Bear Radar

Style Underperformer:

• Mid-Cap Growth (+.13%)

Sector Underperformers:

• 1) Airlines -1.98% 2) Coal -1.33% 3) Homebuilders -.94%

Stocks Falling on Unusual Volume:

• ALLT, SFLY, PHH, MJN and UAL
  

Stocks With Unusual Put Option Activity:

• 1) SVU 2) XOP 3) GPS 4) AET 5) UTX
  

Stocks With Most Negative News Mentions:

• 1) DAL 2) AM 3) BKS 4) RYL 5) UAL
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value (+.38%)

Sector Outperformers:

• 1) Education +1.09% 2) HMOs +1.07% 3) Gaming +1.07%

Stocks Rising on Unusual Volume:

• MNTA, PVD, RE and CHS
  

Stocks With Unusual Call Option Activity:

• 1) CAM 2) SUN 3) SFLY 4) AMD 5) INHX
  

Stocks With Most Positive News Mentions:

• 1) BA 2) C 3) RTN 4) KFT 5) ORCL
  

Charts:

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

Friday Watch

Evening Headlines

Bloomberg:

• King Says Crisis Threatens Europe’s Economy as Stability Outlook Worsens. Mervyn King, vice chairman of the European Systemic Risk Board, said Europe’s sovereign debt crisis is threatening to hurt the real economy and the outlook for financial stability has worsened. Growth prospects “have deteriorated” since September, King, who is also governor of the Bank of England, said at a briefing hosted by the European Central Bank in Frankfurt yesterday. “Investors lack confidence to continue to provide normal levels of funding. Dependence on central banks has risen.” The ECB loaned banks a record 489 billion euros ($636 billion) for three years on Dec. 21 to avert a credit crunch from the sovereign debt crisis. The central bank said earlier this week that the turmoil has taken on systemic proportions not seen since the 2008 collapse of Lehman Brothers Holdings Inc. King said the outlook for financial stability has “worsened” since the last ESRB meeting in September, and while intervention by the ECB is expected to “assuage funding problems in the near term, in the longer term private funding markets must be revitalized.” Bank shares have suffered this year as borrowing costs surged in the euro region. The Stoxx 600 Banks Index has fallen 28 percent since the end of June, compared with a 12 percent decline by the Stoxx Europe 600.
• 'Monti Effect' Fizzles Before $574 Billion New Year: Euro Credit. Prime Minister Mario Monti's market honeymoon is ending as Italian bond yields near 7% signal mounting concern his government may struggle to sell $574 billion of debt next year. Monti took just five weeks in office to push through a 30 billion-euro emergency budget package aimed at taming surging borrowing costs. Investors reacted to the plan's final approval by the Senate yesterday by driving up the yield on Italy's 10-year benchmark bond by 12 basis points to 6.91%, near the 7% level that prompted Greece, Ireland and Portugal to seek bailouts.
• Slovenia’s Debt Rating Cut by Moody’s on Banking Industry Risk. Slovenia had its credit rating lowered one step to A1 by Moody’s Investors Service on the potential need for the government to support its banking system amid Europe’s debt crisis. The euro-area nation’s banking industry has assets that are about 136 percent of gross-domestic product, which is “relatively large when compared to other systems in Eastern Europe,” Moody’s said yesterday in a statement. It assigned a negative outlook to Slovenia’s credit grade, the fifth-highest. Standard & Poor’s ranks the nation AA-, one level higher. Slovenia was downgraded at Moody’s for the second time in three months as the euro area struggles to resolve its sovereign-debt crisis, prompting ratings companies step up scrutiny of the region.
• North Korea Warns Lee Government Over Condolences, Yonhap Says. North Korea said its relationship with South Korea is at a crossroads and could break down completely depending on the Lee Myung Bak administration’s attitude to condolences to the late Kim Jong Il, Yonhap News reported, citing a North Korean website. North Korea is open to all condolence messages and visits from South Korea following Kim’s death and took steps to open air routes and a land corridor via the Gaeseong joint industrial zone, Yonhap said, citing Uriminzokkiri, a website run by the North’s state-run Committee for the Peaceful Reunification of Korea. South Korea’s government on Dec. 20 expressed “sympathy” to the people of North Korea while stopping short of sending an official delegation to offer its communist neighbor condolences. It said it would allow private visits by the wife of late President Kim Dae Jung and family members of the late founder of the Hyundai Group, Chung Ju Yung.
• China May Halt Buying of Corn Until Price Falls to $5 a Bushel, Yigu Says. China, the second-biggest corn consumer, may import more of the grain if global prices fall 19 percent to about $5 a bushel, a level that is significantly below domestic prices, said Yigu Information Consulting Ltd. China’s corn supply is sufficient after a record harvest and the government may import to boost stockpiles only if there is a “clear price advantage,” said Feng Lichen, general manager of Yigu, China’s largest corn information portal. Corn, used as an ingredient in feed and in ethanol, has plunged 20 percent since Aug. 31 on high global grain supplies and concerns that Europe’s deepening debt crisis and a slowing global economy may sap demand. Morgan Stanley on Dec. 13 lowered its price forecasts for agricultural commodities including corn because of rising supplies.
• Mongolia Spending Risks Commodities Bust: IMF. Mongolia’s economy, which grew 20.8 percent last quarter, risks contraction along with a global downturn in commodity prices partly due to a surge in state spending, according to the International Monetary Fund. Government spending jumped 50 percent in real terms to 6.3 trillion tugrik ($4.6 billion) this year, pushing inflation in the $8.4-billion-economy to 14 percent, Steven Bennett, IMF’s head of Mongolia coverage, said in an interview in Tokyo. That may drive up borrowing costs and cut the profitability of mining projects, Mongolia’s biggest industry, he said. “The global economy is in a dangerous phase and what that means for Mongolia is a higher-than-normal chance that commodity prices fall,” Bennett said. “Their spending plans could not be realistically financed if there was a repeat of the 2008 shock. They’d have to cut spending. This is ‘boom-bust’ policy- making.”
• Graduates in 'Weird Limbo' Work for Free While Hunting for Jobs.

Wall Street Journal:

• Agreement Reached to Extend Tax Break. House Speaker John Boehner, bowing to heavy pressure from fellow Republicans, agreed Thursday to a two-month extension of a payroll-tax break, ending a stalemate that had created a wedge within the party.
  
• Canada Finance Minister: Euro Zone May Enter 'Serious' Crisis. Canada's Finance Minister Jim Flaherty said the euro zone sits on the brink of a "very serious crisis," and may require European leaders to use taxpayers' cash to recapitalize the region's banks and stabilize financial markets. During a taped interview with the Canadian Broadcasting Corp., Flaherty said the world's big economies, including Canada, wouldn't turn a "blind eye" to the euro-zone's problems, and are prepared to act under certain conditions. "Europeans have taken some steps, but it is belated and incremental," said Flaherty, the longest-serving finance minister among the Group of Seven industrialized countries. "This is not a good picture." He added euro-zone leaders have been inconsistent in their messaging, by stating that they want to keep the euro area together but at the same time indicating they are unwilling to use taxpayers' cash to bailout weaker peripheral countries. "You can't have it both ways, so something has to give, and it has not given yet," Flaherty said. "I think ultimately the large euro-zone countries will have to make an important decision. Are they going to save the euro zone or not? And, if they are, then they have to recapitalize their banks, and they are going to have to use taxpayers' money."
  
