Wall Street Week Ahead: Bears hibernate as stocks near record highs

NEW YORK (Reuters) - Stocks have been on a tear in January, moving major indexes within striking distance of all-time highs. The bearish case is a difficult one to make right now.

Earnings have exceeded expectations, the housing and labor markets have strengthened, lawmakers in Washington no longer seem to be the roadblock that they were for most of 2012, and money has returned to stock funds again.

The Standard & Poor's 500 Index <.spx> has gained 5.4 percent this year and closed above 1,500 - climbing to the spot where Wall Street strategists expected it to be by mid-year. The Dow Jones industrial average <.dji> is 2.2 percent away from all-time highs reached in October 2007. The Dow ended Friday's session at 13,895.98, its highest close since October 31, 2007.

The S&P has risen for four straight weeks and eight consecutive sessions, the longest streak of days since 2004. On Friday, the benchmark S&P 500 ended at 1,502.96 - its first close above 1,500 in more than five years.

"Once we break above a resistance level at 1,510, we dramatically increase the probability that we break the highs of 2007," said Walter Zimmermann, technical analyst at United-ICAP, in Jersey City, New Jersey. "That may be the start of a rise that could take equities near 1,800 within the next few years."

The most recent Reuters poll of Wall Street strategists estimated the benchmark index would rise to 1,550 by year-end, a target that is 3.1 percent away from current levels. That would put the S&P 500 a stone's throw from the index's all-time intraday high of 1,576.09 reached on October 11, 2007.

The new year has brought a sharp increase in flows into U.S. equity mutual funds, and that has helped stocks rack up four straight weeks of gains, with strength in big- and small-caps alike.

That's not to say there aren't concerns. Economic growth has been steady, but not as strong as many had hoped. The household unemployment rate remains high at 7.8 percent. And more than 75 percent of the stocks in the S&P 500 are above their 26-week highs, suggesting the buying has come too far, too fast.

MUTUAL FUND INVESTORS COME BACK

All 10 S&P 500 industry sectors are higher in 2013, in part because of new money flowing into equity funds. Investors in U.S.-based funds committed $3.66 billion to stock mutual funds in the latest week, the third straight week of big gains for the funds, data from Thomson Reuters' Lipper service showed on Thursday.

Energy shares <.5sp10> lead the way with a gain of 6.6 percent, followed by industrials <.5sp20>, up 6.3 percent. Telecom <.5sp50>, a defensive play that underperforms in periods of growth, is the weakest sector - up 0.1 percent for the year.

More than 350 stocks hit new highs on Friday alone on the New York Stock Exchange. The Dow Jones Transportation Average <.djt> recently climbed to an all-time high, with stocks in this sector and other economic bellwethers posting strong gains almost daily.

"If you peel back the onion a little bit, you start to look at companies like Precision Castparts , Honeywell , 3M Co and Illinois Tool Works - these are big, broad-based industrial companies in the U.S. and they are all hitting new highs, and doing very well. That is the real story," said Mike Binger, portfolio manager at Gradient Investments, in Shoreview, Minnesota.

The gains have run across asset sizes as well. The S&P small-cap index <.spcy> has jumped 6.7 percent and the S&P mid-cap index <.mid> has shot up 7.5 percent so far this year.

Exchange-traded funds have seen year-to-date inflows of $15.6 billion, with fairly even flows across the small-, mid- and large-cap categories, according to Nicholas Colas, chief market strategist at the ConvergEx Group, in New York.

"Investors aren't really differentiating among asset sizes. They just want broad equity exposure," Colas said.

The market has shown resilience to weak news. On Thursday, the S&P 500 held steady despite a 12 percent slide in shares of Apple after the iPhone and iPad maker's results. The tech giant is heavily weighted in both the S&P 500 and Nasdaq 100 <.ndx> and in the past, its drop has suffocated stocks' broader gains.

JOBS DATA MAY TEST THE RALLY

In the last few days, the ratio of stocks hitting new highs versus those hitting new lows on a daily basis has started to diminish - a potential sign that the rally is narrowing to fewer names - and could be running out of gas.

Investors have also cited sentiment surveys that indicate high levels of bullishness among newsletter writers, a contrarian indicator, and momentum indicators are starting to also suggest the rally has perhaps come too far.

