For the week, the S&P500 slipped 0.4% (up 22.1% y-t-d), and the Dow declined 1.4% (up 17.7% y-t-d). The broader market was notably resilient. The S&P 400 Mid-Caps gained 1.3% (up 32.8%), and the small cap Russell 2000 rose 1.7% (up 22.2%). The Morgan Stanley Cyclicals jumped 1.4% (up 72.0%), and Transports increased 0.8% (up 16.7%). The Morgan Stanley Consumer index dropped 1.8% (up 20.5%), and the Utilities declined 0.9% (up 6.1%). The Banks fell 2.1% (down 3.7%), while the Broker/Dealers added 0.5% (up 46.0%). The Nasdaq100 gained 0.9% (up 49.2%), and the Morgan Stanley High Tech index surged 2.0% (up 65.6%). The Semiconductors jumped 2.9% (up 62.5%). The InteractiveWeek Internet index added 0.6% (up 71.1%). The Biotechs slipped 0.2% (up 40.4%). Although bullion was only down about $2, the HUI gold index dropped 3.2% (up 42.1%).

One-month Treasury bill rates ended the week at zero bps, and three-month bills closed at 4 bps. Two-year government yields dipped one basis point to 0.72%. Five-year T-note yields increased 3 bps to 2.19%. Ten-year yields declined one basis point to 3.54%. Long bond yields declined 5 bps to 4.46%. Benchmark Fannie MBS yields increased one basis point to 4.27%. The spread between 10-year Treasury and benchmark MBS yields widened 2 to 73 bps. Agency 10-yr debt spreads narrowed one basis point to 40 bps. The implied yield on December 2010 eurodollar futures declined 6.5 bps to 1.19%. The 10-year dollar swap spread increased 0.75 to 13.0 bps, and the 30-year swap spread increased 0.5 to negative 16.0 bps. Corporate bond spreads narrowed. An index of investment grade bond spreads narrowed 14 bps to 128, while an index of junk spreads narrowed 7 bps to 555 bps.

Investment grade issuers included Dr. Pepper Snapple $850 million, Sherwin-Williams $500 million, Aflac $400 million, and Duke Energy $250 million.

December 18 - Bloomberg (Gabrielle Coppola and Sapna Maheshwari): "McJunkin Red Man Corp., the Houston- based pipe and valve distributor, led the busiest two-week period of high-yield, high-risk bond sales in three years as investors betting on a slow U.S. economic recovery poured money into the fixed-income securities. Borrowers sold $7.6 billion of high-yield bonds this week, bringing the two-week total to $15.2 billion..."

Junk bond funds reported inflows of $220 million (from Lipper). Junk issuers included Clear Channel $2.5bn, Windstream $1.1bn, McJunkin Red Man $1.0bn, GXS Worldwide $785 million, Edgen Murray $465 million, Geokinetics $300 million, Trimas Corp $250 million, Aquilex $225 million, United Maritime $200 million, and Viskase $175 million.

I saw no convert issues this week.

International dollar-denominated debt issuers included Brazil $2.3bn, Lloyds Bank $2.0bn, Expro Finance $1.4bn, ANZ National $1.25bn, BNP Paribas $1.0bn, Banco Santander $800 million and Novasep $150 million.

U.K. 10-year gilt yields dropped 8 bps to 3.77%, and German bund yields fell 7 bps to 3.13%. Bond yields in Greece surged another 50 bps to 5.79%. The German DAX equities index gained 1.3% (up 21.2% y-t-d). Japanese 10-year "JGB" yields declined 5 bps to 1.23%. The Nikkei 225 added 0.3% (up 14.5%). Emerging markets were mostly lower but generally resilient in the face of a rallying dollar. For the week, Brazil's Bovespa equities index declined 3.6% (up 77.9%), and Mexico's Bolsa slipped 0.2% (up 42.2%). Russia's RTS equities index jumped 2.5% (up 124.1%). India's Sensex equities index declined 2.3% (up 73.3%). China's Shanghai Exchange dropped 4.1%, lowering 2009 gains to 71.0%. Brazil's benchmark dollar bond yields jumped 18 bps to 4.99%, while Mexico's benchmark bond yields declined 4 bps to 5.09%.

