Stocks Mostly Higher into Final Hour on Lower Energy Prices, Short-Covering and Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs and Healthcare longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is mildly bullish as the advance/decline line is slightly higher, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 4.35% and is elevated at 45.29. The ISE Sentiment Index is below average at 124.0 and the total put/call is below average at .79. Finally, the NYSE Arms has been running high most of the day, hitting 1.54 at its intraday peak, and is currently 1.39. The Euro Financial Sector Credit Default Swap Index is rising 3.9% today to 124.0 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 rising .33% to 218.33 basis points. The TED spread is falling 4.38% to 151 basis points. The TED spread is now down 315 basis points in just over two months. The 2-year swap spread is down 2.07% to 82.75 basis points. The Libor-OIS spread is dropping 2.64% to 129 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 8 basis points to .10%, which is down 251 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 .00%, which is up 5 basis points today. 1-month US Dollar-based Libor is dropping another 4 basis points to .47% today. It has declined 413 basis points since October 10^th. The recent plunge in gauges of credit angst remain a big positive. Despite potential negative catalysts today, the bears were unable to gain meaningful traction in the (XLF). Tech, REITs and HMOs were especially strong today. Small-cap stocks continue to outperform significantly. Investor reaction to the RIMM/ORCL earnings reports bodes well for the Naz into year-end. If it were not for option expiration today, I suspect the broad market would put in a better showing. I think stocks can build on this week’s gains next week. Nikkei futures indicate an +32 open in Japan and DAX futures indicate a -13 open in Germany on Mon. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices, diminishing credit market angst and short-covering.

Today's Headlines

Bloomberg:
- Gold fell the most in almost three weeks as the dollar rebounded, reducing the appeal of precious metals as an alternative investment. Silver also dropped. The US dollar climbed as much as 2.7 percent against a weighted basket of six major currencies, heading for the biggest one-day jump since September.

- Crude oil dropped below $34 a barrel in New York as rising stockpiles at Cushing, Oklahoma, leave little room to store supplies for delivery next year. Supplies at Cushing, where oil that’s traded in New York is stored, rose 21 percent to 27.5 million barrels last week, the highest since May 2007, the Energy Department said on Dec. 17. Crude inventories in Cushing may increase to full capacity within “a matter of two or three weeks,” Barclays Capital analysts led by Paul Horsnell said in a research note Dec. 17. Spare production capacity in the oil industry may more than double through 2012, because of falling oil demand and new supply from investments already being made, said Cambridge Energy Research Associates. Excess capacity may rise to 8 million barrels a day from 3 million a day this year, according to Cambridge, Massachusetts- based CERA’s estimates.

- Germany, France and Belgium extended protection for banks and insurers against short-selling, part of European efforts to prop up shares during the financial crisis.

- The ruble dropped the most against the euro in nine years after the central bank accelerated its devaluation of the currency to protect reserves as a 26 percent plunge in oil battered the economy.

- Russia may be forced to let the ruble weaken 18% in the first quarter of next year as sliding oil prices send the current economic account into deficit and cut into reserves, says Citigroup Inc.(C).

- The cost of protecting against a default by U.S. automakers and their finance units dropped after the Bush administration said it will offer General Motors Corp. and Chrysler LLC $13.4 billion in loans to keep them operating. The upfront price on credit-default swaps protecting against a default by Detroit-based GM for five years fell 5 percentage points to 76 percentage points, according to CMA Datavision.

- The cost of borrowing in dollars for three months in London dropped to the lowest level since June 2004 as central banks worldwide cut interest rates and pumped emergency cash into money markets. The London interbank offered rate, or Libor, for such loans fell three basis points to 1.50 percent today, according to British Bankers’ Association data. The one-month rate slid to 0.47 percent, the 14th straight decline. Asian rates tumbled and the Libor-OIS spread, a gauge of cash scarcity, declined to the lowest level since Sept. 22.

- Treasury Secretary Henry Paulson urged Congress to release the second half of the $700 billion financial rescue fund after the government exhausted the first $350 billion in less than three months.

- U.S. regulators, trying to unravel the breadth of Bernard Madoff’s alleged $50 billion fraud, have found evidence of misconduct stretching back to at least the 1970s, two people familiar with the inquiry said.

