Tuesday Watch

Late-Night Headlines
Bloomberg:

- Exxon Mobil Corp.(XOM), Chevron Corp.(CVX) and ConocoPhillips(COP) are among companies facing as much as $45 billion in costs under President Barack Obama’s budget plan. Obama is seeking to raise $36.5 billion from fiscal 2011 to 2020 by ending tax credits and deductions for domestic oil and gas production, according to his budget proposal to Congress today. Overall, the president is trying to raise oil company fees by at least 22 percent more than in proposals last year, which failed to win congressional approval, said Stephen Comstock, a tax lawyer for the American Petroleum Institute. While oil, gas and coal are “essential” to today’s energy mix, “America must move to a clean-energy economy,” Interior Secretary Ken Salazar said at a press conference today. The changes proposed today, if approved, would place a financial burden on energy companies, the Washington-based American Petroleum Institute said. “With America still recovering from recession and one in 10 Americans out of work, now is not the time to impose new taxes on the nation’s oil and natural gas industry,” said Jack Gerard, president of the trade group. “New taxes would mean fewer American jobs and less revenue at a time when we desperately need both.” The plan would repeal $17.3 billion over 10 years in benefits to oil companies for a manufacturing tax credit still available to other U.S. industries, a $10 billion tax break for production in depleting oil and gas wells, and a $7.8 billion writeoff for drilling costs. Obama would also do away with about $2.3 billion in tax breaks for coal producers. Oil and gas companies also would face $1.15 billion in new fees. The largest is a penalty of $4 an acre for “non- producing” leases on lands and waters administered by the Interior Department’s Bureau of Land Management and Minerals Management Service.

- The Obama administration hasn’t ruled out holding a trial for Sept. 11 terrorism suspects in Manhattan, though other locations are being evaluated, a top U.S. Justice Department official said. “It’s not off the table,” said Gary Grindler, the incoming acting deputy attorney general, at a briefing today for reporters in Washington. The Justice Department is examining other potential sites for the trial after lawmakers and New York officials raised concerns about holding it in lower Manhattan. President Barack Obama and Attorney General Eric Holder announced in November a plan to try Khalid Sheikh Mohammed, accused mastermind of the 2001 attacks, and four alleged co- conspirators in federal court in New York about a quarter-mile from where the World Trade Center towers stood. Moving the trial would be a setback for the administration, which until this week defended the decision to try the suspects in Manhattan. The Obama administration’s approach to fighting terrorism, and its decisions to try the Sept. 11 suspects in civilian court, has been under assault by Republicans in Congress. U.S. Senator Charles Schumer, a Democrat from New York, said he had lobbied the Obama Administration to not hold the trial in New York City after speaking with New York Mayor Michael Bloomberg and Police Commissioner Raymond Kelly. Bloomberg said on Jan. 27 he wanted the trial moved, a change from November when he said he supported holding it in lower Manhattan. Bloomberg said security for a trial in lower Manhattan could cost as much as $1 billion. The Justice Department remains committed to a criminal trial for the Sept. 11 suspects and is considering the concerns raised by lawmakers to holding the trial in lower Manhattan, Grindler said today.

- A tax credit for U.S. small businesses proposed in President Barack Obama’s $3.8 trillion fiscal 2011 budget may not cover the set-up costs of a mandatory retirement savings plan, a Washington-based trade group said. The spending blueprint, sent to Congress today, would double a maximum tax credit for employers to $1,000 a year from $500 a year, for three years to offset the cost of establishing automatic Individual Retirement Accounts. Businesses that currently don’t offer retirement plans would be required to automatically enroll employees in direct-deposit IRAs under a proposal announced by the administration on Jan. 25. “A payroll service at its cheapest is around $150 per month for just a few employees,” said Molly Brogan, a spokeswoman for the National Small Business Association in an e- mail. “The $1,000 wouldn’t cover it in full.”

- Japan’s wages slumped at a near- record pace in December as employers pared workers’ bonuses, an indication that consumer spending is unlikely to drive the economic recovery. Monthly wages including overtime and bonuses slipped 6.1 percent from a year earlier to 549,259 yen ($5,056), the Labor Ministry said today in Tokyo. Paychecks slumped an unprecedented 7 percent in June.

