Stocks Finish Near Session Highs, Boosted by Rail, Education, Homebuilding, HMO, Drug, Coal and Steel Shares

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Stocks Surging into Final Hour on Short-Covering, Bargain-Hunting, Less Severe Economic Pessimism, Diminishing Credit Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Healthcare longs, Retail longs, Education longs and Computer longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 6.22% and is very high at 42.69. The ISE Sentiment Index is below average at 118.0 and the total put/call is below average at .82. Finally, the NYSE Arms has been running around average most of the day, hitting 1.06 at its intraday peak, and is currently .95. The Euro Financial Sector Credit Default Swap Index is falling .70% today to 118.33 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling 3.08% to 199.0 basis points. The TED spread is dropping 7.39% to 91 basis points. The TED spread is now down 375 basis points in under four months. The 2-year swap spread is falling 2.20% to 69.75 basis points. The Libor-OIS spread is rising 2.63% to 98 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 5 basis points to 1.12%, which is down 158 basis points in under seven months. 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 .32%, which is up 8 basis points today. Given the large declines in the (RKH) and (XLF) earlier in the day, today’s broad market strength is quite impressive. Market-leading stocks are outperforming again. Healthcare-related stocks, my favorite group, remain very strong and are responding positively to news that Tom Daschle is withdrawing his name for consideration for the post of Secretary of Health and Human Services. As well, Education, Road & Rail, Retail, Homebuilding, Steel and Coal stocks are posting 3%+ gains. Unlike last year where most stocks declined significantly, select stocks are massively outperforming and posting strong gains this year. Nikkei futures indicate a +220 open in Japan and DAX futures indicate an +50 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, diminishing credit market angst and less severe economic pessimism.

Today's Headlines

Bloomberg:

- Collin Peterson, chairman of the House Agriculture Committee, said his proposal to ban a majority of the $28 trillion credit-default swap market wouldn’t be permanent and is meant to complement a restriction on short sales of stock imposed by the SEC.

- The number of Americans signing contracts to buy previously owned homes unexpectedly rose in December, signaling that foreclosure-driven declines in prices are boosting demand. The index of pending home resales climbed 6.3 percent to 87.7, the first increase since August, from a revised 82.5 in November, the National Association of Realtors said in a report today in Washington.

- Senator Charles Schumer said the Obama administration should provide guarantees for the toxic assets clogging lenders’ balance sheets, rather than set up a “bad bank” to purchase them.

- Michael Zimmerman, who runs New York- based Prentice Capital Management LP, plans to start a hedge fund focused on retail and consumer stocks after his main fund halted redemptions and lost as much as 88 percent last year, according to marketing documents and investors.

- UBS AG, the Swiss bank under investigation for allegedly helping wealthy Americans evade taxes, hired more than 200 brokers in the U.S. in the fourth quarter as it sought to counter client defections. UBS hired a team of five in Dallas from Goldman Sachs Group Inc. with $4 billion under management, and a group of the same number from Morgan Stanley in Houston with $2.1 billion in assets, Karina Byrne, a spokeswoman for the Zurich-based bank, said in an interview yesterday.

- Ford Motor Co.(F), accelerating its electric-vehicle strategy, selected Johnson Controls-Saft, a U.S.-French joint-venture, to supply batteries for a plug-in hybrid auto coming in 2012.

- Environmental groups are racking up a series of early wins thanks to expanded Democratic majorities in the U.S. Congress. But they aren’t satisfied, and the scope of their agenda may cause headaches for party leaders. Environmentalists want Congress to cap greenhouse-gas emissions, a proposal meeting resistance from companies such as General Motors Corp. because of its cost. They’re pushing for laws to force public utilities to buy 15 percent of their power from renewable energy sources, an idea opposed by Southern Co. and American Electric Power Co. And they want tougher energy- efficiency standards for cars, buildings and appliances. “They have high expectations and non-negotiable demands,” James Lucier, an energy analyst at Capital Alpha Partners LLC in Washington, said of the groups, which include the Sierra Club, Friends of the Earth and the League of Conservation Voters. The tension will soon become apparent. More than 2,000 protesters are planning a March 2 sit-in at a coal-fired plant that produces power for the U.S. Capitol, as part of a drive to get support for climate-change legislation.

- Brazil’s economic growth, after helping drive poverty to the lowest level in almost three decades, is coming to a standstill. Record job losses, factory cutbacks and the biggest drop in exports since 1991 signal expansion in the fourth quarter of 2008 probably stalled. The country may be in its first technical recession -- two consecutive quarterly contractions of gross domestic product -- since 2003, said Tony Volpon, chief strategist at CM Capital brokerage in Sao Paulo. “The worst may just be starting for Brazil as we haven’t yet seen contraction in demand,” said Alvise Marino, an emerging markets economist at IDEAglobal in New York.

- Billionaire investor Warren Buffett’s Berkshire Hathaway Inc. agreed to buy $300 million of debt from Harley-Davidson Inc.(HOG), the biggest U.S. motorcycle maker, adding to holdings of corporate debt as yields rise.

- Secretary of State Hillary Clinton said Hamas must end attacks on Israel and meet conditions that “have not and will not change” on recognizing Israel’s right to exist and accepting current peace agreements.

Wall Street Journal:

- As book publishers look to new digital formats for sales growth, News Corp.'s(NWS/A) HarperCollins Publishers is launching a video edition of Jeff Jarvis's "What Would Google Do?" that it will sell through Amazon.com Inc.'s(AMZN) Amazon digital-download store.The 23-minute video book, which will go on sale for $9.99 Tuesday, will be viewable on personal computers but also is being developed for mobile devices such as Apple Inc.'s iPod and iPhone.

