Today's Headlines

Bloomberg: 

• Italy Confronts Vacuum as Leaders Seek to Avoid Election. Italian political leaders sparred over forming a government after inconclusive elections fueled concern about the outlook for the euro region and the country’s deepening recession. Beppe Grillo, whose anti-establishment movement was the top vote-getter in Italy’s election this week, rejected a call made yesterday by Democratic Party leader Pier Luigi Bersani to back a coalition. Grillo’s movement “must say what they want to do for this country and for their children,” Bersani said.
• Hollande Jobs Pledge Turning Into Achilles Heel as Claims Rise. French President Francois Hollande’s promise to create jobs by the end of the year is turning into his Achilles heel. Jobless claims rose last month to a 15-year high at 3.17 million, the labor ministry said yesterday. The increase brings such claims close to the country’s historic peak in January 1997 -- when they stood at 3.21 million -- with no signs they’ll fall any time soon. 
• Spain’s Bankia-Led Bailout Won’t Spell End of Bank Troubles. Spain’s 41 billion-euro ($54 billion) rescue of lenders, prompted by record losses at Bankia (BKIA), won’t spell the end of troubles for the nation’s financial industry as the economy remains mired in recession.
• China Needs Tighter Monetary Policy, State Research Agency Says. China needs to lean toward a tighter monetary-policy stance as the economy faces risks from excessive liquidity and credit, according to a research unit of the nation’s top economic-planning agency. Authorities should drain more cash from the financial system to manage liquidity and regulators need to enhance oversight of banks’ off-balance-sheet business, the State Information Center, a research arm of the National Development and Reform Commission, said in a report published today in the official China Securities Journal. The report adds to signs that the central bank and other agencies will step up efforts to counter risks from rising property prices and debt as the economy recovers from the weakest growth in 13 years.
• China Provinces Cut Growth Targets in Sign Debt Concerns Heeded. Almost half of China’s provinces are setting their growth sights lower in the wake of the central government’s emphasis on the quality of expansion over speed, a sign of an increased focus on tackling rising debt.
• Canada Losing Debt Halo as Bull Market Housing Peaks With Carney. 
• Gross Says Corporate Bonds Irrationally Priced. Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said asset-price irrationality is rising after years of record low benchmark interest rates by the Federal Reserve. The level of asset prices signal investors should be cautious and the degree of irrationality is about six on a scale of one to 10 and rising, Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. He noted that Fed Governor Jeremy Stein earlier this month said some credit markets, such as corporate debt, are showing signs of excessive risk-taking, while not posing a threat to financial stability.

Wall Street Journal:

• Budget Battle: Live Stream.
• Bernanke: Fed Must Review Exit Strategy Sometime Soon. Federal Reserve Chairman Ben Bernanke on Wednesday said the Fed sometime soon will need to review its strategy for exiting its easy money policies, though it must be careful not to choke off economic growth by raising interest rates too soon. Mr. Bernanke, in his second day of testimony before Congress, also defended the central bank's policies against criticism that it is hurting retirees and other savers. He said raising interest rates too soon would hurt them and the rest of the economy.
• Italy's Grillo Rules Out Forming Coalition. Beppe Grillo, the former comedian whose upstart Five-Star Movement increasingly appears to be the only real winner of Italy's general election, on Wednesday described center-left leader Pier Luigi Bersani as a "dead man walking" and said his own party wouldn't be joining any coalition to form a government. 
• Phil Gramm: Obama and the Sequester Scare. Governing isn't about blaming someone else. It is about choosing.

MarketWatch: 

• Italy yields up less than feared amid gridlock. Center-left’s Bersani attempts to piece together new government.

CNBC: 

• Live Blog: Apple(AAPL) Shareholder Meeting. 
• Pending Home Sales Rise Despite Rough Winter. Contracts to buy existing homes in January rose a strong 4.5 percent from the previous month, according to the National Association of Realtors, which also revised December's numbers down. That beats expectations of a 1.8 percent gain.
• Housing Market May Not Be as Healthy as It Appear. (video)
• Apple(AAPL) 'Seriously Considering' Returning Cash to Shareholders.

Zero Hedge: 

• Capital Goods "Split Decision" Points To Uncertain Economy. (graphs) 
• Bank Deposits Decline Across Europe In January. (graphs) 
• A Century Of French And Italian Economic Decline.
• Europe Limps Higher After Italy Auctions Debt At Four-Month High Yields. (graphs)

Business Insider: 

• THE NEXT STOCK MARKET CRASH: Why Many Pros Think It Has Already Begun. (graphs)
• BOB WOODWARD: Obama Is Showing 'A Kind Of Madness I Haven't Seen In A Long Time'.
• Four Reasons The Next Budget Crisis Will Be Even Worse Than The Sequestration Deadlock. 
• DRAGHI: WE'RE 'FAR' FROM EXITING STIMULUS MEASURES. 
• A Major Conservative Group Is Targeting 'Big Government' Republicans.

