Monday Watch

Weekend Headlines
Bloomberg:

- The global economy is likely to shrink for the first time since World War II, and trade will decline by the most in 80 years, the World Bank said today. The World Bank’s assessment is more pessimistic than an International Monetary Fund report in January predicting 0.5 percent global growth this year. The Washington-based World Bank didn’t provide a specific estimate in its report. World growth will be 5 percent below its potential, the bank said. Developing nations will bear the brunt of the contraction. They will face a shortfall of between $270 billion and $700 billion to pay for imports and service debts, the bank said. “We need to react in real time to a growing crisis that is hurting people in developing countries,” said World Bank President Robert Zoellick in a statement. Action is needed by governments and multilateral lenders “to avoid social and political unrest.”

- The Fall of China’s Billionaires. The entrepreneurs who fueled the booming economy are suffering as growth slows and their wealth plummets.

- Federal Reserve Chairman Ben S. Bernanke said the central bank will “forcefully” use every resource to restore financial-market stability and revive U.S. economic growth. “We will continue to forcefully deploy all the tools at our disposal as long as necessary to support the restoration of financial stability and the resumption of healthy economic growth,” Bernanke said in prepared remarks for an event today in Dillon, South Carolina. The Fed chief returned to his hometown to attend a ceremony naming a highway interchange after him.

- Schering-Plough Corp.(SGP) may be the next U.S. drugmaker to be scooped up by a rival seeking a larger experimental pipeline and products unhindered by imminent patent losses, analysts said.

- Bernard Madoff, the alleged mastermind of a $50 billion Ponzi scheme, may be nearing a guilty plea after federal prosecutors filed a notice that they intend to bring new criminal charges against the New York money manager.

- North Korea ordered its armed forces to be combat ready ahead of U.S.-South Korea military exercises that began today and threatened retaliation if its territory is violated, state-run media reported. The Korean People’s Army will “deal merciless retaliatory blows at them, should they intrude into the sky and land and seas” of the communist state, the Korea Central News Agency said in a statement early today, citing the army’s Supreme Command. In a separate statement, North Korea said it will cut off military communications with South Korea from today.

- Crude oil climbed to near the highest in six weeks in New York on speculation the Organization of Petroleum Exporting Countries will decide to reduce output in an effort to trim stockpiles and lift prices.

Wall Street Journal:

- The U.S. will press world leaders to boost emergency government spending to lift the global economy, risking a rift with European nations more concerned with revamping financial regulation. In President Barack Obama's first foray into economic diplomacy, Washington will urge the shift at a summit next month in London, U.S. officials say, as markets look for a unified plan of action from the world's most economically powerful nations. Washington's focus is at odds with France, Germany and other European nations that want the Group of 20 summit on April 2 to focus on rewriting rules governing financial markets. These nations say lax regulation was a major cause of the financial crisis and want to tighten their grip on hedge funds and private-equity firms.

- Lifting federal funding restrictions on embryonic-stem-cell studies will re-energize U.S. researchers and likely bring tens of millions of dollars to university labs. But researchers caution that it will still take years to determine whether the cells can be marshaled to treat diseases. President Barack Obama plans to announce Monday that he will end limits on funding for embryonic stem-cell research set by President George W. Bush in 2001. Obama administration officials say that under Mr. Bush, ideological beliefs, rather than purely scientific data, factored into personnel and policy decisions in areas such as climate change and health care.

MarketWatch.com:

- As waves of bad corporate and economic news sink values of one blue-chip company after another, among the few that continue to steam ahead is AT&T Inc.(T).

- Google Inc.(GOOG) is bracing for a long winter for Internet advertising, with an array of forecasters predicting that the worst market in years looms on the horizon. At the same time, however, Google (GOOG) is increasingly well positioned to tap at least one big spender to be found amid the economic malaise: the federal government.

- Microsoft’s(MSFT) business model is done.

CNBC.com:
- Investors such as Jon Najarian are hopeful that stocks could soar next week. They say we could see an explosion to the upside after a meeting scheduled for March 12th. On that date, a House financial services subcommittee plans a hearing on mark-to-market accounting rules, which have been blamed for forcing banks to report billions of dollars in write-downs.

- Apple(AAPL) Gets Crushed, For No Good Reason.

NY Times:

- Nationalize? Hey, Not So Fast by Alan S. Blinder.

