Thursday Watch

Late-Night Headlines
Bloomberg:

- Greece’s biggest union is set to approve the second mass strike this month, showing that Prime Minister George Papandreou’s parliamentary majority may not be enough to guarantee implementation of his plan to cut the European Union’s largest deficit. GSEE, which represents about 2 million workers in the private sector, is scheduled to meet in Athens at 10 a.m. to approve the walkout for Feb. 24. The main public-employee union plans a Feb. 10 job action to protest spending cuts as Papandreou steps up budget cuts to persuade investors Greece won’t need a bailout. Greek stocks fell after news yesterday the union group planned a strike and bonds pared gains. The risk premium investors demand to buy Greek debt over comparable German 10- year bonds narrowed 10 basis points to 347 basis points after reaching as low as 328 basis points. Greece’s benchmark ASE Index fell 2 percent. Papapandreou yesterday widened the wage freeze to all public workers. State pay increases provide a gauge for increases given to workers in the private sector. “Our worst expectations were confirmed,” ADEDY Chairman Spyros Papaspyros said yesterday. “There is more to come.”

- Look through President Barack Obama’s proposed 2011 budget, and you’ll see a line calling for a $235 million increase in the Justice Department’s funding to fight financial fraud. Lucky for them, the people who wrote the budget can’t be prosecuted for cooking the government’s books. Whether on Wall Street or in Washington, the biggest frauds often are the perfectly legal ones hidden in broad daylight. And in terms of dollars, it would be hard to top the accounting scam that Obama’s budget wonks are trying to pull off now. The ploy here is simple. They are keeping Fannie Mae and Freddie Mac off the government’s balance sheet and out of the federal budget, along with their $1.6 trillion of corporate debt and $4.7 trillion of mortgage obligations. Never mind that the White House budget director, Peter Orszag, in September 2008 said Fannie and Freddie should be included. That was when he was director of the Congressional Budget Office and the two government-backed mortgage financiers had just been seized by the Treasury Department. The White House is already forecasting a $1.3 trillion budget deficit for 2011, which is about $3 of spending for every $2 of government receipts. By all outward appearances, it seems Obama and his budget wizards decided that including the liabilities at Fannie and Freddie would be too much reality for the world to handle. So they left the companies out, in a trick worthy of Enron’s playbook, except not quite so hidden. Obama’s White House didn’t invent this kind of fudging. President George W. Bush, for example, kept most war costs out of the budget. Obama’s proposal shows about $289 billion of war costs for 2010 and 2011, plus a $50 billion placeholder estimate for each year after that. Those dollars are small compared with the numbers at Fannie and Freddie, though. Excluding Fannie and Freddie, the national debt held by the public is about $7.9 trillion. With them, it exceeds last year’s $13.2 trillion gross domestic product. Even the geniuses at Moody’s Investors Service are warning that the country’s AAA rating might not last. No country can owe more than its yearly productive output for long without giving up its accustomed lifestyle and influence.

- Investors should place bets on gold to fall as the “fear” that helped send the metal to a record last year disappears, said Brian Nick, an investment strategist at Barclays Wealth, which manages $221 billion. “The gold price has gotten way out of whack with where it should be,” Nick said in a telephone interview from New York. “With investment demand playing such a large role, it leaves the market vulnerable to a correction,” Nick said. “We could see a rapid unwinding of investment when sentiment changes. We’ll be left with far more gold supply out there than there is demand.” Yields on U.S. treasuries remain low enough to signal that investors are confident that the government can pay back its debt and that inflation will be “under control,” Nick said. A “fair value” for gold would be $700 to $800 an ounce, he said. “We’re not seeing signs of fear in any other market,” Nick said. “Gold stands alone, in a bubble.”

- U.S. Transportation Secretary Ray LaHood, charged with getting to the bottom of Toyota Motor Corp.’s vehicle-safety crisis, served up more confusion than clarity yesterday. At about 9:30 a.m., LaHood told reporters that drivers of recalled Toyota cars and trucks should “exercise caution” until repairs can be made. Then he told a House panel that owners should “stop driving” them. Then he told reporters his stop-driving comment was “obviously a misstatement.” Toyota’s American depositary receipts, each representing two ordinary shares, gyrated on his remarks. They fell as much as 8 percent to a 10-month intraday low of $71.90 in New York Stock Exchange composite trading after he said owners shouldn’t drive, and then climbed to close at $73.49 following the retraction.

- Australian retail sales unexpectedly fell in December for the first time in five months as households, reeling from a record three interest-rate increases, cut spending at department stores and supermarkets. Sales declined 0.7 percent from November, when they gained a revised 1.5 percent, the Bureau of Statistics said in Sydney today. The median forecast of 20 economists surveyed by Bloomberg News was for a 0.2 percent gain.

