Tuesday Watch

Evening Headlines
Bloomberg:

• Oil Decline's for First Time in Three Days After Qaddafi Resignation Offer. Oil fell for the first time in three days after a report that Libya’s Muammar Qaddafi offered to relinquish power prompted speculation fighting may ease in Africa’s third-biggest producer. Crude dropped as much as 0.9 percent after al-Jazeera reported the proposal that guaranteed safe passage for the leader and his family. The interim rebel council rejected the offer, the TV channel said, without stating how it obtained the information. An Energy Department report tomorrow may show U.S. crude inventories rose 1 million barrels last week, according to a Bloomberg News survey of analysts. Crude for April delivery fell as much as 97 cents to $104.47 a barrel in electronic trading on the New York Mercantile Exchange, and was at $104.95 at 2:01 p.m. Sydney time. Yesterday, the contract gained $1.02 to $105.44, the highest settlement since Sept. 26, 2008. Prices are 28 percent higher from a year ago.
• Metals Fall, Inflation Bonds Gain on Risk of Higher Rates, Unrest in Libya. Metals fell for a third day, Asian stocks fluctuated and inflation-linked bonds gained amid concern rising prices will lead China and the European Union to tighten monetary policy. Crude traded near a 29-month high after Libyan warplanes bombed rebels near an oil-export hub. Tin led the retreat, falling 2.8 percent on the London Metal Exchange, while nickel dropped 1.5 percent and lead declined 1.2 percent.
• China's 10% Growth Threatens Inflation of 10%: William Pesek. If any generalization can be made about China-watchers, it’s that they are an optimistic bunch. They scour government data, energy-use tables and factory output, finding loads to smile about. China can grow 10 percent a year forever. Events on the streets of Beijing offer a timely reality check. There, economists can find ample evidence that China may be approaching the limits of its ability to grow sustainably. Inflation is among the forces unnerving the masses, a phenomenon not unlike the one inspiring uprisings in the Middle East. China is plenty spooked by a smattering of domestic protests. Clampdowns on the Internet and the foreign media have been relentless. Yet it’s the increasing focus of Premier Wen Jiabao on inflation that serves as a warning to those used to nothing but good news from China. Overheating risks are rising before our eyes. The economy may be at a dangerous turning point, one where jumps in asset and consumer prices derail an impressive run. For a Communist Party obsessed with social stability, inflation is a clear and present danger. And it’s not obvious that Chinese officials get that point. If they did, they would be telegraphing big increases in China’s currency at least to get a handle on inflation expectations. For all the talk of five-year plans, China is making things up as it goes along. Its rise differs from Europe’s and the U.S.’s. Aside from scale, the internationalization of finance creates control problems with which western powers don’t have to contend. Easy-money policies from Washington to Frankfurt to Tokyo are boosting Chinese real-estate values. As they climb, slums are emerging in cities including Beijing and Shanghai. Migrant workers and cash-strapped urban youth are hard-pressed to find affordable places to live. An undervalued yuan doesn’t help. China’s $2.8 trillion of currency reserves is the most striking side effect of its state- capitalism model. It amasses ever-growing piles of U.S. debt to maintain a competitive exchange rate. While successful for now, the policy has three negatives: it inflates the money supply, creates trade tensions and prolongs an addiction to exports. What worries China skeptics is how things will play out when the proverbial music stops. The quality of growth matters as much as the pace. Massive investment is needed to sustain economic expansion, yet all too much of it is going to national champions whose returns might never materialize. Is China setting itself up for a bad-loan crisis? No one can say for sure. Yet China’s growing inflation challenge complicates things. It means the gradualist approach favored in Beijing won’t work this time. The danger, say economists such as Glenn Maguire of Societe Generale SA in Hong Kong, is that inflation may rise as high as 10 percent by, say, the third quarter. That would cause households tremendous pain and fuel social discontent. China has made it clear that it won’t tolerate the smallest of protests. It also is warning foreign journalists about covering these gatherings and blames reporters for causing trouble, not unlike leaders from Egypt to Libya. The latest chapter of the so-called Jasmine Revolution involves people showing their frustration by taking strolls in major Chinese cities on Sundays. Blaming the media is rarely a promising sign. It suggests a government more concerned with spin than substance. China should redouble efforts to treat the underlying cause of the turmoil, not the symptoms. China’s people want less inflation, more government accountability and greater egalitarianism. Its leaders want to blame the messengers. Not a good omen, as economic indicators go.
