Stocks Rising Slightly into Final Hour on Less Eurozone Debt Angst, Financial Sector Optimism, US Economic Data, Short-Covering

Broad Market Tone:

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

Equity Investor Angst:

• VIX 17.92 -6.76%
  
• ISE Sentiment Index 146.0 +43.14%
  
• Total Put/Call .76 -10.59%
  
• NYSE Arms 1.0 +98.03%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 98.72 -1.42%
  
• European Financial Sector CDS Index 185.03 -3.35%
  
• Western Europe Sovereign Debt CDS Index 342.34 -1.52%
  
• Emerging Market CDS Index 256.50 -1.01%
  
• 2-Year Swap Spread 30.50 +1.25 bps
  
• TED Spread 41.75 +2.25 bps
  
• 3-Month EUR/USD Cross-Currency Basis Swap -70.25 +1.75 bps
  

Economic Gauges:

• 3-Month T-Bill Yield .08% -1 bp
  
• Yield Curve 172.0 +2 bps
  
• China Import Iron Ore Spot $134.40/Metric Tonne -1.83%
• Citi US Economic Surprise Index 64.90 -.6 point
  
• 10-Year TIPS Spread 2.26 +1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +88 open in Japan
• DAX Futures: Indicating +12 open in Germany

Portfolio:

• Slightly Lower: On losses in my Biotech and Tech sector longs
  
• Disclosed Trades: Covered all of my (IWM)/(QQQ) hedges and some of my (EEM) short, then added some back
  
• Market Exposure: 75% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish, as the S&P 500 trades near session highs on less Eurozone debt angst, better US economic data, short-covering, more financial sector optimism and investor performance angst. On the positive side, Oil Service, Alt Energy, Telecom, Retail and Education shares are especially strong, rising more than +1.0%. Financial shares have traded well throughout the day. Gold is falling -.32% and Lumber is rising +1.4%. The 10Y Yield is rising +2 bps to 2.0%. The France sovereign cds is falling -3.6% to 187.0 bps, the Spain sovereign cds is falling -3.15% to 388.33 bps, the Japan sovereign cds is falling -5.22% to 124.77 bps and the Brazil sovereign cds is down -3.7% to 136.50 bps. On the negative side, Coal, Steel, Semi, Biotech and Hospital shares are under pressure, falling more than -1.0%. Tech shares are underperforming today and the Transports continue to trade relatively poorly. The UBS-Bloomberg Ag Spot Index rising +.35%, Oil is gaining +1.0% and Copper is falling -1.92%. Copper looks like it is rolling over technically at its 200-day. Lumber is -4.5% since its Dec. 29th high despite the better US economic data, more dovish Fed commentary, improving sentiment towards homebuilders, equity rally and decline in eurozone debt angst. Moreover, the weekly MBA Purchase Applications Index has been around the same level since May 2010. The Baltic Dry Index has plunged over -60.0% from its Oct. 14th high and is now down over -50.0% ytd. The 10Y T-Note Yield remains a concern considering the recent stock rally, falling Eurozone debt angst and improvement in US economic data. The Philly Fed’s ADS Real-Time Business Conditions Index has stalled over the last month after showing meaningful improvement from mid-Nov. through year-end. The Western Europe Sovereign CDS Index is still fairly close to its Jan. 9th all-time high. Overall, credit gauges have deteriorated over the last week and remain at stressed levels. China Iron Ore Spot has plunged -25.8% since Sept. 7th of last year. Shanghai Copper Inventories are up +716.0% ytd and are still very near their recent all-time high. I still think this is more of a red flag for falling demand rather than the intentional hoarding, which many suggest. Investors continue to price in a Eurozone debt crisis "can kicking" and stabilizing economic growth in the region. The odds of a disappointment here are increasing. As well, oil is very close to a technical breakout, with copper rolling over, which would also be an equity headwind. For an intermediate-term equity advance from current levels, I would still expect to see further European credit gauge improvement, subsiding hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices and higher-quality stock market leadership. I expect US stocks to trade mixed-to-higher into the close from current levels on less Eurozone debt angst, better US economic data, short-covering, more financial sector optimism, technical buying and investor performance angst.

