Wednesday Watch

Evening Headlines
Bloomberg:

• Mubarak Fails to Calm Protests With Pledge to Step Down. Egyptian President Hosni Mubarak said he will step down after elections for a new leader, a concession rejected by opposition leaders and protesters who refuse to wait months for an end to his regime. Mubarak said he’ll stay on to ensure “stability” and push through political and economic changes before leaving. The crowd in Cairo’s Tahrir Square began chanting anti-Mubarak slogans in response to the president’s state-television address. “Your last day will be Friday,” some shouted, referring to the Muslim prayer day when more demonstrations are planned.
  
• Jordan's Prime Minister Rifai Resigns; King Asks Bakhit to Form Government. Jordan’s King Abdullah replaced his prime minister following street protests and asked former premier Marouf Bakhit to form a new government that will launch a “genuine political reform process.” Abdullah told Bakhit that he should put the country on the path “to strengthen democracy,” and provide Jordanians with the “dignified life they deserve,” the Royal Court said in an e-mailed statement. Islamic and leftist groups have held demonstrations every Friday since a revolt in Tunisia forced President Zine El Abidine Ben Ali into exile on Jan. 14.
• Fed May Discuss Easing If Data Weak, Hoenig Tells Market News. The Federal Reserve may consider buying more U.S. Treasury securities than planned if U.S. economic data show weakness, Kansas City Federal Reserve Bank President Thomas Hoenig told Market News International. The economy will expand at least 3.5 percent this year, Hoenig said yesterday in an interview. He reiterated he would like to “normalize” monetary policy by shrinking the Fed’s balance sheet and raising interest rates, the news service said. The Kansas City Fed president expressed concern over rising land prices, Market News International said. “I don’t predict bubbles, but we certainly are beginning to see an acceleration of prices in this part of the country that I haven’t seen since the late 70s or early 80s,” he was quoted as saying.
• Geithner Met With Dimon, Moynihan, Schwarzman on Dodd-Frank Law. Treasury Secretary Timothy F. Geithner met with chief executive officers Jamie Dimon of JPMorgan Chase & Co.(JPM), Brian Moynihan of Bank of America Corp.(BAC) and Stephen Schwarzman of Blackstone Group LP(BX) in December to discuss how the Dodd-Frank financial overhaul law will be implemented. Geithner talked with Dimon and Peter Scher, JPMorgan’s executive vice president for government relations, on Dec. 7 about the Volcker rule, which restricts banks from risking capital by trading for their own accounts, according to calendars posted on the Treasury Department’s website.
• Atlanta Pension Panel Suggests Firing Subpar Investment Managers. The chairman of an Atlanta advisory panel looking for solutions to a $1.5 billion pension deficit said the city should consider firing its investment managers because returns don’t justify their cost. Atlanta’s three pension funds, with assets of $1.9 billion, could potentially save $5 million a year in fees for active managers that buy and sell investments with the goal of outperforming an index, according to data compiled by the panel. Managers for Atlanta’s police and general employee funds have underperformed benchmarks, panel Chairman John Mellott said today during a meeting at city hall. “We are closet indexers,” said Mellott, a former publisher of the Atlanta Journal-Constitution and an adviser with Bain & Co. The city should consider moving to a less-expensive passive investment strategy, or hire a new crop of active managers with lower fees, Mellott said. The city’s 50 investment fund managers included JP Morgan/Bank One Invesco Ltd, Mesirow Financial Inc. and Wellington Management, as of Sept. 30. The city’s pension funds combined have returned 3 percent over the past 10 years, compared with an 8 percent assumed return, Mellott said.
• India's foreign direct investment is headed for the first drop since the year ending March 2003, hindering a bid to match China's surging economy. FDI fell 24% to $19 billion between April and November compared with the same period a year earlier.
• Germans feel prices are rising almost twice as fast as the official rate, fueling wage demands and making it harder for the European Central Bank to keep a rein on inflation, according to UniCredit Bank AG. So-called "perceived inflation" jumped to 3.3% in December compared with Germany's official rate of 1.7%. UniCredit calculates perceived inflation by giving greater weight to the goods people buy most often, such as fuel, food and clothing. "The rise in perceived inflation increases the likelihood of higher wage demands," said Alexander Koch, an economist at UniCredit in Munich. "An excessive round of wage increases would certainly make the ECB nervous."
• Mines Close, Ships Flee as Cyclone Yasi Nears Australian Coast. Coal and zinc mines are shut and at least 32 coal ships are steaming out to sea, as sugarcane and banana farmers in northeastern Australia brace for the forecast landfall later today of Tropical Cyclone Yasi.
• China's Wen to Curb Property Speculation, Add Low-Cost Homes. China’s Premier Wen Jiabao pledged to curb property speculation and add more affordable housing after home prices rose last month as buyers defied government measures. China’s January home prices posted their biggest month-on- month gain in six months, according to SouFun Holdings Ltd. The country needs to “resolutely control the property market” and “maintain stable housing prices,” Wen said in his Lunar New Year speech yesterday posted on the website of the state-run People’s Daily newspaper, reiterating comments on Jan. 18 ahead of last week’s curbs.

