Wall Street Week Ahead: "Cliff" worries may drive tax selling

NEW YORK (Reuters) - Investors typically sell stocks to cut their losses at year end. But worries about the "fiscal cliff" - and the possibility of higher taxes in 2013 - may act as the greatest incentive to sell both winners and losers by December 31.

The $600 billion of automatic tax increases and spending cuts scheduled for the beginning of next year includes higher rates for capital gains, making tax-loss selling even more appealing than usual.

Tax-related selling may be behind the weaker trend in the shares of market leader Apple , analysts said. The stock is down 20 percent for the quarter, but it's still up nearly 32 percent for the year.

Apple dropped 8.9 percent in this past week alone. For a stock that gained more than 25 percent a year for four consecutive years, the embedded capital gains suddenly look like a selling opportunity if one's tax bill is going to jump sharply just because the calendar changes.

"Tax-loss selling is always a factor (but) tax-gains selling has been a factor this year," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"You have a lot of high-net-worth individuals in taxable accounts, and that could be what's affecting stocks like Apple. If you look at the stocks that people have their largest gains in, they seem to be under a little bit more pressure here than usual."

Of this year's top 20 performers in the S&P 1500 index, which includes large, small and mid-cap stocks, all but four have lost ground in the last five trading sessions.

The rush to avoid higher taxes on portfolio gains could cause additional weakness.

The S&P 500 ended the week up just 0.1 percent after another week of trading largely tied to fiscal cliff negotiation news, which has pushed the market in both directions.

A PAIN PILL FROM THE FED?

Next week's Federal Reserve meeting could offer some relief if policymakers announce further plans to help the lackluster U.S. economy. The Federal Open Market Committee will meet on Tuesday and Wednesday. The policy statement is expected at about 12:30 p.m. on Wednesday after the conclusion of the meeting - the Fed's last one for the year.

Friday's jobs report showing non-farm payrolls added 146,000 jobs in November eased worries that Superstorm Sandy had hit the labor market hard.

"After the FOMC meeting, I think it's going to be downhill from there as worries about the fiscal cliff really take center stage and prospects of a deal become less and less likely," said Mohannad Aama, managing director of Beam Capital Management LLC in New York.

"I think we are likely to see an escalation in profit-taking ahead of tax rates going up next year," he said.

MORE VOLUME AND VOLATILITY

Volume could increase as investors try to shift positions before year end, some analysts said.

While most of that would be in stocks, some of the extra trading volume could spill over into options, said J.J. Kinahan, TD Ameritrade's chief derivatives strategist.

Volatility could pick up as well, and some of that is already being seen in Apple's stock.

"The actual volatility in Apple has been very high while the market itself has been calm. I expect Apple's volatility to carry over into the market volatility," said Enis Taner, global macro editor at RiskReversal.com, an options trading firm in New York.

Shares of Apple, the largest U.S. company by market value, registered their worst week since May 2010. In another bearish sign, the stock's 50-day moving average fell to $599.52 - below its 200-day moving average at $601.38.

"There's a lot of tax-related selling happening now, and it will continue to happen. Apple is an example, even (though) there are other factors involved with Apple," Aama said.

While investors may be selling stocks to avoid higher taxes in 2013, companies may continue to announce special and accelerated dividend payments before year end. Among the latest, Expedia announced a special dividend of 52 cents a share to be paid on December 28.

To be sure, the big sell-off in stocks following the November 6 election was likely related to tax selling, making it hard to judge how much more is to come.

Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, said there's a decent chance that the market could rally before year end.

"Even with little or spotty news that one would put in the positive bucket regarding the (cliff) negotiations, the market has basically hung in there, and I think it's hung in there in anticipation of something coming," he said.

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: caroline.valetkevitch(at)thomsonreuters.com)

(Reporting by Caroline Valetkevitch; Editing by Jan Paschal; Multimedia versions of Reuters Top News are now available for:; 3000 Xtra: visit Reuters Top News; BridgeStation: view story .134; For London stock market outlook please click on .L/O; Pan-European stock market outlook .EU/O; Tokyo stock market outlook .T/O; Wall St Week Ahead runs every Friday.)

