Tuesday Watch

Weekend Headlines
Bloomberg:

- New restrictions on executive pay at U.S. banks receiving federal aid may cause talented managers to flee to hedge funds and foreign-owned banks, say critics of the measure. The limits, championed by Senate Banking Committee Chairman Christopher Dodd, were tucked into a $787 billion fiscal stimulus bill approved yesterday by Congress. President Barack Obama plans to sign the measure early next week. The provisions go beyond the $500,000 cap announced by Obama last month, by restricting bonuses for senior executives and next 20 highest employees at companies that receive more than $500 million from the Treasury Department’s Troubled Asset Relief Program. “The soon-to-be-law prohibits paying commissions, which are the lifeblood of a salesperson’s income,” said Scott Talbott, vice president for government affairs at the Financial Services Roundtable, a Washington trade group that lobbies on behalf of banks. “Non-TARP companies, like hedge funds and foreign firms, don’t have this restriction, so it will be easier for them to hire the top producers away.”

- Japan’s economy, only months ago forecast to be the best performing among the world’s most advanced nations, has become the worst. Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S.

- Asian stocks, down 60 percent from their peak, may decline further as the deepening global slump weakens corporate earnings and drives up funding costs, Deutsche Bank said. The brokerage lowered its year-end forecast for the MSCI AC Asia excluding Japan Index by 9 percent to 240.7, said Niklas Olausson, a Kuala Lumpur-based analyst. That’s a retreat of about 14 percent from the index’s close on Feb. 13.

- The yen may weaken 13 percent against the dollar this year as Japanese exporters lose competitiveness and the nation’s economic slump deepens, according to Asia Genesis Asset Management Pte. The decline in Japan’s currency may wipe out more than half its gains from 2008 that were spurred by the flight into haven currencies due to the global financial crisis, said Chua Soon Hock, managing director of the Singapore-based hedge fund.

- The euro probably won’t rise from its current price over concern some European governments may miss out on a recovery, according to UBS AG.

- The rising cost of insuring against default by a “peripheral” European government is likely to weigh on the euro, according to Merrill Lynch. “This remains an important background negative for the euro,” Steven Pearson, a strategist in London at Merrill Lynch, wrote. “Euro banking-sector exposure to Eastern Europe, often via foreign currency lending, is an additional euro negative story that is gaining air-time.”

- The euro fell to a 10-week low against the US dollar after Moody’s Investors Service said it may downgrade a number of banks with units in Eastern Europe, reigniting concern about financial turmoil in the region. The euro also weakened against 14 of the 16 major currencies on speculation its recent declines triggered the execution of automatic sell orders. The pound dropped versus the yen on concern a U.K. report today will show inflation slowed due to the economic slump, giving the Bank of England more room to cut interest rates.

- Russia’s ruble may slide as much as 22% against its target basket this year as the central bank is forced to relinquish its defense of the currency amid a deteriorating economy, Nomura Holdings says. The ruble risks “overshooting” to 50 against the basket, which is made up of about 55% dollars and the rest euros, at the end of the year as oil prices continue to fall, he added.

- ASM International NV, Europe’s second-largest maker of semiconductor equipment, rose the most in more than a week in Amsterdam trading after Goldman Sachs(GS) added the stock to its “conviction buy” list. ASMI surged 9.54% to 6.9 euros. The brokerage firm predicts order trends in the semiconductor packaging industry will “stabilize” in the first half of this year.

- Oil prices won’t rise above current levels of $40 a barrel even if OPEC decides to cut output by more than 2 million barrels a day at its next meeting in March, Annahar said, citing a Kuwati oil official. Prices are affected by a huge surplus because of non-compliance to quotas by many members of OPEC, citing Mussa Maarafi, a member of Kuwait’s Supreme Petroleum Council.

- Crude oil fell below $37 a barrel in New York on speculation a deepening recession in Europe and Asia will stifle demand for fuels. World oil demand may not rebound until 2010, when it may begin rising by about 1 percent a year through 2013, International Energy Agency Executive Director Nobuo Tanaka said in London yesterday.

