Stocks Sharply Lower into Final Hour on Financial Sector Panic, Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Gaming longs, Biotech longs and Software longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The overall tone of the market is very bearish as the advance/decline line is substantially lower, almost every sector is declining and volume is above-average. Investor anxiety is very high. Today’s overall market action is very bearish. The VIX hit a very high 32.9. The ISE Sentiment Index hit a very depressed 48.0 and the total put/call hit a very high 1.46 today. Finally, the NYSE Arms hit an elevated 3.97. The 10-year swap spread is falling to 72.0 basis points over Treasuries, down from a high of 92.75 six days ago. However, the TED spread is rising to 159 basis points. Given how poorly Asia traded overnight, notwithstanding how much those indices were down the prior day and our rebound yesterday afternoon, I wouldn’t be surprised to see meaningful weakness in Asian shares on Monday. However, given today’s stress another positive catalyst may materialize over the weekend. I will monitor the situation on Monday before further shifting market exposure. Nikkei futures indicate a -120 open in Japan and DAX futures indicate a -33 open in Germany on Monday. I expect US stocks to trade modestly lower into the close from current levels on fear and shorting.

Today's Headlines

Bloomberg:
- Bear Stearns(BSC) Agrees to Secured Loan Facility with JPMorgan Chase.
- Emerging-market bond yield premiums over US treasuries swelled to their widest since June 2005.
- Bear Stearns(BSC) Funding Is ‘Unequivocally Positive,’ Peters Says.
- VIX Poised for Highest Close Since 2003.

Wall Street Journal:
- The SEC is likely to tell companies that, though they must use market prices for securities they hold, they may also give broader spreads of possible values.

CNBC:
- JPMorgan Chase(JPM) CEO Dimon would be interest in buying all or part of Bear Stearns(BSC). “Based on conversations that I’ve had with people familiar with the situation, that certainly is one route that could be taken here,” CNBC’s David Faber said. JPMorgan, which worked with the NY Fed to provide emergency financing for Bear Stearns today, is going to be able to “go through a great deal of securities and figure out what the true marks are, and try and understand whether they want to make a bid for all or part of the company,” Faber said.

BusinessWeek:
- Larry Fink: BlackRock’s(BLK) Bear Starts to Feel Bullish.

Reuters:
- Credit crunch hurting global shipyard orders.

Globe and Mail:
- Bank of Canada Governor Mark Carney said slower growth in the US will extend to other economies, lowering demand for commodities and depressing prices.

Consumer Price Index Unchanged, Confidence Slips Slightly

- The Consumer Price Index for February was unch. versus estimates of a .3% increase and a .4% gain in January.

- The CPI Ex Food & Energy for February was unch. versus estimates of a .2% gain and a .3% increase in January.

- The Preliminary Univ. of Mich. Consumer Confidence reading for March fell to 70.5 versus estimates of 69.5 and a reading of 70.8 in February.

BOTTOM LINE: Consumer prices in the US were unchanged in February, making it easier for Federal Reserve Chairman Ben S. Bernanke to cut interest rates to shore up confidence in the economy, Bloomberg said. The Consumer Price Index rose 4.0% year-over-year versus the long-term average of 3.1% and down from 4.7% in September 2005. The Core CPI rose 2.3% year-over-year versus the long-term average of 2.9% and down from 2.9% in September 2006. The cost of electricity fell by the most since December 2005. Declines in consumer prices were broad-based as the cost of clothing, automobiles and air fares all fell as companies try to lure customers with discounts. Medical care costs rose .1%, the smallest gain since March of last year. The S&P GSCI Agricultural Index Spot, the source of much inflationary angst, is down 4.0% today and looks like it possibly made a double-top. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 2.44%. It has plunged 24 basis points from yesterday’s highs. The ECRI Future Inflation Gauge is falling at a 4.2% rate. Fed Fund futures now imply a 66.0% chance for a 75 basis point rate cut next week and a 34% chance for a 100 basis point cut. I continue to believe investor inflation fears are peaking right about now and that gauges of inflation will show meaningful deceleration in the second-half of the year.

US consumer confidence fell less than economists expected in March, Bloomberg reported. The Expectations component fell to 61.4 from 62.4 the prior month. The Current Conditions component, a gauge of Americans’ perceptions of their own present financial situation, actually rose to 84.6 from 83.8 the prior month. The spread between the two remains historically wide as the future is always perceived as bleak in the current “US negativity bubble.” According to Intrade.com, the odds the US slips into recession this year have declined to 68.8% from a high of 77.5% in January. I still think gauges of consumer confidence are bottoming for the year right about now and will turn higher next quarter.

