Stocks Mostly Higher into Final Hour on Short-Covering, Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Healthcare longs and Technology longs. I covered all my (IWM)/(QQQQ) hedges, some of my (EEM) short and added to my (ISRG) long today, thus leaving the Portfolio 100% net long. The tone of the market is slightly bullish as the advance/decline line is mildly higher, most sectors are rising and volume is below average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling .21% and is elevated at 43.31. The ISE Sentiment Index is below average at 120.0 and the total put/call is above average at 1.08. Finally, the NYSE Arms has been running high most of the day, hitting 1.43 at its intraday peak, and is currently 1.06. The Euro Financial Sector Credit Default Swap Index is rising 2.72% today to 97.0 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 3.0% to 203.0 basis points. The TED spread is down 2.42% to 127 basis points. The TED spread is now down 339 basis points in about three months. The 2-year swap spread is plunging another 9.49% to 57.25 basis points. The Libor-OIS spread is falling 3.89% to 117 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 4 basis points to .54%, which is down 221 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 down 1 basis point today. Volume was light again, with a high NYSE Arms reading, during the lows of this morning’s sell-off. As well, the total put/call has been running pretty high the last few days. It appears to me the bears lack firepower or will at this point. The recent pullback has little energy behind it. A “horrific” jobs’ report tomorrow is likely priced into the market. Any initial kneejerk sell-off in stocks related to this report in the morning will likely be short-lived. Nikkei futures indicate an +120 open in Japan and DAX futures indicate an +41 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, diminishing credit market angst and short-covering.

Today's Headlines

Bloomberg:

- The largest U.S. banks are starting to offer fixed home loans below 5 percent after the government began buying mortgage securities to bolster the housing market. JPMorgan Chase & Co. is advertising 30-year mortgages as low as 4.75 percent on its Web site, Wells Fargo & Co. has an offer for 4.875 percent and Bank of America Corp. has rates at 5 percent. The offers are for borrowers with excellent credit who put 20 percent down.

- JPMorgan’s(JPM) Geoff Lewis, head of investment services at JP Morgan Asset Management, says oil could easily fall below $30 a barrel. (video)

- Emerging-market countries racing to raise funds to finance budget deficits may have to pay higher borrowing costs because of global risk aversion, according to Brown Brothers Harriman & Co. in New York. Export earnings for sub-developing nations have slumped due to slower external demand and falling commodity prices, while the credit crunch has curbed foreign-direct investment, both vital sources of currency earnings, Brown Brothers said.

- Metal and coal prices are expected to average “considerably lower” in 2009 as demand plunges in a global recession and producers can’t cut supply fast enough, Goldman Sachs JBWere Pty said. Prices of coking coal may plummet by 60 percent, copper by 40 percent and aluminum by 28 percent, analysts led by Malcolm Southwood said in a note to clients yesterday. “With gold the most plausible exception, we expect 2009 annual average commodity prices to be considerably lower versus 2008, with negative implications for resources sector earnings,” the analysts said. “We expect global off-take of most metals and minerals to contract this year.” There will be oversupply of aluminum, copper, nickel and zinc and bulk commodities will also move into annual surplus in 2009, the brokerage said.

- Natural gas futures in New York fell for a third day after a government report showed that U.S. supplies of the heating and factory fuel are ample to meet demand in the weeks ahead. Stockpiles stood at 2.83 trillion cubic feet the week ended Jan. 2 after dropping 47 billion cubic feet, the U.S. Energy Department said. The surplus to the five-year average widened to 3.2 percent from 2 percent in last week’s report. Industrial demand for gas may contract by 7 percent in 2009, Ronald Barone, an analyst with UBS AG in New York, said in a report yesterday.

- Representative Barney Frank, chairman of the House Financial Services Committee, said the second half of the government’s $700 billion financial rescue should include aid for municipal bond issuers hurt by the credit crisis.

- Sears Holdings Corp.(SHLD), the largest U.S. department-store company, jumped the most in five years after its profit forecasts beat some analysts’ estimates. The retailer said it expects fourth-quarter earnings per share of $2.44 to $3.09, excluding one-time items that may include store closings, severance costs and hedging transactions. Seven analysts predicted $1.92, on average, in a Bloomberg survey. The company also forecast full-year net income of $1.27 to $1.90 a share today. Seven analysts projected 53 cents.

