Stocks Soaring into Close on Less Financial Sector Pessimism, Short-Covering and Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Computer longs, Biotech longs, Retail longs and Internet longs. I covered all of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. Investor anxiety is very high. Today’s overall market action is bullish. The VIX is falling 11.9% and is historically elevated at 70.58. The ISE Sentiment Index is very low at 96.0 and the total put/call is above average at 1.11. Finally, the NYSE Arms has been running low most of the day, hitting .26 at its intraday trough, and is currently .40. The Euro Financial Sector Credit Default Swap Index is falling 2.9% today to 110.0 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is gaining 1.7% to 223.80 basis points. The TED spread is falling 1.6% to 271 basis points. The TED spread is now down 193 basis points in under three weeks. The 2-year swap spread is up 2.05% to 122.2 basis points. The Libor-OIS spread is falling .23% to 262 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 6 basis points to .80%, which is down 183 basis points in about four months and at the lowest level since January 1999. The US dollar is rising the most against the yen since January 1974. I suspect the dollar will see a pullback against the euro, as it is very extended. This could give a boost to commodities in the short-run. It is extremely positive to see stocks finally ignore more negative news as consumer confidence hit the lowest reading on record. Historically, major lows for US stocks are made around the time of major lows in confidence. Given the rumor’s surrounding (MS)/(GS) the (XLF)’s 9.1% move higher is even more impressive. As well, given the massive profits for short-sellers this month, I would expect to see some more meaningful short-covering and another significant move higher for US stocks before week’s end. Nikkei futures indicate an +500 open in Japan and DAX futures indicate an +7 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism, diminishing forced selling and bargain-hunting.

Today's Headlines

Bloomberg:
- U.S. stocks rallied, following gains in Asian and European markets, as the cheapest valuations in more than two decades lured investors back into equities. ``Anyone who has a long-term view and looks at earnings multiples and inflation will say it's a cheap moment to buy stocks,'' said Linda Duessel, equity market strategist at Pittsburgh-based Federated Investors Inc., which manages more than $333 billion. The S&P 500 was valued at 10.7 times estimated profit when trading opened today, the cheapest compared with the multiple using trailing profit since 1985. ``We're in the camp that believes a bottoming process is in place,'' said Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon Corp., which manages $162 billion. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 4 basis points to 3.47 percent today, according to the British Bankers' Association. It was the 12th straight drop for the rate.

- The Baltic Dry Index, the benchmark for commodity shipping costs, fell below 1,000 for the first time in six years as the lack of credit curbed global trade and shipowners threatened to shun orders.

- The cost of protecting European corporate bonds from default fell, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 28 basis points to 852, according to JPMorgan Chase & Co. prices at 7:23 a.m. in London. The Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 6 basis points to 164, JPMorgan prices show.

- World Is ‘Drowning in Oil’(Again) After Drought.

- Germany's financial-markets regulator is looking into trading of Volkswagen AG shares after Porsche SE's plan to raise its stake in the automaker triggered a fourfold increase in two days. BaFin is monitoring Volkswagen and hasn't started a formal probe, said spokeswoman Anja Engelland. The gains follow Porsche's Oct. 26 announcement that it plans to increase the stake in Volkswagen to 75 percent. The move forced short-sellers to cover their bets on a decline in the stock.

- Morgan Stanley(MS) fell as much as 26 percent in New York trading while larger rival Goldman Sachs Group Inc.(GS) dropped as much as 11 percent amid speculation a surge in Volkswagen AG shares may have saddled some banks with losses.

Wall Street Journal:

- Obama’s ‘Redistribution’ Constitution. The courts are poised for a takeover by the judicial left. One of the great unappreciated stories of the past eight years is how thoroughly Senate Democrats thwarted efforts by President Bush to appoint judges to the lower federal courts.

CNBC.com:
- Roughly half the investors in T. Boone Pickens' BP Capital hedge fund have asked to withdraw their money after losses of about 60 percent this year, a source familiar with the situation said on Tuesday. The Texas oil tycoon and his investment fund, which had invested primarily in the energy sector, have lost about $2 billion since peaking in late June, the source said.

NY Post:

- Hedge funds are once again on track to post their worst monthly return in at least a decade - and the bloodshed this time may exceed the record set 10 years ago. As of last week, the average hedge fund was down 8.4 percent for Oct., according to research firm Hedge Fund Research. The mounting losses are hurting even the biggest names in the business - testing the long-held theory that the large, institutional guys are better insulated than everyone else. For the year, hedge funds are down more than 19 percent, according to data obtained by The Post.

