Stocks Finish Sharply Higher, Boosted by REIT, Construction, Technology and Commodity Shares

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Stocks Soaring into Final Hour on Falling Credit Market Angst, Less Economic Pessimism, Short-Covering and Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Computer longs, Internet longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is high. Today’s overall market action is very bullish. The VIX is falling 3.24% and is very elevated at 57.99. The ISE Sentiment Index is very low at 71.0 and the total put/call is about average at .86. Finally, the NYSE Arms has been running very low most of the day, hitting .27 at its intraday trough, and is currently .60. The Euro Financial Sector Credit Default Swap Index is falling 6.57% today to 140.67 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 falling 9.11% to 259.92 basis points. The TED spread is rising .17% to 218 basis points. The TED spread is now down 246 basis points in two months. The 2-year swap spread is down 4.65% to 118.0 basis points. The Libor-OIS spread is falling .88% to 188 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 11 basis points to .30%, which is down 232 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. Market leading stocks are substantially outperforming the major averages again today, with many surging 2-3x as much as the major indices. The (XLF) continues to trade very well. The Morgan Stanley Cyclical Index is 7.3% higher on the day. Natural gas(UNG), on the other hand, trades very poorly given today’s potential upside catalysts. It is noteworthy that the ISE Sentiment Index has been very low throughout the day, which is a positive. It is a major positive to see the credit default swap indices reversing meaningfully lower today. I still see few signs that the massive mountain of capital parked in safe government securities is starting to flow back into equities. We are getting extended short-term again as the S&P 500 approaches its 50-day moving average. However, the market is still very oversold on an intermediate/long-term basis and I expect pullbacks through year-end to be short-lived. Nikkei futures indicate an +255 open in Japan and DAX futures indicate an +50 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on less financial sector pessimism, short-covering, bargain-hunting, declining credit market angst and seasonal strength.

Today's Headlines

Bloomberg:
- Laszlo Birinyi, the investor who accurately predicted this year’s rout in financial shares, said the Standard & Poor’s 500 Index reached a bear market bottom two weeks ago and recommended buying the largest U.S. stocks. “I’m very comfortable saying the market has made the bottom,” Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut, said in an interview with Bloomberg Television. “It’s time to get out of the bunker mentality. You want to be looking at stocks, you want to be considering the market, and you want to get out of this funk that too many investors have been in for the last three or four months.” “The wind is at the back of the large caps,” Birinyi said.

- Congress and President George W. Bush are negotiating the final details of a $15 billion measure to rescue domestic automakers without forcing the ouster of their chief executives, House Financial Services Chairman Barney Frank said. The measure will likely be approved by Congress and signed into law this week, Frank said on CNBC. About $10 billion more aid may be needed to keep the companies operating through March, and Bush should tap some of the $700 billion financial-rescue package for additional aid, Frank said.

- Caterpillar Inc.(CAT), Manitowoc Co.(MTW) and Fluor Corp.(FLR) were among U.S. construction and engineering companies that rose in New York trading after President-elect Barack Obama announced a plan to boost spending on roads, bridges and public buildings. The Standard & Poor’s Construction and Farm Machinery Index rose 11 percent to 295.45 at 12:10 p.m. in New York.

- New York Times Co.(NYT), facing a $400 million debt repayment in May, may borrow as much as $225 million against its Manhattan headquarters.

- NYSE Euronext(NYX) jumped, leading a rally in exchange stocks, after Deutsche Boerse AG said it explored a merger with the New York Stock Exchange owner. Shares of NYSE Euronext rose as much as 17 percent after Deutsche Boerse commissioned a study on combining with NYSE Euronext(NYX).

- Nintendo Co. President Satoru Iwata expects demand for Wii and DS game players to hold up this year after sales during the Black Friday shopping week increased more than the company had anticipated. “I see no negative signs so far,” Iwata, 49, said in an interview yesterday in Kyoto, Japan, where Nintendo is based. “Until the end of this calendar year, sales will be in line with our expectations.”

- U.S. Steel Corp.(X), the largest U.S.- based steelmaker by sales, and Olympic Steel Inc.(ZEUS) surged in New York trading after Goldman, Sachs & Co. upgraded ratings on the companies amid signs that prices for the metal may stop falling. U.S. Steel, based in Pittsburgh, gained $5.61, or 20 percent, to $34.37 at 11:42 a.m. in New York Stock Exchange composite trading. A close at that price would be the biggest daily increase since May 7, 1991. Olympic rose $3.28, or 22 percent, to $18.47.

- MetLife Inc.(MET), the biggest U.S. life insurer, rose as much as 7.3 percent in New York trading after telling investors it has more than enough capital and liquidity.

- Cheapest Stocks Since 1995 Show Cash Exceeds Market Value.

- Citadel Investment Group LLC, the hedge-fund manager founded by Kenneth Griffin, will close its Tokyo office and cut other Asian operations, eliminating 37 jobs less than a year after adding people in the region.

- Credit-default swaps on a benchmark index linked to 125 U.S. and Canadian companies dropped to the lowest in almost a week. Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies decreased 16 basis points to 259 basis points as of 9:45 a.m. in New York, according to broker Phoenix Partners Group.

