Friday Watch

Evening Headlines
Bloomberg:

• Egypt Braces For More Violence as Mubarak Refuses to Quit. Today’s Friday prayers threaten to bring more violence to Egypt after pro-government mobs turned on foreign journalists and human rights advocates yesterday, and President Hosni Mubarak refused to quit. “Friday is going to be a bloody, difficult day and it may mark the turning point to see whether this uprising is going to continue or whether the regime will sort of be able to wear it down,” Michael Hudson, director of the Middle East Institute at the National University of Singapore, told Bloomberg Television.
• Egypt Riots Add Pressure on OPEC With $100 Oil. OPEC is under pressure from consumers to boost supply as most of the world’s benchmark crudes surpass $100 a barrel amid political unrest in North Africa and the Middle East. Oil prices are high enough to “derail” the global economic recovery, Fatih Birol of the International Energy Agency said this week. Saudi Arabian Oil Minister Ali al-Naimi said last week prices nearer $75 would be “appropriate.” Goldman Sachs Group Inc. says the Organization of Petroleum Exporting Countries has already raised output. “OPEC needs to put in more barrels this year, given how strong demand has been,” said Amrita Sen, a commodity analyst at Barclays Capital in London. “Above $100 there would be a bit more urgency to increase their volumes, because at the end of the day what they want is more stability.”
• Japanese Steel Takeover Driven by 'Radical' Shift as Costs Rise. Nippon Steel Corp. and Sumitomo Metal Industries Ltd.’s plan to create the world’s second-largest steelmaker is aimed at gaining leverage over raw-material purchases and metal pricing as costs soar. Shares in both companies surged the most in more than two years today.
• India's Food Inflation Quickens to One-Month High, Adding to Rate Pressure. India’s food inflation accelerated to a one-month high and services growth quickened, bolstering the case for more interest-rate increases. An index measuring wholesale prices of agricultural products rose 17.05 percent in the week ended Jan. 22, the commerce ministry said in a statement in New Delhi today. “Demand pressures are growing in India,” Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai, said before the release. “Food costs are also feeding into inflation.” He expects the central bank to increase rates by at least 100 basis points by December.

Wall Street Journal:

• U.S. Pressure on Mubarak Opens a Rift With Arab Allies. President Barack Obama's showdown with Egyptian President Hosni Mubarak has sparked a rift with key Arab allies Saudi Arabia and United Arab Emirates, which fear the U.S. is opening the door for Islamist groups to gain influence and destabilize the region. Vying to influence the outcome of events, Saudi Arabia and the U.A.E. have sent public and private messages of solidarity to Mr. Mubarak and his vice president, longtime intelligence chief Omar Suleiman, diplomats said. The messages amount to support for the president and Mr. Suleiman to oversee the transition and to ensure that Islamists can't fill any possible power vacuum. The support from Arab states has provided a measure of comfort to Mr. Mubarak, who announced he wouldn't take part in September's election. It may in part explain why the Egyptian president rebuffed Mr. Obama's call for an immediate transition that includes the opposition. The backlash shows how the turmoil in Egypt is rapidly reshaping U.S. policy in the region. In deciding to set itself against Mr. Mubarak, a U.S. ally for decades, the U.S. is now facing the disquiet of other friendly Arab governments, who have long provided support for American policy goals. Meanwhile, Islamists in the region, including Hamas and Hezbollah, believe they are on the ascent as U.S. allies falter. People familiar with the situation said Israel, the U.S. closest ally, has privately echoed Arab concerns about a U.S. push to kick out Mr. Mubarak, and worries Washington underestimates domestic Egyptian support for the Muslim Brotherhood and other Islamist parties. Senior officials from the U.A.E., another key regional ally, have said in recent days that the unraveling of Mr. Mubarak's government threatens to provide breathing room for Islamic extremists and Tehran. Egyptian security forces have been among the most aggressive in seeking to combat Hamas and Hezbollah, Palestinian and Lebanese militant groups that receive their arms from Iran and Syria. Another Arab official from a government aligned with Washington said the Obama administration seems to be humiliating Mr. Mubarak, despite his close cooperation over the years. This could lessen the willingness of Arab states to cooperate with Washington in the future, said the official. Mr. Obama took a calculated risk by aligning himself this week with the opposition, which includes the powerful Muslim Brotherhood, a group banned by Cairo and long shunned by Washington because of concerns about its ties to Islamist extremism.
  
