Qaddafi Is No Mubarak; Overthrow May Mean 'Descent to Chaos'. Muammar Qaddafi may leave Libya without a way of avoiding further bloodshed. After protesters forced out the leaders of Tunisia and Egypt, both countries had constitutions that laid out the transfer of power to caretakers who are now negotiating a path to greater democracy. Libya, where Qaddafi has ruled since his coup overthrew the monarchy in 1969, has no constitution and political parties and unions have been banned for 35 years. “If Qaddafi goes, there will be an enormous vacuum, not just politically, but also socially and economically,” Diederick Vandewalle, a professor at Dartmouth College in New Hampshire, said by telephone. “There’s no organization that could interact between the government and the protesters.” Libya, home of Africa’s largest oil reserves, may be set for a longer and bloodier period of unrest than its neighbors as Qaddafi, the world’s longest serving non-royal leader, clings to power and no alternative leader emerges.
Cameron Says World May Need to Act to Stop Libyan Repression. The international community may need to take action to halt attempts by the Libyan leader, Muammar Qaddafi, to crush a revolt against his regime, U.K. Prime Minister David Cameron said. It’s still open to Colonel Qaddafi to stop that behavior,” Cameron said in an interview in Qatar yesterday for Al Jazeera television. “More will have to be done if this violence continues.”
Oil Surges on Libya Disruption; Goldman(GS) Sees 'Upside Risk'. Oil surged to the highest in almost two and half years in London as Libya’s violent uprising cut supplies from Africa’s third-biggest producer. Futures in New York gained a sixth day, after trading at $100 a barrel yesterday, amid estimates the revolt has resulted in the loss of as much as two-thirds of the Libya’s oil output. The cuts create “significant upside risk” to prices by reducing OPEC’s ability to absorb any escalation of supply disruptions in the Middle East, Goldman Sachs Group Inc. said. Brent oil for April settlement rose as much as $1.75, or 1.6 percent, to $113 a barrel on London’s ICE Futures Europe exchange today, the highest since Sept. 1, 2008. The contract traded at $112.95 at 10:18 a.m. in Singapore. It rallied 5.2 percent yesterday. Crude for April delivery gained as much as $1.33, or 1.4 percent, to $99.43 a barrel in electronic trading on the New York Mercantile Exchange. Yesterday, it closed up $2.68 at $98.10, the highest since Oct. 1, 2008. Prices are 24 percent higher than a year ago.
Wall Street Journal:
Gadhafi Flails as Libya Splinters. Forces loyal to strongman Col. Moammar Gadhafi imposed rough order in Libya's increasingly fearful capital Wednesday, witnesses said, that stood in sharp contrast to rebel gains in much of the oil-rich country. Gunshots echoed through the night in Tripoli as Col. Gadhafi clung to power even as the international community discussed ways to isolate him with sanctions. More territory slipped from his control, and rebels began to set up rudimentary governments in outlying areas under their sway. "No-one should count him out, but momentum isn't going his way," a U.S. official said.
Second Suspected Syria Nuclear Site Is Found. A second suspected nuclear installation has been identified in Syria, according to commercial satellite photos, providing new evidence that Damascus may have been pursuing atomic weapons before a 2007 Israeli military strike. The publishing Wednesday of the photos by Washington's Institute for Science and International Security could increase pressure on the United Nations to demand expansive new inspections of suspect Syrian facilities during a March board meeting of the International Atomic Energy Agency.
Inflation Concerns Rise Around Asia. Vietnam, Singapore Data, India Rally Underscore Challenges in Price Fight. Worries over inflation in Asia intensified as tens of thousands of people protested rising food prices in India and inflation rates jumped higher in Singapore and Vietnam. Big street rallies aren't uncommon in India, where millions of people subsist on low incomes. Moreover, similar protests have occurred in past years ahead of the Indian government's annual presentation of its budget, which this year is scheduled for Monday. Still, the rallies in Delhi Wednesday underscored how higher food costs, which helped trigger some of the unrest now sweeping the Middle East, represent an increasingly difficult challenge for some Asian governments.