Mortgage Bankers Assoc.:

• Mortgage Applications Decrease in Latest MBA Weekly Survey. Mortgage applications decreased 3.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 22, 2013 This week’s results did not include an adjustment for the Presidents’ Day holiday. The Market Composite Index, a measure of mortgage loan application volume, decreased 3.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 3 percent compared with the previous week. The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier and is at its lowest level since the week ending December 28, 2012.

Reuters:

• Italian president snubs German candidate over "clown" comment. Italian President Giorgio Napolitano canceled a dinner with the German opposition's chancellor candidate on Wednesday after he described Italian former premier Silvio Berlusconi and comic-turned-politician Beppe Grillo as "clowns". Peer Steinbrueck, a Social Democrat who will take on Chancellor Angela Merkel in Germany's next national election in September, has a reputation for gaffes and his remark created the first diplomatic incident of his accident-prone campaign.
• Joy Global(JOY) says starting to see big mining projects come back. Mining equipment maker Joy Global Inc said it was starting to see big projects come back to the market as global miners, looking for more returns than volumes, begin to open up their purses to low-risk projects.

Financial Times:

• China to tighten shadow banking rules. China will rein in its shadow banking system by requiring banks to provide greater disclosure about their off-balance sheet activities, according to people briefed on the new rules. The Chinese shadow banking system – credit flows beyond traditional bank loans – has quadrupled in size since 2008 to about Rmb20tn ($3.2tn), or 40 per cent of economic output. These flows were crucial in reviving the country’s growth last year. But banking analysts and rating agencies have warned that they pose an increasingly serious risk to Chinese economic stability.

Telegraph:

• ECB bond plan in jeopardy as Italy's voters reject conditions. Italy's electoral earthquake is “a catastrophe for the euro and the European Union”, according to Luxembourg’s foreign minister, Jean Asselborn. 
• Eurozone faces serious problem if Italian instability spreads. Paul Kavanagh, chairman of Killik Capital, says if the political instability caused by the Italian election spreads to other European countries it will present serious problems for the EU. 

Bear Radar

Style Underperformer:

• Large-Cap Growth +.79%

Sector Underperformers:

• 1) Gold & Silver -1.71% 2) Alt Energy -.84% 3) Steel +.15%
  

Stocks Falling on Unusual Volume:

• NTT, LO, ABV, CRAY, MRCY, MO, CWH, PZZA, CRI, FSLR, TGT, MX, BSFT, WRLD, INVN, TG, HXM, ORA, TAC, TRLA, WTI, SCTY, LO, NEM, TDC, SHOS, ABV, MSTR, GG, RPRX, SSP and SPWR

Stocks With Unusual Put Option Activity:

• 1) RDN 2) EWI 3) FSLR 4) KSS 5) TGT
  

Stocks With Most Negative News Mentions:

• 1) VRSN 2) AH 3) RIG 4) SCHW 5) GLF
  

Charts:

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

Bull Radar

Style Outperformer:

• Mid-Cap Growth +1.29%

Sector Outperformers:

• 1) Road & Rail +2.69% 2) Oil Tankers +2.01% 3) Homebuilders +1.67%
  

Stocks Rising on Unusual Volume:

• GPOR, OPTR, GWRE, VHC, UNXL, MAKO, QCOR, DLTR, PDCE, COH, JBHT, VRSK, EAT, LNKD, SLCA, GPOR, KSU, TPX, VRTX, STWD and CRZO

Stocks With Unusual Call Option Activity:

• 1) ENDP 2) DLTR 3) DF 4) UNXL 5) NI
  

Stocks With Most Positive News Mentions:

• 1) ETN 2) DE 3) IP 4) EXPD 5) TJX

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Wednesday Watch

Night Trading

• Asian equity indices are -.25% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 110.0 -1.5 basis points.

• Asia Pacific Sovereign CDS Index 84.25 +1.0 basis point.

• FTSE-100 futures +.03%.

• S&P 500 futures -.05%.

