For the holiday week, the S&P500 jumped 6.8% ('08 decline 38.5%) and the Dow gained 6.1% (down 33.8%). The broader market also rallied sharply into year-end. The small cap Russell 2000 jumped 6.1% (down 34.8%) and the S&P400 Mid-Caps rose 7.1% (down 37.3%). The Morgan Stanley Cyclical index gained 9.5% (down 52.5%), and the Morgan Stanley Consumer index advanced 5.4% (down 25.4%). The Transports surged 8.3% (down 22.6%), and the Utilities gained 4.8% (down 29.9%). The NASDAQ100 rallied 6.6% (down 41.9%), and the Morgan Stanley High Tech index increased 7.9% (down 45.2%). The Semiconductors rose 10.2% (down 48%), The Street.com Internet Index 2.7% (down 36.2%), and the NASDAQ Telecommunications index 6.0% (down 43%). The Biotechs gained 4.9% (down 17.7%). The Broker/Dealers rallied 12.1% (down 62.7%), and the Banks rose 7.7% (down 50%). With Bullion gaining $6, the HUI increased 3.5% (down 26.1%).

One-month Treasury bill rates ended the week at 2 bps and three-month bills at 9 bps. Two-year government yields ended down 3 bps at 0.77%. Five-year T-note yields jumped 21 bps this week to 1.55%. Ten-year yields rose 27 bps to 2.40%, and long-bond yields gained 22 bps to 2.85%. The implied yield on 3-month December '09 Eurodollars increased 9 bps to 1.61%. Benchmark Fannie MBS yields surged 27 bps to 4.19%. The spread between benchmark MBS and 10-year T-notes increased one basis point to 80. Agency 10-yr debt spreads increased 2 to 81 bps. The 2-year dollar swap spread increased 11 to 78 bps; the 10-year dollar swap spread declined 0.75 to 37.75 bps, and the 30-year swap spread increased 1.5 to 12.5 bps. Corporate bond spreads were mixed to narrower. An index of investment grade bond spreads declined 4 to 200 bps, while an index of junk bond spreads widened 18 to 1,278 bps.

I saw no debt issuance this week.

German 10-year bund yields added one basis point to 2.95%. The German DAX equities index surged 7.4% ('08 decline 40.4%). Japanese 10-year "JGB" yields declined 4 bps to 1.16%. The Nikkei 225 gained 1.4% ('08 decline 42.1%). Emerging bonds and equities were mostly higher. Brazil's benchmark dollar bond yields fell 13 bps to 6.12%. Brazil's Bovespa equities index rallied 8.4% ('08 decline 41.2%). The Mexican Bolsa increased 3.2% ('08 decline 24.2%). Mexico's 10-year $ yields rose 5 bps to 5.90%. Russia's RTS equities index fell 2% ('08 decline 72.4%). India's Sensex equities index ralllied 6.7% ('08 decline 52.4%). China's Shanghai Exchange declined 1.7% ('08 decline 65.4%).

Freddie Mac 30-year fixed mortgage rates declined 5 bps to 5.10% (down 97bps y-o-y), with a 9-wk decline of 136 bps. Fifteen-year fixed rates fell 8 bps to 4.83% (down 85bps y-o-y). One-year ARMs dropped 10 bps to 4.85% (down 63bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates bps this week at 6.96% (up 23bps y-o-y).

Bank Credit dropped $73.2bn to $9.886 TN (week of 12/24). Bank Credit expanded $673bn y-t-d, or 7.3% annualized. Bank Credit surged $494bn over the past 16 weeks. For the week, Securities Credit dropped $50.3bn. Loans & Leases declined $22.9bn to $7.123 TN (52-wk gain of $292bn, or 4.3%). C&I loans fell $9.8bn, with y-t-d growth to 8.8%. Real Estate loans sank $23bn (up 4.6% y-t-d). Consumer loans were unchanged, while Securities loans gained $12bn. Other loans slipped $2.2bn.