Bull Radar

Style Outperformer:

Large-cap Growth (-1.44%)

Sector Outperformers:

Steel (+.63%), Defense (-.42%) and Hospitals (-.74%)

Stocks Rising on Unusual Volume:

HL, SYX, BHP, BA, BBL, POT, IACI, FULT, SHPGY, STRL, LPNT, OMTR, ZUMZ, NNDS, LCAPA, HMIN, RADS, PCAR, UDRL, CTCM, ALOG, EQIX

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Friday Watch

Late-Night Headlines
Bloomberg:
- The dollar’s record-breaking slide may trigger the first coordinated effort to shore up the currency in 13 years, according to strategies at Morgan Stanley(MS) and Goldman Sachs(GS).
- Yields on agency mortgage-backed securities relative to US Treasuries narrowed for a third day, as concerns eased about how much credit-market losses will hurt financial companies. The difference in yields on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes declined about 3 basis points, to 203 basis points, or 34 basis points less than the high reached last week. The spread helps determine interest rates on new prime home mortgages of $417,000 or less.
- BlueScope Steel Ltd., Australia’s largest steelmaker, rose 6.9%, the most in almost two months in Sydney trading after predicting “stronger” global prices for the alloy. China’s steel exports will fall “significantly” this year, and India may import the alloy, the Melbourne-based company said today.
- Crude oil dropped from a record in NY on concern that the rally in energy prices may reduce demand at a time of increasing stockpiles. US crude stockpile last week roe more than analysts estimates, while gasoline supplies jumped to the highest since 1993.

Wall Street Journal:
- AOL Buys Into Social Networking. Deal for Bebo Aims to Turn Laggard at Time Warner Into Ad-Focused Hot Spot.
- Carlyle Fund in Free Fall As Its Banks Get Nervous.

MarketWatch.com:
- Visa Inc.’s $16 billion IPO oversubscribed, analyst says.
- End of subprime write-downs in sight, S&P says.
- Google(GOOG), seeking to diversify, looks to government contracts.

BusinessWeek.com:
- The iPod Touch: Apple’s(AAPL) Sleeper Device. The new flagship of the iPod line could be the harbinger of new products that blur the line between computers and consumer electronics.
- VMware(VMW) Beefs Up Its Bench. CEO Diane Greene is assembling a crack team of executives to help the virtualization-software marker tackle new economic and competitive pressures.
- How a Michigan Do-Over Would Hurt Obama. A June contest would take a legion of college students out of the mix and pump up older, blue-collar Clinton supporters.

CNNMoney.com:
- Who gets rich off $3 gas – who doesn’t. The guy running the service station makes just a few cents, while crude oil producers take the biggest chunk.

Reuters:
- US video game sales soar 34% in February.
- Total US money market mutual fund assets increased by $6.46 billion to $3.454 trillion in the week ended March 12.

Financial Times:
- American International Group(AIG) is urging regulators to change controversial accounting rules on asset valuations to stem the tide of writedowns that have wreaked havoc on Wall Street. Martin Sullivan, AIG’s CEO said that “mark-to-market” rules forces companies to recognize losses even when they had no intention of selling assets at the current prices. The practice created a vicious circle whereby companies recorded huge losses, lost investors’ confidence and were then forced to raise funds at unfavorable prices.
- An unforgiving eye: Bankers cry foul over fair value accounting rules.

TimesOnline:
- London’s embattled hedge fund community is bracing for a spate of blow-ups in the wake of yesterday’s $16 billion debt default by Carlyle Capital Corporation. Numerous small start-up credit hedge funds, managing between $10 million and $200 million of assets, are facing a funding squeeze. The prime brokers that provide credit liquidity to these funds are beginning to withdraw financial support or heavily increase their margin calls.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (AMZN), target $97.
- Maintained Buy on (MENT), target $15.
- Reiterated Buy on (MAN), target $77.
- Reiterated Buy on (GLBC), target $25.
- Reiterated Buy on (PSUN), target $14.50.

Think Equity:
- Rated (ISRG) Buy, target $360.

Night Trading
Asian Indices are -.50% to +1.50% on average.
S&P 500 futures -.22%.
NASDAQ 100 futures -.06%.

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Earnings of Note
Company/EPS Estimate
- (ANN)/.20
- (SUP)/.18
- (IART)/.49
- (WCG)/1.62
- (KWD)/.11

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for February is estimated to rise .3% versus a .4% gain in January.
- The CPI Ex Food & Energy for February is estimated to rise .2% versus a .3% gain in January.

10:00 am EST
- The Preliminary Univ. of Mich. Consumer Confidence reading for March is estimated to fall to 69.3 versus a reading of 70.8 in February.

Other Potential Market Movers
- The (DNA) investment community meeting, (GCI) analyst meeting and Lehman High-Yield Bond Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by mining and financial stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.