- The yen and dollar strengthened against higher-yielding currencies on speculation the Asia- Pacific region’s economic recovery will slow and European nations will struggle to reduce their deficits. Japan’s currency advanced versus 13 of its 16 major counterparts after reports today showed Australian retail sales unexpectedly shrank and New Zealand’s jobless rate rose to the highest level since 1999. The euro was near a seven-month low against the dollar on speculation the European Central Bank will refrain from ending any more emergency measures at a meeting today as Greece struggles to contain its deficit. “Emerging uncertainties about the Australian economy hurt sentiment toward higher-yielding currencies,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “Lingering sovereign woes in Europe also helped strengthen risk aversion.” “Almunia warned that Greece and Portugal have ‘quite big’ financing needs and that he sees a permanent loss of competitiveness in Spain, Portugal and Greece, with the need for better adjustment in economies,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a research note today. “The euro- dollar is on the edge of its next leg down.”

- Copper slumped in Shanghai by the most in three weeks, tracking losses on the London Metal Exchange overnight, as the dollar’s rally reduced the investment appeal of metals. “Metals such as copper will continue to be pressured as the dollar appears to strengthen,” Zhu Mingyuan, an analyst at Xinguolian Futures Co., said from Shanghai today.

- Corn fell to a four-month low and soybeans dropped as sales from record crops by U.S. farmers topped demand. The 2009 corn harvest rose 8.8 percent to 13.2 billion bushels, the Department of Agriculture said last month. The soybean crop jumped 13 percent to 3.36 billion bushels. Global production of the oilseed will surge 20 percent because of record South American output, the agency said. “Farmers are eager to sell corn and soybeans on any rallies,” said Jim Gerlach, the president of A/C Trading Inc. in Fowler, Indiana. “Weather in South America remains favorable for big crops.”

- Yale University, the second-richest institution of higher learning in the U.S., will cut more than $50 million from its 2010-11 budget, partly by freezing officers’ salaries, and seeks $100 million more in savings. The university, in New Haven, Connecticut, will lower the number of new students by 10 to 15 percent in the Graduate School of Arts & Sciences, reduce time off for some staff and require employees making more than $83,000 a year to contribute to their health-care plans, President Richard Levin and Provost Peter Salovey said today in an e-mailed letter. Individual schools at Yale will be asked to make additional reductions, they said. Yale’s endowment, second to that of Harvard University in Cambridge, Massachusetts, fell to $16.3 billion in June from $22.9 billion a year earlier. The decline means the university must reduce spending by $350 million annually, according to the letter.

- Yahoo! Inc.(YHOO) plans to sell its HotJobs employment Web site to Monster Worldwide Inc.(MWW) for $225 million in cash as the company focuses on its traditional properties, including the home page. As part of the sale, Monster will become the provider of career and job content on Yahoo’s home page in the U.S. and Canada for three years, Monster said today in a statement.

Wall Street Journal:

- For the first time, government programs next year will account for more than half of all U.S. health-care spending, federal actuaries predict, as the weak economy sends more people into Medicaid and slows growth of private insurance. Government health programs are a growing burden on the federal budget, which is running annual deficits of more than $1 trillion, and rising health costs continue to batter private industry. By 2020, according to the new projections, about one in five dollars spent in the U.S. will go to health care, a proportion far beyond any other industrialized nation. "It's going to be a desperate issue five to 10 years out," said Gail Wilensky, the former top Medicare official in the George H.W. Bush administration. She said the U.S. will have to decide soon between raising revenue to pay for Medicare or reducing benefits.

- Last Friday, President Obama met with House Republicans in Baltimore. He took questions, parried criticisms, and allowed all of it to be put on television. Framed as an opportunity for the president to hear from the other side, Mr. Obama's real aim was to portray Republicans as obstructionist and boost his own public standing in the process. Afterward, Gallup found that Mr. Obama's approval hit 51%, up from 47% after the State of the Union address two days earlier. But in winning that small victory, Mr. Obama also further poisoned his relationship with Republicans by repeatedly saying things that are demonstrably not true. For example, when Texas Rep. Jeb Hensarling asked if the president's new budget would, "like your old budget, triple the national debt" and increase "the cost of government to almost 25% of the economy," Mr. Obama denied it. But that's exactly what Mr. Obama proposed doing in his budget framework that Congress passed last April, according to both Congressional Budget Office and White House documents.

- Hedge funds and private-equity funds based outside the European Union should be subject to strict rules if they do business in the 27-nation bloc, according to legislation drafted by the Spanish government. Spain, which currently holds the EU's six-month rotating presidency, wants foreign funds that market their services in the bloc to make their annual report available to investors and regulators as well as be subject to close scrutiny by a regulator that shares information with EU authorities. The funds targeted generally are loosely regulated hedge funds, venture capital funds and private-equity investments based in the U.S. and elsewhere; mutual funds sold to individual investors tend to be registered in an EU country. The foreign-funds clause has been one of the more contentious aspects of the EU's controversial Alternative Investment Fund Managers legislation and has prompted accusations of protectionism by hedge-fund industry officials and the U.S. and U.K. governments.