Freddie Mac 30-year fixed mortgage rates jumped 13 bps to 4.94% (down 25bps y-o-y). Fifteen-year fixed rates rose 6 bps to 4.38% (down 54bps y-o-y). One-year ARMs leaped 10 bps to 4.34% (down 60bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 9 bps to 5.91% (down 118bps y-o-y).

Federal Reserve Credit expanded $22.8bn last week to $2.191 TN. Fed Credit has declined $56bn y-t-d and $63bn over the past 52 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/16) increased $4.9bn to a record $2.949 TN. "Custody holdings" have expanded at a 17.9% rate y-t-d, and were up $450bn over the past year, or 18.0%.

M2 (narrow) "money" supply fell $12.8bn to $8.402 TN (week of 12/7). Narrow "money" has expanded at a 2.7% rate y-t-d and 3.8% over the past year. For the week, Currency added $0.3bn, while Demand & Checkable Deposits declined $6.4bn. Savings Deposits increased $5.5bn, while Small Denominated Deposits dropped $8.2bn. Retail Money Funds dipped $3.9bn.

Total Money Market Fund assets (from Invest Co Inst) sank $51.1bn to a 23-month low $3.269 TN. Money fund assets have declined $561bn y-t-d, or 15.2% annualized. Money funds fell $505bn, or 13.4%, over the past year.

Total Commercial Paper outstanding dropped $59.6bn last week (18-wk gain of $60bn) to $1.150 TN. CP has declined $531bn y-t-d (32.9% annualized) and $559bn over the past year (32.7%). Asset-backed CP fell $9.1bn last week to $484bn, with a 52-wk drop of $255bn (34.5%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $874bn y-o-y to a record $7.626 TN. Reserves have increased $861bn year-to-date.

Global Credit Market Watch:

December 17 - Bloomberg (Beth Mellor): "Greek bonds fell after Standard & Poor's cut the country's credit rating and threatened to take further action unless Prime Minister George Papandreou tackles the European Union's largest budget deficit. The euro also slid against the dollar and the yen after S&P downgraded Greece one step to BBB+ from A-..."

December 16 - Bloomberg (Anna Rascouet and Anchalee Worrachate): "Greece sold 2 billion euros ($2.9bn) of floating-rate notes privately to banks, eight days after Fitch Ratings downgraded the nation's debt as the government struggles to cut the European Union's largest budget deficit... The securities, which mature in February 2015, will yield 250 bps, or 2.5 percentage points, more than the six- month euro interbank offered rate..."

December 15 - Financial Times (Henny Sender): "Distressed debt - defined as a bond trading at less than 50 cents on the dollar - is rapidly disappearing from US financial markets as yield-hungry investors push up the prices for even the most beaten-down securities. Bonds trading at less than 50 cents on the dollar now account for only 1.1% of the high-yield market, or $8.9bn in securities, down from 27.5%, or $202bn in bonds, a year ago, according to JPMorgan data. The intense demand for once-distressed bonds is stirring the debate about whether investors are acting wisely or piling into junk bonds because of a lack of opportunities elsewhere in the fixed-income markets. With the Federal Reserve keeping its overnight lending rate near zero, the yield on a two-year Treasury remains less than 1%. 'The Fed's zero interest rate policy has been a catalyst for billions and billions of dollars flowing into the high-yield market,' said Tim Donohue, managing director for high-yield markets at JPMorgan. 'The government is holding down interest rates and, as a result, cash is chasing one of the few asset classes that still offers a healthy yield.'"

December 18 - Bloomberg (Gabi Thesing and Jon Menon): "Euro-region banks may have to write down an additional 187 billion euros ($268bn) as loans to property companies and eastern European nations threaten the recovery in financial markets, the European Central Bank said. The ECB raised its estimate for writedowns by 13% to 553 billion euros for the period of 2007 through 2010."