The market's resilience could be tested next week with Friday's release of the January non-farm payrolls report. About 155,000 jobs are seen being added in the month and the unemployment rate is expected to hold steady at 7.8 percent.

"Staying over 1,500 sends up a flag of profit taking," said Jerry Harris, president of asset management at Sterne Agee, in Birmingham, Alabama. "Since recent jobless claims have made us optimistic on payrolls, if that doesn't come through, it will be a real risk to the rally."

A number of marquee names will report earnings next week, including bellwether companies such as Caterpillar Inc , Amazon.com Inc , Ford Motor Co and Pfizer Inc .

On a historic basis, valuations remain relatively low - the S&P 500's current price-to-earnings ratio sits at 15.66, which is just a tad above the historic level of 15.

Worries about the U.S. stock market's recent strength do not mean the market is in a bubble. Investors clearly don't feel that way at the moment.

"We're seeing more interest in equities overall, and a lot of flows from bonds into stocks," said Paul Zemsky, who helps oversee $445 billion as the New York-based head of asset allocation at ING Investment Management. "We've been increasing our exposure to risky assets."

For the week, the Dow climbed 1.8 percent, the S&P 500 rose 1.1 percent and the Nasdaq advanced 0.5 percent.

(Reporting by Ryan Vlastelica; Additional reporting by Chuck Mikolajczak; Editing by Jan Paschal)

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Armstrong meeting with USADA appears unlikely

AUSTIN, Texas (AP) — Lance Armstrong's lawyers say the cyclist will talk more about drug use in the sport, just likely not to the U.S. Anti-Doping Agency that led the effort to strip him of his Tour de France titles.

In a testy exchange of letters and statements revealing the gulf between the two sides, USADA urged Armstrong to testify under oath to help "clean up cycling."

Armstrong's attorneys responded that the cyclist would rather take his information where it could do more good — namely to cycling's governing body and World Anti-Doping Agency officials.

USADA's response to that: "The time for excuses is over."

The letters, obtained Friday by The Associated Press, underscore the continuing feud between Armstrong and USADA CEO Travis Tygart, the man who spearheaded the investigation that uncovered a complex doping scheme on Armstrong's U.S. Postal Service teams.

Armstrong's seven Tour de France victories were taken away last year and he was banned for life from the sport.

In an interview with Oprah Winfrey last week, Armstrong admitted doping, said he owed a long list of apologies and that he would like to see his lifetime ban reduced so he can compete again.

His most realistic avenue toward that might be telling USADA everything he knows in a series of interviews the agency wants started no later than Feb. 6.

That seems unlikely.

Armstrong attorney Tim Herman responded to USADA's first letter, sent Wednesday, by saying his client's schedule is already full, and besides, "in order to achieve the goal of 'cleaning up cycling,' it must be WADA and the (International Cycling Union) who have overall authority to do so."

By Friday night, Herman strongly suggested Armstrong won't meet with USADA at all but intends to appear before the UCI's planned "truth and reconciliation" commission.

"Why would we cooperate (with USADA)?" Herman said in a telephone interview. "USADA isn't interested in cleaning up cycling. Lance has said, 'I'll be the first guy in the chair when cycling is on trial, truthfully, under oath, in every gory detail.' I think he's going testify where it could actually do some good: With the body that's charged with cleaning up cycling," Herman said.

In its last letter to Armstrong, sent Friday evening, USADA attorney William Bock said his agency and WADA work hand-in-hand in that effort.

"Regardless, and with or without Mr. Armstrong's help, we will move forward with our investigation for the good of clean athletes and the future of sport," Bock's letter reads.

The letters confirm a Dec. 14 meeting in Denver involving Armstrong, Tygart and their respective attorneys, which is when, in Tygart's words, Armstrong should have started thinking about a possible meeting with USADA.

"He has been given a deadline of February 6th to determine whether he plans to come in and be part of the solution," Tygart said in a statement. "Either way, USADA is moving forward with our investigation on behalf of clean athletes."

The letters were sent to the AP after details about a Tygart interview with "60 Minutes," being aired Sunday, were made public.

Among Tygart's claims: Armstrong is lying when he says he didn't dope during his 2009-10 comeback.

Tygart said USADA's report on Armstrong's doping included evidence Armstrong was still cheating in those years.

"His comeback was totally clean," Herman said. "It's pretty fashionable to kick Lance Armstrong around right now."