- Harvard University, the world’s wealthiest institution of higher learning, paid its five highest-compensated investment officers a combined $25.9 million to manage its endowment for the year ended June 30, before the fund plunged 22 percent. Mohamed El-Erian, the former president and chief executive officer of the school’s management arm, who quit in November 2007, was paid $921,000, the Cambridge, Massachusetts, university said today in a statement. The highest paid investment officer was Stephen Blyth, the managing director for international fixed income, who received $6.4 million, according to the statement.

Wall Street Journal:

- The exchange-traded-fund boom has waned this year amid the market's troubles, with dozens of them folded and many more new launches delayed. About 50 ETFs have liquidated this year, after many failed to drum up enough assets and trading. Meanwhile, more than 500 new entries are in the works, but many are waiting for a better time to debut.

CNBC.com:
- Consumers may flood stores to do last-minute gift shopping this weekend, lured by heavy promotions from US retailers, said Gerald Storch, CEO of Toys “R” Us Inc.(TOY). Holiday-toy shopping is “certainly accelerating now,” Storch said. “I think this weekend will be one of the largest selling weekends in the history of US retailers,” Storch said.

NY Times:
- The Congressional Budget Office said Thursday that many of the health care proposals championed by President-elect Barack Obama and other Democrats would carry a high price tag and would generate only modest savings. One bright spot in a generally bleak picture was the estimate of potential savings from a requirement for doctors and hospitals to use health information technology, including electronic medical records, as a condition of participating in Medicare. Such a requirement could save the federal government $7 billion in the first five years and a total of $34 billion over 10 years, by reducing medical errors and avoiding unnecessary tests and procedures, the budget office said. It “would also lower health insurance premiums in the private sector,” the report said.

- A federal grand jury in New Mexico is investigating accusations that Gov. Bill Richardson’s administration gave lucrative contracts to a California financier because he contributed heavily to the governor’s political action committees, a person familiar with the grand jury proceedings said Thursday. President-elect Barack Obama has appointed Mr. Richardson to be secretary of commerce, and questions about the contracts may be raised in his Senate confirmation hearings in February. The investigation in New Mexico also comes as Mr. Obama deals with the uproar over corruption accusations against Gov. Rod R. Blagojevich of Illinois, Mr. Obama’s home state.

- Representative Charles B. Rangel made it clear again that he has no intention of stepping down from his chairmanship of the House Ways and Means Committee and that he intends to play an active role in making sure that New York City become a prominent beneficiary of any stimulus package undertaken by the Obama administration.

Washington Post:

- President-elect Barack Obama has selected two of the nation's most prominent scientific advocates for a vigorous response to climate change to serve in his administration's top ranks, according to sources, sending the strongest signal yet that he will reverse Bush administration policies on energy and global warming. Like Energy Secretary-designate Steven Chu, who directs the Lawrence Berkeley National Laboratory, Holdren and Lubchenco have argued repeatedly for a mandatory limit on greenhouse gas emissions to avert catastrophic climate change. Holdren's reported selection inspired no joy at the Competitive Enterprise Institute, a free-market advocacy group that denounces global warming "alarmists" and opposes many environmental laws. Myron Ebell, director of energy and global warming policy at CEI, said, "I think he's a very bad choice. His views are extreme, they're not based in fact, and he's a ranter." Of the overall Obama team, Ebell said, "They will pursue an anti-energy agenda that is designed to constrict energy supplies and raise energy prices."

Portfolio.com:

- In the next few months, thousands of hedge funds will go out of business. What the world will look like for the survivors.

Silicon Alley Insider:

- All quarter long, Wall Street has been trying to figure out why Google has introduced a slew of new revenue-generating products and suddenly developed new religion with regard to costs. The obvious answer is that Google is light on revenue and desperately trying to make the quarter. But that may not be the case. A senior source at the company tells us the changes are the result of Google's "secret weapon," new CFO Patrick Pichette.

Handelsblatt:

- The European Union’s plan to boost renewable energy generation by 2020 will cost German companies at least $143 billion. The plan stipulates that Germany must increase the use of renewables for electricity, heating and fuel to 18%, a goal that is not “technically and economically” feasible, citing a study by Ernst & Young LLP.

O Estado de S. Paulo:
- Brazilian exporters are forecasting demand for their products to worsen in coming months because of the global economic crisis, citing a survey by the Getulio Vargas Foundation. Almost two-thirds of the companies included in the survey expect the situation to worsen over the next six months, compared with only 3% that forecast an improvement.