- Drug maker Bristol-Myers Squibb Co.(BMY) is freezing employee salaries for the year. "We announced to employees today the elimination of annual salary increases in 2010 for Bristol-Myers Squibb employees world-wide, except where these practices cannot be eliminated based on legal mandate or contractual obligation," spokeswoman Sonia Choi said. The freeze won't affect bonuses, she said. The company wouldn't explain the reasons for the freeze.

- CBS News is cutting jobs among at its news-gathering bureaus and TV shows, as it grapples with declining revenue.

- A Silicon Valley start-up is trying to shake up the market for camera phones with an unusual technology that can change the focus of a lens using no moving parts. The closely held company, LensVector Inc., says it has developed tiny transparent components for autofocus systems that replace larger mechanical parts. With sturdier and less-expensive components, autofocus could change from an option found only on certain handsets into a standard feature of mainstream phones, the company said.

- Senate Democrats used an on-camera question-and-answer session with President Barack Obama on Wednesday to boost lawmakers facing tough re-election fights this fall, an event that showed how the 2010 campaign is already under way. All but two of the eight questioners who were chosen face stiff challenges, and most of their questions addressed topics central to their campaigns. There was minimal discussion of how to move forward with health care, energy, financial regulation, education or other tough issues stuck in Congress. The session offered Democratic senators the chance to be seen questioning the president, a signal back home of both stature and perhaps willingness to challenge the man in charge. The White House believes it can use such events to counter criticism of Washington's partisan gridlock and show the president at work with allies and critics.

MarketWatch.com:

- European Union regulators are to charge 10 memory chip makers with fixing prices in breach of EU antitrust rules, according to a report Thursday.

- Just when they thought the worst of the mortgage crisis was behind them, billions of dollars in bad loans from the debacle may be rising from the dead and creeping back on the balance sheets of the largest U.S. banks. Big lenders including Bank of America(BAC) , J.P. Morgan Chase(JPM) and Wells Fargo(WFC) may be forced to repurchase troubled home loans from insurers and mortgage-finance giants like Freddie Mac(FRE) that had agreed to take on risks associated with those assets during the real estate boom. The banks are setting aside more reserves to cover the potential costs of such repurchases, cutting into earnings.

IBD:
- MicroStrategy (MSTR) waited four years to rev up its new product engine. Now, less than a year since launching the newest generation of its business intelligence software, the company is moving into high gear.

NY Times:

- To the growing list of grievances between the United States and China, add one more: the Obama administration is reviving American pressure on China to stop artificially depressing its currency, a policy that fuels its persistent trade gap with the United States.

Business Insider:

- Although the FHA's default rate has been climbing for months, the agency insists that it will not run out of cash. Unfortunately for the taxpayers who will ultimately be stuck with the tab if the FHA is wrong, this seems to be based on some questionable assumptions.

- This morning, the EU announced that it stands by Greece's new budget. Great, maybe that will give investors confidence that they don't have to worry about Greece actually missing a payment. But now there's a new loser: Portugal. It's the weak link for Europe to throw to the wolves.

Politico:

- President Obama, who in the past has criticized the media, and specifically "cable chatter," took a moment during his Q & A with Senate Democrats to reiterate that it's important to tune out the running political commentary on cable networks and in the blogosphere."Do you know what I think would actually make a difference.... If everybody here — excuse all the members of the press who are here — if everybody turned off your CNN, your Fox, just turn off the TV, MSNBC, blogs, and just go talk to folks out there, instead of being in this echo chamber where the topic is constantly politics. The topic is politics." Mediaite points out that MSNBC broke away about a minute after Obama's remark on the media. However, MSNBC did return to cover the exchange live, as the network and CNN had been doing since it started.

- The Special Olympics is disputing the White House claim that its chairman, Tim Shriver, accepted Rahm Emanuel's apology for calling liberals "retarded." Seeking to damp down the controversy over Rahm Emanuel's reported, months-old use of the word, a White House official yesterday told me and other reporters that Emanuel had called Special Olympics Chairman Tim Shriver to apologize. "The apology was accepted," the official said yesterday. The vice president for communications at the Special Olympics, Kirsten Seckler, told me that this account of the conversation is "inaccurate." "Tim didn't accept his apology," she said. "Tim can't do that. He can't accept an apology on behalf of all people with disabilities." Shriver had simply said, she said, that he was willing to continue the conversation with the chief of staff. The Special Olympics is disputing the White House claim that its chairman, Tim Shriver, accepted Rahm Emanuel's apology for calling liberals "retarded." Seeking to damp down the controversy over Rahm Emanuel's reported, months-old use of the word, a White House official yesterday told me and other reporters that Emanuel had called Special Olympics Chairman Tim Shriver to apologize. "The apology was accepted," the official said yesterday. The vice president for communications at the Special Olympics, Kirsten Seckler, told me that this account of the conversation is "inaccurate." "Tim didn't accept his apology," she said. "Tim can't do that. He can't accept an apology on behalf of all people with disabilities." Shriver had simply said, she said, that he was willing to continue the conversation with the chief of staff.