• Risk Is Out, and Goldman Sachs(GS) Cuts Ties With Brokers. Goldman Sachs Group Inc. has cut ties with more than a dozen brokers that once steered hedge-fund trades its way amid greater scrutiny of Wall Street’s interactions with customers. Since the beginning of last year, Goldman has cut these broker relationships to roughly six from more than two dozen, people familiar with the matter said. At the same time, Goldman’s prime brokerage division has continued to drop smaller fund clients that aren’t generating enough profits, people familiar with the matter said, in some cases directing them to the brokers Goldman continues to use. The moves come amid increased scrutiny. Last week, Goldman Sachs Execution Clearing LP agreed to pay nearly $10 million to the receiver in a Florida Ponzi scheme that lost $168 million for investors. Goldman hasn’t been accused of wrongdoing, but is connected to the case through Shoreline Trading Group LLC, the “introducing” broker for funds run by Arthur Nadel that cleared trades through Goldman.
• Pyongyang Myth-Builders Step It Up. Kim's Death Forces Propaganda Department to Work Quickly to Bolster New Leader's Legitimacy.
• BMW, Mercedes Duel in U.S. BMW AG and Mercedes-Benz are locked in an expensive race for bragging rights as this year's top-selling luxury car in the U.S. market, and customers are benefiting.
• Fed May Signal Low Rates Into 2014. The Federal Reserve could signal it is likely to keep short-term interest rates near zero into 2014 or beyond, to bolster the fragile economic recovery. Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013. Some believe low inflation and high unemployment could warrant low rates for longer. Updating the view on rates has become an important part of Fed discussions about how the central bank explains its goals and policies to the public.
• Interview: China Economist: Beijing Unlikely To Abandon Housing Curbs. Despite slower economic growth, China's central government won't abandon controls on the property market as that would undermine its credibility, a prominent Chinese economist long associated with the country's market-oriented reforms said. Lu Mai--secretary general of the China Development Research Foundation, a Beijing think-tank that studies development issues and whose reports circulate in China's governing State Council--conceded.

Dow Jones:

• NY Fed: New Dollar Swap Facility Borrowings Total $9.891 Billion. New borrowings at the Federal Reserve's dollar swap facility continued to rise in the week ending on Wednesday. Total new borrowing for the week was $9.891 billion, led by $5.122 billion in borrowing from the European Central Bank and $4.769 billion in borrowing from the Bank of Japan. Total outstanding borrowing stood at $62.599 billion, compared to $54.335 billion the week before. Last week, borrowing jumped on a surge in drawings from the ECB.

MarketWatch:

• Hong Kong's Property Market May Be Slowing. (video)

Zero Hedge:

• Moody's Issues Credit Update of the United States.

CNBC:

• Keystone Pipeline Project: What's All the Fuss About? President Obama will be required to make a decision on the Keystone pipeline project now that Congress appears to have worked out a deal to extend the payroll-tax cut.

NY Post:

• Munster of a Stock. Analyst Predicts Apple(AAPL) to Hit $607.

AppleInsider:

• 'Prototype' Apple Store to call on a decade of design knowledge. Construction of what is being called a "prototype" Apple Store is just days from breaking ground in Palo Alto, and is planned to feature an open-space architecture that draws on the company's 10 years of iconic retail space design.
  

Huffington Post:

• MF Global Collapse Spotlights Practice That Heightens Systemic Financial Risk. The swift implosion of MF Global highlights a common practice used by aggressive speculators, one that experts say makes the broader financial system vulnerable to another crisis. It's called rehypothecation, and it allows a firm to essentially pledge the same limited collateral to arrange fresh loans. MF Global is believed to have used client funds as collateral to borrow money to make bets on the risky sovereign debt of Portugal, Spain and Italy, leading to a daisy chain of securitization, Thomson Reuters Business Law Currents reported. It's akin to using a single home as collateral for several loans and then investing that money to earn dividends before payments are due on the loans.

CBS News:

• U.N. Pay Tribute to North Korea's Kim Jong Il. The U.N. General Assembly paid tribute to North Korea's late leader Kim Jong Il on Thursday by observing a minute of silence in his memory. At the start of Thursday afternoon's meeting, Assembly President Nassir Abdulaziz Al-Nasser told diplomats it was his "sad duty" to report that Kim died on Saturday. He asked North Korea's ambassador "to convey condolences" to his country's government and people and then invited diplomats "to stand and observe a minute of silence in tribute to the memory of the late leader of the Democratic People's Republic of Korea." All diplomats then rose, and North Korea's Ambassador Sin Son Ho and several others bowed their heads. Al-Nasser said North Korea's U.N. Mission asked for the General Assembly tribute, which is customary for leaders who die in office. U.N. Deputy Secretary-General Asha-Rose Migiro went to North Korea's U.N. Mission on Tuesday and signed the condolence book for Kim on behalf of the United Nations system.

Chicago Tribune:

• Exclusive: Oil Fund BlueGold Loses Focus, Sinks Deep Into Red. Respected commodities hedge fund BlueGold has veered from its energy-focused strategy, betting half its money on equities and other trades that are worrying investors as it turns in its first down year. The London-based fund, founded by former Vitol oil traders Dennis Crema and Pierre Andurand, is heading for a negative annual return, losing 34 percent through mid-December. Its asset base is down to $1.2 billion from $2 billion about a year ago. The change in fortunes has raised concerns among some investors who question an increase in exposure to equities, as well as "macro-hedges" which investors say is unfamiliar territory for the fund that made its name in crude derivatives.

Reuters:

• Paulson Funds Down Again In December: Source. There will be no holiday cheer for hedge fund manager John Paulson this month, as his dismal performance in 2011 is capped off by another miserable performance so far in December. The Paulson & Co.'s Advantage Plus fund, which has been the firm's worst performer all year, is down another 9 percent through December 16, sending yearly losses to about 52 percent, according to a person familiar with the numbers. The Paulson Advantage fund, the firm's largest portfolio, is also hurting again this month, declining about 6 percent. The fund is down about 36 percent year-to-date. The Standard and Poor's 500 stock index has been flat so far in December. The average hedge fund was down about 4.37 percent through November, according to Hedge Fund Research's broadest industry index. Meanwhile, the gold fund that earned Paulson billions in 2010, is off about 7 percent for the year, according to an investor. The once safe-haven commodity has slumped 18 percent since September, when it hit $1,920 an ounce. At the end of the third quarter, Paulson was the largest shareholder of the SPDR Gold Trust (GLD) exchange-traded fund with about 20 million shares, according to quarterly regulatory filing.

The Daily Mail:

• UK Business Backs PM Over Euro Veto Row: Clegg proved wrong as 77% call for looser relationship with EU. Britain's business leaders have overwhelmingly backed David Cameron’s decision to veto a new EU treaty. A poll of members of the Institute of Directors found that 77 per cent support the defiant stand he took at a Brussels summit earlier this month. In a further boost for the Prime Minister, business bosses said they want the UK to loosen ties with Brussels. The revelations came as Mr Cameron told his MPs that he was right to veto the plans and would ‘do so again tomorrow’. The findings of the survey dramatically undercut claims by the Liberal Democrats that business is concerned Mr Cameron has left the UK isolated in Europe.

Xinhua:

• China will spend less on railway construction next year than it did in 2011.

China Securities Journal:

• Beijing's 2011 land sales may fall 30% from a year earlier to 110 billion yuan, citing Centaline Property Agency Ltd. The city's sales of land for residential housing development may fall to a three-year low of 46 billion yuan this year. Guangzhou's land sales may drop 36% to 29 billion yuan this year from a year earlier, citing Guangzhou Financial Bureau. Land sales in Shanghai have declined 16% to 115 billion yuan in the year to Nov. 20, compared with a year earlier, China Real Estate Information Corp. said.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 207.0 +.5 basis point.
  
• Asia Pacific Sovereign CDS Index 158.0 unch.
• FTSE-100 futures +.65%.
  
• S&P 500 futures +.53%.
  