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IHT Rendezvous: How to Save Egypt's Dying Chance at Democracy

NEW YORK — The return of protests, tanks and death to the streets of Cairo this week is harrowing. So is the power of the rampant conspiracy theories that cause both Muslim Brotherhood members and their secular opponents to sincerely believe that they are the defenders of Egypt’s revolution.

Criticisms of President Mohamed Morsi’s power grab and rushed constitutional process are legitimate. So are complaints that the country’s secular opposition is poorly organized, lacks majority support and refuses to compromise.

Barring a surprising change in direction, Egypt’s experiment with democracy seems to be headed toward failure. The country’s flawed constitution will likely be ratified in a referendum on Dec. 15. A frustrated and distrustful opposition will boycott subsequent Parliamentary elections. Mr. Morsi will lead a “soft authoritarian” government similar to that of former President Hosni Mubarak. Small opposition parties will exist, but the Muslim Brotherhood’s dominance of the state, politics and society will never be in doubt.

U.S. officials — ever eager for stability in the Middle East — will turn a blind eye and establish a “working relationship” with Mr. Morsi.

“I think the impulse of most American administrations is to show up in an Arab country and say, ‘Take me to your leader,’ ” Nathan J. Brown, a George Washington University professor and leading expert on Egypt, told me in a bleak interview this week. “I don’t think we have many alternatives. The United States is not in the position to back a military coup or the opposition.”

Mr. Brown is correct. Yes, the United States has some economic leverage in Cairo, but in general America remains radioactive in post-Mubarak Egypt. After 40 years of the U.S. backing Egyptian strongmen who made peace with Israel, Washington is hugely mistrusted.

A September 2012 Gallup Poll found that 82 percent of Egyptians opposed the country’s government accepting any economic aid from the United States. By comparison, 42 percent of Egyptians surveyed — roughly half that number — opposed the country’s peace treaty with Israel.

For those who think more “American leadership” is the answer: a U.S.-backed military coup — which it is doubtful the U.S. could engineer — would radicalize Islamists across the region and be an enormous gift to al Qaeda. Similarly, if Washington openly backs the country’s secular opposition, those opponents will be viewed as American stooges and lose popular support.

“A much more effective strategy for the United States is to call for a dialogue between Morsi’s government and the opposition behind closed doors,” said Dalia Mogahed, the American scholar who conducted the Gallup survey. “The U.S. coming out publicly on the side of the opposition will be used against them.”

The only small cause for hope is that Egypt’s struggles are not unprecedented. Other countries have undergone agonizing and turbulent transitions as well. Thomas Carothers, an expert on transitions to democracy at the Carnegie Endowment for International Peace, said that what is occurring today in Egypt is typical when a long-disenfranchised group gains power. Distrustful and insular after years of struggles, it is often reluctant to share power and still views itself as deeply vulnerable.

Mr. Carothers said Egypt’s struggle mirrors the difficult transition still under way in Bolivia. Seven years after Evo Morales was elected that country’s first president of indigenous descent, a tense “fundamental rebalancing of political power” is still playing out in Bolivia. The country’s traditional elite and the indigenous movement still struggle to trust each other and share power. Bigoted arguments that democracy does not work in the Arab world do not apply in Egypt.

“There is nothing particularly Arab about what is happening,” Mr. Carothers said. “It’s not an Islamist issue per se.”

There is another international comparison that should give the Brotherhood pause, according to Mr. Carothers. South Africa’s African National Congress gained a monopoly on power after the country’s first post-apartheid elections in 1994. With no viable opposition, the ANC grew increasingly corrupt as opportunistic figures flocked to the only patronage show in town.

“The party just became a self-sustaining machine,” Mr. Carothers said. “People start joining your party out of sheer opportunism.”

That may not matter to the Brotherhood. Its fear of being forced from power it has finally attained may lead it to become the kind of governing party its members once loathed.

