealBook, Goldman has invested $450 million in a deal that values Facebook at $50 billion. As part of the deal, Goldman is looking to raise as much as $1.5 billion from its wealthy clients to invest in Facebook alongside the firm.

Mineweb:

• Japanese Scientists Develop 1st Artificial Rare Metal-Palladium-Type Alloy. Scientists say they have developed nanoprocessing technology which may lead to the production of other artificial rare metals.

Dallas Fed:

• Slide Show on U.S. Economy.

Boston Globe:

• Medicaid Cost Crisis Looms for Massachusetts. The money, it seems, is never enough. Governor Deval Patrick approved a record $9.6 billion last July for the state’s health insurance program for the poor — sufficient, he assumed, to last a year. But the program’s costs quickly outpaced expectations, forcing the governor to approve an additional $329 million in October and then seek $258 million more, which lawmakers approved last week. And even that may not last, with six months remaining in the budget year. The ballooning cost of Medicaid is one of the biggest challenges facing Massachusetts and other states, which have seen demand for the program jump during the recession as increasing numbers of unemployed residents enroll in the subsidized insurance plan.

Sacramento Bee:

• Brown to Propose Broad List of Budget Cuts. The broad set of budget cuts that Gov.-elect Jerry Brown will propose in the coming days would touch nearly all Californians, eliminating local redevelopment agencies, shrinking social service benefits, shuttering parks and reducing library hours, according to a source familiar with his budget proposal. Brown, to be sworn in this morning, wants to slash virtually every state-funded program to help balance California's massive deficit, in many cases resurrecting cuts sought by Gov. Arnold Schwarzenegger but rejected by lawmakers. Brown would restrict Medi-Cal access, divert low-level offenders to county jails and cut deeply into California State University and the University of California. The Democrat is counting on lawmakers to approve the cuts to encourage voters to also provide revenue. A June ballot measure would extend higher tax rates on income, vehicles and sales set to expire this year, as well as eliminate a new corporate tax benefit.

TradingMarkets:

• Byron Wien Announces The Ten Surprises for 2011.

gigaom:

• Apple(AAPL) Holds Smartphone Lead, But Android is Gaining. While Android surges among new smartphone buyers, Apple’s iOS continues to hold on to the overall marketshare lead, although it remains within spitting distance of a fading BlackBerry OS and a hard-charging Android OS, according to the latest figures from the Nielsen Company. According to November 2010 data, Apple holds 28.6 percent of the U.S. smartphone market, up slightly from 27.9 percent in October. BlackBerry OS slipped again in November to 26.1 percent, down from 27.4 percent in October and 33.9 percent in June. Android OS, meanwhile, closed the distance on Apple — reaching 25.8 percent in November, compared to 22.7 percent in October and 15 percent in June. The big winner in all this is the smartphone market as a whole, which is growing rapidly: Nielsen said that 45 percent of recent phone buyers chose a smartphone in November, up from 34 percent in June, which suggests that we’re not too far off from a time when one out of every two handsets sold in the U.S. is a smartphone.

Politico:

• White House Hires Veteran Environmental Economist. The Obama administration has hired a seasoned environmental economist from the Environmental Defense Fund as the White House prepares to battle congressional Republicans over climate and air pollution regulations.
• Darrell Issa Reveals List of Investigations. Rep. Darrell Issa is aiming to launch investigations on everything from WikiLeaks to Fannie Mae to corruption in Afghanistan in the first few months of what promises to be a high-profile chairmanship of the top oversight committee in Congress. According to an outline of hearing topics obtained by POLITICO, the House Oversight and Government Reform Committee is also planning to investigate how regulation impacts job creation, the role of Fannie Mae and Freddie Mac in the foreclosure crisis, recalls at the Food and Drug Administration and the failure of the Financial Crisis Inquiry Commission to agree on the causes of the market meltdown.
• 6 States to Watch on Health Reform. Health reform repeal efforts will generate a lot of noise in the opening weeks of the 112th Congress – but the real action on health reform is going to ramp up outside the Beltway in state capitals. “Unless states move forward as fast and as hard as they can this year, they will be lost in 2014 when the bulk of health reform hits,” says Stan Dorn, a senior health policy researcher at the Urban Institute. “The pressure is just enormous on state policy makers.”