Bear Radar

Style Underperformer:
Mid-cap Growth (+.85%)

Sector Underperformers:
Papers (-3.52%), Construction (-2.39%) and Steel (-.94%)

Stocks Falling on Unusual Volume:
AVAV, MSCC, SUPX, E, CRH, FLR, QDEL, DT, GEOY, CRDN, CTAS, SCHW, JWN and TNC

Stocks With Unusual Put Option Activity:
1) PTEN 2) LTM 3) CX 4) CVH 5) LUK

Bull Radar

Style Outperformer:
Small-cap Value (+3.19%)

Sector Outperformers:
Software (+3.48%), Alternative Energy (+3.0%) and REITs (+3.0%)

Stocks Rising on Unusual Volume:
ORCL, REGN, IWOV, KNDL, NTLS, PGI, LLY, MRK, PSEC, MHO, RGS, FIX, UFPI, STNR, CMP, RYN, TOWN, STEL, CTBI, KAMN, SHEN, PNFP, ESSA, NBTB, INDM, LBAI, FRME, CGRB, HRLY, SASR, MSFG, TCBK, MGEE, TWGP, FFBC, ACET, DRI, ASI, PKE, STC, UIL, VVI, WAL, UHT, XSD, UNF and MOG/A

Stocks With Unusual Call Option Activity:
1) TSM 2) UNH 3) JWN 4) AEO 5) CAL

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Friday Watch

Late-Night Headlines
Bloomberg:

- The euro will fall some 12% against the US dollar in the coming three months, UBS AG analysts wrote. “The European economy is in very poor condition to deal with the recent appreciation” of the euro, Steven Englander, a currency strategist at Barclays in New York, wrote in a report yesterday. “The outlook for Russia and Eastern Europe remains the most important downside risk to the euro.”

- General Motors Corp.(GM) and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled as soon as today, people familiar with the talks said. The government could take back the money should the automakers not comply with federal restrictions as a condition of receiving the funds, said the people, who asked not to be identified because the discussions are private. The plan isn’t final and may change, the people said.

- California lawmakers approved a plan that would raise $9.3 billion in taxes and fees to help ease the state’s record budget deficit, using a loophole Democrats said would avoid a required two-thirds vote. The Senate approved the measure, 23-15, while the Assembly passed it, 46-27. Democrats control both chambers. The bill taxes oil withdrawn within the state, puts a 2.5 percent surcharge on income taxes and replaces gasoline taxes with a flat 39-cent-a-gallon fee. Democrats said it needed only a simple majority because it cut some taxes while increasing others in equal amount and raised fees that don’t require the two-thirds approval requirement that Republicans used to thwart tax increases.

- Liz Ann Sonders, chief investment strategist at Charles Schwab, says deleverging may be nearing an end. (video)

- Copper futures on the Shanghai Futures Exchange plunged by the daily limit to the lowest in five years after global inventories climbed, signaling waning demand during the recession. Copper fell to a four-year low yesterday on the London Metal exchange after the exchange-monitored stockpiles rose to 324,175 metric tons, the highest level since Feb. 12, 2004. Canceled warrants, or metal booked for withdrawal, totaled 4,775 tons. “The unrelenting gains in London inventory and the extremely low ratio of cancelled warrants to total stockpiles indicate weak fundamentals are here to stay,” Wang Lei, an analyst at Haitong Futures Co., said from Shanghai.

- Crude oil headed for the second- biggest weekly decline in more than five years as a deepening global recession saps demand, countering efforts by OPEC to boost prices. Oil has dropped 33 percent this month even as OPEC agreed to its largest production cut in more than a decade because traders speculated that falling demand would outweigh the reduction. Global oil use may decline the most since 1983, Deutsche Bank analyst Adam Sieminski said yesterday. ``Everyone is revising back demand forecasts and OPEC is desperately cutting in order to catch up to where the market is,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``There is a feeling that OPEC isn't in control.'' Oil companies have booked 25 supertankers to store crude, enough to supply France for almost a month. The vessels, equal to about 5 percent of the global fleet, can carry as much as 50 million barrels. ``In the short term the price can be pretty much anything because of all the crude in storage on the water,'' said Mitsubishi's Nunan.