• NASDAQ 100 futures +.48%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• Durable Goods Orders for November are estimated to rise +2.2% versus a -.7% decline in October.
• Durables Ex Transports for November are estimated to rise +.4% versus a +.7% gain in October.
• Cap Goods Orders Nondef Ex Air for November are estimated to rise +1.0% versus a -1.8% decline in October.
• Personal Income for November is estimated to rise +.2% versus a +.4% gain in October.
• Personal Spending for November is estimated to rise +.3% versus a +.1% gain in October.
• The PCE Core for November is estimated to rise +.1% versus a +.1% gain in October.
  

10:00 am EST

• New Home Sales for November are estimated to rise to 315K versus 307K in October.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

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

Stocks Rising Into Final Hour on Less Financial/Tech Sector Pessimism, Short-Covering, Window-Dressing, Better US Economic Data

Broad Market Tone:

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

Equity Investor Angst:

• VIX 21.27 -.75%
  
• ISE Sentiment Index 131.0 -22.49%
  
• Total Put/Call .98 -9.26%
  
• NYSE Arms .84 +23.92%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 122.23 -3.75%
  
• European Financial Sector CDS Index 270.81 -1.30%
  
• Western Europe Sovereign Debt CDS Index 371.27 -.16%
  
• Emerging Market CDS Index 310.13 -1.26%
  
• 2-Year Swap Spread 48.0 +1 bp
  
• TED Spread 57.0 unch.
  
• 3-Month EUR/USD Cross-Currency Basis Swap -129.0 -1.5 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 168.0 -2 bps
  
• China Import Iron Ore Spot $135.20/Metric Tonne +.30%
  
• Citi US Economic Surprise Index 69.40 -1.1 points
  
• 10-Year TIPS Spread 2.03 -2 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +90 open in Japan
• DAX Futures: Indicating +30 open in Germany

Portfolio:

• Higher: On gains in my Tech, Medical and Retail sector longs
  
• Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added them back
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 moves back near its 200-day moving average and trades to session highs, despite Eurozone debt angst, rising global growth fears, higher energy prices and US tax hike concerns. On the positive side, Coal, Alt Energy, Oil Tanker, Steel, Semi, Networking, Bank, Construction and Educaiton shares are especially strong, rising more than +2.0%. (XLF) and (XLK) have outperformed throughout the day. Copper is gaining +.82% and Gold is falling -.73%. The Germany sovereign cds is falling -.95% to 104.17 bps and the Brazil sovereign cds is falling -2.73% to 162.64 bps. Moreover, the Europe Investment Grade CDS Index is falling -1.8% to 168.38 bps. On the negative side, Homebuilding, Restaurant and Airline shares are lower on the day. The UBS-Bloomberg Ag Spot Index is up +.4%, Oil is up +.63% and Lumber is falling -.56%. The Spain sovereign cds is rising +67% to 400.67 bps, the Italy sovereign cds is climbing +2.9% to 505.0 bps and the US sovereign cds is climbing +1.9% to 51.29 bps. The Italian/German 10Y Yield Spread is rising +2.5% to 497.3 bps. The Western Europe Sovereign CDS Index is still very near its all-time high. The TED spread continues to trend higher and is now at 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 -1.22% to -129.05 bps, which is back to late-Nov. levels. The Libor-OIS spread is rising to the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -29.5% since February 16th and -25.3% since Sept. 7th. The China Corporate Blended Spread Index remains very close to another technical breakout. The Citi Asia Economic Surprise Index is fell another -.3 point today to -28.10, the lowest since April 2009. Asian indices were mixed overnight. The Shanghai Composite tried to reverse sharp morning losses, but couldn’t completely, finishing down -.22%. This index is down -22.1% ytd. 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. Despite the recent improvement in US economic data, the 10-year yield is still at early Nov. levels, which is another red flag. The AAII % Bulls fell to 33.7 this week, while the % Bears fell to 28.2%. Overall, I still think investor sentiment is too bullish given the magnitude of the headwinds emanating from overseas and that the average stock(VGY Index) is down about -18.0% from April’s peak. Year-end window-dressing, short-covering, better US economic data and seasonal strength continue to help out short-term. The S&P 500 is once again approaching 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, less financial/tech sector pessimism, year-end window dressing and seasonal strength.

Today's Headlines

Bloomberg:

• Monti's Emergency Budget Package Wins Final Approval in Italian Parliament. Prime Minister Mario Monti’s emergency budget plan won final approval in Parliament today as Italy struggles to tame surging borrowing costs before facing 53 billion euros ($69 billion) in debt repayments early next year. The Senate voted 257 to 41 to approve the 30 billion-euro package in a confidence vote in Rome. The legislation, dubbed by Monti the “Save Italy Decree” and the nation’s third austerity plan since June, was passed by the Chamber of Deputies in a 402- to-75 vote last week. The plan includes a pension overhaul, a levy on primary residences and a crackdown on tax cheats, all measures aimed at convincing investors Monti is serious about cutting the euro region’s second-largest debt and meet the commitment of balancing the budget in 2013. It may also push Italy, which must sell 440 billion euros in debt next year, deeper into a recession that is forecast to begin in the current quarter. “The austerity package will be sufficient to bring the deficit-to-GDP ratio down to zero,” UniCredit SpA economists Chiara Corsa and Loredana Federico, both based in Milan, wrote in a note to investors today. “The pension reform is by all means a major achievement, which shows the government’s commitment to reduce public spending in a structural way.” The yield on the benchmark 10-year bond rose to 6.92 percent, up 13 basis points from yesterday. The difference with equivalent-maturity German bonds climbed to 497.3 basis points.
• Financial Credit Risk at Two-Week Low on ECB Cash, U.S. Growth. The cost of insuring against default on financial debt fell to the lowest in two weeks amid optimism the European Central Bank’s cash injection will ease bank stress and after data signaled the U.S. economy is strengthening. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers fell for a fourth day, dropping 12.5 basis points to 278, according to JPMorgan Chase & Co. at 4 p.m. in London. The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 nations was little changed at 357.5, the lowest in two weeks. Swaps on Italy dropped eight basis points to 484, France declined one basis points to 223 and Germany was two basis points lower at 103, according to CMA prices. Spain rose two basis points to 391, while swaps on Hungary climbed 40 to 610, the highest this month, after the country was downgraded yesterday to junk status by Standard & Poor’s. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings fell 19.5 basis points to a two-week low of 756. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 5.75 to 172.5, according to JPMorgan prices.
• Merkel Adviser Bofinger Sees Six Months to Save Euro, WiWo Says. The future of the euro will be decided in the next six months and the joint currency has “no future” unless Germany changes its stand, Peter Bofinger, a member of Chancellor Angela Merkel’s council of economic advisers, was quoted as saying by Wirtschaftswoche.
• HSBC Strategist on Europe Credit Crunch. (video) Garry Evans, head of global equity strategy at HSBC Holdings Plc, talks about the impact of the European debt crisis on the U.S. economy.
• U.S. Jobless Claims Fall, Consumer Comfort Climbs. Fewer Americans than forecast sought jobless benefits and consumer confidence climbed, giving the world’s largest economy a boost heading into 2012. Unemployment claims fell by 4,000 to 364,000 in the week ended Dec. 17, the lowest level since April 2008, Labor Department figures showed today in Washington. The Bloomberg Consumer Comfort Index improved to minus 45 in the period ended Dec. 18 from a reading of minus 49.9 the prior week, marking the biggest seven-day gain since January.
• U.S. Economy Expands Less Than Estimated. The economy in the U.S. grew less than previously estimated in the third quarter, reflecting a smaller gain in consumer spending that is giving way to a pickup in demand this quarter as the job market improves. Gross domestic product climbed at a 1.8 percent annual rate from July through September, down from the 2 percent estimated last month, revised Commerce Department figures showed today in Washington. The median forecast of 82 economists surveyed by Bloomberg News projected it would hold at 2 percent. Household purchases increased at a 1.7 percent rate, down from 2.3 percent.
• Baghdad Blasts Kill 57 as Political Tensions Rise. Civilians were targeted in bombings across Baghdad that killed 57 people amid an escalation of political infighting in Iraq that has followed the withdrawal of U.S. troops from the country. Today’s attacks also injured 176, Ziad Tariq, a spokesman for the Health Ministry, said by phone from the capital. Residential areas, schools and shops were hit, said Qassim Atta al-Mousawi, spokesman for the security forces in Baghdad. The blasts took place in mainly Shiite Muslim areas, where security forces cordoned off areas and some businesses shut for the day. “The timing of the crimes and the choice of their areas confirms again to all those in doubt the political nature of the objectives that these people want to achieve,” Prime Minister Nouri al-Maliki said in a statement on his website. There was no immediate claim of responsibility for the attacks. Tensions between al-Maliki’s Shiite-led allies and Sunni politicians have intensified since a warrant was issued this week for the arrest of Vice President Tariq al-Hashimi, a Sunni, on terrorism charges. The case comes amid concern that the U.S. pullout will leave a security vacuum in Iraq, which seeks investment and expertise to develop the world’s fifth-largest crude reserves.
• Oil Rises to $100 as Jobless Claims Decline, Leading Indicators Advance. Oil rose to $100 for the first time in a week as the applications for unemployment benefits in the U.S. decreased to a three-year low and the index of U.S. leading indicators signaled that economic growth will accelerate. Crude oil for February delivery rose $1.17, or 1.2 percent, to $99.84 a barrel at 12:39 p.m. on the New York Mercantile Exchange after climbing to $100 for the first time since Dec. 14. Prices have increased 9.3 percent this year after climbing 15 percent in 2010. Brent oil for February settlement gained 54 cents, or 0.5 percent, to $108.25 a barrel on the London-based ICE Futures Europe exchange. U.S. crude oil stockpiles fell 10.6 million barrels last week, the largest decrease since February 2001, yesterday’s Energy Department report showed. Imports dropped to 7.58 million barrels a day, the lowest level since September 2008. Civilians were targeted in bombings across Baghdad that killed 57 people amid an escalation of political infighting in Iraq that has followed the withdrawal of U.S. troops from the country. U.S. troops from the country. Today’s attacks also injured 176, Ziad Tariq, a spokesman for the Health Ministry, said by phone from the city. “The upsurge in violence in Iraq is probably adding to the oil price,” Lynch said. “Chances are that there will be no impact on the oil industry, but the increase in violence does add to a perception of instability.”
• U.S. 30-Year Mortgage Rates Fall to Record-Low. Mortgage rates for 30-year U.S. loans dropped to the lowest level on record amid signs the housing market may be set for a turnaround. The average rate for a 30-year fixed loan fell to 3.91 percent in the week ended today, the lowest in data dating to 1971, from 3.94 percent, Freddie Mac said in a statement. The average 15-year rate matched last week’s previous all-time low of 3.21 percent, according to the McLean, Virginia-based mortgage-finance company.
• Indian Banks' Bad Loans May More Than Double, RBI Says. Indian lenders’ bad loans may more than double by 2013 in a “severe risk” scenario, the Reserve Bank of India said in a report today. Soured loans may jump to as much as 5.8 percent of total advances within two years under such strained conditions, from 2.8 percent in September, according to the central bank report. The ratio is expected to climb to 3.2 percent to 3.5 percent by March 2013 under a baseline scenario, it said. India’s economy last quarter grew at the slowest pace in more than two years after the central bank raised interest rates by a record to tame the fastest inflation among so-called BRIC nations, the world’s largest emerging markets. Credit growth in India fell to a 20-month low of 17.73 percent in November, data compiled by the Reserve Bank of India shows. “While markets have already factored in some rise in bad loans, the higher projections made by the Reserve Bank will definitely weigh on investors’ sentiment,” Sandeep Jain, a banking analyst at IDBI Capital Market Services Ltd. in Mumbai, said by telephone today.

Wall Street Journal:

• McConnell Calls for Payroll-Tax Deal. Senate Minority Leader Mitch McConnell (R., Ky.), seeking to end an impasse on renewing the payroll-tax cut set to expire at the end of the year, on Thursday urged House Republican leaders to pass a short-term extension and said Senate Democrats should name negotiators to work out a longer-term deal.
• U.S. Erred in Deadly Pakistan Attack. New Report on Pakistan Airstrike That Killed 24 Acknowledges U.S. Culpability.
  

Dow Jones:

• Barclays(BCS) Made 'Huge Losses' in Base Metals Trading. Barclays may reshuffle its base metals desk after a series of "huge" losses mostly tied to copper trading, citing people familiar with the situation. Traders estimate losses up to $500 million, though no official figure can be confirmed.

MarketWatch:

• Akamai(AKAM) Gets a Boost With Cotendo Acquisition.

Business Insider:

• Apple(AAPL) Has Plans To Make Your MacBook's Battery Last For Weeks.
• The 10 Most Popular Restaurant Brands In 2011.
• New Evidence Suggests China's Hacking Into US Drones Using Adobe Reader And Internet Explorer.
• Violent Riots In Southern China Force Authorities To Halt Construction On Power Plant.
  

Zero Hedge:

• Here Is The Math: Carry Trade Profits From The LTRO Are Woefully Insufficient To Make Any Impact.
• Flowcharting The True Cause Of The Eurozone Crisis.
  

Washington Post:

• U.S. Exporters Brace For Cutbacks In European Bank Lending. The European Central Bank’s decision Wednesday to offer loan help to the region’s financial institutions was closely watched by U.S. companies, which have extensive ties to troubled European markets. Boeing warned that European banks would cut lending to companies that buy planes. Pharmaceutical companies Pfizer and Bristol-Myers Squibb have said cash-strapped European governments that provide health care are cutting what they spend on drugs. And other U.S. exporters to the region, such as almond farmers, medical equipment manufacturers and car makers, must brace for the possibility that a European recession will depress their sales.

Finanaial Times:

• The LTRO, The Switch and The Basis Swap Market. Were you puzzled by the immediate reaction of the euro following Wednesday’s LTRO? In short, so much euro liquidity hit the market that it didn’t matter that the ECB had just had a successful dollar funding operation. No one was willing to price currency basis swaps in any other way but one which reflected a dollar drought situation during a euro flood. In such a situation, the euro has no choice but to fall.

Telegraph:

• Debt Crisis: Live.
  

Bear Radar

Style Underperformer:

• Large-Cap Growth (+.38%)

Sector Underperformers:

• 1) Gold & Silver -.50% 2) Restaurants -.40% 3) Homebuilders -.36%

Stocks Falling on Unusual Volume:

• DECK, NEOG, BBBY, MLHR, FINAL, MANH, QKIK, PHH, AM, GRR, EMR and MJN
  

Stocks With Unusual Put Option Activity:

• 1) ECA 2) BBBY 3) AKAM 4) SWN 5) EMR
  

Stocks With Most Negative News Mentions:

• 1) KBH 2) MANH 3) PHH 4) BAC 5) VVUS
  

Charts:

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

Thursday Watch

Evening Headlines

Bloomberg:

• Greece's Creditors Said to Resist Push From IMF for More Losses. Greece’s creditors are resisting pressure from the International Monetary Fund to accept bigger losses on holdings of the indebted nation’s government bonds, said three people with direct knowledge of the discussions. Lenders want the 70 billion euros ($91 billion) of new bonds the government will issue in return for existing securities to carry a coupon of about 5 percent, said the people, who declined to be identified because the negotiations are private. The IMF is pushing for creditors to accept a smaller coupon in order to reduce Greece’s debt-to-gross domestic product ratio to 120 percent by 2020, a key element of the Oct. 27 agreement by European Union leaders, the people said. Greece’s debt will balloon to almost twice the size of its economy next year without a write-off accord with investors, the IMF said on Dec. 13. The IMF and EU leaders are trying to bring the country’s debt down to a sustainable level. As part of Greece’s 130 billion-euro second bailout, investors would take a 50 percent hit on the nominal value of 206 billion euros of privately owned debt. Exchanging bonds for securities with a 5 percent coupon would leave investors with a 65 percent loss in the net present value of their holdings of Greek government debt, the people said.
• U.S. Faces ’13 Fitch Downgrade Without Cuts. The U.S.’s AAA rating will probably be cut by Fitch Ratings by the end of 2013 unless lawmakers are able to formulate a plan to reduce the budget deficit after next year’s congressional and presidential elections. “Without such a strategy, the sovereign rating will likely be lowered,” New York-based Fitch said in a statement today. “Agreement will also have to be reached on raising the federal debt ceiling, which is expected to become binding in the first half of 2013.” Fitch assigned a negative outlook on the U.S. in November after a congressional committee failed to agree on budget cuts. The rating firm forecast federal public-debt will exceed 90 percent of gross-domestic-product by the end of the decade unless the government addresses rising health and social security spending.
  