US Pushes Mortgage Deal. The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars.
Chevron(CVX) Exec: Gulf Water Drilling Expected To Resume Before Midyear.Chevron Corp. (CVX), the second-largest U.S. oil company, expects to be able to resume its ambitious drilling program in the deepwater Gulf of Mexico before the first half of 2011 is over, executives with the company said Wednesday. "We are getting at the end of the road," Gary Luquette, Chevron's head for exploration and production in North America, said in an interview. "One time we thought it will be the end of the year, now our estimate is that it could be before the middle of the year."
The Public Worker Gravy Train. Leaders across the country are proposing restrictions on public employees' pay and benefits in order to put their budgets on a more sustainable path. The political left's counterattack is that government workers aren't overpaid compared to those in the private economy. Who's right?
CNBC:
Priceline(PCLN) Posts Higher Profit, Gives Rosy Forecast. Online travel agency Priceline.com posted on Wednesday a larger-than-expected quarterly profit on bookings growth and the company forecast stronger growth in the first quarter. The company's shares gained more than 5 percent in after-hour trading.
Stagflation Still Regarded as Economy's Dirty Little Secret. Despite rising commodity prices and a bleak employment picture, “stagflation” remains a word not uttered in the polite company of the financial world. But there remain only a few more tumblers to fall into place for a return to that awful word that conjures up images of the “malaise days” of the late 1970's and early ‘80s, where rising inflation and slumping employment tamped down economic growth.
MarketWatch:
Q&A With Kansas City Fed's Thomas Hoenig. Federal Reserve Bank of Kansas City President Thomas Hoenig is going to step down in October when he reaches the central bank's mandatory retirement age of 65, but he is not exactly going quietly into the night. Hoenig is pressing his message that the Fed needs to move away from zero-interest rate and that the $600 billion bond buying program was a mistake. While Federal Reserve Chairman Ben Bernanke has tried to distance Fed policy from the recent spike in global food and fuel prices, Hoenig says the easy money stance is clearly a factor.
Business Insider:
A Haunting Journey Into The Ruins Of Detroit. (pics) French photographers Yves Marchand & Romain Meffre compare the ruins of Detroit to "the Pyramids of Egypt, the Coliseum of Rome, or the Acropolis in Athens." Detroit's ruins are "remnants of the passing of a great Empire."
Prepare For a Trading Revolution: Here Comes Credit Default Swaps for Retail Investors. Ever felt excluded from the list of people who can (allegedly) buy insurance on their neighbor's house, and then burn it down? That's all about to change. The CBOE has announced that that on Tuesday, March 8, the Exchange will begin trading newly-designed Credit Event Binary Options (CEBOs) contracts. In essence these will be like Credit Default Swaps, accessible to everyone, which will have a $1000 payoff per contract in the event of a bankruptcy before contract expiration.
Pakistan's Intelligence Ready to Split With CIA. Pakistan's ISI spy agency is ready to split with the CIA because of frustration over what it calls heavy-handed pressure and its anger over what it believes is a covert U.S. operation involving hundreds of contract spies, according to an internal document obtained by The Associated Press and interviews with U.S. and Pakistani officials. Such a move could seriously damage the U.S war effort in Afghanistan, limit a program targeting al-Qaida insurgents along the Pakistan frontier, and restrict Washington's access to information in the nuclear-armed country.
Fraga Warns on Brazilian Credit Growth. The former central banker who laid the foundation for Brazil’s boom by helping to slay inflation has warned that rapid credit growth in the country needs close scrutiny from policymakers. Arminio Fraga, one of Brazil’s most successful former central bank presidents, said in an interview with the Financial Times that the quality of some new consumer lending was open to question, although Brazil was not approaching a “subprime”-style crisis.