- China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie. As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today. Tougher property policies may lower 2010 sales volumes 10 percent, compared with an earlier forecast for growth of as much as 5 percent, BNP Paribas said in a report today. Shanghai Mayor Han Zheng said Jan. 31 property prices are “too high,” undermining sustainable development of the nation’s commercial hub. Asset bubbles are the “real worry” as China emerges from the global financial crisis into a “boom time,” central bank advisor Fan Gang said in Beijing yesterday. Premier Wen Jiabao pledged in December to stabilize property prices, crack down on speculation and keep housing affordable. The government told banks to raise interest rates on third mortgages and demand bigger down-payments, a person with knowledge of the matter said. The China Banking Regulatory Commission warned lenders of the risks from “hot money” flowing into the property market, the person said, requesting anonymity because the agency hasn’t published the measures. Mortgage defaults are rising, the person said, without giving figures. “We’re seeing some significant measures that have been introduced in the last couple of weeks,” Xie said. “If these changes are implemented, the demand from third-flat buyers is going to dry up and it’s going to have a major impact.” Many properties bought for investment are now left vacant and rental yields are low, pointing to a “bubble,” Xie said.

- China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans, a person with knowledge of the matter said.

Wall Street Journal:

- The militant group al Shabaab said it would ally with al Qaeda in a drive to establish an Islamic state in Somalia and fight for Muslims across East Africa, offering a fresh test for U.S.-backed African peacekeepers struggling to defend a weak Somali government. In a statement Monday, the group said it had agreed, among other things, "to connect the horn of Africa jihad to the one led by al Qaeda and its leader Sheikh Osama Bin Laden." The statement, written in Somali and Arabic, is believed to be the first explicit confirmation of what U.S. and Somali government have long suspected: Militants in one of Africa's least stable places are sharing resources and merging agendas.

- One rule of budget reporting is to watch what the politicians are spending this year, not the frugality they promise down the road. By that measure, the budget that President Obama released yesterday for fiscal 2011 is one of the greatest spend-while-you-can documents in American history. We now know why the White House leaked word of a three-year spending freeze on a few domestic accounts before this extravaganza was released. No one would have noticed such a slushy promise amid this glacier of spending. The budget reveals that overall federal outlays will reach $3.72 trillion in fiscal 2010, and keep rising to $3.834 trillion in 2011. As a share of the economy, outlays will reach a post-World War II record of 25.4% this year. This is a new modern spending landmark, up from 21% of GDP as recently as fiscal 2008, and far above the 40-year average of 20.7%.

- Each spring as the weather warms up, Taliban fighters return from wintering in Pakistan to intensify attacks and intimidation in Kandahar, southern Afghanistan's biggest city and the Islamist movement's birthplace. But coalition commanders and Afghan officials say that in the coming months the U.S. troop surge and a new strategy will allow the coalition to block the annual militant advances—and possibly change the course of the war by reversing the Taliban's momentum.

- Google Inc.(GOOG) is preparing to launch a store selling online business software that integrates with its Web services, according to people briefed by the company, enlisting software developers in its battle against Microsoft Corp. These people said the store will sell business software designed by outside developers to integrate and add capabilities to Google Apps, such as enhanced security features or the ability to import contacts.

- The Obama administration's decision to read the Christmas Day bomber his Miranda rights has rightly come under withering criticism. Instead of a lengthy interrogation by officials with al Qaeda expertise, Umar Farouk Abdulmutallab was questioned for 50 minutes by local FBI agents and then later advised of his "right to remain silent." It's well understood that the focus on gaining evidence for a criminal trial was an intelligence failure of massive proportions. Not well understood is that the most powerful recent argument for aggressively interrogating terrorists, keeping them in military detention, and prosecuting them in military commissions comes to us from the Obama Justice Department itself.

NY Times:

- Sure, the screen is nice. But the iPad’s most important component, at least for Apple’s future, may be the A4, the fingernail-size chip at the tablet’s heart. With the A4, Apple has taken another step toward challenging the norms of the mobile device industry. Device makers typically buy their primary chips from specialized microprocessor companies. But for the iPad, Apple chose to design its own — creating unique bonds between the chip and Apple’s software. The do-it-yourself approach gives Apple the chance to build faster, more battery-friendly products than rivals and helps the company to keep product development secret.

