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

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my Software longs, Biotech longs and Semi longs are more than offsetting gains in my Commodity shorts, (EEM) short, Internet longs and Medical longs. I added to my (XLE) short, added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative as the advance/decline line is substantially lower, most sectors are declining and volume is about average. Investor anxiety is high again. Today’s overall market action is bearish. Financials are under pressure, despite the relative stability in bond insurer shares. Commodities are also registering significant losses on global growth worries and the jump in the US dollar. I sense an increasing number of global investors view Europe as falling substantially behind the curve as their economies weaken and the ECB continues to talk of the possibility of future rate hikes. This will likely lead to further US dollar strength and commodity weakness over the coming months. I continue to see the US Fed as now “ahead of the curve” and the odds of an intermeeting rate cut are rising meaningfully. The VIX is rising 8.0% today to a high 28.0. The ISE Sentiment Index hit a below average 102.0 and the total put/call is hitting an above average 1.12. Finally, the NYSE Arms has been running very high again all day at 2.47, which is also a positive. I still view the odds of a full retest or new lows in the market as unlikely and further weakness providing good entry points in favorite longs for investors. Google(GOOG) is finally outperforming today. I think it is very likely it has seen its lows for the year as investor fears over a possible (MSFT)/(YHOO) combination diminish and its growth picks up this quarter. Comscore said today that Google’s global search market share is 62.4% versus 15.7% for Yahoo/Microsoft combined. The stock is very cheap given its fundamentals and should be awarded a premium valuation based on its ability to grow at a very healthy rate despite an economic slowdown. Nikkei futures indicate a -400 open in Japan and DAX futures indicate an +8 open in Germany. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, rising rate cut odds and short-covering.

Bear Radar

Style Underperformer:

Large-cap Value (-3.07%)

Sector Underperformers:

I-Banks (-3.94%), Coal (-3.41%) and Semis (-3.21%)

Stocks Falling on Unusual Volume:

PFG, IEX, NYX, AIR, CQB, CBL, WOOF, VRUS, CBEY, THOR, ROCM, BPHX, SNCR, DISCA, ACAD and SOHU

Today's Headlines

Bloomberg:
- The euro declined the most against the dollar in almost two months after Europe’s service industries weakened and raised concern that Jean-Claude Trichet’s reluctance to cut interest rates will hamper growth.
- Apple Inc.(AAPL) unveiled higher-prices models of its iPhone mobile handset and iPod media player with double the memory of older versions, altering its lineup for the second time in six months to encourage shoppers to spend more.
- Computer Sciences(CSC) rose the most in more than two years in NY trading after third-quarter profit topped analysts’ estimates.
- Whirlpool(WHR) said fourth-quarter profit rose more than analysts estimated, sparking the largest appliance maker’s biggest gain on the NYSE in nine months.
- Perot Systems(PER) rose the most in more than four years after fourth-quarter profit and sales topped analysts’ estimates.
- Illumina, the market of tools used to analyze genetic material and diagnose disease, rose the most in three weeks after forecasting profit that tops analysts’ estimates.
- Worldwide investment in clean energy technologies, driven by the need to address climate change, could reach a total of $7 trillion through 2030, according to a study by Cambridge Energy Research Assoc.
- Dennis Gartman, editor of the Gartman Letter, Sees Up to 15% Drop for Gold.
- Sugar inventories that rose 19% last year will reach a record within months as farmers from Brazil to India contribute to a growing glut.
- Crude oil is falling more than $2/bbl. on a rising US dollar, less speculation by investment funds, decelerating global demand and record global production.

Wall Street Journal:
- Microsoft Corp.(MSFT) will probably raise its $44.6 billion offer for Yahoo! Inc.(YHOO) to avoid a lengthy battle. Sandeep Aggarwal, an analyst with Oppenheimer, said no other company wants Yahoo as much as Microsoft does and the latter will have to raise its bid to something in the range of $36 to $40 a share.
- Microsoft’s(MSFT) Yahoo(YHOO) Gambit.
- Chinese Investors Relying on ‘Olympic Put’ for Rally.

Businessweek.com:
- Buffett Stock Screen Shows 60 Candidates.

CNBC:
- Wilbur Ross, chairman of NY-based WL Ross, said he’s still looking at several bond insurers and may make a decision on investing in the next few weeks.

Marginal Revolution:
- Commercial loans from large banks are at an all time high and increasingly rapidly.

Dealbreaker:
- Goldman Sachs’ latest hedge fund, which was the largest launch in the history of the industry, had a rough first month. The fund is down 6% for January, according to a source familiar with the results.

San Francisco Chronicle:
- Lennar(LEN) attracts major backer for S.F. projects.
- New Intel(INTC) chip sets a record, doubles processing power.

LA Times:
- Top corporate insiders last month bought more of their companies’ shares than they sold for the first time since 1995, while the volume of shares sold short last month grew to 3.7% of NYSE-traded companies’ total shares outstanding, the highest since at least 1931.

USA Today:
- Farmland more valuable than ever.

AP:
- US-backed Sunni Muslim tribesmen found about 50 bodies in a mass grave west of the Iraqi city of Samarra, citing local officials. About 200 bodies were unearthed in recent months from mass graves around nearby Lake Tharthar, an area that was controlled by al-Qaeda until an uprising this year by local tribes.

De Telegraaf:
- Corporate Express NV is in “exploratory” talks with Staples Inc.(SPLS) to be bought.

Reforma:
- Mexico’s wind-generated power industry will receive $4.5 billion in international and domestic investments in the next five years.

ISM Non-Manufacturing Declines, Prices Paid Falls

- ISM Non-Manufacturing for January fell to 44.6 versus estimates of 52.5 and a reading of 53.2 in December.

BOTTOM LINE: US service industries unexpectedly shrank in January, Bloomberg reported. The New Orders component fell to 43.5 versus 53.9 the prior month. New Export Orders rose to 52.0 from 50.0 in November. The Employment component fell to 43.9 from 51.8 the prior month. The Prices Paid component fell to 70.7 from 71.5 in December. Weekly retails sales rose a sluggish .5% this week. According to Intrade.com, the odds of a recession beginning this year are still down from 77.5% a couple of weeks ago to 68% today, notwithstanding this report. As well, the US dollar index is rising substantially. Fed fund futures now imply a 100% chance for another 50 basis point rate cut at the March 18 meeting, which is up from a 68.0% chance yesterday. I suspect this number will see a substantial snapback next month. I still expect overall US growth to accelerate meaningfully as the year progresses.

Bull Radar

Style Outperformer:

Small-cap Value (-.23%)

Sector Outperformers:

Airlines (+.93%), Gaming (+.78%) and Hospitals (+.14%)

Stocks Rising on Unusual Volume:

HEW, WHR, OMI, YTEC, ILMN, OSIS, PSYS, WYNN, BPHX, TZIX, GOOG, RCII, TNDM, MANT, PRGO, FOSL, ACOR, CVCO, AVTR, SNDK, ISRG, CBRL, LVS, HOT and MAR

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