Reuters:

• U.S. Consumer Bankruptcies Rose 9% in 2010.
• Republicans May Starve US Financial Reform of Cash.
• Barnes & Noble Says Nook Boosts Holiday Sales. Barnes & Noble Inc (BKS) reported strong preliminary holiday results at its superstores, led by the popularity of its Nook e-readers, and shares rose more than 5 percent.

The Age:

• Cashed-Up BHP(BHP) Ready to Splurge. There are about 20 exploration companies in the US market on its watch list, writes Barry FitzGerald. BHP Billiton petroleum chief executive Mike Yeager is rightly proud of the division's top-of-industry performance in achieving an average 11 per cent growth rate in production since the 2007 financial year. But the outlook for the next four years is not so rosy. If anything, BHP's annual oil production could well flatline at its current 160 million barrels of oil equivalent until at least 2015, according to some analysts' forecasts. That could all change should BHP do what is expected by devoting a chunk of its growing pile of cash to a meaningful oil and gas acquisition, with more than 20 independent exploration and production (E&P) companies in the US market on its watch list.

Bear Radar

Style Underperformer:

• Large-Cap Growth (+1.32%)

Sector Underperformers:

• 1) Gold +.03% 2) Foods +.04% 3) Oil Service +.10%

Stocks Falling on Unusual Volume:

• SCOK, MAKO, CLX and HAE
  

Stocks With Unusual Put Option Activity:

• 1) SFI 2) NOV 3) UNG 4) MELA 5) TCK
  

Stocks With Most Negative News Mentions:

• 1) CTRP 2) DVN 3) HES 4) IART 5) WEC
  

Bull Radar

Style Outperformer:

• Small-Cap Value (+2.07%)

Sector Outperformers:

• 1) Coal +3.67% 2) Steel +2.68% 3) Disk Drives +2.67%

Stocks Rising on Unusual Volume:

• DLLR, GNCMA, ZION, BAC, TWTC, TLEO, BP, PZE, AFOP, RLOC, FTEK, UFPT, ASIA, HSIC, STEC, SATS, NNBR, FORR, CENX, ASMI, CRMT, MKSI, MASI, VRSK, IBOC, NEOG, VSAT, BCH, IGN, PXQ, SHI, MOD, ROG, BTH and VFH
  

Stocks With Unusual Call Option Activity:

• 1) LYB 2) NVDA 3) KBH 4) STEC 5) PAYX
  

Stocks With Most Positive News Mentions:

• 1) LOW 2) RT 3) ISRG 4) LNCR 5) WSO
  

Monday Watch

Weekend Headlines
Bloomberg:

• Vigilantes Sidelined as Treasury Swaps Show Growth Tops Deficit. The worst performance by Treasuries since the second quarter of 2009 reflects prospects for faster U.S. economic growth rather than concern that rising budget deficits will drive investors away from government debt. While the average yield on Treasuries rose to 1.89 percent from 1.42 percent at the end of September, according to the Bank of America Merrill Lynch Treasury Master index, the price of credit-default swaps tied to U.S. debt declined to 41.5 basis points from 48.4 basis points at the end of September, according to Bloomberg data. The dollar rose 1.5 percent against an index of currencies of six major U.S. trading partners. The drop in swap prices and the greenback’s strength shows bond vigilantes aren’t ready to punish the U.S. for its spending. Pacific Investment Management Co. and JPMorgan Chase & Co. raised their growth forecasts after President Barack Obama agreed to extend George W. Bush-era tax cuts as reports show gains in retail sales, manufacturing and consumer confidence.
• U.S. Yield Spreads Fall Below Rest of the World. For the first time on record, investors are demanding a smaller premium to own U.S. corporate bonds than global company debt. Bondholders require 166 basis points more yield to hold U.S. investment-grade company debt instead of Treasuries, compared with an average 169 basis-point spread worldwide, according to Bank of America Merrill Lynch data. At the height of the credit crisis in December 2008, companies had the disadvantage of having to pay about 150 basis points more to lure U.S. investors to their bonds than borrowers seeking buyers elsewhere in the world. The shift highlights confidence in North America’s economic recovery as companies across the Atlantic in Europe contend with bailing out Greece and Ireland while waiting to see whether the fiscal crisis ensnares more countries. The U.S. economy is forecast to grow faster this year than either the euro region or Japan, according to Bloomberg surveys. “In the U.S. you have a little more optimism while in Europe you have more concerns about the sovereigns,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London. “The sovereign issues are holding back spreads in Europe.”
• Dollar Rises Versus Euro as Data Shows Slower China Manufacturing Growth. The dollar rose against the euro for the first time in four days after a Chinese report showed manufacturing expanded at a slower-than-forecast pace in December, boosting demand for safer assets. The U.S. currency gained versus 13 of 16 major counterparts after China’s logistics federation and statistics bureau said on Jan. 1 its purchasing managers’ index fell to 53.9 from 55.2 in November. The euro fell by the most in more than two weeks against the dollar as concern Europe’s sovereign debt crisis will linger damped demand for securities in the region, which added Estonia as the 17th member nation on Jan. 1.
• Copper Gains to Record For Third Straight Session on Tight Supply Concern. Copper jumped to a record in New York, extending a second annual advance, on speculation that supply will lag behind demand as the global economic recovery gathers pace. Copper for March-delivery on the Comex in New York gained as much as 0.7 percent to $4.4795 a pound, the highest ever for a most-active contract, before trading at $4.46 a pound. The metal surged 33 percent in 2010, a second annual increase, as the global economy recovered from the worst recession since World War II. The London Metal Exchange and Shanghai Futures Exchange are closed today for holidays. “We’re expecting the Chinese come back into the market in early 2011, leading to a rebound in demand and driving a deficit in the global market balance,” said Xin Yi Chen, a Singapore- based analyst at Barclays Capital.
• Feinberg Says Half of $20 Billion Fund Should Cover BP(BP) Oil-Spillage Claims. Kenneth Feinberg, the lawyer paying victims of BP Plc’s Gulf of Mexico oil spill, said he anticipates about half the $20 billion fund set up by the company should be adequate to cover claims for economic losses.
• Russian Oil Output Hits Post-Soviet Record in 2010. Russia, the world’s largest oil producer, set a post-Soviet record for yearly crude output in 2010, even as the country’s production in December slipped from the previous month. Russian output last year rose 2.2 percent to 10.15 million barrels a day, the highest annual average since the collapse of the Soviet Union in 1991, the Energy Ministry’s CDU-TEK statistics unit said in a statement today. Russia produced 9.93 million barrels a day in 2009.
• Snowplow Slowdowns Might Become American Way: Kevin Hassett. Europeans have grown accustomed to seeing government workers shut down their countries when provoked. At this time of huge deficits from Washington to the smallest towns, government workers in the U.S. also face significant cutbacks. Americans may have had their first taste of what that will mean. New York City Mayor Michael Bloomberg and New York Governor David Paterson are both calling for an investigation of allegations that city workers intentionally dragged out the cleanup of the Dec. 26 blizzard as a way to protest cuts in the city budget. The New York Post, citing City Councilman Dan Halloran, reported that some snow-plow drivers skipped streets on their routes or kept their plows too high to clear streets.