• Overseas investors sold the most Indonesian stocks in about six year after the central bank kept borrowing costs unchanged, raising concern that policymakers aren't doing enough to fight inflation. Overseas investors sold a net $672 million of shares on March 4, the most since May 30, 2005, stock exchange data show. The Jakarta Composite Index has lost 3.8% this year amid concern policy makers have fallen behind regional peers in taking steps to curb inflation. Faster inflation exacerbated by a surge in crude oil has threatened to sap consumer spending, which accounts for about two-thirds of the Indonesian economy. Inflation accelerated to a 21-month high of 7.02% in January.
• Obama Said to Pick Commerce Secretary Locke as China Envoy. President Barack Obama plans to nominate Commerce Secretary Gary Locke to be the next U.S. ambassador to China, an administration official said. Locke, 61, would replace Jon Huntsman, who submitted his resignation in January to take effect April 30. Locke, who is of Chinese ancestry, is a former two-term governor of Washington.
• U.S. Forms Criminal Task Force to Jointly Probe Deepwater Horizon Disaster. The U.S. Justice Department has formed the Deepwater Horizon Task Force to consolidate its investigation into possible criminal charges stemming from the drilling rig explosion that killed 11 workers and caused the worst offshore oil spill in U.S. history.
• China Faces 60% Risk of Bank Crisis by 2013, Fitch Gauge Shows. China faces a 60 percent risk of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices, according to a Fitch Ratings gauge. The assessment is from a macro-prudential monitor used by the ratings company, Richard Fox, a London-based senior director, said in a phone interview on March 4. Fitch sees a risk of “holes in bank balance sheets” should a property bubble burst, Fox said. China’s risk of a systemic crisis is based on the nation’s MPI3 classification, the highest of three risk categories, in a Fitch monitor begun in 2005. The indicator signaled crises in Iceland and Ireland and has been tested back to the 1980s, Fox said. Sixty percent of emerging-market countries downgraded to MPI3 face banking crises within three years, he said. China entered that classification in June. The indicator’s failures have included not sounding an alarm about the banking system in Spain, he added. The fallout from China’s lending spree may be bad loans totaling $400 billion, according to Hong Kong-based advisory firm Asianomics Ltd. China’s government is concerned at the risks posed by lending to local-government financing vehicles for stimulus projects. In his March 5 speech to lawmakers, Wen pledged a “comprehensive audit” of local-government debt, while the Ministry of Finance said separately that “local governments face debt risks that can’t be overlooked.”
• Global Hedge Fund Assets May Hit Record $2.25 Trillion, Deutsche Bank Says. Global hedge fund assets may reach a record $2.25 trillion by year-end on increasing capital inflows and performance gains, according to a Deutsche Bank AG (DBK) annual investor survey. Capital inflows may quadruple to $210 billion this year from 2010, leading to a 10 percent expansion in assets, the survey released today showed. Assets rebounded to $1.917 trillion at the end of last year, closing in on the peak of $1.93 trillion in the second quarter of 2008, according to Hedge Fund Research Inc. data.
• CFTC is 'Out of Step' With Global Derivative Rulemaking, Commissioner Says. The Commodity Futures Trading Commission is “out of step” with U.S. and international efforts to write rules for the derivatives market, Commissioner Jill Sommers told bankers at a conference in Washington. CFTC and Securities and Exchange Commission proposals for governing new swap-execution facilities may lead to inconsistent regulation, Sommers said today in a speech at the Institute of International Bankers annual conference in the U.S. capital.
• Goldman's(GS) Pariah Status Fades With Broadbent's BOE Appointment. The Bank of England’s appointment of Goldman Sachs Group Inc. (GS) Senior European Economist Ben Broadbent to its Monetary Policy Committee shows governments are again looking to the firm for top decision makers, less than a year after it settled U.S. fraud claims. Broadbent, who has worked at Goldman Sachs since 2000, will replace Andrew Sentance at the end of May, the Treasury in London said yesterday. He joins a panel that has split four ways on policy for the first time since the central bank’s independence in 1997. Opposition parties last year pressed U.K. Prime Minister Gordon Brown to suspend Goldman Sachs from government work after the Securities and Exchange Commission sued the New York-based company in April. Brown said at the time he was shocked by the “moral bankruptcy” described in the complaint.