Global Government Finance Bubble Watch:

December 17 - Wall Street Journal (Eleanor Laise): "Changhong Zhu, a derivatives specialist at Allianz SE's Pacific Investment Management Co., is leaving the firm to help manage China's foreign exchange reserves. Mr. Zhu, who runs a lineup of hedge funds at Pimco, has accepted a position as chief investment officer of the reserve management department at the State Administration of Foreign Exchange, which manages over $2 trillion worth of foreign exchange reserves and is part of China's central bank."

December 17 - New York Times (Mary Williams Walsh): "Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support. These companies, the American International Group, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state. And the total risk they pose to the taxpayer far exceeds that of the big banks... All the companies have recently drawn new government money or are in talks to do so: Fannie Mae and Freddie Mac... have used $112 billion...of a total $400 billion pledge from the Treasury. Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end... GMAC... already has $13.4 billion from the [TARP], and has been in talks with the Treasury about getting up to $5.6 billion more... A.I.G.... recently drew $2 billion from a special $30 billion government facility, which was created in the spring after a $40 billion infusion proved inadequate. Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan..."

December 18 - Bloomberg (Gonzalo Vina): "The British government had a 20.3 billion-pound ($33bn) budget deficit in November, the largest since records began in 1993, pushing national debt above 60% of economic output. The shortfall was up from 15.5 billion pounds a year earlier..."

December 15 - Bloomberg (Alex Nicholson): "The International Monetary Fund urged Russia to scale back spending and put interest-rate cuts on hold to avoid creating wider deficits, a weaker ruble and faster inflation... Russia's budget deficit this year may be wider than official estimates show, Deputy Economy Minister Andrei Klepach said... He expects a 7% gap of gross domestic product in 2009..."

Currency Watch:

December 17 - Bloomberg: "Chinese central banker Zhu Min said that the dollar is set to weaken further and it will become more difficult for nations to buy U.S. Treasuries. 'When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken,' Deputy Governor Zhu said..."

December 18 - Bloomberg: "Hong Kong's former central bank chief Joseph Yam said that the yuan can become the "third pillar" of the global monetary system as deteriorating public finances erode confidence in the dollar and the euro. 'Large budget deficits and public debt, and structural problems in the financial system, mean that the two pillars are not resting on sound foundations,' he said... 'There is a need for a third currency to serve as a third pillar, which would also give an opportunity for the two weak pillars to heal.'"

December 15 - Bloomberg (Bomi Lim): "North Korea shut street markets to buy time to bring down prices that have surged since a recent currency revaluation, a Seoul-based rights group said. The three-day closure... came after markets sold most goods for more than double the revised prices set by the communist regime and announced on Dec. 9..."

The dollar index surged 1.5% this week to close at 77.73. For the week on the upside, the Mexican peso increased 0.3%. On the downside, the Australian dollar declined 2.5%, the Swedish krona 1.9%, the Euro 1.9%, the Danish krone 1.9%, the New Zealand dollar 1.9%, the Japanese yen 1.5%, the Norwegian krone 1.3%, the Brazilian real 1.2%, the Swiss franc 0.8%, the Singapore dollar 0.8%, the British pound 0.6%, and the Canadian dollar 0.6%.

Commodities Watch:

December 14 - Bloomberg (Alan Bjerga, Madelene Pearson and Yi Tian): "Falling production in commodities from rice to milk is bad news for just about everyone except investors. Rice may surge 63% to $1,038 a metric ton from $638 on Philippine imports and a shortage in India, a Bloomberg survey of importers, exporters and analysts showed. The U.S. government says nonfat dry milk may jump 39% next year, and JPMorgan... forecasts a 25% gain for sugar. Global food costs jumped 7% in November, the most since February 2008... according to the United Nations Food and Agriculture Organization."

December 18 - Bloomberg: "China, the world's largest steelmaker, faces a shortage of coking coal that may drive imports next year and spur a fight for resources with Japanese and South Korean mills, two Chinese industry groups said. 'Domestic demand for coking coal will rise moderately next year, while global demand may gain faster, intensifying competition,' Wu Chenghou, senior adviser of the China Coal Transportation and Distribution Association, said... China's coking coal imports rose 12-fold this year..."

