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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Rio de Janeiro Grapples With Exploding Manholes

RIO DE JANEIRO — David McLaughlin was thrilled to be in Brazil. He had arrived here from Ohio State University on a Fulbright grant to research Brazilian hip-hop music with his wife, Sarah Lowry, a scholar of Russian literature. The graduate students, newlyweds, set out one morning in June 2010 to search for an apartment in the beachfront neighborhood of Copacabana.

Then, while crossing a bustling avenue, the asphalt under their feet started to tremble. A fireball surged suddenly from a manhole, enveloping Ms. Lowry in flames. Mr. McLaughlin leapt on her and extinguished the fire. But Ms. Lowry had burns on 80 percent of her body and spent 70 days in the hospital here. Mr. McLaughlin was burned on 35 percent of his body.

“The explosion was one of the most traumatic experiences I can imagine,” Mr. McLaughlin, 34, said in a telephone interview from New York, where he and his wife now live. “Almost three years later, recovering is made more complicated every time we learn there’s been a new explosion on the streets of Rio.”

Since 2010, manhole explosions here have shattered windows, flattened cars and injured passers-by. An explosion in 2012 killed a worker at Rio’s port. While the rate of explosions has slowed, the city was rattled yet again in December after a manhole erupted behind the Copacabana Palace, the neo-Classical-style gem that is arguably Rio’s most luxurious hotel. A motorcyclist narrowly escaped the recent blast, filming with his cellphone his motorcycle going up in flames.

Such explosions are not unique to Rio. Indeed, engineering experts say few large cities are immune. Gas from any number of sources can collect underground. Electrical cables, often running in the same pipes, can fray with age, producing a spark that can set off an explosion, shooting up fire and flinging hundred-pound cast-iron manhole covers high into the air.

But Moacyr Duarte, a senior researcher on the city’s infrastructure at the Federal University of Rio de Janeiro, said dozens of explosions here, which often occurred in densely-populated areas, had “clearly gone beyond what it is statistically reasonable,” before recently declining.

The explosions have set Cariocas, as the residents of this traditionally relaxed city are known, on edge, and the blasts point to the broader problem of dilapidated infrastructure even as Rio emerges from a long economic decline.

As Rio prepares for its cameo as host of the 2014 World Cup and the 2016 Summer Olympics, the expansion of offshore oil production has pumped life into its economy. The city has sought to revitalize neglected areas with projects like a new cable car system in Complexo do Alemão, a patchwork of slums, while a real estate boom has attracted the likes of Donald J. Trump, who plans to build five skyscrapers.

At the same time, Rio’s resurgence has only added to the stress on its aging infrastructure.

While passenger traffic at Rio’s international airport climbed 20 percent last year, it has been plagued by blackouts in recent weeks, escalators and elevators work sporadically, and vultures have descended through holes in the airport’s roof.

Rio’s car fleet grew 56 percent in the last decade, but road building and public transportation improvements failed to keep pace, intensifying traffic jams. Last year in downtown Rio, a 20-story office building just collapsed one night, knocking down two other buildings and killing 17 people.

Amid such challenges, erupting manholes have endured as just one more bizarre and potentially dangerous feature of the cityscape.

Some Cariocas have found dark humor in the sheer randomness. A video game for Facebook, “Rio Boom-eiro Challenge,” involves the nimble avoidance of sidewalk explosions.

Others have found artistic inspiration. Fábio Maia, an advertising executive, has been putting stickers in the shape of a lighted fuse alongside manholes. The idea came to him one day after he was dodging manholes while out with his son in a stroller. “I started asking myself, ‘What kind of craziness is this?’ ” he said.

Mr. Duarte, of Federal University, said many of the manhole eruptions have been caused by leaks of gas or oil into overloaded underground networks, some built as far back as the 1920s.

After a surge in street explosions in 2010 and 2011, Rio’s mayor, Eduardo Paes, and prosecutors pressured utility companies into agreeing to pay fines of about $50,000 for each explosion, in addition to damages to victims.

