Thursday Watch

Evening Headlines
Bloomberg:

• Jarrett Says AT&T(T), Deere(DE) Not Undermining Health Law. Valerie Jarrett, a White House liaison to corporate America, said in an interview she doesn’t think businesses are trying to damage the image of the health- care overhaul with accounting charges tied to the law. “I have not observed an orchestrated effort,” said Jarrett, a senior adviser to President Barack Obama. Health-care charges filed by Boeing Co., AT&T Inc., Caterpillar Inc., Deere & Co. and other companies have generated a series of headlines since the March 23 bill-signing by Obama. The disclosures, tied to a 2013 elimination of a tax break on retiree drug benefits, ultimately may shave as much as $14 billion from U.S. corporate profits, according to an estimate by benefits consultant firm Towers Watson. Several of the companies notified the White House as soon as their regulatory filings were made public, Jarrett said. “We have a good working relationship with them and they didn’t want us to be caught by surprise,” she said. “Some of the ones who have the highest dollar amount I have spoken to directly, and I appreciated them giving me the heads up.” Chicago-based Boeing, the world’s second-largest commercial-plane maker, said today it plans to record a $150 million charge because of the law change. Xcel Energy, the owner of utilities that operate in eight U.S. states, said today it expects to record a $17 million charge. AT&T, based in Dallas, announced last week that it was taking a $1 billion charge. Moline, Illinois-based Deere, the world’s largest maker of farm machinery, announced a $150 million charge. And Peoria, Illinois-based Caterpillar, the world’s largest maker of bulldozers, has claimed a $100 million charge. “The companies who are reporting this charge against their net earnings aren’t pushing back, they’re following the law,” Jarrett said. The American Benefits Council, which represents more than 300 large employers, urged the White House and Congress earlier this week to reverse the retiree drug-benefit provision. Jim Dugan, a Caterpillar spokesman, said his company has raised concerns about the issues surrounding retiree benefits since late last year and plans to keep doing so. “Our intention is to continue to communicate with lawmakers and others about our concerns with the law, in an effort to make sure the impact of the law is understood,” he said in an e-mail. About 3,500 employers provided prescription drug coverage to 6.3 million retirees nationwide who qualified for a federal subsidy in 2008, according to New York-based Towers Watson.
• U.S. Trade Office Aims at China's Import Rules, Avoids Yuan. The Obama administration steered clear of the debate over China’s currency policy in an annual report on global trade barriers yesterday, focusing instead on procurement and import restrictions that harm U.S. companies. China’s proposal that its government agencies give preference to domestic companies when buying software and equipment discriminates against foreign competitors, the U.S. Trade Representative’s office said in the report on obstructions to selling U.S. goods and services worldwide. The trade office said it’s examining China’s regulations and tax policies.
  
• CFTC Approves Collateral Segregation for OTC Clearing. The U.S. commodities regulator approved rules to protect bank client assets that support cleared over-the-counter derivatives trades, giving a boost to CME Group Inc.(CME), the world’s largest futures market. The rules passed by the Commodity Futures Trading Commission mean banks will have to segregate the cash and other collateral investors pledge as margin to back credit-default or interest-rate swaps that are processed by a clearinghouse.
• Obama Won't Soon Cut Crude Imports, Hofmeister Says. President Barack Obama’s plan to expand offshore oil drilling won’t soon cut reliance on foreign crude and demonstrates “zigzag politics” that hinder energy development, said Royal Dutch Shell Plc’s former U.S. chief. Obama said today that he will allow drilling off the U.S. East Coast and will cancel development in Bristol Bay, Alaska. He said drilling also would be allowed 125 miles (201 kilometers) off the west coast of Florida if a congressional moratorium is lifted. The U.S. Minerals Management Service estimates that Alaska’s Outer Continental Shelf has 26.6 billion barrels of recoverable oil, almost seven times its projection for the East Coast, and 132.1 trillion cubic feet of gas. The decision to scrap drilling in Bristol Bay overturns former President George W. Bush’s action lifting a long-time ban. “Taking Alaska’s Bristol Bay out of consideration just a couple years after the Bush administration allowed it to be considered is demonstrating once again that zigzag politics controls our energy policy more than substantive long-term strategy,” John Hofmeister, the former Shell executive, said today in an interview in Houston. Obama said lease sales in Alaska’s Chukchi and Beaufort seas would be scrapped to allow further scientific study. Oil companies can’t operate effectively with “on-again, off-again” policies, said Hofmeister, who heads Citizens for Affordable Energy in Houston. “We’re pushing off what might be a hard choice to do Arctic drilling,” Hofmeister said. “Meanwhile, OPEC wins again.” He said Alaska is poised for major energy investments and has enormous resources that would benefit consumers.
• Lihir Gold Rejects A$9.2 Billion Offer From Newcrest.
• AIDS 'Next big Thing' Rests on Study of Gilead(GILD) Prevention Pill. Gilead Sciences Inc. may learn this year whether its drugs for treating HIV can also stop people from catching the virus in the first place. The approach may help curb the AIDS pandemic in poor countries and bring Gilead $1 billion a year in additional U.S. sales, said Josh Schimmer, an analyst at Leerink Swann & Co. in Boston. Most investors aren’t alert to the potential benefit, he said. Researchers are compiling the first data from 10 trials involving more than 20,000 people, and initial results may be available in July.
• Mortgage-Bond Yield Spreads Jump as Fed Exits Market. Yields on Fannie Mae and Freddie Mac mortgage securities jumped by the most relative to benchmark rates in five weeks as the Federal Reserve’s unprecedented buying of housing debt drew to a close today. The Fed’s $1.25 trillion of purchases in the $5.4 trillion market of mortgage securities guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae had helped drive yield premiums to the lowest on record. The difference between yields on Fannie Mae current-coupon 30-year fixed-rate securities and 10-year Treasuries increased 0.05 percentage point today to about 0.65 percentage point as of 4 p.m. in New York, according to Bloomberg data.
• Market Backlash Breeds State Capitalism, Green Sins: Interview. Michael Moore, the satirical filmmaker, says it. So does Richard A. Posner, the outspoken U.S. appeals judge. Both say capitalism has failed. And each, in his own way, reflects what international-law professor Marc De Vos calls “an anti-market psychology,” a Zeitgeist threatening economic growth and human progress. “This storyline -- of how markets have failed -- is getting ingrained in beliefs,” says De Vos, thumping the table during lunch at an Italian restaurant in Brussels. “It’s being exploited politically, and that will not stop anytime soon.”