- The United Auto Workers union is objecting to proposals from General Motors Corp. and Chrysler LLC to modify a retiree health-care fund as required by the U.S. so the automakers can keep $17.4 billion in aid. The UAW stopped negotiations with GM last night, a person familiar with the talks said. Chrysler still is talking to the union, though the talks haven’t been substantive, said another person briefed on those discussions. A delay in the talks could risk the automakers missing a Feb. 17 deadline to show progress in a government-ordered plan to cut labor and debt costs. It’s not clear what that would mean.

- Chinese companies may be using record bank lending to invest in stocks, fueling a rally that’s made the benchmark Shanghai Composite Index the world’s best performer this year, according to Shenyin & Wanguo Securities Co. “Part of the liquidity flowing into the stock market could be from companies using borrowed funds to invest in the stock market instead of working requirements,” said Li. The brokerage was voted the best in the country for research by the national pension fund, China’s largest investor.

Wall Street Journal:

- While much of the investment-banking community looks on the current crisis with a mixture of horror and bemusement, technology bankers have been here before. When the dot-com bubble burst at the beginning of the decade, hundreds of technology companies folded and the flow of deals dried up. Those hard times seem to have returned, but bankers in the sector suggest the prognosis for technology is better than for other sectors, largely because tech companies learned some valuable lessons from the first crash.

- Vodafone, HTC Close to Pact on Use of Google(GOOG) Software.

- Brokerage firms are reducing financing and other services to hundreds of hedge funds, in a move that could accelerate the shakeout among these heavy-hitting investors. Under financial pressure, securities firms are dividing their hedge-fund clients into lists of those they consider best able to weather the financial turmoil and those they're less sure of. The result is that more funds may have to merge, find other financing at higher cost or close. The squeeze, described by a range of brokerage-firm and hedge-fund officials, takes different forms.

NY Times:

- US Survey Shows 90% Don’t Like New Economic Policy.

- There’s an eclectic group of smaller high-tech players that have managed to keep posting double-digit growth and attract new business.

- One distinction this year may turn out to be significant: the various sectors of the stock market have not all been moving in tandem. “The market is starting to sort between the winners and the losers, rather than pushing everything down as if it were a monolithic asset,” said Jeffrey N. Kleintop, chief market strategist at LPL Financial in Boston. While investors lost significant sums in every sector last year, they’re finding some pockets of opportunity now, which could be a sign that pure panic is being wrung out of the market, and that fundamental factors for specific stocks and sectors are beginning to strongly influence investors’ thinking once again.

- US Coal Industry Faces Increased Oppostion.

- What Convergence? TV’s Hesitant March to the Net.

- Zagat Guide to Review Doctors for Wellpoint(WLP) Customers.

Financial News Online:
- Cracks are widening in the $600bn fund of hedge funds business as some of the biggest listed funds face pressure to liquidate and return cash to investors after poor performance. Listed funds of hedge funds represent only a small part of the industry, but analysts warn they face extinction, with potential knock-on effects to the rest of the sector.

NY Post:

- New York Gov. Paterson has secretly granted raises of as much as 46 percent to more than a dozen staffers at a time when he has asked 130,000 state workers to give up 3 percent pay hikes because of the state's fiscal crisis, The Post has learned. The startling pay hikes, costing about $250,000 annually, were granted after the governor's "emergency" declaration in August of a looming fiscal crisis that required the state to cut spending and impose a "hard" hiring freeze. One raise was approved as recently as last month - when Paterson claimed the budget deficit had reached an unprecedented $15.5 billion. The raises, which have stunned the few state workers who know about them, are outlined in data obtained from the office of state Comptroller Tom DiNapoli, prepared at The Post's request.

Chicago Sun-Times:

- State lawmakers are calling for a criminal investigation into whether U.S. Sen. Roland Burris committed perjury before a state impeachment panel, in the wake of a Sun-Times exclusive story published online Saturday. The development comes after the Chicago Democrat failed to initially disclose under oath to a House panel that he was hit up for campaign cash by former Gov. Rod Blagojevich's brother.

Detroit Free Press:

- Dow Chemical Co.(DOW) says it aims to start selling power-generating roof shingles by 2011.

