Stocks Finish Higher, Boosted by HMO, Financial, Steel, REIT, Retail and Alternative Energy Shares

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Stocks Higher into Final Hour on Less Economic Pessimism, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Software longs, Alternative Energy longs and Biotech 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 slightly higher, sector performance is mostly positive and volume is below average. Investor anxiety is above-average. Today’s overall market action is mildly bullish. The VIX is falling 2.9% and remains above average at 23.1. The ISE Sentiment Index is a low 115.0 and the total put/call is an above-average 1.04. Finally, the NYSE Arms has been running about average most of the day and is currently .89. The US dollar continues to trade as if, at the very least, an intermediate-term bottom is in place. A move higher in the US dollar would be a large broad market positive as it would likely take some air out of the current commodity bubble. The TED spread is falling 5 basis points to 158 basis points today. The European Financial Sector Credit Default Swap Index is dropping 7 basis points to 84.50. I continue to believe recent market action indicates to me that the bears are running low on firepower. Nikkei futures indicate an +40 open in Japan and DAX futures indicate an +72 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close on short-covering, less economic pessimism and bargain hunting.

Today's Headlines

Bloomberg:
- Richard Fuld, chief executive officer of Lehman Brothers(LEH), told shareholders “the worst is behind us” in the credit-market contraction. The comments echo those of Lloyd Blankfein, CEO of Goldman Sachs(GS), who told shareholders at the firm’s annual meeting last week that “we’re closer to the end than the beginning” of the crisis.
- Price declines for debt such as top-rated collateralized loan obligations may slow this year because of declining asset sales by structured investment vehicles, Barclays Capital analysts said. SIVs, the funds shut out of short-term debt markets last year, will likely sell about $32 billion of assets the rest of this year, down from $100 billion over the past 10 months, to repay about $60 billion of senior debt that’s due by November, analysts led by Jeff Meli and Madhur Duggar in NY wrote.
- Kevin Gould, head of data products and analytics at Markit Group Ltd. in NY, told Bloomberg that banks shouldn’t rely on its subprime ABX or commercial real estate CMBX indices to value assets. “We don’t think it’s particularly relevant to use the index to value assets. It’s a very useful tool for understanding the direction the market is moving in, but it is not necessarily a tool that one should use to value the cash asset itself,” he said.
- Emerging-market bonds gained, sending yields over US Treasuries to the lowest since February, after a measure of manufacturing in NY state unexpectedly showed growth in April.
- The risk of US companies defaulting fell, according to traders of credit-default swaps. Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the US and Canada dropped 2.5 basis points to 128.5.
- Crude oil and gasoline rose to records as investors purchased commodities because their returns have outpaced stocks, bonds and other financial instruments.
- Boeing(BA) may benefit from the merger between Delta(DAL) and Northwest Air(NWA) as the carriers band together for new cash from growth overseas to replace their aging fleets.
- John McCain prescribed cutting taxes and reduced government spending to boost the US economy and ensure future growth.
- Confidence among US homebuilders was unchanged in April. A measure of single-family sales prospects for the next six months improved to 30, the highest since August.
- Merrill Options Trading Shows Record Bearish Wagers.

Wall Street Journal:
- The US healthcare industry may help replace the declining business of manufacturing as a main source of employment.

NY Times:
- US States Intensify Effort to Control Gun Sales.

Bergen Record:
- Foreclosures in New Jersey fell 6% in March compared with the same period a year ago.

USA Today:
- More US states are turning to high-tech means to curb the number of repeat drunken-driving offenders through the use of alcohol-sensing ignition locks, citing government officials.

Financial Week:
- Subprime players may get big break. A provision in the second housing stimulus plan currently being debated in Congress would allow companies to use losses from this year and next to net higher tax refunds.

Reuters:
- Regional banks top views despite credit losses.

The Hindu Business Line:
- India-focused hedge funds lose over 25% in 2008 so far.