Wall Street Journal:

• Insurers Sued Over Death Bets. Scrutiny on Secondary-Market Policies That Paid Investors When Others Died. New investor lawsuits are emerging amid the wreckage of an investment boom in life-insurance policies that spectacularly collapsed. The suits involve the secondary market in life policies, which boomed from 2004 to 2008 as thousands of old people sought to make fast cash by taking out multimillion-dollar policies on their own lives to sell to investors. Tens of billions of dollars worth of insurance changed hands. Under the deals, the investors pay the premiums until the insured person dies, at which point they collect the death benefit.
• Drilling Is Stalled Even After Ban Is Lifted. More than two months after the Obama administration lifted its ban on drilling in the deep-water Gulf of Mexico, oil companies are still waiting for approval to drill the first new oil well there. Experts now expect the wait to continue until the second half of 2011, and perhaps into 2012. The delay is hurting big oil companies such as Chevron Corp. and Royal Dutch Shell PLC, which have billions of dollars in investments tied up in Gulf projects that are on hold and are paying hundreds of thousands of dollars a day for rigs that aren't allowed to drill. Smaller operators such as ATP Oil & Gas Corp., which have less flexibility to focus on projects in other regions, have been even harder hit. The impact of the delays goes beyond the oil industry. The Gulf coast economy has been hit hard by the slowdown in drilling activity, especially because the oil spill also hurt the region's fishing and tourism industries. The Obama administration in September estimated that 8,000 to 12,000 workers could lose their jobs temporarily as a result of the moratorium; some independent estimates have been much higher. The slowdown also has long-term implications for U.S. oil production. The Energy Information Administration, the research arm of the Department of Energy, last month predicted that domestic offshore oil production will fall 13% this year from 2010 due to the moratorium and the slow return to drilling; a year ago, the agency predicted offshore production would rise 6% in 2011. The difference: a loss of about 220,000 barrels of oil a day. Drilling in waters of less than 500 feet also has been snared by the government's increased scrutiny. Regulators requested modifications to 101 shallow-water drilling plans in 2010, compared with 59 such requests in 2009 and just 31 in 2008. Rig operators say drilling permits once approved in a matter of weeks have taken up to five months to process as the government introduced new rules. Some companies are shifting investments out of the Gulf. Erik Milito, a senior official at the American Petroleum Institute, the oil industry's main lobbying group, said more rigs will leave soon if drilling isn't allowed to resume. "They're doing everything they can to keep the contracted rigs in the Gulf," said Mr. Milito. "But they're idle, they're not able to do the work they intended to be out there doing, and that can only go on so long." ATP Oil & Gas, one of the smallest deep-water operators in the Gulf, has seen its share price fall 27% since the Deepwater Horizon exploded, a sign investors are concerned about lost revenue from its delayed wells. ATP's chairman, Paul Bulmahn, has said the company is now looking for projects in other countries. In a letter to President Barack Obama last month, Mr. Bulmahn pleaded for a drilling permit. The slow pace of permitting has drawn fire even from some Congressional Democrats, especially Louisiana Sen. Mary Landrieu, who has said the policy is hurting the region's economy. Louisiana Department of Natural Resources Secretary Scott Angelle pushed for a return to drilling last month. "It's time to get the men and women of this industry back to work, as well as the other industries that are dependent upon drilling activity for survival—the welders, the boat captains, the pipefitters and caterers," he said. "There is a multitude of individuals on the coast who want to get back to work finding the fuel to energize America."
• Hedge Funds Extend Gains, but Insider Probe Swirls. Hedge funds notched another run of gains in 2010. But as the year closed, a wide-ranging insider-trading investigation spooked the industry and cast a cloud that will loom in the months ahead. In 2010, hedge funds on average returned 7.11% through November, according to the latest data from Hedge Fund Research Inc. The Dow Jones Industrial Average climbed 11% in 2010, with December being particularly strong.
• Cooking Oil's Surge Shows How Inflation Hits Chinese. These days, Liu Chuansheng nervously scouts five locations before he buys cooking oil, illustrating how a sudden spike in the price of the Chinese kitchen's most vital ingredient has become close to a national crisis.
• Investors' Forecast: Sunny With Chance of Overheating. Investor optimism is almost as much of a New Year's tradition as hangovers and resolutions: This January, like last, forecasters see the U.S. economy growing at a rate that is neither too hot nor too cold. For many Americans, with unemployment hovering near 10%, it's hard to feel optimistic in the midst of the current recovery, but investors see things differently: They believe the economy has more to fear from growing too quickly rather than too slowly.
• Big Firms Poised to Spend Again. Big U.S. companies have cleaned up their balance sheets and, flush with cash, appear open to using it in 2011 on factories, stores and even hiring. "We preserved cash" over the past few years, said Jim Flaws, chief financial officer of Corning Inc. "Now we're turning around and feeling comfortable about our outlook and spending it."
• The EPA's War on Texas. The Environmental Protection Agency's carbon regulation putsch continues, but apparently abusing the clean-air laws of the 1970s to achieve goals Congress rejected isn't enough. Late last week, the EPA made an unprecedented move to punish Texas for being the one state with the temerity to challenge its methods.
• New York Real Estate 'Green Shoots' Cheer Developers.
  

