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

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Biotech longs, Technology longs, Financial longs, Retail longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is light. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 6.35% and is very high at 37.45. The ISE Sentiment Index is below average at 122.0 and the total put/call is slightly above average at .93. Finally, the NYSE Arms has been running around average most of the day, hitting 1.18 at its intraday peak, and is currently .64. The Euro Financial Sector Credit Default Swap Index is rising .54% today to 112.54 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 1.27% to 200.0 basis points. The TED spread is down 1.52% to 133 basis points. The TED spread is now down 333 basis points in about eleven weeks. The 2-year swap spread is up 8.24% to 75.50 basis points. The Libor-OIS spread is rising .99% to 123 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at .13%, which is down 248 basis points in about six 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 .08%, which is unch. today. Today’s overall stock gains are broad-based again. REITs are the only notably weak group today, but they may just be pausing after a 37% move higher off their November lows. Despite more weak economic data, the most economically sensitive shares are today’s top-performers. The sell-off in long-term Treasuries remains a positive development. As well, market leading stocks are substantially outperforming the broad market. It appears the US dollar’s rally has resumed, which could pressure gold if tensions calm in the Middle East. Consumer cyclical shares saw the greatest amount of insider buying during the month of December with $235, 623,071 worth of stock purchased. Individual equities with notable net insider buying during the month were V, AKAM, LNY, HRL, HOS, FCNCB, KEX, GS, CSWC, DISCA, HES, ZLC and WEN. I suspect US stocks will extend gains again on Monday. Nikkei futures indicate an +566 open in Japan and DAX futures indicate an +57 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, less economic pessimism, seasonal strength, less forced selling and short-covering.

Today's Headlines

Bloomberg:

- The cost of protecting against a default by GMAC LLC, the automobile- and home-loan company getting a $6 billion federal bailout, fell for the fifth day to a more than 11-month low. Credit-default swaps protecting GMAC bonds for five years fell 1 percentage point to 10.5 percentage points upfront, according to CMA Datavision as of 9:37 a.m. in New York. GMAC contracts have dropped from 44 percent upfront on Dec. 23, the day before the company won Federal Reserve approval to become a bank holding company, making it eligible to tap U.S. financial industry bailout programs. The upfront price on credit-default swaps protecting against a default by GMAC’s mortgage-lending unit, Residential Capital LLC, fell 2.5 percentage points to 42.5 percentage points, CMA data show.

- Crude oil rose in New York for a second day as the conflict in Gaza increased concern that Middle East supplies would be cut and Russia curbed natural-gas shipments to Ukraine.

- Gold prices fell as the dollar strengthened against the euro, eroding the appeal of the precious metal as an alternative investment. Platinum rose.

The dollar gained against the euro after a report showed manufacturing declined, a signal that the European Central Bank will have to cut interest rates to stimulate the economy.

- The euro fell to a two-week low against the dollar and declined versus the yen after a European manufacturing report indicated the recession is deepening in the 16-nation region. “Europe has to begin aggressively slashing rates down to 1 percent very quickly,” said Greg Salvaggio, vice president of capital markets at currency-trading firm Tempus Consulting Inc. in Washington. “The U.S. is in significant trouble too, but policy makers are throwing everything they have at the problems. Ultimately, it will emerge from the recession quicker than Europe, which will increase the appeal of U.S. assets.” “The ECB has no choice but to continue to cut rates,” said Jessica Hoversen, a currency and fixed-income analyst at MF Global Ltd. in Chicago, who predicted the euro may fall in the first quarter below $1.30. “That’s negative for the euro.” The moving-average convergence-divergence chart is showing a selling signal for the euro versus the dollar, traders said. The MACD index for the pair, or the difference between the 12- and the 26-day moving average, fell below the nine-day moving average yesterday for the first time since November, indicating the European currency’s rally starting last month may be over.

- James Chanos Says Hedge Funds Face Regulations: Year in Review.

- India cut interest rates for the fourth time since October and unveiled another stimulus package to counter the effect of the global recession on Asia's third- largest economy. The Reserve Bank of India lowered the repurchase rate by one percentage point to 5.5 percent and the reverse-repurchase rate by the same margin to 4 percent, it said in a statement in Mumbai. The government also more than doubled the amount overseas investors can hold in local bonds and extended capital to the nation's banks.

