Stocks Finish Lower, Weighed Down by REIT, Semi, Commodity and Construction Shares

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Stocks Lower into the Final Hour on Global Growth Fears, Shorting, Profit-Taking

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is lower, most sectors are falling and volume is below average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is falling 5.1% and is elevated at 47.30. The ISE Sentiment Index is below average at 127.0 and the total put/call is slightly below average at .86. Finally, the NYSE Arms has been running high most of the day, hitting 2.28 at its intraday peak, and is currently 2.28. The Euro Financial Sector Credit Default Swap Index is plunging 11.2% today to 119.0 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 falling 6.33% to 217.62 basis points. The TED spread is rising .53% to 158 basis points. The TED spread is now down 308 basis points in just over two months. The 2-year swap spread is up 2.54% to 85.88 basis points. The Libor-OIS spread is dropping 4.81% to 132 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 16 basis points to .18%, which is down 243 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 -.05%, which is down 6 basis points today. 1-month US Dollar-based Libor is dropping another 7 basis points to .51% today. It has declined 409 basis points since October 10^th. The recent plunge in gauges of credit angst remain a big positive. Healthcare-related stocks are displaying significant relative strength today. I think these stocks will be one of the best-performing groups next year. The (XLF), while 2.6% lower, is holding up relatively well considering (GE), (UBS) and (HBC). I suspect that the US dollar has made another tradable low against the yen and euro. This could present another headwind for commodities over the coming weeks. Nikkei futures indicate an +7 open in Japan and DAX futures indicate a -69 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on more shorting, profit-taking and global growth fears.

Today's Headlines

Bloomberg:
- Emerging-market corporate profits may drop 12% in 2009 because of the slowing global economy and a slump in commodity prices, UBS AG said. The decline in commodity prices will contribute most to lower earnings next year, citing a survey of analysts forecasts. Earnings before interest and taxes may drop 30% for South Korean companies in 2009, compared with a 5.5% decline for Chinese firms and an 11% contraction in Brazil, according to UBS. Within industries, earnings before interest and taxes of raw material producers may decline 32% next year, while profit of energy producers will drop 17%, UBS said.

- Investors should buy originally top- rated subprime-mortgage bonds because the government is lowering borrowing rates and taking other steps that will end home-price declines next year, a JPMorgan Chase & Co. analyst said. “The indications are quite strong that policy makers now ‘get it’ and are prepared to take the appropriate actions,” Chris Flanagan, a JPMorgan analyst in New York, wrote in a report yesterday. Subprime bonds may now “rally significantly,” he said.

- Crude oil fell below $36 a barrel for the first time since July 2004 on speculation the drop in demand will outpace OPEC supply cuts as the economy weakens. JPMorgan Chase & Co., the largest U.S. bank by assets, reduced its 2009 average oil price forecast to $43 a barrel from $69 as a global economic slowdown causes a contraction in demand. The prospect of oil falling to $25 is “hard to dismiss amid a serious deterioration of economic conditions and building stocks,” the bank said in a report released yesterday. “When you look at the spare capacity that is being created, even if prices do start to pick up, you will see more leakage of supply onto the market,” Lawrence Eagles, global head of commodities research at JPMorgan Chase in New York, said in a conference call today.

- The US dollar rose from a 12-week low against the euro as traders judged the greenback’s 5 percent plunge after the Federal Reserve slashed interest rates two days ago as too fast to be sustained. The yen fell from near the highest since 1995 against the dollar and tumbled versus the euro as Japan’s government signaled it may intervene in the foreign-exchange market for the first time in four years to stem the currency’s advance. The pound edged closer to parity with the euro, sinking to a record for a ninth day. “This is a little bit of an unwind of some pretty ridiculous, exhaustive extensions,” said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. “You’re going to see a little bit more euro selling.”

- Oil at less than $20 a barrel? Gold at $300 an ounce? Both are possible next year, according to a list of 10 surprises compiled by UBS AG.

- General Electric Co.’s(GE) debt ratings outlook and those of its GE Capital finance arm were changed to negative from stable by Standard & Poor’s, reflecting concern earnings could deteriorate further than previously thought.

