Stocks Finish at Session Highs, Boosted by Airline, REIT, Financial and Commodity Shares

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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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