Friday Watch

Evening Headlines
Bloomberg:

• Greek Lawmakers Must Back Cuts or Risk Euro Exit, Venizelos Says. Greek Finance Minister Evangelos Venizelos pressed domestic political leaders to yield to conditions for a bailout, saying a refusal would open the way for the country’s exit from the euro. Venizelos said his euro-area counterparts refused to approve a second aid package for Greece yesterday at an emergency meeting because the government fell short of austerity demands and because of a lack of assurances by Greek party leaders that they will stick to their commitments after elections due as soon as April. Another extraordinary assembly of the ministers was set for Feb. 15. “From today until the next meeting of the eurogroup, our country, our homeland, our society has to think and make a definitive, strategic decision,” Venizelos, 55, told reporters after the Brussels talks. “If we see the salvation and future of the country in the euro area, in Europe, we have to do whatever we have to do to get the program approved.” The standoff puts the spotlight on the leaders of the three Greek political parties backing the caretaker government of Prime Minister Lucas Papademos, a former European Central Bank vice president. Haggling over austerity measures between Papademos and the “troika” of the European Commission, ECB and International Monetary Fund stalled for days over pension cuts until the premier announced a “general political agreement” hours before yesterday’s Brussels meeting. Greece, which faces a 14.5 billion-euro bond payment ($19.3 billion) on March 20, has since July been seeking a new aid package to follow an initial rescue of 110 billion euros in emergency loans approved in May 2010. The new program foresees a loss of more than 70 percent for bondholders in a voluntary debt exchange and extra public aid of 130 billion euros. The Greek parliament is due to vote on the accord this weekend. “If our homeland, our people favor another policy that necessarily leads outside the euro area and thus outside European integration, we have to say that directly to ourselves and to our fellow citizens,” Venizelos said. “Nobody can hide behind another.”
• Draghi Slams 'Virility Statements' as Ackermann Shuns ECB Loans. European Central Bank President Mario Draghi lashed out at bankers who said tapping the ECB's three-year-loan program carries a stigma, after executives including Deutsche Bank AG's Josef Ackermann said they shunned the loans. “There is no stigma whatsoever on these facilities,” Draghi said at a press conference in Frankfurt yesterday. “Some have made some sort of statements that I would call statements of virility, namely it would be undignified for a bank, a serious bank, to access these facilities. Now let me say that the very same banks that made these statements access facilities of different kinds -- but still government facilities.”
  