IBD:

• No. 2 U.S. Automaker's Engine Revved By Positive Consumer View. Ford(F), also benefiting from increasing U.S. auto sales, isn't ready to let GM outshine it.

NY Times:

• Boomers Hit New Self-Absorption Milestone: Age 65. In keeping with a generation’s fascination with itself, the time has come to note the passing of another milestone: On New Year’s Day, the oldest members of the Baby Boom Generation will turn 65, the age once linked to retirement, early bird specials and gray Velcro shoes that go with everything.
• Public Workers Face Outrage as Budget Crises Grow. “The mantra is that the problem is the unions, the unions, the unions.” Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules. It is an angry conversation.
• Real Estate Developers Prosper Despite Defaults. Industry lore has it that New York is one of the toughest, most unforgiving real estate markets in the world. The costs are so high, the unions so ornery, the politicians so demanding and the rivalries so fierce, that one false move invites financial disaster. But the truth is that there have been surprisingly few career fatalities among New York developers, even though they have lost billions of investor dollars on overpriced real estate and have littered the city with unfinished apartment buildings. While a homeowner who lost a house to foreclosure would find it difficult to borrow for years, developers who defaulted on enormous loans have still been able to attract money. The reasons, experts say, are that there is still plenty of money floating around and that the market has a very short memory.
• Computers That See You and Keep Watch Over You.
• Europe's Young Grow Agitated Over Future Prospects.
• The New Speed of Money Reshaping Markets. A SUBSTANTIAL part of all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike. Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, nearly the size of three football fields, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light. Countless metal cages contain racks of computers that perform all kinds of trades for Wall Street banks, hedge funds, brokerage firms and other institutions. And within just one of these cages — a tight space measuring 40 feet by 45 feet and festooned with blue and white wires — is an array of servers that together form the mechanized heart of one of the top four stock exchanges in the United States. The exchange is called Direct Edge, hardly a household name. But as the lights pulse on its servers, you can almost see the holdings in your 401(k) zip by. “This,” says Steven Bonanno, the chief technology officer of the exchange, looking on proudly, “is where everyone does their magic.”
• Goldman(GS) Invests in Facebook at $50 Billion Valuation. Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.

CNNMoney:

• Congress Preps for War Over Spending.
• Verizon(VZ) Snaps Up iPhone Domains.
  

Business Insider:

• 100 Shocking Predictions for 2011.

LA Times:

• When Will Housing Come Back in California? Five Experts Offer Their Views.
• An Unlikely Duo's Auto Safety Quest. A college professor and a former federal transportation official team up to seek standard installation of black boxes in cars — a system they hoped would do for traffic safety what it's done for aviation.
• Rep. Darrell Issa Pledged to Find $200 Billion in Government Waste. As the new head of the House oversight committee, Republican Darrell Issa of Vista says the Obama administration has 'played fast and loose with the money Congress gave them.'

Boston Herald.com:

• Feds Wind Plan May Zap Massachusetts. Massachusetts electric ratepayers could get jolted by plans to open up huge swaths of federal waters south of Martha’s Vineyard and Nantucket for more offshore wind farms. About a million National Grid ratepayers are already expected to get hit with a 2 percent hike in their electric bills due to the planned Cape Wind project in Nantucket Sound. But if 3,000 square miles of additional federal waters are fully developed, as envisioned by the U.S. Interior Department and the Patrick administration, then ratepayers could see double-digit rate hikes valued at tens of billions of dollars, business and industry experts warn.

gigaom:

• Amazon.com(AMZN) in Talks to Buy Out UK's Lovefilm. Amazon is reportedly looking to buy U.K.-based video rental firm Lovefilm in a deal that would value it at £200 million ($312 million), according to a report in the Sunday Times (cited by Reuters). Buying Lovefilm could give Amazon a stronger position in the U.K. and also give it some expertise to go up against Netflix’s(NFLX) subscription DVD-by-mail and video rental business.