Tygart also reiterated that an Armstrong associate offered USADA a donation of more than $200,000. Armstrong denied that in his interview with Winfrey, too.

In advancing his claim that USADA is only a bit player in the investigation, Herman noted in his letter, sent to USADA on Friday, that most cycling teams are based in Europe.

"I'm pretty sick of people trying to blame a European cycling culture that goes back to the 1920s on one guy," Herman said.

Bock's response to that: "Your suggestion that there is some other body with which Lance should coordinate is misguided," he said in his final letter.

___

AP National Writer Eddie Pells contributed to this report.

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Exxon Mobil dethrones Apple as world’s most valuable company

Apple (AAPL) has lost its title as the word’s most valuable company to Exxon Mobil (XOM) only a year after it reached the milestone. Despite reporting strong earnings this week, expectations are high for the company and its guidance has Wall Street investors worried. Shares of Apple have been hit hard in recent weeks and have continued to fall to a 12-month low. On Friday, the company’s market cap fell below $ 416 billion, giving Exxon Mobil the title of world’s most valuable company once again. As of publication, Apple is currently trading down more than 2% at $ 441.36 a share with a market cap of $ 414.26 billion.

[More from BGR: Unlocking your smartphone will be illegal starting next week]

This article was originally published on BGR.com

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Police and protesters clash in Egypt, army sent to Suez

CAIRO (Reuters) - Egyptian protesters scuffled with police in Cairo on Saturday and troops were deployed in Suez after nine people were shot dead in nationwide protests against President Mohamed Mursi, exposing deep rifts two years after Hosni Mubarak was ousted.

After a day of clashes on Friday, tension remained high with a court expected to rule later on Saturday in a case against suspects accused of involvement in a stadium disaster that killed 74 people. Fans have threatened violence if the court does not deliver the justice they seek.

Eight people including a policeman were shot dead in Suez, east of the capital, and another was shot and killed in Ismailia, another city on the Suez Canal, medics said, after a day when police fired tear gas at stone-throwing youths.

Another 456 people were injured across Egypt, officials said, in Friday's unrest fuelled by anger at Mursi and his Islamist allies over what the protesters see as their betrayal of the revolution that erupted on January 25, 2011.

"We want to change the president and the government. We are tired of this regime. Nothing has changed," said Mahmoud Suleiman, 22, in Cairo's Tahrir Square, near where youths were still hurling stones at police on the other side of a concrete barrier early on Saturday morning.

The protests and violence have laid bare the divide between the Islamists and their secular rivals. The schism is hindering the efforts of Mursi, elected in June, to revive an economy in crisis and reverse a plunge in Egypt's currency by enticing back investors and tourists.

Protesters accuse Mursi and his Islamist allies of hijacking Egypt's revolution that ended 30 years of Mubarak's autocratic rule. Mursi's supporters say their critics are ignoring democratic principles after elections swept Islamists to office.

"The protests will continue until we realize all the demands of the revolution - bread, freedom and social justice," Ahmed Salama, 28, a protester camped out with dozens of others in Tahrir Square, the cauldron of the 2011 revolt.

The court hearing over the Port Said stadium disaster in February last year has fuelled concerns of more unrest.

Live images were shown from inside the court shortly before the session began. Some of those attending chanted for justice and held up pictures of those killed.

The court on the outskirts on Cairo, and in the same police compound where Mubarak was tried and jailed, is due to rule on Saturday in the cases brought against 73 people, 61 of whom are charged with murder in what was Egypt's worst stadium disaster.

However, the public prosecutor has said new evidence has emerged, meaning a verdict may be postponed.

PRESIDENT URGES CALM

Alongside the 61 charged with murder, another 12 defendants, including nine police officers, are accused of helping to cause the February 1, 2012, disaster at the end of a match between Cairo's Al Ahly and al-Masri, the local side.

Expecting a verdict, hardcore Al Ahly fans, known as ultras, have protested in Cairo over the last week, obstructing the transport network. The Port Said disaster triggered days of street battles near the Interior Ministry in Cairo last year.

In a statement in response to Friday's violence, Mursi said the state would not hesitate in "pursuing the criminals and delivering them to justice". He urged Egyptians to respect the principles of the revolution by expressing views peacefully.

The president was due to meet later on Saturday with the National Defense Council, which includes senior ministers and security officials, to discuss the violence and deaths as a result of the protests.