Wall Street Journal:

• Laptop Killer? Pretty Close by Walt Mossberg. iPad Is a 'Game Changer' That Makes Browsing and Video a Pleasure; Challenge to the Mouse.
  
• Wal-Mart's(WMT) Grocery Sales Expand. Wal-Mart Stores Inc. for the first time has drawn more than half its annual U.S. sales from groceries, as the retailer's aggressive push in food and other consumables is paying off. Groceries accounted for 51% of Wal-Mart's $258.2 billion in U.S. sales last year, up from 49% the year before.
• Amazon(AMZN) Strikes Two Book-Pricing Deals. Facing the specter of Apple Inc.'s iPad launch, Amazon.com Inc. has agreed to halt heavy discounting of e-book best-sellers in new pricing deals with two major publishers. The e-book agreements, with CBS Corp.'s Simon & Schuster and News Corp.'s HarperCollins Publishers, mirror deals struck earlier this year with Apple for the iPad. Under what's called the agency pricing model, some new best sellers will be priced at $9.99 but most will be priced at $12.99 to $14.99.
• Credit Suisse May Buy Minority Stake in York Capital. Hedge-fund giant York Capital Management is in talks with Credit Suisse Group about the bank's interest in buying a minority stake of the $12 billion investment firm, according to people close to the matter.
• Ivy Asset Draws Probe Over Role With Madoff. Ivy Asset Management, which BNY Mellon Asset Management is closing, is under investigation for advice it allegedly gave related to investing with Bernard Madoff, according to a person familiar with the matter. New York Attorney General Andrew Cuomo's office has been investigating Ivy, a fund manager that places money with hedge funds, for about a year, and the investigation has come to a head in recent weeks, the person said. At issue among other things is whether Ivy failed to relay concerns it had about Mr. Madoff's firm.
• CEOs See Pay Fall Again. Total Compensation Slipped .9% in 2009, Survey Shows, as Recession Took Toll. The boss took another haircut as CEO compensation edged lower in 2009, the first time in two decades that pay declined for two consecutive years. The median value of salaries, bonuses, long-term incentives, and grants of stock and stock options for the chief executives of 200 major U.S. companies declined 0.9% to $6.95 million, according to an analysis for The Wall Street Journal by the Hay Group management consultancy.
• Would the Founders Love ObamaCare? The resistance to Obamacare is about a lot more than the 10th Amendment. The left-wing critics are right: The rage is not about health care. They are also right that similar complaints about big government were heard during the New Deal and the Great Society, and the sky didn't fall. But what if this time the sky is falling—on them.
• CBS, ABC Plan Free iPad Shows. CBS Corp. and Walt Disney Co.'s ABC are adapting episodes of their TV shows to be viewable free of charge on Apple Inc.'s new iPad, according to people familiar with the matter, offering Apple new TV content as it prepares for the multimedia gadget's Saturday release.

BusinessWeek.com:

• Sugar 'Crash' Isn't Over as Output Gains, Traders Say. Sugar prices will extend a slump, following the biggest quarterly plunge since 1985, as Brazil and India, the world’s largest producers, harvest bumper crops next season, analysts and traders said. Raw sugar will fall 9.6 percent to 15 cents a pound by early July as the bulk of Brazilian supplies reach the market, said Marcelo Dorea, a partner at Round Earth Capital in New York. The price will tumble to 13 cents at the end of the year, posting a 52 percent annual loss, said Mark Hansen at CPM Group. “Sugar has transitioned from a bullish scenario to a bearish scenario,” said Dorea, who began trading agricultural commodities in 1981. “Investors should sell into rallies. The market may correct itself a little bit more, but there isn’t anything that would bring sugar up to the levels of the mid- 20s.” Raw sugar tumbled as much as 47 percent from a 29-year high of 30.4 cents on Feb. 1, as importers including India, Pakistan and Egypt withdrew from the market. Today, the contract for May delivery plummeted 1.29 cents, or 7.2 percent, to 16.59 cents on ICE Futures U.S., the biggest drop since December 2008. Output in Brazil’s Center South, which produces about 90 percent of the nation’s sweetener and ethanol, will be a record 34.1 million metric tons in the season starting tomorrow, 19 percent higher than a year earlier, industry group Unica said today. Brazilian yields are beating forecasts as a waning El Nino brings dry weather, boosting prospects for a record harvest. “I had never seen a single mill operating in January before,” Biagi said in an interview on March 24. “This January, we had 90 of them working at full capacity.” The National Federation of Cooperative Sugar Factories Ltd. said today that India’s production may jump as much as 26 percent this year to 18.5 million tons. Output next season may be as much as 24 million tons, according to the Indian Sugar Mill Association. Hedge-fund managers and other large speculators reduced their net-long position in New York futures by 9.3 percent in the week ended March 23, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 155,463 contracts, down 15,890 contracts from a week earlier. Net-longs have dropped 23 percent since Feb. 2, the day after sugar reached the highest level since January 1981. The bullish wagers were up 19 percent from a year ago. “There’s still a very large speculative-long position in the market,” CPM’s Hansen said. “We need prices probably to fall further to see that washed out.”
• RIM(RIMM) Fourth-Quarter Sales, Shipments Miss Estimates.
  

