Stocks Soaring into Final Hour on Less Economic Fear, Diminishing Financial Sector Pessimism, Subdued Long-Term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Steel longs, Technology longs, Biotech long, Medical longs and Financial longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is about average. Investor anxiety is very high. Today’s overall market action is very bullish. The VIX is falling 3.16% and is very high at 25.18. The ISE Sentiment Index is low at 108.0 and the total put/call is above average at .92. Finally, the NYSE Arms has been running low most of the day, hitting .31 at its intraday trough, and is currently .49. The Euro Financial Sector Credit Default Swap Index is rising 3.32% today to 84.0 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising 4.18% to 114.99 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 1.23% to 28 basis points. The TED spread is now down 438 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 8.5% to 38.94 basis points. The Libor-OIS spread is rising 1.29% to 26 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.90%, which is down 76 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is down 1 basis point today. The broad market’s reaction to today’s news is very impressive. All industries are participating, with many market leading stocks up significantly. Small-caps are especially strong. The bond market is holding onto gains achieved over the last two days despite supply fears, equity gains and dovish FOMC comments, which is a large positive. The Citi US economic surprise index is now up to +57.10 versus a reading of +41.50 in Europe. US scrap steel prices are up another 3% this week, which is an economic positive. On the negative side, credit default swap indices are higher again today, despite equity market gains. As well, the Shanghai Composite is now down 10.3% in 8 days and is testing its 50-day moving average for the first time since March. Further weakness in China would be a concern for US investors. Nikkei futures indicate an +200 open in Japan and DAX futures indicate an +33 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic fear, diminishing financial sector pessimism, investment manager performance anxiety, subdued long-term rates and declining healthcare reform concerns.

Today's Headlines

Bloomberg:

- The Federal Reserve said it will slow the pace of its $300 billion program to buy U.S. Treasuries and anticipates that the full amount will be purchased by the end of October. “To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington. The buying was previously scheduled to end in September. Officials left the benchmark interest rate between zero and 0.25 percent, and said economic conditions mean the rate will stay “exceptionally low” for an “extended period.” The decision was unanimous.

- The U.S. budget deficit topped $1 trillion for the first nine months of the fiscal year and broke a monthly record for June as the recession subtracted from revenue and the government spent to rejuvenate the economy. The shortfall for the fiscal year that began Oct. 1 totaled $1.1 trillion, the first time that the gap for the period surpassed $1 trillion, Treasury figures showed today in Washington. The excess of spending over revenue for June was $94.3 billion, the first deficit for that month since 1991, according to data compiled by Bloomberg.

- President Barack Obama sent Congress his plan to rein in the $592 trillion over-the-counter derivatives industry, a measure that would cut into a profitable market for banks led by Goldman Sachs Group Inc.(GS) and JPMorgan Chase & Co(JPM). The proposal issued yesterday would pressure derivatives users such as banks and hedge funds to move away from opaque customized contracts by imposing higher capital and margin requirements on the instruments. Standardized derivatives would be moved to regulated exchanges or trading platforms and sent through official clearinghouses, according to the draft measure. “The big broker dealers make a lot of money trading these customized derivatives,” said Paul Miller, a banking analyst for FBR Capital Markets in Arlington, Virginia. Custom derivatives are more profitable than contracts traded over an exchange, so the dealers will work to get the legislation “watered down,” Miller said.

- China’s stocks tumbled, with the Shanghai Composite Index entering a so-called correction, on concern a slump in exports and new loans will undermine the country’s economic recovery. The benchmark index fell 4.7 percent to a four-week low as the commerce ministry said China’s $4 trillion yuan ($585 billion) stimulus package can’t completely offset falling export demand. The gauge has lost 10 percent since reaching a 15-month high on Aug. 4 as banks reined in lending to avert asset bubbles. “Investors have realized the recovery of the economy isn’t as solid as they had expected,” said Wang Zheng, a fund manager at Jingxi Investment Management Co. in Shanghai. “Inflows into equities will slow down for the rest of the year as new lending growth eases.”

- United States Natural Gas Fund(UNG), the world’s largest exchange-traded fund in the fuel, will suspend offering new shares on concern that federal regulators will keep it from investing in natural gas. The Commodity Futures Trading Commission heard testimony in July and August that commodity funds may be distorting energy prices. CFTC Chairman Gary Gensler has said he believes that speculation contributed to a surge in crude oil to a record $147.27 a barrel. The fund invests in futures and swaps to track the price natural gas. UNG said in a filing today that it won Securities and Exchange Commission approval to sell up to 1 billion new units, which would give the fund room to almost triple in size. The new units won’t be offered until the fund is certain it can meet its investment objectives or knows what regulatory limits it may face for energy product holdings, according to the filing.

- Chinese limits on the sale of books, films and music from the U.S. violate global commerce rules, the World Trade Organization ruled, handing President Barack Obama’s administration its first trade victory against China. WTO judges largely sided with a U.S. complaint that accused China of making U.S. companies sell copyright-protected products such as magazines, CDs and video games through state-approved or state-run businesses. The ruling, handed down in June and only made public today, also went against Chinese curbs on foreign producers of audiovisual goods that exempt domestic rivals.