China Files Subversion Charges Against Internet Users Who Spread Call to Protest. China filed subversion charges against Internet users who reposted a call for protests as the authoritarian government enforced its crackdown against any Middle East-style democracy movement, activists said. In addition to well-known activists who apparently remained in custody after being taken away ahead of the planned protests on Sunday, at least three people were detained on charges of "inciting subversion of state power," according to the Hong Kong-based Information Center for Human Rights and Democracy. China often uses the vaguely worded charge to lock up outspoken government critics.
Xinhua:
Shanghai set two rates for its new property tax based on the price per square meter of a property, citing the city's statistics bureau.
A Jasmine Revolution in China is an "absurd" possibility, citing Zhao Qizheng, head of the Committee of Foreign Affairs of the National Committee of the Chinese People's Political Consultative Conference.
China Securities Journal:
Five banks in Beijing stopped giving discounts on the benchmark interest rate for mortgage loans to buy first homes, citing bank officials.
China's money supply growth and the money expansion multiplier may drop in the second half of the year as fewer central bank bills come due.
DongA Ilbo:
North Korea recently set up a special police squad team to stamp out any riot movement in North Korea, citing Daily NK, a Seoul-based group that opposes the government of Kim Jong Il.
People's Daily:
China will this year "closely" prevent and "strictly" crack down on violence and terrorism activities that aim at splitting up China, Zhang Qingli, Tibet's Communist Party chief, wrote in a commentary.
China's southern province of Hainan will take measures to curb soaring property prices, citing Qu Jianmin, deputy secretary-general of the provincial government. Hainan must take steps to increase its housing supply and stop speculation in the market by the end of March, Qu said.
Evening Recommendations Citigroup:
Reiterated Buy on (PCLN), raised target to $575.
Wells Fargo:
Rated (CIEN) Outperform.
Night Trading
Asian equity indices are -1.50% to unch. on average.
Asia Ex-Japan Investment Grade CDS Index 112.0 -1.5 basis points.
The Chicago Fed National Activity Index for January is estimated to rise to .09 versus a reading of .03 in December.
Initial Jobless Claims for last week are estimated to fall to 405K versus 410K the prior week.
Continuing Claims are estimated to fall to 3880K versus 3911K prior.
Durable Goods Orders for January are estimated to rise +2.8% versus a -2.5% decline in December.
Durables Ex Transports for January are estimated to rise +.5% versus a +.5% gain in December.
Cap Goods Orders Non-Defense Ex Air for January are estimated to fall -1.0% versus a +1.4% gain in December.
10:00 am EST
New Home Sales for January are estimated to fall to 305K versus 329K in December.
The House Price Index for December is estimated to fall -.1% versus unch. in November.
11:00 am EST
Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,100,000 barrels versus a +860,000 barrel gain the prior week. Distillate supplies are expected to fall by -1,200,000 barrels versus a -3,096,000 barrel decline the prior week. Gasoline inventories are estimated to rise by +850,000 barrels versus a +205,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.5% versus a -3.5% decline the prior week.
Upcoming Splits
(POT) 3-for-1
(UGP) 4-for-1
Other Potential Market Movers
The Fed's Bullard speaking, $29 Billion 7-Year Treasury Notes Auction, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report, (GGC) investor day and the (SNDK) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and mining shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.