• GM(GM) Said to Hire Hackett Group to Find North America Job Cuts. General Motors Co. has hired management consultant Hackett Group to help identify areas to cut an undetermined number of white-collar jobs, said two people familiar with the matter. Hackett Group, based in Miami, will help identify opportunities for cuts and efficiency improvements at headquarters and elsewhere in North America, said the people, who asked not to be identified revealing private plans.
• China's Stocks Decline for Fourth Day on Cash Crunch, Europe Debt Concern. China’s stocks fell for a fourth day as investors speculated Europe’s debt crisis will worsen and lending to small companies may drop as banks hoard cash to meet year-end reserve-ratio requirements. Yunnan Copper Industry Co. and Shandong Gold Mining Co. dropped more than 3 percent as material producers added to losses that made them the worst performing group in 2011. Stocks fell after Europe’s lenders sought to borrow more cash from the European Central Bank than economists had expected, increasing concern the crisis won’t be contained. Focus Technology Co. and Anhui Gujing Distillery Co. led a gauge of small-company stocks to their lowest level in two years as money market rates jumped. “There’s no confidence in the market and the worry is focused on the economic slowdown and a poor export outlook,” said Wu Kan, a fund manager at Dazhong Insurance Co., which oversees $285 million. “Investors are worried the government doesn’t have many tools to bolster growth now as debt levels are now higher than a couple of years ago.” The Shanghai Composite Index (SHCOMP) dropped 21 points, or 0.9 percent, to 2,170.56 at 1:22 p.m., the lowest since March 2009. The Shanghai Composite has fallen 7.1 percent in December, adding to a 23 percent slump this year, after the central bank raised interest rates three times to cool inflation and exports to Europe slowed because of the region’s debt crisis. The CSI smallcap gauge (SH000905) has tumbled 34 percent this year. The ChiNext measure of start-up companies slid 2.7 percent today, adding to a 35 percent slide in 2011.
• Corn Crop Heads for Sixth Record Year to Feed 1 Billion Cows: Commodities. Farmers will reap a record corn crop for a sixth consecutive season in 2012, slowing a slump in stockpiles of livestock feed as global meat demand approaches a quarter of a billion metric tons. Production will rise 4.8 percent to 867.5 million metric tons in 2011-12, curbing the drop in inventories to 0.8 percent, the smallest decline in three years, the U.S. Department of Agriculture estimates. With harvests expanding from Argentina to China, prices will fall as much as 30 percent to $4.305 a bushel in Chicago trading next year, according to the median of 24 analyst estimates compiled by Bloomberg News.
• India Drops Plans to Allow FDI in Pensions, Singh Ally Says. Indian Prime Minister Manmohan Singh has shelved plans to allow foreign direct investment in pension funds in the second major policy setback this month, according to one of the government’s largest parliamentary allies. Trinamool Congress leader Mamata Banerjee objected to a bill to overhaul the pensions sector, leading to it being dropped for now, Sultan Ahmed, a lawmaker from Banerjee’s party, said by phone without elaborating. India’s cabinet had approved the plans last month in what would have been the first major change to foreign ownership rules in five years.

Wall Street Journal:

• European Banks Rush to Grasp Lifeline. Hundreds of euro-zone lenders took out €489.19 billion ($640 billion) in low-interest loans from the European Central Bank on Wednesday, as the currency area extended a massive financial lifeline to its struggling banking industry. The unexpectedly heavy demand from 523 banks for the three-year loans highlighted the severity of Europe's financial crisis, while also stirring some hopes that the action could help defuse it, or at least prevent it from getting worse. Investors didn't seem convinced that the loans would drastically improve banks' prospects.
• Funds Sue Deutsche Over Deal On Claims. Two hedge funds filed a lawsuit accusing a Deutsche Bank AG unit of reneging on a $1 billion deal to buy their claims for losses in Bernard L. Madoff's Ponzi scheme. The suit, filed in a New York federal court by Kingate Global Fund Ltd. and Kingate Euro Fund Ltd., is a sign of the negative consequences of recent court decisions against the trustee overseeing the bankruptcy of Mr. Madoff's firm.Courts have handed down recently a series of unfavorable decisions to Irving Picard that limit his ability to further recover money.
• What Fannie and Freddie Knew. The SEC shows how the toxic twins turbocharged the housing bubble. Democrats have spent years arguing that private lenders created the housing boom and bust, and that Fannie Mae and Freddie Mac merely came along for the ride. This was always a politically convenient fiction, and now thanks to the unlikely source of the Securities and Exchange Commission we have a trail of evidence showing how the failed mortgage giants turbocharged the crisis.
• What Ron Paul Thinks of America. It seemed improbable that the best-known American propagandist for our enemies could be near the top of the pack in the Iowa contest, but there it is.

Business Insider:

• The Violence In Video Games Is Getting Disturbingly Out Of Hand.

Zero Hedge:

• It's Official: US Debt-to-GDP Passes 100%.
• Flowcharting Europe's Sovereign And Bank Debt Problems.
  

CNBC:

• Asia-Pacific Stock Sales at 3-Year Low in 2011. Stock sales in Asia Pacific plunged to a three-year low in 2011 and the downturn is expected to last well into 2012 as weak performance by most of the IPOs in the region makes it harder to attract investors to new deals.
• China Hedge Fund Bears Look Good in Shorts. Hedge funds betting against China have earned outsized returns this year by shorting mainly property and auto stocks and positioning their portfolios to benefit from a feared hard-landing by the world's second-biggest economy.
• Rio Police Seek to Indict Chevron(CVX), Transocean(RIG) Officials. Federal police in Brazil on Wednesday recommended the indictment of several Chevron and Transocean officials involved in an oil spill in early November for environmental crimes and withholding information in an investigation.
• Collapse in M&A Amid Debt Turbulence. Mergers and acquisitions activity collapsed in the fourth quarter as the sovereign debt crisis and market volatility put the brakes on dealmaking and equity sales, pushing European investment banking fees to their lowest level in more than a decade.

IBD:

• FDA OKs Gall Bladder Surgery For Intuitive's(ISRG) Da Vinci.

Forbes:

• French Banks Won't Be Able To Handle Inevitable Italian Restructuring. Despite the latest attempt by the European Central Bank to kick the proverbial can far down the road, the Eurozone remains under heavy pressure, and France’s AAA credit rating hangs from a thread. According to research by Nomura, France’s exposure to peripheral Europe tops €680 billion ($887 billion), more than 25% of its GDP, putting its banks at substantial risk in the event of another debt restructuring or an outright default among the PIIGS.
• CES 2012: 5 Trends to Watch.
  