The stark picture painted by Shady Humid, the director of research at the Brookings Doha Center, in this excellent piece in Foreign Policy this week, may prove to be true. There may be no common vision in Egypt, as Humid argues; there may be no consensus on what the Egyptian nation should be.

If there is a common ground, the surest way to reach it is for there to be more democracy in Egypt, not less. Yes, the flawed draft constitution is likely to be ratified on Dec. 15. But the opposition should not boycott the vote or subsequent legislative elections.

In a best-case scenario, the “no” vote could reach as high as 30 percent, according to Mr. Brown, the George Washington University professor. The opposition could then run in subsequent legislative elections. It would not win a majority, but perhaps it would win enough seats to be a viable opposition to the Brotherhood. Two groups that loathe each other would be forced to sit in Parliament together.

Time and a desire to win elections might make them compromise and save Egypt’s fading chances at democracy.

---

David Rohde is a columnist for Reuters, former reporter for The New York Times and two-time winner of the Pulitzer Prize. His forthcoming book, “Beyond War: Reimagining American Influence in a New Middle East” will be published in March 2013.

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The Olsen Twins Design $55,000 Backpack

Stylewatch
Style News Now

12/06/2012 at 06:00 PM ET

Courtesy Just One Eye; Inset: Sipa

We’re positive we weren’t the only ones whose jaws dropped when we read that Mary-Kate and Ashley Olsen‘s fashion line, The Row, is selling $55,000 backpacks.

But this isn’t exactly the Jansport you carried your Trapper Keepers in during elementary school. The extravagant accessory is designed in collaboration with renowned artist Damien Hirst and it’s been dubbed “wearable art.” The backpack is limited edition — as in, there are only 12 of these babies. Each bag features black patent, Nile crocodile leather and is adorned with various designs (like pills or gold circles) courtesy Hirst.

Initially the price of the backpack was originally kept hush-hush and The Row declined to release that info. But when we called Just One Eye (the site selling the creations), they shared with PEOPLE.com the five-figure price tag.

But before you go thinking that absolutely no one is going to drop $55,000 on a backpack, consider this: The Olsens released a similar a purse for $39,000 earlier this year — and it sold out. Tell us: If you had all the money in the world, would you buy this backpack? If not, how much would you pay for it?

–Jennifer Cress

PHOTOS: SHOP STAR STYLE — FOR LESS!

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Celebrations planned as Wash. legalizes marijuana

SEATTLE (AP) — Legal marijuana possession becomes a reality under Washington state law on Thursday, and some people planned to celebrate the new law by breaking it.

Voters in Washington and Colorado last month made those the first states to decriminalize and regulate the recreational use of marijuana. Washington's law takes effect Thursday and allows adults to have up to an ounce of pot — but it bans public use of marijuana, which is punishable by a fine, just like drinking in public.

Nevertheless, some people planned to gather at 12:01 a.m. PST Thursday to smoke in public beneath Seattle's Space Needle. Others planned a midnight party outside the Seattle headquarters of Hempfest, the 21-year-old festival that attracts tens of thousands of pot fans every summer.

"This is a big day because all our lives we've been living under the iron curtain of prohibition," said Hempfest director Vivian McPeak. "The whole world sees that prohibition just took a body blow."

In another sweeping change for Washington, Gov. Chris Gregoire on Wednesday signed into law a measure that legalizes same-sex marriage. The state joins several others that allow gay and lesbian couples to wed.

That law also takes effect Thursday, when gay and lesbian couples can start picking up their wedding certificates and licenses at county auditors' offices. Those offices in King County, the state's largest and home to Seattle, and Thurston County, home to the state capital of Olympia, planned to open the earliest, at 12:01 a.m. Thursday, to start issuing marriage licenses. Because the state has a three-day waiting period, the earliest that weddings can take place is Sunday.

The Seattle Police Department provided this public marijuana use enforcement guidance to its officers via email Wednesday night: "Until further notice, officers shall not take any enforcement action — other than to issue a verbal warning — for a violation of Initiative 502."

