Stocks Sharply Lower into Final Hour on Credit Market Angst, Economic Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Biotech longs and Medical longs. I added to my (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 50% net long. The overall tone of the market is bearish as the advance/decline line is substantially lower, sector performance is mostly negative and volume is above average. Investor anxiety is elevated. Today’s overall market action is very bearish. The VIX is hitting a very high 29.6. The ISE Sentiment Index is a very low 77.0 and the total put/call is a high 1.39 again today. Finally, the NYSE Arms is a high 1.54. The TED spread is rising 9 basis points to 159 basis points. The 3-month T-bill yield is falling another 12 basis points to 1.32%, which is also a negative. Overall, credit market angst is rising again today. As well, airline, homebuilding, construction, biotech, i-banking, steel, gold, coal, alternative energy and oil tanker stocks are all down 3%+. It is looking increasingly likely that the emerging markets’ mania is ending. This would have very positive implications for the US dollar and negative implications for commodities over the intermediate-term. On the positive side today, restaurant, food, gaming, tobacco, HMO, computer service, disk drive, software and utility shares are higher or just mildly lower today. I am starting to see signs of capitulatory-type action, which could finally set the stage for at the very least a tradable rally. Nikkei futures indicate a -100 open in Japan and DAX futures indicate a -14 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as short-covering and rising rate cut odds offset increasing credit market angst and economic worries.

Today's Headlines

Bloomberg:
- European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said the US has indicated it would liked the dollar to appreciate and “will act accordingly.”
- Hedge Funds Reel as Bankers Raise Collateral Even on Treasuries.
- A default by MBIA Inc.(MBI) is “highly improbable” during the next year, CEO Jay Brown said. Trading in credit-default swaps suggesting a high risk of default in the next year “is illogical,” Brown said.
-Crude oil is rising above $108/bbl. on historic investment fund speculation as traders continue to chase momentum.
- McDonald’s Corp.(MCD), the world’s biggest restaurant company, rose the most in more than a month in NY trading after reporting February sales that exceeded analysts’ estimates on increased demand in Europe and China.
- European Central Bank President Jean- Claude Trichet said he’s “concerned” about the euro’s appreciation.

NY Times:
- Democratic New York Governor Eliot Spitzer has informed his most senior administration officials that he had been involved in a prostitution ring, an administration official said.
- Ameriprise, MasterCard(MA) Pairing to Offer Credit Cards.
- Divisions in Democrat Hillary Clinton’s presidential campaign over strategy and dislike advisers had for each other have led some to question Clinton’s management abilities.

CNBC:
- Former Bear Stearns(BSC) Chairman Alan “Ace” Greenberg called rumors of liquidity problems at the financial services company “ridiculous, totally ridiculous.”

USA Today:
- New college graduates to find a strong job market.

MacScoop:
- Apple(AAPL) is readying to release an improved version of both its iMac and Mac mini lineups by the next few weeks.

Daily Telegraph:
- Apple Inc.(AAPL) may pay as much as $604.8 million for the right to offer the Beatles’ albums for download from its iTunes store.

Gulf Times:
- Mideast growth to slow on economic fears, weak dollar.

Bear Radar

Style Underperformer:

Small-cap Growth -2.02%

Sector Underperformers:

Coal (-5.85%), Airlines (-5.07%) and Steel (-4.23%)

Stocks Falling on Unusual Volume:

AUXL, TIE, CRAI, AIMC, SMTS, XNPT, IDXX, COIN, GSIC, BSC and CRN

Wholesale Inventories Decelerate, Inventories at New Record Low

- Wholesale Inventories for January rose .8% versus estimates of a .5% gain and a 1.1% increase in December.

BOTTOM LINE: Inventories at US wholesalers in January rose less than a third as much as sales, Bloomberg reported. Sales rose 2.7%, the most since March 2004. The increase in sales brought the inventories down to 1.07 months worth, the lowest on record. Wholesalers make up about 25% of all business inventories. Inventories at auto wholesalers declined .7%, the most since October. Inventories of non-durable goods, such as oil and farm products, jumped 1.2%. Record low inventories are a big positive during this period of economic weakness. I expect wholesale inventories to rise again in February on inventory rebuilding.

Bull Radar

Style Outperformer:

Small-cap Value (+.08%)

Sector Outperformers:

Disk Drives (+2.73%), Tobacco (+1.67%) and Road & Rail (+1.11%)

Stocks Rising on Unusual Volume:

BCE, TSO, CN, CPE, RAI, BP, ICLR, IDA, CPRT, BOOM, FRME, ATHN, LMIA, CETV, VMED, ALOG, CONN, NFS, BSY and PBT

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