Thursday, February 26, 2009

Friday Watch

Late-Night Headlines

- Executives at buyout, venture-capital and hedge-fund firms will pay an estimated $24 billion more in taxes over nine years if President Barack Obama gets his way. Obama’s 2010 budget proposal, released today, proposes raising taxes on the managers by treating carried interest, the portion of profits they take from successful investments, as ordinary income instead of capital gains. That change would boost the tax rate, starting in 2011, to 39.6 percent for most executives from the 15 percent they now pay. Senior Treasury officials told reporters today that the tax increase would apply to all partnerships that use the carried interest structure and wouldn’t exempt any industries. Venture-capital firms have sought to be excluded from any tax rise. The policy would also affect executives of real estate and oil and gas partnerships.

- Congressional Republicans signaled that the debate over President Barack Obama’s $3.55 trillion budget request will widen the partisan divide that has marked his first weeks in office. “The era of big government is back, and Democrats want you to pay for it,” said House Republican Leader John Boehner of Ohio. At a news conference, he said Obama is starting to make former President George W. Bush “look like a piker when it comes to spending.” Republicans attacked Obama’s plan to raise the taxes of families with annual incomes exceeding $250,000 -- the first such increase in 16 years. They also criticized spending proposed in the budget for the new fiscal year that begins Oct. 1. Representative Mike Pence of Indiana, the third-ranking House Republican leader, said Obama can expect unified opposition to his proposed tax increase on top-earners. About half of Americans earning $250,000 are small-business owners, and the proposed increase will stifle the slackening economy, he said. “There will be overwhelming opposition from the American people and House Republicans to the idea that we should raise taxes during a recession,” Pence said in an interview. “Raising taxes in a recession is not a strategy for recovery.”

- Pharmaceutical stocks fell after Eli Lilly & Co.(LLY) and AstraZeneca Plc said they would lose “several hundred million” dollars each in drug sales if a health-care plan proposed today by President Barack Obama is approved. Obama’s budget proposal would raise rebates that drugmakers must provide for patients on Medicaid, the nation’s health plan for the poor, to 22 percent of the manufacturer’s price, from 15 percent. Antipsychotic drugs including Lilly’s Zyprexa and AstraZeneca’s Seroquel for schizophrenia would be especially hard hit, said Lilly spokesmen Ed Sagebiel and AstraZeneca’s Tony Jewell. People taking schizophrenia drugs are disproportionately poor and covered by Medicaid. “Any price change is going to significantly hurt profits,” said Michael Krensavage, the founder of Krensavage Asset Management in New York, in an interview today. “Whenever you talk about an extra dollar of sales lost, a significant portion falls to the bottom line. Any time you move closer to price control, you’re going to spook the drug industry.” “At a time when the economy is not doing particularly well, you’re taking a pretty big bite out of what is at least a semi- healthy part of the American economy,” said Jay Bonitt, vice president of federal affairs for Lilly, in an interview. “We are going to come back with some alternative suggestions and also point out the impact if some of these things were to happen.”

- MetLife Inc.(MET), the biggest U.S. life insurer, was downgraded by Standard & Poor’s as the rating firm cut 10 companies in the industry on concern that losses on bonds and mortgage holdings will rise. “The pressures within the life sector have been building,” S&P said in a statement. “Given the disarray in the credit and capital markets, most insurers’ financial flexibility has decreased in the past six months.”

- The Obama administration has decided to press criminal charges against accused al-Qaeda operative Ali Saleh Kahlah al-Marri, shifting him into the civilian justice system after 5 1/2 years in a military brig, two government officials familiar with the decision said. The move marks a break with the Bush administration, which had argued it could hold al-Marri indefinitely as an enemy combatant based on assertions that he was sent to the U.S. on a terrorism mission. Al-Marri is the only person now being held as an enemy combatant on U.S. soil. He was a legal U.S. resident when he was arrested in Illinois in December 2001 during the investigation of the Sept. 11 attacks. Jonathan Hafetz, an ACLU lawyer who represents al-Marri, said he would urge the Supreme Court to hear the case even if his client is indicted and shifted to civilian custody. “It is important that the Supreme Court continue to review this case,” he said. “It must make clear once and for all that indefinite detention is illegal.” Former President George W. Bush’s administration said in court papers it had evidence that al-Marri trained at an al-Qaeda camp in Afghanistan, was introduced to Osama bin Laden by Sept. 11 mastermind Khalid Sheikh Mohammed and was sent to the U.S. to explore computer hacking methods to disrupt bank records and the financial system. The Bush administration also said al-Marri’s laptop contained technical information about cyanide and other poisonous chemicals.

