Stocks Soaring into Final Hour on Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting and Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Internet longs, Retail longs, Biotech longs and Computer longs. I covered all of my (IWM)/(QQQQ) hedges, was stopped out of my (TBT) long and added (XLF) long today, thus leaving the Portfolio 100% net long. The tone of the market is very bullish as the advance/decline line is substantially higher, every sector is rising and volume is about average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 7.54% and is very elevated at 52.55. The ISE Sentiment Index is about average at 142.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running below average most of the day, hitting .36 at its intraday trough, and is currently .39. The Euro Financial Sector Credit Default Swap Index is falling 2.19% today to 139.67 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 5.2% to 253.0 basis points. The TED spread is falling 2.37% to 181 basis points. The TED spread is now down 285 basis points in just over two months. The 2-year swap spread is plunging 16.6% to 89.9 basis points. The Libor-OIS spread is rising 8.7% to 167 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 4 basis points to .15%, which is down 246 basis points in about 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 yielding .03%, which is up 2 basis points today. The S&P 500 is breaking slightly above its 50-day moving average for the first time since August. I suspect today’s rally is the beginning of another meaningful move higher in US stocks into year-end. Nikkei futures indicate an +447 open in Japan and DAX futures indicate an +110 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, lower energy prices, less financial sector pessimism and diminishing credit market angst.

Today's Headlines

Bloomberg:
- U.S. stocks gained the most in a week, led by banks, after the Federal Reserve reduced its benchmark interest rate to a record low and said it will employ “all available tools” to revive economic growth. Citigroup Inc. jumped 7.6 percent and JPMorgan Chase & Co. climbed 9.2 percent after the central bank said it “stands ready to expand” purchases of mortgage-backed securities. Goldman Sachs Group Inc. rallied 13 percent after its first quarterly loss as a public company was smaller than some analyst estimates. Boeing Co. and Intel Corp. jumped more than 5 percent as all 10 industry groups in the Standard & Poor’s 500 Index rallied after the Fed’s announcement. “They’re trying to rekindle the confidence of consumers and businesses, and that ultimately drives profits in the stock market,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio, which manages $30 billion.

- The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will do whatever is needed to end the longest recession in a quarter-century and revive credit. The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Treasury notes rallied in anticipation the Fed will buy the securities to force borrowing costs for consumers and companies lower.

- Brazil gasoline sales fell 2.8% in November versus year-ago levels.

- Russian industrial production shrank the most since the economic collapse in 1998 as the global slowdown reduced demand in November for steel, pipes and fertilizers, pushing the nation to the brink of recession. Output contracted 8.7 percent after growing 0.6 percent in October, the Moscow-based Federal Statistics Service said today. The result was about 4 percentage points below the lowest forecast in a Bloomberg survey.

- R3 Capital Management LLC’s $1.5 billion hedge fund lost 31 percent in six months after its founding by Rick Rieder mainly because its assets were frozen by the bankruptcy of his former employer, Lehman Brothers Holdings Inc., according to three people familiar with the matter.

NY Times:
- In a clear signal of how much the fraud allegedly perpetrated by Bernard L. Madoff may have hurt the hedge fund industry, the Credit Suisse/Tremont Hedge Fund Index fell 4.15 percent in November, far more than the preliminary estimation of a 0.7 percent decline issued last week, as the index included funds exposed to Bernard L. Madoff in the finalized numbers.Last week, the equity-market neutral strategy was estimated to have a 0.85 percent gain, The Wall Street Journal noted. But according to the updated numbers, which included new figures from the Kingate Global and Fairfield Sentry funds, both investors in Bernard L. Madoff Investment Securities, the segment actually saw losses of 40 percent for the month, The Journal noted.

Washington Post:

- Most Americans continue to oppose a government-backed rescue plan for Detroit's Big Three automakers as majorities blame the industry for its own problems and are unconvinced failure would hurt the economy, according to a new Washington Post-ABC News poll. Overall, 55 percent of those polled oppose the latest plan that Chrysler, Ford and General Motors executives pitched to Congress last week, on par with public opposition to earlier, pricier efforts. Sixty percent said it would make no difference or would be good for the economy if one or more of the companies were forced to restructure under the protection of bankruptcy laws. Overall, independents continue to lean against the plan, with 57 percent opposing it and 41 percent supporting it. About six in 10 of those in the South and West are opposed to the bailout, while those in the Northeast and Midwest, home to much of the affected manufacturing base, are split evenly on the idea. Union households are no more apt than those without a union member to favor the plan, 44 percent compared with 42 percent.

NY Post:

- Walter M. Noel will likely be singing the blues this Christmas. Noel and his hedge fund Fairfield Greenwich Group are at the top of a growing list of highfliers expected to topple as a result of Bernie Madoff's alleged $50 billion web of deceit.