- Goldman Sachs Group Inc.(GS) said the U.S. Treasury market hasn’t turned into an asset bubble even as investors debate the wisdom of buying government bonds with yields near record lows. The U.S. economy is likely to expand below its potential for the next six to eight quarters, resulting in lower “core” inflation, according to a report released today by the New York- based firm.

- The U.S. average rate on a 30-year fixed mortgage dropped for a 10th straight week to the lowest on record as the government began buying mortgage bonds to stimulate housing demand. The fixed rate dropped to 5.01 percent from 5.10 percent a week earlier, Freddie Mac said in a report today. That’s the lowest in data that goes back to 1971, the McLean, Virginia- based mortgage buyer said.

- Former U.S. Senator Thomas A. Daschle pledged that as Barack Obama’s health secretary, he’ll make sure everyone has access to doctors and hospitals.

- Corporate borrowing in the commercial paper market expanded to the highest level since before Lehman Brothers Holdings Inc. filed for bankruptcy in September as companies took advantage of the lowest rates on record. U.S. commercial paper outstanding rose $83.1 billion, or 4.9 percent, during the week ended Jan. 7 to a seasonally adjusted $1.76 trillion, the Federal Reserve said today in Washington. That’s the highest since the week ended Sept. 10, five days before Lehman’s filing.

Wall Street Journal:

- General Motors Corp.(GM) said it needs to have key elements of a cost-cutting labor deal with the United Auto Workers in place by Feb. 17 to comply with last month's $17.4 billion federal bailout. GM and Chrysler LLC are required to get their labor costs in line with the U.S. operations of foreign-based competitors under terms of the low-interest loans from the Bush administration to avoid bankruptcy.

- Thousands of small, privately-held U.S. banks could have access to the $700 billion financial rescue program within "days, not weeks", according to sources familiar with the matter.

CNBC.com:
- Robert Doll, chief investment officer of global equities at BlackRock Inc.(BLK), told CNBC that in the second half of this year, investors will begin to see “some visibility” of a US economic recovery.

Business Week:

- In recent years several companies have developed 3D computer displays, with results ranging from disappointing to, literally, nauseating. Graphics specialist Nvidia (NVDA) has a new approach that promises to take computing into the third dimension. Video games will be the first to benefit, followed by movies and certain business tasks.

Chicago Sun-Times:

- The more than three-year-old split in the ranks of organized labor may be on the verge of mending. Change to Win was formed by seven unions that broke from the AFL-CIO after disagreements on how to best organize. It includes the Service Employees International Union, the International Brotherhood of Teamsters, Unite-Here, and laborers, carpenters, farm workers and food and commercial worker unions.

Institutional Investor:

- European Central Bank President Jean-Claude Trichet said he sees a “significant” worsening in the economic environment. “It’s clear that we have had a significant deterioration of the real economy,” Trichet said in an interview at the end of 2008 and published late last night.

MacDailyNews:

- Apple(AAPL) iPhone mobile Web market share surpasses RIM BlackBerry and Windows Mobile combined.

Red Herring:

- Apple's(AAPL) iPhone, which has become the touch-screen icon of the 3G mobile computing revolution, leaving its forerunners Palm and Blackberry in its clean cut wake will now be able to run a browser that blocks adult content at the source. With a reported 8 percent of American teenagers now owning the slick white status symbol parents, for the first time parents can will be able to have peace of mind in the knowledge that their children will be able to surf the web safely and in a squeaky clean way. The new browser software from InternetSafety.com's new Safe Eyes Mobile browser blocks the more unsavory side of the web from young, prying eyes was launched this week at MacWorld in San Francisco and at the 2009 International CES exhibition in Las Vegas.

MSNBC:

- It looks like Dick Tracy may finally get his wristwatch cell phone, the one that does video calls. LG Electronics plans to introduce a wrist phone later this year, giving reality a chance of catching up with the comic-strip hero who famously used a two-way "Wrist TV."

Point Carbon:

- Aviation biofuel may become commercially viable for passenger carriers within five years following successful test flights, citing the International Airline Transport Assoc. Commercial tests, including a two-hour demonstration yesterday by a Continental Air aircraft using a fuel blend made from algae and jatropha, are increasing.