• Egypt Girds for Showdown. The Egyptian government ratcheted up its offensive against opponents to President Hosni Mubarak's continued rule and security forces moved to stifle foreign reporting, as international fault lines formed over the U.S. push for Mr. Mubarak to quickly step aside. The power struggle played out in the streets of central Cairo, where Egyptians on both sides of the dispute girded for large-scale protests set to begin after prayers Friday afternoon. The regime found backing from Arab allies who fear Washington's pressure on Mr. Mubarak is opening the door for Islamist groups to gain influence and destabilize the region.
• Turmoil Heartens U.S. Foes. The so-called resistance bloc of nations and Islamist movements, led by Iran and Syria, believes it is increasingly on the ascent as unrest seethes in the Middle East. United in its opposition to the U.S. and Israel, this coalition is seeing many of its chief regional adversaries weakened—particularly Egyptian President Hosni Mubarak and Jordan's King Abdullah II. Tehran and Damascus have also been buoyed by last month's toppling of Beirut's pro-Western government at the hands of Hezbollah, the Lebanese political party and militia the two countries fund and arm. "[The unrest] proved that the global arrogance's era of domination and control of the region has come to an end," Iranian Foreign Minister Ali Akbar Salehi said on Tehran's state television this week, using Iran's catch-phrase for the U.S.
• Rice Hits 27-Month High. U.S. rice futures reached 27-month highs Thursday on concerns Egypt will start importing in the face of escalating tensions and U.S. farmers will sow fewer rice acres come spring. Rice futures climbed 2% to settle at 16.285 cents a pound at the Chicago Board of Trade. The grain was left out of a boom in U.S. commodity prices last year, but has more than kept pace in 2011, up 16% so far this year. In 2010, rice futures fell nearly 4%, while soybean futures climbed 34% and cotton futures surged 91%. Rice futures have been fueled by projections U.S. farmers are likely to abandon the grain this spring in favor of more profitable crops like corn, soybeans and cotton. Analysts predict plantings of long-grain rice—the variety traded in Chicago—could drop 30% from last year. In recent days U.S. rice has seen signs of increased demand from abroad. Weekly export sales for the last full week of January were 57,100 tons, up 32% from the previous week and 22% from the prior four-week average, according to the U.S. Department of Agriculture. Global demand could grow further if Egypt, which has been a rice exporter in recent years, becomes an importer. Analysts said the government may buy rice to mollify residents concerned about rising food prices and make up for a small domestic harvest. The USDA last month estimated Egypt's harvested area was down 30% from the previous year because of a reduction in government support for prices and increased restrictions on water. Foreign governments are growing increasingly worried about food security and costs. The United Nations Food and Agriculture Organization said Thursday its monthly food price index reached a record high in January due to higher global prices for cereals, sugar and vegetable oils.
• China Eyes U.S. Defense Contracts. The maker of China's new stealth fighter jet has teamed up with a tiny, unprofitable California company to try to launch bids for U.S. defense contracts, possibly including one to supply Chinese helicopters to replace the aging Marine One fleet used by the president, according to people involved in the partnership.
• The States Can't Afford ObamaCare. Their budgets will be crushed by the Medicaid expansions that the feds are forcing on them. Behind this week's ruling by U.S. District Court Judge Roger Vinson overturning ObamaCare on constitutional grounds, there is a deeper economic reality. The states can't afford it. That's a primary reason why 26 states joined in the Florida lawsuit to nullify the federal law. It also would be a good reason for the Supreme Court to uphold Judge Vinson's ruling.