December 17 - Bloomberg (Dinakar Sethuraman): "Demand for thermal coal from China and India may boost prices of the fuel to $80 a metric ton next year amid reduced supplies and lower inventories, JPMorgan... said... Prices of coal burnt at power stations may rise to $85 a ton in 2011 from $70 this year... China and India may import a combined 63.9 million tons of thermal coal next year..."

December 17 - Bloomberg (Aya Takada): "Rubber climbed to the highest level in almost 15 months after the Federal Reserve said the economy is strengthening, increasing speculation demand for the commodity used in tires will increase."

December 15 - Bloomberg (Jeff Wilson): "Soybeans prices rose to a two-week high on increasing demand by Chinese importers and U.S. processors. U.S. exporters sold 290,000 metric tons to China for delivery before Sept. 1, the Department of Agriculture said... Cumulative U.S. sales to all customers from Sept. 1 to Dec. 3 are up 56 percent from a year earlier... 'Demand is very strong, and exports to China are phenomenal,' said Dale Durchholz, the senior market analyst at AgriVisor LLC... 'Processors are running near 100% of capacity' to produce animal feed for overseas buyers, he said."

December 16 - Bloomberg (M. Shankar): "Cocoa climbed to the highest level in at least two decades in London as investors bet on further price gains."

The CRB index rose 1.9% this week (up 20.3% y-t-d) in spite of the dollar's strong advance. The Goldman Sachs Commodities Index (GSCI) surged 2.5% (up 43.7%). Gold slipped 0.2% to close at $1,113 (up 26.2%). Silver rallied 1.2% to $17.30 (up 53.2%). January Crude recovered $3.31 to $73.18 (up 64%). January Gasoline gained 2.8% (up 78%), and January Natural Gas surged 12.3% (up 3%). March Copper was little changed (up 123%). March Wheat declined 1.8% (down 14%), while March Corn fell 1.7% (down 2% y-t-d).

China Bubble Watch:

December 18 - Bloomberg (Shiyin Chen): "China's property and stock markets are a 'bubble' that will burst when inflation accelerates in 2011, former Morgan Stanley chief Asian economist Andy Xie said. 'China's asset markets are a ponzi scheme... Property is heading for one huge bust that will take a year and a half to unfold.'"

December 18 - Bloomberg: "China has 'dangerous' bubbles in the real estate market, Huang Yiping, an economics professor at Beijing University and former Citigroup Inc. economist, wrote in the China Daily... He cited the level of vacancies and the ratio of home prices to incomes. Huang said that the Dubai crisis indicated that 'once bubbles emerge, they are sure to burst.'"

December 18 - Bloomberg: "China property stocks fell the most in four months... on concern the government will step up measures to curb property speculation. Poly Real Estate, China's second-largest developer by market value, plunged 7.5%..., a ninth day of losses, after the government increased down payment requirements on land purchases."

December 18 - Bloomberg: "Chinese banks' capital strength is probably more 'strained' than it appears as lenders use more off-balance sheet transactions to make room for loan growth, Fitch Ratings said. The increasing amount of unreported transactions, including repackaging loans into wealth management products to sell to investors, and the outright sale of loans to other financial institutions, represent a 'growing pool of hidden credit risk,' Fitch said in an annual review of Chinese banks."

December 14 - Bloomberg (Stanley James): "China's government departments are expected to speed up spending in the following weeks to try to use up as much as 2 trillion yuan ($293bn) that remains of the budget, the South China Morning Post reported, citing a state researcher. Central and provincial government officials will try to use the remaining money on concern that their budgets may be cut next year if they fail to spend the 2009 allocation..."

December 18 - Bloomberg: "Gloria Gu paid $483,000 for an apartment near Shanghai's financial district so her 3-year-old son could attend one of the city's best kindergartens. Six months later, a similar place in her building sold for $615,000. 'Prices are way past reasonable,' said Gu, 31, a food company manager who bought her three-bedroom, 140-square-meter (1,507-square-foot) apartment in the Pudong area in May. 'The market is too good to be true.'"