Today's Headlines

Bloomberg:

• ECB Greek Plan May Hurt Bondholders While Triggering Debt Swaps. The European Central Bank’s plan to shield its Greek bond holdings from a restructuring may hurt private investors while paving the way for debt insurance contracts to be triggered. The ECB will exchange its Greek debt for new bonds with an identical structure and nominal value, though they’ll be exempt from so-called collective action clauses the government is reportedly planning. That implies senior status for the ECB over other investors, according to UBS AG, and the use of CACs may lead to credit-default swaps protecting $3.2 billion of Greek bonds being tripped. “It may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private-sector bondholders,” according to Chris Walker, a foreign exchange strategist at UBS, the world’s third-biggest currency trader. “If a coercive default does indeed eventually take place then a CDS event seems very likely with all the negative consequences for risk appetite that may bring.” Government officials are separately negotiating a writedown of the nation’s debts with private investors before a 14.5 billion-euro ($19 billion) note comes due on March 20 that risks sending Greece into default. The yield on the nation’s benchmark 10-year bond jumped 28 basis points today to 33.67 percent as of 1:30 p.m. in London, its sixth straight day of increases.
• Greek Bailout Deal Nearer After Germany Signals Backing at Feb. 20 Meeting. Euro-area governments closed in on a deal to unlock a 130 billion-euro ($171 billion) aid package for Greece, seeking to avert the region’s first sovereign default. Germany, the biggest country contributor to euro-area rescues, signaled that finance ministers may be ready to back Greece’s second bailout in two years when they meet Feb. 20 in Brussels. After a week of wrangling among euro-area officials, Chancellor Angela Merkel’s government indicated it aims to avoid splitting the timetable of the aid and a writedown of Greek debt to private bondholders and agree to the deal as one package. Greece’s struggle to give assurances on debt-reduction goals through the end of the decade have heightened uncertainty as the clock ticks toward a March 20 bond redemption when Greece must pay 14.5 billion euros or trigger the first sovereign default in the euro’s 13-year history. The Brussels gathering on Feb. 20 is due to start at 3:30 p.m. instead of the usual 5 p.m.
• Merkel Government Allies May Block Greece Package, Spiegel Says. Chancellor Angela Merkel’s Christian Social Union ally may block a second aid package for Greece in Germany’s lower house of parliament on Feb. 27 should Greece fail to honor its debt reduction commitments, party chairman Horst Seehofer told Spiegel magazine. The CSU, the sister party of Merkel’s Christian Democratic Union, won’t support measures that threaten Germany’s top credit rating, Seehofer also said. Any aid disbursement to Greece must be accompanied by “concrete reform steps” on the part of the Greek government, Seehofer told the magazine.
• Stress Stops Easing With Greek Debt Faltering: Credit Markets. Measures of stress in global credit markets have stopped easing as a rescue plan for Greece threatens to unravel and some of the largest U.S. and European banks face potential ratings cuts. Interest-rate swap spreads, which gauge fear in debt markets, and benchmark measures of corporate credit risk in the U.S. and Europe touched the highest level in more than two weeks yesterday. Sales of bonds in dollars are poised for the slowest week this year. Relative yields on bank bonds worldwide climbed for a second day after an eight-week decline.
• Record $6 Trillion of Fake U.S. Bonds Seized. Italian anti-mafia prosecutors said they seized a record $6 trillion of allegedly fake U.S. Treasury bonds, an amount that’s almost half of the U.S.’s public debt. The bonds were found hidden in makeshift compartments of three safety deposit boxes in Zurich, the prosecutors from the southern city of Potenza said in an e-mailed statement. The Italian authorities arrested eight people in connection with the probe, dubbed “Operation Vulcanica,” the prosecutors said. The U.S. embassy in Rome has examined the securities dated 1934, which had a nominal value of $1 billion apiece, they said in the statement. “Thanks to Italian authorities for the seizure of fictitious bonds for $6 trillion,” the embassy said in a message on Twitter. The financial fraud uncovered by the Italian prosecutors in Potenza includes two checks issued through HSBC Holdings Plc (HSBA) in London for 205,000 pounds ($325,000), checks that weren’t backed by available funds, the prosecutors said. As part of the probe, fake bonds for $2 billion were also seized in Rome. The individuals involved were planning to buy plutonium from Nigerian sources, according to phone conversations monitored by the police. The fraud posed “severe threats” to international financial stability, the prosecutors said in the statement. HSBC spokesman Patrick Humphris in London declined to comment when contacted by telephone.
• Chinese Banks' Bad Loans Rise in Fourth Quarter as Economy Slows. Chinese commercial banks’ bad loans increased in the fourth quarter of last year, highlighting pressures the lenders face in maintaining asset quality as the economy slows. Non-performing loans rose 20.1 billion yuan ($3.2 billion) to 427.9 billion yuan as of Dec. 31, the China Banking Regulatory Commission said in a report on its website today. Bad loans accounted for 0.96 percent of total lending, up from 0.95 percent in September and 0.17 percentage point lower than a year earlier. Chinese banks are struggling to keep bad loans in check as the country’s economic expansion slows and the housing market cools under government curbs. Lenders’ non-performing loan ratio had not increased quarter-on-quarter since the end of 2005, according to data compiled by Bloomberg. “This is somewhat negative news because investors are not yet expecting an industry-wide rebound” in soured loans, May Yan, a Hong Kong-based analyst at Barclays Capital Inc., said by phone. “Banks this year face pressures from bad loans, particularly from developers and small businesses.”
• Leading Economic Indicators Rise .4%. The index of U.S. leading indicators rose in January and the cost of living climbed less than forecast, pointing to sustained economic growth with limited price pressures. The 0.4 percent increase in the Conference Board’s gauge of the outlook for the next three to six months followed a 0.5 percent rise in December, the strongest back-to-back gains in almost a year.
  
