Tuesday Watch

Evening Headlines 
Bloomberg: 

• Italy Renews Market Jitters as Voters Reject Monti Austerity. Italy’s inconclusive election triggered renewed market jitters over Europe’s debt crisis as recession-scarred voters repudiated budget rigor and established former comedian Beppe Grillo as a political force. In the four-way race, pre-election favorite Pier Luigi Bersani led for control of the lower house by less than a half percentage point. Silvio Berlusconi, the former premier fighting a tax-fraud conviction and charges of paying a minor for sex, called for a recount and won a blocking minority in the Senate. In its first national contest, Grillo’s group got 25 percent support and was probably the most-voted party in the lower house. “The political situation across Europe is effectively a race between austerity and reforms on the one hand and the rise of populist movements on the other.” said Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc. “Austerity is painful, and if reforms are not implemented in time, you run the risk of social unrest and populism. It hasn’t happened so far in Greece, it hasn’t happened in Portugal or Spain, but we are very close in Italy.”

• Grillo’s Anti-Austerity Wave Crashes Into Italian Parliament. Beppe Grillo, the comic banned from Italian television two decades ago for ridiculing a corrupt cadre of ruling lawmakers, had his political satire rewarded yesterday with about 180 seats in Parliament. Grillo’s parliamentary list filled with political neophytes amassed enough votes in yesterday’s election to deny a majority to front-runner Pier Luigi Bersani and a comeback to three-time Premier Silvio Berlusconi. As his competitors seek to cobble together a make-shift alliance, the 64-year-old Grillo is keeping his distance and preparing for a new vote. “They can’t hold us back any longer,” Grillo said late yesterday in a video posted to his website. “They might go on another seven or eight months and produce a disaster, but we will be watching and working to keep it under control.”

• Spanish Graft Distracts Rajoy From Fixing Economy: Euro Credit. Prime Minister Mariano Rajoy's battle to curb borrowing and revive the Spanish economy is being thrown off track by corruption scandals rocking his party. "The government is so distracted defending itself against accusations that it isn't getting on with the job of getting the economy on track, meeting the huge disgruntlement of the general public and trying to hold the country together," said Marc Ostwald, a strategist at Monument Securities Ltd. in London.

• U.S. 10-Year Yield Falls Most Since November on Italy’s Vote. Treasuries rose, pushing 10-year yields down the most since November, as polls indicated the euro area’s third-largest economy, Italy, may be left with a hung parliament, stoking refuge demand. “The move today is all about the Italian elections, which is giving a bid to Treasuries,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “When there is concern about one of the largest economics in Europe with one of the largest debt loads in the region, you will see a flight to quality.” 

• Singapore to Raise Property Tax Rates for Luxury Homeowners. Singapore plans to raise property levies for luxury homeowners as it seeks to tax the wealthy residents in the island state after the government imposed more measures to curb property speculation last month.

• Gillard Slips in Australia Poll as Tax Damages Credibility. Prime Minister Julia Gillard slipped behind opposition rival Tony Abbott as Australia’s preferred leader for the first time since August after her credibility was dented when a mining tax she helped design brought in less revenue than forecast. 

• Stagflation Sparks BRIC-Worst Default Risk Surge: Brazil Credit. Brazil’s creditworthiness in the swaps market is eroding at the fastest pace among the biggest developing nations as inflation in Latin America’s largest economy exceeds growth by the most in three years. The cost to protect Brazil’s dollar-denominated government bonds against losses rose 21 basis points in the past month to 128 basis points, increasing the price of credit-default swaps on $10 million of debt to $128,000.

• Moody’s Promises Caps on Mortgage-Bond Ratings as Terms Loosen. Moody’s Investors Service said it won’t assign its top ratings to certain residential mortgage- bond deals with issuer-friendly terms, signaling a potentially tougher stance than competitors as the market revives. Home-loan securities without government backing probably will be able to get rankings only as high as Moody’s Aa tier if “significant” limits are placed on when and how repurchases can be forced of mortgages that fail to match their stated quality, the New York-based firm said today in a report. 

• Fed Faces Explaining Billion-Dollar Losses in Stress of QE3 Exit. Federal Reserve Chairman Ben S. Bernanke’s efforts to rescue the economy could result in more than a half trillion dollars of paper losses on the central bank’s books if interest rates rise abruptly from recent levels. That sum is the difference between the value of securities in the Fed’s portfolio on Dec. 31 and what they may fetch in three years, according to data compiled by MSCI Inc. of New York for Bloomberg News.

Wall Street Journal: 

• Messy Italian Election Shakes World Markets. In a national election meant to push Italy further down a path of economic reform, voters delivered political gridlock that could once again rattle Europe's financial stability. Markets in Europe and the U.S. gyrated even in response to early returns. The Dow Jones Industrial Average swung nearly 300 points, ending with its worst day in almost four months, as the prospects of a stable government appeared to drop. 

• Why the Corporate Pension Gap Is Soaring. Companies Struggle as Low Rates, Other Forces Inflate Funding Needs.

• Banks Face Key Hurdle in Libor Fight. Banks suspected by regulators around the world of manipulating interest rates are trying to escape another mire: more than 30 lawsuits filed by borrowers, lenders and other plaintiffs who claim they were cheated by the same financial institutions.

• China Has Its Own Debt Bomb. Not unlike the U.S. in 2008, China is at the end of a credit binge that won't end well.

• America's Red State Growth Corridors. Low-tax, energy-rich regions in the heartland charge ahead as economies on both coasts sing the blues.