Total Commercial Paper outstanding dropped $20.4bn this week to $1.681 TN, with CP down $117bn y-t-d (6.5%). Asset-backed CP was little changed at $733bn, with 2008 posting a decline of $64bn (8%).

Federal Reserve Credit expanded $39.3bn to a record $2.247 TN, with a historic 16-wk increase of $1.358 Trillion. Fed Credit expanded $1.355 TN for the year (152%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 12/31) rose $6.8bn to $2.516 TN. "Custody holdings" were up $456bn for the year, or 22.5%.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $660bn y-o-y, or 10.8%, to $6.765 TN.

Global Credit Market Dislocation Watch:

December 31 - Bloomberg (James Sterngold): "It has been a year of record misery: the largest bankruptcy, bank failure and Ponzi scheme in U.S. history; $720 billion in writedowns and losses by financial institutions; $30.1 trillion in market valuation wiped out. The biggest loss and the hardest thing to recover, though, may be something that can't be precisely measured -- confidence in the markets and the firms that rely on them. 'The wholesale funding model lost its credibility," said David Hendler, senior analyst at... CreditSights Inc. "That started the semi-nationalization of funding in the financial markets. It's a real chink in the armor of capitalism as supposedly the best process for allocating capital. The government is now deciding who gets access to capital.'"

January 1 - Dow Jones (Rob Curran and Kejal Vyas): "This was the worst year for equities and many other investments since the depths of the Great Depression. The Dow Jones Industrial Average fell 34% in 2008, its biggest loss since 1931... The broader S&P 500 ended the year down 38%, the largest loss since 1937... The technology-oriented Nasdaq Composite shed 40.5%, the worst performance in a history dating back to 1971... 'Devastation,' said Howard Silverblatt... analyst at S&P..."

December 31 - Bloomberg (Gabrielle Coppola and Bryan Keogh): "U.S. corporate bond sales fell 28% in 2008 to the lowest in three years as a recession and seizure in credit markets pushed borrowing costs higher. JPMorgan Chase... and... Verizon Communications... led $805 billion of investment-grade offerings, a 21% drop from 2007. High-yield sales were the lowest in at least a decade. Financial issuance plunged 31%."

December 23 - Wall Street Journal (Gerald F. Seib): "The new edition of Foreign Affairs magazine has a pair of articles about the global financial mess that carry these disturbing headlines: 'A Weakening of the West,' reads one, and 'The Rise of the Chinese Model' the other. Those two pieces frame a serious but little-discussed strategic problem for President-elect Barack Obama. The meltdown in financial markets hasn't simply damaged the American economy. It also has tarnished the U.S. economic model, and threatens to reduce Washington's ability to exert influence around the globe. The 'Anglo-Saxon brand of market-based capitalism' is under a cloud, Roger Altman, former U.S. deputy Treasury secretary... writes in one of the Foreign Affairs pieces. 'The U.S. financial system is seen as having failed.' That can't be good for America's moral authority."December 24 - Bloomberg (Stanley White and Shigeki Nozawa): "Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co. The dollar may lose as much as 40% of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes 'drastic measures' to help bail out the U.S. economy, Mikuni said... 'It's difficult for the U.S. to borrow its way out of this problem,' Mikuni said... 'Japan can help by extending debt cancellations.'"

December 31 - Bloomberg (Jeremy R. Cooke and Michael McDonald): "The worst year for municipal bond investors since 1999 may further reduce demand for tax-exempt debt just as state governments face the biggest budget deficits in at least a quarter-century. State and local borrowers sold $385 billion of long-term bonds through yesterday, down 9% from 2007, according to... Thomson Reuters... The combination of the worst financial crisis since World War II and the collapse of the $330 billion auction-rate debt market will leave 41 states and the District of Columbia with shortfalls just as financing sources diminish."

January 2 - Wall Street Journal (Craig Karmin): "After suffering through 2008, some big pension funds are having second thoughts about their exposure to private-equity firms, hedge funds and other nontraditional investments. Across the U.S., pension-fund managers and investment officers have been scrutinizing their asset allocations, especially toward so-called alternative investments. In addition to wilted returns, pension funds are leery because some hedge funds have made it hard to cash out... 'What we saw as an asset before, we now see as a liability,' says Christopher Ailman, chief investment officer of the California State Teachers' Retirement System, the country's second-largest public pension fund by assets."

