Wednesday Watch

Evening Headlines
Bloomberg:

• Egypt Generals Running Day Care Adds Profit Motive to Political Transition. The Egyptian military, which promises to steer the nation to a new democratic future after the resignation of President Hosni Mubarak, has its own economic interests to protect as well. The armed forces have a substantial stake in the civilian economy through a host of government-owned service and manufacturing companies, at least 14 of them under the auspices of the Ministry of Military Production. Their websites list product lines that include civilian goods. Military-run companies are in such businesses as janitorial services, household appliances, pest control and catering. El Nasr Company for Services and Maintenance, for instance, has 7,750 employees in such sectors as child care, automobile repair and hotel administration, according to its website. Other military companies produce small arms, tank shells and explosives -- as well as exercise equipment and fire engines. These companies add up to “a very large, unaccountable, non-transparent ‘Military Inc.,’” said Robert Springborg, a professor in the department of national security affairs at the Naval Postgraduate School in Monterey, California, and author of “Mubarak’s Egypt: Fragmentation of the Political Order.” The generals “will try to massage the new order so that it does not seek to impose civilian control on the armed forces,” he said. “It’s not just a question of preserving the institution of the Army. It’s a question of preserving the financial base of its members.”
• Peltz's Trian Offers to Buy Discounter Family Dollar(FDO) for Up to $60 a Share. Nelson Peltz, the activist investor pushing for faster growth at Family Dollar Stores Inc., offered to acquire the company for as much as $7.6 billion as consumer spending picks up. Peltz’s Trian Group offered $55 to $60 a share, a 36 percent premium over today’s closing price, for the second- largest U.S. dollar store chain, according to a regulatory filing today.
• Oil Trades Near 11-Week Low on Forecast of Gasoline Supply Gain. Oil traded near an 11-week low in New York after analysts forecast that gasoline supplies rose for a seventh week in the U.S., signaling a slow recovery in fuel demand in the world’s biggest crude-consuming nation. Futures slipped 0.6 percent yesterday after analysts surveyed by Bloomberg News estimated an Energy Department report today will show gasoline stockpiles climbed 1.85 million barrels in the seven days ended Feb. 11, matching the longest streak of gains since August. “Gasoline inventories here are very, very robust, and demand here is still very poor,” said Kyle Cooper, director of research for IAF Advisors in Houston. Brent and West Texas Intermediate are “divorced” because of near-record oil stockpiles at Cushing, the delivery point for the New York contract, he said. U.S. crude inventories probably rose for a fifth week in the seven days ended Feb. 11 as TransCanada Corp. completed an extension of a pipeline to Cushing, adding to the glut at the country’s biggest oil-trading hub, a Bloomberg News survey showed. TransCanada started deliveries to Cushing on Feb. 8 in the second phase of its Keystone pipeline project. Stockpiles at Cushing, Oklahoma, rose to the highest level since at least 2004 in the week ended Jan. 28.
• House Republicans Target Consumer Bureau Funding in Budget Bill. U.S. House Republicans moved to cut the budget of the nascent Consumer Financial Protection Bureau by 40 percent under a temporary spending bill being considered this week. Republicans lawmakers, who took control of the House after the CFPB was created, put a provision in the so-called continuing resolution that would limit Federal Reserve transfers to $80 million. That would be a sharp cut from the $134 million the bureau would get in President Barack Obama’s 2011 budget.
• Air Products(APD) Drops Airgas Bid After Court Loss. Air Products & Chemicals Inc. dropped its $5.9 billion hostile bid for Airgas Inc. after a Delaware judge upheld the packaged-gas supplier’s main anti- takeover defense.
• China Buying North Korean Iron Best Birthday Gift for Kim. North Korean leader Kim Jong Il turns 69 today, his country beset by international sanctions, livestock disease and the aftermath of floods. A rebound in trade with China may be the best birthday present he gets. North Korea’s exports to China jumped 51 percent to $1.2 billion last year, led by iron ore, coal and copper, Chinese government data show. China’s sales to its ally rose 21 percent to $2.3 billion from a year earlier, with supplies of wheat and oil helping ease chronic shortages of fuel and food. Two-way trade fell 4 percent in 2009, when the United Nations tightened sanctions after Kim’s regime carried out a second nuclear test. The revival in commerce contrasts with U.S. efforts to isolate North Korea after a year in which 50 South Koreans died in attacks that roiled currency and debt markets.
• Goldman Sachs(GS) Said to Close Fixed-Income Prop-Trading Group. Goldman Sachs Group Inc., the U.S. bank that relies on fixed-income trading for the largest portion of its revenue, will shut its Global Macro Proprietary Trading desk, a person familiar with the decision said. The eight-person desk, which trades currencies and stocks as well as products tied to interest rates and other fixed- income markets, will close in the days ahead, said the person, who declined to be named because the decision wasn’t public.
• China's consumer-price index may understate inflation, with a separate measure near 7% underscoring the case for higher interest rates, according to Nomura Holdings Inc. The gross domestic product deflator, calculated by subtracting real growth from nominal levels of expansion, climbed 6.76% in the final quarter of 2010, the fastest pace in two years and 2 percentage points above the consumer price index.
  The government should be concerned that inflation which has been largely driven by food costs is becoming more broad-based, said Rob Subbaraman, chief economist for Asia excluding Japan at Nomura in Hong Kong.
  

