Stocks Surging into Final Hour on Less Financial Sector Pessimism, Short-Covering, Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Biotech longs, Semi longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges and took some profits in my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is heavy. Investor anxiety is very high. Today’s overall market action is very bullish. The VIX is falling 3.9% and is very high at 30.45. The ISE Sentiment Index is very low at 90.0 and the total put/call is very high at 1.32. Finally, the NYSE Arms has been running around average most of the day, after peaking at 1.78 this morning, and is currently .44. The Euro Financial Sector Credit Default Swap Index is +13.44% today to 140.50 basis points. This index is up from a low of 52.66 on May 5^th and at a new high. The North American Investment Grade Credit Default Swap Index is +33.9% at 200.42 basis points. The TED spread is rising 2.97% to 2.07 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging another 14 basis point to 1.63%, which is down 99 basis points in about eight weeks and at the lowest level since January 2003, when deflation was the concern. The Fed’s decision today to leave rates unch. leads me to conclude that at the very least a partial resolution to the AIG situation is imminent. I am somewhat surprised the equity market isn’t up more on the decision. This is also a big positive for the US dollar and should lead to further commodity weakness after a bounce from oversold levels. This should also further boost demand for US assets. The S&P Goldman Ag Spot Index is especially weak today, falling another 4.4%. This index is down 26.6% from its March 12^th high. Future inflation readings should continue to register meaningful deceleration. Russian stocks plunged another 11.5% today and are now down 51% for the year. I continue to believe developed markets will substantially outperform most emerging markets for several years. The (XLF) is still right at the bottom end of the trading range it has been in($19.50-$23.50) since July 17^th , which is a big positive considering recent news. Many market leading growth stocks that aren’t dependent on a vigorous global economy are substantially outperforming again today. Nikkei futures indicate a +100 open in Japan and DAX futures indicate an +33 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less forced selling, lower commodity prices, diminishing financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for a cut after Lehman Brothers Holdings Inc.'s(LEH) bankruptcy shook markets worldwide.
- The Federal Reserve is considering extending a ``loan package'' to American International Group Inc.(AIG), the insurer facing a cash shortage, according to a person familiar with the negotiations.
- Cisco Systems Inc.(CSCO) Chief Executive Officer John Chambers said he's ``never'' been more comfortable with his long-term forecast, reassuring investors that network- equipment demand will hold up amid an economic slowdown.
- American International Group Inc.(AIG) investors led by former Chief Executive Officer Maurice ``Hank'' Greenberg may consider taking control of the insurer through a proxy fight or buyout.
- The US dollar rose against the euro after the Federal Reserve left its target lending rate unchanged at 2 percent, saying growth and inflation risks are both ``significant'' concerns.
- Crude oil tumbled, dipping below $91 a barrel and taking its two-day decline to more than $10 on concern that turmoil on Wall Street may weaken the global economy and reduce demand. Oil has declined 4.5 percent this year and dropped 38 percent from the record $147.27 a barrel reached on July 11. The group ``will take action if they see continue pressure for prices to fall below $80,'' John Sfakianakis, chief economist at Saudi British Bank said in an interview in London today. ``I think they are more than fine if prices stay around $80-90 in the next few months.'' Lehman Brothers has been suspended from energy and commodities trading in London.
- Corn fell the most allowed by the Chicago Board of trade and soybeans dropped the most since March on speculation that a deepening global credit squeeze will slow economic growth, eroding demand for food, feed and fuels made from the two biggest U.S. crops. Before today, corn tumbled 30 percent from a June record, and soybeans dropped 28 percent from the all-time high in July.
- The risk of US companies defaulting on their debt fell from a record, 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 fell 11 basis points to 204 at 11:01 am in NY.
- Richard Bove, an analyst at Ladenburg Thalmann, says Goldman(GS) earnings ‘not a good number’. (video)
- Goldman Sachs Group Inc.(GS) said its value at risk in commodities rose in the third quarter from the previous quarter. Goldman’s average value at risk in commodities, a measure of how much the firm estimates it could lose in a single day, rose to $51 million in the three months ended Aug. 29, the firm said today. That compares with $48 million in the second quarter and $24 million in the third quarter last year. Morgan Stanley(MS) had an average value at risk to commodities of $41 million a day in the three months ended May 31. Net revenues at Goldman’s Fixed Income, Currency and Commodities unit dropped 67% to $1.6 billion.