- Japan headed for its worst postwar recession in January as manufacturers cut production by an unprecedented 10 percent and consumers slashed spending. The month-on-month decline in factory output exceeded December’s record decline of 9.8 percent, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

- Fannie Mae, the mortgage-finance company seized by regulators in September, asked the U.S. Treasury for $15.2 billion in capital and raised the possibility of requesting more aid after a sixth consecutive quarterly loss drove its net worth below zero. A wider fourth-quarter net loss of $25.2 billion, or $4.47 a share, pushed the company to make its first draw from a $200 billion federal lifeline, Washington-based Fannie said in a filing today with the Securities and Exchange Commission. Credit quality deteriorated and debt costs soared, forcing the company to record higher expenses and write down the value of its assets. “We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth,” Fannie said in a statement accompanying the filing.

- The U.S. Commodity Futures Trading Commission said it is investigating the involvement of United States Oil Fund LP(USO) and other investors regarding an increase in the price difference between two oil contracts this month. The United States Oil Fund is managed by Alameda, California-based United States Commodity Funds LLC and maintains holdings in West Texas Intermediate crude oil, the grade traded on the New York Mercantile Exchange since 1983. The investigation announced today is part of the CFTC’s larger national oil-market probe that was announced last year. “I want to reassure the public that the CFTC takes seriously issues surrounding price movements in our nation’s vital energy markets,” Stephen Obie, acting director of enforcement at the CFTC, said in an e-mailed statement.

- U.S. lawmakers will hold a hearing next week on whether to consider changes to the bankruptcy code that would give retailers more time to find a buyer or restructure and avoid liquidation, according to a person familiar with the proposed legislation. The session will consider whether to eliminate the 210-day limit retailers have to determine which store leases to keep, according to the person, who declined to be identified because the content of the hearings isn’t public. Such a rule change may help companies avoid going out of business as Circuit City Stores Inc. was forced to do when it couldn’t find a buyer.

- Former Bundesbank President Karl Otto Poehl said Germany should resist increasing pressure to rescue other euro-area countries as the financial crisis brings some of them to the brink of default. “A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora,” he said yesterday at an event at the London School of Economics. “It’s a very dangerous course that we will enter” and “I’m very much against it, many people in Germany are against it, but the political pressure will increase, it’s obvious.”

- China’s stocks dropped, driving the benchmark index to its worst weekly drop this year, as commodity producers slumped on concern the global recession will damp demand for raw materials and batter profits. “Share prices have really risen too fast this year and funds are now switching from those that gained the most,” said Fan Dizhao, an investment manager at Guotai Asset Management Co. in Shanghai, overseeing the equivalent of $4.7 billion. Investors opened 484,510 new share trading accounts last week, according to the nation’s clearing house, the most since the five days to Jan. 25, 2008, and more than four times the levels recorded last month. Still, concern such gains are unsustainable has dragged the Shanghai Composite down 12 percent from a five-month high reached on Feb. 16. China faces an “asset bubble” if credit growth is not matched by an increase in investment opportunities, chief economist Ha Jiming at China International Capital Corp. said in a note yesterday. Aluminum capacity in China may exceed output by 51 percent this year as a result of expansion in the sector, according to research company CBI China Co.

Wall Street Journal:

- Embattled Citigroup Inc.(C) and the U.S. have reached an agreement in which the government will substantially increase its stake in the bank and in return will demand a boardroom shakeup, according to people familiar with the matter. Under a deal expected to be announced early Friday morning, the Treasury Department has agreed to convert some of its current holdings of preferred Citigroup shares into common stock. The government will convert its stake only to the extent that Citigroup can persuade private investors to do so alongside the government, the people said. The Treasury will match the private investors' conversions dollar-for-dollar up to $25 billion. The size of the government's new stake will hinge on the amount of preferred shares that private investors, including sovereign wealth funds, agree to convert into common stock. The Treasury's stake is expected to rise to 30% to 40% of Citigroup's shares, the people said.