The Daily Beast:

- Wall Street Laughs at Volcker by Charles Gasparino. Obama’s banking czar just delivered his reform proposal, and the big banks finally have something to snicker about—because he’s leaving untouched the risky trades that played a leading role in the financial crisis. At first, at least, it sounded so promising: After months of being ignored by President Obama and his senior staff about how to prevent another financial meltdown, economic adviser Paul Volcker got his due. The former Fed chairman’s plan to prevent banks from having their risky trading activities subsidized by the taxpayer was being taken seriously, finally, by the man who matters most to Washington, the president, who has endorsed what is being called the Volcker Rule as the centerpiece of his bank regulatory agenda. But looking deeper, one soon discovers that “The Volcker Plan” isn’t much of a reform plan at all. (Congressional staffers cannot even get details of the proposal and have been directed by the White House to press releases.) It was those trades that served the firm’s customers—namely hedge funds and other big investors—that led to the massive losses and the ultimate government bailout of the big firms that has so much of the country up in arms. And those customer trades—at least based on what Volcker is telling reporters and, as he spoke before the Senate Banking Committee on Tuesday, lawmakers—aren’t being touched in what appears to be yet another half-hearted attempt to make sure Goldman Sachs(GS) and the rest of the fat cat bankers don’t put the country into another fiscal crisis any time soon.

USAToday:

- Wall Street's Goldman Sachs(GS) is taking a pounding in the blogsphere for failing to step up to serious relief efforts in Haiti. First, people scoffed at the donation of $1 million by the firm, calculated to be 11 minutes of GS' 9 billion profits in 2009. Now, the National Council of Churches is whacking GS under the popular headline: GDP of Haiti: $8.5 billion. Goldman Sachs bonus pool: $20 billion. Princeton Theological Seminary professor George Hunsinger and George Kinnamon, NCC general secretary suggest "A Modest Proposal" for GS. The churchmen propose GS turn around its bad press by handing off just $10 billion. That's enough to lap the $100 million pledged by the total U.S. government by 100 times around the ring.

- Federal Reserve Chairman Ben Bernanke expressed concerns Wednesday about the economic recovery during a ceremonial swearing-in for another four-year term. In brief remarks to staffers, Bernanke said that while the economy is growing, "far too many people remain unemployed, foreclosures continue at record rates and bank credit continues to contract."

Reuters:

- Cisco Systems Inc's (CSCO) quarterly results and outlook exceeded Wall Street expectations as more customers upgraded their networks to handle growing Internet traffic, leading CEO John Chambers to declare a very strong recovery. Shares in the leading network equipment maker rose 4 percent as the company forecast revenue growth of 23 percent to 26 percent in the current quarter, far exceeding the average analyst forecast for a rise of 16.5 percent. "We're hitting on all cylinders," Chambers told analysts on a conference call, citing a "dramatic across-the-board acceleration" in the business. "We saw very strong, balanced growth from a year-over-year perspective in almost all of the major geographies and market segment categories," he said.

- Visa Inc (V) posted a stronger-than-expected profit on Wednesday, helped by rising debit card processing volume. The company's shares rose 2.6 percent in after-hours trading to $85.75, a stark contrast to a year ago, when it traded at $47.54.

- Broadcom Corp (BRCM) on Wednesday posted a quarterly profit versus a year-ago loss and revenue that beat Wall Street expectations, citing a better-than-expected holiday season and strong demand in Asia. The stock rose 1.8 percent after Broadcom said it would start paying a dividend of 8 cents per share as of March 8 and forecast that first-quarter revenue would be better than usual for this time of year.

Financial Times:

- It is the poor who pay for the weak renminbi. China’s exchange rate policy has largely been viewed through the prism of global imbalances. That has had three unfortunate consequences. It has allowed China to deflect attention away from its policy. It has obscured the real victims of this policy. And it has made political resolution of this policy more difficult. No sooner is China’s exchange rate policy criticized for creating global imbalances, and hence contributing to the recent global financial crisis, than the door is opened for China to muddy the intellectual waters. Why single us out, the Chinese say? Why not the other surplus-running countries such as Japan or Germany or the oil exporters? And, in any case, countries on the other side of the imbalance – namely, the large current account deficit-running countries – should carry the greatest responsibility for pursuing irresponsible macroeconomic and regulatory policies that led to “excessive consumption”. This debate cannot be settled. But inconclusiveness is just what China needs – and creates – to escape scrutiny of its policies. The second consequence of the global imbalance perspective is that it has created an opposition between current account deficit and current account surplus countries, which has become a slanging match between the US and China. But an undervalued exchange rate is above all a protectionist trade policy, because it is the combination of an import tariff and an export subsidy. It follows therefore that the real victims of this policy are other emerging market and developing countries – because they compete more closely with China than the US and Europe, whose source of comparative advantage is very different from China’s.