Denverpost.com:

- Great snow lured more skiers and snowboarders this past holiday season to resorts than the previous season despite the economic recession. The Lakewood-based National Ski Areas Association found holiday visits to mountain resorts on average were up across the country even though the economy is sliding. In addition to good snowfall across the resorts, it also helped that some, including Silverton, Crested Butte and Telluride, saw record snowfall in December. According to the NSAA research, based on a random survey of several dozen ski areas nationwide, some resorts reported up to a 40 percent increase over 2007.

Financial Times:
- As thousands of people milled around the high-tech devices at the Consumer Electronics Show in Las Vegas, Nevada, on Thursday it was becoming clear that one of the big trends at this year’s event was the push for a holy grail that has thus far eluded the industry: internet connectivity in the living room.

O Estado de S. Paulo:

- Brazil may lose 3 million jobs in the first quarter of 2009, citing a forecast by Paulo Pereira da Silva, president of Forca Sindical, Brazil’s second-largest labor union group. The job cuts would account for about 10% of Brazil’s registered workforce.

Bear Radar

Style Underperformer:
Mid-cap Growth (-.75%)

Sector Underperformers:
Retail (-3.29%), Gaming (-2.59%) and REITs (-2.40%)

Stocks Falling on Unusual Volume:
WMT, SMSC, PUK, XLNX, DB, ISRG, HELE, PMTC, CERN, LEAP, SGMS, PFCB,

Stocks With Unusual Put Option Activity:
1) ELN 2) JAVA 3) ADS 4) SGR 5) TEX

Bull Radar

Style Outperformer:
Large-cap Value (+.49%)

Sector Outperformers:
Construction (+2.76%), HMOs (+1.55%) and Homebuilders (+1.32%)

Stocks Rising on Unusual Volume:
SSRI, SA, REP, ABT, SHLD, PSMT, FSLR, APSG, CRXL, BLUD, URBN, CONN, DRYS, ASEI, TBSI, DMND, SCHN, PLCE, RATE, SPWRB, TISI, GYMB, CSGP, SGR, RBN, CVC and GME

Stocks With Unusual Call Option Activity:
1) ISRG 2) NVLS 3) STT 4) ARO 5) SHLD

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Thursday Watch

Late-Night Headlines
Bloomberg:

- Interest-rate derivatives are signaling credit markets are returning to levels not seen in a year as the Federal Reserve keeps its target lending rate pinned near zero to unfreeze lending. The CHART OF THE DAY shows the two-year interest rate swap spread narrowed to 61.50 basis points yesterday, the least since January 2008. The spread, which is the difference between the rate to exchange floating for fixed interest payments for two years and comparable U.S. Treasury yields, is a gauge of investors’ perceptions of credit risk. Swap rates are based on expectations for the London interbank offered rate, or Libor. “The move tighter in swap spreads is definitely a positive for the credit markets,” said Saumil Parikh, a portfolio manager at Pacific Investment Management Co. in Newport Beach, California, which oversees more than $790.3 billion in assets. “It is an important step in the sequential healing process of U.S. credit conditions and it signals immediately that there is decreasing risk in the inter-bank lending market.”

- The accounting scandal that caused Satyam Computer Services Ltd.(SAY) to collapse yesterday is shaking investor confidence in Indian stocks, putting an end to the market’s best start since 2000. “How did they manage to conceal a fraud of such magnitude even from the auditors?” said Greg Kuhnert, a London-based fund manager at Investec Asset Management Ltd., which manages about $10 billion and sold its 0.15 percent stake in Satyam last month. “That to me is a huge concern and is making me very nervous about the situation in India now.” India’s Sensex index tumbled 7.3 percent yesterday, led by a 78 percent plunge in Satyam, after Chairman Ramalinga Raju said profits at the company had been inflated for years and then resigned. Satyam American depositary receipts fell $8.42, or 90 percent, to 93 cents before the opening of the New York Stock Exchange, which then halted trading in the stock.