Wall Street Journal:

• Rebellion Seethes in Gulf. Protester Killed in Bahrain; Skirmishes in Yemen; Call for Rebel Executions in Iran. The Middle East's wave of popular revolts helped spur the largest street rebellion in years in a Persian Gulf monarchy, and the first to pit a Shiite Muslim majority against Sunni rulers—heightening the dilemma for the U.S. as it struggles to pursue its interests in the region.
• Chicago Population Sinks to 1920 Level. A larger-than-expected exodus over the past 10 years reduced the population of Chicago to a level not seen in near a century. The U.S. Census Bureau reported Tuesday that during the decade ended in 2010, Chicago's population fell 6.9% to 2,695,598 people, fewer than the 2.7 million reported back in 1920. The explosive growth of suburbs far outside Chicago produced huge gains in neighboring counties. Kane County grew by 27.5%, Will County by nearly 35% and Lake County by 9.2%, while DuPage grew a more modest 1.4%. This population shift to traditionally conservative counties could alter the balance of power in both the state house and the Illinois congressional delegation.
• Banks Go Straight to Public Borrowers. Banks are setting aside billions of dollars to do something that until now was rarely heard of: making big loans to cities, states, schools and other public borrowers that otherwise might have turned to the bond market. Banks are aggressively courting municipal borrowers with conventional loans for capital projects. J.P. Morgan Chase & Co.(JPM) is devoting billions of dollars to direct loans this year to both refinance deals and for new projects, according to a bank official. Last year, the bank made a few hundred million dollars of direct loans to municipalities. Now, the bank would consider making a single loan for hundreds of millions of dollars, the official said. It also is dispatching teams to explain the concept to wary public borrowers. Citibank(C) also is courting municipal borrowers with direct loans, according to several bond issuers. "This used to be unheard of," says Eric Friedland, managing director of public finance at Fitch Ratings, noting that in the past, banks would occasionally loan a municipality less than $1 million to finance projects too small for a bond offering. For bigger loans, they would form a syndicate with other lenders. It remains to be seen what land mines may be lurking for lenders and borrowers. Some municipalities are going through significant struggles, raising questions about whether they will prove good credits. And direct loans are less liquid, meaning banks can't sell them as easily as bonds.
• Senate OKs Extension of Key Patriot Act Provisions.
• U.S. Had Year of Warnings Over Egypt. As Critics Pointed to Signs of Unrest, White House Gave a Muted Rebuke.
• Grand Jury Investigates Karzai Brother. U.S. Federal Probe Risks Worsening Relations With the Afghan President; Mahmood Karzai Hires a Washington Lawyer.
• State Plans Anger Unions. Union leaders say overhauls of rules for public- and private-sector unions being considered in Wisconsin, Ohio and about a dozen other states threaten to accelerate the decline in membership nationwide and hurt organized labor's finances and political clout.
• Egypt and Iran. Why Tehran's thugs will be harder to depose than Hosni Mubarak. Iran's Green movement, the squelched democratic hope of 2009, isn't dead after all. Wearing green scarves and chanting "Death to the dictator!", tens of thousands turned out in Tehran, Shiraz and other Iranian cities Monday to demand political change. The size of the protests surprised and embarrassed the regime, but it's important to understand why revolution will be harder than in Egypt and Tunisia.