- Two labor unions have pulled out of a broad coalition seeking agreement on major changes in the health care system. The action, by the American Federation of State, County and Municipal Employees and the Service Employees International Union, shows the seeds of discord behind the optimistic talk at a White House conference on health care this week. It also illustrates the difficulty of reaching agreement on two of the knottiest issues in the health care debate: whether to offer a new government-sponsored insurance option, and whether to require employers to help pay for employee health benefits. Labor unions and leading Democrats in Congress support both ideas. But insurers and many employers oppose them.

- They are larger-than-life figures at home and abroad, men who saw themselves as the Carnegies or Rockefellers of Russia. They are known as oligarchs, and they may soon be thrown into the dustbin of history by the economic crisis. Brash, young and wealthy, those insiders of post-Soviet business who escaped nationalization — to say nothing of exile or prison — under Vladimir V. Putin went on to make ever greater fortunes in the commodity boom of recent years. But few businessmen anywhere have fallen as hard or as fast in recent months.

LA Times:
- Reporting from San Luis Rio Colorado, Mexico -- Arrests of illegal immigrants on the U.S.-Mexico border have fallen to levels unseen since the 1970s as the ailing U.S. economy and enhanced enforcement appear to be deterring people from trekking north. The trend is apparent from San Diego to Brownsville, Texas, but is most dramatically felt on the border's busiest illegal immigrant corridors, which extend through the Mexican state of Sonora to Arizona and California.

Seeking Alpha:

- A Graphical Look ar Hedge Fund Leverage.

Politico:

- How Obama plays the pundits. When New York Times columnist David Brooks accused the White House last week of “shaking confidence with its hyperactivity,” no fewer than four senior administration officials reached out to explain — ever so politely — how he was wrong. Overkill? Maybe. But it’s what journalists have come to expect from an administration that’s trying much harder than its predecessor did to influence inside-the-Beltway opinion makers.

Forbes.com:

- Harvard: the Inside Story of Its Finance Meltdown. The superstars at Harvard defied markets for years-- until now. Here's the inside story of how they finally tripped up.

Washington Post:

- More than $9 trillion -- in taxpayer dollars -- has been pledged, committed, lent or spent by the federal government in response to the economic crisis. Some say that if the economy continues to deteriorate, trillions more might be necessary to prevent another Great Depression. Yet no one has investigated how this crisis happened. That is irresponsible. A comprehensive investigation is essential to prevent this from happening again.

Denver Post:

- Colorado lawmakers and lawyers went over the state's proposed new rules for oil and gas drilling in excruciatingly fine detail Friday, the first round of what is likely to be a contentious and wonky fight over a bill that would sign off on the rules. The regulations impose a number of new requirements and permit procedures on drilling companies designed to prevent hazardous chemical runoff, mitigate impact on wildlife and make drilling operations better neighbors. Industry advocates say the rules are partially responsible for causing drilling companies to pull nearly half the rigs once operating in the state. Supporters of the rules say a rough economy is much more to blame. Dozens of current and former energy workers rallied outside an industry forum Thursday to decry the rules as job-killers.

MercuryNews.com:

- Founded in 1959, Santa Clara-based National Semiconductor(NSM) is one the oldest and best-established technology companies in Silicon Valley. But it's going through a big change under the leadership of its outspoken chairman and chief executive, Brian Halla. The company, which makes integrated circuits that are used in everything from cars to cell phones, says its products help provide electronic gadgets with more vivid images, cleaner sound and longer battery life, among other benefits. But Halla believes that National needs to focus more heavily on what he calls "emerging qualify-of-life megatrends," such as improved solar panels, innovative medical diagnostics and sensors that can spot terrorists trying to sneak into the U.S. or smuggle in weapons of mass destruction.

The Economist:

- Barack Obama’s Budget. Wishful, and dangerous, thinking. If the rich people he is relying on to pay virtually all his bills end up a lot less rich than they were. Much as Mr Obama would like to shield the middle class, he needs to level with Americans: if they want a bigger government, one that will help them in all sorts of ways, they should be prepared to pay for it.

