Morning Note...

Futures +5bps this morning on news of a formal Greek bailout, slightly better Initial Jobless Claims, and weaker-than-expected inflation data in China for the month of January. China’s inflation gained 1.5% - which was less than the 1.9% forecast - and quells some fears over further stimulus tightening there.  Further, Australia posted solid jobs data, as employers added the most workers in over three years in January, marking their fifth straight monthly increase.  In corporate news, PEP is trading slightly lower after their earnings release.  In terms of “follow the bouncing ball” EU news, this morning’s news seems to set the record straight, as a formal agreement on an “internal” European Union bailout is apparently reached:

Feb. 11 (Bloomberg) -- European leaders reached an agreement to deal with Greece’s debt crisis and said they will hold the country to strict budget rules. “There is an accord,” European Commission President Jose Barroso told reporters after the leaders of Greece, France and Germany met in Brussels. German Chancellor Angela Merkel said: “Greece won’t be left alone but there are rules and these rules must be adhered to. On this basis we will agree on a statement.” No details were released as the leaders hustled into a summit of the entire 27-nation EU. Plans by Greek Prime Minister George Papandreou to cut the EU’s highest budget deficit have triggered street protests. The summit, which was delayed because of snow, was originally slated to last about six hours and end at 4:30 p.m. The euro erased declines and Greek bonds rose after Barroso announced the agreement. The euro, which fell as low as $1.3714 today, traded at $1.3739 at 12:59 p.m. in Brussels. The yield on the Greek two-year government bond dropped 54 basis points to 4.915 percent.

In economic news, Initial Jobless Claims for the week ending February 6^th were better-than-expected, at 440k vs. 465k expected.  Continuing Claims were also slightly better, at 4.538M vs. the 4.6M expectation.  On that jobs note, there was an interesting story about corporations “hording cash” on the tape this morning:

A majority of companies in the Standard & Poor’s 500 stock index increased cash to a combined $1.19 trillion while simultaneously reducing spending, keeping a jobs recovery on hold.  Caterpillar Inc., Eaton Corp., Walgreen Co. and General Electric Co. are among 260 companies that ended last quarter with $522 billion more than a year earlier after cutting capital spending by 42 percent. Economists say the dearth of investment is keeping the jobless rate at about 10 percent as the U.S. emerges from its worst recession since the 1930s. “It’s not clear we are going to see the type of growth following this recession that we’ve seen in previous recessions,” Sandy Cutler, Eaton’s chief executive officer, said in an interview yesterday. That view “is leading people to be cautious as to their rate of reinvestment, and right in parallel with that, in terms of hiring additional employees.” Investment and hiring may remain low as companies bring unused capacity back on line and rely on productivity gains to fill demand, said Edward Lazear, former economic adviser to President George W. Bush and a professor at Stanford University in Stanford, California. Employers have eliminated 8.4 million jobs since the U.S. slipped into recession in December 2007.

In geopolitical news, nuclear advances in Iran were announced by Ahmadinejad.  He claimed that Iran has produced its first batch of uranium enriched to a higher level, saying his country will not be bullied by the West into curtailing its nuclear program a day after the US imposed new sanctions. 

With regards to the Greek bailout, I’ll offer the following cynical trader view from the cheap seats:  First, any bailout – in my opinion – is bad news long term.  It’s worth remembering that the morning Tim Geithner announced formal plans to rescue FNM and FRE in September 2008, the S&P was 1236 and was a screaming sell.  Second, while many market pundits correctly argue that Greece is but a blip on the global economic scene and that any default risk is neatly contained, I would remind everyone that these same “experts” also told us that the small subprime defaults that started somewhere in California during the spring/summer of 2007 were also “contained” and “small” in terms of size and potential impact.  Does anyone remember New Century Financial (NEW at the time, eventually relisted to NEWCQ)?  That was the canary in the coalmine – it imploded in February 2007, and (at least in my mind) marked the beginning of the credit crisis.  Remember, back then it was too small to really frighten anyone and it was supposed to be completely contained.  And we all know how that turned out.  I don’t pretend to know a thing about the inner workings of the EU, or what the true risk of contagion – if any at all – might be.  But I do have a long memory, and the Greek/NEW parallel is worth noting…

Bill Gates’ fund ups KOF stake.  BERN ups MMM.  BCAP ups CVC.  OPCO ups CAH.  DBAB ups ABB.  ALU lowers estimates.  AMKR lower on earnings.  OPCO ups ANF, $46 tgt.  FE to merge with AYE in stock-for-stock deal.  BSX lower on earnings, job cuts, and DBAB downgrade.  BT lower on earnings.  DEO profits -10%.  ELON beats by 8c but guides lower.  JEFF ups ENER.  EQIX beats by 10c.  KEYB ups HWK.  JASO beats by 3c and raises guidance.  LF beats and guides in-line.  ROTH ups NVDA.  CITI ups PALM.  PRU misses by 4c.  WSJ reports on RTP bullish outlook.  SNN higher on earnings.  STO reports higher profits.  STRA beats by 2c but guides lower.  SWIR lower on earnings.  TOT higher on earnings.  XIN higher on earnings. 