Troops were deployed in Suez after the head of the state security police in the city asked for reinforcements. The army distributed pamphlets to residents assuring them the deployment was temporary and meant to secure the city.

"We have asked the armed forces to send reinforcements on the ground until we pass this difficult period," Adel Refaat, head of state security in Suez, told state television.

Street battles erupted in cities including Cairo, Alexandria, Suez and Port Said. Arsonists attacked at least two state-owned buildings. An office used by the Muslim Brotherhood's political party was also torched.

The Brotherhood decided against mobilizing for the anniversary, wary of the scope for more conflict after December's violence, stoked by Mursi's decision to fast-track an Islamist-tinged constitution rejected by his opponents.

Inspired by the popular uprising in Tunisia, Egypt's revolution spurred further revolts across the Arab world. But the sense of common purpose that united Egyptians two years ago has given way to internal strife that already triggered bloody street battles last month.

(Additional reporting by Tom Perry, Marwa Awad, Ali Abdelatti and Omar Fahmy; Writing by Edmund Blair; Editing by Andrew Heavens)

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Euro jumps ahead of ECB loan repayments

LONDON (Reuters) - The euro hit an 11-month high and European shares dipped on Friday as markets braced for news on how much banks will repay of the one trillion euros in European Central Bank crisis funds that have been keeping them afloat.

Data due showing whether Britain is heading for its third recession since the financial crisis began and on German business sentiment was also in the spotlight after upbeat manufacturing reports from the United States and China.

Estimates of the size of the banks' likely repayment of the cheap ECB money average around 100 billion euros according to a Reuters poll, although some analysts believe it could be as high as 300 billion as stronger banks try to show they are weaning themselves off of central bank life support.

"An initial repayment in excess of 100 billion euro would be a positive surprise for markets and likely supportive for risk assets," said Michael Symonds, a credit analyst at Daiwa Capital Markets.

Ahead of the announcement from the ECB due at 1100 GMT, the euro gained 0.3 percent to be above $1.34 to the dollar, its highest level since February last year. Against the yen, the single currency rose 0.5 percent to 121.48 yen, its highest level since April 2011.

In the equity market the broad FTSEurofirst 300 index <.fteu3> index of pan-European shares dipped to 0.1 percent to be just under 1,170 points, near its 22 month high. London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were flat to 0.2 percent higher in early trade. <.l><.eu><.n/>

Earlier the MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> eased 0.5 percent, for a weekly drop of about 1 percent, its biggest loss in two months.

The falls came as tech-heavy markets such as South Korea and Taiwan weakened further following disappointing results from Apple this week, but were expected to be contained.

"The PMI indicators from the U.S., Europe and China should serve to keep markets tracking higher," said Tim Waterer, senior trader at CMC Markets in Sydney.

Manufacturing in China and the U.S. grew this month at the quickest pace in about two years, while data suggesting German growth picked up boosted hopes for a swifter euro zone recovery.

Brent crude held above $113, on track to post a second week of gains on the robust economic data, which has improved the outlook for fuel demand in the world's two largest oil consumers.

(Additional reporting by Marc Jones; editing by Philippa Fletcher)

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Voice of Te'o prankster? Couric plays voicemails

NEW YORK (AP) — The person Manti Te'o says was pretending to be his online girlfriend told the Notre Dame linebacker "I love you" in voicemails that were played during his interview with Katie Couric.

Taped earlier this week and broadcast Thursday, the hour-long talk show featured three voicemails that Te'o claims were left for him last year. Te'o said they were from the person he believed to be Lennay Kekua, a woman he had fallen for online but never met face-to-face.

After the first message was played, Te'o said: "It sounds like a girl, doesn't it?"

"It does," Couric responded.

The interview was the All-American's first on camera since his tale of inspired play after the deaths of his grandmother and girlfriend on the same day in September unraveled as a bizarre hoax in an expose by Deadspin.com on Jan. 16.

Te'o's parents appeared with him for part of the interview and backed up his claim that he wasn't involved in the fabrication, saying they, too, had spoken on the phone with a person they believed to be Kekua.

Couric addressed speculation that the tale was concocted by Te'o as a way to cover up his sexual orientation. Asked if he were gay, Te'o said "no" with a laugh. "Far from it. Faaaar from that."

