Tuesday Watch

Evening Headlines 
Bloomberg: 

• China Local-Government Borrowing Costs Drop After Trust Bailout. Borrowing costs for China’s financiers of roads, subways and sewage plants dropped after a troubled trust product was bailed out, averting a threatened default that added to concern about record local debt. The average yield on five-year notes rated AA, the most common grade for the so-called local-government financing vehicles, dropped two basis points yesterday to 7.58 percent, thebiggest decline in more than two weeks. “The news is good for all high-yield bonds, including LGFVs. The positive sentiment may last until the next repayment problem arises.”

• China's Trade Data Under Scrutiny as Hong Kong Imports Diverge. China's trade numbers, distorted by fake exports last year, are set to come under renewed scrutiny after a discrepancy between Hong Kong and Chinese figures for bilateral trade widened to the largest in eight months. Hong Kong's December imports from China fell 1.9% from a year earlier to HK$176 billion($22.7 billion). the city's statistics department said today. That compares with $38.5 billion in exports to Hong Kong reported earlier this month by China's customs administration, up 2.3%, based on data compiled by Bloomberg. 

• Asian Stocks Swing Between Gains, Losses on China, Fed. Asian stocks swung between gains and losses before the Federal Reserve meets to discuss a further reduction in stimulus and as profit growth at China’s industrial companies slowed. BHP Billiton Ltd., the world’s biggest mining company that counts China as its No. 1 market, fell 1.9 percent to be the biggest drag on the index as Australian markets opened after a holiday. LG Display Co. (034220) lost 4.4 percent in Seoul after customer Apple Inc. forecast sales that trailed analyst estimates. Komatsu Ltd., the world’s second-largest maker of construction equipment, gained 2.2 percent in Tokyo after bigger rival Caterpillar Inc. projected earnings that topped expectations. The MSCI Asia Pacific Index was little changed at 134.76 as of 12:22 p.m. in Tokyo, having swung between a gain of 0.2 percent and a loss of 0.3 percent.

• Rebar Drops in Shanghai as Demand Slows Before Lunar New Year. Steel reinforcement-bar futures in Shanghai declined for a second day as physical demand slowed before the Lunar New Year holiday. Rebar for May delivery fell as much as 1 percent to 3,437 yuan ($568) a metric ton on the Shanghai Futures Exchange and traded at 3,451 yuan at 10:44 a.m. local time. Most-active prices, which declined on Jan. 22 to the lowest level since June, are heading for a second monthly drop.

• Rubber Futures Poised for Bear Market as China’s Inventory Rises. Rubber futures in Tokyo headed toward a bear market as stockpiles in China swelled to a nine-year high, signaling weakening demand from the largest consumer of the commodity used in tires. Rubber for delivery in June on the Tokyo Commodity Exchange fell as much as 1.2 percent to 226.5 yen a kilogram ($2,207 a metric ton) before trading at 227.3 yen at 9:13 a.m. local time. A close at or below 228.8 yen would be 20 percent decline from the Sept. 9 settlement for a most-active contract, meeting the common definition of a bear market. That would mark the end of bull run that started on Aug. 26 and stalled as stockpiles monitored by the Shanghai Futures Exchange climbed, advancing for eight straight weeks to 204,451 tons, the largest amount since October 2004.

• STMicro(STM) Posts $36 Million Fourth-Quarter Loss, Trails Estimates. STMicroelectronics NV (STM) reported fourth-quarter results that trailed analysts’ estimates as Europe’s largest semiconductor maker works to restructure plants and revamp its offerings. The net loss narrowed to $36 million, or 4 cents a share, from $428 million, or 48 cents, a year earlier, the Geneva-based company said in a statement yesterday. The loss excluding impairment and restructuring charges totaled 1 cent a share. Analysts projected profit of 2 cents, the average of estimates compiled by Bloomberg.

Wall Street Journal:

• James Chanos: ‘We’re Still Short Caterpillar(CAT)'. Short-seller James Chanos said he’s still betting against Caterpillar Inc. despite the company’s better-than-expected quarterly results.

• Request to SEC for AIG Files Nets Heavily Redacted Documents. Regulator Keeps Details—and Much More—Secret Despite Request for Info on AIG Probe. The Securities and Exchange Commission recently released documents related to its probe into the near-collapse of American International Group Inc. with hundreds of redactions to keep information secret. SEC officials blacked out information more than 800 separate times in one transcript of a witness interview that lasted less than three hours. On one page, redactions left just four words remaining: "okay," "by," "in" and "did." On another page, "um hmm" is one of three short phrases left untouched. Among the blacked-out details: the names of witnesses, their lawyers, the SEC enforcement officials and even the proofreaders who checked the transcripts.

• Government Reaches Deal With Tech Firms on Data Requests. Deal Would Allow Internet Companies to Tell Public More Details About Requests. The Obama administration agreed Monday to let technology companies make more information public about how often the government monitors Internet use, a move that aims to ease public distrust and corporate complaints about snooping.

Fox News:

• Senate Republicans pitch ObamaCare alternative on eve of presidential address. Seizing on the public's continued anxiety over the ObamaCare rollout, a trio of Republican senators on Monday unveiled a sweeping alternative proposal they say would gut the law's mandates and taxes while preserving consumer protections.

MarketWatch.com:

• 3 Apple charts that explain stock investor concerns.