Washington Post:

• U.S. Dangerously Silent on Human Rights.

Politico:

• House GOP Plans Two-Pronged Assault on Health Law. The new Republican-controlled House plans to schedule a vote to repeal the sweeping health care overhaul before President Barack Obama delivers his annual State of the Union address late this month, incoming House Energy and Commerce Chairman Fred Upton (R-Mich.) said Sunday. “We have 242 Republicans,” he said on “Fox News Sunday.” He added, “There will be a significant number of Democrats, I think, that will join us. You will remember when that vote passed in the House last March, it only passed by seven votes.” Upton, whose committee will play a key role in the GOP's effort to roll back the law, said that he believes the House may be near the two-thirds majority required to override a presidential veto. “If we pass this bill with a sizeable vote, and I think that we will, it will put enormous pressure on the Senate to do perhaps the same thing,” he said. “But then, after that, we're going to go after this bill piece by piece.”

USA Today:

• Experts: Gas Could Climb to $3.75 Per Gallon. Drivers in the USA could be paying as much as $3.75 a gallon for gas this spring, oil experts predict. Prices at the gas pump have inched up all year as the cost of crude oil neared $100 a barrel. On Christmas Day, the average nationwide price of self-serve regular hit $3, a record for that day. By year's end, the average price reached $3.06. Prices creeping toward $4 a gallon could have dire consequences for some industries and slow the economic recovery, analysts say. The record price is $4.11 a gallon on July 17, 2008. "We learned in 2008 that $4-a-gallon gas is a deal-breaker for the economy," says Joel Naroff, president of Naroff Economic Advisors. "If it happens, it's not sustainable. There's only so much the consumer will bear." He says drivers who need gas to get to work will buy it, but they'll cut spending elsewhere, sucking money out of the recovering economy. Consumers react when the price reaches $3.50, says Tom Kloza, chief oil analyst for the Oil Price Information Service. People living paycheck to paycheck will cut back on other spending to compensate for higher gas prices, he says, and gas at $4 a gallon "throws us into a consumer slowdown." "Oil prices ripple through every part of the economy," Kloza says. "I think it'll be the second highest year for oil prices on record." He predicts the price of a gallon of gas will range from $3.25 to $3.75 in the spring and crude oil will exceed $100 a barrel for a short time. He attributes much of the increase to speculation in oil futures. Last week, former Shell CEO John Hofmeister caused a stir when he predicted $5-a-gallon gas in 2012 as worldwide demand for oil grows while U.S. production shrinks. Developing wind, solar and biofuel alternatives will not generate enough power to meet the demand, Hofmeister says.
  

Reuters:

• Iraq OKs Shell Plan to Build Its Own Dock. Royal Dutch Shell may build its own dock in Iraq's Shatt al-Arab waterway to speed up delivery of heavy equipment to the supergiant Majnoon oilfield which the oil major is developing with a Malaysian partner.
• BofA(BAC) Reviews Documents Amid WikiLeaks Threat. A team of up to 20 Bank of America Corp officials, led by the chief risk officer, Bruce Thompson, have been reviewing thousands of documents amid a threat that it may be a target of WikiLeaks, The New York Times reported on Sunday.