(The electric company, Light, said it had not yet reached an agreement to pay damages to Mr. McLaughlin and Ms. Lowry.)

Mr. Paes’s office said in a statement that the “worst phase” of the manhole crisis was over, explaining that an emergency operation in 28 neighborhoods that ended last year identified 314 manholes with a great risk of explosion, and that crews were sent to fix each one.

Still, the mayor’s office acknowledged that the issue “hasn’t been completely addressed,” prompting Mr. Paes to raise the fine for each explosion to $250,000 and to advance a project mapping the city’s entire underground network.

Light said it had undertaken a $115 million investment program in the last two years aimed at preventing more explosions.

The company declined to provide figures on how many explosions had occurred recently on Rio’s streets, but it argued that they had become less frequent. “Eventualities in subterranean chambers occur around the world,” the company said.

Manholes continue to explode. The mayor’s office acknowledged that at least five blasts occurred in 2012, leaving one person dead and several injured. The explosion in December in Copacabana, one of Rio’s most populous districts, sowed panic among passers-by.

Antônio Carlos Costa, president of Rio de Paz, a human rights group that has painted Rio’s manhole covers red to bring attention to their potential danger, said the blasts offered a view into the perils that the new economic climate has been unable to resolve.

“In Brazil we have two types of violence,” he said, “intentional violence and violence that is a product of neglect. This is a type of violence that is more subtle, but is very present in Brazilian culture. The country is economically strong, but we do not have a culture of protecting human life.”

Lis Horta Moriconi contributed reporting.

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4 tips for creating a successful Twitter parody account

The guy behind @GowanusDolphin learned his lesson the hard way

A chorus of Twitter elite got really angry on Friday when an opportunistic user decided to register @GowanusDolphin, a horrible account that premised itself on a dolphin trapped in New York‘s murky Gowanus Canal. 

Not sure how I feel about parody account @gowanusdolphin. Poor guy. Don’t find funny at all.

SEE MORE: Connecticut massacre suspect: How the media IDed the wrong guy [Updated]

— Craig Kanalley (@ckanal) January 25, 2013

I don’t think I’m exaggerating when I say that this @gowanusdolphin account is far worse than the Holocaust.

— Joel Johnson (@joeljohnson) January 25, 2013

It’s because we all laughed at the fake Rahm Emanuel guy that these fucking things exist. We brought @gowanusdolphin on ourselves.

SEE MORE: The 17 most memorable tweets of 2012

— Cord Jefferson (@cordjefferson) January 25, 2013

The offender, who has since apologized for being a jerk, learned his lesson the hard way. Don’t let the same fate befall you. Here, four helpful tips for creating a successful* Twitter parody account should the opportunity ever arise again:

1. Don’t use animals
Remember @BronxZooCobra fondly? Neither do we. Predicating your shiny new Twitter handle on a headline-grabbing animal is difficult for two reasons: (a) Animals don’t talk. You’re creating its voice from scratch; and (b) People tend to like animals more than they like other people, so as a rule of thumb, you should probably be making fun of actual human beings.

SEE MORE: Social media masters, ninjas, and gurus: How Twitter pros describe themselves

2. Don’t base it on news
When a mild 5.9-magnitude earthquake rattled New York in 2010, Twitter exploded with parody accounts. (“Boom!” and “Whoa!” and that sort of nonsense.) None of them were funny. None of them were sustainable. Take a lesson from Bloomberg social media director (and the web’s leading voice in parody account hatred) Jared Keller:

If you create a parody account within fifteen minutes of a news event you are the worst person on the planet and I hate you.

SEE MORE: Instagram vs. Twitter: Why their beef is bad news for you

— Jared Keller (@jaredbkeller) January 25, 2013

3. Be funny
Ha ha, you have to actually be funny, which is easier said than done. And “humor,” as we all know, is 100 percent subjective and varies from person to person, NOT TO MENTION it requires constant mental dexterity that 99.99 percent of the population simply isn’t cut out for. So make it easy for yourself. Self-impose some parameters and employ a weird spin like @NYTOnIt or @__MICHAELJ0RDAN. Maybe you’ll even get a book deal! (Probably not.)