CNBC:

• Dell(DELL) Profit Leaps, Easily Tops Wall Street Targets. Dell earnings almost doubled and blew past Wall Street forecasts as corporations continued spending on technology hardware, pushing the shares higher in extended trading.
• NYSE(NYX) Merger 'Far From Done Deal': Economist. The plan to merge Deutsche Boerse with NYSE Euronext is “far from a done deal,” Benn Steil, a senior fellow at the Council of Foreign Relations and director of International Economics, told CNBC Tuesday.

MarketWatch:

• Diamondback Faces at Least $1 Billion in Redemption Requests. Investors in hedge fund Diamondback Capital Management LLC, which is struggling with fallout from an insider-trading investigation, have asked to pull $1 billion in capital out of the firm, a person familiar with the situation said Tuesday. The amount isn't final, and the tally could run higher as investors may put in redemption requests before the deadline later Tuesday.
• China Central-Bank Adviser Urges More Tightening. The People's Bank of China should lift interest rates and boost the ratio of funds banks must aside as reserves in an effort to contain inflation, a central-bank adviser said, according to a report Wednesday in the China Securities Journal.
• China Banks End First-Home Loan Discount. Many banks in the Chinese cities of Shanghai, Beijing and Shenzhen have stopped offering discounts on mortgage loans for first-time home buyers, the National Business Daily reported Tuesday, citing unnamed bank staff.

Business Insider:

• General Petraeus To Quit As US Commander In Afghanistan. Shocker form The Times Of London:

Zero Hedge:

• John Paulson's Interview With The Financial Crisis Inquiry Commission.
• Oaktree's $10 Billion Distressed Fund Returns Investor Capital, Runs Out Of Investing Ideas.
• Bloomberg Interviews Goldman's(GS) Rapaciously Bullish Jan Hatzius. (video)
• Rioting in Bahrain Escalates, Third Protester Dies In Police Clashes. (pics)
  

New York Times:

• SAC Capital's Cohen Opens Up. Steven A. Cohen likes Green Mountain Coffee(GMCR). The founder of SAC Capital Advisers, the $12 billion hedge fund in Stamford, Conn., sat for a rare wide-ranging interview with Paul Tudor Jones, another hedge fund manager, where he discussed his favorite stocks and a whole lot more.
• From Prison, Madoff Says Banks 'Had to Know' of Fraud. In his first interview for publication since his arrest in December 2008, Mr. Madoff — looking noticeably thinner and rumpled in khaki prison garb — maintained that family members knew nothing about his crimes. But during a private two-hour interview in a visitor room here on Tuesday, and in earlier e-mail exchanges, he asserted that unidentified banks and hedge funds were somehow “complicit” in his elaborate fraud, an about-face from earlier claims that he was the only person involved in the fraud.

Forbes:

• Bernanke Put Allows JPMorgan(JPM) to Post Profits on 96.9% of 2010 Trading Days. A scary figure was revealed at J.P. Morgan’s investor day presentation on Tuesday: the bank had a perfect trading record for the second half of 2010 and only lost money on 8 days out of 260 possible trading days for the full year. The New York-based bank made $76 million per day through its trading desks, 9.5% less than the average $84 million it made in 2009, a year when it recorded losses on 42 trading days. J.P. Morgan’s results, echoed by peers like Bank of America(BAC), Goldman Sachs(GS), and Citi(C), should send a chill down investors’ spines as large Wall Street banks capitalize on the so-called Bernanke-put.
• Apple(AAPL): Cheaper iPhone Could Expand Addressable Market By 6x.
  

CNN Money:

• Leaf and Prius Stomp the Volt on Greenest Car List.
• Emerging Markets: $13 Billion Exodus. In a sharp reversal of last year's trend, investors have been pulling money out of emerging market funds and piling into large-cap stocks in more developed economies. Investors have shifted more than $13 billion out of emerging market funds in the last three weeks alone, according to EPFR Global, which tracks fund flows and asset allocation data for financial institutions around the world. That includes $7 billion in the week ended Feb. 3, the biggest weekly outflow in three years. The money is flowing out of equity funds focused on countries such as Brazil, Russia, India and China. While the pace of outflows slowed last week, a total of $6.5 billion has come out of these funds so far this year.