• Consumer Prices in U.S. Climbed Less Than Economists Forecast in January. The cost of living in the U.S. rose less than forecast in January, supporting the Federal Reserve’s view that inflation will be contained. The consumer-price index increased 0.2 percent after no change the prior month, the Labor Department reported today in Washington. Economists surveyed by Bloomberg had forecast a 0.3 percent gain. Over the past 12 months, prices climbed 2.9 percent, the smallest year-to-year advance since March 2011.
• Oil Set For Biggest 2012 Weekly Gain. West Texas Intermediate crude rose as much as 1.2 percent today and is up 4.3 percent this week. Oil for March delivery rose 63 cents, or 0.6 percent, to $102.94 a barrel at 12:17 p.m. on the New York Mercantile Exchange. The contract reached $103.57, the highest level since Jan. 5. Futures are headed for the biggest weekly gain since Dec. 23. Brent oil for April settlement dropped 94 cents, or 0.8 percent, to $119.17 a barrel on the London-based ICE Futures Europe exchange. The contract touched $120.70, the highest level since June 15.
• Canada Housing Poised for 'Severe' Drop. (graph) Canada may be on the cusp of a “severe” housing correction as real estate investment surges above a tipping point relative to economic output, according to George Athanassakos, professor of finance at the Richard Ivey School of Business. The CHART OF THE DAY shows Canada’s housing investment as a percentage of gross domestic product, and the declines in inflation-adjusted house prices that follow when this ratio tops 7 percent.
• Brazil Puts Reach Five-Year High: Options. Options traders are driving the cost of hedging against losses in an ETF tracking Brazilian stocks to a five-year high. The cost of contracts to protect against a 10% decline in the iShares MSCI Brazil Index Fund was 29.5% more than the price of calls, according to Bloomberg. The premium was 29.7% on Feb. 7, the most since February 2007.
  

Wall Street Journal:

• INTERVIEW: Ifo's Sinn: In Greece's Interest To Leave Euro Zone. The head of a prominent German economics institute said it is in the interests of the Greeks themselves to leave the euro zone, because only then can the country regain competitiveness and prosperity.
• IMF Said to Give Less for Greek Bailout. The International Monetary Fund is expected to contribute just €13 billion ($17.07 billion) to a second Greek aid package worth €130 billion, leaving euro-zone governments to provide a much bigger share of funds than they did in the euro zone's three earlier bailouts, people familiar with the situation said.
  

Fox News:

• Exclusive: Feds Arrest Man Allegedly Heading to US Capitol For Suicide Mission After Sting Investigation. Authorities have arrested a man allegedly on his way to the U.S. Capitol for what he thought would be a suicide attack on one of the nation's most symbolic landmarks, Fox News has learned exclusively. The man, in his 30s and of Moroccan descent, was nabbed following a lengthy investigation by the FBI, initiated after he expressed interest in conducting an attack. It's unclear how the FBI learned of his aspirations.
  

CNBC.com:

• Forget Europe, Oil a Bigger Threat to Asia's Growth: Economists. While investors fret over the debt crisis in Europe and discuss its possible impact on Asia’s growth, one economist tells CNBC that emerging markets face a greater risk from rising oil prices than from Greece’s rising woes.
• MBIA Adds to Fraud Claims Against BofA's(BAC) Countrywide. MBIA claimed it has new evidence of “widespread mortgage-origination fraud” at Bank of America’s Countrywide unit, hoping to bolster its $1.4 billion lawsuit accusing that unit of fraudulently inducing it to insure risky mortgage-backed securities.

Business Insider:

• The Truth About Long-Term Unemployment In America.
• THIS Is The Point Where Gas Prices Start Changing People's Behavior.
• POLL: Scott Brown Is Pulling Ahead Of Elizabeth Warren.
  

Zero Hedge:

• Buba's Jens Weidmann Voted Against ECB's Decision To Undermine The Sovereign Bond Market.
• Why Were The Trillions In Fake Bonds Held In Chicago Fed Crates?
• Greek CAC Trigger Walk Thru.
• Primary Dealers Quietly Brace For Impact: Total Dealer Treasury Holdings At Record High. (graph)
  

Washington Post:

• Overreach: Obmacare Vs. The Constitution.