December 17 - Bloomberg (Sophie Leung): "Hong Kong's central bank said the city may face 'sharp corrections' in asset prices should fund flows reverse, adding to concerns voiced by Japan, China and South Korea on the dangers of speculative capital."

Japan Watch:

December 18 - Bloomberg (Mayumi Otsuma): "The Bank of Japan held interest rates at 0.1 percent and policy makers said they are intolerant of price declines amid signs deflation may undermine the economic recovery. The policy board "does not tolerate a year-on-year rate of change in the CPI equal to or below zero percent," the central bank said in a statement in Tokyo today after the unanimous rate decision."

India Watch:

December 18 - Bloomberg (Chitra Somayaji): "India's property market, where prices have risen as much as 29% in major cities, will escape the kind of collapse that afflicted Dubai, said Keki Mistry, incoming head of the nation's biggest mortgage lender... Central banks and governments across Asia have been taking steps to rein in property prices this year on concern speculative money inflows will generate asset bubbles. Some areas in China and India may become the 'next Dubai' because of debt-fueled property investment, fund manager Mark Mobius said..."

December 14 - Bloomberg (Kartik Goyal): "India's inflation accelerated to a ten-month high as food costs soared, making it more likely the central bank will tighten monetary policy soon to contain prices. The benchmark wholesale-price index climbed 4.78% in November from a year earlier..."

December 17 - Bloomberg (Kartik Goyal and Manish Modi): "India's wholesale food prices rose at the fastest pace in eleven years, making it more likely that the central bank will raise borrowing costs to curb inflation. An index of food articles compiled by the commerce ministry increased 19.95% in the week ended Dec. 5 from a year earlier..."

Asia Bubble Watch:

December 17 - Bloomberg (Allen Wan and Shiyin Chen): "Asia is under threat of asset bubbles next year as China's rebounding economy and low U.S. interest rates drive a 'tsunami' of capital into the region, Nomura Holdings Inc. said. Asia has attracted $241 billion in the six months to September of 2009, reversing outflows of $262 billion in the period from July 2008 to March 2009..."

December 18 - Bloomberg (Shinhye Kang): "Sales at South Korea's major department stores rose for a ninth month in November, adding to signs the nation's economic recovery is strengthening. Spending at the three biggest chains climbed 6.4% from a year earlier..."

December 17 - Bloomberg (Shamim Adam): "Singapore's exports rose for the first time in 19 months in November as a recovery in the global economy boosted demand for pharmaceuticals and reduced a slump in electronics sales. Non-oil domestic exports climbed 8.7% from a year earlier..."

December 16 - Bloomberg (Katrina Nicholas): "Mortgage lending is accelerating in Singapore, making the city-state more susceptible to a property bubble than Hong Kong and South Korea... according to Moody's..."

Latin America Bubble Watch:

December 17 - Bloomberg (Iuri Dantas): "Brazil's central bank said the country's current account deficit rose to a 19-month high in November and the gap may expand to a record next year. Brazil had a $3.3 billion current account deficit in November... The gap will nearly double to $40 billion next year, from a forecast $22 billion deficit this year... The gap may rise to 2% of gross domestic product in 2010, from an estimated 1.4% this year..."

December 14 - Bloomberg (Fabiola Moura): "Brazilian store owners expect the best holiday sales in eight years as government tax cuts and a revival in consumer finance bolster demand. Sales revenue will rise 12% in the Christmas season, up from 9.5% last year and the most since 2001, according to 66% of the store owners polled by the national association of mall retailers..."

December 15 - Bloomberg (Helder Marinho and Andre Soliani): "Brazil's retail sales jumped in October twice as fast as forecast... as surging consumer demand drives the recovery of Latin America's biggest economy... From the same month a year earlier, sales rose 8.4% in October... It was the biggest annual jump since October, 2008."

December 18 - Bloomberg (Andre Soliani): "Brazil's unemployment rate fell for a third month to the lowest level of 2009 as Latin America's biggest economy rebounds. Brazil's jobless rate fell to 7.4% in November from 7.5% in October..."