TimesOnline:
- Britain faces the longest period of spending cuts since records began in 1948 if the Government is to repair the damage to public finances inflicted by the banking crisis and the recession. The Institute for Fiscal Studies (IFS) said yesterday that departmental spending would be cut for at least five consecutive years as the Government battled to curb public borrowing. This would reverse the total rise in spending since Labour came to power in 1997.

Caijing:

- China's Ministry of Finance has no plan to boost its investment in China Investment Corp., the country's sovereign wealth fund, citing a ministry official.

arabianbusiness.com:

- Uncertainty about state owned Dubai World's $22 billion debt restructuring is starting to weigh on the credit again, pushing up bond yields and Dubai's debt insurance costs, just six weeks after a multi-billion dollar bailout by neighboring Abu Dhabi. Five year credit default swaps (CDS) for Dubai have risen sharply in the past week and are now quoted at 510 basis points, up about 45 bps on the week, meaning it costs over half a million dollars a year to insure $10 million of the emirate's debt for a five-year period. Nish Popat, head of fixed income, ING Investment Management Middle East, Dubai: "Since the Dubai World statement which came out of the blue, we have not had any sort of clarity as to how the talks are progressing, we have not had any statements or any proposals." He added: "We are hearing they are still talking to the banks, but it's been two months and there is still this uncertainty and lack of clarity." The CDS surge back to levels seen just before the mid December bailout is fuelling a rise in debt insurance costs, albeit on a smaller scale, for other regional corporates and names such as Abu Dhabi and Bahrain, according to prices from CDS monitor CMA DataVision. Analysts say the rise comes against the backdrop of wobbly global equity markets and the debt crisis in Greece and other euro zone peripherals. But they said a recent move by Standard & Poor's to withdraw its rating for Dubai Holding Commercial Group (DHCOG), owned by the emirate's ruler, had hit sentiment for the region. Luis Costa, emerging debt strategist, Commerzbank, said: "We don't think headlines will go back to the emergency mode in the coming quarters but clearly people are cautious because there is some danger of debt rescheduling." He added: "The $10 billion package from Abu Dhabi means Dubai World can plug refinancing for 2010, but huge chunks of refinancing remain still for 2011."

Evening Recommendations

Citigroup:

- Reiterated Buy on (THO), boosted estimates, raised target to $42.

- Reiterated Buy on (NKE), target $75.

Night Trading
Asian indices are -1.0% to +.25% on avg.

Asia Ex-Japan Inv Grade CDS Index 113.0 +2.50 basis points.
S&P 500 futures -.12%.
NASDAQ 100 futures +.08%.

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Earnings of Note
Company/Estimate
- (ATK)/2.16

- (CME)/3.43

- (BKC)/.34

- (BG)/.90

- (HOT)/.22

- (CI)/.95

- (DO)/2.32

- (RGLD)/.19

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- (K)/.49

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- (AGN)/.77

- (ILMN)/.19

- (N)/.02

- (CLX)/.75

- (SRCL)/.55

- (AVP)/.62

- (PBO)/.61

Economic Releases

8:30 am EST

- Preliminary 4Q Non-farm Productivity is estimated to rise +6.5% versus a +8.1% gain in 3Q.

- Preliminary 4Q Unit Labor Costs are estimated to fall -3.5% versus a -2.5% decline in 3Q.

- Initial Jobless Claims are estimated to fall to 455K versus 470K the prior week.

- Continuing Claims are estimated to fall to 4581K versus 4602K prior.

10:00 am EST

- Factory Orders for December are estimated to rise +.5% versus a +1.1% increase in November.

Upcoming Splits

- None of note

Other Potential Market Movers
- The Fed's Hoenig speaking, Geithner's testimony before Senate Budget Committee, January retail same-store-sales before the open, BoE rate decision, ECB rate decision, EIA weekly natural gas inventory report, Raymond James Growth Airline Conference, (WFR) capital markets day, CSFB Energy Summit and the (EK) analyst meeting could also impact trading today.

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

Stocks Finish Lower, Weighed Down by Bank, Gaming, Airline, Paper, Steel and REIT shares