• NASDAQ 100 futures -.01%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CRI)/.85
• (NRG)/-.12
• (AES)/.30
• (LAMR)/.10
• (JOY)/1.14
• (ITT)/.38
• (TGT)/1.48
• (TJX)/.81
• (JCP)/-.24
• (LTD)/1.74
• (RGR)/.82
• (MYL)/.64
• (MNST)/.41
• (CECO)/-.33
• (CPRT)/.36
• (DLTR)/.99   

Economic Releases
8:30 am EST

• Durable Goods Orders for January are estimated to fall -4.7% versus a +4.6% gain in December.
• Durables Ex Transports for January are estimated to rise +.2% versus a +1.3% gain in December.
• Cap Goods Orders Nondef Ex Air for January are estimated to fall -1.3% versus a +.3% gain in December.

10:00 am EST

• Pending Home Sales for January are estimated to rise +1.8% versus a -4.3% decline in December. 

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +2,500,000 barrels versus a +4,143,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -1,000,000 barrels versus a -2,884,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,550,000 barrels versus a -2,277,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise +.2% versus a -.9% decline the prior week.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke addressing House, UK GDP, weekly MBA mortgage applications report, German consumer confidence, (CSTR) analyst day, (AAPL) annual meeting, BofA Merrill Ag Conference, Keefe Bruyette Woods Bank Conference and the KeyBanc Consumer Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by mining and consumer shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Rebounding on More Dovish Fed Commentary, Short-Covering, Homebuilding/Metals Sector Strength

Today's Market Take:

Broad Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Slightly Below Average

• Market Leading Stocks: Outperforming

Equity Investor Angst:

• VIX 17.13 -9.79%
  

• ISE Sentiment Index 105.0 +23.53%

• Total Put/Call 1.09 -4.39%

• NYSE Arms .85 -70.47%

Credit Investor Angst:

• North American Investment Grade CDS Index 89.28 -1.01%

• European Financial Sector CDS Index 167.54 +11.5%

• Western Europe Sovereign Debt CDS Index 107.33 +8.85%

• Emerging Market CDS Index 237.60 +.79%

• 2-Year Swap Spread 15.0 +.75 bp

• TED Spread 17.5 +.5 bp

• 3-Month EUR/USD Cross-Currency Basis Swap -21.5 -1.75 bps

Economic Gauges:

• 3-Month T-Bill Yield .11% -1 bp

• Yield Curve 164.0 unch.

• China Import Iron Ore Spot $151.90/Metric Tonne unch.

• Citi US Economic Surprise Index 7.70 +12.7 points

• 10-Year TIPS Spread 2.51 -1 bp

Overseas Futures:

• Nikkei Futures: Indicating +5 open in Japan

• DAX Futures: Indicating +36 open in Germany

Portfolio: 

• Slightly Higher: On gains in my tech/retail sector longs and emerging markets shorts
• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges
• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:

• Merkel’s Euro Doctrine Threatened as Italians Snub Austerity. Silvio Berlusconi may have the last laugh -- at Europe’s expense. Once the subject of German Chancellor Angela Merkel’s barely suppressed titters, the former Italian leader roared back from the political wasteland in yesterday’s election, blocking the formation of a new Italian government and fracturing the euro zone’s brittle newfound stability. The billionaire’s resurrection coupled with the emergence of comedian-turned-politician Beppe Grillo risked igniting anti- austerity forces in southern Europe’s depressed economies, overturning the German-led crisis-management formula and renewing doubts about popular backing for the euro. “This is a catastrophe for Europe,” Luxembourg Foreign Minister Jean Asselborn said in a telephone interview. “There are a lot of people in Italy, in Europe, who think that Europe is to blame for Italy’s problems. Second, I have very serious doubts that populism would make it possible to find a solution to create stability in Italy.” 
• Italy Confronts Vacuum as Leaders Seek to Avoid Election.Italian party chiefs began jockeying to forge a coalition of rivals and head off a second vote as a political vacuum of at least a month loomed, threatening to whipsaw financial markets. In the aftermath of an inconclusive election, Democratic Party leader Pier Luigi Bersani and resurgent ex-Premier Silvio Berlusconi may be seeking to avoid a ballot that would favor populist Beppe Grillo, whose movement was the top vote-getter in its first national contest. No formal steps can be taken until a new parliament convenes March 15. “If they don’t change strategy and go vote again with similar candidates, the risk is a Grillo landslide,” Giovanni Orsina, a history professor at Luiss Guido Carli University in Rome, said in an interview today.
• Italy’s Bonds Slump After Inconclusive Elections. Italy’s government bonds slumped, leading declines among securities from Europe’s high-deficit nations, as inconclusive election results triggered renewed concern that the region’s sovereign-debt crisis will worsen. Italian 10-year yields climbed the most in 14 months as results showed pre-election favorite Pier Luigi Bersani won the lower house by less than a half a percentage point, while Silvio Berlusconi, the former premier fighting a tax-fraud conviction, gained a blocking minority in the Senate. Spanish and Portuguese securities also slid, while German and Finnish bonds advanced for a fourth day. Italy sold 8.75 billion euros ($11.4 billion) of six-month bills at the highest yield since October. Italy’s 10-year yield climbed 40 basis points, or 0.4 percentage point, to 4.89 percent at 4:42 p.m. London time after rising as much as 44 basis points, the biggest increase since Dec. 19, 2011. The extra yield, or spread, investors demand to hold Italian 10-year securities instead of similar-maturity bunds widened 50 basis points to 344 basis points after expanding to 347 basis points, the most since Dec. 11.
• Bank Credit Risk Surges in Europe Amid Italian Election Deadlock. The cost of insuring against default on European bank debt surged to the highest in three months on concern deadlock in Italy’s elections will trigger a flight from risky assets as a political vacuum roils markets. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers climbed 12 basis points to 163, at 11:30 a.m. in London, the highest since Nov. 28 and headed for the biggest monthly increase since May. Contracts insuring Italy’s bonds rose 43 basis points to a 2 1/2-month high of 293, the biggest jump since December 2011. Italy faces months of political turbulence which may see President Giorgio Napolitano install an interim government to write a new election law as the prelude to another vote.
• “Gridlock in parliament means gridlock in the economy,” Alberto Gallo, the head of European macro credit research at Royal Bank of Scotland Group Plc in London, wrote in a client note. “The longer the instability lasts, the more the recession can deepen, pushing up unemployment, defaults and bad loans. In the worst-case scenario, the weaker banks could see deposit outflows re-emerge.” The Markit iTraxx Europe Index of swaps on investment-grade companies rose seven basis points to 120, the highest since Nov. 30. The Markit iTraxx Crossover Index of swaps on 50 companies with mostly speculative-grade ratings climbed as much as 26 basis points to 470, the highest this year before paring the gain to 465 basis points.
• European Stocks Decline on Italian Election Deadlock. European stocks declined as Italy’s inconclusive parliamentary election renewed concern that the Mediterranean nation will dilute its austerity program and the region’s sovereign-debt crisis will deepen. Italian shares led the retreat, with the FTSE MIB Index (FTSEMIB) tumbling 4.9 percent.
• ECB Should Join ‘Currency War’ to Weaken Euro, Montebourg Says. The European Central Bank should weaken the euro, confronting the new “currency war” head on to help address economic stagnation in the region, French Industry Minister Arnaud Montebourg said today. Calling for a more activist and “political” management of the currency shared by 17 European nations, Montebourg said at a press conference in Paris that he wants “the European Central Bank to do its job.” “The euro is too strong and doesn’t correspond to economic fundamentals,” he said. The ECB “should prepare to confront a new currency war in which the weakening of currencies becomes a political tool.”
• Italy Votes for Chaos and the Euro Crisis Is Back. Italy’s parliamentary election could not have gone worse for the country or the euro area. It is now possible that in the coming months the currency zone’s third-largest economy will need a bailout from international creditors, at a time when Italy will have no government in place to ask for, or negotiate, a rescue. In case you had any doubts, the euro-area crisis is back.
• UBS Sees Iron Ore Plunging 54% to Lowest Since ’09 on Supply. Iron ore, trading near 16-month highs, may slump 54 percent to the lowest level since 2009 as China boosts production and global supply climbs, said UBS AG. (UBSN) Rates may tumble to $70 a ton in the three months ending September after trading between $130 and $160 through June, Sydney-based commodity analyst Tom Price said in a phone interview today. China is the world’s biggest importer. “We expect a big correction in the third quarter,” said Price. “We see a big lift in supply.”
• Aluminum Falls as Commodities Slide on Inconclusive Italian Vote. Aluminum fell for a seventh session in London as commodities slid amid concern that the euro-area debt crisis might worsen, following an inconclusive election in Italy. The Standard & Poor’s GSCI Spot Index of 24 raw materials fell to the lowest since Jan. 17. China, the biggest aluminum consumer, is set to have a “significant” surplus of about 700,000 metric tons that is likely to be partly shipped in the form of semi-fabricated products, according to Goldman Sachs Group Inc. “There is selling across the board as there is so much uncertainty because of Italy,” Walter de Wet, an analyst at Standard Bank Plc, said today in a telephone interview. “The fundamentals are also very weak.” Aluminum for delivery in three months declined 0.5 percent to $2,027.50 a metric ton at 3:09 p.m. local time on the London Metal Exchange. Prices earlier touched $2,010, the lowest since Nov. 29.
• Brazil’s Unemployment Rises More Than Forecast in January. Brazil’s unemployment rate rose more than analysts predicted in January as the world’s second-biggest emerging economy continues to respond slowly to government efforts to spur growth. The jobless rate jumped to 5.4 percent from the record low 4.6 percent in December, the national statistics agency said in Rio de Janeiro today. Economists had forecast unemployment would rise to 5.2 percent, according to a survey by Bloomberg of 28 analysts.
• Consumer Confidence in U.S. Increases More Than Forecast. The Conference Board’s index climbed to 69.6, exceeding all forecasts in a Bloomberg survey of economists, from a revised 58.4 in January, data from the New York-based private research group showed today. It was the first improvement in four months and the biggest since November 2011.