Bloomberg Businessweek:

• A Setback for China's Solar Industry. Last year was a good one for Yingli Green Energy Holding (YGE). The Chinese company makes photovoltaic solar-power modules, which convert sunlight into electricity. With global demand up, Yingli doubled production capacity and ran its factories "365 days a year, 24/7," says Bryan Li, the company's chief financial officer. "We sold everything." Almost all the modules went to Europe, where governments provide generous subsidies for solar-energy producers. Yingli plans to expand production another 70 percent this year, and it isn't alone: Other Chinese solar companies, including Suntech Power Holdings (STP) and LDK Solar (LDK), plan double-digit production boosts in 2011. "All of the major Chinese producers are engaged in massive, very aggressive capacity-expansion programs," says Paul Leming, an analyst with Soleil Securities in New York. Their timing might be off. As the Chinese ramp up, austerity-minded governments in Europe are scaling down their solar subsidies. Germany plans to reduce its feed-in tariffs, which guarantee above-market rates to solar power producers, as much as 15 percent by July. France, Spain, the Czech Republic, and other European countries are reducing their support as well. "The amount of capacity being added is way ahead of what the market can take," says Finlay Colville, senior analyst with market research firm Solarbuzz.
• U.S. Commercial Property Recovery Spares Economy Another Blow. From Manhattan office towers to apartments in Florida to retail properties in Washington, commercial real estate values are rising, defying predictions of a collapse that would drag the U.S. economy back into recession. Prices of commercial properties sold by institutional investors surged 19 percent in 2010, the second-biggest gain on record, according to an index developed by the MIT Center for Real Estate. Investments in office properties, the largest part of the market, more than doubled last year to $41.6 billion, according to Real Capital Analytics Inc., which tracks commercial property sales globally.

CNBC:

• Financial Crisis Could Happen Again: FICC's Angelides. The financial crisis that crippled the economy could happen again, Phil Angelides, chairman of the Financial Crisis Inquiry Commission (FCIC) told CNBC Thursday. Blaming regulators for lacking backbone and corporate management for being imprudent, Angelides said it was "striking how little has changed" since the crisis came to a close. Although these factors are not at play due to the recession, Angelides said that "a lot of the same risk factors are there."
• Fed Balance Sheet Grows to Record Size in Week. The U.S. Federal Reserve's balance sheet grew to a record size in the latest week, spurred by its $600 billion bond-buying program aimed to support economic growth, Fed data released on Thursday showed. The balance sheet — a broad gauge of Fed lending to the financial system — expanded to $2.452 trillion in the week ended Feb. 2 from $2.426 trillion the prior week.

Business Insider:

• A Must-Read Takedown of Bernanke's Cringeworthy National Press Club Speech. First, the Chairman asserts that by lowering long term yields, the Fed forced investors into alternative assets, as opposed to Treasuries. Interestingly, however, the move did not force investors into the key asset in question, the stock market. Volume from August 1st through December 31st was down 15% year over year. The volume in the equity futures market was up 3%. Volume in the Treasury futures market, the area investors were theoretically being crowded out of, was up 43% year over year. Volume in Gold and Silver futures was up 23% and 70% respectively. Corn and Wheat futures volume was up 41% and 22% respectively. The list goes on. We are pretty confident these are not the alternative assets the FOMC was trying to force investors into. It is interesting how the Chairman has now backdated QE2 to August when the replacement purchases commenced, which only prevented the Fed's balance sheet from contracting as opposed to expanding it as QE2 does. The fact is that QE2 only officially commenced half way through Q4, and if one looks at it from that perspective, then the Fed cannot take credit for the Q4 GDP report. The stronger data we are seeing 4-5 months later started strengthening before QE2. Whatever happened to monetary policy has a lagged effect? There was no doubt the QE2 expectations were out there and started getting priced in, but was that the real driver in Q4? We suspect that if you ask most Americans what prompted the confidence to go out and make the 2010 holiday season the strongest gain since 2004, QE2 will not even rank among the answers. Events like the election and tax cut extensions almost certainly will.
• Chart of the Day: If You Think Wheat Prices Have Gotten Expensive.... The agriculture story of the moment is wheat. It's surging day in and day out, and arguably it's causing riots in North Africa and the Middle East. But what's the cause? Some say it's due to Bernanke and his cheap money policies. Weather is also a clear contributor. What's clear though is that while all soft commodities are higher, there's a lot of variation.
  