Wall Street Journal:
- Cray Inc. is introducing a $25,000 low-end mode which will handle tasks beyond a desk-top system but which don’t require a supercomputer, citing Ian Miller, a senior vp.

NY Times:
- Democrat Representative Charles B. Rangel met behind closed doors with House leaders on Monday evening, as he faced increasing pressure to relinquish his position as chairman of the Ways and Means Committee.

Eurekahedge:
- The first half of 2008 has seen not only the lowest hedge fund launch activity (272 funds), but also the highest number of liquidations (243 funds) during any comparable period over the past nine years.

Reuters:
- The head of Toshiba Corp's semiconductor division said on Tuesday he was interested in SanDisk (SNDK), its partner in the flash memory chip business.

Handelsblatt:
- Munich Re CEO Bomhard said he is interested in acquiring parts of NY-based American International Group(AIG).

AFP:
- France will back the US to press for a fourth round of sanctions against Iran at the UN Security Council over its nuclear program, citing the French Foreign Ministry.

RIA Novosti:
- Russia’s budget will break even next year if the price of oil averages $70 a barrel, citing Finance Minister Alexei Kudrin. “We are at the limits of our budget parameters,” Kudrin said.

Globe and Mail:
- Once viewed as a safe haven, crude oil has lost its luster as investors bet that the crisis in financial markets will hurt an already weakened global economy and drive down petroleum demand. At the same time, speculators who piled into oil and other commodities on the way up have reversed course, as brokerages and hedge funds are being forced to liquidate those positions to buttress their balance sheets, traders said yesterday. Lehman Brothers Inc. and Merrill Lynch & Co. Inc. are both major players in the crude oil markets, and both companies are expected to unwind their positions after Lehman sought bankruptcy protection and Merrill agreed to be acquired by Bank of America. "Every time we have one of these financial crises, we have managed to lose about one million barrels per day of demand in a very short amount of time. And that's what is scaring the [crude] markets," Ms. Novak said. Many analysts expect crude prices to continue their slide - to perhaps as low as $75 a barrel, where it sat this time last year.

Haaretz:
- Former Finance Ministry Director General David Brodet said on Monday that Israel's economy will continue to weaken into 2009.

Sarmayeh:
- Iran’s import costs rose by as much as 45% because of international sanctions against the country, citing an industry official.

Bear Radar

Style Underperformer:

Large-cap Growth (-.38%)

Sector Underperformers:

HMOs irlind (-4.06%), Coal (-3.26%) and Utilities (-2.78%)

Stocks Falling on Unusual Volume:

UBS, CAJ, AMP, CEG, ROS, VIP, AVAV, HES, SU, RRI, ICE, PETD, DELL, ACGY, NTRS, RVBD, CLNE, CTRP, CEDC, BCE, GS, SBR, VCO and OKS

Stocks With Unusual Put Option Activity:

1) MU 2) CPN 3) CIT 4) CB 5) BUD

Bull Radar

Style Outperformer:

Small-cap Value (+.38%)

Sector Outperformers:

Airlines (+5.39%), Banks (+2.69%) and Restaurants (+1.80%)

Stocks Rising on Unusual Volume:

FSP, SPG, WFC, HPQ, JPM, SCSC, AWC, FTE, ABT, REP, DSCP, IFSIA, AMGN, NTCT, BRLI, FFIN, DRYS, FWLT, CTCT, SCHW, CBRL, UMPQ, EGLE, LMNX, LOGI, ACGL, OTTR, PWRD, CPSI, UBSI and CPS

Stocks With Unusual Call Option Activity:

1) PMCS 2) CB 3) CVS 4) GE 5) PRU

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- European Union officials regard the dollar's advance against the euro as welcome respite for their economies at a time when several countries are close to a recession, according to a draft of an internal EU document. The euro has fallen more than 10 percent since reaching a record $1.6038 on July 15. The ``near-term outlook for growth remains relatively weak'' and inflationary pressures should ease ``in the next few months,'' according to the document, which is a summation of the talks on Sept. 12-13 in Nice and will be the basis for discussions at the finance ministers' next meeting in early October in Luxembourg. ``The depreciation of the euro is welcome even if the euro remains overvalued,'' Luxembourg Finance Minister Jean-Claude Juncker, who chairs the group of counterparts from the euro region, said on Sept. 12 in Nice.
- Bank of America’s(BAC) acquisition of Merrill Lynch(MER) will help to narrow credit-default swap spreads linked to the debt of both companies, CreditSights Inc. analysts said. Bank of America, the biggest US consumer bank by assets, has the capital to handle Merrill’s “hot stove” shortfalls related to investments in real estate, asset-backed securities and collateralized-debt obligations, the analysts wrote.
- Criterion Investments Ltd. is converting to cash the assets in its commodities hedge fund that are linked to notes issued by a unit of American International Group Inc. The move is ``a result of uncertainty regarding the note issuer,'' Toronto-based Criterion said today in a statement. The move to cash is not related to losses in commodity markets, Fisher said. The Reuters/Jefferies CRB Index of 19 raw materials fell 3.3 percent today and is down 27 percent from a July 3 record, putting it in a bear market.
- Crude oil for October delivery fell $2, or 2.1 percent, to $93.71 a barrel at 8:06 a.m. Sydney time on the New York Mercantile Exchange, the lowest intraday price since Feb. 14. Oil on the exchange is down $2.27 this year. Prices have fallen 36 percent from a record $147.27 a barrel on July 11. ``Prices went beyond what the fundamentals justified on the upside and the same may occur as we move lower,'' said Tom Bentz, senior energy analyst at BNP Paribas in New York. CME Group Inc., the world's largest futures market, and its Nymex unit, said Lehman ``continues to meet all of its obligations'' and is operating as normal. Options Clearing Corp., which guarantees all trades in the $1.6 trillion U.S. options market, also said Lehman remains in good standing. Lehman Brothers was suspended from energy and commodities trading in London.
- S&P reduced its rating on Seattle-based WaMu to BB- from BBB-, leaving it three levels below investment grade, the ratings firm said today in a statement.
- American International Group Inc.’s(AIG) long-term counterparty rating was cut three levels to A- from AA- by Standard & Poor's, and its senior unsecured debt rating was downgraded by Moody's Investors Service to A2 from Aa3.
- The Bank of Japan added 1.5 trillion yen ($14.4 billion) to the financial system and China cut interest rates as Asian central banks attempted to calm markets after Lehman Brothers Holdings Inc. filed for bankruptcy. The Federal Reserve yesterday added $70 billion in reserves to the banking system, the most since the September 2001 terrorist attacks, and may cut its benchmark lending rate today. China lowered its benchmark rate for the first time in six years late yesterday and may act again.

Wall Street Journal:
- T-Mobile USA plans to begin selling the first telephone powered by Google Inc.'s(GOOG) new mobile software late next month, according to people familiar with the matter, facing off against Apple Inc.'s iPhone and Research In Motion Ltd.'s BlackBerry with a device that blends aspects of both.
- American International Group Inc.(AIG), its shares in free-fall, struggled Monday to pull off a tangled deal that involved placating state and federal regulators, convincing banks to give it a huge loan and staving off the credit-rating agencies that hold the giant insurer's fate in their hands.

CNBC.com:
- Goldman Sachs(GS) Preview: Setting the Tone.
- Lehman Brothers(LEH) was in talks for a deal to sell parts of the company to Barclays with the potential for an agreement to be reached as early as Tuesday, the Wall Street Journal reported on its Web site on Monday night.

CNNMoney.com:
- The high price of gasoline is voters' top economic concern, according to a poll released Friday.

IBD:
- Vocus(VOCS): PR Software Helps Companies Polish Their Image With Efficiency.

comScore:
- comScore, Inc. (SCOR), a leader in measuring the digital world, today announced that mobile search is gaining in both popularity and frequency of use in the U.S. and Western Europe. comScore M:Metrics reports that in June 2008, 20.8 million U.S. mobile subscribers and 4.5 million European mobile phone subscribers accessed search during the month, an increase of 68 and 38 percent from June 2007, respectively. The U.K. had the highest penetration(GOOG) is the preferred brand for browser-based searches with a 60 percent share of mobile searchers (“mobile searcher penetration”) in all countries measured by comScore M:Metrics.

Reuters:
- The bankruptcy filing of Lehman Brothers (LEH) is another blow for the hedge fund industry, though the writing has been on the wall long enough for many to have reduced their exposure to the U.S. investment bank. Legendary fund manager George Soros, who runs around $18 billion in assets, looks likely to have had his fingers burned after raising his stake in Lehman to 9.5 million shares in the second quarter. Dealings through Lehman's prime brokerage business were also suspended on Monday, which will have caused problems for some hedge funds, though the industry has been seeking to increase the number of banks they deal with to spread risk.