Fox News:

• Republicans urge Obama to end 'road show,' work with Senate to avert automatic cuts. House Republican leaders on Monday urged President Obama to "stop campaigning" and hunker down with Congress to find an alternative to the bludgeon of spending cuts set to hit Friday, saying now is not the time "for a road-show president." The plea came as the president prepared to head Tuesday to Newport News, Va., a major military community, to highlight the impact of Pentagon cuts on a shipbuilding facility. Obama's Cabinet secretaries also continued to issue dire warnings about the impact of so-called sequestration if the $85 billion in cuts begin to take effect March 1. House Speaker John Boehner and his deputies, emerging late Monday to field a few questions from the press, said the Virginia stop shows Obama is more interested in scoring political points than making a deal. "This is not time for a road-show president," House Republican Whip Kevin McCarthy, R-Calif., said. House Republican Leader Eric Cantor, R-Va., whose state Obama is visiting, repeatedly accused the president of offering a "false choice" -- between passing tax increases and allowing steep cuts to take effect. The president has blamed Republicans for holding up a deal, which under Obama's terms would include a mix of cuts and revenue increases through closing tax loopholes. Republicans suggest there's still time to replace the sequester with cuts -- not tax hikes -- that makes sense. "If the president was serious, he'd sit down with (Senate Democratic Leader) Harry Reid and begin to address our problems," Boehner said. Boehner was not backing off his insistence that it's the Senate's turn to act. 

MarketWatch.com:

• Autodesk(ADSK) declines after hours following outlook. ‘Fear index’ tracker extends its dayside rally. Stock in Autodesk was down 2.7% at $35.63 after the company forecast first-quarter adjusted earnings of 41 cents to 46 cents a share and sales of $570 million to $590 million. Analysts polled by FactSet were expecting, on average, earnings of 51 cents a share on revenue of $588.7 million.

CNBC: 

• Bernanke Speaks as Italy Becomes New Market Headwind. Fed Chairman Ben Bernanke is expected to provide soothing words about the Fed's easy money policies Tuesday, but markets may react more to new bearish concerns out of Europe.

Zero Hedge: 

• Behold The Horror Of The Sequester... In Context. (graph)

• Is This The Chart That Everyone Is Concerned About? (graphs)

• Next Domino: Spain, As Main Suspect In Rajoy Graft Scandal Has Passport Confiscated.

• Citi: "This Is The First European Election In Which Voters Didn't Do The Right Thing".

• 20 Signs The U.S. Economy Could Be Heading For Trouble.

Business Insider: 

• China's 'Dubai' Has Turned Into A Deserted Island.

• CHART: 35 Countries Desperately Need China To Keep Growing.

• Gas Prices Are Closing In On A Danger Zone For Stocks. (graph)

• The One Thing That Could Destroy The Eurozone...

• Boehner Accuses Obama Of Having A Spending 'Addiction'.

Forbes:

• The 40 Highest-Earning Hedge Fund Managers And Traders.

The Detroit News:

• GM(GM) proposes to pay CEO $11.1 million in '13. General Motors Co. wants to pay its chief executive $11.1 million in total compensation this year — an increase of more than 20 percent over 2012— and offer raises to most of its highest paid executives, according to a document turned over to Congress. The Detroit automaker, which received a $49.5 billion bailout in 2008 and 2009, must get approval for the pay packages for its top 25 executives from the Treasury Department, as a condition of its government bailout. According to a copy of the proposal obtained by The Detroit News from a source familiar with the documents, GM is proposing raises for 18 of its top 25 executives for 2013, with each of those making at least $1.8 million.

Reuters: 

• Fed's Lockhart sees chance of surprisingly strong U.S. growth. U.S. economic growth could surpass expectations this year, but an anemic labor market requires ongoing support from monetary policy, a top Federal Reserve official said on Monday. 

• California pension liabilities may swell to $328.6 bln -report. New credit evaluation standards for public pension liabilities proposed by Moody's Investors Service would swell unfunded liabilities for California's state and local public pension plans to $328.6 billion from $128.3 billion, according to a report released on Monday. 

• Illinois' unpaid bills could soar to $21.7 bln in 5 yrs-report. Illinois' stack of overdue bills could nearly triple to $21.7 billion in five years unless the state takes action to curb its public pension costs, a financial watchdog group said on Monday. 

• U.S. standing still on financial transaction tax as EU proceeds. Much of Europe is speeding toward a tax on financial transactions, but the idea is going nowhere fast in the United States, as the Obama administration reaffirmed its opposition.

Financial Times: 

• US oil imports from Middle East increase. The US was more reliant on the Middle East for its oil imports last year, underscoring the critical importance of the politically unstable region for the country despite the growing energy independence its shale gas revolution is bringing.

Telegraph:

• Euro debt crisis looms again as Italians defy EU austerity demands. The eurozone’s debt crisis strategy was in chaos on Monday night after anti-austerity parties appeared on track to win a majority of seats in the Italian parliament, vastly complicating efforts to forge a government able to carry through EU-imposed reforms.

• Trillion pound cash mountain to the rescue? It’s unwise to bank on it. Meaningless though it might otherwise be, the downgrade in Britain’s credit rating at least acts as a reminder of just how deeply mired in post-crisis gloom the UK economy really is, and quite how difficult extracting the country from the ruination of more than a decade of banking excess and burgeoning social spending commitments is proving.

Kyodo:

• Japan Your Party Tells Abe It Opposes Kuroda as BOJ Head. Yoshimi Watanabe, head of Japan opposition Your Party, told Prime Minister Shinzo Abe today.

Beijing Morning Post:

• Ping An, Minsheng Bank Curbs Mortgage Lending. Ping An Bank and China Minsheng Bank have stopped mortgage lending in Beijing, citing people from the banks. Minsheng has halted second-home mortgages, according to the report. Ping An will stop mortgage lending for the next year.