- Macy’s Inc.(M), the second-biggest U.S. department-store chain, increased its full-year profit forecast and posted earnings that beat analysts’ estimates after it cut expenses and inventories.

- Treasuries fell as a record $23 billion auction of 10-year notes drew less-than-forecast demand with investors reluctant to buy securities before the conclusion of today’s Federal Reserve policy meeting.

- Home price declines in the U.S. accelerated in the second quarter, dropping by a record 15.6 percent from a year earlier, as foreclosures weighed on values. The median price of an existing single-family home dropped to $174,100, the most in records dating to 1979, the National Association of Realtors said today. Total sales rose 3.8 percent to a seasonally adjusted annual rate of 4.76 million from the first quarter and fell 2.9 percent from 2008’s second quarter.

- A 37% drop in the Baltic Dry Index, a barometer of commodity prices, from this year’s high may foreshadow losses in the dollars of Canada, Australia and New Zealand, countries that rely on raw-material exports. “Commodity currencies and the Baltic Dry Index tend to move somewhat in synch,” said Camilla Sutton, director of currency at Scotia Capital Inc. in Toronto. “We’ve seen the index drop dramatically. It’s a cautionary sign.” The fall in the Baltic Dry Index may reflect a deceleration in the stockpiling of commodities in China, Sutton said. If that’s the case, “commodity currencies including the Canadian dollar could move dramatically lower,” she said.

- European industrial production unexpectedly declined in June, suggesting the region’s economy may struggle to emerge from the recession. Output in the 16-nation euro area dropped 0.6 percent from May, led by a 4.2 percent decline in production of durable consumer goods, the European Union’s statistics office in Luxembourg said today. Economists had predicted a gain of 0.3 percent, according to the median of 30 forecasts in a Bloomberg News survey. From a year earlier, June output fell 17 percent.

- Confidence in the world economy surged to a 22-month high in August on signs the worst global recession since World War II is approaching an end, a Bloomberg survey of users on six continents showed. The Bloomberg Professional Global Confidence Index jumped to 58.12 this month from 39.13 in July. It is the first time the reading exceeded 50, which means optimists outnumber pessimists. A measure of U.S. participants’ confidence in the world’s largest economy rose to 47.3 from 29.5, the survey showed. “It’s clear the recession is over and some kind of recovery is underway,” said Nick Kounis, chief European economist at Fortis Bank Nederland Holding NV in Amsterdam, and a regular survey participant. “We have the biggest monetary and fiscal stimulus policy in history, globally, and we’re starting to see it work. Probably the next debate will be about how strong and sustainable the recovery is.”

- Toll Brothers Inc.(TOLL), the largest U.S. luxury homebuilder, rose the most since November after third- quarter revenue that exceeded analysts’ estimates. “It does feel as if the fence-sitters are looking for reasons to jump in on the side of buying,” Chief Executive Officer Robert Toll said in the statement. “Those taking this step today have more confidence than one year ago.” Toll said customers signed 837 net contracts, 3 percent more than the third quarter of 2008. The builder cut the incentives to buyers and the company’s cancellation rate was 8.5 percent, the lowest since the second quarter of fiscal 2006. Toll rose $2.45, or 12 percent, to $11.96 at 10:59 a.m. in New York Stock Exchange composite trading.

Wall Street Journal:

- Insiders at the biggest U.S. banks have had a poor record in picking the bottom for their companies' stocks, but at Citigroup, where insiders bought shares as they bottomed in March, bank officials are buying again. Chairman Richard Parsons, new Citibank head Eugene McQuade and Manuel Medina-Mora, the chief executive of Citigroup's Latin America and Mexico business, combined to buy $6.68 million in stock at an average per-share price of $3.31, according to regulatory filings.

- The SEC has sent Wells Notices to Pequot Capital Management and founder Art Samberg relating to their trading in Microsoft securities. As this Wall Street Journal article Tuesday reported, the agency received at least 45 tips related to the hedge fund, which closed in May under the weight of investigations into possible insider trading. Here is the letter Pequot sent to explain the Wells Notice to investors:

- Accounting rulemakers may expand the use of mark-to-market accounting, a move which could affect some banks' earnings by including changes in the value of their assets to a greater degree. But the banking industry, which already loathes mark-to-market accounting -- pegging an asset's value to the ups and downs of the market -- is likely to oppose such a change strongly. Many financial assets already must be marked to market, but others aren't - notably loans, which make up a huge chunk of banks' balance sheets.

- A controversial House proposal to double a Pentagon request to buy executive jets for use by government officials died in chorus of opposition that started with the press, spread to the public and ultimately included President Barack Obama. The episode, as reported in The Wall Street Journal, offers some insight into the way members of Congress use the budget process to get things they want -- usually in the absence of public uproar.

- The White House is priming the defibrillator paddles to revive ObamaCare, and its new strategy is to talk about "health-insurance reform," rather than "health-care reform." The point is to make its proposals seem less radical than they are, while portraying private insurers as villains for supposedly denying coverage to the sick. Sounds like a good time to explain a few facts about the modern insurance market. Start with the reality that nine out of 10 people under 65 are covered by their employers, most of which cover all employees and charge everyone the same rate. President Obama's horror stories are about the individual insurance market, where some 15 million people buy coverage outside of the workplace.