Fox:

• Goldman(GS) Preps for New Age of Regulation. “In the end, Goldman Sachs is still going to be Goldman Sachs,” Lloyd Blankfein recently remarked during a wide-ranging dinner conversation with Larry Fink, the chief executive of money management outfit Blackrock (BLK), according to people with direct knowledge of the matter. Fink, seated next to Blankfein at a tony New York City eatery, didn’t disagree, but some in the firm that Blankfein runs are now taking issue with that statement.
• Extremist Teachings Remain in Saudi Textbooks Despite Kingdom's Claims of Reform. Despite Saudi Arabia's promises to clean up textbooks in the kingdom, recent editions continue to raise alarms in the West over jihadist language. The recent editions were obtained by the Institute for Gulf Affairs in Washington, D.C., and the translations were first provided to Fox News. “This is where terrorism starts, in the education system.” Ali Al-Ahmed, director of the Institute for Gulf Affairs, told Fox News. Al-Ahmed, a Saudi national, said the textbooks, made and paid for by the Saudi government, were smuggled out of the kingdom through confidential sources.

Real Clear Markets:

• The Slow, Agonizing Death of Europeanism. What do the endlessly repeating cycle of futile Eurozone rescue talks and the endlessly repeating cycle of futile annual UN climate summits have in common? Put more plainly, what accounts for the unreality of both efforts, such that "breakthrough" agreements are soon recognized to be ineffective, if not fraudulent?

Reuters:

• Bed Bath(BBBY) sales miss estimates; outlook soft. Bed Bath & Beyond Inc reported slightly weaker-than-expected third-quarter sales and gave a conservative profit outlook for the current quarter, sending shares in the home goods chain down 4 percent in after-hours trading.
  
• Tepid PC sales weigh on Micron's results. Micron Technology (MU.O) posted quarterly results below expectations and said weak prices for DRAM memory chips are making industry consolidation inevitable. The top U.S. memory manufacturer's poor showing lent weight to recent warnings from both Intel (INTC.O) and Texas Instruments (TXN.N) about weak chip market conditions, and came after Oracle's first earnings miss in a decade stoked fears that corporate America may be pulling back on tech spending. Given that the reports from Micron and Oracle were for the quarter that ended in November, they may signal what to expect when more technology companies report after their quarters end in December.

Sky News:

• RBS Chairman Warns Of Euro Split In 2012. (video) The head of Britain's biggest state-controlled bank has warned that a eurozone country could leave the single currency during 2012, sending shockwaves around Europe's banking system. Royal Bank of Scotland chairman Sir Philip Hampton made the prediction during Jeff Randall's Christmas Dinner, a seasonal discussion between business leaders on Sky News. He said: "I think it's likely that one country, a small country will drop out. "It could be any of them because I think that some of these things will be driven by political events, as much as by economic circumstances and social unrest, and all of those sorts of things. But I think there is a very good chance that one country will fall out." Sir Philip said such an event would "produce massive strains" in Europe's banking system. "At the more extreme levels of that you would get a wave of recapitalisations of banks by governments throughout Europe," he added.

La Tribune:

• French new car sales plunged by almost 60% from Dec. 1 to Dec. 21 versus the year-earlier period, citing a person speaking in an official capacity.

China Daily:

• Chinese households that prefer real estate investments declined to 16.5%, down 7.1 percentage points vs. 3Q, China's central bank said in its 4Q survey. 73% of respondents deem China home prices as "too high". 19% of respondents expect a further rise in home prices, 19 percentage points less than in 3Q. 14% of households may buy a home within 3 months, close to a record low.

Evening Recommendations
Citigroup Global Markets:

• Reiterated Buy on (SHOO), target $45.

Night Trading

• Asian equity indices are -1.0% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 206.50 -3.5 basis points.
  
• Asia Pacific Sovereign CDS Index 158.0 unch.
• FTSE-100 futures +.04%.
  
• S&P 500 futures -.25%.
  
• NASDAQ 100 futures -.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AM)/.81
• (DMND)/.72
  

Economic Releases
8:30 am EST

• Chicago Fed Nat Activity Index for Nov. is estimated to fall to -.17 versus -.13 in October.
• Final 3Q GDP is estimated to rise +2.0% versus a prior estimate of a +2.0% gain.
• Final 3Q Personal Consumption is estimated to rise +2.3% versus a prior estimate of a +2.3% increase.
• Final 3Q GDP Price Index is estimated to rise +2.5% versus a prior estimate of a +2.5% gain.
• Final 3Q Core PCE is estimated to rise +2.0% versus a prior estimate of a +2.0% gain.
• Initial Jobless Claims are estimated to rise to 380K versus 366K the prior week.
• Continuing Claims are estimated to fall to 3600K versus 3603K prior.
  

9:55 am EST

• Final Univ. of Mich. Consumer Confidence for December is estimated to rise to 68.0 versus a prior estimate of 67.7.

10:00 am EST

• Leading Indicators for November are estimated to rise +.3% versus a +.9% gain in October.
• The House Price Index for October is estimated to rise +.2% versus a +.9% gain in September.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, Dec. Bloomberg Economic Expectations Index could also impact trading today.
  

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

Stocks Rebounding into Final Hour on Less Financial Sector Pessimism, Short-Covering, Seaonal Strength, Window Dressing

Broad Market Tone:

• Advance/Decline Line: Lower
  
• Sector Performance: Mixed
  
• Volume: Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 22.2 -4.39%
  
• ISE Sentiment Index 178.0 +60.36%
  
• Total Put/Call 1.14 -9.30%
  
• NYSE Arms .78 +358.23%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 126.99 +.3%
  
• European Financial Sector CDS Index 286.54 +.84%
  
• Western Europe Sovereign Debt CDS Index 371.92 +1.7%
  
• Emerging Market CDS Index 310.30 -.62%
  
• 2-Year Swap Spread 47.0 -1 bp
  
• TED Spread 57.0 +1 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -127.50 -11.0 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.
  
• Yield Curve 170.0 +3 bps
  
• China Import Iron Ore Spot $134.80/Metric Tonne +2.12%
  
• Citi US Economic Surprise Index 70.50 -3.4 points
  
• 10-Year TIPS Spread 2.05 +1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating -9 open in Japan
• DAX Futures: Indicating +32 open in Germany

Portfolio:

• Slightly Lower: On losses in my Tech and Retail sector longs
  
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and then covered some of them
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 moves back to the flatline and trades to session highs, despite rising Eurozone debt angst, rising global growth fears, higher energy prices, more tech sector pessimism and US tax hike concerns. On the positive side, Energy, Utility, Hospital and Education shares are especially strong, rising more than +1.0%. (XLF) has outperformed throughout the day. Copper is gaining +.67%. The 10-year yield is rising +5 bps to 1.97%. The Europe Investment Grade CDS Index is down -1.73% to 171.56 bps. On the negative side, Internet, Software, Disk Drive, Networking, Computer Service and Airline shares are under meaningful pressure, falling more than -1.5%. The UBS-Bloomberg Ag Spot Index is up +.58%, Oil is up +1.5% and Lumber is falling -1.7%. The Germany sovereign cds is gaining +.74% to 105.5 bps, the UK sovereign cds is gaining +.91% to 97.83 bps, the Brazil sovereign cds is jumping +3.8% to 167.21 bps, the France sovereign cds is rising +.95% to 224.67 bps and the Belgium sovereign cds is rising +1.05% to 319.33 bps. The Italian/German 10Y Yield Spread is rising +4.2% to 485.37 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 plunging -9.5% to -127.50 bps, which is back to late-Nov. levels. The Libor-OIS spread is rising to the widest since May 2009, which is also noteworthy considering the equity surge off the recent lows. China Iron Ore Spot has plunged -29.8% since February 16th and -25.5% since Sept. 7th. The China Corporate Blended Spread Index remains very close to another technical breakout. The Citi Asia Economic Surprise Index is unch. today at -27.80, the lowest since April 2009. Major Asian indices surged 2-4% overnight, however the Shanghai Composite reversed opening gains and closed near session lows, down -1.12%. This index is back near a multi-year low, down -22.0% ytd. 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. According to SentimenTrader.com, this would be only the 2nd time in the past decade that the S&P 500 rose on a day in which the Nasdaq 100 fell over -1.5%. The other day this happened was 7/18/08. Moreover, given the tech sector's importance to the overall economy and (ORCL)'s very disappointing earnings report, a positive day for the S&P 500 is even more surprising. Year-end window-dressing, short-covering, better US economic data and seasonal strength continue to help out short-term. Credit gauges are still at highly stressed levels(and in many cases worsening), today’s rally was led again by many of this year’s worst-performing stocks, concerns over Asia are still intensifying and volume remains light, which does not bode well for a sustainable advance. I expect US stocks to trade modestly higher into the close from current levels on better US economic data, short-covering, bargain-hunting, less financial sector pessimism, year-end window dressing, seasonal strength and technical buying.