Reuters:

• iPad Maker Foxconn Lifts China Workers Pay Again. Foxconn Technology Group, the top maker of Apple Inc's iPhones and iPads whose factories are under scrutiny over labor practices, has raised wages of its Chinese workers by 16-25 percent from this month, the third rise since 2010.
• FACTBOX - 'Fiscal cliff' Looms for United States in Late '12. Big tax and budget decisions will not confront U.S. lawmakers for months now that Congress has extended the payroll tax cuts, but a reckoning will be at hand in late 2012 and early 2013. It is being called the 'fiscal cliff' by some on Capitol Hill, and it will likely arrive after the Nov. 6 presidential and congressional elections. The elections are likely to involve intense debate about what should be done. The issues that will confront the United States include dealing with the expiration of the Bush tax cuts affecting nearly all U.S. taxpayers, big budget cuts set to kick in automatically and once again hitting the federal debt ceiling. Here is a summary of approaching deadlines.
• Work To Do To Hit Greece's 2020 Debt Target: Juncker. Efforts to reduce Greece's debt burden to 120 percent of GDP by 2020 are still a long way off target, the head of the Eurogroup said on Friday. Speaking ahead of a critical meeting of euro zone finance ministers in Brussels on Monday, when they are expected to finalize the details of a second rescue program for Greece, Jean-Claude Juncker said there was a lot of work to be done to get the debt down to a sustainable level. Greece's debts currently stand at around 160 percent of GDP. The IMF, ECB and European Commission have carried out an analysis into where the debt will stand after a bond swap with the private sector, with sources saying that they expect the ratio to remain at around 129 percent. The IMF has said that if the ratio cannot be cut to around 120 percent by 2020, it may not be able to finance the second, 130 billion euro program for Greece.
• Copper Falls on China Demand Concerns.
• Deadly Bird Flu Studies to Stay Secret for Now: WHO. Two studies showing how scientists mutated the H5N1 bird flu virus into a form that could cause a deadly human pandemic will be published only after experts fully assess the risks, the World Health Organization (WHO) said on Friday. Speaking after a high-level meeting of flu experts and U.S. security officials in Geneva, a WHO spokesman said an agreement had been reached in principle to keep details of the controversial work secret until deeper risk analyses have been carried out. The WHO called the meeting to break a deadlock between scientists who have studied the mutations needed to make H5N1 bird flu transmit between mammals, and the U.S. National Science Advisory Board for Biosecurity (NSABB), which wanted the work censored before it was published in scientific journals. Biosecurity experts fear mutated forms of the virus that research teams in The Netherlands and the United States independently created could escape or fall into the wrong hands and be used to spark a pandemic worse than the 1918-19 outbreak of Spanish flu that killed up to 40 million people.
• Iran Naval Ships Enter Mediterranean Via Suez. Two Iranian naval ships have sailed through Egypt's Suez Canal into the Mediterranean, in a move likely to be keenly watched by Israel. "Two Iranian ships crossed through the Suez Canal (on Thursday) following permission from the Egyptian armed forces," a source in the canal authority said on Friday. The destroyer and a supply ship could be on their way to the Syrian coast, the source added. Iran and Syria agreed to cooperate on naval training a year ago, and Tehran has no naval agreement with any other country in the region.

Telegraph:

• Debt Crisis: Live. Germany's Wolfgang Schaeuble seeks to reassure Europe ahead of key Greek bailout talks on Monday, as the Dow Jones Industrial Average rises to a four-year high in the US.

Bear Radar

Style Underperformer:

• Small-Cap Growth -.32%

Sector Underperformers:

• 1) Biotech -1.80% 2) Gold & Silver -1.80% 3) Steel -1.50%

Stocks Falling on Unusual Volume:

• GILD, RP, QLIK, LIFE, AEM, CLF, NTT, ARTC, WOOF, TNGO, ARUN, HMSY, MDRX, MXWL, BIDU, LPNT, BMRN, BJRI, NTES, NVDA, Z, ONXX, PLCE, SCX, GIS, EVN, OIS, BMRN and TNGO
  

Stocks With Unusual Put Option Activity:

• 1) ERIC 2) BBD 3) AET 4) TBT 5) XHB
  

Stocks With Most Negative News Mentions:

• 1) DHI 2) CLF 3) VLO 4) WMT 5) CBEY
  

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume
  

Bull Radar

Style Outperformer:

• Large-Cap Value +.08%

Sector Outperformers:

• 1) Education +.79% 2) Retail +.77% 3) Telecom +.58%

Stocks Rising on Unusual Volume:

• ACHN, AIXG, VRTX, IDIX, CPA, RAIL, VVUS, WWWW, PFCB, ROVI, FSLR, AGP, CAB, FIO, BGS, HP and CLD
  

Stocks With Unusual Call Option Activity:

• 1) CSIQ 2) MIPS 3) IMAX 4) SVU 5) MCK
  

Stocks With Most Positive News Mentions:

• 1) CHK 2) CSX 3) BIDU 4) K 5) AMAT
  

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume
  

Friday Watch

Evening Headlines
Bloomberg:

• Germany Eyes Approval for Greek Rescue. Germany wants euro-area finance chiefs to avoid splitting consideration of a 130 billion-euro ($171 billion) Greek rescue and a bond swap to cut the nation’s debt load at a meeting next week, coalition lawmakers were told by German government officials in a briefing. As long as Greece meets conditions for the aid, the finance chiefs will probably approve the package along with the debt exchange, three German officials involved in the telephone briefing yesterday said. A Finance Ministry spokesman declined to comment. Wrangling among euro-area finance ministers on a Feb. 15 conference call over how to reduce Greece’s debt load and tighten control of the aid raised the prospect of a two-step process, according to two people familiar with the talks. In that scenario, the ministers’ Feb. 20 gathering in Brussels would be limited to kicking off the bond exchange and deferring decision on the rest of the bailout funds. As recriminations fly between Greece and its northern European creditors, the clock is ticking toward a March 20 bond redemption when Greece must pay 14.5 billion euros or trigger the first sovereign default in the euro’s 13-year history. “We expect the Greeks to rise to their responsibilities,” German Deputy Finance Minister Steffen Kampeter told a group of lawyers in Hamburg yesterday. “This coming Monday, we will see whether Greece delivers or whether we will be forced to decide on another course of action, one that is not desired.”
• Stress Stops Easing With Greek Debt Faltering: Credit Markets. Measures of stress in global credit markets have stopped easing as a rescue plan for Greece threatens to unravel and some of the largest U.S. and European banks face potential ratings cuts. Interest-rate swap spreads, which gauge fear in debt markets, and benchmark measures of corporate credit risk in the U.S. and Europe touched the highest level in more than two weeks yesterday. Sales of bonds in dollars are poised for the slowest week this year. Relative yields on bank bonds worldwide climbed for a second day after an eight-week decline.
• Euro May Fall to Lowest in Two Years on 'Bear Trend': Technical Analysis. The euro may fall toward its lowest level in more than two years against the dollar after dropping below a key support level, Bank of America Corp. said, citing trading patterns. The 17-nation currency’s slide below $1.3026 yesterday confirmed its decline through the 21-day moving average and signals a “larger bear trend,” according to a report by MacNeil Curry, the bank’s New York-based head of foreign- exchange and interest-rates technical strategy. “The subsequent close through the 21-day and break of $1.3026 intra-day pivot points to a resumption of the larger bear trend targeting $1.2644/$1.2510 area support,” Curry wrote in the research note published yesterday.
• Singapore Exports Drop on Europe Fallout. Singapore’s exports fell for the first time in three months in January on lower electronics and petrochemical shipments, as Europe’s debt crisis crimped demand and the Chinese New Year holiday shortened the working month. Non-oil domestic exports slid 2.1 percent from a year earlier, after a 9 percent gain in December, the trade promotion agency said in a statement today. The median of 15 estimates in a Bloomberg News survey was for a 1.6 percent decline. Shipments to Europe plunged 14.5 percent. Singapore’s electronics shipments by companies including contract manufacturer Venture Corp. fell 10.9 percent in January from a year earlier, after declining a revised 4.2 percent the previous month. “The manufacturing sector, and the electronics cluster in particular, have been hit hard by the weakness in final demand from the U.S. and Europe,” said Leif Eskesen, an economist in Singapore at HSBC Holdings Plc. “This is likely to persist. Moreover, slower growth in China and the rest of Asia will also dampen external demand in 2012.”
• Egypt-U.S. Rift Hangs Over IMF Loan Talks as Reserves Plunge. Egypt’s politicians and media are issuing ever-louder accusations of American meddling just as the country seeks loans from the International Monetary Fund, where the U.S. is the biggest shareholder. “America is behind the chaos,” blared a red headline on the front page of state-run Al-Gomhuria newspaper this week. The Muslim Brotherhood said U.S. money was being spent “to destroy Egypt and ruin its society.” The dispute over the prosecution of employees at U.S.-based NGOs, accused of breaking rules on foreign financing, has opened the deepest rift for decades between the military allies. It’s happening as the government prepares to submit an economic program to parliament that will be the basis for its application for a $3.2 billion IMF credit.
• Yelp(YELP) to Raise as Much as $100 Million in IPO. Yelp Inc., the user-generated review website, plans to raise as much as $100 million in what may be the first initial public offering from a major Internet company this year. Yelp, based in San Francisco, said it will offer 7.15 million shares for $12 to $14 each, according to a regulatory filing today. The stock will trade on the New York Stock Exchange under the ticker YELP. The IPO will probably come ahead of Facebook Inc., the biggest social-networking website, which filed to raise $5 billion on Feb. 1, without setting terms. At the midpoint of the price range, Yelp’s offering would value the company at about $778 million, or about 9.3 times last year’s sales. That compares with 5.2 times for Google Inc. and 3.8 times for Yahoo! Inc., which Yelp lists as competitors in its IPO prospectus.
• Al-Qaeda Bid for Role in Syria Cited by Panetta as U.S. Concern. U.S. Defense Secretary Leon Panetta expressed concern that al-Qaeda has voiced support for the opposition in Syria, a sign the group may be seeking a role in the conflict there. “It does raise concerns for us that al-Qaeda is trying to assert a presence there,” Panetta said yesterday in response to a question during a briefing at the Pentagon. “The situation there has become that much more serious as a result of that.”
• U.S Volcker Rule Could Hurt Liquidity, Bipartisan Senators Say. A proposed U.S. ban on proprietary trading may limit liquidity and restrict bank market-making for clients, six Republican and Democratic senators told the Federal Reserve and other regulators. “The proposed rule, as drafted, could adversely affect Main Street businesses by reducing market liquidity and increasing the cost of capital,” the senators said in a letter today. “There is evidence that this is already beginning to occur.” The letter was signed by Democratic Senators Tom Carper of Delaware, Mark Warner of Virginia and Chris Coons of Delaware; and Republicans Pat Toomey of Pennsylvania, Mike Crapo of Idaho and Scott Brown of Massachusetts.
• Most-Hated Stocks Burn Short Sellers as Sears(SHLD), Netflix(NFLX) Lead S&P. The companies investors hated the most in 2011 have returned twice as much as the Standard & Poor’s 500 Index this year, burning speculators who bet stocks from Sears Holdings Corp. to Netflix Inc. would keep falling. The 26 companies in the S&P 500 with the highest so-called short interest relative to shares available for trading rallied 18 percent this year, compared with 8 percent for the full index, data compiled by Bloomberg show.