Thanks to a 2003 law, marijuana enforcement remains the department's lowest priority. Even before I-502 passed on Nov. 6, police rarely busted people at Hempfest, despite widespread pot use, and the city attorney here doesn't prosecute people for having small amounts of marijuana.

Officers will be advising people to take their weed inside, police spokesman Jonah Spangenthal-Lee wrote on the SPD Blotter. "The police department believes that, under state law, you may responsibly get baked, order some pizzas and enjoy a 'Lord of the Rings' marathon in the privacy of your own home, if you want to."

Washington's new law decriminalizes possession of up to an ounce for those over 21, but for now selling marijuana remains illegal. I-502 gives the state a year to come up with a system of state-licensed growers, processors and retail stores, with the marijuana taxed 25 percent at each stage. Analysts have estimated that a legal pot market could bring Washington hundreds of millions of dollars a year in new tax revenue for schools, health care and basic government functions.

But marijuana remains illegal under federal law. That means federal agents can still arrest people for it, and it's banned from federal properties, including military bases and national parks.

The Justice Department has not said whether it will sue to try to block the regulatory schemes in Washington and Colorado from taking effect.

"The department's responsibility to enforce the Controlled Substances Act remains unchanged," said a statement issued Wednesday by the Seattle U.S. attorney's office. "Neither states nor the executive branch can nullify a statute passed by Congress" — a non-issue, since the measures passed in Washington and Colorado don't "nullify" federal law, which federal agents remain free to enforce.

The legal question is whether the establishment of a regulated marijuana market would "frustrate the purpose" of the federal pot prohibition, and many constitutional law scholars say it very likely would.

That leaves the political question of whether the administration wants to try to block the regulatory system, even though it would remain legal to possess up to an ounce of marijuana.

Colorado's measure, as far as decriminalizing possession goes, is set to take effect by Jan. 5. That state's regulatory scheme is due to be up and running by October 2013.

___(equals)

Johnson can be reached at https://twitter.com/GeneAPseattle

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Stock futures turn positive after payrolls data

NEW YORK (Reuters) - The stock index futures recovered from earlier losses to advance on Friday after data showed non-farm payrolls came in above expectations at 146,000 and the unemployment rate dipped to 7.7 percent.

S&P 500 futures rose 7.7 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures added 67 points and Nasdaq 100 futures gained 14.25 points.

(Reporting by Chuck Mikolajczak; Editing by Bernadette Baum)

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Congo Peace Talks Set to Open in Uganda

KAMPALA, Uganda — Congolese rebels and government officials prepared on Thursday for direct peace talks in the Ugandan capital, Kampala, their first face-to-face encounter since the rebels relinquished Goma, one of Congo’s principal cities, after capturing it last month.

“Since May, we asked Kabila to come to the table,” said Amani Kabasha, a spokesman for the March 23 rebels, or M23, at the rebel-held border post of Rumangabo. Mr. Kabasha said his delegation was awaiting vehicles sent by the Ugandan government to carry them to Kampala. “He didn’t agree, he used force, arms, fighting. But now, because he was defeated, he agrees,” Mr. Kabasha said, referring to President Joseph Kabila.

An uneasy rhythm of commerce and calm returned to Goma this week as Congolese government soldiers again patrolled the streets and the port and airport reopened, allowing a fresh influx of people and cargo, as well as much-needed humanitarian aid for more than 100,000 people displaced by the recent fighting.

“It’s as good as it has been for the last two and a half weeks,” Tariq Riebl, a humanitarian coordinator for Oxfam in Goma, said Thursday. But the situation remained “very dynamic, very fluid,” he said.

In the strategic area of Masisi, to the northwest of Goma, fighting has continued to flare between government troops and numerous militias. Masisi has long been a hotbed of militia groups and ethnic tensions, and humanitarian relief workers said they were increasingly worried about the situation.

Furthermore, neither side has said it has any real faith in the upcoming talks, which delegates said would likely begin Friday, or possibly late Thursday.