Reuters:

- Where, oh where, did AIG's bailout billions go? That question may reverberate even louder through the halls of government in the week ahead now that a partial list of beneficiaries has been published. The Wall Street Journal reported on Friday that about $50 billion of more than $173 billion that the U.S. government has poured into American International Group Inc since last fall has been paid to at least two dozen U.S. and foreign financial institutions. The newspaper reported that some of the banks paid by AIG since the insurer started getting taxpayer funds were: Goldman Sachs Group Inc, Deutsche Bank AG, Merrill Lynch, Societe Generale, Calyon, Barclays Plc, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, and Lloyds Banking Group. Morgan Stanley and Goldman Sachs declined to comment when contacted by Reuters.

- China Shipping (Group) Co President Li Shaode told Reuters on Monday that he had proposed that the government use some of its foreign exchange reserves on floating oil storage because the onshore tanks were full.

Financial Times:

- Falls in the value of financial assets worldwide might have reached more than $50,000bn, equivalent to a year’s global economic output, the Asian Development Bank will warn on Monday. Asia has been hit disproportionately hard, the bank will say, in a report that warns of many Asian stimulus plans lagging behind those of the leading global economies.

- Hank Greenberg, the former chief executive of AIG, has accused the US government of bungling the insurer’s rescue by imposing a high-interest loan and forcing the repayment of $30bn-plus to banks and partners. In a video interview with the Financial Times, Mr Greenberg, who led AIG for 38 years before being ousted in 2005 during a probe of its accounting practices, suggested the US authorities’ actions made the company’s break-up inevitable. “You’re not going to see an AIG – AIG will be gone, it will be broken up into many pieces,” he said days after the company, which is 80 per cent owned by the government, received its third bail-out in five months. Mr Greenberg attacked the government’s decision last November to pay out more than $30bn to institutions that had purchased AIG’s insurance on mortgage-backed securities. He argued that although the value of those collateralised debt obligations had fallen sharply – and AIG had suffered big losses on them – the counterparties, which are believed to include Goldman Sachs, Deutsche Bank and other Wall Street names, had the full value of their investments returned. “Christmas came early for many of them. It was a gift,” Mr Greenberg said. Asked whether he thought shareholders and taxpayers were unfairly subsidising the company’s counterparties, he replied: “I think that is one thing.”

- A huge expansion of global capacity for producing liquefied natural gas is set to bring additional volumes on to an already depressed global market. Plants scheduled to come on stream over the next year will increase global LNG production capacity by 30 per cent, putting downward pressure on natural gas prices worldwide, particularly in the US and Britain. Much of the surplus gas is likely to head for the US. LNG from Qatar costs about $2.50 per million British thermal units to deliver to America, according to Frank Harris of Wood Mackenzie, a consultancy. That makes it competitive in the US market, where the Henry Hub benchmark price was at a 29-month low of $3.93 per million BTU on Friday.

TimesOnline:
- Goldman Sachs(GS) has raised concerns about the standards of corporate governance in India by accusing the Government of siphoning off $20 billion (£14.1 billion) from India's largest oil company without consulting other shareholders. Goldman said that the funds had been diverted by the state-controlled Oil and Natural Gas Corporation (ONGC) via “ad-hoc cash withdrawals” over five years to subsidise loss-making government-owned refiners. “Despite repeated objections raised by investors and more recently by independent directors on ONGC's board, there has not been headway on this issue,” Goldman analysts said. “The market appears to have got used to this practice by ONGC promoters [controlling shareholder], while similar issues in privately run companies would likely cause serious concern.” The allegations come at a sensitive time for the Government, which is struggling to restore investor faith in the wake of a £1 billion fraud at Satyam, the IT outsourcer.

Welt am Sonntag:

- Lloyd Blankfein, chief executive officer of Goldman Sachs(GS), said US dollar gains versus the euro reflect market uncertainty about the European Union’s commitment to support financially strapped member states. “The question is how will the European Union react to the problems of its weaker member states,” Blankfein said.

Handelsblatt:

- Deutsche Bank AG continued its revenue growth trend last month, citing CEO Josef Ackermann. January revenue was $3.6 billion and “developments in February confirmed this trend,” Ackermann said.

O Estado de S. Paulo:

- Brazilian companies had about $30 billion of losses related to foreign-currency contracts after the real weakened against the US dollar, citing a central bank report.

South China Morning Post:

- More than 3,000 Hong Kong factories in the Pearl River Delta region are closed or idle because they have no orders, despite expectations that they would have reopened by now after an extended Lunar New Year holiday.