Wall Street Journal:

• Change In Loan-Tallying Method. Goldman Sachs Group Inc. and Morgan Stanley have reduced their use of "mark-to-market" accounting, shielding them from swings in the value of some loans made to companies. After several months of internal discussion, the two companies are making an accounting change affecting a portion of corporate loans that have a combined value of more than $100 billion. The change will value that portion using so-called historical-cost accounting, according to financial filings and people familiar with the matter. Under that accounting method, assets generally are held at their original value or purchase price. Goldman and Morgan Stanley could set aside reserves against possible losses on the loans and hedge them in other ways. The banks are making the change in part because, as a result of regulators' rules, securities firms using historical-cost accounting won't have to hold much-larger amounts of capital against the assets if their values go down. There also will be less fluctuation in Goldman and Morgan Stanley's earnings, because marking the loans to market creates immediate gains or losses for the companies as the values of the loans fluctuate.
• Applied Materials(AMAT) 1Q Profit Falls 77%; 2Q Outlook Sunny. Applied Materials Inc.'s (AMAT) fiscal first-quarter profit slumped 77% on weaker sales and acquisition costs, though the semiconductor-equipment maker said recent orders would deliver a stronger result in the second quarter. Shares jumped 4.8% to $13.84 after hours as results topped expectations and the company projected current-quarter earnings between 20 cents and 28 cents a share, including some acquisition costs, as sales grow 5% to 15% from the prior quarter. Revenue would reach between $2.3 billion and $2.52 billion at that pace. Analysts polled by Thomson Reuters were looking for 15-cent profit and $2.08 billion in revenue.
• Qualcomm(QCOM) President: Continuing With Technology M&As.
• Traders Manipulated Key Rate, Bank Says. A group of traders and brokers successfully managed to manipulate an interest rate that affects loans around the world, one of the banks being investigated has told regulators. In a court filing in Ottawa, Canada's Competition Bureau said a bank it didn't identify has told the agency's investigators that people involved in the alleged scheme "were able to move" interest rates. People familiar with the situation said the "cooperating party" is UBS AG.
• Lehman Brothers Subpoenas Geithner In JPMorgan(JPM) Fight. Lehman Brothers Holdings Inc. (LEHMQ) and its creditors late Thursday said they want to subpoena Treasury Secretary Timothy Geithner to question him under oath over allegations J.P. Morgan Chase & Co., (JPM) illegally siphoned billions of dollars from the collapsing investment bank in the days before it filed for the largest bankruptcy in U.S. history.
• Syrian Conflict Spills to Neighbors. Syria's civil conflict is rapidly expanding into a regional proxy battle that threatens to cleave neighboring countries, including Lebanon and Iraq, as their populations harden along sectarian lines. Syria's struggle is reopening sectarian fault lines in places like Tripoli, a city in northern Lebanon where tensions have long simmered. The area's minority Alawite residents belong to the same Muslim offshoot sect as Syrian President Bashar al-Assad, and have long supported the family regime. Meanwhile, Sunni residents in recent months have provided shelter, hospitals and a base for arms trade to Syrian rebels, all sides acknowledge.
• The War on Wyden. For daring to work on Medicare reform with Republican Paul Ryan, the Democratic senator from Oregon is lambasted by keepers of the liberal flame. Ticked off by Washington's failure to tackle big problems? Spare a moment for Oregon's senior senator. Mr. Wyden is the Democrat who in December had the audacity to team up with House Republican Paul Ryan on a proposal to reform and strengthen Medicare—the entitlement that is pushing the country, and seniors, off a cliff. As bipartisan exercises go, this was big, thoughtful, promising.

