Friday Watch

Late-Night Headlines
Bloomberg:
- The SEC takes “very seriously” allegations that stock manipulators spread lies about Bear Stearns(BSC), forcing its sale to JPMorgan Chase(JPM), Chairman Christopher Cox said. The rumors were “too big to miss,” Cox said, when asked whether the SEC is investigating. “Your hopes will be met and exceeded with respect to the agency’s response to these concerns.” The SEC opened probes last month into whether hedge funds and other investors spread false rumors in seeking to profit from declines in stocks of companies including Bear Stearns and Lehman Brothers. “It looked like more than just fear, it looked like people wanted to induce a panic,” Bear Stearns CEO Alan Schwartz told the Senate panel today. The possibility investors might seek to profit by undermining public confidence in other firms has prompted warnings from a growing list of regulators, including the UK’s Financial Services Authority. On March 31, three US market watchdogs said they will “vigorously and aggressively” investigate such cases.
- Federal Reserve Bank of San Francisco President Janet Yellen said the US economy faces “significant” risks, and policy makers must be ready to respond “in a timely manner.”
- Lehman Brothers Holdings(LEH), seeking to get high-risk, high-yield loans off its books, created a $2.8 billion collateralized loan obligation.
- Secretary of State Condoleezza Rice said a Chinese court’s decision to sentence a human-rights activist to 3 ½ years in prison was “deeply disturbing” as the two countries prepare to resume talks on civil liberties.
- The number of babies born with the virus that causes AIDS or infected by breast milk decreased by 20% in six years, according to a United Nations report that credited treatment programs.
- Australia’s economic growth is cooling and will quell the fastest inflation in 16 years, Reserve Bank Governor Glenn Stevens said, indicating he may have finished raising interest rates.

Wall Street Journal:
- US Sought Low Price In Bear Sale, Officials Say.
- MF Global Ltd.(MF) is seeking financing for debt due in June after losing about two-thirds of its market value.
- The ACLU is spearheading a high-profile effort to defend Khalid Sheikh Mohammed and other alleged 9/11 conspirators from conviction by the Bush administration’s military commissions at Guantanamo Bay.
- Fifth Third Bancorp(FITB) is considering a bid to buy its larger rival National City Corp.(NCC).
- Obama Raised Twice as Much as Clinton in March.

MarketWatch.com:
- Aerospace giant Boeing Co.(BA) said Thursday that it has successfully flown the first aircraft powered by fuel-cell technology, as part of an in-house research project.
- Former UBS AG(UBS) president pushing for break-up.
- Apple(AAPL) displaces Wal-Mart as top US music seller.

CNBC.com:
- Should US Crack Down on Fuel Speculators? “Excessive speculation on energy trading facilities is the fuel that is driving this runaway train in crude prices,” said heating oil executive Sean Cota. He supports a bill from Rep. John Larson that would widen the regulatory framework and make it harder for speculators to participate in the energy market.

Forbes.com:
- Special Report: Virtualization. Virtualization is sweeping the business world, promising to transform corporate computing and reduce IT costs.

CNNMoney.com:
- AQR Capital to Close Hedge Fund by End of April. After months of poor performance, Goldman Sachs(GS) has stopped offering an investment that AQR Capital Management created for the bank’s 401(k) lineup. AQR’s flagship $2.9 billion Absolute Return Fund was down almost 15% through Feb. 15. AQR was among the first firms to create quantitative or “black box” hedge funds.

SmartMoney:
- Developers Help Home Buyers Fix Their Credit.
- Electronics Retailers Offering Range of Deals.

Portfolio.com:
- Corporate America may fear recession, but startups are flourishing and financiers are confident.

USA Today.com:
- Marketing gold could be found in Web video. You don’t need a pan and stream in California to join the next gold rush. A video camera, computer and high-speed internet connection will do.

Reuters:
- China Investment Corp., the nation’s $200 billion sovereign wealth fund, agreed to start a $4 billion private-equity fund with JC Flowers focusing on US financial assets.
- General Motors(GM) on Thursday showed off its progress in developing the highly anticipated Chevrolet Volt and detailed its road map for bringing the rechargeable car to the market by 2010.
- THQ Inc.(THQI) is looking at buying other video game developers, but the publisher of games like “Cars” and “Saints Row” can grow without making acquisitions, CEO Farrell said.
- Venezuelan President Hugo Chavez on Thursday announced the immediate nationalization of the country’s cement industry.

Financial Times:
- New cloud on horizon for hedge funds. Hedge funds are still reeling after banks unexpectedly pulled credit lines and demanded more security against loans, forcing firesales and heavy losses. Now they face a new threat: investors are abandoning them, raising the risk that the funds will have to sell assets at any price to raise the cash to meet withdrawals.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (FACE), target $14.

Lehman Brothers:
- Copper, lead, nickel and zinc prices may decline on average next year as production increases faster than consumption, said Michael Widmer, a metals analyst.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 futures -.01%.
NASDAQ 100 futures +.07%.

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Earnings of Note
Company/EPS Estimate
- (AZZ)/.59
- (FDO)/.42
- (MOS)/.95

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for March is estimated at -50K versus -60K in February.
- The Unemployment Rate for March is estimated at 5.0% versus 4.8% in February.
- Average Hourly Earnings for March are estimated to rise .3% versus a .3% gain in February.

Other Potential Market Movers
- The Fed’s Pianalto speaking and Fed’s Kroszner speakingcould also impact trading today.

