Stocks Jumping into Final Hour on Plunging Credit Market Angst, Bargain-Hunting, Less Financial Sector Pessimism and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Defense longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is above-average. Investor anxiety is still very elevated. Today’s overall market action is bullish. The VIX is falling 17.46%, but is still very elevated at 58.01. The ISE Sentiment Index is about average at 160.0 and the total put/call is slightly below average at .84. Finally, the NYSE Arms has been running around average most of the day, hitting 1.22 at its intraday peak, and is currently .86. The Euro Financial Sector Credit Default Swap Index is rising 2.91% today to 99.34 basis points. This index is up from a low of 52.66 on May 5^th, but down significantly from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling 4.2% to 193.5 basis points. The TED spread is plunging another 18.6% to 295 basis points. The TED spread is now down 169 basis points in less than two weeks. The 2-year swap spread is falling 9.57% to 111.0 basis points. The Libor-OIS spread is dropping 11.59% to 292 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 7 basis points to 1.13%, which is down 150 basis points in under four months and at the lowest level since April 1999. Another meaningful decline in gauges of credit angst is a large positive for the broad market. Uncertainty regarding the settlement of the now-defaulted Lehman credit derivatives may be holding the market back a bit today. I suspect a lifting of this uncertainty tomorrow will lead to further US stock gains. The US dollar continues to trade very well and I still see further upside in the currency over the intermediate-term. The worst-case scenario for the global economy, that had been factored into many stock prices near current levels, diminishes with each day of improvement in the credit markets, in my opinion. Nikkei futures indicate an +250 open in Japan and DAX futures indicate an +100 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit angst, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- The cost to protect against defaults by U.S. banks fell today as money-market rates declined in a sign that central bank efforts to unfreeze interbank lending are starting to help. Credit-default swaps on Morgan Stanley, Goldman Sachs Group Inc., Citigroup Inc. and Merrill Lynch & Co. declined, according to CMA Datavision. The amount banks charge each other for three-month loans in U.S. dollars, as measured by the London interbank offered rate, or Libor, dropped the most in nine months, according to the British Bankers' Association. A measure of cash availability, known as the Libor-OIS spread, fell below 300 basis points for the first time in almost two weeks as U.S. and European governments guaranteed bank debt and started other rescue efforts including the purchase of equity stakes in some banks.

- Money-market rates fell, extending last week's declines, as governments bailed out banks and policy makers intensified efforts to combat the freeze in lending with cash injections. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 36 basis points to 4.06 percent today, the biggest drop in nine months, according to the British Bankers' Association. The overnight- dollar rate declined 16 basis points to 1.51 percent, the lowest level in more than four years. The three-month rate for euros fell. The Libor-OIS spread, a measure of cash availability, dropped below 300 basis points for the first time in almost two weeks.

- The US dollar rose against the euro for a fourth day as Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus.

- Ann Kohler, analyst at Caris & Co. says an OPEC production cut may prolong the global economic slump. (video)

- Ray Barros, CEO of Ray Barros Trading Group, says TED spread’s fall may signal stock rally. (video)

- The Bush administration is ``open to the idea'' of another economic stimulus package, though approval would depend on details drafted by Congress, spokeswoman Dana Perino said.

- Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus, saying the credit crunch is ``hitting home'' as Americans find it harder to get loans, threatening a prolonged economic slump.

- Crude oil rose for a second day in New York on speculation OPEC will lower output in an attempt to halt a slide in prices, which have fallen more than 50 percent from July's record.

- Exelon Corp., the biggest U.S. operator of nuclear power plants, offered to buy NRG Energy Inc. for $6.2 billion to take advantage of a 55 percent drop in the debt-laden company's shares since July 1.

- Judith Miller, the former New York Times reporter who spent 85 days in jail for refusing to testify in a grand jury investigation, joined News Corp.'s Fox News as a contributor.

Wall Street Journal:

- You would think we would learn. But we don’t. We tirelessly follow Wall Street prophets such as talk-show host Jim Cramer, Internet analyst Mary Meeker and investor Bill Miller. At least until we discover that they, too, get lost in the wilderness. And we learn nothing. The latest of these prophets is Arjun N. Murti, an influential Goldman Sachs oil analyst, who has marched his bullish oil followers straight off a cliff. On May 6, 2008, Murti predicted $150 to $200 oil within six to 24 months. Prices dutifully jumped. Then they rose even higher, peaking at more than $147 on July 11. Later that month, of course, it all came apart. The prospects for strong global economic growth were fading. Speculators and leveraged traders turned tail. Fast. “Super Dips” replaced “Super Spikes.” By mid-September, Murti was in full retreat. He cut his 2009 oil price target to $110 from $140. A week ago, he was back at it. Goldman cut its 2009 oil price target to $75 from $110. Apparently, it might go even lower. Goldman’s “worst case” scenario is $50 a barrel. That is roughly the price at which oil was trading on March 30, 2005, when Murti made his $105 prediction.