G2Weather Intelligence:

- Long Global Warming? It Might be Time to Rethink. “In general, the climate regime no longer resembles the recent warm spell of the last 25 years. The persistence of the very cold Pacific Ocean of the last couple of year has resulted in…patterns more similar to the 1950s-1970s. If this “old-school” pattern persists much longer, the global oceans will continue to cool off, and we will likely head into a cooler multi-decadal climate regime.” – Dr. Todd Crawford, WSI Seasonal Forecaster

Reuters:

- General Motors Corp(GM), nearing a Tuesday deadline to present a viability plan to the U.S. government, is considering as one option a Chapter 11 bankruptcy filing that would create a new company, the Wall Street Journal said in its Saturday edition.

- Mobile telephones are seen as "a basic necessity" around the world and should enjoy persistent strong demand throughout an economic downturn, a United Nations agency said in a report published on Monday. "With or without a recession," millions of people in India, China, Nigeria, and other emerging markets will seek out mobile phones, according to the International Telecommunication Union (ITU). Increasingly cost-conscious households in Europe and North America are also expected to keep up their mobile use, and many will drop their fixed-line telephones as a way to save money, the ITU said in a report released for the Mobile World Congress trade show in Barcelona.

- Adobe Systems(ADBE), which popularized the use of video and animation on the Web, is introducing a new version of its Flash software that runs not only on computers but also on the latest high-end mobile phones. Adobe, which makes Acrobat, Flash and Photoshop software, plans to bring a full PC version of its Flash video player to smartphones next year, but has no imminent deal to announce for Apple's influential iPhone, it said.

Financial Times:

- IntercontinentalExchange(ICE), the operator of futures exchanges and over-the-counter trading platforms, plans to set up a European clearer for credit default swaps in an effort to establish the first transatlantic clearing mechanism for such products.

TimesOnline:
- If, like John Maynard Keynes, you believe that spending, any spending, will revive a flagging economy, the freshly minted, 1,000-page American Recovery and Reinvestment Act of 2009, calling for $504 billion in deficit-financed spending, is for you. Well, not quite. It seems that most of the money will not be spent very soon. About 30% won't hit the economy until 2011, and the balance is likely to be tied up in the procurement processes of the federal and state governments until well into 2010, and beyond. Besides, much of the spending will end up boosting other economies — subsidies for wind machines will benefit workers in the other countries in which such machines are manufactured, not our very own horny-handed toilers. And much of the spending will not create jobs for the unemployed: laid-off car workers do not have the skills to design the software to manage the "smart grid" that is the apple of the greens' eye.

- ARM Holdings(ARMH) believes its strength lies in sharing.

- Ireland ‘could default on debt’

Die Welt:

- Deutsche Telekom AG’s T-Mobile division is doing “solid” business in the US, where it won 3 million new customers last year, citing an interview with T-Mobile CEO Hamid Akhavan.

WirtschaftsBlatt:
- European Central Bank Executive Board member Gertrude Tumpel-Gugerell said speculation about a breakup of the euro area is “nonsense” as countries have benefited from monetary union especially in times of crisis.

Haaretz.com:

- Israeli officials are putting together a position paper on talks between the United States and Iran for the new administration in Washington, Israeli officials say. The paper will include a list of reservations about the state of international efforts against Iran's nuclear program. One worry is that negotiations will go on for too long. The paper states that talks between the United States and Iran should be limited to a short period of time. It also recommends that harsh sanctions be imposed against the Islamic Republic if negotiations fail. U.S. President Barack Obama, who appointed envoys to the Middle East and Afghanistan within days of his inauguration, has not done so with Iran. An Israeli official in Jerusalem told Haaretz that "this procrastination is very disconcerting."

Weekend Recommendations
Barron's:
- Made positive comments on (VFC), (MRK), (GOOG), (JNJ), (WMT), (ABT), (IACI) and (RAI).

- Made negative comments on (MON), (CVS) and (EBAY).

Citigroup:

- Reiterated Buy on (CELG), target $73.

Night Trading
Asian indices are -2.25% to -.75% on avg.
S&P 500 futures -1.54%.
NASDAQ 100 futures -1.85%.

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Earnings of Note
Company/Estimate
- (FOSL)/.68

- (RIG)/3.68

- (LPX)/-.46

- (UTHR)/.53

- (WMT)/.99

- (GGC)/-.95

- (MDT)/.70

- (A)/.31

- (JACK)/.52

- (CGNX)/.05

- (CHK)/.75

- (GPC)/.56

- (FTI)/.68

Upcoming Splits

- None of note

Economic Releases

8:30 am EST

- Empire Manufacturing for February is estimated to fall to -23.75 versus -22.20 in January.