He also said he was "scared" and "didn't know what to do" after receiving a call on Dec. 6 — two days before the Heisman Trophy presentation — from a person who claimed to be his "dead" girlfriend.

The first voicemail, he said, was from what was supposed to be Kekua's first day of chemotherapy for leukemia.

"Hi, I am just letting you know I got here and I'm getting ready for my first session and, um, just want to call you to keep you posted. I miss you. I love you. Bye," the person said.

In the second voicemail, the person was apparently upset by someone else answering Te'o's phone.

The third voicemail was left on Sept. 11, according to Te'o, the day he believed Kekua was released from the hospital and the day before she "died."

"Hey babe, I'm just calling to say goodnight," the person on the voicemail said. "I love you. I know that you're probably doing homework or you're with the boys. ... But I just wanted to say I love you and goodnight and I'll be ok tonight. I'll do my best. Um, yeah, so get your rest and I'll talk to you tomorrow. I love you so much, hon. Sweet dreams."

Couric suggested the person who left those messages might have been Ronaiah Tuisasosopo, a 22-year-old man from California, who Te'o said has apologized to him for pulling the hoax.

"Do you think that could have been a man on the other end of the phone?" she asked.

"Well, it didn't sound like a man," Te'o said. "It sounded like a woman. If he somehow made that voice, that's incredible. That's an incredible talent to do that. Especially every single day."

Tuiasosopo has not spoken publicly since news of the hoax broke. The Associated Press has learned that a home in California where Te'o sent flowers to the Kekua family was once a residence of Tuiasosopo and has been in his family for decades.

Also on Thursday, the woman whose pictures were used in fake online accounts for Kekua said Tuiasosopo confessed to her in a 45-minute phone conversation as the scheme unraveled.

Diane O'Meara spoke with The Associated Press in a telephone interview. She said Tuiasosopo told her he'd been "stalking" her Facebook profile for five years and stealing photos.

O'Meara's attorney, Jim Artiano, said they had not decided on whether to take any legal action.

The 23-year-old O'Meara, of Long Beach, Calif., said she knew Tuiasosopo from high school and he contacted her through Facebook on Dec. 16. She said that, over the next three weeks, Tuiasosopo got in touch with her several times, attempting to get photos and video of O'Meara. She said he made up a story about wanting them to help cheer up a cousin who was injured in a car crash.

O'Meara learned her identity had been stolen on Jan. 13 when she was contacted by Deadspin.com.

The next day she got in touch with Tuiasosopo.

"When I contacted Ronaiah I got a very bizarre vibe from him, he became very nervous, he wasn't asking the questions I expected. He was asking 'Who contacted you? What did they say?'" O'Meara said.

Later that day, he confessed, O'Meara said. She said she asked Tuiasosopo why he didn't simply stop the hoax.

"He told me he wanted to end the relationship," O'Meara said. "He said he wanted to stop the relationship between Lennay and Manti, but Manti didn't want Lennay to break up with him ... He said he tried to stop the game many times."

When news of the hoax broke a few days later, O'Meara said she received a text from Tuiasosopo asking her to call him as soon as possible. O'Meara said she didn't respond.

___

Associated Press writer Tami Abdollah contributed to this report from Los Angeles.

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Soccer coach suspended in Maine West hazing case

Another soccer coach linked to hazing allegations on athletic teams at Maine West High School has been suspended without pay by the district while officials pursue his dismissal.

Maine Township High School District 207 officials reached that decision on freshman boys soccer coach Emilio Rodriguez at a special board meeting Thursday night, a month after reaching the same decision on the employment of head varsity soccer coach Michael Divincenzo.

“The board believes Mr. Rodriguez violated District 207 Board of Education policy and professional expectations by failing to adequately prevent, recognize, report and punish student hazing,” board president Sean Sullivan said in a statement read at the meeting.

Both men were originally placed on paid leave and reassigned from teaching duties this fall when allegations of hazing surfaced in early October on the Des Plaines school’s soccer and baseball teams.

Those allegations are the subject of a lawsuit filed on behalf of four alleged hazing victims on the soccer team and against the district, both coaches and Maine West Principal Audrey Haugan.

Rodriguez, a tenured applied arts and technology teacher, has 17 days to request a hearing on his dismissal through the Illinois State Board of Education, officials said.