• Greek Doctors Battle Hospital Superbug. Greek doctors are fighting a new invisible foe every day at their hospitals: a pneumonia-causing superbug that most existing antibiotics can’t kill. The culprit is spreading through health centers already weighed down by a shortage of nurses. The hospital-acquired germ killed as many as half of people with blood cancers infected at Laiko General Hospital, a 500-bed facility in central Athens. The drug-resistant K. pneumoniae bacteria have a genetic mutation that allows them to evade such powerful drugs as AstraZeneca Plc’s Merrem and Johnson & Johnson’s Doribax. A 2010 survey found 49 percent of K. pneumoniae samples in Greece aren’t killed by the antibiotics of last resort, known as carbapenems, according to the European Antimicrobial Resistance Surveillance Network. Many doctors have even tried colistin, a 50-year-old drug so potent that it can damage kidneys. “We’re not used to seeing people die of an untreatable infection,” said John Rex, vice president for clinical infection at London-based AstraZeneca, which is developing a new generation of antibiotics. “That’s like something in a novel of 200 years ago.”
• Chinese Recession May Pummel Commodities, Smead Capital CEO Says. China is at risk of falling into a recession by about 2015 that would reduce commodity prices as much as 70 percent, according to the chief executive officer at Smead Capital Management Inc. Commodities from copper to crude oil may drop 50 percent to 70 percent from current prices in three years to five years, Bill Smead, CEO of the Seattle-based mutual fund, said in an interview in Singapore. China, the world’s biggest consumer of energy, metals and grains, has a 30 percent chance of slipping into a recession as property prices fall, hurting local banks that made loans to developers and home buyers, he said. Smead, whose fund manages $170 million and has stakes in Starbucks Corp. (SBUX), McDonald’s Corp. (MCD) and Bank of New York Mellon Corp., doesn’t own natural-resource companies because commodity prices are “massively overvalued,” he said. “Commodities are currently 50 to 70 percent above their cost of production,” Smead said. “History shows prices tend to bottom near the production cost. That’s at about $50 to $55 a barrel for crude oil.” Companies and banks that financed China’s construction boom, which started in 2008, show signs of accumulating more debt than they can pay off, he said. China’s government debt, which may have risen to 20 trillion yuan ($3.14 trillion) by the end of 2010, or about 50 percent of its gross domestic product, is becoming a major constraint on its economic growth, research firm Beijing Fost Economic Consulting Company Ltd. said in December. “Local banks are woefully undercapitalized,” Smead said. “They financed all these developers when it was all build, build, build, build, build. Now, all these buildings are coming up and nobody wants them.” Local governments in China, prohibited from directly taking bank loans or selling bonds, have set up more than 6,000 financing companies to sidestep those rules and raise funds for building stadiums, roads and bridges, the National Audit Office said in a June report. Governments at provincial, city and county levels amassed 10.7 trillion yuan of debt by the end of 2010, the auditor said. Home prices fell for a fifth month in January, according to SouFun Holdings Ltd., the nation’s biggest real-estate website owner that began compiling the figures in July 2010. “We’re not negative about the long-term prospects for the Chinese economy,” Smead said. “But what needs to happen for the success story in China to continue is that they have to clean the system. And that’s what a recession will do.” He recommends buying so-called custody banks like Bank of New York Mellon Corp. (BK) and U.S. equities with low exposure to the Chinese market.
• China's Exports, Imports Fall as Surplus Surges. China’s exports fell and imports slid more than forecast in January, the first declines in two years, as a weeklong holiday disrupted trade and commodity prices dropped. Overseas shipments decreased 0.5 percent from a year earlier, the customs bureau said on its website today. Imports dropped 15.3 percent, compared with a median economist estimate for a 3.6 percent fall. The data may add to concerns that demand from China will be insufficient to help global growth withstand weakness from Europe’s debt crisis. Commerce Minister Chen Deming said yesterday January exports “cannot make us optimistic” and the International Monetary Fund cautioned this week a deterioration in Europe could cut China’s expansion almost in half this year. “Domestic demand was genuinely weak in January, while exports remained on a gradual downward trend,” said Yao Wei, a Hong Kong-based economist for Societe Generale SA. The decline in exports compared with the median estimate for a 1.4 percent drop in a Bloomberg News survey of 31 economists. The median analyst estimate was for a $10.4 billion trade surplus last month after a $16.5 billion excess in December and $6.46 billion a year ago. Imports fell for the first time since October 2009. Last year, purchases from overseas rose 51 percent in January from a year earlier; in January 2010, they surged 86 percent.