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Stocks Mostly Lower into Final Hour on Euro Sovereign Debt Worries, More Shorting, Rising Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs and Biotech longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is lower, most sectors are declining and volume is slightly above average. Investor anxiety is high. Today’s overall market action is neutral. The VIX is rising 1.3% and is above-average at 21.76. The ISE Sentiment Index is slightly below average at 128.0 and the total put/call is around average at .85. Finally, the NYSE Arms has been running above average most of the day, hitting 1.81 at its intraday peak, and is currently 1.73. The Euro Financial Sector Credit Default Swap Index is rising +.06% to 80.76 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is falling -1.85% to 91.83 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is unch. at 16 basis points. The TED spread is now down 447 basis points since its all-time high of 463 basis points on October 10^th, 2008. The 2-year swap spread is falling -3.03% to 28.31 basis points. The Libor-OIS spread is unch. at 10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up +1 basis point to 2.40%, which is down -25 basis points since July 7^th, 2008. The 3-month T-Bill is yielding .09%, which unch. today. Cyclical shares are underperforming today. The Transports are falling -1.45%. (XLF) has been heavy throughout the day. Airline, Gaming, REIT, Bank, Paper and Steel shares are especially weak, falling 2.0%+. Weekly retail sales continue to decelerate, rising 1.0% in the latest report. The Portugal sovereign debt cds is spiking 17.6% to 193.3 basis points and the Western European sovereign debt cds index is jumping 6.3% to a new high of 93.47 bps. The euro has traded heavy throughout the day. Copper remains under significant pressure. The Ag spot index is also falling 2.54%. The Baltic Dry Index is down -16.0% over the last 5 days. On the positive side, Education, Ag, Restaurant, Computer and Internet shares are rising .5%+. Tech sector market leaders are substantially outperforming the broad market ahead of (CSCO), (BRCM) and (AKAM)’s earnings reports tonight. I am surprised that the market isn’t paying more attention to the surge in European sovereign debt credit default swaps and the weakness in the euro. Right now, this is a positive, but could become a big negative if the situation continues to deteriorate. Nikkei futures indicate an +61 open in Japan and DAX futures indicate a +25 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, European sovereign debt concerns, higher long-term rates and rising financial sector pessimism.

Today's Headlines

Bloomberg:

- Companies in the U.S. cut an estimated 22,000 jobs in January, in line with forecasts, according to data from a private report based on payrolls.

- Expectations that U.S. stocks will tumble 10 percent or more rose to highest level since April 1984 this week, according to Investors Intelligence’s weekly survey of newsletter writers. The proportion of investment writers who anticipate a so- called correction climbed to 38.9 percent in the week ended yesterday, an increase from 36.7 percent in the period ended Jan. 27. The New Rochelle, New York-based company has tracked the projections of newsletters since 1963.

- Airbus SAS and Boeing Co., the world’s two biggest planemakers, expect a demand slump to continue for at least two more years as airlines pare growth following a record drop in air travel. “The market will stay slow for new orders until 2012,” Airbus Chief Operating Officer John Leahy said in a Bloomberg TV interview at the Singapore Air Show yesterday.

- The gap between the U.S. manufacturing expansion and growth in the rest of the world’s largest economy widened to a record in January, signaling the recovery will slow to less than a 2% pace later this year, according to Harm Bandholz. The jump in manufacturing was the result of efforts to stabilize inventories after running down the supply of goods during the recession. Stockpiles will contribute less to economic growth in coming months. “The economy is particularly dependent on inventories and probably the stimulus program and apart from that final demand is still sluggish,” Bandholz, a senior economist at UniCredit Global Research in NY, said.

- Moody’s Investors Service said it will cut its rating on a portion of New York’s Metropolitan Transportation Authority’s $28.6 billion of bonds after the busiest U.S. transit agency said it may get $350 million less from a new payroll tax than it projected two months ago.

- US farm and transportation-industry groups called for stricter limits on commodities trading and urged Congress to pass laws reining in speculators. The House of Representatives in December passed legislation designed to shed more light on the $605 trillion over-the-counter market for derivatives contracts such as swaps, options and futures. Businesses including oil companies and airlines that use derivatives to hedge operational risks would be exempted from many of its rules. The Senate has not yet acted on a similar bill. Senator Maria Cantwell said the House bill is “riddled with loopholes” and said she’d work for stricter rules.

- Kenneth Naehu, who invests $2.5 billion for Bel Air Investment Advisors in Los Angeles, sold California bonds late last year as he saw deficits mounting -- and says he’s not ready to buy back in yet. Naehu, 43, is among investors including Newport Beach, California-based Pacific Investment Management Co. and Thornburg Investment Management in Santa Fe, New Mexico, forecasting that the state’s yields -- which move inversely to prices -- may increase relative to other municipal bonds because of the financial strains. Pimco, the world’s biggest fixed-income manager, predicts the yield on 30-year debt may rise above 6 percent, the highest since last summer’s fiscal crisis.

Wall Street Journal:

- Venezuela energy and oil minister Rafael Ramirez arrived in Beijing Tuesday for talks with government and company officials on joint-venture refinery projects and Chinese investment in Venezuela's heavy crude oil reserves. While Chinese oil companies didn't bid in Venezuela's Carabobo oil round a week ago, the two sides have extensive energy ties, which were recently expanded by new oil pacts.

- The cost of insuring Portuguese sovereign debt against default using credit derivatives reached a record high Wednesday, after the country sold fewer treasury bills than expected at an auction. Portugal's five-year sovereign credit default swap spreads rose to 197 basis points Wednesday afternoon from 165 basis points Wednesday morning, according to data provider CMA DataVision.