- Former Sen. Tom Daschle withdrew his name from contention to be President Barack Obama's secretary of health and human services, bowing to the pressure that arose from his failure to pay more than $100,000 in taxes. The move is a blow to the administration and to one of Mr. Obama's closest friends and political allies, a man he had tapped to spearhead his push for sweeping health reform.

CNBC.com:
- Jamie Dimon is fighting back. The CEO of JPMorgan Chase & Co.(JPM) on Tuesday acknowledged banks' role in the current crisis, but rebutted Washington's claims that banks aren't lending and that pay on Wall Street is "shameful." His responses: Yes we are, and don't "paint us with the same brush." "I have great hopes for the new president and his team," said Dimon, a self-proclaimed Democrat, in a speech at a conference in Manhattan hosted by Crain's New York Business magazine. But, the CEO said, it is unfair for the president and Congress to characterize all workers on Wall Street as the bad guys in the current financial crisis.

- Warren Buffett's stake in Burlington Northern Santa Fe has reached 22.4 percent, with a new options-related stock purchase of over two million shares.

MarketWatch:
- The reeling asset-management industry may benefit greatly from elements of the stimulus bill passing through Congress, according to an analyst report published Tuesday. While the American Recovery and Reinvestment Plan is aimed at boosting the broader economy, the part of the bill that provides tax bills to corporations "presents a positive for certain asset managers," said Craig Siegenthaler, analyst at Credit Suisse.

- Amazon.com(AMZN) has steadfastly refused to disclose details on the sales of its popular e-book reader known as the Kindle, which hasn't stopped Wall Street analysts from trying to pinpoint the number anyway.

NY Times:

- During almost two years on the campaign trail, Barack Obama vowed to slay the demons of Washington, bar lobbyists from his administration and usher in what he would later call in his Inaugural Address a “new era of responsibility.” What he did not talk much about were the asterisks. The exceptions that went unmentioned now include a pair of cabinet nominees who did not pay all of their taxes. Then there is the lobbyist for a military contractor who is now slated to become the No. 2 official in the Pentagon. And there are the others brought into government from the influence industry even if not formally registered as lobbyists. President Obama said Monday that he was “absolutely” standing behind former Senator Tom Daschle, his nominee for health and human services secretary, and Mr. Daschle, who met late in the day with leading senators in an effort to keep his confirmation on track, said he had “no excuse” and wanted to “deeply apologize” for his failure to pay $128,000 in federal taxes. But the episode has already shown how, when faced with the perennial clash between campaign rhetoric and Washington reality, Mr. Obama has proved willing to compromise.

USA Today/Gallup Polls:

- Public satisfaction with the state of the nation remains in short supply just over a week after President Barack Obama was sworn in. Only 17% of Americans and 18% of Democrats are satisfied with the way things are going in the country in Gallup Poll Daily tracking from Jan. 27-29; 80% are dissatisfied.

- Of seven actions Barack Obama has taken during the early days of his presidency, five are supported by large majorities of Americans. Americans say they disapprove (50%) than approve (44%) of his decision to order the closing of the Guantanamo Bay prison for terrorist suspects in Cuba within a year. Further, Obama's decision to reverse the prohibition on funding for overseas family-planning providers may be the least popular thing he has done so far. This was an executive order that forbade federal government money from going to overseas family-planning groups that provide abortions or offer abortion counseling. Fifty-eight percent of Americans disapprove of Obama's decision to lift this ban, while only 35% approve of it.

- Only 38% of Americans want Congress to pass President Obama’s economic stimulus plan as he has proposed it without changes.

Portfolio.com:

- 10 Questions to Ask Your Fund-of-Funds Manager.

- The Broken Hedge-Fund Model.

Financial Times:
- The European Union warned of a possible trade claim against the United States if Washington presses ahead with a Buy American provision in its forthcoming economic stimulus bill. EU officials have expressed concern that the provision, which would require that companies use US steel and manufacturing products in projects funded by the bill, could encourage a wave of protectionist measures from other countries.

Xinhua:
- China’s gold output rose to a record 282 metric tons in 2008, citing the China gold Assoc. Production gained 4.3% last year from 270.5 tons a year earlier.

arabianBusiness.com:
- The cost of renting in Dubai has fallen by up to a third in the last eight weeks, agents said on Tuesday, as homeowners flood the leasing market amid a lack of buyer demand. Research by Arabian Business has revealed that following Dubai’s six year property boom, rents for villas and apartments have plunged up to 33 percent in some of the city’s most prestigious locations including downtown Burj Dubai and the Palm Jumeirah.

Bear Radar

Style Underperformer:
Small-cap Value (-.80%)

Sector Underperformers:
Banks (-5.89%), Gaming (-3.70%) and REITs (-1.99%)

Stocks Falling on Unusual Volume:
PNC, NTGR, CAM, EEP, MBT, PRGO, TECH, PTRY, SQNM, FGP, CYT, BKH and ADS

Stocks With Unusual Put Option Activity:
1) ITMN 2) MBT 3) DUK 4) DOW 5) AN

Bull Radar

Style Outperformer:
Large-cap Growth (+.50%)

Sector Outperformers:
Homebuilders (+6.0%), Steel (+3.89%) and Road & Rail (+2.72%)

Stocks Rising on Unusual Volume:
TYC, TI, VOD, RTP, PHG, MRK, NVS, LGCY, DB, HXM, LRY, KB, NOK, UBS, CMTL, OSIP, ITMN, MYGN, NCMI, COCO, CEDC, RCII, ATHR, HOLX, ICUI, ADP, TSRA, DTSI, CPSI, ISRG, CME, AUXL, FSYS, TTEK, TDG, SMG, AXE, HOG, DT and HNT

Stocks With Unusual Call Option Activity:
1) ITMN 2) DHI 3) MYGN 4) PRU 5) COCO