Morning Update

Sentiment Up on Citi Report of Possible Government Support

Although well off of the highs, stocks remain poised to open higher on relative optimism following a report that the US government may up its stake in struggling financial firm Citigroup. Overseas, financials are leading stocks mostly higher, supported by the Citi report, while Japanese stocks came under pressure after a small business lender filed for bankruptcy protection. Treasuries are lower in morning trading ahead of a busy week on the economic calendar, which includes housing and manufacturing data, and Fed Chief Ben Bernanke's semi-annual testimony on Capitol Hill.

As of 8:38 a.m. ET, the March S&P 500 Index Globex futures contract is 9 points above fair value, the Nasdaq 100 Index is 10 points above fair value, and the DJIA is 54 points above fair value. Crude oil is up $0.04 to $40.07 per barrel, and gold is down $15.20 at $986.60.

Dow member Citigroup (C $2) is modestly higher, but has pared early gains that stemmed from reports that the US government could take a larger stake in the financial firm. The Wall Street Journal said the government could convert a large portion of the $45 billion in preferred shares that it bought and may end up holding as much as 40% of Citi's common stock. Citi did not comment.

Treasuries lower ahead of a slew of data

Treasuries are lower in early action, and although today will be void of any major economic reports, the week is poised to provide a plethora of possible sentiment shaping data, with key readings on housing, manufacturing, and the latest revision to 4Q GDP.

Tomorrow brings the first in a string of data on the state of the housing market with the release of the S&P/Case-Shiller Home Price Index for December, expected to fall 18.3% year-over-year (y/y) according to the Bloomberg survey of economists. The index tracks the price path of a typical single-family home in 20 metropolitan areas and is considered by many analysts to be the most accurate reflection of pricing trends versus other measures that track current sales. However, the index started in 2001 and therefore does not have a long history when compared to other data sets.

Existing home sales for January will be reported on Wednesday, and the expectation is for a rate of 4.80 million units on an annualized basis, up 1.3% month-over-month (m/m), after unexpectedly rising 6.5% in December. The dramatic price discounts presented by foreclosures and lower mortgage rates have begun to stimulate sales in regions that have been hammered the most. The NAR noted that distressed sales, such as foreclosures, comprised 45% of transactions in December. However, new home sales have had a tough time competing with the steep price reductions, and the expectation is that the January new home sales release on Thursday will show a decline of 2.1% m/m to 324,000 units on an annualized rate.

Foreclosure filings could begin declining with the mortgage relief plan announced by the Obama administration last week. However, while the plan will likely slow the rate of foreclosures at the margin, it does little to compel lenders to write down principal. According to Norm Miller, director of real estate programs at the University of San Diego School of Business Administration, one-third of owners will walk away when the value of their home drops 20% or more below what they owe, even if they can afford the payments, a situation known as "rational default." Additionally, the plan does not give relief to owners of jumbo mortgages.

Thursday also brings more data on the health of the manufacturing sector with the release of durable good orders, which is expected to have declined 2.5% in January. Ex-transportation, orders are expected to have dropped 2.2%. The industrial production report last week showed manufacturers continue to recoil and the largest declines in production were in durable goods, as consumers and businesses are pulling back on large purchases that require access to credit and are highly discretionary.

Friday, preliminary Gross Domestic Product for 4Q will be released-the second update on economic activity for the quarter. The Bloomberg survey of economists is expecting that 4Q GDP fell 5.4%, subsequent to receiving revisions to data after the first reading announced last month that stated 4Q GDP fell 3.8%.

Other releases on the economic calendar this week include consumer confidence on Tuesday, weekly MBA mortgage applications on Wednesday, weekly initial jobless claims on Thursday, and the Chicago Purchasing Manager survey and University of Michigan consumer confidence on Friday.

Also look for Fed Chief Ben Bernanke's semi-annual report on the economy and Fed Policy, where he will provide his testimony before the Senate Banking Committee on Tuesday and before the House Financial Services Committee on Wednesday. Traders may be looking for comments on the expansion of the Fed's balance sheet and the possibility of the Fed purchasing longer-term Treasuries.

Financials fears soothed somewhat to boost Europe

Stocks in Europe are higher in afternoon action as financials are leading the way as traders react favorably to the news that Citigroup may be close to receiving more government support. Financials are also receiving a boost from a 15% rise in shares of Royal Bank of Scotland Group (RBS $6) after the company is reportedly planning to cut costs by more than 1 billion pounds ($1.45 billion) and separate its bad assets into a new unit. RBS will split into two units in the next three to five years, with one unit holding core businesses and the other holding toxic asset and operations that aren't central to the financial firm, according to Bloomberg, citing a person familiar with the matter. RBS did not comment.

Japan sits out Asian advance

Stocks in Asia were mostly higher, led by financials on the Citigroup news, while news of a bankruptcy by a Japanese lender weighed on trading in Japan. The Topix Index was 0.6% lower and the Nikkei 225 slid 0.5% after SFCG (SHOHF $17) filed for bankruptcy protection. SFCG is a small business lender and listed 338 billion yen ($3.6 billion) in liabilities, making it the biggest bankruptcy by a publicly traded Japanese company in almost seven years, according to Bloomberg. Adding to the decline in Japan, shares of Toshiba Corp. (TOSBF $2) fell over 6% after the Yomiuri newspaper reported Japan's largest chip maker is considering raising capital to shore up its balance sheet. The company did not comment. Elsewhere, Hong Kong's Hang Seng Index jumped 3.8%, supported by solid gains in financial issues, while South Korea's Kospi Index advanced 3.2% after its government said it is prepared to support its currency, which has tumbled recently, and it will add to a bank recapitalization fund if the economic conditions worsen. In other equity news in Asia, Australia's largest steelmaker BlueScope (BLSFF $2) fell almost 11% after it warned it may post a loss for this half of the year.