Business Insider:

- Treasury Department Is Already Saying Volcker Rule Won't Change Goldman Sachs(GS). Tim Geithner is back on top in the Obama administration, and his deputies are making it clear that the "Volcker Rule" won't seriously overturn the way business is done on Wall Street. If anything, the Volcker rule will only strengthen the hands of Morgan Stanley(MS) and Goldman Sachs. They'll no longer face competition from JP Morgan and Citi's traders. In fact, they'll be able to hire the best of them. And the financial system won't be one iota safer than it was in August of 2008.

- TARP Watchdog Diagrams Exactly How The Government Is Inflating The Next Housing Bubble.

- McKinsey Quarterly's State of the Day takes a look private and public sector debt by country as a percentage of GDP. (graph)

Business Week:

- General Electric Co.(GE) and Amerigroup Corp.(AGP) would be winners under President Barack Obama’s proposed $3.8 trillion budget, while Pfizer Inc.(PFE) and Exxon Mobil Corp.(XOM) would pay more in taxes. The budget plan, released today, calls for extended government payments for health insurers such as Amerigroup and loan guarantees that would help companies making equipment for renewable energy and nuclear power, such as GE. It would impose tax hikes on overseas operations and end subsidies for oil and gas companies such as Exxon Mobil and Chevron Corp. “The president is looking at raising a lot of taxes,” Douglas Holtz-Eakin, a Republican economist who was the chief economic adviser to his party’s 2008 presidential nominee, Senator John McCain, said in a television interview. “I think he is going to get some pushback from Congress.”

- The weather pattern behind last week’s ice and snow storm that killed seven people is forecast to continue through February, an outlook that sent heating oil and natural gas futures up the most in almost a month. Temperatures across much of the continental U.S. are expected to be below normal from Feb. 6 to Feb. 10 while precipitation will be higher along the Eastern Seaboard, Gulf Coast and California, according to the national Climate Prediction Center in Camp Springs, Maryland. “We’re definitely looking now for a colder-than-normal February for the central and eastern U.S.,” said Matt Rogers, president of Commodity Weather Group in Bethesda, Maryland. “The initial impact will be on the East Coast and South, with a gradual expansion into the Midwest as well.”

- Barnes & Noble Inc.(BKS) rose 18 percent in late U.S. trading after Ron Burkle, its largest outside shareholder, asked the book seller to waive a provision preventing unwanted takeovers and allow him to acquire as much as 37 percent of the shares.

- Chinese stocks may fall further before reaching a “bottom” in April or May as money supply growth slows and policy risks increase, JPMorgan Chase & Co. said. The Shanghai Composite Index, representing the larger of China’s two mainland markets, has dropped 10 percent this year, the worst performer among 94 gauges compiled by Bloomberg globally, on concern the government will tighten monetary policy to curb inflation and asset price speculation. The Hang Seng China Enterprises Index has lost 9.2 percent. “We could see more and harsher tightening measures to come from China in the coming months, as China’s CPI is expected to keep rising till July or August before tapering off,” the analysts wrote. “Despite the correction over the past month, MSCI China has yet to fully price in the current tightening cycle in China.”

Politico:

- So... where was Janet Napolitano last Wednesday when she decided to skip a House Homeland Security Committee hearing on the Christmas bombing plot? At the moment the homeland security secretary might have been testifying about the biggest security breach on her watch -- before the major House committee tasked with investigating the matter, she was in her office consulting with members of an unspecified think-tank, according to a person familiar with the situation. Dems on the committee are still seething over what they view as a snub. "I am very dismayed that the secretary herself isn't here. I mean it's probably fair to ask — where the hell is Secretary Napolitano?" asked an angry Rep. Chris Carney (D-Penn.), when her deputy, Jane Holl Lute, appeared in her stead. Rep. Jane Harman (D-Calif.), said she was "very personally disappointed that she isn't here."