December 16 - Bloomberg (Andrea Jaramillo and Carlos Manuel Rodriguez): "Mexico's credit ratings may be cut further next year as the budget gap swells more than the government forecast, said Rogelio Ramirez de la O, the economist who predicted the 1994 peso devaluation. The deficit will widen to at least 5% of gross domestic product next year, almost double the government's forecast of 2.8%..."

Dubai Watch:

December 14 - Bloomberg (Haris Anwar): "Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, avoid defaulting on a $4.1 billion bond payment that roiled global financial markets during the past month. Dubai World will use the money to cover debt of real-estate unit Nakheel PJSC that comes due today. The rest of the money will cover Dubai World's interest and operating costs until the company reaches a standstill agreement with its creditors, Dubai's government said..."

Unbalanced Global Economy Watch:

December 15 - Bloomberg (Alexandre Deslongchamps): "Canadian home resales rose to a record 46,450 units in November, as the housing market helped to pull the economy out of recession... sales in November climbed 67% from a year earlier, the Canadian Real Estate Association said..."

December 14 - Bloomberg (Greg Quinn): "Canadian household net worth rose between July and September as individuals benefited from a rise in stock markets. The value of families' assets, such as houses and savings accounts, minus their liabilities rose 2.3% to C$5.72 trillion ($5.38 trillion) in the third quarter... The ratio of household debt to income rose 2 percentage points to a record 145%..."

December 17 - Bloomberg (Scott Hamilton): "U.K. retail sales unexpectedly fell in November for the first time in six months as the recession prompted consumers to spend less at clothing and department stores in the approach to Christmas."

December 18 - Bloomberg (Frances Robinson and Jana Randow): "German business confidence increased to the highest level in 17 months in December as the global recovery sparked a revival in exports and manufacturing growth."

U.S. Bubble Economy Watch:

December 14 - Bloomberg (Rich Miller and Michael McKee): "The U.S. may have avoided the Japanese disease of prolonged stagnation only to end up with a dose of eurosclerosis: chronically high unemployment in a growing economy. Economists are starting to extend their forecasts through 2011 and the results don't look pretty. Jan Hatzius, chief U.S. economist at Goldman Sachs... forecasts that the jobless rate will rise to 10.75% by the middle of 2011 from 10% now."

December 14 - Bloomberg (Brian Louis): "The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55% to 1.7 million at the end of September, according to estimates by First American CoreLogic. The 'shadow inventory' rose from 1.1 million a year earlier. Such properties include those taken over by banks and mortgage companies and those where the loans are at least 90 days delinquent..."

Central Banker Watch:

December 15 - Bloomberg (Scott Lanman and Steve Matthews): "Proposals in Congress to trim the Federal Reserve's powers and subject it to greater scrutiny mean Chairman Ben S. Bernanke may have to think twice about raising rates in 2010 as long as unemployment stays high. Bernanke and his colleagues on the Federal Open Market Committee meet for the last time this year under the shadow of proposals to audit the Fed's monetary policy decisions, strip it of bank-supervision authority and give politicians a role in choosing regional Fed bank presidents."

December 16 - Bloomberg (Bo Nielsen): "The Norwegian krone extended gains against the euro and the dollar after the country's central bank unexpectedly raised its main interest rate... Norges Bank, which in October became Europe's first to reverse an easing cycle since the credit crisis peaked, raised the overnight deposit rate to 1.75%..."

December 16 - Bloomberg (Simone Meier and Frances Robinson): "The European Central Bank will lend banks more money than economists forecast in its final tender of 12-month funds as some financial institutions try to lock in cash at a record low interest rate. Banks bid for 96.9 billion euros ($141 billion), the... ECB said..."

Fiscal Watch:

December 17 - Wall Street Journal (Jessica Holzer): "Former Federal Reserve Chairman Alan Greenspan said in prepared testimony the threat to U.S. fiscal stability is larger than ever, mostly because of rising medical costs. Averting a situation where the U.S. struggles to finance unprecedented budget deficits 'is more urgent than at any time in our history,' he said... before the Senate Committee on Homeland Security and Governmental Affairs. Mr. Greenspan argued that the problem of large projected shortfalls in Medicare and Medicaid can't be wiped away with more appropriations from Congress. 'It is a physical resource crisis,' he argued, which will suck more of the U.S. labor force and capital investment into the medical sector. 'A dollar of the nation's scarce savings employed to finance a new medical technology investment is a dollar not available to fund other critical, non-medical, cutting-edge technologies that enhance our material wellbeing,' he said."