Houston Chronicle:
- After five years of robust economic growth in Latin America, the global financial crisis appears set to bring its boom to a swift and painful halt. Economic growth in Latin America, the World Bank says, will slow from annual rates of about 5 percent to between 2.5 percent and 3.5 percent in 2009. And some analysts believe the situation will worsen before it improves.

USA Today:

- Competitive Costs Give Hydropower New Spark.

Les Echos:

- Ian Stannard, a currency strategist at BNP Paribas SA, said the euro may fall to $1.17 at the end of the year, $1.07 in the first quarter of 2009 and to $1 “soon,” citing an interview. The euro will drop because it’s harder to make economic and political decisions in the face of the crisis in Europe, Stannard said. The credit crisis will also hurt eastern European countries, which were helping Europe’s growth. China’s economic slowdown is also pointing to a gain in the US dollar, as foreign investments will slow, Stannard said. The dollar is a haven in the global economic turmoil.

The National:

- Barack Obama is the overwhelming better choice among Middle East residents to become the next US president. Mr Obama was favored by 51.1 per cent, while only 8.8 per cent of the respondents chose John McCain, his Republican opponent, in an online survey conducted for The National by Real Opinions, an online research company, this month.

Bear Radar

Style Underperformer:
Small-cap Growth (+.26%)

Sector Underperformers:
Alternative Energy (-2.26%), I-Banks (-1.88%) and Gaming (-1.64%)

Stocks Falling on Unusual Volume:
RCII, RNT, WHR, ICLR, ECOL, BWLD, CRDN, PFWD, KNDL, AUXL, WYNN, DRYS, CR, USG, UHS, ACL, KSU and WHR

Stocks With Unusual Put Option Activity:
1) ATVI 2) ACF 3) USG 4) PRC 5) TSN

Bull Radar

Style Outperformer:
Large-cap Growth (+.87%)

Sector Outperformers:
Hospitals (+3.54%), Telecom (+3.01%) and Internet (+1.55%)

Stocks Rising on Unusual Volume:
ABAX, BRL, IDXX, ABAX, MASI, ATHR, STRA, WINN, CETV, RYAAY, PSYS, ISRG, SOHU, CBST, LPNT, AXYS, BIDU, FISV, AHG, KNM, DEG, CHH and IBA

Stocks With Unusual Call Option Activity:
1) VRSN 2) CCE 3) WHR 4) LIZ 5) MCO

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Boeing Co.(BA) and machinists-union leaders agreed on ``tentative'' terms for a contract that if approved by members would end the third-longest strike in the union's 73-year history and reopen the planemaker's shuttered factories. The agreement for a four-year contract, rather than the usual three years, would provide job security for machinists ``and limit the amount of work outside vendors can perform in the workplace,'' the International Association of Machinists and Aerospace Workers said in an e-mailed statement today.

- The euro dropped to its lowest in more than two years against the dollar on speculation European interest rates will slide as recession looms.

- Investors should sell the Australian dollar against the greenback as the currency is likely to extend this year’s record declines because a weaker Chinese economy will sap demand for raw materials, RBC Capital Markets said. China’s economic growth may slow to 8% in the fourth quarter, after growing by a weaker-than-expected 9% in the three months ended Sept. 30, “exerting further downward pressure on commodities prices,” Trinh wrote.

- SAP AG(SAP), the world's biggest maker of business-management software, withdrew its 2008 sales forecast and lowered its margin projection, citing the economic slump.

- Japanese Finance Minister Shoichi Nakagawa said restrictions on short-selling of shares will take effect today to bolster the stock market.

- The European economy's close ties to emerging markets are turning from a blessing to a curse. Already skirting recession, the 15 euro nations face greater pain as economies which gave them an edge over the U.S. and Japan falter. Trade partners to the east, that buy about a third of the region's exports, are faltering as their banks weaken and currencies slide. Meanwhile, the halving of oil prices is slowing demand from the Middle East.

- Hong Kong's retail rents, declining since the third quarter, will probably drop further as the city's slowing economy dents consumer spending, real estate agents said. Rents at malls and street-level shops, down 10 percent from their peak earlier this year, may slide 10 percent more by the second quarter next year, said Pierre Wong, chief executive officer at Midland IC&I Ltd., the commercial property arm of the city's biggest publicly traded real estate agency.

Wall Street Journal:
- Electronics manufacturers and retail chains are slashing prices of Blu-ray players in a bid to boost adoption of the high-definition movie format, which has yet to catch on with American consumers.