January 2 - Bloomberg (Lindsay Fortado): "Linklaters, hired to advise on four of the 10 biggest deals in 2008, led all law firms in mergers and acquisitions during the smallest deal market in four years... Sullivan & Cromwell ranked second among firms representing buyers and sellers as total announced mergers, acquisitions and divestitures plunged 38% to $2.50 trillion from $4.06 trillion last year."

December 30 - Bloomberg (Makiko Kitamura and Alan Ohnsman): "Toyota Motor Corp. and Honda Motor Co., Japan's two largest carmakers, may modify their so-called 'just-in-time' manufacturing system to avoid possible supplier bankruptcies disrupting production. General Motors Corp. and Chrysler LLC are battling to restructure after winning $13.4 billion in emergency federal loans to keep them operating through March. Detroit's woes could lead to a 'supplier shock,' crippling U.S. production at Japanese and other foreign carmakers, according to the Center for Automotive Research."

December 30 - Bloomberg (Rebecca Christie and David Mildenberg): "GMAC LLC, bolstered by a $6 billion federal bailout, resumed lending to General Motors Corp. customers with lower credit scores as the U.S. widened its effort to keep the automaker in business."

Currency Watch:

The dollar index gained 1.2% to 81.84. For the week on the upside, the South African rand increased 4.3%, the Australian dollar 4.0%, the Swedish krona 3.8%, the Norwegian krone 3.5%, the Brazilian real 2.1%, the New Zealand dollar 1.8%, and the Canadian dollar 1.4%. On the downside, the Mexican peso declined 2.3%, the South Korean won 1.7%, the Japanese yen 1.1%, the Swiss franc 1.1%, the Singapore dollar 0.8%, and the Euro 0.8%.

For the year on the upside, the Japanese yen gained 23.1%, the Swiss franc 6.2%, and the Singapore dollar 0.7%. For the year on the downside, the South African rand declined 27.7%, the British pound 26.3%, the South Korean won 25.7%, the New Zealand dollar 24.1%, the Brazilian real 23.1%, the Norwegian krone 21.7%, the Mexican peso 20.9%, the Australian dollar 19.5%, the Canadian dollar 18.9%, the Swedish krona 17.0%, and the Danish krone 4.0%.

Commodities Watch:

January 1 - Bloomberg (Pham-Duy Nguyen): "Commodity prices in 2008 plunged the most in five decades as demand for energy, metals and grains tumbled in the second half... From July to December, the slumping economy drove crude oil, gasoline, copper, corn, and wheat down from records in the first half. In 2008, the Reuters/Jefferies CRB Index of 19 raw materials fell 36%, the most since the gauge debuted in 1956..."

December 31 - Wall Street Journal (Scott Kilman and Roger Thurow): "Benjamin Riensche has just come off two of his best years in farming. But like growers all over the globe, he is in the midst of a more turbulent era of sharply rising and then suddenly falling prices. Now the 47-year-old, who grows corn and soybeans across 10,000 acres in Iowa, fears he will incur losses in 2009 that would be his first red ink in 16 years. His revenue is falling, but the costs of seed, fertilizer and machinery have remained high... 'I never thought the stakes could get so big,' Mr. Riensche says. 'We've gone from the nickel slots to world-class poker.'"

December 30 - Bloomberg (Kevin Orland): "U.S. steel-sheet prices fell 17% this month as the U.S. economy weakened, Purchasing magazine said."

Gold added 0.7% to $875 ('08 gain 5.7%), and silver jumped 9.1% to $11.49 ('08 decline 23%). January Crude rallied $8.63 to $46.34 ('08 decline 54%). January Gasoline surged 25.8% ('08 decline 25%), and January Natural Gas added 2.7% ('08 decline 59%). March Copper rose 12.1% ('08 decline 54%). March Wheat increased 2.0% ('08 decline 31%), while Corn was unchanged ('08 decline 54%). The CRB index rallied 8.7% ('08 decline 36%). The Goldman Sachs Commodities Index (GSCI) jumped 12.9% ('08 decline 42.8%).