North American Investment Grade CDS Index 85.31 +3.71%
European Financial Sector CDS Index 131.17 bps -.34%
Western Europe Sovereign Debt CDS Index 177.50 bps +1.81%
Emerging Market CDS Index 230.98 +1.36%
2-Year Swap Spread 17.0 -6 bps
TED Spread 20.0 -1 bp
Economic Gauges:
3-Month T-Bill Yield .11% +1 bp
Yield Curve 274.0 -3 bps
China Import Iron Ore Spot $184.90/Metric Tonne -1.81%
Citi US Economic Surprise Index +77.20 +.6 point
10-Year TIPS Spread 2.41% +4 bps
Overseas Futures:
Nikkei Futures: Indicating +11 open in Japan
DAX Futures: Indicating -9 open in Germany
Portfolio:
Slightly Higher: On gains in my Technology longs, ETF hedges and emerging market shorts
Disclosed Trades: Covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short
Market Exposure: Moved to 75% Net Long
BOTTOM LINE: Today's overall market action is bearish as the S&P 500 trades lower despite a pullback in oil from today's high, energy sector strength and positive economic data. On the positive side, Coal, Oil Tanker, Energy, Oil Service, Gold, Bank and Hospital shares are higher on the day. On the negative side, Airline, Disk Drive, Computer, Paper, Alt Energy, Road & Rail and Education shares are under significant pressure, falling more than 1.75%. Cyclicals and Small-Caps are substantially underperforming. The transports are breaking down on volume. Lumber is declining -2.06% and copper is down another -.6%.The Saudi sovereign cds is rising +1.41% to 139.95 bps and the Israeli sovereign cds is jumping +7.30% to 173.13 bps. Moreover, the Spain sovereign cds is rising +2.67% to 264.12 bps, the Greece sovereign cds is gaining +2.33% to 931.25 bps, the Belgium sovereign cds is climbing +2.87% to 177.75 bps and the Brazil sovereign cds is gaining +2.33% to 120.39 bps. China Iron Ore Spot has now fallen -3.65% over 5 days. Investor complacency regarding the situation in the Mideast still seems too high. Oil touched $100/bbl today. In my opinion, any meaningful break above $100/bbl., which is likely, will lead to further broad market weakness. I still believe any significant rise in food or energy prices from current levels will increase the odds of hard-landings in some key emerging market economies. So far, markets are, for the most part, not pricing in this possibility. I expect US stocks to trade mixed-to-lower into the close from current levels on rising Mideast unrest, eurozone sovereign debt angst, technical selling, profit-taking, emerging market inflation fears and more shorting.
Libya Split as Qaddafi Holds Tripoli, Rebels Organize in East. Libyans claiming to have ousted Muammar Qaddafi’s troops organized committees to run and defend their eastern cities, as forces loyal to the leader retained control of the capital, Tripoli. In Benghazi, armed members of popular committees surrounded a courthouse as women held a sit-in after marching from the now- deserted army base, a resident said. Two air force pilots bailed out of their plane and let it crash near Benghazi after refusing orders to attack the city, local newspaper Quryna said, and the army commander at Tobruk in the northeast said his unit has joined the rebels. In Tripoli, where heavy gunfire was heard overnight, protesters stayed off the streets as the government urged people to go back to work and show that life is normal, the Associated Press said.
Oil Rallies, Stocks Retreat on Libya Revolt; Euro Gains. Oil rallied, touching $100 a barrel in New York for the first time since October 2008, as Libya’s uprising threatened to halt exports. Stocks fell amid concern higher energy costs will slow economic growth, while Treasuries erased gains after a $35 billion auction. Crude for April delivery climbed as much as 4.8 percent to $100 at 1:07 p.m. in New York and gasoline and heating oil surged. Concern that surging fuel prices will derail the global economic recovery grew as governments evacuated thousands of expatriates from Libya and opponents to Muammar Qaddafi took control of eastern port cities in Africa’s third-biggest crude supplier. An extended $10 rise in oil cuts 0.5 percentage point off U.S. growth over two years, according to Deutsche Bank AG. Gasoline rose for a third day on the New York Mercantile Exchange, gaining 4.7 percent to a more than two-year high of $2.7236 a gallon. Brent oil for April delivery climbed 5.3 percent to $111.37 a barrel. The cost of protecting U.S. investment-grade corporate bonds from default rose for a third day to the highest in almost four weeks. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 2.9 basis points to a mid-price of 86.69 basis points, according to index administrator Markit Group Ltd.
Qaddafi's Regime Will Fall in Days, Houni Tells Al-Hayat. Libyan leader Muammar Qaddafi’s regime has a matter days before it falls, Al-Hayat reported, citing Major Abdel Moneim al-Houni, a former member of Libya’s revolutionary command council who resigned as the country’s ambassador to the Arab League on Feb. 20.