NY Times:

• Hedge Funds' Mediocre Middlemen. Funds of hedge funds are rightly getting a dose of reality. Justifying their extra fees was always a tall order. Unremarkable returns and investor defections have made it harder. And the traditional fees — 1 percent of assets plus 10 percent of gains, known as 1-and-10, are fast becoming 1-and-zero. Hedge funds’ frequently mediocre middlemen eked out an average return of just 13 percent last year — just half the rate for the average multistrategy hedge fund, according to Morningstar. The average fund of funds has performed less well than the average hedge fund in all but two of the last 20 years. That record undermines the sales pitch. Funds of funds variously claim to offer investors valuable diversification, access to exclusive top-ranked hedge funds and due-diligence services that help investors avoid funds that are fraudulent or just poorly run. Yet diversification hasn’t led to superior performance. Although a few hedge funds are once again reluctant to take new investors, most are still happy to take capital from pretty much anyone these days. And the due-diligence claim has been damaged for the sector by the presence of Bernard Madoff’s Ponzi scheme in several portfolios. Large investors can often get better value by hiring consultants to vet a selection of hedge funds directly. Those with smaller wallets can find cheaper alternatives, like mutual fund vehicles that invest in hedge funds. From the perspective of hedge fund managers, funds of funds also proved to be flighty investors during the crisis. The fallout has accelerated one trend that was already under way — a decline in fees. Eurekahedge, a data provider, reports that average performance fees declined to 6.5 percent in 2009, from 10 percent in 2005. If some fund-of-funds experts at banks are representative of the industry, the reality is that incentive fees have already essentially disappeared.
• Crisis Panel Hot Seat Awaits Rubin and Prince. Get ready for Round Two in the search for answers about why the financial system nearly collapsed in 2008. The Financial Crisis Inquiry Commission said Wednesday that it would question a number of financial executives and government officials during three days of hearings next week. Among those scheduled to testify are Alan Greenspan, the former Federal Reserve chairman; Charles O. Prince, a former chief executive of Citigroup, and Robert E. Rubin, the former Treasury secretary who was once an influential member of Citi’s board.
• Senator Seeks to Limit Banks' Role in Derivatives. Senator Sherrod Brown, Democrat of Ohio, is seeking to restrict the Wall Street banks’ ownership of clearinghouses for over-the-counter derivatives. Under his proposed amendment to the financial overhaul bill, the large broker-dealers could be mostly shut out of this potentially lucrative business, raising concerns as to where liquidity would come from to clear the huge inflow of O.T.C. trades expected to hit the open market in the near future. Mr. Brown’s amendment would restrict shareholder ownership of a clearinghouse by the large banks to 20 percent in total. The proposal would also prohibit large financial institutions from controlling a majority of the board and would require regulators to set rules for self-dealing.
• Pfizer(PFE) Chief Says Growth Is Imminent.
  

Business Insider:

• Fannie And Freddie's Caving On Standards Has Officially Begun(NYC Condo Salvation Coming Soon).
• Remember SIVs? China Has 'Em And They're Hiding A Massive Credit Bubble. For awhile now we've been telling you about the work of professor Victor Shih who is warning about the $1trillion+ debts incurred by Chinese state governments. A new report from research from Independent Strategy has a very nice characterization of these local governments, and their analogue to the US crisis: they're the SIVs, the vehicles that allowed Citigroup (C) et. al. to mask the true state of their rot. According to Shih, the rot is located in the so-called Local Government Financing Vehicles (LGFVs) belonging to one of China’s many levels of local government ranging from towns and counties to cities and provinces. LGFVs are conduits, like the Special Investment Vehicles (SIVs) were for western banks, used by local government to borrow and spend on infrastructure and other projects (like real estate).
  

zerohedge:

• PIIGS Claims On European Banks: $1.5 Trillion; France Most On Hook In PIIGS Implosion.
• March Records Fastest Ever CMBS Delinquency Deterioration In History According to TREPP. On top of the previously announced record delinquency rate for Fannie, here comes some even worse news out of commercial real estate, which together with record high downtown vacancy rates, should be enough to push all REITs to 52 week highs tomorrow. RealPoint has just released its March CMBS delinquency data, according to which delinquencies hit an all time high 6%. Not to be ignored, according to TREPP this number is even worse, at nearly 8%, after the single biggest monthly spike in 30 day + delinquencies.

Pensions & Investments:

• S&P Lowers CalSTRS' Long-Term Credit Rating. CalSTRS’ long-term issuer credit rating was lowered by Standard & Poor’s to AA- from AA, the rating agency said in a statement.The decline is directly related to S&P’s action on Feb. 3 to downgrade California general obligation bonds to A- from A, David Hitchcock, S&P credit analyst, said in the statement.
• Ivy Asset Management, the unit of Bank of New York Mellon Corp. that invests in hedge funds, is closing down. BNY Mellon is dismissing Ivy employees and encouraging clients to move their money to two other hedge fund-of-fund units that it owns. Ivy's assets have declined from $15 billion at the end of 2006 to less than $5 billion as of Dec. 31, according to the publication.
  