- House Democrats plan votes this week on two measures that would make it easier for U.S. workers to win pay-discrimination lawsuits, overriding business groups’ opposition. One bill would let workers sue on a claim they are underpaid because of discrimination that occurred years earlier. It would undo a 2007 U.S. Supreme Court decision barring such lawsuits. The second measure would lift a cap on damages in pay-bias suits and restrict defenses that can be raised by employers. Majority Leader Steny Hoyer, a Maryland Democrat, said the measures will be put to a vote on Jan. 9. Business lobbyists say Speaker Nancy Pelosi, of California, and other Democratic leaders are pushing the proposals to reward unions for supporting the party in November. “It shows that labor won the election,” said John Engler, president of the National Association of Manufacturers. “There’s no sugar-coating that.”

- Brazilian stocks declined for the first time in two weeks on concern the slowdown in Latin America’s biggest economy is worsening, hurting the outlook for metals and oil. Cia. Siderurgica Nacional SA led a drop in steelmakers after Itau Corretora said manufacturing will be weak through the first half of the year. Cia. Vale do Rio Doce, the world’s biggest iron ore miner, slumped more than 5 percent as metal prices declined. Petroleo Brasileiro SA fell for the first time in seven days on plunging oil prices and a newspaper report that the energy producer is seeking as much as $15 billion in loans.

- Pershing Square International Ltd., the biggest hedge fund of activist investor William Ackman, lost 12 percent in 2008, less than industry average. The fund fell 0.2 percent in December, New York-based Pershing said in a Jan. 6 letter to investors, a copy of which was obtained by Bloomberg News. It lost money on retailer Target Corp., which dropped 31 percent last year, soft-drink maker Dr Pepper Snapple Group Inc. and book-store chains Borders Group Inc. and Barnes & Noble Inc.

- The U.S. Securities and Exchange Commission opened a new investigation into whether Pequot Capital Management Inc., the hedge fund run by Arthur Samberg, illegally profited from inside information on Microsoft Corp. in 2001, two people familiar with the matter said.

- Corn prices that reached a record $7.9925 a bushel last year are headed for a decade-long slump below $4 as production in the U.S., the world’s top grower, catches up with demand, according to congressional analysts. The average cash price will bottom out at $3.65 in the 2012-2013 marketing year, then rise no higher than $3.94 through 2019, the analysts from the Congressional Budget Office said in a document used as part of a government-wide estimate of federal spending over the next decade.

- The euro fell against the US dollar before data that may show the jobless rate rose and retail sales declined in the countries sharing the currency, bolstering speculation the European Central Bank will lower interest rates. The European unemployment rate increased to 7.8 percent in November from 7.7 percent the previous month, according to a Bloomberg News survey of economists before the release of the data at 11 a.m. in Luxembourg today. A separate report tomorrow will show retail sales in the countries using the euro fell 1.7 percent in November from a year earlier after a 2.1 percent decline in the previous month, according to another survey.

- Democrats on the Senate Finance Committee will make some “tweaks” to President-elect Barack Obama’s fiscal stimulus plan to add items sought by lawmakers such as a “stronger energy component,” said the tax-writing panel’s chairman.

- Bank of China Ltd. fell the most in a month in Hong Kong trading after billionaire Li Ka-shing sold a $511 million stake in the nation’s third-largest lender following the end of a three-year lockup period. Li, ranked Asia’s richest man by Forbes Magazine, follows UBS AG and Bank of America Corp. in cutting holdings in Chinese lenders after stakes they bought in 2005 became freely traded. Royal Bank of Scotland Group Plc, the bank controlled by the U.K. government, is in talks sell shares in Bank of China, the Financial Times reported today.

Wall Street Journal:

- Wyeth(WYE) is in talks to purchase Dutch vaccine maker Crucell NV as the big U.S. drug maker attempts to grab a larger share of one of the industry's fastest-growing segments.

- Citigroup Inc.(C) is leading other lenders in advanced talks with key senators on legislation that would allow judges to set new repayment terms for millions of mortgage holders who wind up in bankruptcy court, people involved in the talks say. A person close to Citigroup said that it is still negotiating details of an agreement with lawmakers, and that it hasn't made a final decision to embrace the "cramdown" legislation. But the efforts mark a surprising change of direction by the financial-services industry. Banks have consistently fought such legislation.

- Swiss bank Union Bancaire Privée, which faces hefty losses in the alleged Ponzi scheme run by money manager Bernard Madoff, is threatening to pull several billion dollars of investments from large U.S. hedge funds because they don't use a full-time independent administrator. The effort by Union Bancaire Privée, or UBP, is notable because it is one of the world's largest investors in hedge funds, with about $124.5 billion of assets as of June.