- Research In Motion Ltd.(RIMM), maker of the BlackBerry smart phone, forecast fourth-quarter sales that topped analysts’ estimates, buoyed by demand for new handsets. Revenue in the period ending Feb. 28 will be as much as $3.5 billion, the Waterloo, Ontario-based company said today in a statement. That compares with the average analyst estimate of $3 billion in a Bloomberg survey. Research In Motion gained 50 cents to $38.94 in extended trading, after dropping $2.23 to $38.44 at 4 p.m. New York time in Nasdaq Stock Market trading.

- Oracle Corp.(ORCL), the world’s second- largest software maker, met analysts’ estimates with its second- quarter profit and third-quarter forecast as support contracts made up for slumping orders of new programs. Second-quarter net income was $1.3 billion, or 25 cents a share, the same as a year earlier, Redwood City, California-based Oracle said today in a statement. Excluding costs from acquisitions and stock-based compensation, profit was 34 cents a share in the period ended Nov. 30, matching the average estimate of analysts in a Bloomberg survey. Oracle rose 64 cents, or 3.9 percent, to $17.25 in late trading after closing at $16.61 on the Nasdaq Stock Market.

- Citigroup Inc., the U.S. bank that got $65 billion in government funds to replenish capital after four straight quarterly losses, had its senior debt rating cut two grades by Moody’s, the first downgrade in a year.

- A blast of wintry weather across the U.S. that left a record-breaking snowfall in Las Vegas threatens to drop as much as 5 inches (12.7 centimeters) of sleet and snow on New York City tomorrow and disrupt travel across the country.

- Japan’s government will buy as much as 20 trillion yen ($223 billion) of shares held by banks to boost their capital and support a sagging stock market. The amount is part of a stimulus package totaling 75 trillion yen that also includes 10 trillion yen for capital injections into banks, the Cabinet Office said in a statement.

Wall Street Journal:

- Standard & Poor's Ratings Services lowered its long- and short-term counterparty credit ratings on Citadel Kensington Global Strategies Fund Ltd. and Citadel Wellington LLC to just a notch above junk and then withdrew the ratings at the company's request. S&P, which cut the ratings a notch to BBB-, said the funds' business model is under pressure in the current operating environment. S&P affirmed their A-3 short-term credit rating, but said the outlook was negative before the withdrawal. The two funds, run by hedge-fund operator Citadel Investment Services, are down 51% this year as of last Friday, according to investors.

- President-elect Barack Obama said Thursday that remaking the nation's financial regulatory system will be one of his first initiatives, and he pledged to streamline authority, consolidate agencies and spread financial oversight far beyond the banking system. New regulations are likely to fall on financial institutions currently seeking federal assistance that are either lightly regulated or not regulated at all, Obama aides said. Mortgage brokers are under particular scrutiny, as are hedge funds and private-equity firms.

- Russia's oil-fired economic miracle is unraveling as industry shrinks and job losses mount. Now the first stirrings of social unrest have the Kremlin groping for a response. Gloom deepened over the outlook for oil-export revenue, Russia's main earner, as prices plunged Thursday despite OPEC's move this week to deeply cut production. Oil hit a 4½ year low on anxiety about falling global demand, with crude closing at $36.22 a barrel in New York, down $3.84. This could spell trouble for Russia, which has pegged its 2009 budget on much higher oil prices, meaning it will have to trim spending.

CNBC.com:
- Barton Biggs, of hedge fund Traxis Partners, is bullish because he thinks the economy won’t be as sick as people think. He says with headline inflation in negative territory, real incomes are rising which will support consumer spending. He thinks the markets have already discounted a significant decline in future earnings and that US treasuries are in a bubble. He said the bottom in bear markets always occurs at a point of maximum pessimism when the news is at its worst. (video)

NY Times:

- Federal prosecutors on Thursday accused a Barclays Wealth employee of helping run a $4.8 million insider-trading ring based on information illegally obtained from his wife, a public relations executive involved in several deals.

- How many clients of Bernard L. Madoff Investment Securities profited unwittingly on what Mr. Madoff described as a big Ponzi scheme isn’t known. But given the structure of Ponzi schemes, which use money from later investors to pay early investors, many longtime clients may actually have wound up ahead. “In a Ponzi scheme, not all investors lose,” said Tamar Frankel, a law professor at Boston University who has written on Ponzi schemes. “Those who manage to get out in time retain their investments and some of their gains.” But previous court rulings regarding financial frauds suggest the winners could be forced to give up some of their gains to losers.