- Republican John McCain promised Monday to break with President Bush's policies on the economy and put a tight lid on government spending. Flanked by some of his economic advisers, the Republican presidential candidate bashed Democratic rival Barack Obama, but also made clear he would steer a different course than the current GOP administration.

- The seemingly unstoppable rise of the Japanese yen is raising the prospect that, for the first time in years, the Japanese government could intervene to stifle its surge.

CNBC.com:

- A fast and furious as the crude oil market selloff has been, it's far from over, says one expert. "The pendulum does swing much faster than we give it credit for," says Peter Beutel of Cameron Hanover. Beutel says $37 a barrel is likely, even $20 a barrel isn't out of the question. (video)

CBS 2 TV:
- Todd Rokita, Indiana secretary of state, is asking federal, state and local prosecutors to open an investigation into alleged fraudulent voter-registration applications. Rokita said many registration applications filed by the Assoc. of Community Organizations for Reform Now, or Acorn, have indications of fraud, forgery or incomplete information.

IBD:

- Green Mountain Coffee Roasters(GMCR): Tully Deal Should Give Coffee Maker’s West Coast Push A Nice Jolt.

Reuters:

- The average U.S. retail gasoline price fell 26 cents over the last week to $2.66 a gallon, the cheapest pump price since March 2007, the Energy Department said on Monday. In addition to cheaper motor fuel, falling crude oil is also lowering heating oil prices, which will save consumers on their heating bills this autumn and winter.

TimesOnline:
- A new front is opening up in the battle between London and New York to be the world's dominant financial centre. Hedge funds, and the thorny question of where they decide to do business over the coming months, could mark a turning point in the delicate balance of power between the two market capitals. Despite widespread fears that hundreds of funds are poised to collapse, any shake-out in the industry will still leave hundreds of healthy firms with billions to invest. Experts say that some of the industry's biggest funds are considering whether to move billions of dollars worth of assets across the Atlantic to the United States in the wake of the collapse of Lehman Brothers, the Wall Street investment bank.

AFP:

- John McCain renewed his bid to paint Barack Obama as a "socialist" Monday, saying remarks made by his rival in a 2001 interview proved he was hellbent on large-scale redistribution of wealth. In the interview, which surfaced on the Internet over the weekend, Obama discussed the failure of the civil rights movement to achieve "redistributive change" -- comments seized upon by McCain. "In a radio interview revealed today, he said that one of the quote -- 'tragedies' of the civil rights movement is that it didn't bring about a redistribution of wealth in our society," McCain said. "That is what change means for Barack the Redistributor: It means taking your money and giving it to someone else," he told a crowd of around 2,000 at a sports hall in this key battleground state.

Straits Times:

- Singapore’s construction industry will be hit by the global financial crisis as more developers delay their projects, citing the city-state’s contractors’ association.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (EQT), target $38.

- Reiterated Buy on (RIGL), target $32.

- Upgraded (PHM) to Buy, target $11.

- Reiterated Buy on (HUM), target $38.

- Reiterated Buy on (VECO), target $13.

Night Trading
Asian Indices are -5.0% to -.50% on average.
S&P 500 futures +.50%.
NASDAQ 100 futures +.24%.

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Earnings of Note
Company/EPS Estimate
- (IPG)/.06

- (MAS)/.18

- (TIN)/.05

- (X)/6.96

- (SII)/.97

- (SCHN)/2.53

- (MSO)/.00

- (MHP)/1.23

- (HMA)/.08

- (RCL)/1.67

- (EL)/.23

- (VLO)/1.45

- (WHR)/1.69

- (BYD)/.19

- (UA)/.50

- (OXY)/2.71

- (MCK)/1.06

- (CEPH)/1.23

- (BXP)/1.21

- (APOL)/.68

- (CTX)/.95

- (DRIV)/.46

- (ADVS)/.17

- (FLS)/1.73

Economic Releases
9:00 am EST

- The S&P/CaseShiller Home Price Index for August is estimated at 165.0 versus 166.2 in July.

10:00 am EST

- Consumer Confidence for October is estimated to fall to 52.0 versus 59.8 in September.

Upcoming Splits
- (BKE) 3-for-2

Other Potential Market Movers
- The weekly retail sales reports, Richmond Fed Manufacturing Index, BIOCOM Investor Conference, Sidoti Emerging Growth Forum, (DPZ) analyst meeting, (PFE) analyst meeting, (PFWD) analyst meeting and (PLL) analyst meeting could also impact trading today.

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