4. You probably shouldn’t make a parody account
Ignore everything I just said. Don’t make one. Sorry.

SEE MORE: Should Twitter be forced to reveal racist users?

*Just kidding.

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The Surprising Style Item Adam Levine Likes to Wear

Stylewatch
Style News Now

01/25/2013 at 02:00 PM ET

Courtesy Men’s Health

While some stars are repeat Fashion Faceoff offenders (we’re looking at you, Kim Kardashian), Adam Levine is determined to never be one of them. (Though the man really never should say never.)

In fact, his desire to have singular style is so strong that he won’t even pick up a plain old tee at a regular store for fear that another dude owns it. “I don’t want to buy a T-shirt and then go out to lunch and see someone else wearing the same thing,” Levine says in the new issue of Men’s Health. “I want my clothes to be unique. Not necessarily expensive, just one of a kind.”

So with that in mind, Levine puts a lot of thought into selecting those T-shirts. And even though they might look like basic Hanes to everyone else, what’s important to him is that he knows they’re not. The singer usually finds the tops at vintage shops because, “I also want them to have a story, a history, some meaning.”

In addition to his tees with history, the Maroon 5 frontman loves formalwear, saying, “[At] night I’ll throw on a suit and go out looking like a businessman.”

But it’s what he wears when he’s not on the red carpet or taping The Voice that really left us surprised — when he relaxes at home, Levine prefers something a bit, well, tighter. “I love waking up, throwing on some yoga pants, and hanging out all day looking like a psycho,” the singer reveals. His words, not ours.

For more Levine, pick up the March issue of Men’s Health, on newsstands Feb. 5. Tell us: Do you like Levine’s style? What do you think of guys wearing yoga pants?

Courtesy Men’s Health

–Jennifer Cress

PHOTOS: SEE MORE STAR STYLE IN ‘LAST NIGHT’S LOOK’

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CDC: Flu seems to level off except in the West

New government figures show that flu cases seem to be leveling off nationwide. Flu activity is declining in most regions although still rising in the West.

The Centers for Disease Control and Prevention says hospitalizations and deaths spiked again last week, especially among the elderly. The CDC says quick treatment with antiviral medicines is important, in particular for the very young or old. The season's first flu case resistant to treatment with Tamiflu was reported Friday.

Eight more children have died from the flu, bringing this season's total pediatric deaths to 37. About 100 children die in an average flu season.

There is still vaccine available although it may be hard to find. The CDC has a website that can help.

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CDC: http://www.cdc.gov/flu/

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P&G earnings lift stocks; S&P set for 8-day win streak

NEW YORK (Reuters) - Stocks advanced on Friday as Procter & Gamble's earnings offset softer-than-expected housing numbers and kept the Standard & Poor's 500 Index on track for its longest winning streak in more than eight years.

Procter & Gamble shares rose 3.7 percent to $73.04 and gave the biggest boost to both the Dow and S&P 500 after the world's top household products maker's quarterly profit soared past expectations. The company also raised its sales and earnings outlook for the fiscal year.

But the stock market's gains were curbed after economic data showed new U.S. single-family home sales fell in December, although expectations for a continued housing sector recovery remain intact. The PHLX housing sector index <.hgx> slipped 0.2 percent.

The benchmark S&P 500 index is up 5 percent so far in January. The equity market's strong start this year has been attributed to solid corporate results, an agreement in Washington to extend the government's borrowing power, encouraging signs from the global economy, and seasonal inflows into stocks.

Those factors helped the S&P 500 rally for a seventh day on Thursday to reach a five-year peak. But the index has struggled to convincingly climb above 1,500, a level it surpassed briefly on Thursday for the first time since December 2007 and momentarily topped again on Friday.