Zero Hedge:

• Egypt and the Muslim Brotherhood: A Stratfor Special Report. If indeed as Credit Suisse speculated gold's move was predicated by concerns that the Muslim Brotherhood may end the peace treaty with Israel, then the relationship between Egypt and the country's largest Islamist movement, the Muslim Brotherhood, deserves a special focus. Below we publish a special report by Stratfor focusing precisely on this relationship, and what the future may hold for either.

IBD:

• United Therapeutics(UTHR) Grows With Drugs For Rare Diseases.

New York Times:

• Merkel, in Reversal, Urges Rescue of Euro. For a year, as Europe struggled with its debt crisis, Germany’s chancellor, Angela Merkel, lived up to her nickname of “Frau Nein,” or Mrs. No, by stalling on each rescue effort. Suddenly Mrs. Merkel is saying “yes,” and that could mean a big leap forward in European integration. When they meet here on Friday, the 27 heads of government will hear new ideas on how to save the euro, delivered by Mrs. Merkel and the French president, Nicolas Sarkozy, but written largely in Berlin. In exchange for bolstering the euro zone rescue fund, Mrs. Merkel will press others to mimic Germany’s economic rise. She is proposing to coordinate retirement ages across countries, scrap any links between wages and inflation and bring corporate tax systems closer together. In a remarkable about-face, Mrs. Merkel now wants more economic integration in the euro zone, including regular meetings of its leaders. That sounds similar to a French plan for a prototype economic government for Europe — something once considered so radical that Germany killed it.

Forbes:

• Did JPMorgan(JPM) Ignore Madoff's Ponzi Scheme? Many financial institutions enabled Bernard Madoff’s Ponzi scheme but a newly unsealed lawsuit alleges that JPMorgan Chase was “at the very center” of the fraud and “thoroughly complicit in it.”
• JDSU's(JDSU) Huge December Quarter Triggers Optical Stock Frenzy. For the quarter, JDSU reported $477.2 million in revenue on a non-GAAP basis, or $473.5 million on a GAAP basis, ahead of the Street consensus at $437.7 million. Non-GAAP profits of 29 cents a share beat the Street by a dime. Gross margin expanded to 48.8%, from 47.4% in the previous quarter, and 44.6% a year ago. For the March quarter, the company sees revenue of $440 million to $460 million, nicely ahead of the old Street consensus at $420.75 million. “In fiscal Q2 JDSU reported record revenues, gross margin and operating margin, which exceeded our operating model target,” CEO Tom Waechter said in a statement. “This is an exciting time for JDSU. Our market drivers are strong, our innovation engine and pipeline for new products is robust, and we continue to increase our operating leverage.” JDSU is up $3.27, or 18.2%, to $21.20 in after-hours trading.

ai-cio:

• AXA Rosenberg Settles With SEC, Paying $242 Million for Hiding Computer Glitch. Three AXA Rosenberg entities have settled charges brought by the US Securities and Exchange Commission (SEC), agreeing to pay more than $240 million. The SEC had accused the money manager of concealing a major computer error that led its investment managers to make erroneous investment decisions in 2008 and 2009, allegedly causing a $217 million loss. In compensation, the AXA Rosenberg entities agreed to pay back the $217 million in losses plus a $25 million penalty.

Fox Business:

• Congress Wants to Hear from Meredith Whitney on Muni Call. A congressional subcommittee investigating the recent implosion of the $3 trillion municipal bond market wants analyst Meredith Whitney to come clean and explain her doomsday prediction of hundreds of billions of dollars in muni defaults over the next year.