Wall Street Journal:

• How Cairo, U.S. Were Blindsided by Revolution. Two months before Egypt exploded in popular rage, Secretary of State Hillary Clinton met Ahmed Aboul Gheit, Egypt's foreign minister, in her seventh-floor offices in Washington. U.S. officials were miffed that Cairo was ignoring their pleas to make coming legislative elections more credible by allowing international ballot monitors. But after the meeting, neither Mrs. Clinton nor Mr. Aboul Gheit mentioned that disagreement when they spoke publicly. Mrs. Clinton praised the longstanding partnership between the U.S. and Egypt as the "cornerstone of stability and security in the Middle East and beyond." Months later, that cornerstone is crumbling. A week-long wave of demonstrations has pushed President Hosni Mubarak to promise he'll leave—and the repercussions of the tumult in the Arab world's most populous land have only begun to reverberate around the strategic and volatile Middle East.
• Egypt's Islamist Riddle. Muslim Brotherhood Says It Seeks Limited Role, but Its Radical Roots Spur Questions. The decision by Egyptian President Hosni Mubarak to not stand for re-election forces the U.S. to confront a thorny dilemma—how to deal with Egypt's Muslim Brotherhood. The 83-year-old Islamic movement, Egypt's biggest opposition bloc, played a subdued role in the uprising. But its past performance in parliamentary elections and its dedicated following mean it will be a force to be reckoned with as Egypt moves toward open elections. Newly minted Vice President Omar Suleiman has indicated to U.S. diplomats that he wants any talks with the opposition to include the Brotherhood, U.S. officials say. That would mark a fundamental shift for Egypt's government, which outlawed the group in 1954 and says the Brotherhood is a threat to the country's stability.
• Wall Street Pay Hits Record. When it comes to paychecks, Wall Street's law of gravity is back in full force: What goes down must come back up. In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion, according to an analysis by The Wall Street Journal. The total is up 5.7% from $128 billion in combined compensation and benefits by the same companies in 2009.
• Yemen Leader Summons Parliament. President Ali Abdullah Saleh called for an emergency meeting of Yemen's parliament to be held Wednesday, at which officials close to the president say he will announce measures aimed at tamping down unrest that has swept his country and much of the rest of the Arab world.
• Battling a Wireless Deluge. AT&T(T), Other Carriers Use Wi-Fi 'Hotzones' to Siphon Off Smartphone Traffic.
• Another Rajaratnam Named in Ring. Younger Brother of Galleon Founder Was Co-Conspirator, Prosecutors Allege; Pressure on Raj Builds. Prosecutors have alleged that a younger brother of Galleon Group founder Raj Rajaratnam was a co-conspirator in a criminal insider-trading ring, according to people familiar with the matter. The latest development—which hasn't previously been made public—comes as the pressure builds on Raj Rajaratnam to plead guilty.
• The Nuts and Bolts of the ObamaCare Ruling. According to the government's theory, wrote Judge Vinson, 'the more harm the statute does, the more power Congress could assume for itself under the Necessary and Proper Clause.'
• Where Should Egypt Go From Here? Protests in Egypt have rocked the country's political order, and last night President Hosni Mubarak announced he would not run in the September presidential election. Four experts—Francis Fukuyama, Ryan Crocker, Maajid Nawaz and Amr Bargisi—weigh in on where Egypt should go from here.
• U.S. Firms, China Are Locked in Major War Over Technology. A titanic battle is under way between U.S. business and China, a battle reflected in President Barack Obama's State of the Union address last week and destined to dominate relations between the two countries for years. At issue: Innovation. China's bureaucrats have been rolling out an array of interlocking regulations and state spending aimed at making their country a global technology powerhouse by 2020. The new initiatives—shaped by rising nationalism and a belief that foreign companies unfairly dominate key technologies—range from big investments in national industries to patent laws that favor Chinese companies and mandates that essentially require foreign companies to transfer technology to China if they hope to sell in that market. To hear U.S. business executives describe it, Beijing's mammoth new industrial policy is like the Borg in "Star Trek"—an enormous organic machine assimilating everything in its path, in this case the inventions of other nations. Notably, China's road map, which is enshrined in the "National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020)," talks in those terms. China will build its dominance by "enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies." "It's a huge, long-term strategic issue," says a top executive at a U.S. technology firm operating in China. "It isn't just the crisis of the day for U.S. business. It's the crisis."