BOTTOM LINE: Asian indices are mixed as gains in commodity stocks in the region are being offsets by weakness in automaker shares. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher, Boosted By Technology, Homebuilder, REIT and Construction Shares

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In Play

Stocks Higher into Final Hour on Tech Sector Strength, Short-Covering, Lower Energy Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Semi longs and Computer longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The overall tone of the market is mildly bullish as the advance/decline line is about even, sector performance is mostly positive and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is bullish considering recent gains, apprehension over tomorrow’s employment report and the scary rhetoric on CNBC coming from the testimony regarding the JPMorgan/Bear acquisition. The VIX is falling 1.0% and remains above average at 23.2. The ISE Sentiment Index is a low 101.0 and the total put/call is above average at 1.02. Finally, the NYSE Arms has been below average most of the day and is currently .86. The AAII % Bulls fell to 36.7% this week and the % Bears rose to 39.4%. Investor reaction to Research In Motion’s(RIMM) strong earnings report is a broad market positive. Many market-leading stocks are substantially outperforming the major averages today. Corporate insiders continue to exhibit very bullish behavior. The iTraxx Europe Senior Financials Credit Default Swap Index, which includes UBS AG among many other key European financials, is plunging another 10.25 basis points today to 82.75. This is down almost 50% from its high on March 13, which is a major positive. Nikkei futures indicate an +35 open in Japan and DAX futures indicate an +100 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, tech sector strength and lower energy prices.

Today's Headlines

Bloomberg:
- SEC Chairman Christopher Cox, facing congressional scrutiny over his agency’s response to Bear Stearns’ brush with bankruptcy, said the SEC succeeded in protecting consumers.
- Fed Bank President Timothy Geithner said capital markets are still substantially impaired and policy makers and financial industry leaders must act forcefully to stem the crisis.
- The cost of protecting corporate bonds from default declined to the lowest in almost two months after Federal Reserve Chairman Ben S. Bernanke eased investor concern of possible bank failures. Credit-default swaps on the benchmark Markit iTraxx Crossover Index dropped 17 basis points to 507, according to JPMorgan(JPM).
- Democratic congressional leaders spit today over whether Senate legislation designed to reduce housing foreclosures does enough to aid homeowners.
- The resilience of the US economy in the face of a devastated housing sector and a financial crisis is amazing. The severe recession some have predicted is still nowhere in sight. The odds are at least 50-50 that the current period of economic weakness won’t be labeling as even a mild recession.
- The market for short-term debt backed by assets such as car loans, credit card receivables and mortgages rose as investors pumped a record $3.51 trillion into US money-market mutual funds.
- iPhone Frenzy in Russia Fueled by Smugglers, Jeweler.
- Oil Falls on Concern US Supplies Are Rising as Economy Slows.

Wall Street Journal:
- The US Fed put staff members on site at five of the biggest brokerage firms to review their finances. The staffers are at Goldman Sachs(GS), Morgan Stanley(MS), Lehman Brothers(LEH), Merrill Lynch(MER) and Bear Stearns(BSC).
- It may be time to get back into cable stocks.

Financial Times:
- HBOS Plc, Britain’s biggest mortgage lender, estimates that the number of UK home sales may decline as much as 30% this year, citing Finance Director Mike Ellis.

Interfax:
- Russians spent as much as $2.1 billion shopping online last year, citing President-elect Dmitry Medvedev.

Market News Intl.:
- European Central Bank council member Nicholas Garganas said inflation may start to slow in the first half of this year and drop below 2% in 2009, citing an interview.

Nikkei:
- Merrill Lynch(MER) CEO Thain said the securities firm doesn’t need to raise additional capital, citing an interview.

Bear Radar

Style Underperformer:

Small-cap Value +.20%

Sector Underperformers:

Internet (-1.29%), Retail (-.64%) and Restaurants (-.52%)

Stocks Falling on Unusual Volume:

GEOY, WIT, BLKB, PLXS and TSFG

Stocks With Unusual Put Option Activity:

1) MAS 2) RWT 3) SYMC 4) GRMN 5) SINA

Jobless Claims Rise, ISM Non-Manufacturing Strengthens

- Initial Jobless Claims for this week rose to 407K versus estimates of 366K and 369K the prior week.

- Continuing Claims rose to 2937K versus estimates of 2860K and 2840K prior.

- ISM Non-Manufacturing for March rose to 49.6 versus estimates of 48.5 and 49.3 in February.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits unexpectedly increased last week, Bloomberg reported. This week’s report may have been skewed as some state unemployment offices processed a backlog from the prior week, which included the Good Friday holiday. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2.2% from 2.1%. The four-week moving average of claims rose to 374,500 from 358,750 the prior week. A strike at auto-parts supplier American Axle is contributing to declining employment at GM plants. The strike has closed or idled 30 plants, affecting almost 50% of GM’s employees. I still expect tomorrow’s jobs report to modestly exceed estimates. Jobless claims should fall next week.

Service industries in the US beat economists’ forecasts in March, easing concern the economy was slowing too much, Bloomberg reported. The ISM non-manufacturing index captures about 90% of the US economy. The Employment component of the index was unch. at 46.9. The Business Activity component rose to 52.2 from 50.8 in February. The New Orders component rose to 50.2 from 49.6 the prior month. The Prices Paid component rose to 70.8 from 67.9 in February. The Inventories component rose to 51.0 from 50.0 prior. This reading does not indicate the US is in recession. I continue to believe that after a slight contraction in 1Q, US growth will bounce back into positive territory this quarter on monetary/fiscal stimuli, booming exports and inventory rebuilding. An end to the American Axle strike and a decline in energy prices could also help boost growth later this quarter.