CNBC.com:
- Starwood Hotels & Resorts Worldwide(HOT) signed a confidentiality agreement with property magnate Sam Zell's Equity Group Investments, according to a regulatory filing. Such a move could be in preparation for Zell's firm taking a greater stake in Starwood.

- After a year-long hangover in 2008, the real estate industry is hoping for some strong, black coffee in the new year. All sectors—commercial, residential and retail—were hammered last year. And though the outlook for this year is still shaky, there is some optimism that the market will at least stabilize this year.

Barron’s:

- Apple(AAPL): Jobs Isn’t Sick, Says Argus Research.

VentureBeat:
- The image above shows a netbook Asus EEEPC 1000H running on Google’s mobile operating system Android. Huh? You thought Android was for mobile phones, right? Well, as we’ve written before, Google is planning to use Android for any device — not just the mobile phones.

NY Times:

- So your cellphone has a brushed-metal shell, can flip and slide four ways and has more buttons than an airplane cockpit. Big deal. The new status symbol is what your phone can do — count calories, teach Spanish, simulate a flute, or fling a monkey from a tree.

- Nucor Corp.(NUE) said the US steel industry is asking the government to include a ‘buy America’ clause in any upcoming economic stimulus package.

Channel Insider:

- Coming Soon: Managed Services for iPhones. Kaseya is developing remote management tools to give solution providers the ability to remotely configure and manage Apple iPhones, Microsoft Mobile and Symbian devices. In just 18 months since its debut, the Apple iPhone commands the third largest market share for smart phones in the North American market. In 2008, the number of iPhone users soared more 325 percent, and an increasing number of people are turning in their Blackberry and Symbian-based devices in favor of Steve Job’s handheld creation. “The time we spend on getting phones configured is huge. To be able to do remote management on someone’s device would be a great benefit,” says Dan Wilson, CEO of Waypoint Solutions Group in Charlotte, N.C.

Forbes:

- It's been foul weather for hedge-heads. Redemptions are rampant, performance is drooping, the Securities and Exchange Commission briefly banned short-selling, and Congress summoned them to do some 'splaining. But the really bad stuff is yet to come. Hedge funds are coming under attack from popular culture. In fact, the two uber-villains of Candace Bushnell's new book, One Fifth Avenue, are hedge-heads.

CNN:

- If you dare to look out your window at houses for sale, you might be surprised at what you can buy and with how little money. Prices are falling, and inventory is plentiful; it's a buyers' market. Alas, credit is so tight, potential buyers might think they need boat loads of cash or a superlative credit score to wade into the devastated housing market. But it isn't so, largely because of dramatic changes at the Federal Housing Administration (FHA), a federal housing loan insurer. FHA makes it less risky for lenders to provide mortgages because it will pay a claim to the lender in the event that a homeowner defaults on their loan.

cnet:

- The browser wars are heating up in earnest, with Google urging its customers to dump Internet Explorer 6 for the Mozilla Firefox or Google Chrome browsers. Internet Explorer commands a 68 percent global market share, according to Net Applications, but a full 20 percent of that share is for IE6. With Firefox apparently picking up 66 percent of all IE6 defectors, according to TG Daily, Google is effectively subsidizing the open-source Firefox at the expense of Microsoft. In sum, Microsoft is getting a taste of its own medicine from the company that increasingly looks and acts like Microsoft.

Philadelphia Inquirer:

- The long-planned direct train service between New York and Atlantic City is slated to start on Feb. 6, with introductory one-way ticket prices set at $50 for coach seats and $75 for first class. The weekend-only trips will take about 2 1/2 hours. They are aimed at affluent young New Yorkers who want to avoid the traffic congestion that often delays bus and auto travelers.

Reuters:
- Factories in China, India and Eastern Europe joined the United States and other developed countries in slashing output.

- The Treasury said on Friday said it will consider financial institution rescues and asset guarantees similar to those it provided Citigroup (C) on a case-by-case basis.

