Wednesday, January 07, 2009

Stocks Sharply Lower into Final Hour on More Economic Pessimism, Shorting, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Internet longs and Financial longs. I added to some of my commodity shorts, to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, every sector is falling and volume is about average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 12.8% and is elevated at 43.55. The ISE Sentiment Index is below average at 115.0 and the total put/call is high at 1.17. Finally, the NYSE Arms has been running very high most of the day, hitting 2.14 at its intraday peak, and is currently 1.66. The Euro Financial Sector Credit Default Swap Index is falling 3.11% today to 93.77 basis points. This index is up from a low of 52.66 on May 5th, but down from 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is falling .80% to 197.0 basis points. The TED spread is up 2.7% to 131 basis points. The TED spread is now down 335 basis points in about three months. The 2-year swap spread is plunging another 11.36% to 63.38 basis points. The Libor-OIS spread is rising .06% to 122 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 25 basis points to .50%, which is down 225 basis points in about six months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is yielding .09%, which is down 4 basis points today. Cyclical shares, which had been soaring, are today’s worst-performers. The news from Satyam Computer Services(SAY) is weighing heavily on emerging market shares today. I suspect financial fraud is far more pervasive throughout the emerging markets than is generally perceived and it is one of the many reasons I expect developed markets to outperform these shares for several more years. Volume is only around average on today’s sell-off, combined with a high NYSE Arms reading, which is a positive. It is noteworthy that the US sovereign debt credit default swap is dropping 14.2% today to 54.6 basis points, which is down from a high of 69.4 on January 2nd. I suspect Asian shares will come under meaningful pressure tonight, which could lead to further weakness in the US in the morning. Nikkei futures indicate a -234 open in Japan and DAX futures indicate a -16 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as bargain-hunting, diminishing credit market angst and short-covering offsets more economic pessimism.

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