CommodityOnline:

- What is the future of hedge funds in these times of economic meltdown and recession? A report from Fortis Metals Monthly says commodity-oriented funds will decline over the coming months, but those that weather the storm will emerge strengthened. The report says on Nov 10th, Rahm Emanuel, President-elect Obama's selection as his chief of staff, backed proposed legislation to prevent hedge fund managers from deferring taxes on offshore compensation. However, according to the Centre for Responsive Politics, Emanuel was the largest recipient of donations from hedge funds' employees during this election cycle, which suggests that he may be a moderating force on what is likely to be an impetus toward greater regulation of the industry.

Chicago Sun-Times:

- Americans aren't ready to give up their Christmas trees just because of the slumping economy. But it does seem that people are downsizing -- picking smaller trees -- to save money. That's according to growers, sellers, and industry analysts, who say Christmas tree sales are holding steady.

Reuters:
- Lockheed Martin’s(LMT) CEO expects the company to make a US acquisition next year.

TimesOnline:

- The Kremlin has hardened its stance against dissent in Russia by expanding the definition of treason to include critics of the state. A new Bill submitted to the Duma, the Russian parliament, on Friday will leave people vulnerable to prosecution for acts considered to threaten not only national security but also the country's constitutional order. Critics said that it was designed to intimidate opposition to the Kremlin at a time of rising economic discontent.

MailOnline:
- There was grave embarrassment at London's biggest hedge-fund group as FTSE 100 Man Group insiders admitted the firm effectively breached its own standards to invest in and lose $360million in the Madoff scandal.

Interfax:

- Russian housing prices may decline as much as 20% next year, citing Viktor Zabelin, head of the Russian Union of Builders. A drop of more than 20% would be “critical” for construction companies, which would be at risk of not recouping their investments.

recast to "

Globe and Mail:

- Madoff debacle reveals stunning failure of due diligence. Bernie Madoff never, ever explained just how he was making money. There was vague talk of owning blue-chip stocks and writing covered calls. But most of this business was done on a trust-me basis, by a trader with five decades of experience, credentials such as a stint as Nasdaq's chairman, and a great story of getting started in markets with $4,000 earned as a lifeguard. Anyone who tried to replicate Mr. Madoff's results, based on the minimal disclosure from his funds, couldn't reverse-engineer his performance. Auditors to Madoff Investment were never made available. Now we're finding out that Madoff's auditors consisted of two guys working out of a New York City suburb, one of whom is in his 70s, and living in Florida. There seems to have been a massive failure of due diligence at Madoff Investments.

Bull Radar

Style Outperformer:
Small-cap Value (+2.75%)

Sector Outperformers:
Gaming (+4.48%), I-Banks (+4.07%) and Homebuilders (+3.35%)

Stocks Rising on Unusual Volume:
DFG, CHU, AZN, DTSI, HAR, DRYS, BIDU, HURN, BOKF, LBAI, BRCM, RPG, KCE, FDS, BEC, TMB, BBY, KNM, ATE, BLK, CMN, ENL, CIB and TDY

Stocks With Unusual Call Option Activity:
1) CA 2) ERIC 3) GNW 4) GILD 5) BA

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- Heart attacks and stroke deaths dropped by a third in 2006 from 1999 as more people stopped smoking, ate better and used medications such as Bristol-Myers Squibb Co.’s Plavix to keep blood flowing freely within arteries. Heart disease accounted for 1 in 3 U.S. deaths in 2006, the latest year for which data is available, the Dallas-based American Heart Association said in a statement today. Drugs including cholesterol-lowering statins such as Pfizer Inc.’s Lipitor and the Plavix blood-thinner joined with better heart- attack treatment to lower the mortality rate, the health advocacy group said.

- Venezuela’s debt rating was lowered by Fitch Ratings on the “increased risk of financial and economic crisis” as a result of the nation’s policies.

- Ken Heinz, president of Hedge Fund Research sees hedge funds shift out of emerging markets. Heinz also discusses the investigation into Bernard Madoff’s alleged $50 billion Ponzi scheme. (video)

- Sugar fell for a second straight session in New York after Brazil, the world’s largest producer, said next year’s cane harvest will be its largest ever. The cane crop, used to make refined sugar and ethanol, will rise 11 percent in 2009, Alexandre Strapasson, sugar-cane director at Conab, Brazil’s Agriculture Ministry crop- forecasting agency, said at a news conference in Brasilia.