China Watch:

December 30 - Bloomberg (Wang Ying): "China National Nuclear Corp., the nation's biggest builder of atomic power plants, secured 350 billion yuan ($51 billion) of credit lines from eight domestic banks told by the state to increase lending to spur the economy. Lenders... will extend more loans to China National Nuclear for the development of atomic power and fuels, the official Xinhua News Agency reported."

Japan Watch:

December 23 - Wall Street Journal (Takashi Nakamichi and Takashi Mochizuki): "Japanese exports dropped at their fastest rate on record in November and the government cut its view on the economy in a monthly report, cementing expectations of a deeper recession here. ...exports fell 27% year-to-year in November to 5.327 trillion yen ($59.77 billion), underlining that the escalating global downturn and rising yen are taking a toll on Japan's export-dependent economy."

December 30 - Bloomberg (Keiko Ujikane and Tatsuo Ito): "Japan's economy will probably shrink at an annual 12.1% pace this quarter, the sharpest drop since 1974, as exports collapse, Barclays Capital said. Gross domestic product in the three months ending tomorrow will fall at almost three times the 4.1% rate previously predicted, said Kyohei Morita, chief Japan economist at Barclays... 'Given the speed and the length of the contraction, this recession could be the most severe in the postwar era,' Morita said."

Asia Bubble Watch:

January 2 - Bloomberg (Shamim Adam): "Singapore said its economy may shrink more than previously forecast in 2009, foreshadowing a deepening slump throughout the region as exports and manufacturing contracted further in China, South Korea and Australia... 'Asia is facing a growth shock with indicators suggesting the contraction will be as sharp as during the depth of the Asian financial crisis,' said Frederic Neumann, an economist at HSBC... 'There will be more fiscal pump-priming and monetary-policy loosening forthcoming over the next three to four months.'"

January 2 - Bloomberg (William Sim): "South Korea's exports fell by more than 15% for a second straight month in December, adding to signs the economy is headed for its first recession since 1998."

India Watch:

January 2 - Bloomberg (Kartik Goyal and Anil Varma): "India cut interest rates for the fourth time since October and unveiled another stimulus package to counter the effect of the global recession on Asia's third- largest economy. The Reserve Bank of India lowered the repurchase rate by one percentage point to 5.5%..."

Latin America Watch:

January 1 - Bloomberg (Andre Soliani): "Brazil's trade surplus narrowed to a six-year low in 2008 as accelerating economic growth and a strong local currency powered demand for more imports. The surplus shrunk to $24.7 billion, from $40 billion in 2007..."

Unbalanced Global Economy Watch:

December 30 - Bloomberg (Svenja O'Donnell): "U.K. house prices fell in November by the most in at least 12 years... Home values in England and Wales... fell 12.2% from a year earlier, the most since records began in 1996, the Land Registry said..."

December 30 - Dow Jones (Nina Koeppen): "Broad money supply growth in the euro zone slowed sharply in November... while lending to the private sector also eased... The annual growth rate of broad M3 money supply declined to 7.8%, from 8.7% in October... Private sector loan growth eased to 7.1%, following a 7.8% annual growth in October, the ECB data showed."

December 30 - Bloomberg (Johan Carlstrom): "Swedish household credit grew at the slowest pace in at least six years in November... Household lending grew an annual 8.7%, compared with 9.4% in October..."

December 29 - Bloomberg (Kati Pohjanpalo and Juho Erkheikki): "Finnish consumer confidence fell to a record in December as concern mounted the economy is heading for recession and unemployment is set to rise."

January 2 - Bloomberg (Torrey Clark): "Russian manufacturing shrank at a record pace in December as slumping foreign and domestic demand led to production and jobs cuts, VTB Bank Europe said."