CNBC:

• After 2 Misses, Bankable 'January Barometer' May Be Back.

MarketWatch:

• Embarrassment of Riches by Andy Xie. Despite the dot-com bust, 9-11, the wars in the Middle East, the U.S. property bubble, the euro-zone sovereign credit crisis, the continuing stagnation of the Japanese economy — the first decade of the 21st century was the most prosperous, according to conventional measurements, in our lifetime. But the prosperity on paper isn’t reflected in the moods of peoples around the world. In fact, most people around the world say that they are dissatisfied with their economic plight. The poor quality of economic growth may explain the gap between economic indicators and social moods. The poor growth quality is reflected in (1) inflation of economic necessities, (2) rising debt levels for the support of living standards in the developed world, (3) rising property prices that puts housing out of reach for the middle class in the developing world, and (4) skyrocketing economic inequality that makes the economy dependent on the demand of a small, wealthy minority. The right path forward is slower but results in more equitable growth. The most important policy change should be to move away from using liquidity to boost economic growth. It is the most important cause of inflation and rising inequality.

Business Insider:

• 15 Stocks That People Are Shorting Like Crazy.

IBD:

• Caterpillar(CAT) Sees Growth in Developed World.

New York Times:

• Why Dinan Worries About Fate of Small Hedge Funds. For the head of a multibillion-dollar hedge fund, James G. Dinan worries a lot about the fate of the industry’s littlest players. Mr. Dinan, the chief executive and founder of York Capital Management, said in a speech on Monday that he wasn’t concerned that added regulation would hurt his bottom line, although he’s significantly beefed up his legal and compliance staff. Rather Mr. Dinan fears that the new rules will keep smaller players out of the hedge fund game — a critical group that keeps large institutions like York from getting lazy.
• China Is Poised to Raise Rates Again, Bankers Say. China’s government, increasingly worried about soaring inflation, plans to continue tightening its money supply and will probably raise interest rates again within the month. That is the forecast of economists and bankers with knowledge of policy makers’ views, who insisted on anonymity because of the political and diplomatic sensitivity of Chinese monetary policy.

Forbes:

• Earnings Season: 72% of Companies Have Beat Estimates.

CNN Money:

• Pressure Builds for Debt Reduction. The push to come up with a plan to reduce national debt got a bipartisan bear hug in the Senate on Tuesday. Three lawmakers who sat on President Obama's bipartisan debt commission -- Sens. Kent Conrad, Tom Coburn and Mike Crapo -- convened a meeting of more than 30 senators from both parties "to make sure everyone comes to consensus on how big the problem is and how real it is," Coburn told CNN.

Politico:

• Anti-Abortion Sting Hits Planned Parenthood. Anti-abortion groups released a video Tuesday that they allege shows a Planned Parenthood employee advising minors to provide false information in order to obtain an abortion. The video was shot by 22-year-old Lila Rose, an anti-abortion activist who has previously worked with James O’Keefe on undercover videos shot inside Planned Parenthood clinics. O’Keefe did a series of undercover sting videos on ACORN workers during the last presidential campaign. This most recent video, involves two activists, allegedly posing as sex traffickers, seeking advice on how to get STD testing, birth control and abortions for 14- and 15-year-old girls at a Planned Parenthood clinic in New Jersey. A clinic employee seemingly advises them on how to skirt reporting requirements and provides a phone number of another clinic where girls 14 and under can more easily obtain abortions. Anti-abortion groups have seized on the video, widely circulating it Tuesday afternoon, calling on Congress to defund Planned Parenthood.

USA Today:

• Fees For Home Mortgages Increase. The cost of getting a mortgage is rising as higher fees hit more borrowers, including those with stellar credit. For the first time since 2009, Fannie Mae and Freddie Mac are raising risk fees they charge lenders on loans they buy for resale to investors. The mortgage giants are also adding risk fees to more loans extended to people with stellar credit. To avoid a fee or to get a discount, most borrowers will need FICO scores of 740 or better and down payments of 25% or more. Lenders could absorb the cost, but most are expected to add it to loan costs within days, if they haven't already, says Cameron Findlay, LendingTree economist.