Haaretz.com:

- Israel is under increased pressure from the United States over settlement construction. In the past month, since Barack Obama was sworn in as U.S. president, Israel has received four official complaints from members of the new administration regarding various issues linked to West Bank settlements. A senior government official in Jerusalem told Haaretz that the complaints represent a gradual increase in American pressure vis-a-vis settlement activity.

- Israeli Military Intellience chief Amos Yadlin said Sunday at the weekly cabinet meeting that "Iran has crossed the technological threshold" in its quest for nuclear arms. "Arrival at military nuclear capability is a matter of strategy," Yadlin said. "Iran is accumulating hundreds of kilograms of enriched uranium at a low level and hopes to utilize the dialogue with the West in order to gain time, which is required in order to achieve the capability to manufacture a nuclear bomb."

Weekend Recommendations
Barron's:
- Made positive comments on (GOOG), (WYNN), (BAC), (NOC), (BMY) and (EMC).

Night Trading
Asian indices are -1.50% to unch. on avg.
S&P 500 futures -.10%.
NASDAQ 100 futures -.09%.

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Earnings of Note
Company/Estimate
- (AVAV)/.27

- (CMTL)/.44

- (PEGA)/.09

- (BPT)/2.93

Upcoming Splits

- None of note

Economic Releases

- None of note

Other Potential Market Movers
- The (TXN) Mid-quarter Update, Raymond James Institutional Investors Conference and the Stifel Nicolaus Consumer Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial 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 75% net long heading into the week.

Weekly Outlook

Click here for Wall St. Week Ahead by Reuters.

Click here for stocks in focus for Monday by MarketWatch.

There are a handful of economic reports of note and a few significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – None of note

Tues. – Wholesale Inventories, IBD/TIPP Economic Optimism, weekly retail sales reports

Wed. – Weekly EIA energy inventory report, weekly MBA mortgage applications report, Monthly Budget Statement

Thur. – Advance Retail Sales, Initial Jobless Claims, Business Inventories

Fri. – Trade Balance, Import Price Index, Univ. of Mich. Consumer Confidence

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – None of note

Tues. – Dick’s Sporting Goods(DKS), Brown-Forman(BF/B), Hovnanian(HOV), Kroger(KR)

Wed. – National Semi(NSM), Korn/Ferry(KFY), Navistar(NAX), American Eagle(AEO)

Thur. – Pacific Sunwear(PSUN), Aeropostale(ARO)

Fri. – None of note

Other events that have market-moving potential this week include:

Mon. – (TXN) Mid-quarter Update, Raymond James Institutional Investors Conference, Stifel Nicolaus Consumer Conference

Tue. – (ACIW) analyst day, (FIC) analyst meeting, Bernanke speaks on bank regulation, (CVX) analyst meeting, (TEL) meeting of shareholders, (DIS) meeting of shareholders, Raymond James Institutional Investors Conference, JPMorgan Aviation & Transportation Conference, Barclays Healthcare Conference, Deutsche Bank Hospitality & Gaming Conference, (AMAT) meeting of stockholders, (APC) investor conference, (ADI) shareholder meeting

Wed. – (COP) analyst meeting, (PL) investor conference, (BEN) shareholders meeting, Raymond James Institutional Investors Conference, Barclays Capital Healthcare Conference, JPMorgan Aviation & Transportation Conference, UBS Engineering & Construction Conference, Bank of America Consumer Conference, Merrill Lynch Consumer Conference, Merrill Lynch Cleantech Leaders Conference

Thur. – Oppenheimer Alternative Energy Conference, Bank of America Consumer Conference, (IT) investor day, (ITT) shareholders meeting

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week mixed as bargain-hunting, technical buying and diminishing financial sector pessimism offset more shorting, rising credit market angst and tax hike worries. My trading indicators are giving mostly bearish signals and the Portfolio is 75% net long heading into the week.