“It’s not a negotiation,” said a Congolese government spokesman, Lambert Mende. “We will receive a grievance from M23 and help the president compare with what was decided in 2009,” when the peace agreement for which the rebels are named was signed on March 23.

“We are not very optimistic, because we know that M23 is a very small part of the problem; we need the problem to be solved regionally, and internationally,” Mr. Mende said.

The governments of Uganda and Rwanda have denied accusations by a United Nations panel of covertly supporting the M23 rebels, including in the rebels’ capture of Goma. Both countries have been accused of supporting other Congolese rebels groups in the past.

Many of the rebels’ demands, which the government has dismissed, would benefit Rwanda and Uganda, which are two main transit points for commercial exports from eastern Congo.

“We want more than decentralization, we want federalism,” said Mr. Kabasha, although the specific demands had not yet been finalized. “The eastern parts of Congo’s interests are in eastern Africa. Decentralization means that the leader is near the population.”

In recent days there have been reports of lootings and rape, summary executions and recruitment of children, the United Nations office for humanitarian affairs has said. In Goma, there have also been reports of targeted killings.

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Brooke Burke-Charvet on Cancer Scare: I'm Not Afraid Anymore

TV Watch

Dancing With the Stars

By Tim Nudd

12/06/2012 at 08:40 AM EST

When you're a mom who gets a cancer scare, you're not the only one at home who suddenly needs comfort and support.

In the midst of her thyroid diagnosis Brooke Burke-Charvet – a mother of four – has learned just how vulnerable children can be at such a time, and how differently each one can respond to that kind of stress and anxiety.

"I've really realized that everything I'm going through, my family is going through too," the Dancing with the Stars host, 41, writes in a new blog post.

Burke-Charvet decided initially not to reveal the diagnosis to daughters Neriah, 12, Sierra, 10, and Rain, 5, and son Shaya, 4. "I didn't want them to worry," she writes. "I know that my younger ones still don't have a great concept of time and I didn't want them to be anxious, worried and asking 1,000 questions."

Soon, the kids overheard things, and she and her husband David Charvet told them what was going on. Each child reacted differently, says Burke-Charvet – with emotions ranging from anger to fear to surprise, hope, protectiveness and worry.

The Children React

Shaya's reaction was the most heartbreaking. "He laid in bed last night with David, kinda sad and said, 'I don't want Mommy to die,' " Burke writes. "We both held him and told him that I wasn't going to leave him ever. I know that my surgery is not that serious, but kids get scared, hear 'hospital' and go to the darkest place. Poor little guy."

As she comforted each child in a different way, Burke-Charvet also cared for her husband as he was caring for her.

"He's been so strong and such a rock," she writes. "He's trying not to show any of his fears and concerns so that he can be strong for me. But we've had our moments and I think it's so, so important that you care for everyone in a family that's dealing with a medical crisis the same way you emotionally care for the patient themselves."

As the surgery approaches, she has packed her bag, sorted things out at the house and stocked the fridge with leftovers for the family. Now, she just wants the surgery to be over.

"I'm not afraid anymore," she says. "I think I've been dealing with it so much the past couple months that now I'm ready to just get it done and put this behind me. My only need is being ok for my husband and my children so they don't have to go through any pain and making this as easy as possible for them."

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Celebrations planned as Wash. legalizes marijuana

SEATTLE (AP) — Legal marijuana possession becomes a reality under Washington state law on Thursday, and some people planned to celebrate the new law by breaking it.

Voters in Washington and Colorado last month made those the first states to decriminalize and regulate the recreational use of marijuana. Washington's law takes effect Thursday and allows adults to have up to an ounce of pot — but it bans public use of marijuana, which is punishable by a fine, just like drinking in public.

Nevertheless, some people planned to gather at 12:01 a.m. PST Thursday to smoke in public beneath Seattle's Space Needle. Others planned a midnight party outside the Seattle headquarters of Hempfest, the 21-year-old festival that attracts tens of thousands of pot fans every summer.

"This is a big day because all our lives we've been living under the iron curtain of prohibition," said Hempfest director Vivian McPeak. "The whole world sees that prohibition just took a body blow."