Asia higher overnight.  Europe mixed but leaning lower.  USD +10bps.  Gold +60bps.  Oil +25bps.

S&P 500 PreMarket (last/% change prior close/volume): 

ALLEGHENY ENERGY        23.26    +10.66%           1753014

BOSTON SCIENTIFC       7.69      -7.24%              13598007

CARDINAL HEALTH         34.33    +6.75%             200

FIRSTENERGY CORP       39.40    -4.97%              510271

PROLOGIS                     11.95    -3.63%              3120

VF CORP                       74.90    +3.4 %              16560

NOVELL INC                   4.64      -3.13%              400

ABERCROMBIE & FI        33.26    +3.0 %              1300

Today’s Trivia:  By way of comparison to the Marianas Trench, how many miles high is Mount Everest?

Yesterday's Answer:  The average ocean depth is 2.5 miles, and the Marianas Trench is 6.8 miles deep. 

Best Quotes:  “China Economy Will Slow, Hurt Commodities, Faber Says:  2010-02-11 05:01:40.131 GMT

By Shiyin Chen and Bernard Lo

     Feb. 11 (Bloomberg) -- China’s economy will slow down “meaningfully” and may even be at risk of a “crash” because of the nation’s excess capacity and as loan growth slows, investor Marc Faber said.

     China’s fragile economy may undermine industrial commodities in the “near term,” the publisher of the Gloom, Boom and Doom report said. Faber added that he’s pessimistic on the euro as a possible bailout of Greece by other European countries increases deficits in the region.

      Gross domestic product expanded 10.7 percent in China last quarter from a year earlier, the fastest pace since 2007.

Lending in January exceeded the total for the previous three months while property prices climbed the most in 21 months, even after the central bank raised banks’ reserve requirements last month, reports released today show.

     “The economy, for sure, will slow down meaningfully this year,” Faber said in an interview with Bloomberg Television in Hong Kong. “It has the potential to crash because of the overcapacities that have developed, and when loan growth slows down, we don’t know how the economy will react.”

     Consumer prices advanced 1.5 percent in January from a year before, a third straight gain, the central bank said today. The median estimate was for a 2.1 percent increase. Lending surged to 1.39 trillion yuan ($203 billion) last month while property prices in 70 cities rose 9.5 percent from a year earlier.

                        China’s Economy

     Central bank Governor Zhou Xiaochuan said in Sydney this week that policy makers need to “closely watch” inflation, which was still “relatively low.”

     Concerns that the central bank will seek to cool rising consumer and asset prices have dragged the nation’s stock market lower this year. The Shanghai Composite Index has slipped 8.9 percent, the 10th-worst performer among 94 benchmark gauges tracked by Bloomberg globally.

     China may raise interest rates before the end of March as accelerating economic growth prompts the central bank to tighten monetary policy, Royal Bank of Canada’s emerging-market strategist Brian Jackson said in a Bloomberg Television in Hong Kong today.

     A possible crash in China’s economy will be “disastrous” for raw materials used in industrial production, Faber said. He instead favors commodities including wheat, corn and soya beans and also said he doesn’t see a “huge downside risk” for gold.

                    Faber’s Recommendations

     “Other commodities haven’t gone up yet, such as the grains,” Faber said. “It may take time until they start to go up substantially but if you have time, you should be long wheat, corn, soya beans or own a farm, which is one way to participate in future food price increases.”

     Faber advised investors to buy U.S. stocks on March 9, when the S&P 500 reached its lowest level since 1996. The measure subsequently rallied as much as 70 percent. He also predicted in May 2005 that stocks would make little headway that year, with the S&P 500 gaining 3 percent.

     Faber was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 climbed 10 percent between then and its record of 1,565.15 seven months later.

     The investor said today the euro may rebound to $1.40 against the U.S. dollar because the currency is currently “oversold” amid concerns over Greece’s deficit, the largest in the European Union. The region, along with the European Central Bank, will probably “bail out” the country, in turn creating more deficits, he also said.

     The euro traded at $1.3752 as of 9:16 a.m. in Tokyo from $1.3737 in New York yesterday. It reached a nine-month low of $1.3586 on Feb. 5.

     “When Greece is bailed out, it’s a further indication that paper money is losing its purchasing power because it’s diluted through larger and larger bailouts and more and more deficits,” Faber said. “Now it can rebound to around $1.40 but more than that, you shouldn’t expect.”