Bursting Bubble Economy Watch:

January 2 - Bloomberg (Shobhana Chandra): "Manufacturing in the U.S. shrank in December at the fastest pace in almost three decades... The Institute for Supply Management's factory index fell to 32.2...the lowest level since 1980, from 36.2 the prior month..."

December 29 - Bloomberg (Heather Burke): "U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years. Retailers will close 12,000 stores in 2009, according to Howard Davidowitz, chairman of retail consulting and investment- banking firm Davidowitz & Associates..."

December 30 - Wall Street Journal (Gary Fields): "At Society Hill Loan, a pawnshop in a middle-class neighborhood here, a steady rain fell outside as a fashionably dressed young man parked his Cadillac Escalade outside. Looking around warily, he came in to speak with Nat Leonard, co-owner of the store. The visitor was a 29-year-old engineer who was laid off earlier this year from one of the local chemical companies. Since then, he's been cleaning planes at the airport for less than half the salary he was earning a year ago. Now he needs a $2,500 loan on his watch -- a Movado Fiero with a diamond bezel -- to pay his mortgage note. 'I want to help,' said Mr. Leonard. But unlike Rolex and a few other brands, 'there's no market' for Movado in his pawn universe."

January 2 - Wall Street Journal (Matthew Futterman): "For all the talk of slumping ticket sales and sponsorships, the most troubling scenario for the sports industry is the growing trend of team owners beset by financial problems in their principal businesses. The issue crystallized last month when Tribune Co., owner of the Chicago Cubs, filed for bankruptcy-court protection. The problems have been spreading as the souring economy diminishes the fortunes of team owners. That jeopardizes the essential ingredient of the sports business: rich people who can afford a really expensive hobby. 'The willingness or tolerance for future losses is very, very low,' says Allen and Co.'s Steve Greenberg, an investment banker to the sports industry and former deputy commissioner of Major League Baseball. 'More owners are looking to operate at break-even or better. The problem is, it's hard to turn a $15 million to $25 million loss into break-even in a short period of time.'"

December 30 - Bloomberg (Terrence Dopp): "It's 3:45 a.m. in Atlantic City, New Jersey, and Jimmy Panagiotou just walked away from the poker table after 5 1/2 hours, about $200 lighter. The 43-year-old professional gambler, wearing a World Series of Poker baseball cap and leather jacket, is on a cigarette-and-coffee break outside Caesar's casino, pondering his next move. Looking around, he takes his loss in stride as he notes the eerie quiet of the largest gambling district in the U.S. after Las Vegas. Only diehards remain. 'It's not like it used to be,' Panagiotou said. 'All of the casinos are struggling. People are not going to find money to gamble when they need to find it just to live.'"

Central Banker Watch:

December 30 - Bloomberg (Brian Parkin): "Interest-rate cuts by central banks to counter the global financial crisis may repeat the problem that led the banks to act in the first place, German Finance Minister Peer Steinbrueck said... Germany should forego spending its way out of the crisis by tapping cheap consumer credit as interest rates fall, he is quoted as saying. 'We should avoid letting a policy of cheap money create a new credit-financed growth bubble,' Steinbrueck is cited as saying. Germany's ruling coalition should focus its economic stimulus policy on infrastructure programs that offer long-term benefits rather than fan private consumption, he said."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

December 29 - Bloomberg (Craig Torres): "Federal Reserve researchers found that 169 independent mortgage companies ceased operations in 2007... Non-bank lenders' share of the high- priced loan market, which includes subprime loans, fell to 20.5% in 2007 from 50.6% in 2004... Most of the non-bank lenders sold their home loans to investment banks which repackaged them into bonds."

Real Estate Bust Watch:

December 30 - Bloomberg (Bob Willis): "Home prices in 20 major U.S. cities declined at the fastest rate on record... The S&P/Case-Shiller index declined 18% in the 12 months to October... The gauge has fallen every month since January 2007."