Haaretz.com:
- Former US President Jimmy Carter on Tuesday warmly embraced a leading Hamas figure in the West Bank and laid a wreath at the grave of Yasser Arafat, further antagonizing Israel as he pushed forward with his latest Mideast peace mission.

Bear Radar

Style Underperformer:

Large-cap Growth -.06%

Sector Underperformers:

Airlines (-4.5%), Gaming (-3.09%) and Defense (-1.12%)

Stocks Falling on Unusual Volume:

LNG, TIE, REP, AFFX, FRX, NOC, IFLO, LVS, AVT, STT, KCI, MTW, REP, ABI, CMN, JAH, ELX, ARW, CROX, RADS, SIGM, DDUP, CPHD and IVGN

Stocks With Unusual Put Option Activity:

1) OVTI 2) DDUP 3) AZN 4) JOSB 5) STT

Weekly Retail Sales 5-Year Graph

(click on image to enlarge)

BOTTOM LINE: Johnson Redbook weekly retail sales rose 2.0% this week versus a 1.0% gain the prior week and up from a .5% gain the week ending March 4th. This is the largest weekly improvement, notwithstanding unseasonably cold/wet weather, since the week ending July 17th of last year and is the largest weekly rise since the week ending Dec. 4th during the holiday shopping season. While this is only one week and sales still remain modestly below the long-term average of 3.0%, it is a noteworthy improvement. The significant drop in weekly retail sales growth during December was one of the first indications that overall economic growth was slowing substantially.

PPI Above Estimates, NY Manufactuing Gauge Rebounds Sharply, International Demand for US Assets Healthy, Weekly Retail Sales Surge

- The Producer Price Index for March rose 1.1% versus estimates of a .6% decline and a .3% rise in February.

- The PPI Ex Food & Energy for March rose .2% versus estimates of a .2% gain and a .5% rise in February.

- Empire Manufacturing for April rose to .6 versus estimates of -17.0 and a reading of -22.2 in March.

- Net Long-term TIC Flows for February rose to $72.5 billion versus estimates of $60.0 billion and $57.1 billion in January.

BOTTOM LINE: Headline US producer prices rose more than expected, while core prices decelerated, Bloomberg reported. Core prices rose 2.7% year-over-year. Food prices rose 1.2%, with rice surging 8.7%, the most since 2002. Wholesale energy costs rose 2.9%. Passenger car prices fell .2%, while the cost of light trucks declined .3%. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis points to 2.35%. However, it remains well below the 2.68% seen a few weeks ago. I still believe inflation fears have peaked for the year and gauges will show substantial moderation by year-end.

Foreign buying of US financial assets rose more than expected in February as international investors purchased Treasuries and agency debt, Bloomberg reported. International purchases of US stocks rose by a net $6 billion. Private investors bought a net $76.7 billion in long-term securities, compared with a net $23.9 billion in January. Foreigners bought a net $19.3 billion of corporate bonds, versus $4.2 billion the prior month. The difference between the trade gap and securities purchased by international investors is an indication of how easily the US can finance its external obligations. I expect foreign demand for US assets to remain strong over the long-term.

A measure of manufacturing in NY state unexpectedly jumped in April as new orders and shipments surged, Bloomberg reported. The Prices Paid component rose to 57.3 versus 50.6 the prior month. The New Orders component rose to .06 from -4.7 the prior month. The Shipments component jumped to 17.5 versus -5.2 in March. The Inventories component rose to -4.2 from -4.5 prior. The Employment component fell to zero from 4.5 in March. Moreover, weekly retail sales rose 2.0% this week, the best showing since the holiday shopping season during the week of December 4th last year. This is up from a .5% increase the week ended March 4^th. This is only one week, but is still a substantial improvement from the month of February, especially considering the unseasonably cold and wet weather in much of the country during that week. Overall, economic data have been showing modest economic improvement of late.