CBS News:

• CBS News' Lara Logan Sexually Assaulted During Egypt Protests. On Friday, Feb. 11, the day Egyptian President Hosni Mubarak stepped down, CBS chief foreign correspondent Lara Logan was covering the jubilation in Tahrir Square for a "60 Minutes" story when she and her team and their security were surrounded by a dangerous element amidst the celebration. It was a mob of more than 200 people whipped into frenzy. In the crush of the mob, she was separated from her crew. She was surrounded and suffered a brutal and sustained sexual assault and beating before being saved by a group of women and an estimated 20 Egyptian soldiers. She reconnected with the CBS team, returned to her hotel and returned to the United States on the first flight the next morning. She is currently in the hospital recovering.

The Trentonian:

• Sources: Trenton, NJ Mayor Tony Mack at Center of FBI Probe.

LA Times:

• U.S. Agent Killed, Second Wounded at Mexico Drug Gang Blockade, Officials Say. The Immigration and Customs Enforcement agents, assigned to the Mexico City office at the U.S. Embassy, were driving toward the northern city of Monterrey when attacked, U.S. officials say.

USA Today:

• Burger Chain Stacked Puts iPads on Tables to Take Orders.
• Spiraling Inflation Threatens China's Stability. Inflation is dangerous for China's leaders because it erodes economic gains that underpin the Communist Party's claim to power. And it hits the poor majority hardest in a society where millions of families spend up to half their incomes on food. That is politically awkward as Beijing tries to enforce stability ahead of a once-a-generation handover of power next year to younger Communist Party leaders. Beijing has tried to mollify the public by paying food subsidies to poor families, holding down prices in university cafeterias and ordering local leaders to see that vegetable markets have adequate supplies. It has tried to diffuse public frustration by claiming that hoarding and price-fixing by speculators is partly to blame. But analysts say Beijing also failed to act quickly enough to head off inflation after it deflected the 2008 crisis by flooding the economy with stimulus money and bank lending. The economic rebound gave consumers more money to spend and banks are pumping out loans despite orders to curb credit. The headline inflation numbers hide even sharper increases in key items. In January, the price of fresh fruit soared more than a third from year earlier, while eggs rose 20%, the National Bureau of Statistics reported. At the Xinya Shopping Center, a supermarket on Beijing's east side, the price of sugar is up 80% over a year earlier, while high-quality rice costs 65% more, according to manager Wang Yongyi. "Since the second half of last year, we have been busily changing the price tags to mark the prices up," Wang said. "It seems that the more control we had from the government, the higher prices rise." Inflation could also spill over into Chinese export prices. That might raise costs for Western consumers but also could help countries such as Vietnam and India compete with China as suppliers of clothing, furniture and other low-cost goods. Global Sources, a company that connects Chinese suppliers with foreign customers, said this week that a survey of 232 Chinese companies found 74% of them raised prices last year — some by up to 20% — due to higher costs for materials and components. "China is steadily moving away from being the world's low-cost source of various products," the company said in a report released this week. A separate Global Sources survey of 385 foreign buyers last month found 31% were increasing purchases from Vietnam due to higher Chinese prices. "I hope the government can rein in the food price rises this year, or else people's lives will be greatly hurt," said Wang, the supermarket manager. "No matter how high prices go, people need to eat anyway, right?"
• 'Kill Switch' Internet Bill Alarms Privacy Experts. A raging debate over new legislation, and its impact on the Internet, has tongues wagging and fingers pointing from Silicon Valley to Washington, D.C. Just as the Egyptian government recently forced the Internet to go dark, U.S. officials could flip the switch if the Protecting Cyberspace as a National Asset legislation becomes law, say its critics.