"We hit (1,500) yesterday, we've hit it today, it is going to take a little bit of work to get through it - it's a psychological resistance point," said Paul Mendelsohn, chief investment strategist at Windham Financial Services, in Charlotte, Vermont.

"The housing numbers coming in a little weaker, you would have expected that with Hurricane Sandy and the fiscal cliff," Mendelsohn said. "With everything that was going on in December, you would expect a little weaker number. Maybe analysts were looking for a little too much out of that report."

If the S&P 500 rises for an eighth day on Friday, it will be its longest winning streak since late 2004, when it rallied for nine straight days.

The Dow Jones industrial average <.dji> gained 31.19 points, or 0.23 percent, to 13,856.52. The Standard & Poor's 500 Index <.spx> advanced 3.48 points, or 0.23 percent, to 1,498.30. The Nasdaq Composite Index <.ixic> rose 13.05 points, or 0.41 percent, to 3,143.43.

Honeywell International Inc posted fourth-quarter earnings just above Wall Street's estimates, reflecting the diversified U.S. manufacturer's campaign to boost profit margins in the face of sluggish sales growth. Honeywell's stock shed 0.3 percent to $68.04.

The initial portion of earnings season has been encouraging relative to recent expectations. Overall, S&P 500 fourth-quarter earnings growth is on track for a 2.9 percent rise, up from the forecast of a 1.9 percent gain at the start of earnings season, but well below the 9.9 percent increase in an October 1 forecast.

Thomson Reuters data through Friday showed that of the 147 S&P 500 companies that have reported earnings, 68 percent exceeded expectations. Since 1994, 62 percent of companies have topped expectations, while the average over the past four quarters stands at 65 percent.

Microsoft Corp gained 1.2 percent to $27.95 after posting a quarterly profit that edged lower as Office software sales slowed ahead of a new launch, offsetting a solid but unspectacular start for its Windows 8 operating system.

Halliburton Co shares jumped 5 percent to $39.70 after the world's second-largest oilfield services company reported higher-than-expected earnings and sales for the fourth quarter. Strong international drilling activity offset a slowdown in onshore North America work, Halliburton said.

(Editing by Jan Paschal)

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IHT Rendezvous: Gallery Stroll: Istanbul

ISTANBUL—Unpredictable weather means winter isn’t the most popular season for visiting Istanbul, but it is a great time for gallery-hopping: Many of the best museums and art spaces in the Beyoglu district have just opened compelling new exhibitions.

At Arter, the curator Emre Baykal has gathered mostly new works by Turkish artists to create the second installment of “Envy, Enmity, Embarrassment.” Here, the artist known as Canan presents the installation, “I beg you please do not speak to me of love,” a room plastered with erotic movie posters from the heyday of the Yesilcam porn industry of the 1970s. In a transparent case in one corner of the room is a seemingly innocent white bathrobe. Embroidered on its back is a suicide note.

Other interesting works include “Twin Goddess: The Sketch of an Encounter,” an embroidered collage by Nilbar Gures using ancient symbols from Anatolian archaeology, and “The Island” by Hera Buyuktasciyan, a look at taboos.

The most powerful piece in this show is Hale Tenger’s “I Know People Like This III.” Visitors who enter the gallery from Istiklal Caddesi walk through this chronological maze of x-ray prints, a sort of light-box labyrinth, that lays out traumatic images from Turkish political history, including public protests, the killing of journalists and scenes of violence that followed the 1980 military coup.

On the parallel street, Mesrutiyet Caddesi, the Pera Museum has just opened a double-barreled program. A retrospective of the works of the Hungarian-American photographer Nickolas Muray covers the dashing man-about-town’s early black-and-white art nudes as well as his color-saturated portraits of beauties like Marilyn Monroe, Elizabeth Taylor and a woman he adored, Frida Kahlo. On another floor, “Between Desert and Sea” presents a selection of 52 works from the Jordan National Gallery of Fine Arts, pieces that speak to topical issues like religion, the rights of women, and the impact of the Arab Spring revolutions.