- The president's budget takes on what has long been considered a sacred cow by trying to reduce the mortgage-interest tax deduction for top earners. The president's budget seeks to raise $318 billion over the next decade by lowering the value of itemized tax deductions for the wealthy -- including interest paid on home mortgages. Households that currently pay income taxes at the 33% and 35% rates would only be able to claim deductions at the 28% rate. That means that for every $1,000 in deductions, a household in the top tax bracket would realize a tax savings of $280, down from the current $350. The proposal wouldn't take effect until 2011. The mortgage-interest deduction for owner-occupied homes is estimated to cost the government $100 billion this year, making it the largest government subsidy for housing and one of the most expensive tax deductions. The real-estate industry, which has long squelched efforts to tamper with the mortgage-interest deduction, warned Thursday that any rollback could undermine an already decimated housing market. "It's an awful policy to recommend at this time," said Lawrence Yun, chief economist for the National Association of Realtors. "The source of economic problems is falling home prices, and this proposal raises additional uncertainty" about where and when prices would set a floor, he said.

- A dramatic shift in Washington's view of business is expressed in the Obama budget, which would raise taxes, increase regulation and ax subsidies cherished by corporate America. Makers of brand-name pharmaceuticals would see increased competition, thanks to a proposal to allow people to buy cheaper medicines from other countries. Oil and gas companies, multinational corporations and managers at private-equity firms and real-estate partnerships would be hit by higher tax rates. Financial markets would be subject to tighter oversight, while businesses would see more regulation. Among other things, the Securities and Exchange Commission is proposed to receive a 13% funding boost next fiscal year, bringing its 2010 budget to more than $1 billion. Moreover, a series of corporate subsidies, such as more than $4 billion in payments annually doled out to the private student-loan industry, would be eliminated. Taken together, the proposals usher in a government more skeptical of corporate concerns and more deeply involved in the U.S. economy. That sent a chill through Wall Street that caused student-loan providers and health-care stocks to tumble. Across the board, business leaders, including the U.S. Chamber of Commerce, raised alarms about the budget plan. "You don't build a house by blowing up its foundation," said Bruce Josten, the Chamber's executive vice president for government affairs, who contended the plan would penalize small businesses and entrepreneurs. The Chamber had previously aligned itself with Mr. Obama on big-ticket items such as the stimulus package. "If there was any doubt as to whether this administration would govern from the center, that doubt is now gone," said Dirk Van Dongen, president of the National Association of Wholesaler-Distributors, a trade group. "This budget is a forced march toward socialism, in my opinion, without trying to be dramatic about it."

- The Senate intelligence committee is expected to open a new probe into the Central Intelligence Agency's interrogation program as soon as Friday, congressional aides said, signaling a desire in Congress to examine Bush-era policies, even as President Barack Obama talks of looking to the future rather than the past. The review could produce ammunition for further investigations or lawsuits against Bush administration officials involved in the program.

- Iraq's Ministry of Oil and the British-based Mesopotamia Petroleum Co. signed a joint venture to drill for oil in Iraq, marking the first partnership between a state-owned Iraqi oil company and a foreign firm.
- President Obama’s new budget has Cramer wondering if stocks – any of them – are safe. Just look at what the White House’s spending plan does to health-care companies: Medicare changes are turning Humana (HUM) 23.64 -5.72 (-19.48%) and UnitedHealth (UNH) 20.07 -2.96 (-12.85%) into charities. Cigna (CI) 16.39 -1.53 (-8.54%) and Aetna’s (AET) 24.03 -3.05 (-11.27%) margins will shrink. Reimbursement cuts might extend to drug and biotech companies like Eli Lilly (LLY) 31.04 -1.52 (-4.67%) and Genzyme (GENZ) 64.63 -4.44 (-6.43%) These used to be classic recession-resistant stocks, but not anymore. This kind of move makes Obama, well, an enemy, Cramer said. There’s no telling which sector will be next. Maybe he’ll cut defense spending. Maybe he’ll institute a windfall profits tax on the oil companies. So now, on top of their economic woes, investors have to worry about the president’s next potential victim. (video)

NY Times:

- The Energy Department has $25 billion to make loans to hasten the arrival of the next generation of automotive technology — electric-powered cars. But no money has been allocated so far, even though the Advanced Technology Vehicles Manufacturing Loan program, established in 2007, has received applications from 75 companies, including start-ups as well as the three Detroit automakers. With General Motors and Chrysler making repeat visits to Washington to ask for bailout money to stave off insolvency, some members of Congress are starting to ask why the Energy Department money is not flowing yet. The loans also are intended to help fulfill President Obama’s campaign promise of putting one million electric cars on American roads by 2015.


- How the Crisis is Hitting Europe. Its economy harbored far more risk than most people realized, and businesses are more in hock than their US counterparts.

- The Best Undergraduate Business Schools.