Reuters:

• US Gasoline Demand Down 3% - MasterCard(MA). U.S retail gasoline demand has fallen for a second consecutive week, pressured by higher retail prices, MasterCard Advisors' SpendingPulse report showed on Tuesday. Average gasoline demand in the week to Feb. 11 dropped 3 percent from the previous week to 8.46 million barrels per day. Retail gasoline prices rose 3 cents last week to $3.13 per gallon, their first gain in four weeks. Last week's prices were up 19.5 percent from a year earlier and at their highest since October 2008, MasterCard said.
• Hedge Fund D.E. Shaw Cuts Fees - Source. D.E. Shaw & Co., one of the world's biggest and priciest hedge fund firms, has told investors that it plans to charge them less, an investor with the firm said on Tuesday. The New York-based firm, which oversees roughly $19 billion in assets, plans to lower its fees to a 2.5 percent management fee and a 25 percent performance fee, said the person, who was not permitted to speak about the matter publicly. Previously, the firm charged a 3 percent management fee plus a 30 percent performance fee. Most managers charge investors less, asking for a 2 percent management fee and a 20 percent performance fee.
• North American Potash(POT) Inventories Tighten Further.
  

Telegraph:

• BHP Billiton(BHP) Unveils $10 Billion Buyback as Profits Surge 72%. Net income was $10.5bn, or 188.6 cents a share, in the six months to the end of December, up from $6.1bn, or 109.8 cents a share, a year earlier, Melbourne-based BHP said on Tuesday night. That compares with the $10.2bn median estimate of nine analysts surveyed by Bloomberg News. With the $10bn buyback, chief executive Marius Kloppers joins his counterpart at Rio Tinto, Tom Albanese, in boosting shareholder returns as commodity prices rise. BHP said today it’s “cautiously optimistic” on the short-term outlook for the global economy.

Beijing Daily:

• Beijing's Communist Party approved local property control measures, citing a party meeting. The city will "strictly" implement loan and tax policies for homes.

Shanghai Securities News:

• China Banking Regulatory Commission issued a notice, warning about the risks in property loans and local financing vehicles. Chinese banks should prevent loans flowing into speculative property market investment and land purchases, citing the notice.

Evening Recommendations
Citigroup:

• Reiterated Buy on (MAS), target $18.
• Reiterated Buy on (MMC), boosted target to $35.

Morgan Keegan:

• Rated (SLB), (NE), (HAL), (NOV) and (CAM) Outperform.

Night Trading

• Asian equity indices are -.25% to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 108.50 +1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 121.50 + basis point.
  
• S&P 500 futures +.35%.
  
• NASDAQ 100 futures +.26%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CVC)/.41
• (DVN)/1.38
• (OC)/.18
• (DF)/.14
• (GENZ)/.83
• (OMX)/.10
• (WCG)/.52
• (DE)/.99
• (CMCSA)/.32
• (ANF)/1.32
• (PFCB)/.57
• (ITRI)/1.06
• (NVDA)/.16
• (ESRX)/.70
• (CLF)/2.22
• (NTAP)/.50
• (SNPS)/.40

Economic Releases
8:30 am EST

• Housing Starts for January are estimated to rise to 539K versus 529K in December.
• Building Permits for January are estimated to fall to 559K versus 635K in December.
• The Producer Price Index for January is estimated to rise +.8% versus a +1.1% gain in December.
• The PPI Ex Food & Energy for January is estimated to rise +.2% versus a +.2% gain in December.
  

9:15 am EST

• Industrial Production for January is estimated to rise +.5% versus a +.8% gain in December.
• Capacity Utilization for January is estimated to rise to 76.3% versus 76.0% in December.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of 2,000,000 barrels versus a +1,898,000 barrel gain the prior week. Distillate supplies are expected to fall by -400,000 barrels versus a +288,000 barrel gain the prior week. Gasoline inventories are estimated to rise by +1,850,000 barrels versus a +4,663,000 barrel increase the prior week. Finally, Refinery Utilization is estimated unch. versus a +.2% gain the prior week.

2:00 pm EST

• Minutes of FOMC Meeting.
  

Upcoming Splits

• (SFUN) 4-for-1
  

Other Potential Market Movers

• The weekly MBA mortgage applications report, BB&T Transports Conference, Leerink Swann Therapeutics Conference and the Sterne Agee Financial Institutions Investor Conference could also impact trading today.
  

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