9:00 am EST

- Net Long-term TIC Flows for December are estimated to rise to $20.0B versus -$21.7B in November.

1:00 pm EST

- The NAHB Housing Market Index for February is estimated at 8.0 versus 8.0 iun January.

Other Potential Market Movers
- The Fed’s Bullard speaking, (OMTR) analyst meeting, Morgan Stanley Basic Materials Conference and Roth Growth Stock Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and automaker shares in the region. I expect US stocks to open lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the week.

Weekly Outlook

Click here for Wall St. Week Ahead by Reuters.

Click here for stocks in focus for Tuesday by MarketWatch.

There are several economic reports of note and a number of significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – US markets closed

Tues. – Empire Manufacturing, Total Net TIC Flows, NAHB Housing Market Index

Wed. – Weekly retail sales reports, weekly MBA mortgage applications report, Import Price Index, Housing Starts, Building Permits, Industrial Production, Capacity Utilization, Minutes of Jan 28^th FOMC Meeting

Thur. – Producer Price Index, Initial Jobless Claims, Leading Indicators, Philly Fed

Fri. – Consumer Price Index

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – US markets closed

Tues. – Louisiana-Pacific(LPX), Transocean (RIG), Wal-Mart(WMT), Medtronic(MDT), Agilent Technologies(A), Jack in the Box(JACK), Chesapeake Energy(CHK)

Wed. – Owens Corning(OC), Comcast(CMCSA), Goodyear Tire(GT), Analog Devices(ADI), Itron Inc.(ITRI), CBS Corp.(CBS), Ingram Micro(IM), Synopsys(SNPS), Hewlett-Packard(HPQ), Whole Foods(WFMI), Advance Auto(AAP), Priceline.com(PCLN), Constellation Energy(CEG), OfficeMax(OMX), Deere(DE)

Thur. – Williams Cos(WMB), Expedia(EXPE), Barnes Group(B), Sprint Nextel(S), CVS Caremark(CVS), Apache Corp.(APA), Career Education(CECO), Intuit(INTU), Newmont(NEM), Wynn Resorts(WYNN), XTO Energy(XTO)

Fri. – JC Penney(JCP), Campbell Soup(CPB), Blackstone(BX), MGM Mirage(MGM), Lowe’s(LOW), Zale Corp.(ZLC)

Other events that have market-moving potential this week include:

Mon. – US markets closed

Tue. – The Fed’s Bullard speaking, (OMTR) analyst meeting, Morgan Stanley Basic Materials Conference, Roth Growth Stock Conference

Wed. – The Fed’s Pianalto speaking, Fed’s Bernanke speaking, Fed’s Evans speaking, Kaufman Bros. Green Tech Conference, Morgan Stanley Basic Materials Conference, Roth Growth Stock Conference

Thur. – The Fed’s Lockhart speaking, (PVTB) Investor Day, (AIPC) shareholders meeting, (SAFM) annual meeting(CBE$) annual outlook, Oppenheimer REITs/Real Estate Forum, CSFB Paper Conference, Piper Clean Tech Conference, (CR) analyst conference, Oppenheimer Semi Summit, CIBC Institutional Investor Conference

Fri. – (BEAV) Investor Meeting

BOTTOM LINE: I expect US stocks to finish the week modestly higher on bargain-hunting, technical buying, declining credit market angst, less severe economic fear, falling financial sector pessimism and short-covering. My trading indicators are giving mostly bullish signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 826.84 -4.81%*

Click here for the Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices
S&P 500 826.84 -4.81%
DJIA 7,850.41 -5.20%
NASDAQ 1,534.36 -3.60%
Russell 2000 448.36 -4.75%
Wilshire 5000 8,341.67 -4.62%
Russell 1000 Growth 362.13 -3.84%
Russell 1000 Value 421.70 -5.66%
Morgan Stanley Consumer 507.01 -4.66%
Morgan Stanley Cyclical 399.93 -7.24%
Morgan Stanley Technology 351.71 -4.99%
Transports 2,957.28 -7.69%
Utilities 365.37 -5.05%
MSCI Emerging Markets 23.95 -2.43%

