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

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Stocks Reversing Sharply Higher into Final Hour on Bargain-Hunting, Less Financial Sector Pessimism, Lower Energy Prices and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Biotech longs, Computer longs, Internet longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges, some of my (EEM) short, added (TBT) long and took profits in another trading long today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is higher, almost every sector is rising and volume is about average. Investor anxiety is high. Today’s overall market action is very bullish. The VIX is falling 3.98% and is very elevated at 61.04. The ISE Sentiment Index is below average at 113.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running high most of the day, hitting 1.49 at its intraday peak, and is currently .56. The Euro Financial Sector Credit Default Swap Index is rising 3.78% today to 150.52 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 up 5.4% to 285.98 basis points. The TED spread is falling .31% to 217 basis points. The TED spread is now down 247 basis points in about seven weeks. The 2-year swap spread is +6.9% to 123.75 basis points. The Libor-OIS spread is falling .36% to 188 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 11 basis points to .41%, which is down 221 basis points in under five months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The 3-month T-Bill is still yielding .01%, which is unch. today. Considering today’s news, stock gains are very impressive. As well, many individual stocks continue to rise as they announce negative news, which is a large positive and indicative of a market that wants to head higher. Market leading stocks are substantially outperforming the major averages again today. It is a large positive that investors finally seem to be thinking about the hugely positive ramifications of falling energy prices rather than only worrying about slowing demand. The insurance index is soaring 10.1% today, which is also helping to boost the (XLF). Given Asia’s relative strength last night, Europe’s dramatic underperformance today and US stocks’ large reversal higher, I would expect to see further gains early next week. The sectors with the largest losses for the year will likely outperform into year-end as shorts with large profits cover and bargain-hunters reposition for next year. There remains massive bull firepower on the sidelines and I still believe this recent rally will last longer and be bigger than most expect. Nikkei futures indicate an +33 open in Japan and DAX futures indicate an +145 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on less financial sector pessimism, short-covering, bargain-hunting, lower energy prices and seasonal strength.

Today's Headlines

Bloomberg:
- Russia weakened its defense of the ruble for a fourth time in a month, pushing the currency near a three-year low against the dollar, as the price of the nation’s crude oil fell by a record this week to less than $40 a barrel. The currency slid as much as 1.4 percent to 28.1768 per dollar.

- Yields on bonds backed by commercial mortgages fell relative to benchmark interest rates as prices rebounded after a plunge sparked by concern that borrowers will default. The gap, or spread, on AAA commercial mortgage-backed securities has dropped 5.12 percentage points to 10.17 percentage points more than swap rates since hitting a record 15.2 percentage points over swaps on Nov. 20, according to Bank of America Corp. data. The swap rate is currently 2.88 percent. “We’ve had several days of pretty good momentum,” said Kent Born, a senior managing director in the commercial lending group at PPM America Inc.

- Gold Futures Head for Biggest Weekly Decline Since 1983 on Dollar’s Rally. Gold fell to the lowest in two weeks as the dollar climbed, eroding the appeal of the precious metal as an alternative investment. Silver also declined. The US dollar gained as much as 1.2 percent against a weighted basket of six major currencies. “The dollar has once again become king, and until that changes, gold is going to have a hard time,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “Gold is caught in this deflationary cycle,” said Tom Hartmann, a commodity analyst at Altavista Worldwide Trading in Mission Viejo, California. “Demand for gold is just not there.”

- Crude oil fell for a sixth day, heading for the biggest weekly drop since the Persian Gulf War in 1991, on concern demand will decline after a report showed U.S. employers cut jobs in November at the fastest pace since 1974. Oil is down 24 percent since Nov. 28. “The $40 level will act as a magnet that we should break through in the next day or two,” said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. “Prices may consolidate there for a week before going down further. It looks like we will continue to fall to levels that looked impossible five months ago.” U.S. equity markets declined yesterday as oil stocks dropped on forecasts of $25-a-barrel crude from analysts at Merrill Lynch & Co. U.S. fuel demand during the four weeks ended Nov. 28 was down 6.2 percent from a year earlier, an Energy Department report showed Dec. 3.