In another sweeping change for Washington, Gov. Chris Gregoire on Wednesday signed into law a measure that legalizes same-sex marriage. The state joins several others that allow gay and lesbian couples to wed.

That law also takes effect Thursday, when gay and lesbian couples can start picking up their wedding certificates and licenses at county auditors' offices. Those offices in King County, the state's largest and home to Seattle, and Thurston County, home to the state capital of Olympia, planned to open the earliest, at 12:01 a.m. Thursday, to start issuing marriage licenses. Because the state has a three-day waiting period, the earliest that weddings can take place is Sunday.

The Seattle Police Department provided this public marijuana use enforcement guidance to its officers via email Wednesday night: "Until further notice, officers shall not take any enforcement action — other than to issue a verbal warning — for a violation of Initiative 502."

Thanks to a 2003 law, marijuana enforcement remains the department's lowest priority. Even before I-502 passed on Nov. 6, police rarely busted people at Hempfest, despite widespread pot use, and the city attorney here doesn't prosecute people for having small amounts of marijuana.

Officers will be advising people to take their weed inside, police spokesman Jonah Spangenthal-Lee wrote on the SPD Blotter. "The police department believes that, under state law, you may responsibly get baked, order some pizzas and enjoy a 'Lord of the Rings' marathon in the privacy of your own home, if you want to."

Washington's new law decriminalizes possession of up to an ounce for those over 21, but for now selling marijuana remains illegal. I-502 gives the state a year to come up with a system of state-licensed growers, processors and retail stores, with the marijuana taxed 25 percent at each stage. Analysts have estimated that a legal pot market could bring Washington hundreds of millions of dollars a year in new tax revenue for schools, health care and basic government functions.

But marijuana remains illegal under federal law. That means federal agents can still arrest people for it, and it's banned from federal properties, including military bases and national parks.

The Justice Department has not said whether it will sue to try to block the regulatory schemes in Washington and Colorado from taking effect.

"The department's responsibility to enforce the Controlled Substances Act remains unchanged," said a statement issued Wednesday by the Seattle U.S. attorney's office. "Neither states nor the executive branch can nullify a statute passed by Congress" — a non-issue, since the measures passed in Washington and Colorado don't "nullify" federal law, which federal agents remain free to enforce.

The legal question is whether the establishment of a regulated marijuana market would "frustrate the purpose" of the federal pot prohibition, and many constitutional law scholars say it very likely would.

That leaves the political question of whether the administration wants to try to block the regulatory system, even though it would remain legal to possess up to an ounce of marijuana.

Colorado's measure, as far as decriminalizing possession goes, is set to take effect by Jan. 5. That state's regulatory scheme is due to be up and running by October 2013.

___(equals)

Johnson can be reached at https://twitter.com/GeneAPseattle

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"Fiscal cliff" worries linger, futures flat

NEW YORK (Reuters) - Stock futures were little changed on Thursday in what could be another choppy session as the progress of fiscal negotiations in Washington continues to determine the market's fate.

President Barack Obama said there could be a quick deal to avert the "fiscal cliff" - tax hikes and spending cuts set to begin next year, possibly driving the U.S. economy back into recession - if Republican leaders agree to raise tax rates for those making more than $250,000 a year.

While Republican leaders in the House of Representatives insist that raising tax rates on the rich is a no-go, some GOP lawmakers now see it as inevitable to avoid the fiscal cliff.

"The market is going to continue to look for news out of Washington and that is going to be the main driver," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

She said with the holidays fast approaching and market participants taking days off, trading volumes will start to shrink, leaving the market vulnerable to sharp swings.

"We have some days ahead that are going to be volatile."

Several European equity benchmark indexes hit 2012 highs, boosted by hopes a U.S. budget deal will be reached before the year-end, and that the worst of Europe's debt crisis might be over. <.eu/>

CME Group , the biggest operator of U.S. futures exchanges, joined several companies Wednesday that were moving 2013 dividend payouts to this month to shield shareholders from expected tax hikes in 2013. Without action from Congress in coming weeks, tax cuts on capital gains and dividends will expire at the end of 2012.