NY Times:
- In an unusual partnership, New York State and federal prosecutors are investigating trading in credit-default swaps, the insurance-like securities that have come under close scrutiny for their role in the financial crisis, The New York Times’s Vikas Bajaj reported. Prosecutors are looking at whether traders manipulated the largely unregulated market for credit-default swaps to drive down the price of financial shares over the last year, The Times said, citing people briefed on the investigation.

- Unhappy with both the A.P. service and its price — more than $800,000 a year at a time when The Dispatch’s finances are severely pinched — the paper on Friday took the once-unthinkable step of saying it would drop the service.

NY Post:

- Media mogul Sumner Redstone, caught in the vise-like grip of the credit crunch, may be forced to sell his prized Viacom Inc., home of MTV, Nickelodeon and Paramount Studios. A sale of Viacom, or any piece of the company, would be a tremendous setback to the 85-year-old Redstone, as he has spent the better part of his professional life pulling together the crown jewel of his investment portfolio.

Integrity Research:
- Developing Hedge Fund Trends To Hurt Research Biz. We suspect that many research providers - both sell-side firms and independent research providers - will suffer as the sheer number of current (or potential) clients drops. In our view, the firms that will bear the brunt of the difficulties will be the smaller regional players and the indie shops that produce undifferentiated fundamental company research. This trend will be exacerbated by the fact that the amount of commissions available to pay for third-party research should also plunge.

MDA DataQuick:

- Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Last month's sales were the highest for any month since December 2006 and the year-over-year gain was the highest for any month in DataQuick's statistics, which go back to 1988.

Washington Post:

- Is Capitalism Dead? The market that failed was not exactly free. The 1999 repeal of the Glass-Steagall Act, a Depression-era law separating commercial banking and investment banking, passed with overwhelming bipartisan support in Congress and was signed into law by President Bill Clinton. No subsidy would prove more fateful than the massive federal commitment to residential real estate -- from the mortgage interest tax deduction to Fannie Mae and Freddie Mac to the Federal Reserve's low interest rates under Mr. Greenspan. Unregulated derivatives known as credit-default swaps did accentuate the boom in mortgage-based investments, by allowing investors to transfer risk rather than setting aside cash reserves. But government helped make mortgages a purportedly sure thing in the first place. Home prices seemed to stand on a solid floor built by Washington.

Reuters:
- Nigeria has cut the proposed benchmark oil price in its draft 2009 budget to $45 per barrel from $62.5 as a result of the decline in world crude prices, a senior finance ministry official told Reuters on Monday. "Forty-five dollars is what we are working with right now, but it has to go to the National Assembly (for approval)," the official said, declining to be named.

Deutschlandradio:

- European Central Bank Executive Board member Juergen Stark said inflation will slow more than expected next year as the economy weakens. Stark said that “we have to brace ourselves for a longer phase of difficult economic developments.” While the crisis “may have reached a peak” in the past week, it will take a “long time” for confidence to return to the banking sector.

Al-Jazirah:

- Saudi Arabia’s inflation is easing as global commodity prices decline because of the international financial crisis, citing Hamad Saud al-Sayari, the central bank Governor. Inflation will continue to slow in the coming months as basic commodity prices decline in the kingdom, he said.

Bear Radar

Style Underperformer:
Small-cap Value (-.76%)

Sector Underperformers:
Gaming (-1.93%), Retail (-.81%) and REITs (-.61%)

Stocks Falling on Unusual Volume:
VE, AMAG, XRAY, RIMM, MBR and HRL

Stocks With Unusual Put Option Activity:
1) SNV 2) AMAG 3) JASO 4) KBR 5) BBD

Bull Radar

Style Outperformer:
Mid-cap Growth (+2.03%)

Sector Outperformers:
Steel (+3.53%), Oil Service (+3.5%) and Restaurants (+2.17%)

Stocks Rising on Unusual Volume:
CLMT, HTX, WBMD, ROCM, PETS, PEET, MMSI, ASML, BCPC, BIDU, AMAT, SYNA, CRZO, LPHI, IVGN, CERN, SLGN, HURC, CWEI, CHRW, DRYS, MICC, ING, NRG, IFN, TPL, EBS, LNY, ABI, IRE and EDU

Stocks With Unusual Call Option Activity:
1) AMAG 2) SIRI 3) DOW 4) NDAQ 5) AMLN

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