Absolute Return + Alpha:

• Is Credit Ready for a Fall? The big run-up in credit prices over the past year has top hedge fund managers looking for short positions. King Street Capital Management, Cerberus Capital Management, Third Point, York Capital Management, Perry Capital and Eton Park Capital Management are among the top players that think credit may be overpriced right now.

USA Today:

• Verdict Is In on Apple(AAPL) iPad: It's a Winner.

Reuters:

• Illinois Launches Investigation of MGM Mirage. MGM Mirage will be investigated by the Illinois Gaming Board, after the state of New Jersey found that the casino company's Macau partner has links to Chinese organized crime.
• Micron(MU) Results, Margins Beat Street View, Shares Up.
• NY Fed Reveals Its Bear Stearns Portfolio.
• Ingersoll(IR) Sees $41 Mln Charge on Healthcare Reforms.
  

Financial Times:

• California's Treasurer Joins Default Swap Debate. California has joined a global push to lift the veil on derivatives, as questions abound about how they influence markets - particularly when debt issuers run into trouble. Bill Lockyer, the western US state's treasurer, has asked large banks that sell the state's bonds for information about credit default swaps, including each bank's role in making markets for California and other municipal CDSs, the types of clients and trading volumes. The growth of taxable "muni" bonds, led by California, is expected to increase the use of CDSs for munis because it has opened this market to large, international buyers who also trade CDSs. The state treasurer queried the price of California CDSs, saying the swaps "wrongly brand our bonds as a greater risk than those issued by such nations as Kazakhstan, Croatia, Bulgaria and Thailand". That could affect state borrowing costs, he said. According to the DTCC, the number of CDS contracts on California has risen from 160 to 422 in the past year.
• Dimon Attacks 'Demonisation' of Big Banks. Jamie Dimon on Wednesday attacked the “demonisation” of large banks by politicians, arguing that multinational groups need large financial institutions to thrive in global markets. In his annual letter to shareholders, the JPMorgan Chase chief mounted a defence of the role played by banks in the economy and criticised politicians for taking “punitive efforts” against the sector without distinguishing between good and bad performers. “We have to stop slipping into a cacophony of finger-pointing and blame,” Mr Dimon wrote in his letter, an annual tradition inspired by Warren Buffett, one of his heroes. “While bad actors always should be punished, we also should note that not all who got into trouble were irresponsible.”

Telegraph:

• PIMCO Fears UK 'Debt Trap'. The US bond fund PIMCO has warned that Britain risks a vicious circle of rising debt costs as global investors demand a penalty fee on gilts to protect against inflation.Bill Gross, the fund's chief and emminence grise of bond vigilantes, said the UK was on its list of "must avoid" countries along with Greece and others in eurozone's Club Med. The flood of British debt is likely to "lead to inflationary conditions and a depreciating currency", lowering the return on bonds. "If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap," he wrote in his April monthly note.
• Government Must Welcome the Private Sector for the Health of the Nation. Care for the elderly has once again been brushed aside by Labour. One of our biggest problems shoved back into the Downing Street filing tray marked "too difficult" – a pile of paper tottering over. No one's pretending insurers have all the answers but at the moment the state provides cover for about 65pc of society's addressable risks when it comes to things like health care provision and care for the elderly, the private sector 35pc. That needs to be reversed if our public finances are ever going to be sane again.

Evening Recommendations
Citigroup:

• Reiterated Sell on (RIMM), boosted target to $55.
  

Night Trading

• Asian indices are +.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 98.0 +1.5 basis points.
• S&P 500 futures +.20%
• NASDAQ 100 futures +.12%

Morning Preview Links

Earnings of Note
Company/Estimate

• (KMX)/.24
• (SCHL)/-.11
• (WOR)/.21

Economic Releases
8:30 AM EST

• Initial Jobless Claims for last week are estimated to fall to 440K versus 442K the prior week.
• Continuing Claims are estimated to fall to 4618K versus 4648K prior.
  

10:00 AM EST

• ISM Manufacturing for March is estimated to rise to 57.0 versus a reading of 56.5 in February.
• ISM Prices Paid for March is estimated at 67.0 versus 67.0 in February.
• Construction Spending for February is estimated to fall -1.0% versus a -.6% decline in January.

Afternoon

• Total Vehicle Sales for March are estimated to rise to 12.0M versus 10.36M in February.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bullard speaking, Fed's Dudley speaking, Challenger Job Cuts report and the weekly EIA natural gas inventory report could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and commodity 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 day.

Stocks Lower into Final Hour on Tax Hike Fears, Profit-Taking, More Shorting, Rising Sovereign Debt Angst

Broad Market Tone:

• Advance/Decline Line: Slightly Lower
  
• Sector Performance: Most Declining
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 17.60 +2.74%
  
• ISE Sentiment Index 124.0 unch.
  