Shanghai Securities News:

• Beijing has completed a draft of property control measures, which will be released after the central government issues more detailed policies, citing a person familiar with the matter.

China Securities Journal:

• China May Tighten Monetary Policy. China may tighten monetary policy because of excessive liquidity in the market and rising property prices, according to a front-page commentary written by a reporter Ren Xiao. China may manage liquidity in 1H by selling repos or reverse repos, the commentary said. Home prices rose for a third month adding pressure to intensify policy-tightening efforts.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.25% to -.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 111.5 +3.0 basis points.

• Asia Pacific Sovereign CDS Index 83.25 +.25 basis point.

• FTSE-100 futures -1.52%.

• S&P 500 futures +.01%.

• NASDAQ 100 futures +.01%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (EXPD)/.43

• (THC)/.67

• (UNFI)/.50

• (AZO)/4.76

• (HD)/.64

• (AMT)/.77

• (CBRL)/1.25

• (M)/1.99

• (SKS)/.15

• (PCLN)/6.53

• (FSLR)/1.77

• (EIX)/1.05

• (DWA)/-.10

• (VNO)/1.08 

Economic Releases
9:00 am EST

• The S&P/CS 20 City MoM% SA for December is estimated to rise +.65% versus a +.63% gain in November.

10:00 am EST

• Richmond Fed for February is estimated to rise to -4 versus -12 in January.

• Consumer Confidence for February is estimated to rise to 62.0 versus 58.6 in January.

• New Home Sales for January are estimated to rise to 380K versus 369K in December.

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Bernanke Senate Testimony, weekly retail sales reports, 5Y T-Note auction, UK Housing prices, (JPM) investor day, (WBSN) analyst day, RBC Healthcare Conference, Robert Baird Business Solutions Conference, Goldman Ag Conference and the Wells Fargo Real Estate Conference could also impact trading today.

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

Stocks Reversing Sharply Lower on Surging Eurozone Debt Angst, Global Growth Fears, Technical Selling, Financial/Homebuilding/Commodity Sector Weakness

Broad Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Slightly Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• VIX 16.83 +18.77%
  

• ISE Sentiment Index 100.0 -16.67%

• Total Put/Call 1.12 +21.74%

• NYSE Arms 1.65 +137.60%

Credit Investor Angst:

• North American Investment Grade CDS Index 89.20 +3.31%

• European Financial Sector CDS Index 150.49 +.31%

• Western Europe Sovereign Debt CDS Index 98.60 -1.95%

• Emerging Market CDS Index 235.95 +.60%

• 2-Year Swap Spread 14.25 -.25 bp

• TED Spread 17.0 +.25 bp

• 3-Month EUR/USD Cross-Currency Basis Swap -19.75 unch.

Economic Gauges:

• 3-Month T-Bill Yield .12% unch.

• Yield Curve 164.0 -7 bps

• China Import Iron Ore Spot $151.90/Metric Tonne -1.11%

• Citi US Economic Surprise Index -5.0 -.2 point

• 10-Year TIPS Spread 2.52 -2 bps

Overseas Futures:

• Nikkei Futures: Indicating -287 open in Japan

• DAX Futures: Indicating -108 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging markets shorts
• Disclosed Trades: Added to my (IWM)/(QQQ) hedges
• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• Italy Projections Show Hung Parliament on Berlusconi. Italy may require another vote after partial election results suggested the four-way race may end in a divided parliament, an aide to Democratic Party candidate Pier Luigi Bersani said. “Those projections show a risk of ungovernability,” Stefano Fassina, Bersani’s economic-policy spokesman, said today on Italy’s La7 television. Projections by IPR Marketing and state-broadcaster RAI showed Bersani was denied victory as Silvio Berlusconi built a blocking minority in the Senate. Italian bonds reversed gains and stocks pared a rally on speculation that voters repudiated budget rigor and turned to the premier who was forced out in November 2011 by Europe’s financial crisis. In Italy, where premiers require control of both houses of parliament, Berlusconi may have won the Senate race in the swing regions of Sicily, Campania and Lombardy, according to an IPR projection based on partial vote counts. “A hung parliament would be a guarantee of paralysis both in terms of economic program and structural reforms,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in an e-mail. “Such a scenario would be the worst-case outlook.” 
• Italian Bonds Decline as Polls Indicate Hung Parliament. Italy’s bonds fell, erasing an advance that saw 10-year yields decline by the most in six months, as polls indicated the euro area’s third-largest economy may be left with a hung parliament. Italian two-year yields reversed the biggest slide in six weeks as partial results of the country’s election suggested former Prime Minister Silvio Berlusconi may have built a blocking minority in the Senate to deny outright victory to Pier Luigi Bersani. Stefano Fassina, an aide to Bersani, said the nation may need a second election. German bunds rose as concern the results will derail austerity measures introduced by outgoing premier Mario Monti boosted demand for safer assets. 
• Euro Declines to Six-Week Low Amid Italian Election Concern.The euro fell to the lowest in six weeks versus the dollar after partial election results from Italy suggested the four-way race may end in a divided parliament requiring another vote. “We think the euro will remain under pressure until we get more clarity,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA (ACA), said in a telephone interview. “There’s a lot of uncertainty there, and it’s weighing on the euro and risk assets in general.” The euro declined 0.4 percent to $1.3144 as of 1:41 p.m. in New York after gaining as much as 1 percent. It touched $1.3137, the lowest since Jan. 10.
• China’s Slower Manufacturing Casts Shadow Over Recovery. China’s manufacturing is expanding at the slowest pace in four months, a private survey showed, underscoring the headwinds faced by policy makers in the world’s second-biggest economy. The preliminary reading of a Purchasing Managers’ Index was 50.4 in February, according to a statement from HSBC Holdings Plc and Markit Economics today. That compares with the 52.3 final reading for January and the 52.2 median estimate of 11 analysts surveyed by Bloomberg News.
• Asian Ship Loans Seen Prolonging Worst Industry Slump in Decades. Asian banks are prolonging the shipping industry’s worst slump in decades by lending more money to fund building of vessels ordered from local yards, according to HSH Nordbank AG, the world’s biggest marine lender. Record deliveries of new ships built in the past four years are curbing earnings and vessel owners’ cash flows, Christian Nieswandt, Hamburg-based HSH Nordbank’s global head of shipping for Germany, said in interviews in the city and London on Feb. 21-22. “Significant” numbers can’t repay loans, he said. The Baltic Dry Index of rates to ship minerals and grains by sea fell in four of the last five years as the fleet’s growth outpaced demand for commodities. A delayed recovery will hurt European banks estimated by Petrofin Research to hold about 75 percent of $500 billion in global shipping loans. Banks are deferring repayments and restructuring terms to avoid foreclosures and writing off defaulting loans as vessel prices plunge to levels below outstanding debt. 
• Nickel and Aluminum Drop as China Manufacturing Expansion Slows. Nickel extended the biggest weekly drop since 2011 in London and aluminum fell after figures showed manufacturing is expanding at the slowest pace in four months in China, the world’s largest consumer of the metals. “The majority of metal prices are continuing to show weakness,” Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, said by e-mail today. “Besides the restraint being exercised by market players on account of the Italian elections,” the Chinese gauge was “doubtless also weighing on sentiment,” he said. Nickel for delivery in three months slid 0.8 percent to $16,832 a metric ton by 10 a.m. on the London Metal Exchange.