Mediaite:

• Fox News' Greg Palkot Was Blindfolded and Accused of Being Israeli Spy. Earlier today we reported on the attacks of Fox News journalists Greg Palkot and video journalist Olaf Wiig that sent them both to the hospital with “fairly grave” injuries . Mediaite has learned that upon being rushed the hospital, Palkot and Wiig were both detained by military police and accused of being Israeli spies. A source with knowledge of the situation says that Palkot was blindfolded throughout the ordeal.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-one percent (41%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -15 (see trends).

Reuters:

• U.S. SEC Pushes Banks to Disclose cost of Lawsuits. The U.S. Securities and Exchange Commission is cracking down on corporate disclosure of litigation costs, a Reuters Legal analysis has found. In particular, the agency is targeting banks and other institutions that have reported large settlements of financial crisis-related lawsuits that they had not disclosed in prior regulatory filings.
• U.S. Muni Funds' Flows Negative for Week - LipperFMI. U.S. municipal bond funds reported $1.07 billion of net outflows in the week ended Feb. 2, compared with the previous week's outflows of $1.90 billion, LipperFMI reported on Thursday. It was the 12th consecutive week of sizable net outflows since the funds, popular with individual investors, reported $42 million of net inflows in the week ended Nov. 10, according to LipperFMI, previously AMG Data Services. High-yield municipal bond funds had $35.2 million of net outflows in the latest week, compared with $222.1 million of outflows in the previous week. It was the ninth consecutive week of outflows for the funds.
• Record Net Outflow from Emerging Market Stocks - Lipper.
• Fed's Kocherlakota: Headwinds to Curb U.S. Growth. Headwinds stemming from the collapse of the housing bubble will hold back the U.S. economy this year, keeping growth closer to 3 percent than 4 percent, a top Federal Reserve official said on Thursday. While 2011 will be better than 2010, the pace of recovery will not be fast enough to make a serious dent in the stubbornly high jobless rate, Minneapolis Fed President Narayana Kocherlakota said in a speech prepared for delivery at the Twin Cities campus of the University of Minnesota. Kocherlakota sees the jobless rate staying above 9 percent for the rest of this year. "Even more troubling," it will still be above 8 percent by the end of next year, he said in the speech, which largely repeated one he gave on Jan. 11 in Madison, Wisconsin.
• Wharton's Siegel Says Stock Bull Run Far From Over.
  