- Tremont Group Holdings Inc., a hedge- fund firm owned by OppenheimerFunds Inc., had $3.3 billion invested with Bernard Madoff, according to a person familiar with the matter. Tremont’s Rye Investment Management unit had $3.1 billion, virtually all of its assets, invested with Madoff, said the person, who declined to be identified because the information is private. Tremont had another $200 million invested through its fund of funds group, Tremont Capital Management. “We believe Tremont exercised appropriate due diligence in connection with the Madoff investments,” the company said in a statement. Tremont, which manages a total of $5.8 billion, is the second hedge fund company to report that more than half its assets were invested with Madoff, who was arrested Dec. 11 after he allegedly confessed to running a “giant Ponzi scheme” that may have bilked investors out of $50 billion. Fairfield Greenwich Group said on Friday it had placed $7.5 billion of its $14.1 billion in total assets with the Madoff.

- China’s spending on factories and real estate rose at a slower pace as property sales fell and export growth collapsed because of the global recession.

- The U.S. Treasury may adopt a plan that would let a car czar or the Treasury Secretary force General Motors Corp. and Chrysler LLC into bankruptcy if the automakers don’t show they can survive without government aid, a U.S. senator said. GM and Chrysler would be required to submit viability plans by March 31 or lose any further U.S. support, Carl Levin, a Democrat from Michigan, told reporters in Detroit yesterday. The Treasury plan would resemble a measure passed by the U.S. House last week that was rejected by the Senate. “I expect that the terms would be similar to the ones that were in the House bill,” Levin said. “The power rests in the hands of either the czar or the Secretary of the Treasury to force bankruptcy by March 31.”

Wall Street Journal:

- When U.S. Attorney Patrick Fitzgerald announced the arrest of Illinois Gov. Rod Blagojevich Tuesday, he suggested that he needed to act urgently because "we were in the middle of a corruption crime spree." But some members of Mr. Fitzgerald's team actually wanted the alleged scheme to sell President-elect Barack Obama's Senate seat to advance for a little longer, according to some people close to Mr. Fitzgerald's office. Had the plot unfolded, prosecutors might have gotten a rare opportunity to catch the sale of a Senate seat on tape, including the sellers and the buyers.

- President-elect Barack Obama's transition team said it had completed an internal review of contacts with Illinois Gov. Rod Blagojevich -- but wouldn't release its findings until Christmas week, at the request of federal investigators. The move comes as Mr. Obama tries to keep the news of his home state's disgraced governor from overshadowing his transition, and highlights the challenges of dispensing with the controversy in the face of a live investigation involving Mr. Obama's Senate seat.

- Illinois Gov. Rod Blagojevich was preparing to issue an executive order prior to his arrest last week that would have allowed union organizing of home-care workers that could have benefited a labor union with close ties to the governor. The existence of this executive order, though never signed, illustrates the close ties between the embattled governor and the powerful Service Employees International Union, the nation's fastest growing labor organization.

- President-elect Barack Obama is pushing to give U.S. energy policy a California-style makeover, choosing for key energy and environmental posts people who advocate more aggressive steps against climate change. Mr. Obama's picks add to the growing number of Californians poised to influence U.S. energy policy. That group includes House Speaker Nancy Pelosi, who has made addressing global warming a priority; Senate Environment Committee Chairman Barbara Boxer; and Rep. Henry Waxman, who last month defeated Rep. John Dingell (D., Mich.) for the chairmanship of the House Energy and Commerce Committee, after arguing he was better qualified to push climate-change legislation than Mr. Dingell, a longtime ally of his home state's auto makers. Mr. Obama declined to say Monday whether he would seek to resurrect a recently ended federal ban on drilling for oil and natural gas in many areas of the outer continental shelf.

CNBC.com:
- How Short-Sellers Almost Destroyed US Banking. Forget Bernard Madoff’s $50 billion fraud. The SEC, and the press, should be focused on short-sellers’ attempts to destroy the U.S. banking system, Cramer said. Don’t believe him? Here are the hard numbers, courtesy of a source inside the New York Stock Exchange: Just in the 12 days leading up to the Nov. 24 Citigroup(C) bailout, short selling accounted for over 49% of the total trading volume in that company’s stock. For JPMorgan Chase(JPM), it was 41%. Bank of America(BAC): 35%. Goldman Sachs(GS): 40%. Morgan Stanley(MS): 37%. Wachovia(WB): 42%. Wells Fargo(WFC): 42%. As a result, these stocks tumbled anywhere between 69% and 27% over that time period – all because of huge volumes of short selling.

- The Federal Reserve is expected to cut interest rates to close to zero on Tuesday and may point to further unconventional steps to battle a year-old recession. Economists expect the US central bank to lower its target for benchmark overnight rates by at least a half-percentage point to 0.5 percent and clearly state it will deploy so-called quantitative easing measures to restore growth.

- Goldman Sachs(GS) Earnings Preview:

NY Times:
- Dell(DELL) Needs Acquisitions in Software, Servers, Storage.