Wall Street Journal: 

• Italians Seem Set to Reject Austerity in Vote. The makeup of Italy's future government and Parliament was uncertain as votes were being counted in watershed national elections, but one trend seemed clear: Italians are fed up with the austerity that has characterized the past year of the caretaker government. Instant polls released just after the close of the voting stations at 3 p.m. on Monday showed the center-left Democratic Party winning a majority in the lower house of Parliament. But projections released shortly after, based on early counting of actual votes, showed the center-right coalition run by former Premier Silvio Berlusconi leading in the upper house of Parliament, the Senate. That divide, if confirmed by the final vote tally, could steer the country back to a new election as early as this summer. Both the polls and projections showed two trends: the surge of popularity of former comedian Beppe Grillo, who campaigned on an antiausterity, anti-establishment platform; and the lower-than-expected showing of departing Premier Mario Monti's centrist coalition. 
• WSJ Analysis: Fed Exit Strategy a Work in Progress. Two developments are worth watching on the Federal Reserve front these days. Both relate to Fed planning for how it will withdraw one day from the aggressive bond buying it is now pursuing to bolster the markets and the economy. Call the first the tapering debate. Right now the Fed is buying $85 billion per month of U.S. Treasury debt and mortgage-backed securities. It has said it would continue to buy this debt until it sees substantial improvement in the outlook for employment.

CNBC: 

• One Quarter of US Has More Card Debt Than Savings. For more than half the country, 55 percent, an emergency fund outweighs credit card debt. Nearly a quarter, 24 percent, admit to having more debt on plastic than money in the bank, while 16 percent say they have neither credit card debt nor savings. That puts 40 percent of the population close to the edge of ruin while everyone else seems to be sitting pretty.
• Bob Woodward: Obama Made Big Mistake on Sequester. 
• Why Consumers May Be On Crash Course. Consumers are clipping coupons at a rate not seen since before the 2007 recession, and that's a troubling sign, according to Coupons.com CEO Steven Boal. The website tracks how often people view and print coupons and their redemption rate. Right now, Coupon.com's Internet Coupon Index, as it's called, shows a spike in coupon offers and demand.

Zero Hedge: 

• Did Bunga Bunga Just Kill The US Housing Recovery As Lumber Futures Plunge. (graph)
• From Hung Parliament To BTP Sell Off: JPM Says To Expect A 40-100 Bps Rise In Italian Bond Yields. 
• Europe Ends Unch As "Italian Hope" Gains Evaporate. (graphs) 
• What If ObamaCare, Too Big To Fail Banks, And The State Are All the Wrong Sized Unit?
• Italy May Be Headed For Revote Following Miserable Bersani-Monti Senate Showing.

Business Insider: 

• LIVE: NIGHTMARE SPLIT SCENARIO LOOMS IN ITALIAN ELECTION, COUNTRY MAY BE 'UNGOVERNABLE'. 
• Here's John Kerry's First 'Gaffe' As Secretary Of State. 
• REPORT: There's A Fresh Round Of Layoffs Coming To Goldman Sachs(GS). 
• Six Years Later, The Biggest Leveraged Buyout Deal In History Faces Spectacular Failure. 
• Gas Prices Are Unusually High Right Now, And They're Heading Higher. 
• FELIX ZULAUF: 'Lira-ization Of The Euro' Is Inevitable. 
• ANALYST: Here's Why The Berlusconi Surge Is Slamming Every Market In The World. 
• Dallas Fed Manufacturing Survey Misses Expectations Falling To 2.2. 
• John Boehner Is Holding A Sequester Press Conference Today...

New York Times:

• A New Cold War, in Cyberspace, Tests U.S. Ties to China. When the Obama administration circulated to the nation’s Internet providers last week a lengthy confidential list of computer addresses linked to a hacking group that has stolen terabytes of data from American corporations, it left out one crucial fact: that nearly every one of the digital addresses could be traced to the neighborhood in Shanghai that is headquarters to the Chinese military’s cybercommand.