December 23 - Wall Street Journal (Gregory Meyer): "The tide of investors demanding money back from hedge funds is washing into New York-area office buildings, as funds that rented plush space when times were good adopt a sort of austerity. After driving Manhattan office rents to nearly $200 a square foot, hedge funds are struggling with stingier lenders, investor redemptions and, in many cases, poor returns. As a result, in East Coast hedge fund capitals New York City and Greenwich, Conn., several high-profile hedge funds are scrambling to sublet office space."

Speculator Watch:

January 2 - Financial Times (Deborah Brewster): "Investors pulled a net $320bn from mutual funds in 2008, a record both in dollar terms and as a percentage of assets, in one of the biggest flights to safety the industry has seen. The shift from what were previously regarded as safe and stable investments followed a record year of investor inflows in 2007. However, it appears outflows stabilised and even reversed in the final weeks of the year. Investors put a net $23bn into equity funds during December and withdrew only $3.5bn from bond funds, less than in previous months. Equity funds had outflows of $233.5bn in the year to December 29, with bond funds seeing outflows of $58.2bn and balanced funds - which include both securities - having outflows of $28bn, according to Emerging Portfolio Funds Research, which tracks fund flows in most of the world."

December 24 - Wall Street Journal (Peter Lattman): "Cerberus Capital Management suspended withdrawal requests from investors, joining a parade of hedge and private-equity funds that have halted redemptions. Stephen Feinberg, the head of the... investment firm, told clients in a letter last week that the flagship Cerberus Partners fund plans to pay 20% of year-end withdrawals in cash and suspend the remaining withdrawals for investors for up to one year. Separately, Blackstone Group LP said... it will spin out Kailix Advisors, its long-short equity hedge fund, into an independent firm."

Muni Watch:

January 2 - Bloomberg (Jerry Hart): "More local governments face credit- rating downgrades than during any recession in the past 40 years because of their reliance on property taxes amid the housing market's collapse, Moody's... said. State and federal aid cuts, lower income from economically sensitive fees and increased demand for services will also pressure local finances... Governments dependent on short-term financing may be denied credit-market access... 'The downturn in real estate values has exacerbated the general economy's impact on municipal governments' budgets,' Moody's analysts including Lisa Cole wrote... Some local governments "will potentially face material stress over the next few years.'"

California Watch:

December 24 - Bloomberg (Michael Janofsky): "Just $5 million of work is needed to complete a new California Court of Appeals building in Santa Ana. The state may not have the money, and come July judges may be writing opinions in their living rooms. 'I've been on the bench for 23 years, and I've never seen anything like this," said David G. Sills, the presiding justice for the Fourth District Court of Appeals..."

December 29 - Bloomberg (Michael McDonald): "The California Housing Finance Agency remains under Moody's... scrutiny amid rising delinquencies and falling prices. Moody's said... that it is still reviewing the credit rating on $1.4 billion in bonds the state agency sold to finance mortgages in California, including $1.3 billion for multifamily projects."

New York Watch:

December 29 - Bloomberg (Michael McDonald and Michael Quint): "Six years after embarking on an effort to lower borrowing costs using derivatives, New York is watching those savings evaporate. The state says it paid bankrupt Lehman... and other Wall Street banks at least $75.9 million since March to end interest-rate swap contracts that were supposed to lock in below-market rates. That money and the costs of issuing new debt to replace bonds linked to swaps gone awry are eroding the $207 million in savings New York budget officials say the derivatives produced since 2002. New York isn't alone."

Crude Liquidity Watch:

December 30 - Bloomberg (Abdulla Fardan): "Gulf Cooperation Council's leaders may defer a decision on the start of a monetary union to their biannual meeting in May, Bahrain' Al-Wasat said, citing unidentified G.C.C. officials. Members countries couldn't agree on which country would host the proposed central bank for the group, the newspaper reported..."

December 29 - Bloomberg (Arif Sharif): "Banks in the United Arab Emirates face the prospect of increasing loan defaults as the country's property boom loses steam amid the global credit crisis. Small and medium-sized real-estate developers are being hurt as home sales fall... Banks are also cutting lending, which is weighing on property values, bringing the fourfold increase in residential real-estate prices over the last five years to an end."