• Total Put/Call .88 +3.53%
  
• NYSE Arms 1.21 -18.54%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 87.73 bps +1.68%
  
• European Financial Sector CDS Index 74.67 bps +1.68%
  
• Western Europe Sovereign Debt CDS Index 79.67 bps +4.46%
  
• Emerging Market CDS Index 231.70 bps +.87%
  
• 2-Year Swap Spread 17.0 bps +2.0 bps
  
• TED Spread 14.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .15% +1 bp
  
• Yield Curve 282.0 bps +1 bp
  
• China Import Iron Ore Spot $155.0/Metric Tonne +.91%
  
• Citi US Economic Surprise Index +33.80 -2.1 points
  
• 10-Year TIPS Spread 2.26% +4 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +41 open in Japan
• DAX Futures: Indicating +5 open in Germany

Portfolio:

• Slightly Lower: On losses in my Retail and Tech long positions
  
• Disclosed Trades: None
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bearish as stocks move to session lows into the final hour. On the positive side, Oil Service, Gold, Energy and Airline stocks are especially strong, rising .5%+. (XLF) is outperforming today. The 10-year yield is pulling back -3 bps on the ADP report. On the negative side, Education, Retail, Homebuilding, Hospital, I-Bank, Networking, Defense, Internet and Oil Tanker shares are falling .75%+ on the day. The S&P GSCI Ag Spot Index is falling another -3.44% today and has plunged -19.2% since January 6th, which is a red flag for other commodities. The Citi Asia Economic Surprise Index is falling -17.4% today to +43.70, which is below its 200-day moving average for the first time during this recovery. The US sovereign cds is rising +10.0% to 38.50 bps and the Greece sovereign cds continues to move back up, rising another +2.1%. I suspect we could see further equity weakness tomorrow morning. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, more shorting, tax hike fears and rising sovereign debt angst.

Bear Radar

Style Underperformer:

• Large-Cap Growth (-.09%)

Sector Underperformers:

• Education (-.94%), Homebuilding (-.87%) and Hospitals (-.78%)

Stocks Falling on Unusual Volume:

• MWE, F, HEAT, LINC, APWR, AUTC, CEPH, BUCY and CAGC
  

Stocks With Unusual Put Option Activity:

• 1) NOV 2) NBR 3) THC 4) LO 5) DCTH
  

Bull Radar

Style Outperformer:

• Small-Cap Growth (+.32%)

Sector Outperformers:

• Oil Service (+1.25%), Gold (+1.20%) and Banks (+.50%)

Stocks Rising on Unusual Volume:

• STL, CDE, BVN, HDB, ESV, NFX, RIG, SWC, IVN, GEOY, ISIS, KMGB, SYNA, NWPX, GIVN, JOSB, DRIV, JDSU, WPPGY, PPDI, VSEA, RCRC, AMSC, GPOR, GMCR and MTG
  

Stocks With Unusual Call Option Activity:

• 1) UBS 2) SWC 3) MTG 4) MOT 5) F
  

Wednesday Watch

Evening Headlines
Bloomberg:

• Fed's Fisher Says U.S. Can't Ignore Effect of Deficit on Yields. Federal Reserve Bank of Dallas President Richard Fisher said the U.S. can’t ignore the effect of the growing federal deficit on Treasury yields and the outlook of investors. “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see,” Fisher said in the text of a speech today in Tucson, Arizona. “The markets, fearing the consequences of runaway deficit financing, have bid up longer-term nominal rates, resulting in a yield curve that is now historically steep.” Still, “we cannot turn a blind eye to the effect that growing government indebtedness has on investors’ confidence and Treasury yields,” said the bank president, 61, who has led the Dallas Fed since 2005 and doesn’t vote on the Federal Open Market Committee again until 2011. The Fed shouldn’t step in to buy Treasuries just to hold longer-term rates down, which would create the perception that policy makers are “monetizing the debt,” he said. “The good news is that we are beginning to see some rays of sunshine emerge from the leftover clouds of the frightful storm we have just experienced,” Fisher said. Even so, “the skies are far from clear,” with too many unemployed workers and a “precarious” housing situation, he said. The budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package. The Obama administration in February projected the shortfall would widen to $1.6 trillion this year.
  
• Britain's soaring interest bill is forecast to exceed 10% of revenue in four years, the most since Margaret thatcher was prime minister, an analysis of Treasury documents by the Institute for Fiscal Studies shows. Moody's Investors Service said this month that Aaa-rated sovereigns with financing costs at 10% or more of revenue exceed the bounds of "debt affordability." The IFS says Treasury figures indicate the ratio will reach 10.6% by March 2015. The projections underline the pressure on whichever party wins this year's election to reduce the budget deficit.
  