Financial Times:
- The Chinese government is moving to crush a group of prominent dissidents and intellectuals that has released a rallying call for democracy, human rights and rule of law. The group of about 300 writers, peasant farmers, students, professors, journalists, economists, and political activists from across the country all signed a document, known as Charter 08, that provides a detailed and wide-ranging blueprint for peaceful political, legal and economic reform in China.

Valor Economico:

- Brazil will have a surplus of energy this year as slowing economic growth saps demand and rainfall increases hydroelectric reservoirs. Brazil’s energy research agency lowered its estimate for demand growth in 2009 to 5.2% from 5.8%.

MEED:

- The value of the UAE construction market fell by 85 per cent over the course of 2008, according to MEED Projects, which tracks project activity across the Gulf. The latest figures show that just USD14.4bn of contract awards were made during the fourth quarter of 2008, down from USD98.1bn during the same period in 2007. Over the past five years, the sector has become one of the most important parts of the UAE economy. A recent report by US credit ratings agency Standard & Poor's estimated that the construction and real estate sectors account for almost half of Dubai's gross domestic product (GDP).

Bear Radar

Style Underperformer:
Large-cap Value (+1.32%)

Sector Underperformers:
REITs (-1.29%), Tobacco (+.47%) and Insurance (+.50%)

Stocks Falling on Unusual Volume:
None of note

Stocks With Unusual Put Option Activity:
1) CYPB 2) LLY 3) NBR 4) HOT 5) GT

Bull Radar

Style Outperformer:
Mid-cap Growth (+2.0%)

Sector Outperformers:
Disk Drives (+7.28%), Oil Service (+5.62%) and Steel (+5.46%)

Stocks Rising on Unusual Volume:
CLF, RTP, NIHD, PTR, JLL, CVA, APA, DRYS, UEPS, HURN, NCIT, PWRD, FELE, MDVN, TBSI, AVAV, HURC, EZPW, AKO/A, PBE, MBR, HOT, KRO and SCG

Stocks With Unusual Call Option Activity:
1) CIEN 2) WMB 3) NSM 4) SGR 5) ACE

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Friday Watch

Late-Night Headlines
Bloomberg:

- President Hu Jintao said China is ready to strengthen dialogue and expand cooperation with the US in the face of “complex and profound changes” in the world. “The strategic significance and global implications of China-US relations have become all the more evident,” Hu said in a congratulatory message to President Bush today to mark the 30^th anniversary of the establishment of diplomatic relations between the two countries. The relationship has “greatly contributed to peace, stability and the development of Asia and the world at large,” Hu said.

- The euro fell against the dollar and the yen before a European manufacturing report today that will probably show a recession is deepening in the 16-nation region. The euro, the weakest of the three currencies in 2008, slid on prospects the European Central Bank will lower interest rates to revive economic growth. “There’s a lot more weakness in Europe ahead,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “We’ve got them cutting to 1 percent by March.”

- Yale University is buying debt to help its endowment recover after losing almost $6 billion in the last six months amid the global financial crisis. “There are some really extraordinary opportunities in the credit world,” said David Swensen, the school’s investment chief, in a phone interview on Dec. 30 from his office at the New Haven, Connecticut, university. “Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels.”

- The U.S. Treasury threw the door open to taxpayer financing for a widening array of companies and industries by drafting broad guidelines on aid to the auto industry. The Treasury’s guidelines, published yesterday, would let officials provide funds to any company they deem important to making or financing cars. That leaves room for the government to provide money from the Troubled Asset Relief Program beyond loans already committed to General Motors Corp., GMAC LLC and Chrysler LLC. “There are going to be other industries that are going to have just as good a case,” as the auto companies, former St. Louis Federal Reserve Bank President William Poole said in an interview on Bloomberg Television.

- Tech Trends That Shaped 2008, Set Stage for 2009.

- Small-cap Financial Shares Defy Market, Lead Rising US Stocks. In the worst year ever for financial companies, small-cap firms like First BanCorp, First Financial Bankshares Inc. and Tompkins Financial Corp. gave investors some of the best returns of 2008.

- US Album Sales Decline 14% While Online Track Sales Surge.