At the Salt Galata, a 10-minute stroll away on Bankalar Caddesi, “1 + 8″ is an installation of large-screen videos by Cynthia Madansky and Angelika Brudniak, who traveled to the borders between Turkey and its eight neighbors: Greece, Bulgaria, Georgia, Armenia, Nakchivan, Iran, Iraq and Syria to tape local residents talking about their daily lives and hopes. In the case of Iran, just a black screen is shown: The artists were refused permission to film in Iran, but they managed to record audio of Iranians who had crossed into Turkey for personal or business reasons. None felt safe having their faces shown.

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Al Shabaab says enemies closed its Twitter account

MOGADISHU (Reuters) – Al Shabaab on Friday said its Christian enemies had closed its Twitter account, which the Somali militant group used to parade hostages, mock rivals and claim responsibility for bombings and assassinations.

The group’s official Twitter account, which has thousands of followers, was offline on Friday with a message saying “Sorry, that user is suspended”.

It was not immediately clear why the account, which was created in 2011 under the HSM PRESS Twitter handle, was suspended. The account was still unavailable as of 1233 GMT.

On Wednesday the al Qaeda-aligned rebels used the social media site to threaten to kill several Kenyan hostages and on January 17 announced the execution of a captive French agent after a French commando mission to rescue him failed.

“The enemies have shut down our Twitter account,” al Shabaab‘s most senior media officer, who refused to be named, told Reuters.

“They shut it down because our account overpowered all the Christians’ mass media and they could not tolerate the grief and the failure of the Christians we always displayed (online).”

Al Shabaab wants to impose their strict version of sharia, or Islamic law, across Somalia. However, it has lost significant territory in the southern and central parts of the country in the face of an offensive by African Union troops.

Twitter said it does not comment on individual accounts and the Kenyan government denied it had filed any request for the account to be taken down.

“It’s an emphatic no. We would not try to negotiate or have anything to do with the Al Shabaab. We didn’t even know the account was suspended,” said government spokesman Muthui Kariuki.

Al Shabaab posted on the account on Wednesday a link to a video of two Kenyan civil servants held hostage in Somalia, telling the Kenyan government their lives were in danger unless it released all Muslims held on “so-called terrorism charges” in the country.

“Kenyan government has three weeks, starting midnight 24/01/2013 to respond to the demands of HSM if the prisoners are to remain alive,” the group said.

Despite the closure of the Twitter account, al Shabaab said it would continue to “display the loss and grief of Christians no matter what means we use,” al Shabaab’s spokesman said.

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Katy Perry Causes a Total Audience Freak Out at Ellen

TV Watch

By Andrea Billups

01/25/2013 at 11:55 AM EST

Katy Perry and Ellen DeGeneres

Michael Rozman

It's hard to tell who's more enthusiastic – a mustachioed Katy Perry (and more on that facial hair in a minute) or two breathless audiences members at The Ellen DeGeneres Show, who were plucked from their seats and grilled on just how well they knew the talk show host.

The prize? A trip to Australia for the one who could answer the most questions, though judging from both women's borderline hyperventilation as they stood there, it seemed like they had already won just standing next to the two stars.

Perry showed off her comedy chops in a plaid carnival barker's suit, plus that mustache and a boy's haircut – "I asked for the Anne Hathaway," the pop star, 28, quipped about her pixie cut – in an apparent celebration of DeGeneres's 55th birthday Saturday.

"I'm actually a second cousin to Bob Barker," Perry, fresh off of her trip to the Obama inauguration with beau John Mayer, joked as she presided over the game she called Grab Ellen's Bust.

Who won the trip to Australia? Who cares! Check out the clip (below) for a good laugh – and lots of tears from one very, very excited contestant!

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Penalty could keep smokers out of health overhaul

WASHINGTON (AP) — Millions of smokers could be priced out of health insurance because of tobacco penalties in President Barack Obama's health care law, according to experts who are just now teasing out the potential impact of a little-noted provision in the massive legislation.