Telegraph:

• European Debt Markets 'Face Second Credit Crisis'. European debt markets could be hit by a second credit crisis within months as fears grow over the huge volume of new bonds that must be sold by governments and banks in 2011. Banks alone must refinance about €400bn (£343bn) of debt in the first half of the year, but add in the more than €500bn European governments must replace over the same period, as well as further hundreds of billions of euros of mortgage-backed debt maturing and there is the potential for chaos in the credit markets. "What we are looking at here clearly has the potential to become a second credit crunch. However, this time it would be much worse than before," said Celestino Amore, founder of IlliquidX, which specialises in trading hard-to-price debt. "Governments have been able to slow down the process, but the problems did not go away. There remains trillions of dollars of debt that must be refinanced or sold."
• World on Red Alert Over China's Inflation. China could be hit by inflation of 7pc to 8pc over the next two months, panicking Beijing's policy-makers into dramatically raising interest rates, economists have warned. The prospect of at least four further interest rate rises in the world's second-largest economy is likely to alarm global markets, which tumbled in shock at China's decision to raise rates on Christmas Day.

Der Sonntag:

• There is mounting evidence that the economic recovery is sustainable, Swiss Reinsurance Co. Chairman Walter Kielholz said. The situation in the U.S. has improved recently, Kielholz said in an interview. The risk of a double dip is "very small," he said.

CBCNews:

• Egyptian Church Bomb Victims Mourned. Dozens of grieving Christians attended mass at the Saints Church in Egypt's Mediterranean port city of Alexandria on Sunday, the day after 21 worshippers were killed there in an apparent suicide bombing. The service was marked by the grief and anger felt by a congregation devastated by the attack, which took place outside the church's door about 30 minutes into the new year as churchgoers were leaving. Many sobbed while others cried hysterically and screamed in anger. Some lamented that attacks on Christians and churches often happen during usually happy occasions like Christmas. Others complained that the government was not doing enough to protect churches. Riot police backed by armoured vehicles were deployed outside the church on Sunday, however many felt it was too little, too late. "There is a lack of security in Egypt. The Interior minister must be removed," said one man who had lost a relative in the attack. Rev. Maqar, who led the service, did not give a sermon, preferring to express his grief with silence. "Is it possible that what happened is even remotely human? We were carrying dead bodies, but in pieces. Who can fathom such a thing? Who can tolerate it?" he said on Sunday. Saturday's attack, which left nearly 100 people injured, was the worst violence against Egypt's Christian minority in a decade. The Interior ministry blamed the bombing on "foreign elements." The Alexandria governor has accused al-Qaeda, pointing to the network's branch in Iraq, which has attacked Christians there and threatened Egypt's Coptic Orthodox Christian community.

Sydney Morning Herald:

• Two Dead as Flood Chaos Hits 22 Queensland Towns. Two people are dead and one other is feared drowned in Queensland as northern Australia's devastating flood emergency continues to wreak havoc. More than 1000 people were sheltering in evacuation centres across Queensland last night. Twenty-two towns in the state's centre are either under water or isolated and 900 houses have been abandoned.

Weekend Recommendations
Barron's:

• Made negative comments on (AIG).

Citigroup:

• Rated (WR) Buy, target $27.
• Rated (ANAC) Buy, target $9.
  
• Reiterated Buy on (AMD), raised estimates, boosted target to $12.50, added to Top Picks Live list.

Night Trading

• Asian indices are +.50% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 102.0 -1.0 basis point.
• Asia Pacific Sovereign CDS Index 103.0 unch.
• S&P 500 futures +.21%.
• NASDAQ 100 futures +.53%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
10:00 am EST

• ISM Manufacturing for December is estimated to rise to 57.0 versus a reading of 56.6 in November.
• ISM Prices Paid for December is estimated to rise to 71.3 versus a reading of 69.5 in November.
• Construction Spending for November is estimated to rise +.2% versus a +.7% gain in October.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

BOTTOM LINE: Asian indices are higher, boosted by technology and commodity shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as more economic optimism, equity fund inflows, seasonal strength, buyout speculation and short-covering offsets profit-taking, rising sovereign debt angst and China inflation worries. My intermediate-term trading indicators are giving mostly bullish signals and the Portfolio is 100% net long heading into the week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as US debt ceiling concerns, global growth worries and emerging market inflation fears offset short-covering, less financial sector pessimism and technical buying. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 100% net long heading into the week.