Forbes.com:

- There’s Gold In Bluetooth Chips. Even in a weak phone market, rising acceptance of connectivity technology should benefit semiconductor suppliers.

USA Today.com:

- A federal judge on Monday threw a lifesaver to investors who may have been duped in one of Wall Street's biggest alleged frauds, saying they need the protection of a special government reserve fund set up to help investors at failed brokerage firms. U.S. District Judge Louis L. Stanton ordered that clients of Bernard Madoff's private investment business seek relief under a federal statute created to rescue cheated investors. Stanton also ordered that business be liquidated under the jurisdiction of a bankruptcy court and named attorney Irvin H. Picard as trustee to oversee that process. Stanton signed the order after the Securities Investor Protection Corporation asked that steps be taken to protect investors in the scheme, which has ensnared several major banks and prominent figures as victims and could result in as much as $50 billion in losses.

- Hope builds for stock recovery in new year? Pros share predictions.

Reuters:

- Brazil’s Deputy Finance Minister Nelson Barbosa said the economy may shrink 1% in the fourth quarter. Barbosa also said it’s possible that Brazil’s gross domestic product will fall again in the first quarter.

- The Bush administration could act as early as Wednesday to approve an automaker bailout from its bank rescue fund, with conditions likely to reflect at least those approved by the U.S. House of Representatives last week, key lawmakers and other sources said on Monday.

- Sweetened terms on GMAC LLC's bond exchange offer makes it more likely the finance company will gain the support it needs to convert to a bank and gain access to government support needed to keep the company alive.

- Japan's Toshiba Corp said on Tuesday it would cut its NAND flash memory production by 30 percent from January as the global slowdown hits demand for the memory chips used in digital cameras and portable music players.

- Toyota Motor Corp plans to ask Nippon Steel Corp and other steel makers for a price cut of about 30 percent amid slower steel and vehicle demand, the Nikkei business daily reported on Tuesday.

Financial Times:
- Oil companies and traders are storing at least 50m barrels of oil in supertankers in a clear sign of supply outstripping demand as the global economy slows. The surge in floating storage, – enough to meet France’s oil imports for a month and the biggest since late 2001–, is likely to push the Opec oil cartel, which is due to meet on Wednesday in Oran, Algeria, to make a deeper production cut to reduce stocks. Storing oil in tankers is unusual as it is significantly more expensive than inland. Abdullah al-Badri, Opec’s secretary general, said on Monday:“Stocks are very high. We have to act. We see a very sizeable reduction [in production].” Several Opec officials have suggested a 2m barrels-a-day cut, the biggest in recent history, and were also hoping to persuade Russia – the world’s largest oil producer outside the cartel – to make a reduction. But with Russia’s oil output already declining because of a lack of investment, any commitment is likely to be seen as a political gesture rather than an actual reduction. Whatever the size of Opec’s cut, the floating storage surge is a clear sign the cartel is losing its battle to cut supplies more quickly than demand falls. Opec ministers said in November they intended to reduce developed countries’ oil stocks from the equivalent of 56 days of demand to 52. But the surge in floating storage indicates that tanks are brimming, in spite of Opec’s having announced 2m b/d in cuts. Indeed, inventories have risen to almost 57 days’ demand.

TimesOnline:
- Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jump-start stalled economies, the head of the International Monetary Fund said on Monday. Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out eurozone nations over what he attacked as an inadequate response.

The Independent:

- The Madoff situation is, at a time of mass redemptions and dwindling returns, what hedge funds needed least. A spectacular scandal causing huge losses that undermines trust in the industry.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.25% to +.75% on average.
S&P 500 futures -.16%.
NASDAQ 100 futures -.19%.

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Earnings of Note
Company/EPS Estimate
- (FDS)/.63

- (BBY)/.23

- (GS)/-3.72

- (PAY)/.19

- (ADBE)/.57

- (HOV)/-1.71

Economic Releases
8:30 am EST

- The Consumer Price Index for November is estimated to fall 1.3% versus a 1.0% decline in October.

- The CPI Ex Food & Energy for November is estimated to rise .1% versus a .1% decline in October.

- Housing Starts for November are estimated to fall to 736K versus 791K in October.

- Building Permits for November are estimated to fall to 700K versus 730K in October

2:15 pm EST

- The FOMC is expected to drop the benchmark fed funds rate 50 basis points to .50%.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, (GE) Outlook Meeting, (AVT) Analyst Day, (BEC) Business Review, (HLF) Investor Day, (V) Special Meeting, (INTU) Shareholders Meeting, (HANS) Mid-Quarter Business Update, (ETP) Shareholders Meeting and (GMR) Shareholders Meeting could also impact trading today.

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

Stocks Finish Lower, Weighed Down by Alternative Energy, REIT, Financial and Homebuilding Shares

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