Iron-Ore Haulage Rates Fall Most in Seven Weeks on Fleet Growth. The cost of hiring capesize ships to haul iron ore and coal fell the most in almost seven weeks amid prospects for an expanding fleet. Hire rates dropped 11% to $5,339 a day, compared with operating costs estimated at about $7,000 by Dag Kilen, an analyst with RS Platou Markets AS in Oslo. Today's decline was the biggest since Jan. 6th and the seventh in a row. The capesize fleet will swell by 17% in 2011, almost triple the 6% increase in demand to ship the vessels' primary cargo of iron ore, Clarkson Plc, the biggest shipbroker, estimates. Capesize rents have plunged 73% this year after sliding by almost half in 2010.
Gold Heads for Longest Rally in Six Months on Libyan Turmoil. Gold rose, heading for the longest rally in six months, as mounting tensions in Libya and the Middle East boosted demand for an investment haven. Libyan leader Muammar Qaddafi has vowed to fight a growing rebellion until his “last drop of blood.” Gold climbed for the seventh straight session, the longest advance since early August. Yesterday, the price reached $1,411.50 an ounce, a seven-week high. The metal climbed to a record of $1,432.50 on Dec. 7.
Copper Drops to Four-Week Low as Middle East Turmoil May Derail Economies. Copper fell to a four-week low on speculation that unrest in North Africa and the Middle East will derail recovering economies as oil prices jump. “We’ve seen that every time we get a big jump in oil prices, it seems to manifest itself in poor economic activity and a slowdown,” said Wayne Atwell, a managing director at Casimir Capital LP in New York. “There are a lot of reasons to be anxious right now.” Copper futures for May delivery dropped 8.5 cents, or 1.9 percent, to $4.278 a pound at 10:16 a.m. on the Comex in New York.
Corporate Bond Risk Rises in Europe, Credit-Default Swaps Show. The cost of insuring against default on European corporate bonds rose, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 9 basis points to 400, according to JPMorgan Chase & Co. at 3 p.m. in London. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose for a fifth day, increasing 1.75 basis points to 101.75. The Markit iTraxx Financial Index of 25 banks and insurers fell 0.25 basis points to 165 and the subordinated index was 8 higher at 284 basis points.
King Abdullah Pours Money Into Saudi Housing, Welfare Amid Regional Unrest. Saudi Arabia’s King Abdullah boosted spending on housing by 40 billion riyals ($10.7 billion), and earmarked more funds for education and social welfare amid popular uprisings sweeping the Arab world. The social security budget was raised by 1 billion riyals, according to a statement read on state-run television. King Abdullah also ordered the creation of 1,200 jobs in supervision programs and made permanent a 15 percent cost-of-living allowance for government employees, according to the statement. Saudi Arabia, the world’s largest oil supplier, is spending more on social programs as political unrest roils the region.
SEC's Top Lawyer Becker Sued for Inheriting Madoff Ponzi Profits. David M. Becker, the departing chief lawyer at the U.S. Securities and Exchange Commission, said he had no detailed knowledge of how his parents came to earn $1.5 million from an investment in Bernard Madoff’s Ponzi scheme. Becker and his brothers, who inherited the money upon his mother’s death in 2004, were sued in bankruptcy court in New York by the trustee liquidating Madoff’s firm, Irving H. Picard, who seeks to recover the funds as a fictitious gain.