• Fed Plays Wall Street Favorites in Secret Bond Deals: Mortgages. The Federal Reserve secretly selected a handful of banks to bid for debt securities acquired by taxpayers in the U.S. bailout of American International Group Inc., and the rest of Wall Street is wondering what happened to the transparency the central bank said it was committed to upholding. “The exclusivity by which the process has shut out smaller dealers is a little un-American,” said David Castillo, head of sales and trading at broker Further Lane Securities LP in San Francisco, who said he would have liked to participate. “It seems odd that if you want to get the best possible price that it wouldn’t be open to anyone who wants to put in the most competitive bid.” After inviting more than 40 broker-dealers to take part in a series of auctions last year, the Federal Reserve Bank of New York asked only Goldman Sachs Group Inc., Credit Suisse Group AG (CSGN) and Barclays Plc (BARC) to bid on the full $13.2 billion of bonds offered in two sales over the past month. The central bank switched to a less open process after traders blamed the regular, more public disposals for damaging prices in 2011. This week, Goldman Sachs bought $6.2 billion of bonds in an auction. The selectivity has irked firms that weren’t also given the chance to profit from the auctions, and raises the question of whether the Fed got the highest price for U.S. taxpayers, who gave insurer AIG a $182.3 billion bailout. The New York Fed resumed its sales of the assets in January after the market recouped a portion of last year’s losses. “The purpose should be to get the best price for the taxpayer,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors. “Anybody knows the more bidders the better, so it’s a little hard to understand why they would essentially pick potential winners and losers. That smacks of crony capitalism.”
• Gross Raises Holdings of Treasuries to Highest Since 2010. Pacific Investment Management Co.’s Bill Gross, a year after banishing U.S. government debt from the world’s biggest bond fund, increased his holdings of Treasuries to the highest level since July 2010. Gross increased the proportion of U.S. government and Treasury debt in Pimco’s $250.5 billion Total Return Fund in January to 38 percent from 30 percent in December, according to a report placed on the company’s website.
• Senate Democrats Split Over Obama's Contraception Rule. The Obama administration’s decision to issue a contraception-coverage rule without a broad exemption for religious groups is creating an election-year split among Senate Democrats, with some Catholics in the party joining Republicans in calls to modify or scrap it. Senator Joe Manchin, a West Virginia Democrat up for re- election in November, introduced a bill today that would block the federal government from requiring health insurance plans to cover contraception if the purchaser opposes it for religious or moral reasons. “I feel it’s wrong, the direction and the position that the administration is taking,” Manchin said. “I think it needs to be rebuild, return, and let’s go back to where we were.” Some other Catholic Democrats in the Senate, including John Kerry of Massachusetts and Claire McCaskill of Missouri, said they want the administration to adjust its rule.
• U.S. Banks Face More Costs After $25 Billion Mortgage Deal. Bank of America Corp.(BAC) and other U.S. lenders’ settlement over foreclosure lapses leaves the firms vulnerable to years of litigation and billions of dollars in liabilities for their roles in the housing collapse. Government officials can still pursue claims tied to the packaging of loans into securities, criminal-enforcement actions and fair-lending violations, U.S. Attorney General Eric Holder said today in a press conference. “It’s a big check with narrow immunity,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and now an analyst with FBR Capital Markets in Arlington, Virginia. “You get the state attorneys general off your back, but you’re not getting immunity from securitizations, which could come with their own steep cost down the road.” “Because of the narrow nature and the fact that the banks didn’t get the widespread assurances they were seeking, this was mostly meaningless,” said David Lykken, managing partner at Mortgage Banking Solutions, an Austin-based consulting firm. Regulators are “aggressive” on pursuing securities claims and created a task force to do so, said Department of Housing and Urban Development Secretary Shaun Donovan. The deal doesn’t protect banks from claims related to creating defective loans sold to government-owned Fannie Mae and Freddie Mac, he said. While banks have largely reserved for costs from today’s deal, bigger lenders could face as much as $2 billion a quarter in legal expenses from remaining issues, said Richard Bove, a bank analyst at Rochdale Securities LLC, in an interview with Bloomberg Television. He compared lenders’ predicament to that faced by tobacco and asbestos firms after government agreements. “What we’re going to see for the next five to seven years is these lawsuits going through court after court,” Bove said.
• P&G(PG) Said to Seek Termination of Pringles Sale to Diamond(DMND). Procter & Gamble Co. has decided it will seek to terminate its sale of the Pringles snack business to Diamond Foods Inc., said three people with knowledge of the situation, following the accounting probe that ousted Diamond’s chief executive officer.
• Oil Falls From Three-Week High as Global Economic Concern Counters U.S. Outlook. Oil fell from the highest settlement in three weeks, trimming a weekly gain, as concern that Europe’s debt crisis will worsen and curb global commodity demand countered signs of an economic recovery in the U.S. West Texas Intermediate futures declined as much as 0.5 percent, snapping the longest winning streak since December. Greece won’t receive financial aid until it implements an austerity plan, according to Luxembourg Prime Minister Jean- Claude Juncker. China’s exports fell for the first time in more than two years and OPEC cut its forecast for oil demand. The Organization of Petroleum Exporting Countries reduced its estimate of crude consumption for this year by 120,000 barrels a day to 88.76 million a day, the group’s Vienna-based secretariat said in its monthly market report yesterday. Supply from the 12 members increased to 30.9 million barrels a day last month, the most since October 2008, compared with estimated requirements of 29.55 million, the report showed.