- The benchmark index for U.S. stock options headed for its lowest close in 2 1/2 months as the Federal Reserve’s rate helped calm the equity market’s swings. The VIX, as the Chicago Board Options Exchange Volatility Index is known, retreated for a third day, losing 9.7 percent to 44.99 at 1:37 p.m. in New York.

Wall Street Journal:

- Fourteen U.S. technology companies are joining forces and seeking $1 billion in federal aid to build a plant to make advanced batteries for electric cars, in a bid to catch up to Asian rivals that are far ahead of the U.S.

CNBC.com:
- With the Bush administration unlikely to seek the second half of the $700 billion Wall Street bailout fund before it leaves office, many experts think that money will now go toward foreclosure relief—and possibly an economic stimulus plan—under the Obama administration.

MarketWatch.com:

- Bernard Madoff, the alleged perpetrator of what could be the largest Ponzi scheme in history, relied on a network of leverage providers and controversial fee arrangements built up over more than a decade to feed his operation. The scandal, which may trigger at least $17 billion in losses, shows how much the hedge-fund business relied on trust and personal relationships rather than the rigorous due diligence typically demanded by institutional investors and lenders that have come to dominate the industry in recent years.

NY Times:
- Nearly 18 percent of households in the United States have no traditional telephone and rely on wireless services only, which is up several percentage points from a year earlier, the government said on Wednesday. In the first half of 2008, 17.5 percent of households were wireless only, up from 13.6 percent a full year earlier, according to the U.S. Centers for Disease Control and Prevention.

- President-elect Barack Obama has chosen Rick Warren, an evangelical pastor and author of the book “The Purpose Driven Life,” to give the invocation at his inauguration. The choice of Warren drew criticism from gay rights groups for his opposition to same-sex marriage. Warren also opposes abortion.

LA Times:

- For the fourth year in a row, more residents left the Golden State than moved here from other states, according to a report released Wednesday by the California Department of Finance.

Economist.com:

- Financial markets, which have been depressed by “fear” not seen since at least the 1930s, are likely to rebound in the next six to 12 months, former Federal Reserve Chairman Alan Greenspan said.

CBSNews.com:

- Former President Bill Clinton's foundation has raised at least $41 million from Saudi Arabia and other foreign governments that his wife Hillary Rodham Clinton may end up negotiating with as the next secretary of state. Clinton agreed to release the information after concerns emerged that his extensive international fundraising and business deals could conflict with America's interests if his wife became President-elect Barack Obama's top diplomat. The list also underscores ties between the Clintons and India, a connection that could complicate diplomatic perceptions of whether Hillary Clinton can be a neutral broker between India and neighbor Pakistan in a region where Mr. Obama will face an early test of his foreign policy leadership.

Telegraph:
- Hedge fund liquidations in the third quarter of 2008 soared by 70% compared to the same period last year, according to the latest figures from Chicago-based Hedge Fund Research.

Al Ahram:

- Egypt’s proven oil reserves rose 454 million barrels in the fiscal year ended June 30 to a record 4.2 billion barrels.

Bear Radar

Style Underperformer:
Mid-cap Growth (-.83%)

Sector Underperformers:
Gold (-7.14%), Coal (-7.01%) and Oil Service (-5.37%)

Stocks Falling on Unusual Volume:
LNT, ATHR, SGY, WFR, HBC, UBS, BTE, TSCO, GTU, TNC and FII

Stocks With Unusual Put Option Activity:
1) PCLN 2) DFS 3) IPAS 4) KGC 5) BMY

Bull Radar

Style Outperformer:
Mid-cap Value (+1.18%)

Sector Outperformers:
Airlines (+4.44%), Insurance (+4.34%) and HMOs (+4.22%)

Stocks Rising on Unusual Volume:
AUXL, ACOR, PRU, MET, KTC, CEG, HNP, BMY, TSO, SUN, ENB, NTG, DRYS, CRXL, APOG, MVSN, AVAV, UEIC, TWGP, NAVG, NICE, STFC, ASI, PVD, HEI, A and NWL

Stocks With Unusual Call Option Activity:
1) PCLN 2) BNI 3) LUV 4) PAYX 5) PRU

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