- Hartford Financial Services Group Inc.(HIG) soared as much as 65 percent in New York trading after the insurer lifted its 2008 forecast for operating profit and said the capital outlook at its insurance units was “strong.” Hartford rose $4.15 to $11.36 at 11:47 a.m. in New York Stock Exchange composite trading and sold today for as much as $11.87, the biggest rise in almost 13 years.

- O.J. Simpson, the former Buffalo Bills football player found not guilty 13 years ago of murdering his ex-wife and her friend, was sentenced to 16 years in prison for robbing two sports memorabilia dealers at gunpoint.

Wall Street Journal:

- Former Sen. Tom Daschle, who is slated to oversee health-care policy in the Obama administration, is kicking off the effort to pass a comprehensive health-care plan. In a speech to be delivered Friday in Denver, Mr. Daschle will say, "The president-elect made health-care reform one of his top priorities of his campaign, and I am here to tell you that his commitment to changing the health-care system remains strong and focused."

NY Times:
- U.S. charitable foundations gave money to international causes at record levels in 2007 and their contributions are likely to increase again this year, says a report by an organization that monitors philanthropy. International giving by U.S. foundations totaled about $5.4 billion last year, according to the report released Thursday by the New York-based Foundation Center.

AP:

- CBS News and BusinessWeek plan to collaborate on stories and segments to be broadcast on CBS Evening News with Katie Couric and appear in the magazine as well as on the companies' Web sites.

TVNewser:

- After layoffs at the Dallas and Burbank bureaus, NBC News employees in Washington, DC are beginning to feel the effects of cuts that will trim the global NBCU workforce by 3% or about 500 jobs.

Financial Times:
- Funds dedicated to emerging markets remain in the doghouse as far as investors are concerned, the latest data from EPFR show. Investors withdrew the equivalent of 0.27 per cent of total assets under management from EM equity funds during the week ending Dec 03, bringing year to date outflows to $41.7bn, the equivalent of 9.6 per cent of average assets over the period. This has essentially reversed the record $40.8bn inflows of 2007. But Citi’’s Andrew Howell noted the outflows have actually been equivalent to nearly two years of inflows, given how far markets have fallen in 2008. Moreover, by Citi’s estimate, “about half of the EM fund purchases that have occurred since 2003 have now been withdrawn.” Still, Howell says there are no signs of panic - yet:

Yomiuri:
- North Korean leader Kim Jong Il’s health is worse than initially thought, citing a US source. Kim’s left side is paralyzed from a stroke he suffered on Aug. 14 for 15. The source said that while it’s unclear whether Kim is currently fit to rule, “it’s highly unlikely that he will fully return to power.” The US government has started to map out its strategy in the event Kim dies or is ousted from power.

China National Radio:

- China plans to raised the retail tax on gasoline to 1 yuan from .2 yuan, citing the government. The tax on diesel will be increased to .8 yuan form .1 yuan, the report said.

Bear Radar

Style Underperformer:
Large-Cap Growth (-1.37%)

Sector Underperformers:
Papers (-4.16%), Energy (-2.50%) and Gold (-2.40%)

Stocks Falling on Unusual Volume:
GMXR, CHK, PCU, CVC, FCX, STO, SU, LAYN, CBST, LSTR, CPRT, STL, SFL, SON, MTR and TPP

Stocks With Unusual Put Option Activity:
1) CL 2) HIG 3) UPL 4) AUY 5) MEE

Bull Radar

Style Outperformer:
Mid-cap Value (-1.49%)

Sector Outperformers:
Insurance (+2.22%), REITs (+.25%) and Banks (+.05%)

Stocks Rising on Unusual Volume:
AHL, FPL, BT, GSK, RTP, MSCC, THOR, CMTL, SAFM, CASY, LEAP, CYBX, ATHN, DMND, HIG and ASF

Stocks With Unusual Call Option Activity:
1) SWY 2) HIG 3) D 4) EMR 5) CRM

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