Fed's Hoenig Says U.S. Should Break Up Largest Financial Firms. Federal Reserve Bank of Kansas City President Thomas Hoenig said U.S. regulators should avert another crisis by breaking up large financial institutions that pose a threat “to our capitalistic system.” “I am convinced that the existence of too-big-to-fail financial institutions poses the greatest risk to the U.S. economy,” Hoenig said today in a speech in Washington. Hoenig, the lone dissenter from every Fed meeting in 2010, has argued that the most sweeping overhaul of U.S. financial regulation since the Great Depression won’t prevent the largest banks from taking excessive risks and increasing market share. “They must be broken up. We must not allow organizations operating under the safety net to pursue high-risk activities and we cannot let large organizations put our financial system at risk.”“In my view, it is even worse than before the crisis,” Hoenig said at a luncheon for Women in Housing and Finance. “As well-intentioned as the Dodd-Frank Act may be, it will not improve outcomes,” he said. “Protected institutions must be limited in their risk activities because there is no end to their appetite for risk and no perceived end to the public purse that protects them,” Hoenig said.
Wall Street Journal:
Gadhafi Forces Open Fire in Tripoli. Heavy gunfire broke out in Libya's capital Wednesday as forces of Col. Moammar Gadhafi opened fire in the streets a day after the longtime leader vowed to defend his rule and called on supporters to crack down on antigovernment protesters. The fighting in Tripoli came as the opposition reportedly seized control of the coastal city of Misurata, with witnesses saying people were honking their horns and raising pre-Gadhafi flags from the monarchy to celebrate. Misurata would be the first major city in the west to fall to antigovernment forces, which have mainly been concentrated in the east.
Violence Flares Amid Greek Strike. Greece was paralyzed Wednesday by a nationwide general strike as hundreds of thousands of workers, shopkeepers and civil servants walked off the job in a 24-hour protest over the Socialist government's austerity program.
U.S. Drops Defense of Law Banning Gay Marriage.In a major policy reversal, the Obama administration said Wednesday that it will no longer defend the constitutionality of a federal law banning recognition of same-sex marriage. Attorney General Eric Holder said President Barack Obama has concluded that the administration cannot defend the federal law that defines marriage as only between a man and a woman.
MarketWatch:
Philly Fed's Plosser Weighs Vote Against QE2.One of the most hawkish new members of the Federal Reserve’s interest-rate setting committee on Wednesday said he was considering voting to shut down a $600 billion bond buying program early due to the strength of the U.S. economy. Philadelphia Fed President Charles Plosser said his only hesitation in doing so was fears of undermining the Fed’s credibility.
CNBC.com:
As Cotton Prices Rise, So May the Cost of Hotel Rooms. Apparel makers aren't the only ones stitching together a plan to deal with rising cotton costs. Hotel chains, including some of the world's biggest brands, are looking to pass costs on to customers as soaring commodity prices hit the bottom line.
Obama's Leadership Ratings Fall to a New Low. A new Rasmussen Reports national telephone survey finds that just 37% of Likely U.S. Voters now say the president is doing a good or excellent job as a leader. Forty percent (40%) rate his performance as poor.
Reuters:
Vertex(VRTX) Shares Soar on Cystic Fibrosis Drug Data. An experimental drug developed by Vertex Pharmaceuticals Inc significantly improved lung function in a late-stage trial of patients with cystic fibrosis, sending the company's shares as much as 17 percent higher to a level not seen since late 2006.
Lebanon CDS Wider, Others In Region Mixed. The cost of insurance on Lebanon 5-year sovereign CDS are pushing wider as turmoil in the Middle East and North Africa continues, Markit says. Lebanon CDS are 18 bps wider at 375 bps, while Morocco CDS are 10 bps wider at 195. Israel CDS are 5 bps wider at 170, while Tunisia and Qatar CDS are just slightly wider at 200 and 116 respectively. Egypt CDS have rallied 2 bps to 357 while Saudi Arabia and Bahrain CDS are both flat at 137 and 320 respectively.
Iranian Naval Ships Arrive in Syria. Two Iranian naval ships arrived Wednesday afternoon at the Port of Lattakia in Syria, after crossing the Suez Canal Tuesday, Iranian news agency IRNA reported. An Iranian senior official told IRNA that Iranian Navy Commander Admiral Habibula Siari is slated to arrive to Damascus later on Wednesday, accompanied by a delegation of military officials.