Wall Street Journal:

• Gadhafi's Circle Debates Regime's End. Col. Moammar Gadhafi's inner circle is debating whether the man in charge of Libya since 1969 should remain in power or relinquish his role, as his government invited rebels and tribal leaders to negotiate a political solution and Western nations took steps to prepare for a possible military intervention.
• West Shuns Libyan Crude. Big oil companies and Wall Street banks have stopped trading crude with Libya in response to sanctions against the country, threatening a near-shutdown of exports from the North African country and driving oil prices even higher.
• Obma Restarts Terrorism Tribunals. The Obama administration on Monday lifted its freeze on new military trials at Guantanamo Bay and for the first time laid out its legal strategy to indefinitely detain prisoners who the government says can't be tried but are too dangerous to be freed. With the policy shifts, Mr. Obama is acknowledging the difficulty he has faced in trying to close the prison at the Guantanamo Bay Naval Base in Cuba, which he had ordered on his second day in office.
• Teen Retailer American Eagle(AEO) Looking for New CEO.
• Google(GOOG) Buys Next New Networks to Bolster YouTube Partner Program. Google Inc. (GOOG) said Monday it has acquired web-video development startup Next New Networks as part of the Internet search giant's effort to help content creators develop new videos and make money on its YouTube video site.
• China Media Push Into the Web. As increasing numbers of Chinese go online, China's state media outlets are aggressively expanding beyond their traditional roles as propaganda outlets and competing with private Internet companies. Xinhua, the state-run news service, recently launched a search engine, Panguso.com, in partnership with state-owned telecommunications carrier China Mobile Ltd. The move comes a few months after People's Daily, a big state-run newspaper, started its own search engine, Goso.cn. The paper has also started its own Twitter-like messaging service. Meanwhile, China Central Television has launched its own online video platform, CNTV, which provides content from the monopoly broadcaster's 20 channels, as well as content from other online-video sites. But the state-run giants face challenges as they scramble to catch up with companies such as Baidu Inc., which operates China's largest search engine; Sina Corp., which runs China's most active Web-based messaging service; and Youku.com Inc., China's biggest video website.

Business Insider:

• Fixing Pensions Requires Cutting Existing Benefits.

Zero Hedge:

• Ted Kaufman's Friday Hearing Explains Everything That is Broken With the US Financial System. The insights proffered by the panelists and the witnesses, while nothing new to those who have carefully followed the generational theft that has been occurring for two and a half years in plain view of everyone and shows no signs of stopping, are truly a must read for virtually every citizen of America and the world: this transcript explains in great detail what absolute crime is, and why it will likely forever go unpunished. Key highlights from the transcript:

Forbes:

• Obama's Recycled Energy Misdirection. President Obama has been touring the country to talk about "winning the future." And at each event, he's promised to take "clean energy from imagination to reality." Conspicuously absent from all his recent speeches, though, has been any mention of climate change, global warming or carbon-dioxide rationing. No doubt this is the result of the political fiasco surrounding his favored cap-and-trade legislation. By way of background, shortly after then-Speaker Nancy Pelosi jammed it through the U.S. House of Representatives in 2009, cap-and-trade lost favor with the American people. They recognized it for what it was: a new open-ended tax, a massive job killer and a government power grab of the energy industry. Its supporters tried to put on a brave face, but the U.S. Senate, chock full of opponents on both sides of the aisle, never even brought it up for a vote.