• G-8 Has 'Serious Doubts' About Iran Nuclear Program. Group of Eight foreign ministers said actions by Iran have deepened “serious doubts” about the peaceful nature of the country’s nuclear program, and they are prepared to take “strong steps” to show resolve on the issue. The G-8 foreign ministers, in a statement released today following a meeting in Gatineau, Quebec, urged Iran “in the strongest possible terms” to cooperate fully with relevant resolutions of the United Nations Security Council and the International Atomic Energy Agency. “Ministers agreed to remain open to dialogue, and also reaffirmed the need to take appropriate and strong steps to demonstrate international resolve to uphold the international nuclear non-proliferation regime and persuade Iran to build greater international confidence in the peaceful nature of its nuclear program,” according to the statement. The statement fell short of calling for sanctions against Iran.
• China May Shun US Treasuries, Sending Yields to 4.5%, SocGen Says. China may curb purchases of U.S. Treasuries this year as its first trade deficit in 17 years leaves it with fewer dollars to invest, causing yields to climb, according to Societe Generale SA. Maguire’s call clashes with the view of JPMorgan Chase & Co. and Barclays Capital analysts, who say it’s too early to conclude that China will run a sustained trade deficit. The debate highlights the potential vulnerability of U.S. borrowing costs to any shift in trade patterns for China, the biggest foreign holder of American government debt.
• Ford(F) Said to Plan Hybrid Lincoln to Bolster Last Luxury Line. Ford Motor Co. plans to expand the Lincoln luxury line by adding a hybrid model based on its top- selling Fusion sedan, two people familiar with the matter said. The hybrid Lincoln MKZ will be unveiled tomorrow at the New York auto show, said the people, who asked not to be identified because Dearborn, Michigan-based Ford hasn’t announced the details.
• Chavez Cash Crunch Looms on Oil, Morgan Stanley Says. Venezuela’s government may face a cash crunch as early as this year as oil production slumps amid stable prices, Morgan Stanley said today in a report. The country, which depends on crude for 94 percent of export revenue, has seen output plunge to 2.2 million barrels a day from 3.7 million in 1997, according to Morgan Stanley. Venezuela now faces the risk that oil prices won’t rise enough in coming years to offset declines in production, forcing it to use savings to fund spending, the report said. “Venezuela may be hard pressed to avoid its day of reckoning,” analysts Giuliana Pardelli and Daniel Volberg said. “If we assume that oil prices remain in the $80-$85 per barrel range, such a level is likely to be insufficient to offset the decline in production.” Investors bet that oil prices will stay close to $90 a barrel through 2015, according to data compiled by Bloomberg. Venezuela’s international reserves fell to a 10-month low March 29 after the central bank transferred $5 billion to President Hugo Chavez’s off-budget development fund. Cash is also being used up as investors pull out of the country and a drop in manufacturing increases reliance on imports bought with dollars, Morgan Stanley said.
• Obama's Health Beast Squashes State Experiments: Amity Shlaes. State attorneys general are filing lawsuits seeking to prove President Barack Obama’s health-care plan is unconstitutional. The litigation takes the spotlight away from something else about the states that matters. It is that states can be laboratories where the country experiments to ascertain which mix of taxes, incentives and public administration works best when it comes to health care. Obamacare threatens such experiments by superseding them. In doing so, the new federal program deprives the country not only of the experiments themselves but also of evidence that might cast doubt on the promises of the new legislation. In few states is the change as dramatic as in Indiana.

Wall Street Journal:

• Year's First CMBS Deal Arrives. The first commercial-mortgage-bond deal of the year is expected to be marketed to investors this week, according to sources familiar with the transaction. The offer is seen as a sign of investors' willingness to tolerate risk, despite the deteriorating fundamentals of commercial real estate, as long as a deal is accompanied by adequate protection and conservative underwriting. Royal Bank of Scotland Group, through its real-estate advisory business, will offer a $500 million security backed by existing loans that were refinanced and underwritten to stricter guidelines, the sources said.
• Trader's 'Nice Little Kiss' Tests Reach of Regulators. A series of phone calls between a Deutsche Bank AG bond salesman and a hedge-fund trader has landed the two men at the center of a courtroom test of how far federal regulators can go in pursuing insider trading.
• BP(BP) Begins Big Push to Revive Iraq's Oil. BP PLC Tuesday awarded $500 million in contracts to drill wells in Iraq's giant Rumaila oil field, the first step in a mammoth initiative by foreign oil companies to revive the country's energy industry. If successful, the effort at Rumaila and several other fields near Basra could be one of the largest expansions of crude-oil production ever achieved anywhere. Increased Iraq production could be the difference between a well-supplied global market with oil steadily trading below today's $82 a barrel and a tight oil market with triple-digit prices, struggling to meet rising Asian demand. "It could change the map of oil," says Paolo Scaroni, chief executive of Italy's Eni SpA, which is preparing to begin work on the giant Zubair field. The new drilling contracts are the beginning of a long effort by a dozen of the world's largest oil companies to revive Iraq's decrepit oil infrastructure and turn it into a rival of Saudi Arabia for world's biggest crude exporter, industry officials say. Iraqi officials say they plan to add 10 million barrels a day of oil production capacity by 2017. Iraq has an estimated 115 billion barrels of crude-oil reserves. At current prices, that is valued at $9.5 trillion. The bottom line is that the lure of working in Iraq—with its plentiful oil—is too great for most big oil companies to ignore. "It makes commercial sense for us to increase production as quickly as we can," said Toby Odone, a BP spokesman. BP and the South Oil Co. let contracts to drill 49 wells to Weatherford International Ltd.; a partnership between Schlumberger Ltd. and the state-run Iraqi Drilling Co.; and China's Daqing Oil Field Company Ltd., said Abdul Mahdy al-Ameedi, a senior official in the oil ministry. He said BP plans to increase production at Rumaila from 1.07 million barrels a day to 1.23 million barrels within 12 months. These contracts are the first of what is expected to be a wave of oil-field-service related work let by BP, Exxon, Royal Dutch Shell PLC, Eni, Lukoil OAO and China National Petroleum Corp. over the next few months. The companies have been awarded contracts to increase production at separate fields. Energy analysts at Sanford C. Bernstein recently wrote that developing seven major Iraq fields, including Rumaila and Zubair, would require $102 billion in investment. The development of so many enormous projects—most clustered within 50 miles of each other—will create an enormous demand for workers, engineers and drilling rigs. It will also require the construction of a giant infrastructure build out, including roads, ports, oil export facilities and water plants. Even a few million barrels a day of crude oil production capacity could have an enormous impact. The growth of Iraqi oil production and exports will play a "decisive role in shaping global oil markets," says Fatih Birol, chief economist of the Paris-based International Energy Agency, a watchdog for industrialized nations.
• Russia Boosts Security as Capital Mourns. Prime Minister Vladimir Putin vowed to "drag out of the sewer" those behind twin bombings that killed 39 people Monday in Moscow's subway, as officials pledged to stiffen penalties for terrorists and tighten security.