Business Insider:

• Oppenheimer: This Is Why EU Leaders Don't Want A Greek Credit Event.
• GMO: Here's A 3-Tiered Way To Short China.
• Chart of the Day: All of the Stock Market Sentiment Indicators Combined Into One Index.
  

Zero Hedge:

• Housing Settlement To Be Taxpayer Funded Confirming Big Banks Are Truly Beyond The Law. The epic farce continues again as the FT reports tonight that the foreclosure settlement over their improper seizure of tax-paying US citizens' homes will in fact be subsidized by those very same US taxpayers. It is a hidden clause (that has not been made public yet) that allows the banks to count future loan modifications under the $30bn (taxpayer funded) HAMP initiative towards their $35bn agreement to restructure obligations under the new settlement.
• Bank Bonds Not Buying The Rally. (graphs)
• Credit Suisse The Sequel: "Probability Of The Largest Disorderly Default Loss In History On March 20 Has Increased".

CNBC:

• Rising Gas Prices May Limit Payroll - Tax Cut Savings. Rising gasoline prices could bite into any savings from the expected extension of the payroll tax cut, but for now the higher costs could be somewhat offset by lower winter heating bills.

CNN:

• Is China Faking Its Economic Growth? Influential short-seller Jim Chanos is still on a China rampage. He thinks the Chinese government is understating its inflation problem -- thereby making its economy look stronger than it actually is. "One of the things I'm pretty convinced of based on our analysis, is that inflation is under-reported in China by as much as 4 to 5% a year," he told CNNMoney's Poppy Harlow in an interview. If Chanos is right and the Chinese government is under-reporting its inflation data, its measure of economic growth would also be off-kilter. While economists are often skeptical of China's government figures, Chanos estimates those numbers are way off. "We are seeing rapid falloffs in demand in things like construction equipment, railway construction over there, housing sales -- so lots of things are slowing down pretty quickly over there," he said. "It remains to be seen whether that's going to go into a full-fledged recession. I do think the property sector which is where we're focused on, is going to enter -- or has entered a recession."
  

Financial Times:

• Athens Faces Tough Bail-Out Terms. The agreement, which officials hope to finalise on Monday, is likely to include an escrow account that must always contain enough cash to pay Greece’s debt for nine to 12 months. If the account falls below that level, money will be taken from funds earmarked to run the Greek government, according to people briefed on the talks. In addition, the bail-out will include a permanent and beefed-up presence of international monitors who will attempt to keep real-time tabs on the Greek government’s spending decisions, officials said.
• Berlin Keeps Unearthly Hush On Eurozone Crisis. Sitting in Berlin in the midst of the eurozone crisis feels like being trapped in the eye of a hurricane. All around Europe the storms of alarm and despondency rage, but in the German capital there is an unearthly hush.

Telegraph:

• Just as Greece Complies at Last, Europe Pulls the Plug. Officials from the EU and the International Monetary Fund made two grave errors when they swooped into Greece in mid-2010 and dictated the now hated "Memorandum".

Economic Information Daily:

• China will "unwaveringly" maintain property curbs in both the long and short term, citing Qin Hong, head of the policy research center under the Ministry of Housing and Urban-Rural Development. Local governments will face "relatively large" fiscal pressure this year because of public housing investment and debt repayment, according to Qin.

21st Century Business Herald:

• Beijing 2011 Land Sales Slump 33% on China Property Curbs. Income from land sales in China's capital city drops to 105.4b yuan last year from 156.2b yuan a year earlier, citing Centaline Property data. Residential site sales plunged 50% year/year in Beijing to 49.8b yuan. Developers remain cautious on buying land this year. 2012 land sales may be less than 100b yuan.
• China will support some banks in securitizing local government debt that have "good qualities" this year.
  

Evening Recommendations
Raymond James:

• Raised (GEOY) to Strong Buy, target $36.
  
• Rated (DGI) to Strong Buy, target $25.

Night Trading

• Asian equity indices are +.50% to +1.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 164.0 -5.0 basis points.
  
• Asia Pacific Sovereign CDS Index 141.75 +4.5 basis points.
• FTSE-100 futures +.35%.
  
• S&P 500 futures unch.
  
• NASDAQ 100 futures -.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (B)/.32
• (CPB)/.62
• (ECA)/.09
• (FRO)/-.58
• (HNZ)/.85
• (HMSY)/.16
• (PPC)/-.31

Economic Releases
8:30 am EST

• The Consumer Price Index for January is estimated to rise +.3% versus unch. in December.
• The CPI Ex Food & Energy for January is estimated to rise +.2% versus a +.1% gain in December.
  

