Stocks Lower into Final Hour on Weakness in Financials

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Biotech longs, Medical longs and Internet longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are falling and volume is above average. Investor anxiety is above average again. Today’s overall market action is bearish. The US dollar-based 3-month LIBOR rate is falling another 7 basis points to 4.99% today and is down 74 basis points from September highs. As well, the 30-day asset backed commercial paper yield is falling another 4 basis points today to 5.97%, down 36 basis points from September highs. The 10-year swap spread is falling slightly today and is now 66 basis points over treasuries, which is down from 87 basis points three weeks ago. The Bear Stearns High Yield Index and JPMorgan Emerging Market bond indices are up .39% and .18%, respectively, over the last five days. These are all positives. The rise in the 10-year yield today is more related to the strong retail sales report, rather than inflation worries, in my opinion. The decline in oil is mainly related to US dollar strength. I continue to believe the US dollar has at the very least put in place an intermediate-term bottom. Market leading stocks and the financials(XLF) are cutting losses rapidly. Given how pessimistic the environment has become and the overwhelming belief that a recession is just around the corner, I suspect US stocks can rise meaningfully during the first quarter if such an outcome fails to materialize. I continue to believe modestly below trend economic growth of around 2% on average is likely over the intermediate-term. I expect US stocks to trade modestly higher into the close from current levels on falling energy prices, less economic pessimism, bargain-hunting and short-covering.