BusinessWeek.com:

• U.K. Climate Science 'Damaged' by Leaked E-Mails, Lawmakers Say. Britain’s global warming scientists damaged their reputation by “unacceptable” withholding of data in response to freedom of information requests, said a panel of lawmakers who probed the so-called climategate scandal. Parliament’s Science and Technology Committee said the University of East Anglia’s “culture of non-disclosure” in relation to its climate research may have broken freedom of information laws by failing to publish data sought by critics of global warming theory. “What was reprehensible is that this area of science is of such global importance economically and politically that there was not a culture of releasing all the data and methodology as a matter of course,” panel Chairman Phil Willis said in London before the report was released today. “That is how things should be in the future.” The e-mails from the university’s Climatic Research Unit allowed global warming skeptics, including U.S. Senator James Inhofe, a Republican from Oklahoma, to question data making the case that humans are causing worldwide increases in the temperature. “The disclosure of CRU e-mails has damaged the reputation of U.K. climate science and, as views on global warming have become polarized, any deviation from the highest scientific standards will be pounced on,” the committee wrote. The lawmakers also said that because a general election is due by June, they didn’t have enough time to hold an in-depth enquiry. They cleared Phil Jones, head of the school’s Climatic Research Unit, of wrongdoing, saying he acted “in line with common practice,” in not publishing all his methods and computer codes. Jones stepped aside from his post in December pending completion of an investigation. In one e-mail, he wrote of deleting files rather than handing data to skeptics. The lawmakers cleared Jones of dishonesty in one of the most widely-cited e-mails, in which he discussed a “trick” to hide the decline in one temperature record. Graham Stringer, one of the four members of the panel who attended the hearings and a lawmaker from the ruling Labour Party, voted against that conclusion. He argued that not enough evidence had been heard. The school said it welcomed the lawmakers’ “largely positive” report.
• Nissan Prices U.S. Leaf Battery Car to Challenge Prius Hybrid. Nissan Motor Co., aiming to be the biggest seller of electric cars, said its battery-powered Leaf will cost $25,280.

CNBC:

• Coach's(COH) Shares Still Have Room to Rise: Analyst.
• Wednesday Look Ahead: ADP More Important Than Usual.
  

Business Insider:

• Because Companies Said Obamacare Will Hit Them, Henry Waxman Is Launching A War On Accounting. Accounting basics: when a company experiences what accountants call "a material adverse impact" on its expected future earnings, and those changes affect an item that is already on the balance sheet, the company is required to record the negative impact--"to take the charge against earnings"--as soon as it knows that the change is reasonably likely to occur. This makes good accounting sense. The asset on the balance sheet is now less valuable, so you should record a charge. Otherwise, you'd be misleading investors. Obviously, Waxman is incensed because this seems to put the lie to the promise that if you like your current plan, nothing will change. But this was never true. Medicare Advantage beneficiaries are basically going to see their generous benefits slashed, retiree drug benefits suddenly cost more and may now be discontinued, and ultimately, more than a few employers will almost certainly find it cheaper to shut down their plans. If Congress didn't want those things to happen, it should have passed a different law. If Congress thinks that it made the right tradeoffs--or at least, justifiable choices--then our Congressmen should step up and accept responsibility for what they've done. At the very least, I think we can ask that they refrain from trying to force companies to join them in denying reality by threatening congressional investigation of any company who dares to notify investors that this thing is going to cost them money.

Chicago Tribune:

• Taking a Hatchet to Moderate Government. Go ahead, attack promoters of moderate government. Paint them as flakes, kooks and goons. Call them unhinged and unglued. Toxic, mean-spirited, shrill and dangerous. othing would please us more than your persisting in mislabeling or misunderstanding — the effect is the same — what angers the majority of Americans. Convince yourself that dissenters to your engorgement of government are doing it because they are racists and bigots. Don't give anyone credit for objecting to where you're leading the country because your path is misdirected. Please, please, continue your crusade to alienate more and more honest and worried Americans who see great danger in the extreme expansion that government has undergone in the last few years. You've already done a great job of dividing the country, but don't stop now. Seventy-eight percent, including 82 percent of independents, think government spending is out of control. Eighty-one percent are fed up with the growing deficit and 73 percent with government spending. Sure, deride the poll because it came from Fox News; ignore the clarity of American anger.

Politico:

• Now the Real Healthcare Fight Begins. Many liberals are euphoric about Congress passing health care reform. When President Barack Obama signed the most ambitious social legislation since President Lyndon B. Johnson's Great Society, the tide seemed to have turned for the Democrats. But this is not the end of the political struggle. Just the start of a new chapter. While outright repeal of health care reform — as many conservatives demand — seems unlikely, there is no guarantee this reform will stick. Future Congresses could erode or undercut the law. For there is a long history of major social legislation coming under attack post-enactment. New legislation, whether misunderstood or poorly designed, often can take several years to gain solid public support. Political sustainability is not automatic. One of the Democrats’ most embarrassing moments involved the Medicare Catastrophic Coverage Act of 1988, which Congress repealed 16 months after adoption. The reform was the biggest expansion of Medicare since its creation in 1965. It earned some of the same praise we hear today for Obama's health care reform.

Reuters:

• CME(CME) Working With Fannie, Freddie on Swaps. CME Group Inc. is working with mortgage lending giants Fannie Mae (FNM) and Freddie Mac (FRE) to design a clearing facility for the $414 trillion global market for interest-rate swaps. "We have been working with them to help structure our cleared interest rate swap offering," CME CEO Craig Donohue said on Tuesday at the Reuters Global Exchanges and Trading Summit in New York. Fannie Mae and Freddie Mac, which were seized by the U.S. government in September 2008, will start moving their swaps to centralized clearing within months, their regulator said earlier in March. Their combined $3 trillion portfolio makes them the biggest swaps holders in the U.S. "That's a big opportunity for us," said Donohue said, who added the exchange operator is also working with a broad range of other market participants.