- Big bang gives way to busted budget. President Barack Obama’s new $3.83 trillion budget is a chickens-come-home-to-roost moment for Democrats who skipped past the deficit to tackle health care last year and now risk paying a heavy price in November. The great White House political gamble was to act quickly — before the deficits hit home — and institute major changes which proponents say will serve the long-term fiscal health of the country. Instead, a year of wrangling and refusal to consider more incremental steps have brought Obama and Congress to this juncture, where waves of red ink threaten to swamp their boat and drown reform altogether. “It’s very important to understand, we won’t be able to bring down this deficit overnight given that the recovery is still taking hold and families across the country still need help,” Obama told reporters Monday. But with $5.08 trillion in deficits over the next five years, his spending plan seems also a cry for help in the face of what he sees as intransigent Republican opposition. Not until 2014 to 2015 — midway through what Obama hopes will be his second term — is there any chance of approaching a sustainable budget. New Hampshire Sen. Judd Gregg, the ranking Republican on the Senate Budget Committee, called Monday for a bolder “game-changing budget that will turn things around.” “I’m available if they need me, but I don’t think they’re thinking big,” Gregg told POLITICO, checking off his list of ideas, including a freeze on spending — ramped up by taking out all money now earmarked for lawmakers’ home-state projects.

Boston Globe:

- A White House spokesman says it would "not be warranted" for China to slap sanctions on U.S. companies in retaliation for the Obama administration's plans to sell arms to Taiwan.

Financial Times:

- President Barack Obama will not attend a European Union-US summit to have been held in Spain in May, dealing a further blow to the EU’s attempts to be taken seriously as a coherent force in international affairs. Philip Gordon, US assistant secretary of state for Europe, insisted that Washington was committed to good relations with both the EU and Spain, but the announcement will nevertheless be greeted with dismay in Madrid and disappointment in Brussels. His decision not to travel to Madrid is sure to disappoint European policymakers who a year ago had assumed that, with the Republican George W. Bush out of the White House, they would have a more sympathetic interlocutor in the form of the Democrat Mr Obama.

- Eurozone governments have borrowed a record €110bn from the markets so far this year, forcing up borrowing costs for those countries with the weakest public finances as they pay a heavy price for their ballooning debt levels. Investors warned that the yields, or interest rates, they would demand to lend to Greece and other peripheral economies, such as Portugal, Spain, Ireland and Italy, would rise until they were convinced they had put their finances in order. Theodora Zemek, global head of fixed income at Axa Investment Managers, said: "The problem of sovereign risk is just beginning. Countries with high debt levels will have to pay higher and higher yields to issue new bonds." Another investor said: "Confidence in high-debt countries has reached such a low point. If there is any sign from politicians that they are not prepared to tackle their debt levels, then there will be a sell-off in eurozone bonds."

- US banks made it easier for big companies to borrow money for the first time since the crisis, but loan demand fell as corporate America remained worried about the economy, the Federal Reserve said on Monday in its quarterly loan-officers survey. The Fed report underlined banks’ growing desire to lend to companies at a time when politicians are calling on financial institutions to aid the economic recovery by extending credit to companies and consumers.

Telegraph:

- Amazongate: new evidence of the IPCC's failures. The IPCC is beginning to melt as global tempers rise, says Christopher Booker. It is now six weeks since I launched an investigation, with my colleague Richard North, into the affairs of Dr Rajendra Pachauri, chairman of the UN's Intergovernmental Panel on Climate Change (IPCC), the hugely influential body which for 20 years has been the central driver of worldwide alarm about global warming. Since then the story has grown almost daily, leading to worldwide calls for Dr Pachauri's resignation. But increasingly this has also widened out to question the authority of the IPCC itself. Contrary to the tendentious claim that its reports represent a "consensus of the world's top 2,500 climate scientists" (most of its contributors are not climate experts at all), it has now emerged, for instance, that one of the more widely quoted scare stories from its 2007 report was drawn from the work of a British "green activist" who occasionally writes as a freelance for The Guardian and The Independent. Last week I reported on "Glaciergate", the scandal which has forced the IPCC's top officials, led by Dr Pachauri, to disown a claim originating from an Indian glaciologist, Dr Syed Husnain, that the Himalayan glaciers could vanish by 2035. What has made this reckless claim in the IPCC's 2007 report even more embarrassing was the fact that Dr Husnain, as we revealed, was then employed by Dr Pachauri's own Delhi-based Energy and Resources Institute (Teri). His baseless scaremongering about the Himalayas helped to win Teri a share in two lucrative research contracts, one funded by the EU. The source the IPCC cited as its "scientific" authority for this claim, however (as Dr North first reported on his EU Referendum blog), was a propagandist pamphlet published in 2005 by the WWF, the environmentalist pressure group, citing a magazine interview with Dr Husnain six years earlier. Dr North next uncovered "Amazongate". The IPCC made a prominent claim in its 2007 report, again citing the WWF as its authority, that climate change could endanger "up to 40 per cent" of the Amazon rainforest – as iconic to warmists as those Himalayan glaciers and polar bears. This WWF report, it turned out, was co-authored by Andy Rowell, an anti-smoking and food safety campaigner who has worked for WWF and Greenpeace, and contributed pieces to Britain's two most committed environmentalist newspapers. Rowell and his co-author claimed their findings were based on an article in Nature. But the focus of that piece, it emerges, was not global warming at all but the effects of logging. A Canadian analyst has identified more than 20 passages in the IPCC's report which cite similarly non-peer-reviewed WWF or Greenpeace reports as their authority, and other researchers have been uncovering a host of similarly dubious claims and attributions all through the report. These range from groundless allegations about the increased frequency of "extreme weather events" such as hurricanes, droughts and heatwaves, to a headline claim that global warming would put billions of people at the mercy of water shortages – when the study cited as its authority indicated exactly the opposite, that rising temperatures could increase the supply of water. Little of this has come as a surprise to those who have studied the workings of the IPCC over the years. As I show in my book The Real Global Warming Disaster, there is no greater misconception about the IPCC than that it was intended to be an impartial body, weighing scientific evidence for and against global warming. It was set up in 1988 by a small group of scientists all firmly committed to the theory of "human-induced climate change", and its chief purpose ever since has been to promote that belief.