Wall Street Journal:

• Google(GOOG) Developing Home Entertainment System. Google Inc. is developing a home-entertainment system that streams music wirelessly throughout the home and would be marketed under the company's own brand, according to people briefed on the company's plans. The effort marks a sharp shift in strategy for Google, which for the first would time would design and market consumer electronic devices under the Google brand.
• Treasury Explores Final Exit From Bank Bailouts. The Treasury Department is weighing the sale of stakes it owns in hundreds of smaller banks, a senior Obama administration official said, potentially accelerating the government's exit from the financial-system rescue. More than three years after the launch of the Troubled Asset Relief Program, the federal government still owns stakes in about 370 banks. While the biggest institutions, such as Citigroup Inc. and Bank of America Corp., have long since paid back their bailouts, many smaller banks have struggled to repay the government.
• Roads to Nowhere: Program to Win Over Afghan Fails. U.S. taxpayers paid Afghan entrepreneur Ajmal Hasas millions of dollars as part of a plan to win over villages in the country's insurgent heartlands. Instead, Mr. Hasas' seven-mile road construction project went so awry that his security guards opened fire on some of the very villagers he was trying to woo on behalf of his American funders. Mr. Hasas was a point man in a $400 million U.S. Agency for International Development campaign to build as much as 1,200 miles of roads in some of the Afghanistan's most remote and turbulent places.
• Budget Ducks Big Benefit Cuts. President Barack Obama's budget proposal Monday will offer several measures to trim the federal deficit in the next 10 years. But it would leave largely unchanged the biggest drivers of future government spending: the Medicare, Medicaid and Social Security programs that are expanding rapidly as the baby boom turns into a senior boom.
• As Syria Strikes Kill Scores, Opposition Seeks Backing. Syrian forces reportedly killed scores of people during the sixth straight day of attacks on the city of Homs, as opposition leaders and international alliances moved on disparate fronts in an attempt to resolve the conflict. Members from the Syrian National Council, an umbrella of opposition groups, met Thursday in Qatar, ahead of a weekend Arab League summit aimed at hashing out the next moves on Syria. Another opposition group met with leaders in Beijing.

MarketWatch:

• True Religion(TRLG) Profit Drops On Weaker Sales. True Religion Apparel Inc.'s TRLG -22.56% fourth-quarter earnings sank 8.4% as the jeans-maker saw weaker sales in its wholesale business, though its direct consumer unit showed strength. Shares slid 22% to $28.70 after hours as the company missed earnings and revenue expectations and as it gave a downbeat 2012 profit forecast.
• Insiders Are Selling Heavily. Commentary: July was last time insiders were equally as bearish.

Zero Hedge:

• Greece Is Nicht Sehr Happy With Frau Merkel.
• Schaeuble Blesses Gaspar: German FinMin Promises To Rescue Portugal.
  

IBD:

• Discovery's(DISCA) Animal Magnetism Draws In All Markets.

NY Times:

• In Europe, Stagnation as a Way of Life. For all the struggles that Greece has gone through to satisfy its demanding lenders, Europe’s troubles are not going away.

CNN:

• Fewer Young Adults Hold Jobs Than Ever Before. The share of young adults with jobs has hit its lowest level since the government started keeping records just after World War II. By the end of 2011, only 54.3% of those between the ages of 18 and 24 were employed, according to a Pew Research Center report released Thursday. And the gap in employment between the young and all working-age adults is roughly 15 percentage points -- the widest on record.

Reuters:

• EU's Barnier Expresses Concern About Volcker Rule. Michel Barnier, the European commissioner in charge of financial regulation, wrote U.S. regulators earlier this week raising concerns about the impact that a ban on most proprietary trading by banks could have on financial markets outside the United States. Barnier said that a proposed U.S. rule implementing the ban applies too broadly to foreign banks and markets and should instead focus only on trading activities that occur in the United States. He raised the concern that the proposal would make trading markets less liquid, which can raise the costs of borrowing and increase market volatility.
• LinkedIn(LNKD) Upbeat for 2012 on Members, Product Growth. Professional networking service LinkedIn's outlook for the current quarter and the full year surpassed expectations as the company banks on continued strong product and subscription growth after its fourth-quarter revenue beat estimates.

Financial Times:

• Germans Concerned Over Draghi Liquidity Offer. Mario Draghi has run into Bundesbank resistance over easing access to European Central Bank offers of three-year liquidity for eurozone banks, highlighting German unease over the measures the ECB president has taken to turn the region’s fortunes.