Wall Street Journal: 

• Recap: Bernanke Faces Senate Lawmakers.

MarketWatch: 

• Gold set for biggest one-day gain of the year. Prices top $1,600 on Bernanke testimony, Italy election uncertainty.
• ECB bond-buying program may not be there to save Italy.

Fox News:

• DHS to release thousands of illegal immigrants, blaming budget cuts. The Department of Homeland Security has started releasing hundreds of illegal immigrants held in local jails in anticipation of automatic budget cuts, in a move one Arizona sheriff called politically motivated -- and dangerous. 
• Republicans accuse Obama of using military as 'prop,' crying wolf over budget 'chaos'.

CNBC: 

• Foreign Autos Shut Out Big 3 In New Report. In a report that will trouble fans of the Big 3, the annual selection of top automobiles and top brands by Consumer Reports shows Detroit falling behind its foreign competitors. In fact, for the first time since 2007 the top ten vehicles picked by Consumer Reports does not include a model built by General Motors, Ford or Chrysler. 
• Bernanke: My Inflation Record at the Fed Is One of the Best. Federal Reserve Chairman Ben Bernanke strongly defended the central bank's easy monetary policy before a Senate committee on Tuesday and said there's little risk of a spike in inflation in the near term. In criticizing the central bank's easy monetary policy, Sen. Bob Corker, a Republican from Tennessee, called Bernanke the biggest dove since World War II.
• Why Italy’s Stalemate Could Mean Chaos for Euro Zone.

Zero Hedge: 

• Case Shiller Home Prices Post Tiny Increase In December Driven By Las Vegas, Los Angeles. (graph)
• Dear Senate: Please Ask Bernanke To Explain This. (graphs)
• New Home Sales Seasonal Adjustments. (graph)
• The Huge Shift In Market Structure That Occurred Yesterday. (graphs)
• The Unsafe Foundation of Our Housing 'Recovery'. (graphs)

Business Insider:

• The Part Of The Drone War We Still Know Nothing About. 
• BOEHNER: THE SENATE NEEDS TO 'GET OFF THEIR ASS'.

Reuters:

• Strong sales help Home Depot(HD) outshine Lowe's(LOW). Improvements in the U.S. housing market and sales tied to Hurricane Sandy helped Home Depot Inc report a higher-than-expected quarterly profit and outshine rival Lowe's Cos Inc for the 15th straight quarter. 
• French jobless claims hit 15-year high in Jan. The number of people out of work in France shot up again in January after a smaller rise in December, piling new pressure on Socialist President Francois Hollande who has made tackling joblessness his top priority. The number of jobseekers in mainland France jumped by 43,900 or 1.4 percent, signalling a return to the rapid pace of increase seen over 19 straight months to December - although half of the rise was due to a change in methodology in January. Without the adjustment the January increase would have been 22,800, still a much bigger jump than the 8,000 seen in December and dealing a blow to Hollande, who has promised to stem the rise in unemployment by the end of 2013.

Telegraph: 

• Debt crisis: Italian election impasse reignites euro fears - live.

Frankfurter Allgemeine Zeitung:

• Lars Feld, a member of a panel of economic advisers to German Chancellor Angela Merkel, said the euro crisis will return "with a vengence" as capital loss will lead to higher risk premiums for Italy's interest rates, citing an interview. Anton Boerner, head of Germany's BGA exporters' association, says Italy must reform tax, labor, judicial system or risk "irreparable damage" of euro. Boerner says if Italy not willing to reform, "we have to think about how to deal with a modified eurozone".

Baltic News Service:

• European Union President Herman Van Rompuy said Italy has "no alternatives" to continuing fiscal reforms. "Now it's up to the leading politicians to make the necessary compromises to form a government on a stable basis and keep the course of fiscal consolidation and reforms. There is no way  back, there are no alternatives."

Valor:

• Bank of America's(BAC) Brazil credit exposure has risen to $10 billion.