Through an attorney, Divincenzo recently requested an appeal hearing with the state board. The appeal process could take up to one year, officials said.

Rodriguez could not be reached for comment on Thursday night. But Des Plaines police reports show he and Divincenzo previously denied any knowledge of team hazing or initiation rituals.

District officials also fulfilled early promises made shortly after the hazing allegations surfaced by approving the hiring of former assistant U.S. attorney Sergio Acosta to lead the district’s independent investigation into hazing allegations, and California-based consultant Community Matters to lead focus groups studying bullying and hazing prevention techniques.

Last week, district officials confirmed the receipt of grand jury subpoenas in the Cook County state’s attorney’s ongoing investigation. Officials reiterated their commitment to “cooperate fully with all agencies conducting their own investigations, including the Cook County State’s Attorney, Des Plaines Police and the Illinois Department of Children and Family Services.

One subpoena, dated Dec. 6 and obtained by the Tribune, directs Maine West Principal Audrey Haugan to produce “personnel files, disciplinary records, reports, memorandums, summaries, interviews, investigations, notes, statements or other such writings or recordings for Michael Divincenzo and Emilio Rodriguez, and any and all other employees associated with coaching student athletes from 2007 to the present time.”

In another Dec. 6 subpoena, Superintendent Ken Wallace is directed to produce “any written materials describing or explaining” school, student athlete, coach or teacher conduct codes or rules, “or rules or any other similar such writings including but not limited to the topics of hazing, sexual misconduct or physical misconduct in any manner associated with Maine West High School.”

Wallace, Haugan, Maine East Principal Michael Pressler and Maine South Principal Shawn Messmer also received subpoenas dated Dec. 7. Those subpoenas, which were partially redacted, seek “any and all letters, emails, reports, memorandums, call logs, writings, recordings, or other such material regarding” redacted information, “including any such documents from within the school records or school file for” redacted information.

jbullington@tribune.com

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North Korea threatens war with South over U.N. sanctions

SEOUL (Reuters) - North Korea threatened to attack rival South Korea if Seoul joined a new round of tightened U.N. sanctions, as Washington unveiled more of its own economic restrictions following Pyongyang's rocket launch last month.

In a third straight day of fiery rhetoric, the North directed its verbal onslaught at its neighbor on Friday, saying: "'Sanctions' mean a war and a declaration of war against us."

The reclusive North has this week declared a boycott of all dialogue aimed at ending its nuclear program and vowed to conduct more rocket and nuclear tests after the U.N. Security Council censured it for a December long-range missile launch.

"If the puppet group of traitors takes a direct part in the U.N. 'sanctions,' the DPRK will take strong physical counter-measures against it," the North's Committee for the Peaceful Reunification of Korea said, referring to the South.

The committee is the North's front for dealings with the South. DPRK is short for the North's official name, the Democratic People's Republic of Korea.

The U.N. Security Council unanimously condemned North Korea's December rocket launch on Tuesday and expanded existing U.N. sanctions.

On Thursday, the United States slapped economic sanctions on two North Korean bank officials and a Hong Kong trading company that it accused of supporting Pyongyang's proliferation of weapons of mass destruction.

The company, Leader (Hong Kong) International Trading Ltd, was separately blacklisted by the United Nations on Wednesday.

Seoul has said it will look at whether there are any further sanctions that it can implement alongside the United States, but said the focus for now is to follow Security Council resolutions.

The resolution said the council "deplores the violations" by North Korea of its previous resolutions, which banned Pyongyang from conducting further ballistic missile and nuclear tests and from importing materials and technology for those programs. It does not impose new sanctions on Pyongyang.

The United States had wanted to punish North Korea for the rocket launch with a Security Council resolution that imposed entirely new sanctions against Pyongyang, but Beijing rejected that option. China agreed to U.N. sanctions against Pyongyang after North Korea's 2006 and 2009 nuclear tests.

NUCLEAR TEST WORRY

North Korea's rhetoric this week amounted to some of the angriest outbursts against the outside world coming under the leadership of Kim Jong-un, who took over after the death of his father Kim Jong-il in late 2011.

On Thursday, the North said it would carry out further rocket launches and a nuclear test, directing its ire at the United States, a country it called its "sworn enemy".

U.S. Defense Secretary Leon Panetta said the comments were worrying.

"We are very concerned with North Korea's continuing provocative behavior," he said at a Pentagon news conference.