Reuters:

• Italy's Election Live.
• Sinopec to buy stake in Chesapeake assets for $1.02 billion. China Petroleum & Chemical Corp (Sinopec) (600028.SS) will buy half of Chesapeake Energy Corp's (CHK.N) Mississippi Lime oil and gas properties in Oklahoma for $1.02 billion to increase its presence in the booming North American shale gas industry. Output from shale fields in the United States and Canada has jumped over the last three years due to the advent of drilling methods such as hydraulic fracturing. Companies in China, which has the largest shale reserves in the world, are keen to get the know-how of drilling in such unconventional fields. China's state-owned CNOOC Ltd (0883.HK) has struck a deal to buy Canadian oil and gas company Nexen Inc (NXY.TO) for $15.1 billion, while Pioneer Natural Resources Co (PXD.N) said last month it would sell a stake in its assets in the Wolfcamp shale field of Texas to Sinochem Group SINOC.UL for $1.7 billion. Sinopec, Asia's largest oil refiner, will buy 50 percent of Chesapeake's 850,000 acres of net oil and natural gas leasehold properties in the Mississippi Lime shale field in northern Oklahoma, the companies said. 
• Lowe's(LOW) makeover bears fruit; Sandy helps sales. Lowe's Cos Inc's quarterly results beat analysts' estimates on Monday as sales benefited from rebuilding after Hurricane Sandy and the retailer's own efforts to improve product selection and customer service.

Telegraph: 

• Value of money slides 30pc in 30 years as cost of goods rockets.
• Uncertainty for Italy as election exit polls show split vote. The centre-right coalition led by Silvio Berlusconi is leading in the race for the Italian upper house, while Pier Luigi Bersani's centre-left group is ahead in the lower house.
• George Osborne: Moody's downgrading sends 'clear message' for UK austerity. Chancellor George Osborne says Britain's loss of its prized AAA credit rating shows that the UK needs to continue to deal with its debt.  

Bild:

• German SPD Chief Gabriel Still Opposes Cyprus Aid. New govt in Cyprus doesn't necessarily make it easier for Germany's opposition party SPD to agree to aid package, SPD leader Sigmar Gabriel said. Gabriel says Cyprus made money laundering part of its business model.

Les Echos:

• ECB's Coeure Says France Must Stick to Commitments. Asked if France's wish to delay its 2014 deficit reduction target would put Europe's stability pact in danger, Benoit Coeure, French board member on the ECB, said that the question is more important than France alone. Behavior of big countries is "particularly important" in determining the credibility of the stability pact, he said. France must stick to commitment to cut 2013 structural deficit and the nominal deficit increase must remain as small as possible. France needs spending cuts to ensure mid-term credibility, he said.

Xinhua:

• Survey highlights opaque Chinese govt procurement. A survey of government procurement prices showed that nearly 80 percent of surveyed products were purchased at a price much higher than market price, indicating irregularities in government procurement. The survey was conducted by the Chinese Academy of Social Sciences in Guangdong, Heilongjiang, Jiangxi and Fujian provinces. The survey results were issued Monday. Of 19,020 surveyed products, mainly office utilities, 15,190 were purchased at a price higher than market price, the survey showed. For instance, 18 million yuan ($2.88 million) was spent on 2,098 laptops, but only 13.73 million yuan would've been needed if they were purchased at market price. China's government procurement law states that government procurement prices must be lower than the average market price. Tian He, head of the survey team and a researcher with the CASS, said a lack of transparency and high procurement prices will invite public suspicion. The volume of government procurement surged from 100.9 billion yuan in 2002 to 1.13 trillion yuan in 2011, according to the survey.

Bear Radar

Style Underperformer:

• Small-Cap Value -.71%

Sector Underperformers:

• 1) Oil Tankers -2.36% 2) Education -2.35% 3) Homebuilders -1.82%
  

Stocks Falling on Unusual Volume:

• DEPO, WIFI, BSTR, SFUN, TNAV, BBVA, ABV, BP, DEO, BAC, PSO, DDD, CWH, DDS, PANL, TGP, SSYS, CG, MTD, HSNI, BGC, EXLP, DCI, BRY, MJN, FIRE, CCC, ESI, FFIV, ABAX, HAIN, CHK, ABG, UL and PLCE

Stocks With Unusual Put Option Activity:

• 1) ALXA 2) CVC 3) ADSK 4) STT 5) XLI
  

Stocks With Most Negative News Mentions:

• 1) PLCE 2) NVDA 3) RIG 4) BRY 5) HIG
  

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth -.26%

Sector Outperformers:

• 1) Gold & Silver +1.65% 2) Utilities +.19% 3) Restaurants +.16%
  

Stocks Rising on Unusual Volume:

• ENDP, NTWK, WBMD, ELN, BKS, HTZ, CTB, CZR and AMGN

Stocks With Unusual Call Option Activity:

• 1) PANL 2) RDN 3) BKS 4) SD 5) SBAC
  

Stocks With Most Positive News Mentions:

• 1) STJ 2) WBMD 3) RKT 4) DDS 5) HTZ

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg:

• U.K. Stripped of AAA Rating by Moody’s Amid Outlook Weakness. Britain lost its top credit rating by Moody’s Investors Service, which cited weakness in the nation’s growth outlook and challenges to the government’s fiscal consolidation program. The rating on the U.K. was lowered one level to Aa1 from Aaa and the outlook on the nation’s debt changed to stable from negative, Moody’s said in a statement yesterday. With the U.K.’s high and rising debt burden, deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement. “We don’t expect much market impact from the downgrade, it was widely expected,” David Tinsley, an economist at BNP Paribas SA in London, said today in an e-mail. “The bottom line is that the U.K. needs to find some growth to raise tax revenues.” 