10:00 am EST

• Leading Indicators for January are estimated to rise +.5% versus a +.4% gain in December.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• None of note
  

BOTTOM LINE: Asian indices are lower, boosted by technology and industrial shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Surging into Final Hour on Euro Bounce, Better US Economic Data, More Tech/Financial Sector Optimism, Short-Covering

Broad Market Tone:

• Advance/Decline Line: Substantially Higher
  
• Sector Performance: Almost Every Sector Rising
  
• Volume: Slightly Below Average
  
• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• VIX 19.34 -8.51%
  
• ISE Sentiment Index 109.0 +73.02%
  
• Total Put/Call .87 -20.18%
  
• NYSE Arms .53 -60.62%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 100.14 +.55%
  
• European Financial Sector CDS Index 191.95 -4.16%
  
• Western Europe Sovereign Debt CDS Index 348.21 -.46%
  
• Emerging Market CDS Index 259.67 -2.03%
  
• 2-Year Swap Spread 29.25 +.75 bp
  
• TED Spread 39.50 +.75 bp
  
• 3-Month EUR/USD Cross-Currency Basis Swap -72.0 +.25 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .09% -2 bps
  
• Yield Curve 170.0 +5 bps
  
• China Import Iron Ore Spot $136.80/Metric Tonne -.44%
• Citi US Economic Surprise Index 65.50 +2.2 points
  
• 10-Year TIPS Spread 2.25 +4 bps
  

Overseas Futures:

• Nikkei Futures: Indicating +130 open in Japan
• DAX Futures: Indicating +48 open in Germany

Portfolio:

• Higher: On gains in my Biotech, Retail, Medical and Tech sector longs
  
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my (EEM) short
  
• Market Exposure: Moved to 75% Net Long

BOTTOM LINE: Today's overall market action is bullish, as the S&P 500 trades near session highs on a bounce in the euro, better US economic data, short-covering, a reversal higher in (AAPL), more financial/tech sector optimism and investor performance angst. On the positive side, Alt Energy, Software, Computer, Semi, Disk Drive, Airline, Bank and Oil Tanker shares are especially strong, rising more than +2.0%. Small-cap and Cyclical shares are relatively strong. Tech and Financial shares are also outperforming. Oil and Gold are flat. The 10Y Yield is rising +6 bps to 1.98%. The Germany sovereign cds is falling -1.23% to 87.67 bps. On the negative side, Ag, Drug, Homebuilding, Education and Road & Rail shares are lower-to-flat on the day. Copper and Lumber are flat with the UBS-Bloomberg Ag Spot Index rising +.5%. The Spain sovereign cds is up +2.45% to 401.0 bps, the Italy sovereign cds is up +1.2% to 420.0 bps, the Belgium sovereign cds is gaining +2.4% to 240.50 bps and the Saudi sovereign cds is gaining +3.2% to 135.68 bps. Moreover, the Emerging Markets Sovereign CDS Index is jumping +7.2% to 267.33 bps. Lumber is -6.0% since its Dec. 29th high despite the better US economic data, more dovish Fed commentary, improving sentiment towards homebuilders, equity rally and decline in eurozone debt angst. Moreover, the weekly MBA Purchase Applications Index has been around the same level since May 2010. The Baltic Dry Index has plunged over -60.0% from its Oct. 14th high and is now down over -50.0% ytd. The 10Y T-Note Yield remains a concern considering the recent stock rally, falling Eurozone debt angst and improvement in US economic data. The Philly Fed’s ADS Real-Time Business Conditions Index has stalled over the last month after showing meaningful improvement from mid-Nov. through year-end. The Western Europe Sovereign CDS Index is still fairly close to its Jan. 9th all-time high. Overall, credit gauges have meaningfully deteriorated over the last week and remain at stressed levels. China Iron Ore Spot has plunged -24.6% since Sept. 7th of last year. Shanghai Copper Inventories are up +728.0% ytd to another new all-time high. I still think this is more of a red flag for falling demand rather than the intentional hoarding, which many suggest. The AAII % Bulls fell to 42.7% this week, while the % Bears rose to 26.6. Overall, investor complacency is still fairly high, but performance angst is likely kicking in again with the S&P 500 breaking out from its recent range. Stocks are strengthening on a bounce in the euro off the lows and better US economic data. While I do think the US economy is still improving, I do not think it is improving as much as perceived. As well, the recent deterioration in credit gauges is more noteworthy than the bounce in the euro off the lows. However, today's convincing break above S&P 500 1,350 should lead to further near-term gains. For an intermediate-term equity advance from current levels, I would still expect to see further European credit gauge improvement, subsiding hard-landing fears in key emerging markets, a rising 10-year yield, better volume, stable-to-lower energy prices and higher-quality stock market leadership. I expect US stocks to trade mixed-to-higher into the close from current levels on a bounce in the euro, better US economic data, short-covering, a reversal higher in (AAPL), more financial/tech sector optimism, technical buying and investor performance angst.