Financial Times:
- Investors in Royal Dutch Shell and BP are facing increasing risks as a result of the companies' involvements in Canada's oil sands, fund managers and campaign groups will tell a meeting in London on Tuesday. Environmental groups such as Greenpeace and the WWF, as well as some socially responsible investment funds including Co-operative Asset Management, are warning that developing the oil sands is not only environmentally damaging but also financially risky. They argue it is increasingly likely that there will be a price put on carbon dioxide emissions in North America, threatening the economic viability of oil sands projects, which generally have much higher emissions than conventional oil developments. Paul Monaghan of the Co-op, which urged the UKSIF to call the meeting, says the oil sands and oil shale - similar deposits where oil can be extracted from rock - will be its "number one campaign" and adds: "We are calling for a moratorium on new investment." A group of British and American investors, including Calpers and Calstrs, the Californian public employees' retirement funds, and F&C Management of the UK, has written to the US Securities and Exchange Commission urging it to push companies to disclose the potential liabilities created by their oil sands reserves. In a letter to the SEC, the investors wrote that oil sands "could be subject to potentially enormous risks associated with their extraction and development, including litigation-related risks and higher carbon taxes". Mark Hoskin of Holden & Partners, an environmental investment fund with about £200m under management, says companies that do not recognize the threat of climate change, and the likelihood of action to combat it, are making poor strategic decisions. He says: "It might not happen this year, or next year, or in the next five years. But at some point it is going to break, and Shell is going to have a share price shock".
- US securities regulators are expected to adopt new measures against abusive short-selling as early as this week in response to financial market turmoil, according to people briefed on the situation. It was unclear what impact, if any, naked short-selling had on the acceleration of the fall in Lehman's share price in the past week. But the latest market developments "should move the SEC to do more about naked short-sellers," said John Coffee, professor of law at Columbia University. Lehman, which has been one of the most heavily-shorted stocks, had 18.5 per cent of its stock shares held by short-sellers as of last Thursday, according to the latest available data from Data Explorers. That is almost double the level of the week before, though shy of the record 22 per cent held by short-sellers in July.
- The Federal Reserve is likely to hold fire on interest rates at its policy meeting today, while establishing flexibility to cut rates later on if financial turbulence runs out of control or the economy weakens dramatically.
- Investors' immediate reaction to the Lehman collapse was to sell the dollar against the euro and sterling as confidence in US assets was undermined. However, the US currency rallied sharply after hitting a one-week low of $1.4479 against the euro and trading down to $1.8128 against the pound. Analysts said recent evidence suggested that any weakness in the dollar would be short-lived as investors turned their attention to the growth implications for the rest of the world from the financial markets turmoil. Indeed, the dollar has benefited in recent weeks as US investors cut positions in asset markets across the globe and repatriated funds.
- India’s economy will experience a marked slowdown in the 2008 and 2009 financial years, ending its run of five consecutive years of very high growth, according to the Asian Development Bank.

Munhwa Ilbo:
- KT Freetel Co. plans to start offering Apple’s(AAPL) iPhone in South Korea in November. KT Freetel will have exclusive rights to distribute the iPhone in the Asian nation, helping it compete against SK Telecom Co.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (WW), target $66.

Night Trading
Asian Indices are -5.0% to -2.0% on average.
S&P 500 futures -1.55%.
NASDAQ 100 futures -1.07%.

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Earnings of Note
Company/EPS Estimate
- (BBY)/.57
- (KR)/.41
- (CBRL)/.93
- (GS)/1.71
- (DRI)/.63
- (ADBE)/.46

Economic Releases
8:30 am EST
- The Consumer Price Index for August is estimated to fall -.1% versus a +.8% gain in July.
- The CPI Ex Food & Energy for August is estimated to rise +.2% versus a +.3% gain in July.

9:00 am EST
- Net Long-term TIC Flows for July are estimated to rise to $55.0 billion versus $53.4 billion in June.

1:00 pm EST
- The NAHB Housing Market Index for September is estimated to rise to 17.0 versus 16.0 in August.

2:15 pm EST
- The FOMC is expected to leave the benchmark fed funds rate at 2.0%.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, (AIQ) investor day, (ATR) analyst day, (MNKD) analyst day, (CSCO) financial analyst conference, (TOT) mid-year review, CSFB Chemical Conference, BB&T Consumer Softlines Conference, Bank of America Investment Conference, Jeffries Shipping/Logistics/Offshore Services Conference, RBC Financial Institutions Conference and UBS Global Paper/Forest Products Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and financial shares in the region. I expect US equities to open sharply lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.