- Dennis Gartman, an economist and editor of the Gartman Letter, expects new lows for crude oil over the next year. (video)

- Natural gas futures in New York fell for a fifth day after Dow Chemical Co., the largest U.S. chemical maker, said it plans to shut plants and cut jobs because of declining sales. “Dow is a big consumer of gas,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “It seems natural gas is focusing on the fact industrial demand is so weak.”

- Oil, copper and corn rose after President-elect Barack Obama pledged the biggest U.S. public works program in about 50 years to revive the economy.

- China is “highly unlikely” to favor a weaker yuan because the government will rely more on spurring domestic demand than exports to support the economy, a former adviser to the central bank said.

- China, the world’s largest iron ore consumer, may ask Rio Tinto Group and rivals to accept an 82 percent price cut for the raw material after steel prices plunged to 1994 levels, an industry official said.

- Standard & Poor’s Ratings Services lowered Russia’s long-term sovereign credit rating and maintained its negative outlook because of the “rapid depletion” of the country’s financial reserves.

- Rodman & Renshaw Capital Group Inc., the investment bank whose chairman is retired U.S. Army General Wesley Clark, plans to pursue its bid to buy Cowen Group Inc. for about $100 million after it was rejected.

Wall Street Journal:

- Intel Corp.(INTC) is claiming another advance in creating optical communications components from silicon, an effort designed to reduce the cost and increase the speed of transmitting computer data.

CNBC.com:
- A prominent U.S. lawyer who headed the 250-attorney corporate law firm Dreier was charged on Monday with perpetrating a brazen, $100 million real-estate investment fraud that targeted hedge funds.

Forbes.com:

- Broadcom(BRCM) says to buy back stock, and buy weaker competitors in downturn.

San Francisco Chronicle:

- The market downturn has walloped the nation's largest pension fund. The California Public Employees' Retirement System portfolio has lost 31.1 percent of its value since peaking last fall, a staggering $81.4 billion drop.

LA Times:

- California could run short of college graduates needed to keep its economy humming by 2025, a think tank warned in a report to be issued today. As a result, the state may not have enough teachers, computer programmers, scientists and other key workers to meet escalating 21st century demands.

- City of Los Angeles to certify green businesses. The program to urge environmentally friendly practices hopes to launch in six months.

Washington Post:

- Americans rode subways, buses and commuter railroads in record numbers in the third quarter of this year, even as gas prices dropped and unemployment rose. The 6.5 percent jump in transit ridership over the same period last year marks the largest quarterly increase in public transportation ridership in 25 years, according to a survey to be released today by the American Public Transportation Association.

MacRumors.com:

- Last week, Boy Genius Report cited an unconfirmed source that Wal-Mart(WMT) may begin selling a 4GB iPhone for only $99. Based on available Wal-Mart training materials and advertising (pictured above) we've received, however, it seems that this rumor is unlikely. The advertising shown only lists 8GB iPhones for sale at $197, without any hints of a cheaper model. The iPhone will go on sale at Wal-Mart beginning on December 28th. This information also correlates with MacBlogz' AT&T sources who claim the 4GB rumors were untrue.

TechCrunch.com:

- Google(GOOG) is now formatting AdWords text and image ads for Android and iPhone mobile browsers. The ads can include mobile-only calls to action, and can be created from standard Google ads run on the Web. The ads will also work on other phones with full HTML browsers in the future as they become available.

Financial Times:
- The curiously grey status of foreign hedge funds in Japan just gets - well, curiouser and greyer. A little announcement popped up on the website of Japan’s key financial regulator, the FSA, on Friday saying the watchdog is considering “administrative measures” against Japan Advisory for alleged insider trading. As Tokyo’s investment community knows, Japan Advisory is essentially the Tokyo office of JH Whitney Investment Management, the US investment and hedge fund group.

- The Markit iTraxx Europe index dipped back below 200bp in a broad-based rally. Materials- and energy-related credits were among the best performers amid hopes that the fiscal stimulus would limit the severity of the global economic slump. The Markit CDX IG index posted large gains today. However, it was not only driven by auto news and plans of government activism. The insurance sector was the day’s best performer, after MetLife became the latest life insurer to offer a bullish outlook.

Bear Radar

Style Underperformer:
Mid-cap Value (+1.39%)

Sector Underperformers:
Homebuilders (-1.90%), Restaurants (-1.17%) and Insurance (-1.16%)

Stocks Falling on Unusual Volume:
CBST and MGLN

Stocks With Unusual Put Option Activity:
1) BGC 2) BUCY 3) CBRL 4) KFT 5) JOYG

Bull Radar

Style Outperformer:
Large-cap Growth (+4.71%)

Sector Outperformers:
Steel (+12.15%), Construction (+11.57%) and Computer Hardware (+6.75%)

Stocks Rising on Unusual Volume:
CHK, FCX, CLF, CRK, BAC, HES, SU, KTC, CHU, JPM, EHTH, NETL, THOR, SNDA, AFAM, STRL, PSMT, ASTE, CREE, EZCH, ITRI, AMSC, BIDU, INDM, FSTR, QSII, BJRI, SXCI, INSU, PKB, PUW, KCE, VIV, MLM, WF, ASI, RTP and XOP

Stocks With Unusual Call Option Activity:
1) ALL 2) PWR 3) MTW 4) GNW 5) CEPH

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