• Italian Notes Slide Before Election; Bunds Gain on Haven Demand. Italian notes dropped for the fifth week in six weeks amid speculation parliamentary elections will result in a hung parliament, derailing economic reforms in Europe’s biggest debt market.

• Correlation at Four-Year Low Leaves Europe Stocks Missing Rally. Euro-region stocks are missing this year’s global rally as four years of lockstep moves in markets break down amid diverging outlooks for economic growth. Correlation between the Euro Stoxx 50 Index and the MSCI All-Country World Index of 45 developed and emerging markets has fallen to 77 percent, the lowest level since the collapse of Lehman Brothers Holdings Inc. in 2008, according to data compiled by Bloomberg. The European gauge has dropped 0.2 percent in 2013.

• H.K. Weekend Property Sales Fall on Doubled Stamp Duty. Residential property sales in Hong Kong fell after the government doubled a sales tax, saying bubble risks are spreading in the world’s most expensive place to buy an apartment. Secondary sales for the 15 most popular housing estates fell 15 percent at the weekend from the previous weekend, according to Buggle Lau, chief analyst at Midland Holdings Ltd., the city’s biggest publicly traded realtor. The stamp duty on all properties above HK$2 million ($258,000) was raised to as much as 8.5 percent of the purchase price.

• China to Expand Short-Selling Program as Part of Reform. China will expand its short-selling program on Feb. 28 by allowing selected brokerages to borrow shares from institutional investors, the Shanghai Securities News reported. Eleven brokerages will be able to borrow shares in a pre- approved pool of 90 publicly traded companies, according to the report, which cited China Securities Finance Corp. The state- owned agency was set up to provide securities firms with funds and stock for short-selling and margin trading. The expansion of short-selling -- in which investors sell borrowed shares in the expectation of profiting when they fall - - will increase the efficiency of China’s equity market, help manage risks and boost brokers’ revenue, the report said. 

• KFC Growth Seen Slowing as Indonesia Limits Franchisees. Yum! Brands Inc. (YUM), owner of the KFC and Pizza Hut dining chains, and other fast-food companies may be forced to slow store growth in Indonesia, the world’s fourth- most populous nation, because of government rules to protect small businesses. 

• China to Increase Fuel Prices for First Time Since September.

• Fed’s Tarullo Sees Remaining Contagion Risk in Bank Liabilities. Federal Reserve Governor Daniel Tarullo said large banks are vulnerable to runs from non-deposit liabilities, and regulators need to do more to curb such risk. “These vulnerabilities involve both large, prudentially regulated institutions, and thus too-big-to-fail concerns, and the broader financial system,” Tarullo said today in the text of remarks to the Cornell International Law Journal Symposium in New York. “The liability side of the balance sheets of financial firms has been barely addressed in the reform agenda.” Fed bank supervision and monetary policy is increasingly focusing on stemming threats to financial market stability. Tarullo, the Fed governor in charge of financial regulation and bank oversight, has worked with Chairman Ben S. Bernanke on the overhaul of the central bank’s risk surveillance and bank oversight. 

• Rebar Trades Near One-Month Low on Property Curb Expectation. Steel reinforcement-bar futures traded near a one-month low in Shanghai as investors cut their exposure to the building material amid signs of tighter control on property investment. Rebar for October delivery dropped by as much as 0.9 percent to 3,998 yuan ($641) a metric ton on the Shanghai Futures Exchange, the lowest since Jan. 22, before trading at 4,028 yuan at 10:32 a.m. local time. The contract lost 5.6 percent last week.

• Commodities May Drop on Moving-Average Sign: Technical Analysis. Commodity prices, heading for the biggest weekly drop since early December, may fall an additional 7.2% in the next two months, according to technical analysis by Futurepath Trading LLC. The S&P's GSCI Spot Index of 24 raw materials may fall to 610 by April 30 from yesterday's settlement of 657.31 after the gauge dropped below the 50-day moving average for the first time since December, said Paul Kavanaugh, the Chicago-based director of business development. "Market action is suggesting that we may see some declines," said Kavanaugh, who correctly predicted in January that gold would drop below $1,600 an ounce by March. "The tone of the market has changed."

• Gold Bets Cut by Most Since ’07 as Sugar Bears Grow: Commodities. Hedge funds cut bets on a rally in gold by the most since 2007 and became the most bearish ever on sugar and coffee as concern that the Federal Reserve will slow U.S. stimulus programs drove prices for raw materials to the biggest loss this year. Money managers and other large speculators reduced their net-long position in gold futures and options by 40 percent in the week ended Feb. 19 to 42,318, the biggest drop since July 31, 2007, U.S. Commodity Futures Trading Commission data show. Wagers across 18 U.S. raw materials tumbled to the lowest since December 2011 as investors’ net-short positions for sugar and coffee hit record highs. Bullish corn wagers fell the most since June 2010.

• BHP(BHP) Says Cost Cutting Needed to Meet Falling Demand for Minerals. BHP Billiton Ltd. (BHP), the world’s biggest mining company, said a slowdown in demand for minerals over the next five years makes cutting costs and boosting productivity a priority. “I’m committed to drive an agenda of productivity and that will almost certainly” be a “top theme,” Andrew Mackenzie, the Melbourne-based company’s newly appointed chief executive officer, said in an interview with the Australian Broadcasting Corp. today, according to a transcript. 

• McCain Says Hagel Not Qualified for Defense, Sees Full Vote. U.S. Senator John McCain said Chuck Hagel isn’t qualified to be secretary of defense while predicting that the former lawmaker will receive a Senate vote, barring any further disclosures about his past statements. “I do not believe that Chuck Hagel, who is a friend of mine, is qualified to be secretary of defense,” Republican McCain said on CNN’s “State of the Union” program today.