New York Post:

- Taking aim at its rivals, Google(GOOG) revealed it's working on a new version of its popular search engine that strives to deliver faster and more comprehensive results. Google invited Web developers to check out the project, code-named "caffeine," at an alternate site and provide feedback.

MarketWatch:
- Byron Wien is leaving Pequot Capital in the wake of an investigation that's forcing the hedge fund firm to shut down. Wien, who was chief investment strategist at Pequot, will join private-equity giant Blackstone Group L.P. (BX) as vice chairman of Blackstone Advisory Services, the firm said.

- The market for credit default-swaps, whose record spikes last year became an emblem of panic cascading across financial markets, faces a future that's calmer but still reflects far more credit risk than in years past. An index that tracks the cost of buying credit protection against defaults by some of North America's biggest, investment-grade companies, has fallen to about 113 basis points, off 60% on Tuesday from its November peak. Last week it reached its lowest level since May 2008. The drop indicates banks that sell the protection feel less worried about the ability of corporations to make debt payments and they're willing to sell credit protection more cheaply.

TechCrunch:

- LinkedIn tonight celebrated their 45 millionth user sign up, according to LinkedIn’s Marketing Project Manager Florina Xhabija’s Twitter message. According to comScore, LinkedIn had 16 million worldwide monthly unique visitors and 331 million page views in June 2009, up from 7.7 million and 114 million a year ago, respectively.

Politico:

- Democrats have a senior citizen problem. Frustrated older Americans are packing the town halls on health care. They are incredibly passionate about their Medicare benefits. Polls show senior citizens largely disapprove of health care reform ideas so far. And of course, they vote — in larger numbers than any other demographic. But so far, Democrats have focused much of their health care sales pitch on middle-class Americans and the uninsured — a slight that has been noticed by senior citizens, who hold great influence with members of Congress. A July 31 Gallup Poll found that just 20 percent of Americans aged 65 and older believe health care reform would improve their own situation, noticeably lower than the 27 percent of 18- to 49-year olds and 26 percent of 50-to-64-year-olds who say the same. The senior citizen problem could pose a serious problem for the 2010 election cycle.

The Washington Times:

- Four years after Hurricane Katrina exposed major deficiencies in the capacity of governments to evacuate and care for the disabled during a natural disaster, America's most vulnerable citizens are barely considered in most emergency plans, according to a report being issued Wednesday by the National Council on Disability. The report says huge gaps exist in those emergency plans despite an executive order issued by President Bush in 2004 urging federal and local governments, as well as private organizations, to consider the unique needs of the disabled when planning rescues and preparing to provide emergency shelter.

USA Today:

- Federal authorities have launched an effort to detect lone attackers who may be contemplating politically charged assaults similar to the recent murders of a Kansas abortion doctor and a Holocaust museum security guard. The effort, known as the "Lone Wolf Initiative," was started shortly after President Obama's inauguration, in part because of a rising level of hate speech and surging gun sales. "Finding those who might plan and act alone, the so-called lone offenders ... will only be prevented by good intelligence, the seamless exchange of information among law enforcement at every level, and vigilant citizens reporting suspicious activity," said Michael Heimbach, the FBI's assistant director for counterterrorism.

Reuters:
- Citigroup Inc's(C) contract with energy trader Andrew Hall, which reportedly could pay him up to $100 million this year, will not be subject to rulings by the Obama administration's pay czar, a source close to the bank said on Wednesday.

Financial Times:
- The US summer driving season “seems to have fizzled out before getting started” the International Energy Agency said on Wednesday, striking a cautious tone on prospects for a recovery in global energy demand next year. Warning that evidence of a bottoming out of the global recession was “patchy”, the energy watchdog of the developed world said next year’s expected recovery in global oil demand growth would be subdued at just 1.6 per cent, or 1.3m barrels a day, in 2010.

Bear Radar

Style Underperformer:
Large-cap Growth (+1.28%)

Sector Underperformers:
Education (-.49%), Coal (+.31%) and Drugs (+.52%)

Stocks Falling on Unusual Volume:
HURN, BOBE, GRMN and SYX

Stocks With Unusual Put Option Activity:
1) ADSK 2) LINTA 3) GNW 4) A 5) MBI

Bull Radar

Style Outperformer:
Small-Cap Value (+1.77%)

Sector Outperformers:
Insurance (+3.74%), Homebuilders (+3.60%) and Networking (+3.22%)

Stocks Rising on Unusual Volume:
CREE, ADSK, ERTS, STO, HRBN, AAON, BAGL, CLNE, LINTA, AIXG, ALOG, AMAT, FTEK, STEC, ROCK, BUCY, PRXL, PANL, VRSN, ZUMZ, IDCC, SAM, TRW, TOL, ITB, MFB and ETH

Stocks With Unusual Call Option Activity:
1) ESI 2) QLGC 3) CREE 4) TOL 5) FITB

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