Telegraph:

• Quantitative Easing: Pensioners Are Paying The Price For Sir Mervyn's 'funny money'. George Osborne should come clean about the long-term effects of quantitative easing.
• Euro Crisis Averted? Don't Believe A Word Of It. Greece may be clinging on, but the eurozone’s real problems remain resolutely unaddressed. There’s nothing like the long Christmas break for calming things down. Back in early December, it looked as if the euro was on its last legs. Then everyone went on holiday, and by the time they got back, seemed quite to have forgotten what they were originally panicking about. No one honestly believes the eurozone crisis has been vanquished, but since early January there has been a lull in the storm and even a sense of beginning to get on top of things. The European Central Bank’s promise of unlimited liquidity for the stricken banking system seems to be turning things around. Successful resolution of the Greek debt talks yesterday has added to the impression of a crisis in retreat. Regrettably, it’s a view which is almost certainly wrong, both in political and economic terms. The ECB’s actions have bought time, but haven’t addressed the causes of the crisis. The problem of widely divergent competitiveness uncorrected by free-floating exchange rates remains exactly the same as before.
• Greeks Approve 'Tombstone' Austerity Deal With Troika. Politicians in Athens surrendered after a four-day stand-off and approved a tough austerity package in a bid to avoid bankruptcy, but a meeting of eurozone finance ministers said €325m (£273m) of extra cuts are needed.

TVI:

• Germany would be willing to consider adjusting terms of Portugal's aid program once "substantive decision" is made on Greece, Finance Minister Wolfgang Schaeuble tells Portuguese counterpart Vitor Gaspar, in video clip on website of Portuguese TV station TVI.

Globe and Mail:

• Camp Oil Sands: Alberta's New Economic Boom.

Global Times:

• Tibet officials 'Prepare for war'. Officials in the Tibet Autonomous Region have been ordered to recognize the "grave situation" in maintaining stability and to ready themselves for "a war against secessionist sabotage," months before a major plenary session of the Communist Party of China. The fight against the Dalai Lama clique is a "long-term, complicated and sometimes even acute" one, Chen Quanguo, regional Party chief of Tibet, was quoted by the Tibet Daily Thursday as saying. "For those irresponsible officials who walk away from their duties, fail to implement policies or are found guilty of dereliction of duty in maintaining stability, they shall be immediately removed from their posts, pending punishment, regardless of how great the contributions they made in the past or what kind of position they held," Chen warned in a strongly worded speech. Chen asked local officials to "improve the precautionary and emergency management mechanism," and ensure the government's ability to immediately and resolutely handle any emergency. "We should make every effort to win the tough battle to maintain stability, and seize the initiative in our fight against separatism," Chen said. Xu Zhitao, an official with the United Front Work Department of the CPC Central Committee, told the Global Times Thursday that "secessionists led by the Dalai Lama appeared more determined to plot conspiracies this year." The Dalai Lama clique had claimed that they might carry out some schemes to wreck the upcoming Tibetan New Year, which falls on February 22 this year, according to Xu.
  

People's Daily:

• European Unions implementation of the same aviation carbon tax across all economies hurts the aviation industry in developing nations, according to a commentary written by Zhong Sheng. Environmental standards should be set based on "common but differentiated responsibilities", the commentary said.

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are -1.0% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 159.0 -2.0 basis points.
  
• Asia Pacific Sovereign CDS Index 135.0 +.25 basis point.
• FTSE-100 futures -.15%.
  
• S&P 500 futures -.48%.
  
• NASDAQ 100 futures -.31%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ALU)/.08
• (AB)/.23
• (ACI)/.31
• (FLIR)/.45
• (IPGP)/.64
• (LH)/1.41
• (LYB)/.75
• (NYX)/.49
• (PPL)/.62
• (THS)/.87
  

Economic Releases
8:30 am EST

• The Trade Deficit for December is estimated to widen to -$48.5B versus -$47.8B in November.

9:55 am EST

• Preliminary Univ. of Mich. Consumer Confidence for February is estimated to fall to 74.8 versus 75.0 in January.

2:00 pm EST

• The Monthly Budget Deficit for January is estimated at -$34.0B versus -$49.8B in December.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke speaking, Fed's Pianalto speaking, (AEP) Investor Meeting, (MAT) Analyst Presentation and the (MU) Analyst Conference could also impact trading today.
  

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