• Iran Says Uranium Reserves Almost Tripled as 16 Plants Planned. Iran said recent discoveries of uranium resources have almost tripled the country’s reserves of the radioactive fuel and that it plans to build reactors at 16 new locations, Iranian news agencies reported. Finding domestic supplies of uranium to fuel Iran’s civilian power program is the country’s top priority, Atomic Energy Organization of Iran head Fereidoon Abbasi told reporters yesterday at an annual industry meeting in Tehran, Fars News Agency said. Iran now has about 4,400 tons of raw uranium, up from 1,527 tons, the Islamic Republic News Agency said, citing Abbasi. 

• Chinese Hackers Attacked EADS, ThyssenKrupp. European Aeronautic Defence & Space Co. and ThyssenKrupp AG (TKA) were attacked by Chinese hackers last year, both companies said.

Wall Street Journal:  

• Fresh Front in Budget Battle. Congressional Leaders Discuss Deal to Avert Shutdown at Cost of Extending Cuts. Already looking past the current budget impasse gripping the capital, congressional leaders are quietly considering a deal to avert a government shutdown next month—but at the cost of prolonging across-the-board spending cuts. Attention is beginning to shift from Friday, when the broad cuts known as the sequester kick in, to the next budget deadline: Congress must pass a so-called continuing resolution by the end of March to keep funding government operations.

• Brazil Bank Prioritizes Inflation Fight. The Brazilian central bank's priority is fighting inflation, and not spurring growth, its president said in an interview before policy makers meet to set interest rates, even as Latin American's biggest economy struggles to escape a long stretch of slow growth. Brazil's economy expanded around 1% in 2012, down from 7.5% as recently as 2010. At the same time, annualized inflation hit 6.2% in mid-February, close to the maximum the government has said it would tolerate. Analysts say the perception of dueling policies aimed at stimulating the economy and tamping down inflation have created confusion in the market, causing the Brazilian real to gyrate from multi-month lows to highs in the space of a few months. "Our goal is inflation, so we have to adjust and calibrate our policies to meet our goals," Central Bank President Alexandre Tombini told The Wall Street Journal. "Growth is not a goal for the central bank." 

• 'Lost Generation' Feels Italy's Fiscal Squeeze. Forty-Somethings Pay Price of Austerity in Higher Taxes, but Will Reap Lower Pension Benefits. Forty-something Italians are facing austerity for the rest of their working lives—just as they have since becoming adults. "We are the lost generation," says Andrea Bolla, the 46-year-old chief executive of energy provider Vivigas and the Valdo Prosecco winery near the northern city of Verona. He says he pays more taxes and receives fewer services while navigating more red tape than his father did while running the family businesses.

• Jack Lew's Golden Parachute. His Citigroup contract paid him a bonus for returning to government.

Marketwatch.com:

• China’s premature overheating. Commentary: Questions surface over Chinese growth numbers.

Fox News: 

• Lawmakers, officials list problems cuts would bring, but appear no closer to compromise. Lawmakers from the White House to Capitol Hill to the Western Plains agree that the fast-approaching, $85 billion in cuts to the federal budget jeopardize everything from combat readiness to pre-K programs. But they also express little optimism about a deal to avert the reductions before they kick in Friday. All of them made their case over the weekend for President Obama along with congressional Democrats and Republicans to reach a budget deal to avert the cuts -- known as sequester. However, both parties accused each other of extending the stalemate. “It will kick in,” Oklahoma Republican Sen. Tom Coburn told “Fox News Sunday.”  "The reason there is no agreement is because there's no leadership from the president on actually recognizing what the problem is." 

CNBC: 

• Which Tax Deductions Are Most Likely to Go?

• Bernanke's Challenge: Prime Markets for End of QE. Federal Reserve Chairman Ben Bernanke is preparing for a most sensitive task: telling jittery investors who have grown accustomed to the U.S. central bank's ultra-easy monetary policies that things will eventually have to change.

Zero Hedge:

• Why A China Crash May Be Imminent. 

• Titan(TWI) CEO vs France Round 3: "The Wackos Of The Communist Union Destroy The Highest Paying Jobs"

• Farewell Eng£AAAnd: Moody's Downgrades The UK From AAA To Aa1.

• Memo To Japan: It Is Going To Be A Cold, Expensive Winter.

• The Other Sequestration That No One Is Talking About.

• Andy Lees: "Emerging Markets Unable To Continue The Heavy Lifting". 

• Yen Plunges As Uber-Dove Kuroda Set To Head Bank Of Japan. 

• Yet Another Unintended Central Planning Consequence: Running To Stand Still. 

• China HSBC PMI Misses, Prints At Four Month Low. (graph)

Business Insider:  

• There's An Even Worse Scandal Hidden In Obama's Secret Drone Memo. 

• Now 6 Tanks Are Leaking Radioactive Waste At America's Most Contaminated Site. 

• North Korea Warns US Commander In South Korea Of 'Miserable Destruction'. 

• The Last Remaining Hope For Europe Is Slipping Away. 

• GOLDMAN: There's Almost A 50% Chance Of A Negative Outcome In Italy Tomorrow. 

• It Looks Like The Dollar Is About To Surge.

Wall Street All-Stars:

• Weekly Sector Update.

Examiner.com:

• Industry experts worry GM(GM) subprime spree could trigger auto loan bubble. General Motors has the highest auto loan delinquency rate in the industry due to its increasing reliance on subprime customers, a fact some experts fear could lead to a bubble like the one that wrecked the housing market in 2007 and produced the Great Recession of 2008. "High production costs and falling profit-per-car have led auto manufacturers to turn to financing to earn higher profits. Automakers have capitalized on lending by not only loaning money to customers but also packaging and selling those loans to investors in a manner similar to the sale of mortgage-backed securities that created the housing bubble," according to the Washington Free Beacon's Bill McMorris. "The dramatic increase in securitization has coincided with GM's acquisition of AmeriCredit, one of the nation's largest subprime auto lenders, which it renamed GM Financial (GMF)," McMorris said. John Berlau of the Competitive Enterprise Institute, a Washington think tank, and Ed Niedermeyer, a veteran automotive industry analyst, told McMorris they see multiple worrisome signs on the horizon.