Shanghai Securities News:

- Second-hand home sales in Beijing fell almost 70% in January from the previous month, after the central government issued several policies aimed at curbing prices. Home sales in Shanghai fell 51% in January from December.

TheNational:

- A top banker called for up to Dh25 billion in further government injections into banks yesterday, raising fears the financial sector has yet to emerge from the recession. Banks want the cash to revive lending to businesses and consumers after setting aside ever larger amounts of money to cushion against unpaid loans. Hussain al Qemzi, the chief executive of the Dubai-based Noor Islamic Bank, said the banking system could need as much as Dh25 billion on top of Dh120bn already spent on shoring up bank finances since 2008. “The banking sector in the UAE needs continued capital injection,” Mr al Qemzi said. “I can say we need another Dh20bn to Dh25bn.”

Evening Recommendations

Citigroup:

- Reiterated Buy on (OMX), target $17.

- Reiterated Buy on (NWSA), raised target to $15.

- Reiterated Buy on (HEW), target $46.

Night Trading
Asian indices are -.50% to +1.0% on avg.

Asia Ex-Japan Inv Grade CDS Index 111.50 +3.0 basis points.
S&P 500 futures -.28%.
NASDAQ 100 futures -.17%.

Morning Preview
BNO Breaking Global News of Note

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Yahoo Most Popular Biz Stories

MarketWatch News Viewer

Asian Financial News

European Financial News

Latin American Financial News

MarketWatch Pre-market Commentary

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TradeTheNews Morning Report

Briefing.com In Play

SeekingAlpha Market Currents

Briefing.com Bond Ticker

US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
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Commodity Futures
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Conference Calendar

Who’s Speaking?
Upgrades/Downgrades

Politico Headlines
Rasmussen Reports Polling

Earnings of Note
Company/Estimate
- (BEAV)/.31

- (AMSC)/.12

- (ADP)/.58

- (STE)/.48

- (EMR)/.42

- (ADM)/.72

- (DHI)/-.26

- (TDW)/1.19

- (SMG)/-.83

- (COCO)/.40

- (WHR)/1.30

- (DOW)/.11

- (UPS)/.33

- (NWSA)/.20

- (VRSN)/.34

- (IRF)/-.12

- (MEE)/.28

- (JLL)/1.39

- (AFL)/1.15

- (MET)/.95

- (LXK)/.62

- (ADS)/1.62

- (CMI)/.78

- (HSY)/.60

Economic Releases

10:00 am EST

- Pending Home Sales for December are estimated to rise +1.0% versus a -16.0% decline in November.

5:00 pm EST

- Total Vehicle Sales for January are estimated to fall to 10.90M versus 11.23M in December.

Upcoming Splits

- None of note

Other Potential Market Movers
- The weekly retail sales reports, Morgan Stanley Financials Conference, CSFB Energy Summit, ABC consumer confidence reading and the weekly API energy inventory report could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology stocks in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.