Reuters:

• EU Back Curbs on Commodity Speculation - Document. The European Union will pledge a crackdown on speculation in commodities such as grain to combat "unprecedented" price volatility, the EU's executive will say in a strategy document to be released on Wednesday, seen by Reuters. France's President Nicolas Sarkozy has made combating commodity price volatility a priority for his country's presidency of the G20 group of leading countries. "The volatility of prices of agricultural commodities has recently increased to unprecedented levels. This is the case both on EU and international markets, and on spot and futures markets," the Commission said in its strategy document.
• Broadcom(BRCM) Outlook Disappoints, Shares Fall. Chip maker Broadcom Corp on Tuesday forecast an increase in first-quarter expenses but a drop in revenue from the fourth quarter, and its shares fell 6 percent.
• Acme Packet(APKT) Q4 Profit Tops Street, Raises FY'11 View. Acme Packet Inc posted fourth-quarter results that topped analysts' estimates and raised its 2011 outlook above Wall Street expectations, sending its shares up 4 percent in after-market trade. Acme, which provides communication infrastructure for telecoms and businesses, raised its 2011 adjusted earnings forecast to about $1.05 a share from 99 cents-$1 a share. It also raised its full-year revenue view to about $300 million from $286-$287 million. Analysts on average expected earnings of $1.04 on revenue of $296.3 million, according to Thomson Reuters I/B/E/S.

Financial Times:

• Fed Passes China in Treasury Holdings. The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing, according to official figures. Based on weekly data released on Thursday, the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips. According to the most recent US Treasury data on foreign holders of US government paper, China holds $896bn and Japan owns $877bn.

Telegraph:

• IMF Raises Spectre of Civil Wars as Global Inequalities Worsen. The International Monetary Fund (IMF) has warned that "dangerous" imbalances have emerged that threaten to derail global recovery and stoke tensions that may ultimately set off civil wars in deeply unequal countries. Dominique Strauss-Kahn, the IMF's chief, said the economic rebound across the world is built on unstable foundations, with many rich nations still strapped in job slumps while the rising powers of China, India and Brazil already facing the threat of overheating. "It is not the recovery we wanted. It is a recovery beset by tensions and strain, which could even sow the seeds of the next crisis," he said. "Global unemployment remains at record highs, with widening income inequality adding to social strains," he said, citing turmoil in North Africa as a prelude to what may happen as 400m youths join the workforce over the next decade. "We could see rising social and political instability within nations – even war," he said.

Herald Sun:

• Al Qaeda Actively Seeking 'Dirty' Bombs - WikiLeaks Documents. AL-QAEDA is attempting to procure nuclear material and recruit rogue scientists in order to build a radioactive "dirty bomb," leaked documents published in Wednesday's Telegraph newspaper revealed. The cables, released by the WikiLeaks website, showed that security chiefs told a Nato meeting in January 2009 that Al-Qaeda was planning a programme of "dirty radioactive improvised explosive devices (IEDs)." The makeshift nuclear bombs, which could be used against soldiers fighting in Afghanistan, would contaminate the surrounding area for years to come. The leaked documents also revealed that Al-Qaeda papers found in 2007 convinced security officials that "greater advances" had been made in bio-terrorism than was previously feared. US security personnel were warned in 2008 that terrorists had "the technical competence to manufacture an explosive device beyond a mere dirty bomb."

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +.75% to +1.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 107.0 -2.5 basis points.
  
• Asia Pacific Sovereign CDS Index 119.0 -5.0 basis points.
  
• S&P 500 futures -.03%.
  
• NASDAQ 100 futures -.15%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (MAT)/.86
• (WHR)/2.30
• (HSY)/.61
• (TWX)/.62
• (AOL)/.56
• (IACI)/.33
• (MAN)/.60
• (AGN)/.89
• (NWSA)/.28
• (YUM)/.60
• (V)/1.20
• (BMC)/.80
• (CYMI)/.68
• (AVB)/1.01
• (VMC)/-.18
• (THQI)/.26
• (BYI)/.46
• (GMCR)/.17
• (MRO)/.96

Economic Releases
8:15 am EST

• The ADP Employment Change for January is estimated at 140K versus 297K in December.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,500,000 barrels versus a +4,836,000 barrel gain the prior week. Distillate supplies are expected to fall by -1,000,000 barrels versus a -140,000 barrel decline the prior week. Gasoline inventories are expected to rise by +2,000,000 barrels versus a +2,404,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.05% versus a -1.20% fall the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Duke speaking, Challenger Job Cuts for January, weekly MBA mortgage applications report and the (GNW) investor day could also impact trading today.
  

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