December 17 - Bloomberg (Brian Faler): "The U.S. House approved a $154 billion economic-aid package and a $290 billion increase in the legal limit on government borrowing as the chamber wrapped up its legislative business for the year... The chamber also passed a $636 billion defense budget bill yesterday. All three measures await Senate action."

Real Estate Watch:

December 17 - Bloomberg (Kathleen M. Howley and Dan Levy): "Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers... Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to... First American CoreLogic Inc."

December 17 - Bloomberg (Dan Levy): "Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market. The bank has been negotiating an 'orderly transfer' of the towers since earlier this year..."

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

December 18 - Bloomberg (Michael McDonald, John Lauerman and Gillian Wee): "Anne Phillips Ogilby, a bond attorney at one of Boston's oldest law firms, on Oct. 31 last year relayed an urgent message from Harvard University, her client and alma mater, to the head of a Massachusetts state agency that sells bonds. The oldest and richest academic institution in America needed help getting a loan right away. As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion... The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them."

Muni Watch:

December 18 - Bloomberg (Jeremy R. Cooke): "Benchmark yields on U.S. municipal bonds reached a 10-week low as this week's long-term, fixed-rate issuance shrank to less than half the previous week's tally ahead of the year-end holidays."

California Watch:

December 16 - Bloomberg (Michael B. Marois): "California's finances resumed a decline in November, adding to the state's resurgent deficit as Governor Arnold Schwarzenegger readies a spending plan that will need to erase a $21 billion gap. California... collected $439 million less revenue in November than what was estimated in July... The decline leaves revenue $1 billion behind projections halfway through the fiscal year... California Legislative Analyst Mac Taylor said in November the state will face a deficit of $14.4 billion beginning in July. That's in addition to a $6.3 billion gap opening up in the current year as several projections within the budget falter or miss revenue projections. 'In many respects, the steps to close next year's budget gap will be even more difficult and more challenging than what we've just had to do this year,' Department of Finance spokesman H.D. Palmer said... From February through July, lawmakers worked to close a record $60 billion deficit with spending cuts, temporary tax increases and other one-time fixes. The unemployment rate rose to 12.5% in October from 8% the year before and 4.8% in July 2006."

December 17 - Bloomberg (Sharon L. Lynch): "San Francisco Bay Area home prices rose in November, the second increase in two years, reflecting fewer foreclosure sales, MDA DataQuick said. The median price for new and resale houses and condominiums in the nine-county San Francisco Bay Area climbed to $387,000 in November, up almost 11% from the previous year... The number of transactions rose almost 20% to 6,878. Foreclosure sales accounted for almost 33% of existing homes sold. Foreclosure sales peaked at 52% of resales in February."

New York Watch:

December 18 - Bloomberg (Jeremy R. Cooke): "The largest U.S. transit agency had its credit outlook on about $11.5 billion of debt reduced on concern New York state may cut more funding from a system already resorting to service cuts to balance its budget."

Speculation Watch:

December 15 - Bloomberg (Pierre Paulden and Kristen Haunss): "The three largest U.S. banks are preparing for a comeback in the market for collateralized debt obligations backed by high-yield, high-risk loans, two years after issuance tumbled when credit markets seized up. JPMorgan... Bank of America.... and Citigroup... are approaching managers of leveraged loans to offer terms for new collateralized loan obligations following a record rally this year in the debt, according to people familiar with the discussions... The highest-rated portions of CLOs have climbed to 89 cents on the dollar from a record low of 69 cents in April.... The $440 billion market for CLOs, which pool loans and slice them into securities of varying risk, largely disappeared at the end of 2007..."

December 18 - Bloomberg (Richard Bravo and Emre Peker): "Leveraged