Today's Headlines

Bloomberg:

• Europe Stocks Drop as ECB Loans Fail to Ease Debt-Crisis Concern. European stocks fell for the first time in three days as lenders sought more funds from the European Central Bank than economists had predicted, reducing optimism that the debt crisis will be contained. The Frankfurt-based ECB awarded 489 billion euros ($640 billion) in 1,134-day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the funds, which it will lend at the average of its benchmark rate over the term of the loans. “The added liquidity is being seen as just another quick shot in the arm rather than anything more meaningful,” Yusuf Heusen, a sales trader at IG Index in London, wrote in e-mailed comments. “As a result hopes of an upbeat run to Christmas seem to be waning.” UniCredit, Italy’s biggest bank, dropped 4.4 percent to 70.8 euro cents and France’s Societe Generale (GLE) SA slid 3.4 percent to 16.63 euros. A gauge of banks in the Stoxx 600 slipped 0.7 percent.
• Italian GDP Contracts as Nation Enters New Recession: Economy. The Italian economy contracted in the third quarter, signaling the country may have entered its fifth recession since 2001 as the government adopts new austerity measures that will further weigh on growth. Gross domestic product declined 0.2 percent from the second quarter, when it expanded 0.3 percent, national statistics institute Istat said in Rome today. It was the first contraction since the final three months of 2009 and matched the median forecast in a survey of 23 economists by Bloomberg News. Consumer spending declined 0.2 percent from the second quarter, with investment contracting 0.6 percent. Exports grew 1.6 percent in the quarter, while imports fell 1.1 percent.
• French Banks Struggling to Raise $48 Billion for First-Quarter Debt Needs. BNP Paribas SA, Societe Generale SA (GLE), Credit Agricole SA and Groupe BPCE, France’s biggest banks, are struggling to fund about 37 billion euros ($48 billion) of debt payments due in the first quarter. As their access to U.S. dollar short-term funds dries and they face soaring costs in the bond market, French lenders are raising money by selling their debt through structured products and issuing bonds backed by mortgages on properties in Paris and regions including Cote-d’Azur, the French Riviera playground of the rich. The European Central Bank is also offering them three- year loans through a facility, which opened today. “It’s gotten harder and harder to get refinancing on the markets, and as time goes by rating agencies are taking negative actions, pushing up already high funding costs,” said Jacques- Pascal Porta, who helps manage 500 million euros at Ofi Gestion Privee in Paris and owns BNP Paribas shares.
• Fitch to Cut Hungary Sovereign Credit by Two Steps to Junk, Origo Reports. Fitch Ratings has notified the Hungarian government of its intention to cut the country’s sovereign credit grade by two steps to junk, Origo news website reported, citing two “market sources independent of each other.” Hungary is currently rated BBB-, the lowest investment grade, with a negative outlook at Fitch.
• The ECB's lending operation may buy the EU politicians more time to create a more comprehensive solution, though it won't increase "external demand" for peripheral sovereign debt, Nomura strategist Guy Mandy wrote in a note today. There were 523 bidders, which was less than the 1,121 participants in 2009, which indicates tehre wan't a wholesale take-up in operations for carry purposes.
• The 3M EUR/USD Cross Currency Basis Swap is falling -11 bps to -128 bps, which is the lowest since Dec. 15 on a closing basis, after 523 banks borrowed EU489B at the ECB's 3-year LTRO.
  
• Mortgage Bonds Miss Out on Rally as Europe Bank Sales Loom: Credit Markets. U.S. mortgage bonds that lack government backing are trading at about the lowest prices in more than a year, even as riskier assets from high-yield company bonds to stocks rally, with investors bracing for sales of home- loan debt by European banks. A group of prime jumbo-mortgage securities tracked by JPMorgan Chase & Co. as a benchmark fell to 93.3 cents on the dollar this month, the lowest level since August 2010. A set of subprime bonds tumbled to a two-year low of 28.1 cents. Banks across Europe have pledged to cut more than 950 billion euros ($1.2 trillion) of assets during the next two years, after regulators made them increase core capital to 9 percent by June instead of in 2019, according to data compiled by Bloomberg. Combined with the greater difficulty of trading in the $1.1 trillion market of non-agency mortgage bonds and concern that the U.S. housing market has yet to bottom, the threat of the region’s banks unloading their holdings is helping to depress values. “The European banks are scrambling for capital and the traditional route” of selling shares isn’t available as investors shun their equity securities, said Reza Ali, who heads Prosiris Capital Management LLC, a New York-based hedge fund that’s gained 10.7 percent since starting in July. “There are big question marks that don’t exist to the same degree for corporate bonds” and structured debt in the U.S. including collateralized loan obligations, aircraft-backed notes and commercial-mortgage securities.
• China Stocks Drop for Third Day on Cash Crunch, Ping An's Fundraising Plan. China’s stocks fell for a third day as a cash crunch weighed on equities after banks hoarded cash to meet year-end reserve-ratio requirements and Ping An Insurance (Group) Co. (601318) plunged on fundraising plans. Ping An, China’s second-biggest insurer, slid 5.2 percent on a plan to sell as much as 26 billion yuan ($4.1 billion) of bonds after business expansion brought down its capital adequacy. China Vanke Co. led a decline for developers as cities including Shanghai extended the period limiting home purchases. “The economy and the capital markets are still facing a credit crunch as a result of two years of monetary tightening,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “The economy is experiencing a down cycle. Stocks are not a place to put money until economic growth picks up again.” The Shanghai Composite Index (SHCOMP) fell 1.1 percent to 2,191.15 at the close. The Shanghai Composite has fallen 6.1 percent in December as concern about an economic slowdown overshadowed the first cut in reserve requirement ratios in three years on Nov. 30. For the year, the measure is down 22 percent after the central bank raised interest rates three times to curb inflation and exports to Europe slowed because of the region’s debt crisis.
• Wen Says China's Slowing Growth, Elevated Prices Add to Policy Challenge. Chinese PremierWen Jiabao said slowing growth and elevated prices are adding to the difficulties the government faces in helping manage the world’s second-biggest economy. The nation will keep its export policies such as tax rebates “basically stable” next year and the government will mainly use fiscal spending to support “structural tax cuts” and to improve people’s lives, Wen was cited as saying in a statement posted on the central government’s website yesterday. “The current economic growth momentum is generally sound, but we are also facing many new situations and problems,” Wen said. China will maintain prudent monetary and proactive fiscal policy next year and policies will be fine-tuned as needed in accordance with the changing situation, the ruling Communist Party said after an economic work meeting last week. Export growth slowed to the weakest pace since 2009 in November, a development that Wen said reflects a “grim” situation facing China.
• Shale Boom Heralds Fifth Year of Gas Declines: Energy Markets. Booming U.S. natural gas production from shale formations and slowing demand from households, factories and power plants are poised to send prices down for an unprecedented fifth year in 2012. Gas may tumble 8.2 percent from its 2011 average next year, as output rises 2.8 percent to a record 67.72 billion cubic feet a day, according to the Energy Department. Demand will probably climb 1.7 percent, after a 1.8 percent increase this year, the department said in its Dec. 6 Short-Term Energy Outlook. "It's been practically impossible to turn off the shale- gas tap," Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, said in a telephone interview Dec. 14. "Industrial demand has been rising, but it's not enough." Natural gas has dropped 28 percent on the New York Mercantile Exchange this year, the most since 2006, as improved drilling technology and profits from selling gas liquids encouraged producers to pump record amounts of the fuel from shale formations from Texas to Pennsylvania. Futures have dropped in each of the past three years, the longest stretch of declines since the contracts began trading on the Nymex in 1991.
• Crude Futures Rise for Third Day as Inventories Decline Most in a Decade. Oil rose for a third day as U.S. inventories declined the most in a decade. Futures gained as much as 2.1 percent after the Energy Department reported supplies fell 10.6 million barrels to 323.6 million last week. It was the largest decline in barrels since Feb. 16, 2001, and almost five times the 2.13 million-barrel drop that was the median of 12 analyst estimates in a Bloomberg News survey. “Refiners are trying to reduce inventories to minimize their ad valorem taxes” in Texas, Andy Lipow, president of Lipow Oil Associates LLC in Houston, said in a telephone interview before the report. “This is accomplished by increasing exports of product and minimizing imports of crude oil to reduce inventories.”
• Airlines Lose Fight Against EU Carbon Caps. International airlines lost a challenge to the European Union’s planned expansion of its carbon cap-and-trade system, the region’s highest court said. The EU Court of Justice “confirms the validity of the directive that includes aviation” in the emissions-trading program, the Luxembourg court ruled today.
• Brazil CPI Accelerated for Second Month in Mid-December. Consumer prices, as measured by the IPCA-15 index, rose 0.56 percent in the month, compared with an increase of 0.46 percent in mid-November, the national statistics agency said today. The increase was in line with the median estimate of 43 analysts surveyed by Bloomberg. Annual inflation slowed to 6.56 percent, still above the 6.5 percent upper limit of the central bank’s target range.
• Existing Homes Sold Since '07 Revised Down. Sales of existing homes in the U.S. rose in November to a 10-month high, showing demand may be starting to stabilize following a plunge over the past four years that was steeper than previously calculated. Purchases climbed 4 percent to a 4.42 million annual pace, the most since January, the National Association of Realtors said today in Washington. The group revised down figures going back to 2007 by an average 14 percent, putting them more in line with other measures of demand.

