Stocks Higher into Final Hour on Falling Credit Market Angst, Less Financial Sector Pessimism and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Financial longs, Retail longs, Internet longs and Medical 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, most sectors are gaining and volume is very light. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 1.5% and is elevated at 44.36. The ISE Sentiment Index is about average at 140.0 and the total put/call is below average at .81. Finally, the NYSE Arms has been running around average most of the day, hitting .99 at its intraday peak, and is currently .95. The Euro Financial Sector Credit Default Swap Index is falling 2.01% today to 111.94 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 1.40% to 207.89 basis points. The TED spread is rising 1.27% to 148 basis points. The TED spread is now down 318 basis points in just over two months. The 2-year swap spread is down another 3.58% to 67.25 basis points. The Libor-OIS spread is plunging 9.55% to 112 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 1 basis point to .10%, which is down 251 basis points in just 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 -.01%, which is down 1 basis point today. The plunge in the Libor-OIS spread, Greenspan’s favorite gauge of credit market health, is a big positive. As well, the yen is beginning to give up morning gains and has been trending lower over the last week, which is a positive. Oil is getting oversold again short-term, but will very likely see lower lows next year. I expect this to finally be viewed as the big positive that it is next year. Those that say the market can’t rise without oil rising are ignoring the long-term history between the two. Inflation should be non-existent next year and as the economy stabilizes those stocks that can grow earnings at a relatively healthy rate despite sluggish growth should see their multiples expand dramatically. I still expect another push higher in the major averages before year-end. Nikkei futures indicate an +128 open in Japan and DAX futures indicate an +37 open in Germany on Friday. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices, diminishing credit market angst, bargain-hunting, less financial sector pessimism and short-covering.

Bull Radar

Style Outperformer:
Large-cap Value (+.30%)

Sector Outperformers:
Airlines (+2.34%), Gaming (+1.55%) and Retail (+1.19%)

Stocks Rising on Unusual Volume:
SUPX, RMBS, ACV, TSO, TXT, INDB, AMSF, ACAP, HNP, SPH, OI, VLY and OHI

Stocks With Unusual Call Option Activity:
1) BRCM 2) CB 3) EBAY 4) RYL 5) GE

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Wednesday Watch

Late-Night Headlines
Bloomberg:

- Blackstone Group LP(BX), the world’s largest private-equity firm, plans to combine its distressed securities hedge funds and spin off a stock fund to cut costs as the credit shortage makes buyouts almost impossible to finance.

- California single-family home sales rose 83 percent in November and the median price fell below $300,000 for the first time since 2002 as buyers bought properties in foreclosure, the California Association of Realtors said.

- Online spending rose to $677 million in the U.S. last weekend, almost twice the total spent last year on the final weekend before Christmas, ComScore Inc. reported.

- The Financial Industry Regulatory Authority, formed by the merger of the NASD and the New York Stock Exchange’s oversight unit, was accused in a lawsuit of misleading NASD members over $35,000 payments to each of them.

Wall Street Journal:

- After 18 tempestuous months with Citigroup Inc., the managers of hedge fund Old Lane Partners LP are looking for a fresh start.

- Vice President-elect Joe Biden released new details on the incoming administration's planned stimulus package, saying 85% of the three million jobs to be generated would be in the private sector and that no pet projects of lawmakers would be accepted.

- Clinton’s Donor List Raises Lots of Questions. Can’t the United Way find better uses for its money?

- Rep. Pete Stark, chairman of the House Ways and Means Committee's health panel, will be an important player as Washington tackles health care next year. But his blunt criticism of opponents and his positions to the left of many other Democrats promise to make the process bumpier.

South Florida Business Journal:

- In contrast to the national trend, Florida's existing home sales rose in November – the third month in a row. Statewide sales rose by 4 percent over last year, according to the latest housing data released by the Florida Association of Realtors.

Financial Times:
- GAM, one of the biggest investors in hedge funds, will allow clients to withdraw from most of its funds of hedge funds only once a quarter rather than once a month, as the industry tightens redemption terms. GAM, which is owned by Swiss bank Julius Baer, has been hit by redemptions and losses, leading assets under management to fall about a third this year, according to people familiar with the group. GAM’s assets fell 20 per cent in the first six months to $63bn.

People’s Daily:

- China won’t weaken the yuan to spur exports, citing Commerce Minister Chen Deming.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.0% to +.50% on average.
S&P 500 futures -.02%.
NASDAQ 100 futures -.04%.

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Earnings of Note
Company/EPS Estimate
- None of note

Economic Releases
8:30 am EST

- Personal Income for November is estimated unch. versus a .3% gain in October.

- Personal Spending for November is estimated to fall .7% versus a 1.0% decline in October.

- The PCE Core for November is estimated unch. versus unch. in October.

- Durable Goods Orders for November are estimated to fall 3.0% versus a 6.2% decline in October.

- Durables Ex Transports for November are estimated to fall 3.0% versus a 5.4% decline in October.

- Initial Jobless Claims for last week are estimated to rise to 558K versus 554K the prior week.

- Continuing Claims are estimated to rise to 4410K versus 4384K prior.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report and weekly EIA energy inventory report could also impact trading today.

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

Stocks Finish Lower, Weighed Down by Financial, Semi, Gaming and Homebuilding Shares

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In Play

Stocks Lower into Final Hour on Global Growth Worries, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs. I haven’t traded 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 declining and volume is very light. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising .58% and is elevated at 44.77. The ISE Sentiment Index is about average at 140.0 and the total put/call is below average at .76. Finally, the NYSE Arms has been running high most of the day, hitting 1.55 at its intraday peak, and is currently 1.25. The Euro Financial Sector Credit Default Swap Index is falling .23% today to 114.25 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 1.25% to 210.84 basis points. The TED spread is falling .96% to 146 basis points. The TED spread is now down 320 basis points in just over two months. The 2-year swap spread is down 4.30% to 66.75 basis points. The Libor-OIS spread is rising 1.47% to 124 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 3 basis points to .11%, which is down 250 basis points in just 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 unch. today. A number of market-leading stocks are in positive territory today despite the broad market’s low-volume decline. Financials are heavy again today. Brazilian stocks are also notably weak, falling 3%. The Bovespa is 9% lower over the last five days. I still expect another surge higher in US stocks to occur over the next few days. Nikkei futures indicate a -168 open in Japan and DAX futures indicate an +26 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices, diminishing credit market angst, bargain-hunting and short-covering.