- Spreads on a credit-default-swap index of developed European sovereign borrowers rose above 90 basis points Wednesday, as euro-zone government bond markets experienced another volatile day. The SovX Western Europe index, which lets investors buy or sell default insurance on a basket of 15 sovereigns, widened over four basis points to 92.5 basis points, Gavan Nolan, vice president of credit research at index owner Markit said in a note. The index, which began trading last September, has never closed above 90 basis points, although it was at 89.5 basis points in late January. The gross notional value of trades on the index is now over $71 billion, a 17% increase from the previous week.

CNBC:

- The Obama administration’s plan to help community banks would help “upwards of a thousand” institutions if the regulations are looser than those of TARP, Camden Fine, CEO of Independent Community Bankers of America, told CNBC. “You need to design this program to get the money into the hands of the right banks and drop all these strings that were attached to TARP and allow these banks to use this money to both strengthen their bank and make local loans,” Fine said.

NY Times:

- California is preparing to introduce the first statewide system of monitoring devices to detect global-warming emissions, installing them on towers throughout the state. The monitoring network, which is expected to grow, will initially focus on pinpointing the sources and concentrations of methane, a potent contributor to climate change. The California plan is an early example of the kind of system that may be needed in many places as countries develop plans to limit their emissions of greenhouse gases. “This is the first time that this is being done anywhere in the world that we know of,” said Jorn Dinh Herner, a scientist with the California Air Resources Board. While monitoring stations around the globe already detect carbon dioxide, methane and other greenhouse gases, they are deliberately placed in remote locations and are generally intended to measure average global concentrations of greenhouse gases rather than local emissions. The California network, by contrast, is meant to help the state find specific sources of emissions, as well as to verify the state’s overall compliance with a plan it adopted to limit greenhouse gases.

The Business Insider:

- This is a great sign of just how smoking hot China has become. Burton Malkiel, the author of A Random Walk Down Wall Street, and a huge critic of active portfolio management, is starting a long-only China-focused hedge fund, according to FinAlternatives (via PragCap). The fact that he's doing this -- apparently in contravention of the gospel he preaches -- is a sign of just how big a lure the China moneypot is to everyone. It's still tiny, with just $30 million, but with a famous name, and a hot country, it should have a good shot at growing. But anyway, are we to presume that efficient markets don't apply in China like they do here, and that it's worth paying high fees for the ability to go long only the Shanghai market?

- Obama’s Budget Will Cost Us Freedom, Security, And Influence by Sarah Palin.

- Citi's Alan Heap warns that gold could soon lose a lot of the factors supporting its price right now. That's because a stronger U.S. dollar and rising interest rates would be bad news for gold, based on history.

- Ray LaHood: WHOOPS, What I Really Meant To Say Is That You Should Get Your Toyota Fixed.

- Roger Altman, the CEO of boutique investment bank Evercore and former Clinton Deputy Treasury Secretary, has some harsh words about Obama's new budget. He flat out calls the projected debts "not viable" over the medium or long term. One of two things will happen, he says: Either the government will address this pro-actively, or in the next two years, we'll have a financial market revolt leading to massive instability in forex.

Lloyd’s List:

- Freight-derivative traders will meet Feb. 16 to discuss pricing their contracts in US dollars, citing Andrew Jamieson, chairman of the Forward Freight Agreement Brokers’ Association. The contracts are currently denominated in Worldscale points.

SeekingAlpha:

- 3 Best Hedge Fund Healthcare Ideas.

LATimes:

- After the news last week that Apple and AT&T are now allowing VoIP apps to make phone calls over the 3G network, Skype said it's still waiting to release a new 3G-ready version of its software for the iPhone. Today the company offered a few updates on the progress of the app, which it is apparently putting the finishes touches on and which Skype says will be available "really soon." In a YouTube video, David Ponsford, the leader of Skype's iPhone team, said the app would have "CD-quality sound" for calls between Skype users. He also mentioned that the app would have a red-yellow-green-coded indicator that will show users what kind of signal quality they're getting on a call in real time.

NY1:

- A group of leading United States senators wants to cut off funding for civilian trials of accused September 11th terrorists. A bipartisan coalition led by Senators John McCain and Joe Lieberman introduced the measure yesterday. President Barack Obama's proposed budget for next year includes funds for the Justice Department to handle the trial of five alleged terrorists suspected of participating in the 9/11 attacks, including self-proclaimed mastermind Khalid Sheikh Mohammed. A growing chorus of opposition led the Obama administration to reconsider holding the trials in Federal Court in Lower Manhattan. Senators say they want the suspects tried by military commission, not in a criminal court. "The law enforcement model being used by the Obama administration should be rejected,” said South Carolina Senator Lindsey Graham. “We're not fighting a crime, we're fighting a war." "We should not try these people in New York, we should not try them in Illinois, we should not try them in Phoenix,” said Senator John McCain of Arizona. “We should try them in the courtroom at Guantanamo Bay."