CNNMoney.com:
- Mortgage rates fell this week, with the 30-year fixed mortgage sinking to its lowest rate in 37 years as the Federal Reserve cut interest rates to historic lows. Government-sponsored mortgage lender Freddie Mac (FRE) said Thursday that fixed rates on 30-year mortgages averaged 5.19% for the week ending Dec. 18. That's down from 5.47% last week and below the year-ago rate of 6.14%.

- A record number of hedge funds went bust during the third quarter, a report showed Thursday, as shaky markets and tight credit drove investors away from risky investments. Hedge Fund Research, a Chicago-based information company, said the number of hedge funds liquidated in the third quarter rose to 344, which is more than three times the 105 liquidations in the third quarter of 2007. It's also 77 more than the previous record of 267 liquidations in the fourth quarter of 2006. The data also showed that 693 hedge funds were closed in the first nine months of the year versus 409 in the same period last year. That's an increase of 70% and represents nearly 7% of all hedge funds, according to HFR.

Financial Times:
- Leading banks from Britain, France and Japan helped investors treble or quadruple bets on Bernard Madoff by lending billions of dollars to “feeder” funds, which placed their money with the alleged fraudster. HSBC, Royal Bank of Scotland, Nomura and BNP Paribas lent the money without spotting a fraud, and in at least one case without due diligence teams visiting Mr Madoff’s brokerage, which held the assets. Banks including Nomura and Spain’s BBVA also helped create special “notes”, structured products that allowed small investors or those barred from investing in offshore vehicles to put as little as $50,000 into Madoff feeder funds. BBVA – which raised €300m ($429m) through these products – offered a guaranteed return of capital, while Nomura provided leverage.

- The Taiwanese government and a host of Middle Eastern donors are among the leading supporters of Bill Clinton’s philanthropic foundation, according to figures released on Thursday. The full list of contributors to the former US president’s William J. Clinton Foundation, made public after protracted negotiations with president-elect Barack Obama, highlights the delicate diplomatic path Hillary Clinton could face as Mr Obama’s choice for secretary of state.

BBC:

- France will enter recession in 2009, according to Insee, the country's national statistics agency. The agency says the French economy has shrunk by 0.8% in the last three months of 2008 and will contract by another 0.4% in the first quarter of 2009. The figures are worse than predictions, which said the economy would shrink by just 0.1% from October and December.

Straits Times:

- Singapore’s property auction sales have slumped to the lowest in 10 years, citing Colliers International. The value of properties sold through an auction dropped 79% to S$83.7 million in 2008 from S$4047.4 million a year earlier, citing Colliers.

China Times:

- Taiwan’s central bank bought large amounts of US dollars yesterday to slow gains by the island’s currency, citing traders it didn’t identify.

Late Buy/Sell Recommendations
Citigroup:

- We do not waver from our positive stance on the semiconductor sector. We continue to advise that investors overweight select stocks in the sector. We reiterate our “buy the dips” not “sell the rallies” strategy in this light. Our Buy-rated names are: NVDA, QCOM, ALTR, INTC, IDTI, STM and TXN.

- Downgraded (FLR) to Sell, target $37.

- comScore released US qSearch data for Nov-08. The data shows that total search queries in Nov. from the core search engines were 12.3 billion, up 22.3% Y/Y versus 20.1% Y/Y growth in October and 21.0% Y/Y in Q3. GOOG gains query share and growth accelerated – Nov. queries grew 32.3% Y/Y, which marked a reacceleration versus 29.6% Y/Y growth in October and 35.0% in Q3. In Nov., GOOG had 63.5% share, up 42 bps versus October share of 63.1%, and up about 77 bps versus Q3 share. This represents a new record high query share for GOOG. We view the qSearch results as incrementally positive for our Q4 GOOG estimates.

CSFB:

- Rated (SCOR) Outperform, target $13.

Night Trading
Asian Indices are -50% to +75% on average.
S&P 500 futures -.57%.
NASDAQ 100 futures -.67%.

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Earnings of Note
Company/EPS Estimate
- (KMX)/.01

- (CTAS)/.54

- (JBL)/.32

Economic Releases
- None of note

Upcoming Splits
- None of note

Other Potential Market Movers
- The (CA) Analyst Day could also impact trading today.

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