CNBC: 

• Emerging markets are still vulnerable to panic. Emerging markets may be unrecognizable from the small and fragile economies that fell like dominoes 15 years ago, but they are just as vulnerable today to the same sort of indiscriminate selling when investor panic sets in. As even the relatively robust economies of Mexico and Poland now feel the heat from disparate flashpoints from Turkey to Argentina, there are growing doubts that emerging markets have built any immunity to such contagion. The wildfire engulfing the developing world is starting to look very like the currency runs of the past, such as the Asian, Russian and Latin American collapses that began in 1997. Dominic Rossi, Global CIO for equities at fund manager Fidelity, likens the current wave of plunging currencies, equities and bonds to watching an old film—one in which some of the biggest emerging markets could feature.

• New home buyers are seeing more barriers. (video)

• Apple(AAPL) drops 5% on weak iPhone sales, revenue outlook. Apple posted quarterly results that beat estimates Monday, but reported weak iPhone sales and handed in a current-quarter revenue forecast that underwhelmed, sending shares lower in extended-hours trading. The company posted earnings of $14.50 a share on sales of $57.59 billion, surpassing expectations for $14.07 a share on sales of $57.46 billion, according to a consensus estimate from Thomson Reuters. Shares dropped more than 5 percent in extended-hours trading.

• America’s recovery a 'false dawn,' says Stephen Roach. Despite signs that the U.S. economy is gaining traction, Stephen Roach, former chairman of Morgan Stanley Asia, says the recovery appears to be a "false dawn." "Financial markets and the so-called Davos consensus are in broad agreement that something close to a classic cyclical revival may finally be at hand for the U.S. But is it?" Roach, a senior fellow at Yale University, wrote in an op-ed published on the Project Syndicate website on Monday.

Zero Hedge:

• Margin Debt Soars To Record High; Investor Net Worth Now Doubly Negative From 2007 Bubble Peak. (graph)

• The Trades That Broke The Nasdaq.

• Gavekal Explains The Emerging Market Panic.

• Stats Of The Union. (graph)

• Doug Noland Warns "Bubbles Are Faltering... China Trust Is The Tip Of The Iceberg".

• Democratic Congressman Admits Obamacare Won't Work (After Announcing Retirement).

• What Constitution? Obama To Emphasize Intention To Use Unilateral Presidential Authority.

Business Insider: 

• A Dangerous New Form Of Heroin Is Spreading Across America.

• Apple(AAPL) Suppliers Tank In Asian Trading.

Washington Post: 

• The lie that hangs over the State of the Union. Today, a record 72 percent of Americans say big government is the biggest threat to our country — the highest that number has been in 50 years of polling. Concern with big government is so bad, even a majority of Democrats — 56 percent — consider it the biggest threat the nation faces. So not only do Americans not trust Obama, they also have never been more skeptical of bi -government solutions to our nation’s problems. So the president can talk all he wants about income inequality, but it’s unlikely anyone will trust him with a solution. That is Obama’s dilemma as he delivers his State of the Union address tomorrow night.

Reuters: 

• China details $3-trillion local public debt risk. China's local governments have published separate audit reports detailing their combined public debt of $3 trillion for the first time ever, to increase transparency and quell investor concerns. The audits showed China's wealthiest eastern provinces are the most indebted, though repayment burdens are more onerous in poorer areas such as the southwestern province of Guizhou, where the ratio of debt to GDP is the highest, at 79 percent. Most governments were shown repaying the vast majority of their debt on time, though a handful, such as Inner Mongolia, have fallen behind, with the portion of loans due but unpaid running as high as 28 percent.

• U.S. Steel(X) loss widens as steel shipments fall. United States Steel Corp. reported a wider fourth quarter loss as total steel shipments declined compared to last year. The Pittsburgh-based steelmaker had a net loss of $122 million, or 84 cents per share, compared to a loss of $50 million, or 35 cents per share, a year earlier.

• Seagate(STX) misses estimates as growth slows in cloud business. Hard-disk drive maker Seagate Technology Plc's second-quarter results missed analysts' estimates as growth slowed in its cloud storage business, sending its shares down 7 percent in extended trading.

Evening Recommendations

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 150.0 -5.5 basis points.

• Asia Pacific Sovereign CDS Index 117.50 -1.5 basis points.

• FTSE-100 futures -.08%.

• S&P 500 futures +.29%.

• NASDAQ 100 futures -.66%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (NUE)/.40

• (CIT)/.80

• (LXK)/1.11

• (TROW)/1.03

• (APD)/1.33

• (PFE)/.52

• (GLW)/.28

• (DHI)/.30

• (DD)/.55

• (DHR)/.95

• (F)/.28

• (CMCSA)/.68

• (OSK)/.31

• (ITW)/.91

• (AKS)/.05

• (CRUS)/.77

• (BXP)/1.25

• (YHOO)/.38

• (ILMN)/.44

• (VMW)/1.00

• (AMGN)/1.69

• (T)/.51

• (JLL)/3.11

• (EA)/1.23

• (OI)/.52

• (WERN)/.29

• (MSTR)/1.10

Economic Releases
8:30 am EST

• Durable Goods Orders for December are estimated to rise +1.8% versus a +3.5% gain in November.

• Durables Ex Transports for December are estimated to rise +.5% versus a +1.2% gain in November.

• Cap Goods Orders Non-Defense Ex Air for December are estimated to rise +.3% versus a +4.5% gain in November.

9:00 am EST

• The S&P/CaseShiller Home Price Index for November is estimated to fall to 165.72 versus 165.91 in October.

10:00 am EST

• Consumer Confidence for January is estimated to fall to 78.0 versus 78.1 in December.

• The Richmond Fed Manufacturing Index for January is estimated at 13.0 versus 13.0 in December.

Upcoming Splits

• None of note

Other Potential Market Movers

• The State of the Unions, German Retail Sales, UK GDP, 2Y $32B T-Note auction, weekly retail sales report, TD Securities Mining Conference and the (VIP) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by consumer and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.