"We are fully prepared ... to deal with any kind of provocation from the North Koreans. But I hope in the end that they determine that it is better to make a choice to become part of the international family."

North Korea is not believed to have the technology to deliver a nuclear warhead capable of hitting the continental United States, although its December launch showed it had the capacity to deliver a rocket that could travel 10,000 km (6,200 miles), potentially putting San Francisco in range, according to an intelligence assessment by South Korea.

South Korea and others who have been closely observing activities at the North's known nuclear test grounds believe Pyongyang is technically ready to go ahead with its third atomic test and awaiting the political decision of its leader.

The North's committee also declared on Friday that a landmark agreement it signed with the South in 1992 on eliminating nuclear weapons from the Korean peninsula was invalid, repeating its long-standing accusation that Seoul was colluding with Washington.

The foreign ministry of China, the North's sole remaining major diplomatic and economic benefactor, repeated its call for calm on the Korean peninsula at its daily briefing on Friday.

"The current situation on the Korea peninsula is complicated and sensitive," spokesman Hong Lei said.

"We hope all relevant parties can see the big picture, maintain calm and restraint, further maintain contact and dialogue, and improve relations, while not taking actions to further complicate and escalate the situation," Hong said.

But unusually prickly comments in Chinese state media on Friday hinted at Beijing's exasperation.

"It seems that North Korea does not appreciate China's efforts," said the Global Times in an editorial, a sister publication of the official People's Daily.

"Just let North Korea be 'angry' ... China hopes for a stable peninsula, but it's not the end of the world if there's trouble there. This should be the baseline of China's position."

(Additional reporting by Michael Martina in Beijing; editing by Jeremy Laurence and Raju Gopalakrishnan)

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Shares dip as investors brace for euro zone data

LONDON (Reuters) - European shares weakened on Thursday as investors braced for the year's first reading on euro zone business activity for 2013 after data showed that France, the region's second-biggest economy, may be in recession.

Markets are hoping for a modest improvement in the estimates for manufacturing and service sector activity across the euro area for January, due later, to support the recent rallies in equities and peripheral European debt markets.

"January's flash PMI data (for France) signals a very disappointing start to 2013," said Jack Kennedy, senior economist at Markit, which compiles the purchasing managers' index (PMI) data.

Europe's FTSEurofirst 300 index <.fteu3> of top company shares fell 0.3 percent to 1,164.30 points after the French data was released, still not far from a peak of 1,170.29 points hit two weeks ago, a level not seen since early 2011.

London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were down by up to 0.5 percent.

"All the major benchmarks are looking overbought, and any short-term correction will be seen as a buying opportunity, but the longer-term trend is still to the upside," said Jawaid Afsar, a sales trader at Securequity.

The euro fell 0.2 percent on the day to hit $1.3286 after Markit said its preliminary composite purchasing managers' index (PMI) for France, covering activity in the services and manufacturing sectors combined, came out at 42.7 for the month, down from 44.6 in December.

The common currency recovered slightly when German PMI data for January showed private-sector activity jumped to its highest level in a year.

APPLE BITES

The main European tech stock index <.sx8p> was down 0.85 percent after the world's largest technology company, Apple , released disappointing earnings figures after the U.S. markets had closed.

The results had earlier fanned earnings worries across the technology sector in Asia, overshadowing positive data on Chinese manufacturing activity.

China's HSBC flash purchasing managers' index (PMI) rose to 51.9 in January to a two-year high, signaling a rebound in manufacturing activity and confirming a recovery in growth in the world's second-largest economy was on track.

(Additional reporting by David Brett; Editing by Will Waterman)

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Defending champ Azarenka into final against Li

MELBOURNE, Australia (AP) — Victoria Azarenka overcame some anxiety, a sore left knee, and a slew of frustrating forehand errors before fending off American teenager Sloane Stephens to reach the Australian Open final against Li Na.

For the second time in two days, 19-year-old Stephens sat patiently in a courtside chair late in the second set while an experienced, older player took a medical timeout.

On Thursday, the top-seeded Azarenka asked for a medical timeout after wasting five match points with a sequence of forehand errors, but returned to quickly finish off a 6-1, 6-4 win on her sixth match point. The outcome was different on Wednesday, when Stephens rallied from a set and a break down to beat an injured Serena Williams in three sets.