CNN Money:

• GM's(GM) Painful Addiction? New Car Discounts Take Hold Again. Auto executives commonly refer to discount pricing of vehicles as an addiction: sure to bestow pleasurably higher sales volume, at least for awhile, but difficult to kick and potentially destructive over time.
• Speculators Double Down on Oil. Big traders are betting the ranch that oil prices will keep rising, testing the pain threshold of an economy that is not exactly setting records as is. Large noncommercial speculators – firms that play the futures markets without taking delivery – added to their long position in West Texas Intermediate crude by 50,200 contracts last week, according to Commodity Futures Trading Commission data. The surge of speculative money into the oil futures pits shows that big financial players are expecting the price of WTI crude to surge well above the recent $105 or so seen last week. If they are right, it will bring $4 gasoline a step closer. That will not be good news for most consumers, though it could help some big energy traders score big paydays, thank goodness. You would hate to see the talent fail to get its due. "It does not get any clearer which way Wall Street is trying to take oil," says Stephen Schork, who writes the Schork Report energy markets newsletter in Villanova, Pa. Schork notes that speculators now own nearly six times as many barrels of oil – 268,622 futures contracts representing nearly 269 million barrels – as can be stored at the WTI trading hub in Cushing, Okla. And since the CFTC numbers released Friday only go through last Tuesday, they likely underestimate the degree of speculative fervor building in the energy markets. Olivier Jakob, who covers energy markets for Petromatrix in Zug, Switzerland, estimates that traders added 40,000 to 50,000 crude contracts to their long positions in the second half of last week. That would take them up to seven times the Cushing capacity, a level he calls "extraordinary." The speculative fervor is so remarkable that the big trading firms now have nearly twice as many long contracts open as they did in 2008, when oil spiked to $147 in the summer, a development that either foreshadowed or caused the global economic meltdown, depending on how you look at it. All this seems to point to a further rise in oil prices, which will only add to the squeeze on consumers' wallets. If oil and other commodity prices continue skyward, it is only a matter of time till the economy cries uncle, it stands to reason. $4 gasoline this spring could spell slowdown in the fall or winter, Goldman Sachs economists say. "Our analysis shows the maximum impact of oil on growth occurring with a lag of 3-4 quarters, which would point to a peak impact in late 2011," Goldman's Jan Hatzius wrote in a note to clients Friday. This is not the ideal time for a big impact from higher oil prices, what with the United States banking on a growth spurt to get out from under a massive debt burden. That said, Jakob notes that prices could also fall, believe it or not -- with equally interesting ramifications. A huge level of speculative interest "is fine as long as fighting intensifies in Libya or protests continue in Bahrain," Jakob writes, "but on any signs of conflict resolution there will be historic level of speculative investments that will need to be unwound."

Reuters:

• Icahn Explores Sale of Federal-Mogul(FDML): Sources. Billionaire investor Carl Icahn is in the early stage of exploring a sale of Federal-Mogul Corp and has hired financial advisers to assist on the process, people familiar with the matter said.
• IMF: Signs of Overheating in Emerging Markets. Emerging market economies that powered the global recovery may be growing too fast for their own good as inflation pressures build, a top International Monetary Fund official said on Monday. China, Brazil and other fast-growing nations have struggled to contain inflation and control heavy inflows of investment money. Although the IMF has been warning for months of the risks of price pressure, the comments by the Fund's first deputy managing director, John Lipsky, suggested the IMF is growing increasingly concerned. "For the emerging economies, growing at 6.5 to 7 percent, their margins of excess capacity have been largely used up, and as a result we're starting to see incipient signs of overheating," Lipsky told Reuters Insider in an interview. Rising oil prices have compounded the inflation problem, but Lipsky said the IMF has not cut its growth forecast because it thinks the oil price spike will prove temporary. The latest worries about supply disruptions created a "fear factor" that drove oil above $100 a barrel, which if sustained would pose a bigger threat to growth. Rising food prices are also worrisome, particularly for poorer countries where food consumes a larger percentage of household budgets, he said. The cost of food was one of many reasons behind the recent upheaval in Egypt and Tunisia. "We have to be concerned even in places where there is no political upheaval," Lipsky said. "The social strains and real difficulties for poor residents in many economies is something that has to be attended to." Zhu Min, special adviser to the IMF's managing director, said China's loan growth was too strong and addressing that was key to safely slowing down the economy. "It's a fundamental challenge," he said during a presentation to an economists' group meeting in Arlington, Virginia. "So that's a concern, overheating. In China, slowing down economic growth is important."
• Job Outlook Muted in Developed Economies: Manpower. The employment traffic light is flashing yellow in most corners of the world. Job prospects have improved in 18 large economies from three months ago but are flat in eight countries and weaker in 13 others as employers exercise caution, unwilling to take on workers until economic growth accelerates. Hiring plans for the second quarter are unchanged in the United States and Britain, and are down in several Western European countries, according to a quarterly survey by global employment services company Manpower Inc.
• A Million Libyans Need Aid: UK, France Seek No-Fly Zone. Britain and France said they were seeking U.N. authorisation for a no-fly zone over Libya, as Muammar Gaddafi's warplanes counter-attacked against rebels and aid officials said a million people were in need. Al Jazeera television said rebels had rejected an offer by Gaddafi to hold a meeting of parliament to work out a deal under which he would step down. With civilians surrounded by forces loyal to Gaddafi in two western towns, Misrata and Zawiyah, fears grew of a rising humanitarian crisis if the fighting continued.
• Connecticut Hedge Fund Manager Pleads Guilty Over Ponzi Scheme. A Connecticut hedge fund manager pleaded guilty on Monday to running a multiyear Ponzi scheme that may have defrauded investors out of hundreds of millions of dollars, U.S. prosecutors said. Francisco Illarramendi, 42, pleaded guilty to five criminal counts including securities fraud, wire fraud and conspiracy to obstruct justice and defraud the U.S. Securities and Exchange Commission, U.S. Attorney David Fein in Connecticut said. Two other men, Juan Carlos Guillen Zerpa and Juan Carlos Horna Napolitano, are being detained following their arrests Thursday on conspiracy and obstruction charges, he added.
• Urban Outfitters(URBN) Q4 Profit Misses Estimates; Shares Down. Urban Outfitters Inc's quarterly earnings missed market estimates for the first time in two years as discounts and higher shipping costs snip margins, sending its shares down 9 percent.
• Shanghai Copper Slides, LME Extends Losses on Growth Woes.
  

The Australian:

• Australia's governing Labor party's primary voter support slumped to 30%, the lowest on record, after Prime Minister Julia Gillard proposed a new carbon pricing plan, a Newspoll opinion survey shows. Gillard's voter satisfaction rating dropped to 39% in the poll of 1122 people conducted between March 4 and March 6, from 50% two weeks before, the poll said.

South China Morning Post:

• China Slows Rate of Infrastructure Spending. Caution governs annual investment planning. The mainland expects to continue increasing spending on transport and infrastructure this year but at a more cautious pace, according to the Ministry of Transport. For its two largest ports, that means Shanghai plans moderate growth, while Shenzhen is reviewing its expansion on fears of slowing global trade.

Shanghai Securities News:

• Around 62% of a total 175 airports in China made losses last year, citing Liang Ningsheng, an official at the country's Civil Aviation Administration.

Evening Recommendations
Citigroup:

• Upgraded (EXPE) to Buy, target $29.
• Reiterated Buy on (EPB), target $41.

Night Trading

• Asian equity indices are -.25% to +.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 108.50 +1.0 basis point.
  
• Asia Pacific Sovereign CDS Index 119.25 +.5 basis point.
  
• S&P 500 futures +.37%.
  
• NASDAQ 100 futures +.27%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DKS)/.72
• (SSI)/.84
• (BF/B)/.87
• (FNSR)/.47
• (DMND)/.89
• (PEGA)/.40

Economic Releases
7:30 am EST

• The NFIB Small Business Optimism Index for February is estimated to rise to 95.0 versus a reading of 94.1 in January.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The weekly retail sales reports, $32 Billion 3-Yr T-Notes Auction, $23 Billion 1-Year T-Bills auction, IBD/TIPP Economic Optimism Index for March, (TXN) mid-quarter update, (IBM) investor briefing, (BAC) investor conference, (NYX) investor day and the (NVDA) analyst day could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and technology 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.