Wall Street Journal:

• R&I Lowers Japan Sovereign Debt Rating. The Japanese credit-rating company Rating and Investment Information Inc. lowered Japan's sovereign debt rating to AA+, the first time a domestic firm has said the country's debt is not of triple-A caliber. While Japan isn't considered in immediate danger of default, the European debt crisis has brought more attention to its massive fiscal deficits and growing debt load. The government relies on fresh borrowing for 50% of its annual spending which has helped push the gross debt level to 200% of annual economic output. The debt load is by far the highest among major industrialized countries, outpacing even troubled economies such as Greece. In making the announcement, R&I said that even if a planned increase in the sales tax goes ahead, the added revenue won't be enough to halt the rise in Japan's debt load. The firm forecasts that the debt will continue to rise for "an extensive period of time." The government of Prime Minister Yoshihiko Noda is trying to push through a major increase in the national sales tax to help close the budget deficit.
• CEO of TheStreet Inc. Stepping Down.
  

CNBC.com:

• More Easing in China Risks Hard Landing in 2013. (video)
• US Asks Journals to Censor Articles on Flu Virus. For the first time ever, a government advisory board is asking scientific journals not to publish details of certain biomedical experiments, for fear that the information could be used by terrorists to create deadly viruses and touch off epidemics.

Business Insider:

• North Korean State News: Jimmy Carter Expressed Condolences On The Death Of Kim Jong Il.
• Taibbi: Obama and Geithner are Acting Like Lehman Executives Before The Crash.
• Short Term Yields On Spanish And Italian Bonds Are Shooting Back Up. (graph)
  

Zero Hedge:

• ECB's FX Swap Line With Fed Soars To $85 Billion Total. (graph)
• Chart of European Emergency Liquidity Back at Record Levels, And Why Bank of America(BAC) Is Long French CDS.
• Citigroup(C) Analyzes The Failure Of The LTRO, Muses On The Upcoming French Downgrade.
  

FINalternatives:

• Hedge Funds Fall -.59% In Early Dec. Hedge funds aren't getting the help this month they need to avoid a losing year. As things stood at the end of November, the industry would have needed a major rally to get into the black for 2011. But hedge funds haven't gotten any kind of rally, and instead lost further ground in the first half of November, according to Hedge Fund Research. The HFRX Global Hedge Fund Index lost 0.59% through Friday. The benchmark is down just over 9% on the year, with two weeks to go before New Years Day. Over the same period, the Standard & Poor's 500 Index was down about 2.2%. Fundamental growth funds fell an average of 2.57% (down 15.01% YTD),equity hedge funds 1.61% (down 19.69% YTD), market directional funds 1.57% (down 18.98% YTD), fundamental value funds 1.14% (down 23.61% YTD), special situations funds 0.73% (down 3.74% YTD), event-driven funds 0.69% (down 5.03% YTD), North American funds 0.53% (down 3.8% YTD), distressed restructuring funds 0.49% (down 7.69% YTD) and multi-regional funds 0.49% (down 15.21% YTD).

FXStreet:

• French Downgrade Would Cut EFSF Capacity By A Third: S&P Director Says.

Reuters:

• Italy bank assn-ECB loans won't prompt banks to buy state bonds. Banks won't increase their exposure to sovereign debt even after the European Central Bank's massive three-year funding operation because European Bank Authority (EBA) rules discourage it, Italy's banking association (ABI) said on Wednesday."The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB's important liquidity injection -- of almost 500 billion euros -- can be used to support sovereign debt," ABI director general Giovanni Sabatini told reporters. "The EBA created this problem by making the new toxic assets, in the eyes of the markets, sovereign bonds," Sabatini said. In new rules announced by the EBA earlier this month, banks will be required to mark to market their sovereign bond holdings, which has prompted ABI to threaten legal action. "Banks not only will not increase their exposure, but they will probably cut it, and this creates a potential problem for refinancing sovereign debt," he said.
• Egypt Sees Clinton Remarks as "Interference" - Agency. The Egyptian foreign minister said on Wednesday that Egypt would not accept any interference in its internal affairs, in response to criticism by U.S. Secretary of State Hillary Clinton on the way security forces dealt with women protesters. In a speech on Monday, Clinton criticised the actions of Egyptian security forces as showing the "systematic degradation" of women that "disgraces the state", some of the strongest U.S. language used against Egypt's new rulers. Footage showed Egyptian soldiers beating protesters with batons, often after they had fallen to the ground, in what activists described as a forcible attempt to clear a sit-in demanding a swifter transfer to civilian rule. The clashes since Friday have left at least 13 dead and hundreds wounded. "Egypt does not accept any interference in its internal affairs and conducts communications and clarifications concerning statements made by foreign officials," the state news agency quoted Foreign Minister Mohame d Kamel Amr as saying. "Matters like that are not taken lightly," he was quoted as saying, in his response to a question about Clinton's remarks.

Telegraph:

• Herr Draghi or Signor Draghi, and the ECB's Santa Rally (technical). Enjoy Mario Draghi's Santa Rally while it lasts. The euphoria is likely to dissipate once markets remember the sheer scale of the task at hand.