Rassmussen:

- With concerns about the economy and mounting federal deficits before them, 46% of voters nationwide favor an across-the-board tax cut for all Americans. The latest Rasmussen Reports national telephone survey finds that 35% oppose such a tax cut.

Politico:

- With the broader health care bill still perilously close to collapse, House Speaker Nancy Pelosi plans to take a shot at the health insurance industry next week by scheduling a vote on a smaller bill to revoke its half-century-old exemption from antitrust laws. The vote is part of her new two-track strategy to tackle things that won’t be included in a more sweeping bill — if Congress ever passes one — while giving her members something politically popular to vote on. The move also puts pressure on Republicans, the industry and wavering Democrats, who wish their leaders would abandon the push altogether. The bill comes as party brass struggles to find a path forward in the broader health care reform effort and amounts to a concession to her caucus as more sweeping legislation twists in the wind.

- Senate Majority Leader Harry Reid chided President Barack Obama Tuesday for making Las Vegas a “poster child” for excessive spending. “I just spoke to the White House and told them that while the president is correct that people saving for college need to be fiscally responsible, the president needs to lay off Las Vegas and stop making it the poster child for where people shouldn't be spending their money,” Reid, a Democrat from Nevada, said in a statement.

Market folly:

- Bank of America Merrill Lynch is out with the newest iteration of their hedge fund monitor report and they highlight that hedge funds suffered heavy losses last week and ended January on a weak note. As such, hedge funds were looking to de-risk and BofA notes that global macro was by far the worst performing strategy for the month of January. Turning to overall movements, they saw that long/short equity funds pared market exposure down to 29-30% net long, below the historical average of 35-40% net long. Market neutral funds also reduced equity exposure, having been pretty long the two weeks prior. In terms of specific positioning, hedge funds sold SPX futures last week and even went net short.

Reuters:

- Australia's third largest gold miner, Resolute mining, said on Wednesday it would expand gold output by a quarter within the next three years to 500,000 ounces, boosted by its new project in Mali.

- Copper extended losses to touch a fresh two and a half month low on Wednesday, as concerns over Chinese monetary tightening and the pace of global economic recovery weighed on base metals. "We see more downward pressure in the next month," said Edward Meir, energy and metals analyst for MF Global in New York. " People are becoming a bit more uneasy about China and we're starting to see rate increases. "China's macro environment has changed from one predominantly focused on growth to one where balancing growth and inflation has become increasingly important to policymakers," Barclays Capital said in a note. "Given China's importance to key commodity markets, these moves have had a noticeable impact on sentiment."

Financial Times:

- Paulson & Co, a hedge fund that made billions of dollars betting against subprime mortgages, has received a request for information from the Securities and Exchange Commission in connection with an investigation into complex securities at the heart of the financial crisis, according to people familiar with the matter. The firm run by John Paulson profited from the subprime crisis by placing bets against securities known as collateralized debt obligations, or CDOs, which promised investors returns from pools of mortgages extended to borrowers with tarnished credit histories. The people familiar with the matter said they believed that Paulson & Co was not a target of any investigation. In December, the SEC sent subpoenas to banks including Bank of America/Merrill Lynch, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS seeking information about the sale and marketing of such CDOs. The SEC is examining whether the banks took negative positions on these securities at the same time they marketed them to investors. Mr Paulson made $15bn for his firm and his investors through his subprime bets, which often involved the purchase of credit insurance that would be paid off if slices of CDOs backed by US subprime mortgages defaulted. Mr Paulson made his move when the cost of such credit insurance was low and his returns reflected the wisdom of his move. His credit opportunity fund, created in 2006 to take advantage of a meltdown in mortgages, gained 591 per cent in 2007. In pursuing his strategy, Mr Paulson also asked banks to create “synthetic” CDOs – so-called because they pool derivatives of mortgages rather than actual mortgages – on which he could take short positions, according to an account from investors confirmed by a spokesman for Mr Paulson. This strategy would succeed if the underlying mortgages lost value. Mr Paulson sought to have these CDOs include mortgages, or derivatives based on such mortgages from regions of the country where the mortgage market was believed to be overheated. To facilitate the creation of these instruments, Mr Paulson also offered to buy the tranches that would be paid off last – the “equity” pieces, which offer the highest rates of interest. Such CDO slices are difficult to sell, which means that an offer to buy them would be of great help to a bank seeking to market the CDOs.

- Chinese regulators have imposed a partial ban on listed companies raising capital from equity markets to repay bank loans or replenish working capital, amid a general tightening of liquidity and official curbs on soaring bank debt in the country. At least 34 companies, mostly in the industrial and real estate sectors, have cancelled or reduced plans to raise money through private placements or secondary offerings in recent weeks. Many of those companies said their plans were vetoed by the securities regulator, which said they are no longer allowed to raise money for working capital or repaying bank debt. Some companies, including a number of listed cement producers, said they had been ordered to abandon their fundraising plans because they are in sectors identified by the central government as suffering from over-capacity.