After dropping serve in the ninth game of the second set, Azarenka went to the locker room for treatment — the tournament confirmed later it was for left knee and rib injuries — and then returned to break the 29th-seeded Stephens' serve to finish off the match.

"Well I almost did the choke of the year right now at 5-3 having so many chances I couldn't close it out," Azarenka said in an on-court TV interview. "I just felt a little bit overwhelmed. I realized I'm one step away from the final and nerves got into me for sure."

The crowd had tried to get Stephens back into the match in the second set. Fans yelled encouragement after almost every point and a few in the crowd heckled Azarenka by mocking the noise she makes when she hits the ball.

Azarenka started to lose her composure when she hit a forehand way beyond the baseline on her third match point, her hooting sound elevating to a louder, high-pitched shriek.

After Stephens saved the match points, the crowd gave her a huge round of applause and a few people jumped out of their seats. Azarenka got a tepid applause after clinching the match.

The 23-year-old Azarenka later said she'd had difficulty breathing.

"I couldn't breathe. I had chest pains," she said. "It was like I was getting a heart attack.

"After that it wasn't my best, but it's important to overcome this little bit of a struggle and win the match."

Stephens said the timing of the medical break didn't affect the match.

"It's happened before. Last match, match before, I've had people going for medical breaks, going to the bathroom," she said. "Didn't affect me. Just another something else that happens."

The temperature hit 97 degrees during the second women's semifinal, slightly hotter than it had been when Li Na beat No. 2-ranked Maria Sharapova 6-2, 6-2 to reach the Australian Open final for the second time in three years.

Sharapova was the heavy favorite after conceding only nine games in her first five matches, a record at the Australian Open.

But the semifinal started badly for the 25-year-old Russian, serving double-faults to lose the first two points and conceding a break in the first game.

Li was the first Chinese player to reach a Grand Slam final when she lost to Kim Clijsters at Melbourne Park in 2011. She had her breakthrough a few months later when she won the French Open, beating Sharapova in the semifinals along the way.

The crowd got behind Li early in the match, yelling "Come on, Li Na!" and others yelling "Jia You!" which is "Come on" in Chinese. After she broke Sharapova to take a 5-2 lead, the Chinese fans in the crowd shook Chinese flags and shouted again, "Jia You!"

"I don't know what happened (but) I always play well here, so thanks guys," said Li, who was playing her third Australian Open semifinal in four years. "I just came to the court feeling like, 'OK, just do it.'"

The heat and the speed of the court surface suited Li's game.

She broke Sharapova in the third game of the second set and served an ace to move within a point of a 4-2 lead, but lost the next three points to give her opponent a break opportunity.

Two big second serves took Sharapova by surprise, and Li fended off the challenge.

Li's coach, Carlos Rodriguez — who worked with retired seven-time major winner Justine Henin — pumped his fist over his heart after Li won the game.

Sharapova had control in her next service game, but Li scrambled from side to side and pushed the reigning French Open champion to go for the lines, getting a series of unforced errors and another break.

The sixth-seeded Li has been working since August with Rodriguez, and credits him with reviving her career with a renewed emphasis on condition.

"I'm happy. I know I have a tough coach, a tough physio," Li said, looking across to the stands and adding: "You don't need to push me anymore. I will push myself."

Sharapova, who lost the 2012 Australian final in straight sets to Azarenka, admitted it was hard to get into the match against Li.

"She was certainly much more aggressive than I was, dictating the play. I was always on the defense," said Sharapova, who could have gained the No. 1 ranking by reaching the Australian final. "When I had my opportunities and break points in games that went to deuce, I don't think any of them really went my way."

The composition of the women's semifinals was somewhat unexpected.

Stephens produced the upset of the tournament to advance to a Grand Slam semifinal for the first time with her 3-6, 7-5, 6-4 victory over 15-time major winner Serena Williams on Wednesday. Williams, who had been bidding for a third consecutive Grand Slam title, hurt her back in the second set and, after leading by a set and a break, ended a 20-match winning streak.

While there were surprises in the composition of the women's last four, the makeup of the men's semifinals was as expected.

Top-ranked Novak Djokovic will continue his bid for a third consecutive Australian title when he takes on No. 4 David Ferrer on Thursday. No. 2 Roger Federer and No. 3 Andy Murray will meet Friday.

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