Market Week in Review

S&P 500 683.38 -7.03%*

Click here for the Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices
S&P 500 683.38 -7.03%
DJIA 6,626.94 -6.2%
NASDAQ 1,293.85 -6.10%
Russell 2000 351.05 -9.76%
Wilshire 5000 6,873.54 -7.31%
Russell 1000 Growth 308.51 -5.30%
Russell 1000 Value 336.67 -9.19%
Morgan Stanley Consumer 432.22 -5.04%
Morgan Stanley Cyclical 285.98 -13.73%
Morgan Stanley Technology 307.54 -3.65%
Transports 2,194.99 -12.17%
Utilities 296.89 -8.36%
MSCI Emerging Markets 21.10 -1.31%

Sentiment/Internals
NYSE Cumulative A/D Line 6,397 -47.25%
Bloomberg New Highs-Lows Index -1,972 -175.42%
Bloomberg Crude Oil % Bulls 50.0 +4.2%
CFTC Oil Large Speculative Longs 214,302 -8.46%
Total Put/Call .88 -9.28%
OEX Put/Call 1.14 +26.67%
ISE Sentiment 108.0 -20.0%
NYSE Arms .67 -60.35%
Volatility(VIX) 49.33 +6.43%
G7 Currency Volatility (VXY) 16.80 -4.82%
Smart Money Flow Index 6,903.50 -5.26%
AAII % Bulls 18.92 -22.14%
AAII % Bears 70.27 27.44%

Futures Spot Prices
Crude Oil 45.60 +3.54%
Reformulated Gasoline 133.25 -1.75%
Natural Gas 3.94 -6.20%
Heating Oil 122.94 -3.32%
Gold 942.70 -.07%
Base Metals 112.14 +6.15%
Copper 168.90 +9.50%
Agriculture 277.44 -.94%

Economy
10-year US Treasury Yield 2.87% -15 basis points
10-year TIPS Spread .85% -14 basis points
TED Spread 1.10 +8 basis points
N. Amer. Investment Grade Credit Default Swap Index 247.93 +12.40%
Emerging Markets Credit Default Swap Index 858.99 +3.97%
Citi US Economic Surprise Index -47.90 +11.30%
Fed Fund Futures imply 98.0% chance of no change, 2.0% chance of 25 basis point cut on 3/18
Iraqi 2028 Govt Bonds 45.35 +1.34%
4-Wk MA of Jobless Claims 641,800 +.3%
Average 30-year Mortgage Rate 5.15% +8 basis points
Weekly Mortgage Applications 649,700 -12.62%
Weekly Retail Sales -1.60%
Nationwide Gas $1.94/gallon +.06/gallon
US Heating Demand Next 7 Days 20.0% below normal
ECRI Weekly Leading Economic Index 105.20 -.28%
US Dollar Index 88.51 +.57%
Baltic Dry Index 2,167 +9.11%
CRB Index 209.59 -.94%

Best Performing Style
Large-cap Growth -5.30%

Worst Performing Style
Small-cap Value -11.1%

Leading Sectors
Gold +.84%
Semis -2.31%
Drugs -2.33%
Foods -2.92%
Restaurants -3.28%

Lagging Sectors
HMOs -14.17%
Airlines -15.44%
Gaming -18.89%
Oil Tankers -21.29%
Banks -22.93%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Finish Mixed as Gains in HMO, Airline, Paper and Construction Shares Offset Losses in Coal, Gaming, Financial and Technology Stocks

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In Play

Stocks Lower into Final Hour on Rising Economic Pessimism, Forced Selling, Greater Financial Sector Concerns, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Technology longs and Retail longs. I added to my (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, almost every sector is declining and volume is above average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 2.67% and is elevated at 51.45. The ISE Sentiment Index is low at 89.0 and the total put/call is about average at .89. Finally, the NYSE Arms has been running low most of the day, hitting .35 at its intraday trough, and is currently .99. The Euro Financial Sector Credit Default Swap Index is soaring 16.81% today to 194.33 basis points. This index is making another new record high. The North American Investment Grade Credit Default Swap Index is falling 1.36% to 247.93 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is rising .24% to 110 basis points. The TED spread is now down 353 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 3.97% to 78.50 basis points. The Libor-OIS spread is rising .41% to 104.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is dropping 4 basis points to .84%, which is down 180 basis points since July 7th. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .19%, which is down 1 basis point today. Market-leading stocks are under significant pressure today, sharply underperforming the broad market. This is likely the result of forced selling. As well, financials are continuing their freefall. Some gauges of investor angst still remain stubbornly low given the carnage that is taking place. Nikkei futures indicate a -173 open in Japan and DAX futures indicate a -34 open in Germany on Monday. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic pessimism, more shorting, higher energy prices, rising financial sector pessimism and tax hike worries.