New York Post:

• Amazon(AMZN) Original Series Plans Heat Up. Just about everyone in Tinseltown has been bowled over by Netflix’s first big original series, “House of Cards.” Now it’s Amazon’s turn to prove it can pick a hit show for its rival streaming service, although it’s taking a decidedly different tack.

Reuters:

• Tens of thousands in Spain protest economic policy, corruption. Tens of thousands of Spaniards marched through cities across the country on Saturday to protest deep austerity, the privatization of public services and political corruption. Gathering under the banner of the "Citizen Tide", students, doctors, unionists, young families and pensioners staged rowdy but non-violent demonstrations as a near five-year economic slump shows no sign of recovery and mass unemployment rises.

• Hedge funds grow nervous after credit rally. Hedge fund managers who profited from a huge rally in credit since last summer are seeking ways to protect themselves against a sharp market sell-off if investor confidence evaporates. Managers have been selling some bonds, increasing short positions or moving away from areas of the market more sensitive to a swing in sentiment, following a 38 percent drop since June in the iTraxx index, which measures the credit risk premium for a basket of high quality European bonds.

• Gloomy Italians vote in election crucial for euro zone. Italy voted on Sunday in one of the most unpredictable elections in years, with many voters expressing rage against a discredited elite and doubt that a government will emerge strong enough to combat a severe economic crisis. "I am pessimistic. Nothing will change," said Luciana Li Mandri, 37, as she cast a ballot in the Sicilian capital Palermo on the first of two days of voting that continues on Monday. "The usual thieves will be in government."

The Economist:  

• The country formerly known as Syria. As sectarian divisions deepen, the war is changing the country beyond recognition. 

• New European economic forecasts. The ever-receding recovery. A WEEK after official figures showed a steep fall in euro-zone output in late 2012 the European Commission (EC) has added to the gloom by unveiling some gloomy forecasts for 2013. Three months ago the EC envisaged a modest recovery getting under way in the first half of this year. Now that is not expected until the second half of 2013.

Telegraph:

• Trade protectionism looms next as central banks exhaust QE. Officials at the US Federal Reserve may be more worried than they have let on about the treacherous task of extricating America from quantitative easing. This is an unsettling twist, with global implications.

Stuttgarter Zeitung:

• Schaeuble Says Won't Be Pressured on Cyprus Aid. Proof that Cyprus is systemically relevant for the stability of the euro region is a precondition for German parliamentary approval of any aid to the country Finance Minister Wolfgang Schaeuble. France will adhere to its European obligations in lowering its budget deficit, he also said. It is in Italy's interest to continue policies carried out by Prime Minister Mario Monti after the elections, Schaeuble said.

Prensa Latina:

• Russia's Medvedev Warns U.S. on Europe Missle Shield Plans. He said Russia still believes U.S. anti-missile defense plans for Europe directed against Russian nuclear capability. Implementation of the plan would have "extremely unpleasant" consequences for international relations as Russia would be forced to respond. Russia also opposes U.S. sanctions on Cuba, he said.

Want China Times: 

• Crisis looms as local government debt to mature this year. China's local government debt crisis has been getting worse as national statistics show that 53% of local government debt will be due by the end of 2013, when local governments enter a peak period for repaying loans. Financial reports recently issued by various local governments have all issued warnings, including information that they have been under heavy pressure to repay debts and deal with local financial risks that could not be ignored. China's National Audit Office says 42% of the debt was due by the end of 2012. This year the local government debt crisis is greater than in the past few years due to increasing debts and mounting pressure to repay amid an economic slowdown and declining financial revenue, warned Zhao Quanhou, director of the Research Office of Finance under the Ministry of Finance's Research Institute for Fiscal Science.

Xinhua:

• China's Military to Implement Rules to Manage Spending. China's military will give priority to ensuring combat readiness as it seeks to control non-urgent infrastructure investments, citing a rule approved by Xi Jinping, chairman of the Communist Party of China Central Military Commission.

China Securities Journal:

• China May Release Detailed Rules on Property Control. Some Chinese ministries and local governments may announce detailed rules to control property market "soon," citing a person familiar with the matter. Some of the measures will likely be announced before the National People's Congress and the Chinese People's Political Consultative Conference, according to the report. The CPPCC annual meeting will start on March 3 and the NPC will begin on March 5.

Weekend Recommendations

Barron's:

• Bullish commentary on (TWI), (SU), (DKS), (ADT), (COH), (GLPW) and (CNQ).

Night Trading

• Asian indices are -.25% to +.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 108.50 -1.0 basis point.

• Asia Pacific Sovereign CDS Index 83.0 -1.0 basis point.

• FTSE-100 futures +.19%.

• S&P 500 futures -.04%.

• NASDAQ 100 futures -.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DDD)/.38

• (HTZ)/.31

• (LOW)/.23

• (DCI)/.38

• (CTB)/.85

• (ADSK)/.49

• (TWI)/.47

Economic Releases
10:30 am EST

• Dallas Fed Manufacturing Activity for February is estimated to fall to 3.0 versus 5.5 in January.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Lockhart speaking, Chicago Fed National Activity Index for January, 2Y T-Note auction, Mobile World Congress, Morgan Stanley Tech/Media/Telecom Conference, Citi Healthcare Conference and the (DRI) analyst day could also impact trading today.

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