- The U.S. Securities and Exchange Commission, which sued Bernard Madoff last month for allegedly directing a $50 billion fraud, won’t make public a list of his assets filed yesterday, the regulator said. A federal judge ordered Madoff to provide the SEC an accounting of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings. The court hasn’t authorized its public disclosure, said SEC enforcement official Andrew Calamari, who confirmed receipt of the list.

- China’s manufacturing contracted for a fifth month in December. The CLSA China Purchasing Managers’ Index stood at a seasonally adjusted 41.2, compared with a record low of 40.9 in November, CLSA Asia-Pacific Markets said today in an e-mailed statement. A reading below 50 reflects a contraction. Manufacturers in industries from metals to toys are reducing production or closing down. “Chinese manufacturing was very weak in December,” said Eric Fishwick, head of economic research at CLSA in Singapore. “With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession.” “Chinese manufacturers reduced the size of their workforces at the fastest rate recorded by the series to date,” today’s report said.

- China Telecom Corp., the nation’s biggest fixed-line phone company, rose the most in almost two months after the government said it would proceed with issuing licenses for high-speed services. China phone companies will spend as much as $41 billion on network spending for the 3G services that enable faster Web- browsing and music downloads in the next two years, the government said last month.

- LG Display Co., the world’s second-largest maker of liquid-crystal displays, rose the most in six weeks in Seoul LG Display climbed 10% on the Korea Exchange. Prices of notebook and television panels are expected to be flat in January after declining for the past six months, David Hsieh, an analyst at researcher DisplaySearch, said. Some LCD makers have raised prices of computer monitor panels to their customers for January, according to Hsieh. trading on speculation panel prices will halt their declines this month after manufacturers cut production.

Wall Street Journal:

- Israeli warplanes killed a senior Hamas leader in the Gaza Strip and hit the territory's parliament building as bombing continued Thursday. But with the militant group still firmly in control there Israeli officials appeared to open the door to a possible cease-fire.

- The man appointed by Illinois Gov. Rod Blagojevich to fill the U.S. Senate seat vacated by President-elect Barack Obama suggested he would challenge any effort to block the move, but said he is confident Senate Democrats will relent and let him take the job. "We think they will come around and recognize that the appointment is legal and valid and I am the junior senator from Illinois," Roland Burris said during an interview at his office.

BusinessWeek:

- China 2009: The Confidence Deficit. Stock markets fell some 65% in 2008. Growth is down, unemployment is up. Will Beijing try to buy its way out of its problems with more exports?

- Investors in Citadel Investment Group’s two main hedge funds can take solace in the fact that 2008 has finally come to an end. Of course, that won’t ease the pain of seeing those two porfolios lose about 53% of their value going into the final week of the year. The latest numbers from Ken Griffin’s Chicago-based investment empire are only marginally better than the performance figures posted by Citadel’s two biggest funds for the past several months. As of Dec. 24, Citadel’s once giant Kensington and Wellington funds were down 9.35% for the month. That’s a slight improvement over the funds’ 14.27% November decline and October’s horrific 22% slide. The big plunge at Citadel is far worse than the 20% average decline this year for hedge funds and greater than the 35% decline in the Dow Jones. That’s a big blow to Griffin’s reputation as one of the titans of the fast-shrinking hedge fund industry—a trader many have tried to emulate over the years because of his long proven track record of success.

IBD:

- Last year was a tough time to be a financial service firm, or a technology firm, or a new IPO. Yet RiskMetrics (RMG) managed to pull off all three without damage.

MacDailyNews:

- Net Applications' Operating System stats for December 2008 show Apple's Mac hit 9.63% share of the operating systems visiting Net Applications' network of websites worldwide. The stats also show Apple iPhone with a new all-time high of 0.44% share and Apple iPod with 0.08%.

AP:

- The U.S. formally transferred control of the Green Zone to Iraqi authorities Thursday in a pair of ceremonies that also handed back Saddam Hussein's former palace. Iraq's prime minister said he will propose making Jan. 1 a holiday marking the restoration of sovereignty. Under the new security agreement between Washington and Baghdad to replace a U.N. mandate for foreign troops in Iraq, the Iraqi government also now has control of American troops' actions and of the country's airspace. The moves came amid a dramatic fall in violence over the past year.