Apple Inc's rank in China's smartphone market fell to No.6 in the third quarter as it faces tougher competition from Chinese brands, research firm IDC said Thursday. Apple's 6.4 percent drop on Wednesday was its worst daily performance since mid December 2008 and dragged down the Nasdaq Composite. Shares of Apple were down 1 percent at $533.59 in premarket trading.

S&P 500 futures dipped a point and were flat in terms of fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures were flat, and Nasdaq 100 futures dropped 2 points.

On the data front, the Labor Department releases first-time claims for jobless benefits for the latest week at 8:30 a.m. ET (1330 GMT). Economists in a Reuters survey forecast a total of 380,000 new filings compared with 393,000 in the prior week.

H&R Block , the biggest U.S. tax preparer, reported a narrower-than-expected quarterly loss as its cost-reduction measures continued to pay off.

The broad market seesawed Wednesday, with the S&P 500 dropping into negative territory before it rebounded off the 1,400 level, seen as a key technical support.

(Editing by Bernadette Baum)

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India Ink: India's Parliament Opens Door to Foreign Retail Investors

After two days of sometimes ear-splitting debate, India’s Lok Sabha, or lower house, of Parliament voted down a measure prohibiting large foreign retailers like Wal-Mart from entering the country. Of the 543 members in the house, 218 voted in favor of a proposition banning these companies from the country, and 253 against.

Rival leaders from Uttar Pradesh, Samajwadi Party leader Mulayam Singh Yadav and Bahujan Samaj Party leader Mayawati, walked out before the debate and their parties’ abstentions helped defeat the measure.

The issue will now travel to the upper house of Parliament.

Allowing foreign multi-brand retailers into India has been a matter of debate for years, and was fast-tracked this year by a government under fire from allegations of corruption and paralysis. Here’s recent India Ink coverage on the issue:

The United Progressive Alliance government announced in September that they would allow big department stores who carry multiple brands, like Wal-Mart Stores, into the country but “laid out some very specific conditions,” Heather Timmons reported.

In an interview with India Ink in the same month, Anand Sharma, the minister of commerce and industry, said that despite the conditions some companies had “already expressed interest, from Tesco to Carrefore to Wal-Mart and Marks and Spencer.”

Explaining the benefits for rural producers he said:

“It will benefit the rural economy with the farmers, who will get a better price for what they produce. What perishes to a large extent will reach the market or the kitchens.”

The announcement was met with skepticism from industry and analysts, Vikas Bajaj reported, but there was hope that “If they follow through, it could prompt a new economic boom in India, where once-brisk growth has slowed markedly in recent years. But it is a big if.”

In a later article he focused on the way foreign direct investment in retail “often divides Indians as much by age as by their livelihoods.”

“Those younger than 25, a group that includes about half the country’s 1.2 billion people, appear quite open and eager to try foreign brands and shopping experiences, researchers say,” Mr. Bajaj wrote.

The Prime Minister, in a rare address to the nation, tried to assuage small retailers’s fears in late September, by saying that they “had nothing to fear from the impending arrival of giant Western retailers like Wal-Mart or Carrefour because there was a place for everyone, large or small, in a growing economy.”

The government may be overly optimistic about the benefits of allowing foreign direct investment into the retail sector, judging by Wal-Mart’s experience in other countries.

And even if that is not true, “any long-term impacts of Wal-Mart’s Mexico business have been overshadowed this year by the company’s involvement in a bribery scandal there,” and was “sure to find similar demands for bribes in India – especially now that ample evidence exists that the company has paid them elsewhere,” Heather Timmons wrote in an article titled, “Can Wal-Mart Build a Nation?”

In November, Wal-Mart said that an internal “investigation into violations of a federal anti-bribery law had extended beyond Mexico to China, India and Brazil, some of the retailer’s most important international markets,” Stephanie Clifford and David Barstow wrote in the New York Times.

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