The Affordable Care Act — "Obamacare" to its detractors — allows health insurers to charge smokers buying individual policies up to 50 percent higher premiums starting next Jan. 1.

For a 55-year-old smoker, the penalty could reach nearly $4,250 a year. A 60-year-old could wind up paying nearly $5,100 on top of premiums.

Younger smokers could be charged lower penalties under rules proposed last fall by the Obama administration. But older smokers could face a heavy hit on their household budgets at a time in life when smoking-related illnesses tend to emerge.

Workers covered on the job would be able to avoid tobacco penalties by joining smoking cessation programs, because employer plans operate under different rules. But experts say that option is not guaranteed to smokers trying to purchase coverage individually.

Nearly one of every five U.S. adults smokes. That share is higher among lower-income people, who also are more likely to work in jobs that don't come with health insurance and would therefore depend on the new federal health care law. Smoking increases the risk of developing heart disease, lung problems and cancer, contributing to nearly 450,000 deaths a year.

Insurers won't be allowed to charge more under the overhaul for people who are overweight, or have a health condition like a bad back or a heart that skips beats — but they can charge more if a person smokes.

Starting next Jan. 1, the federal health care law will make it possible for people who can't get coverage now to buy private policies, providing tax credits to keep the premiums affordable. Although the law prohibits insurance companies from turning away the sick, the penalties for smokers could have the same effect in many cases, keeping out potentially costly patients.

"We don't want to create barriers for people to get health care coverage," said California state Assemblyman Richard Pan, who is working on a law in his state that would limit insurers' ability to charge smokers more. The federal law allows states to limit or change the smoking penalty.

"We want people who are smoking to get smoking cessation treatment," added Pan, a pediatrician who represents the Sacramento area.

Obama administration officials declined to be interviewed for this article, but a former consumer protection regulator for the government is raising questions.

"If you are an insurer and there is a group of smokers you don't want in your pool, the ones you really don't want are the ones who have been smoking for 20 or 30 years," said Karen Pollitz, an expert on individual health insurance markets with the nonpartisan Kaiser Family Foundation. "You would have the flexibility to discourage them."

Several provisions in the federal health care law work together to leave older smokers with a bleak set of financial options, said Pollitz, formerly deputy director of the Office of Consumer Support in the federal Health and Human Services Department.

First, the law allows insurers to charge older adults up to three times as much as their youngest customers.

Second, the law allows insurers to levy the full 50 percent penalty on older smokers while charging less to younger ones.

And finally, government tax credits that will be available to help pay premiums cannot be used to offset the cost of penalties for smokers.

Here's how the math would work:

Take a hypothetical 60-year-old smoker making $35,000 a year. Estimated premiums for coverage in the new private health insurance markets under Obama's law would total $10,172. That person would be eligible for a tax credit that brings the cost down to $3,325.

But the smoking penalty could add $5,086 to the cost. And since federal tax credits can't be used to offset the penalty, the smoker's total cost for health insurance would be $8,411, or 24 percent of income. That's considered unaffordable under the federal law. The numbers were estimated using the online Kaiser Health Reform Subsidy Calculator.

"The effect of the smoking (penalty) allowed under the law would be that lower-income smokers could not afford health insurance," said Richard Curtis, president of the Institute for Health Policy Solutions, a nonpartisan research group that called attention to the issue with a study about the potential impact in California.

In today's world, insurers can simply turn down a smoker. Under Obama's overhaul, would they actually charge the full 50 percent? After all, workplace anti-smoking programs that use penalties usually charge far less, maybe $75 or $100 a month.

Robert Laszewski, a consultant who previously worked in the insurance industry, says there's a good reason to charge the maximum.

"If you don't charge the 50 percent, your competitor is going to do it, and you are going to get a disproportionate share of the less-healthy older smokers," said Laszewski. "They are going to have to play defense."

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Online:

Kaiser Health Reform Subsidy Calculator — http://healthreform.kff.org/subsidycalculator.aspx

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