• China MediaExpress(CCME) Shares Plummet on Fraud Allegation. Shares of China MediaExpress Holdings Inc sank 33 percent on Thursday after a research report, for the second time this week, called the company's financial results into question. On Thursday, Hong Kong-based Muddy Waters Research alleged that the advertising firm's actual revenue fell far short of what it had reported in 2009. The brokerage started coverage of the stock with a "strong sell" rating and gave it an estimated value of $5.28 a share. Shares of the company fell 33 percent to close at $11.09 on Thursday amid ten-times its 50-day average volumes.
• US Watchdog Finds $33 Million in Erroneous Electric Car Credits. Thousands of Americans who filed tax returns erroneously claimed $33 million in plug-in electric and alternative motor vehicle tax credits, a government watchdog said in a report released on Thursday. The Treasury watchdog also found that the Internal Revenue Service was unable to track and account for credits claimed by individuals on paper-filed tax returns. The Obama administration's economic stimulus package included tax breaks for Americans who bought environmentally friendly cars.
• CB Richard Ellis(CBG) Q4 Profit Beats Street. CB Richard Ellis Group Inc, one of the world's largest real estate services companies, said fourth-quarter adjusted profit grew 34 percent, underscoring the rebound in commercial real estate, especially in the United States. The company, whose brokers link buyers and sellers of commercial real estate and landlords and tenants, sees 2011 adjusted earnings of $0.95-$1.05 per share on expectations of continued recovery in the commercial real estate market. Analysts, on average, expect 2011 earnings of 99 cents per share, according to Thomson Reuters I/B/E/S. Shares of CB Richard Ellis were up 7 percent to $25.50 in extended trade after closing at $23.78 on Thursday on the New York Stock Exchange.
• U.S. Small Firms Still Wary About Hiring - Survey. Most small businesses in the United States remained cautious about hiring new employees during the past three months, according to a survey by the National Federation of Independent Business. The results were issued a day ahead of the Labor Department's release of national employment figures expected to show U.S. hiring gathered steam in January. Asked about changes in total employment over the past three months, 11 percent of owners reported increasing employment at their firms by an average of 2.8 workers while 15 percent reported reducing total employment an average of 2.9 workers per form. the small business group said. "Clearly, no surge in hiring in the last few months," the report said.
• Tennessee Shoppers Pay Highest Sales Tax Rate in U.S. Shoppers in Tennessee, California, Arizona, Louisiana and Washington state pay the highest retail sales tax rates, according to a report released on Thursday by the Tax Foundation. The organization, which analyzes federal and state tax trends, said 34 states allow localities to charge their own sales taxes, which can boost the amount levied on purchases. It averaged local-option sales taxes and added them to state rates to find that shoppers in Tennessee face the highest sales tax rate, at 9.44 percent. In California and Arizona the combined rates are above 9 percent as well, while in Louisiana the sales tax is 8.69 percent and in Washington it is 8.64 percent. Five states do not have a statewide sales tax, the foundation added. Among those that do charge sales taxes, Hawaii has the lowest state-local combined rate at 4.35 percent, followed by Maine and Virginia at 5 percent. South Dakota has one of the lower combined rates at 5.22 percent and Wyoming shoppers are charged a combined rate of 5.3 percent.
• Las Vegas Sands(LVS) Revenue Misses Estimates, Shares Fall. Las Vegas Sands Corp, the casino operator run by billionaire Sheldon Adelson, reported revenue that fell short of estimates, and the stock fell nearly 7 percent in after-hours trading.

Financial Times:

• Spotlight on Hedge Funds in SEC Probe. At least 15 hedge funds improperly received corporate secrets from company officials, according to securities regulators investigating alleged insider trading on Wall Street, expanding the number of money managers under government scrutiny.

Telegraph:

• Egypt Protests: Barack Obama May Rue The Day He Decided to Abandon Mubarak. Whoever replaces Egypt's president might not prove such a staunch ally of the US, writes Con Coughlin.

Frankfurter Rundschau:

• Peter Bofinger, a member of German Chancellor Angela Merkel's council of economic advisers, said Merkel's plan to increase euro-region competitiveness unduly pressures other countries to align their economic policies with those of Germany. The German strategy of cutting public spending and moderating wages while boosting exports "only worked because other euro states didn't follow this path," and the rest of the euro region following suit could be a zero-sum game, Bofinger said.
  

Evening Recommendations
Citigroup:

• Upgraded (PTEN) to Buy, target $35.

Night Trading

• Asian equity indices are -.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 108.50 unch.
  
• Asia Pacific Sovereign CDS Index 120.0 +.75 basis point.
  
• S&P 500 futures +.11%.
  
• NASDAQ 100 futures +.14%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (AET)/.62
• (ABC)/.54
• (CLX)/.61
• (WY)/.06
• (TDW)/.68
• (SPG)/1.74
• (PHM)/-.09
• (PPL)/.58
• (FO)/.58
• (CEG)/.59
  

Economic Releases
8:30 am EST

• The Change in Non-farm Payrolls for January is estimated at 146K versus 103K in December.
• The Change in Private Payrolls for January is estimated at 145K versus 113K in December.
• The Unemployment Rate for January is estimated at 9.5% versus 9.4% in December.
• Average Hourly Earnings for January is estimated to rise +.2% versus a +.1% gain in December.

Upcoming Splits

• (DLLR) 3-for-2
  

Other Potential Market Movers

• The Fed's Fisher speaking, (GLW) investor meeting and the (STJ) investor meeting could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.