Sentiment/Internals
NYSE Cumulative A/D Line 20,920 +1.41%
Bloomberg New Highs-Lows Index -429 -12.89%
Bloomberg Crude Oil % Bulls 30.0 +3.45%
CFTC Oil Large Speculative Longs 239,563 +2.06%
Total Put/Call .89 +23.61%
OEX Put/Call .85 +70.0%
ISE Sentiment 150.0 +13.64%
NYSE Arms 1.51 +287.18%
Volatility(VIX) 42.93 -1.01%
G7 Currency Volatility (VXY) 18.19 +.44%
Smart Money Flow Index 7,587.61 -.88%
AAII % Bulls 32.91 +33.62%
AAII % Bears 39.24 -10.88%

Futures Spot Prices
Crude Oil 37.51 -5.24%
Reformulated Gasoline 120.63 -1.93%
Natural Gas 4.45 -7.89%
Heating Oil 130.0 -3.64%
Gold 942.20 +3.42%
Base Metals 109.44 -2.95%
Copper 155.45 -5.79%
Agriculture 293.49 -2.39%

Economy
10-year US Treasury Yield 2.89% -10 basis points
10-year TIPS Spread 1.25% +4 basis points
TED Spread .95 -2 basis points
N. Amer. Investment Grade Credit Default Swap Index 199.84 +3.28%
Emerging Markets Credit Default Swap Index 788.44 +5.86%
Citi US Economic Surprise Index -26.0 +35.0%
Fed Fund Futures imply 94.0% chance of no change, 6.0% chance of 25 basis point hike on 3/17
Iraqi 2028 Govt Bonds 44.0 -4.97%
4-Wk MA of Jobless Claims 607,500 +4.1%
Average 30-year Mortgage Rate 5.16% -9 basis points
Weekly Mortgage Applications 600,600 -24.49%
Weekly Retail Sales -1.70%
Nationwide Gas $1.96/gallon +.05/gallon
US Heating Demand Next 7 Days 2.0% below normal
ECRI Weekly Leading Economic Index 106.10 -.47%
US Dollar Index 86.04 +.81%
Baltic Dry Index 1,989 +21.13%
CRB Index 213.14 -5.0%

Best Performing Style
Small-cap Growth -3.07%

Worst Performing Style
Small-cap Value -6.38%

Leading Sectors
HMOs -.96%
Biotech -1.75%
Medical Equipment -1.82%
Construction -1.94%
Computer Services -2.07%

Lagging Sectors
Gaming -7.95%
Homebuilders -8.87%
Road & Rail -10.18%
REITs -13.03%
Banks -14.03%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Finish Lower, Weighed Down by Bank, Gaming, Insurance, Retail, REIT and Oil Tanker Shares

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After-hours Commentary
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In Play

Stocks Slightly Lower into Final Hour on Financial Sector Pessimism Ahead of Three-day Weekend

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 2.67% and is very high at 42.34. The ISE Sentiment Index is slightly below average at 134.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running above average most of the day, hitting 2.01 at its intraday peak, and is currently 1.15. The Euro Financial Sector Credit Default Swap Index is rising 2.75% today to 119.38 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising 1.25% to 199.84 basis points. The TED spread is rising .33% to 95 basis points. The TED spread is now down 372 basis points in under four months. The 2-year swap spread is rising 1.17% to 66.25 basis points. The Libor-OIS spread is down .71% to 97 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 8 basis points to 1.25%, which is down 145 basis points in under seven months. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .29%, which is down 1 basis point today. The bears are unable to gain any traction today despite weakness in the bank and reit sectors. A number of sectors are gaining today. Homebuilding, education, hospital, semi, steel, oil service and alternative energy stocks are especially strong. “Growth” stocks continue to dramatically outperform “value” shares. This year’s best performing style is mid-cap growth(-.90% ytd), while this year’s worst performing style is small-cap value(-14.29% ytd). I still expect this trend to continue through year-end. One of my longs, (QSII), is 2.2% higher today and should be a big beneficiary of the coming digitization of US medical records. I still think the stock is very attractive at current levels. It appears the financials are holding the broad market back from a significant surge higher. A potential change in the mark-to-market rule could provide a substantial upside catalyst for the group over the coming weeks, which would push the broad market meaningfully higher. Nikkei futures indicate an +11 open in Japan and DAX futures indicate an +1 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and less extreme economic pessimism.