Washington Post:

- Commercial banks and investment firms trimmed borrowing over the past week from the Federal Reserve's emergency lending program, a modest sign of some easing in credit strains.


- Softbank Mobile, the iPhone carrier in Japan, plans to introduce a new program Friday that will give some iPhones away for free with a new two-year contract. The 8GB iPhone will be free to new subscribers who sign up for a plan starting on Friday, likely to disappoint those who paid the equivalent of $235 (22,782 yen) in the recent past, according to CrunchGear. Softbank is also reducing the price of the 16GB version from $350 to $118 as part of the new "iPhone for everybody Campaign."

- Contradicting a Barack Obama campaign position, a former transition team official said mining companies could pay federal royalties of up to 8 percent for gold, silver and other hard-rock mining on public lands. John Leshy, who served on the president's Interior Department transition team, told a House panel Thursday that revisions to a 137-year-old hard-rock mining law were long overdue. He said the government should reinstate environmental restrictions for hard-rock mining on public land that were wrongly abandoned by the Bush administration, contending that legislation that would impose environmental controls and first-ever royalty fees would not hurt the industry. In November 2007, candidate Obama told reporters in Nevada that the measure was too burdensome on industry and could end up costing miners jobs in Nevada and other Western states. Sheri Eklund-Brown, chair of the Elko County board of commissioners in Nevada, told the House panel Thursday that the mining industry provides the highest-wage jobs in the state, and "today no community can have enough high-wage jobs." The majority of the federal lands where hard-rock mining operations occur are in 12 Western states: Alaska, Arizona, Colorado, California, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.

Boston Globe:

- The U.S. State Department and universities around the country are warning college students headed for Mexico for some spring-break partying of a surge in drug-related murder and mayhem south of the border. "There have been Americans kidnapped, and if you go you need to be very aware and very alert to this fact." Much of the drug violence is happening in border towns, and tourists have generally not been targeted, though there have been killings in the big spring-break resorts of Acapulco and Cancun, well away from the border. Mexico's drug cartels are waging a bloody fight among themselves for smuggling routes and against government forces, carrying out massacres and dumping beheaded bodies in the streets. More than 6,000 people were killed in drug violence in Mexico last year.


- Dell Inc (DELL) posted a sharper-than-expected fall in quarterly revenue as consumers bought cheaper personal computers and overall demand remained weak, but cost cuts helped profit beat Wall Street forecasts. Shares of Dell rose 1.6 percent in a relief rally as investors had feared the results would be worse, after bigger rival Hewlett-Packard Co (HPQ) last week posted disappointing quarterly revenues and cut its full-year outlook.

South China Morning Post:

- The amount of land sold at Chinese government auctions in 60 major mainland cities plunged 53 per cent last month from a year ago as cash-hungry developers became more cautious and put the brakes on acquisitions.

Late Buy/Sell Recommendations

- Reiterated Buy on (LTD), target $10.

Night Trading
Asian Indices are -.50% to +1.25% on average.
S&P 500 futures +.33%.
NASDAQ 100 futures +.42%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Global Commentary
WSJ Intl Markets Performance
Commodity Futures
Top 25 Stories
Top 20 Business Stories
Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Earnings Calendar

Conference Calendar

Who’s Speaking?
Rasmussen Business/Economy Polling

Earnings of Note
Company/EPS Estimate
- (BX)/-.30

- (MIR)/.51

- (RUTH)/-.03

Economic Releases

8:30 am EST

- Preliminary 4Q GDP is estimated to decline 5.4% versus a prior estimate of a 3.8% decrease.

- Preliminary 4Q Personal Consumption is estimated to fall 3.7% versus a prior estimate of a 3.5% decline.

- Preliminary 4Q GDP Price Index is estimated to fall .1% versus a -.1% prior estimate.

- Preliminary 4Q Core PCE is estimated to rise .6% versus a prior estimate of a .6% increase.

9:45 am EST

- The Chicago Purchasing Manager report for February is estimated to fall to 33.0 versus 33.3 in January.

10:00 am EST

- The Final Univ. of Mich. Consumer Confidence reading for February is estimated to fall to 56.0 versus a prior estimated of 56.2.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Bullard speaking, Fed’s Plosser speaking, Fed’s Yellen speaking, NAPM-Milwaukee, Goldman Tech & Internet Conference, Pacific Crest Technology Summit, (ETN) analyst meeting, (IMGN) analyst meeting, (HS) investor day and (PGN) analyst meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

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