Financial Times:

• Climate for Flotations Continues to Improve. International equity issuance in the first quarter rose to the highest level in two years as the market for stock market flotations continued to thaw and investor and corporate sentiment was soothed by improving economic data. While deals in the US raised the largest amount globally ($27.4bn), a series of big deals from Asia reiterated the region’s recent prominence in both initial public offerings and secondary issuance. Chinese exchanges led the way for initial public offerings. Shenzhen stock market listings raised $6.7bn while Shanghai came in second for the quarter, raising $6bn, meaning China won a 47 per cent market share of the global IPO market.

Chosun Ilbo:

• U.S. and South Korean intelligence officials have detected the return of North Korean submarines near the site where a South Korean naval ship sank last week. The submarines had moved elsewhere before the incident and are now back at their usual location close to where the 1,200-ton Cheonan sank, citing a South Korean intelligence official.

Yonhap News Agency:

• Pentagon Remains Cautious on S. Korean Warship's Sinking. The United States Tuesday remained cautious about the cause of the sinking of a South Korean warship in waters near North Korea last week. "I don't think there's a way to determine that at this point, given that the boat in question, I think, is submerged," Geoff Morrell, Pentagon spokesman, told reporters. "I think they have some more work to do to determine that."

Evening Recommendations
Citigroup:

• Reiterated Sell on (LRCX), target $27.
  
• Reiterated Buy on (AAPL), target $300. Our checks suggest that iPhone will become available on Verizon's(VZ) network in either 4CQ10 or 1CQ11. Assuming we are correct about a Verizon iPhone during this time period, our CY11 iPhone unit estimates of 40M seems conservative. In fact, our CY11 estimate is below the current CY10 iPhone build plan. Net, net, we see potential for FY11 earnings estimates to move meaningfully higher.
  

Night Trading

• Asian indices are -.25% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 96.5 +.5 basis point.
• S&P 500 futures -.05%
• NASDAQ 100 futures -.11%

Morning Preview Links

Earnings of Note
Company/Estimate

• (MOS)/.60
• (RECN)/.02
• (GPN)/.53
• (BLUD)/.27
• (RAD)/-.19
• (AYI)/.39
• (MU)/.24
• (RIMM)/1.28

Economic Releases
8:15 AM EST

• The ADP Employment Change for March is estimated at +40K versus -20K in February.
  

9:45 AM EST

• Chicago Purchasing Manager for March is estimated to fall to 61.0 versus a reading of 62.6 in February.

10:00 AM EST

• Factory Orders for February are estimated to rise +.5% versus a +1.7% gain in January.
  

10:30 AM EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,500,000 barrels versus a +7,245,000 barrel increase the prior week. Gasoline inventories are expected to fall by -1,850,000 barrels versus a -2,715,000 barrel decline the prior week. Distillate supplies are estimated to fall by -1,375,000 barrels versus a -2,422,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise +.2% versus a +.56% gain the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lockhart speaking, Fed's Duke speaking, weekly MBA mortgage applications report, Bloomberg FCI Monthly and the NAPM-Milwaukee report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity 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 day.

Stocks Slightly Higher into Final Hour on Short-Covering, Less Economic Fear

Broad Market Tone:

• Advance/Decline Line: Slightly Higher
  
• Sector Performance: Mixed
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• VIX 17.30 -1.65%
  
• ISE Sentiment Index 124.0.0 -24.39%
  
• Total Put/Call .84 +1.20%
  
• NYSE Arms 1.41 +36.57%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 86.28 bps +.27%
  
• European Financial Sector CDS Index 73.09 bps -.95%
  
• Western Europe Sovereign Debt CDS Index 76.10 bps +2.48%
  
• Emerging Market CDS Index 226.41 bps -3.0%
  
• 2-Year Swap Spread 15.0 bps -1.0 bp
  
• TED Spread 15.0 -2 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .14% +2 bps
  
• Yield Curve 281.0 bps -2 bps
  
• China Import Iron Ore Spot $153.60/Metric Tonne +1.39%
  
• Citi US Economic Surprise Index +35.90 +1.4 points
  
• 10-Year TIPS Spread 2.22% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +43 open in Japan
• DAX Futures: Indicating +21 open in Germany

Portfolio:

• Slightly Higher: On gains in my Retail, Medical and Tech long positions
  
• Disclosed Trades: Added slightly to (GOOG) long, took profits in another long
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish as stocks move slightly higher after the bears again failed to gain meaningful traction this morning despite rising sovereign debt angst. On the positive side, HMO, Wireless, Semi, Software, Internet, Oil Service and Alt Energy stocks are especially strong, rising .5%+. The 10-year TIPS spread is slightly lower and the 10-year yield is stable again today. US scrap steel prices have surged another 15.4% over the last five days. Weekly retail sales rose +3.6% this week versus a +3.4% gain the prior week and up from a +1.8% increase during the last week of February. On the negative side, Airline, Homebuilding, Disk Drive, Gold and Coal shares are falling .75%+ on the day. (XLF) is underperforming again and hovering just off session lows. The Greece sovereign debt cds is surging another +4.3% today, which is beginning to pressure the euro again. We could see some early morning weakness tomorrow on a sell-the-news reaction to the ADP jobs report and quarter-end profit-taking. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and less economic fear.