Reuters:

- After worst year ever, commodities may lag recovery. Institutional funds who shunned commodities until earlier this decade flooded into the sector since 2003, increasing investment 20-fold to a peak above $200 billion by the middle of this year, a shift often blamed for the rally in prices. Those funds fell sharply as prices collapsed -- by the fourth quarter, commodity assets under management had fallen by about a third to $144 billion, according to Barclays Capital estimates. But it also said that only a small portion of that drop was caused by active withdrawals, suggesting most of pension funds and investors are sticking with the sector, for now.

- Bank of America Corp completed its purchase of Merrill Lynch & Co and Wells Fargo & Co finished buying Wachovia Corp, the latest sea changes in a transformed banking industry facing dire economic times ahead. The Merrill takeover was completed on Thursday, ending more than 94 years of independence for the Wall Street investment bank and brokerage. The Wachovia merger closed on Wednesday, marking the denouement for a lender that started in 1879 with what it deemed a "very adequate" $100,000 of capital.

- Top 10 best and worst S&P 500 performers for 2008.

Financial Times:
- Lotus, the sports-car manufacturer, plans to enter the burgeoning field of battery-powered cars with a high-performance electric vehicle. The car, like General Motors’ planned Volt, will be equipped with a fuel-based “range extender” to back up its battery. Lotus may show it in concept form at the Geneva motor show in March.

- Germany may add tax cuts to the multi-billion package of measures it will adopt later this month in its second attempt to prevent Europe’s largest economy falling into its deepest recession in history, Angela Merkel, chancellor, said on Wednesday. The suggestion marks a partial concession by the chancellor as she seeks to defuse a dispute with her conservative allies in Bavaria that is threatening to torpedo her plan for a major fiscal boost. The Bavarian Christian Social Union has threatened to veto any package that would not include tax cuts.

- Prominent UK politicians are calling for the ban on short-selling of financial stocks to be extended by the City watchdog when it expires in two weeks’ time.

- US lawmakers will use the findings of Congressional hearings on the alleged $50bn fraud by Bernard Madoff, which begin on Monday, to guide them in rewriting the laws governing US financial markets.

- Investors pulled a net $320bn from mutual funds in 2008, a record in both dollar terms and as a percentage of assets, in one of the biggest flights to safety the industry has seen. The move out of what were previously regarded as safe and stable investments followed a record year of investor inflows in 2007. However, it appears that outflows stabilized and even reversed in the final weeks of the year. Investors put a net $23bn into equity funds during December and withdrew only $3.5bn from bond funds, less than in earlier months.

TimesOnline:
- Stock markets are poised for a resurgence in 2009 after what is likely to be a shaky start to the new year following brutal losses in the past 12 months, leading institutions predict. Despite the still-deepening global recession, stockpickers are defying the economic gloom to back high-stakes bets that shares in the West’s main markets will now rally. Equity strategists and traders are pinning their hopes on past trends that have seen stock markets rally well before recessions end, as well as on further, aggressive action expected from governments and central banks earlier in the year as they strive to limit the scale of the economic slump. Strategists are predicting that a 2009 fightback by the New York equity markets will see US blue chips in the broad-based S&P 500 index jump by almost 11 per cent.

Commercial Times:

- Hon Hai Precision Industry Co. will sell Apple Inc.(AAPL) products in China after the Taiwanese manufacturer was named the sole distributor in the country, citing Chairman Terry Gou. The company’s strategy for 2009 includes entering China’s consumer electronics market, citing Gou. Taipei-based Hon Hai is the world’s largest contract maker of electronics and makes iPhones for Apple and computers for Dell Inc.(DELL).

South China Morning Post:

- Guangdong economy hit by Beijing’s policies, says governor. Guangdong Governor Huang Huahua has admitted publicly for the first time that the provincial economy has been battered by central government policies restricting the export manufacturing industry.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.25% to +1.75% on average.
S&P 500 futures n/a.
NASDAQ 100 futures n/a.

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Earnings of Note
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Economic Releases

10:00 am EST

- ISM Manufacturing for December is estimated to fall to 35.4 versus 36.2 in November.

- ISM Prices Paid for December is estimated to fall to 20.0 versus 25.5 in November.

Upcoming Splits
- None of note

Other Potential Market Movers
- None of note

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.