- President-elect Barack Obama and Senate Democrats backed down Wednesday from an embarrassing political fight with the man appointed by accused Illinois Gov. Rod Blagojevich to fill Mr. Obama's Senate seat. The reversal came days after Democratic leaders said they would refuse to seat Roland Burris -- a former state attorney general -- because of corruption allegations against the governor.

- President-elect Barack Obama's unexpected pick to lead the Central Intelligence Agency cleared a key hurdle on Wednesday when he won the backing of the previously skeptical incoming chairman of the Senate intelligence committee. Sen. Dianne Feinstein (D., Calif.) said Wednesday that after speaking late Tuesday with Leon Panetta, she now supports his nomination. She said Mr. Panetta allayed her concerns about his lack of direct intelligence experience by assuring her that he would surround himself with intelligence professionals at the CIA.

MarketWatch.com:
- The Kingate funds, run by FIM Advisers LLP, are considering joining a class-action lawsuit against Bernard Madoff after investing at least $2.7 billion with him.

The funds are likely to be part of a group of investors eligible to join a class-action suit filed by Irwin Kellner on Dec. 12. In his complaint, Kellner -- a columnist for MarketWatch, the publisher of this report -- claims he lost more than $3 million because of Madoff's alleged fraud.

NY Times:

- PITTSBURGH — This is what life in one American city looks like after an industrial collapse: Unemployment is 5.5 percent, far below the national average. While housing prices sank nearly everywhere in the last year, they rose here. Wages are also up. Foreclosures are comparatively uncommon. A generation ago, the steel industry that built Pittsburgh and still dominated its economy entered its death throes. In the early 1980s, the city was being talked about the way Detroit is now. Its very survival was in question.

- More than a year after the United States entered a recession, Europe is now catching up quickly as the pain of job losses and shrinking orders spreads. Data released Wednesday showed that the monthly unemployment rate in Germany rose in December for the first time in three years — by 18,000, to 7.6 percent. Throughout most of 2008, German strength ensured that unemployment held steady at the European level despite sharp rises in Spain and Ireland, two countries hit hard by the housing crisis. But it appears that Germany, too, is suffering. “Europe is now rushing rapidly into a recession, faster than the United States,” said Bart van Ark, chief economist of the Conference Board, a nonprofit group that assesses business trends.

IBD:

- The process goes smoother for Frazer, Pa.-based Cephalon (CEPH), which lands medicines at low cost and turns them into market winners.

USA Today.com:

- Millions of consumers by year's end should be able to watch free, over-the-air television on cellphones, PDAs and other portable digital devices as the result of initiatives that will be unveiled Thursday by some of the nation's largest TV station owners and electronics manufacturers. The changes promoting on-the-go viewing are "quite significant," says John Eck, president of the NBC TV Network and Media Works. "If we play it right, it can be a compelling service," for example, by offering local news, which normally isn't available from cellphone video services. At least 63 stations in 22 cities — including New York, Chicago, Philadelphia, San Francisco, Boston and Washington — will transmit news, entertainment and sports to portable devices this year, according to the broadcast industry's Open Mobile Video Coalition (OMVC). The initial group will include affiliates of ABC, CBS, Fox, NBC, CW, ION and PBS. Each city will have a different mix. Most will simulcast regularly scheduled shows.

Reuters:

- Yahoo Inc(YHOO) unveiled on Wednesday a list of partners to aid its push to bring the Internet and television together, hoping their joint effort will finally connect with consumers.

- Sony Corp's (SNE) sales on some of its core products, including flatscreen TVs and Blu-ray DVD players, exceeded its expectations during the U.S. holiday season despite the sharp economic downturn. Seeking to stoke consumer demand this year, Sony unveiled a series of new products on Wednesday including a line of eco-friendly, energy-efficient flat TVs and what it called the world's lightest 8-inch notebook computer.

Straits Times:

- Singapore’s prime office rents may fall about 40% by next year, citing a report by Cushman and Wakefield.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MON), target $110.

Night Trading
Asian Indices are -3.75% to -1.75% on average.
S&P 500 futures -.12%.
NASDAQ 100 futures -.10%.

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Earnings of Note
Company/EPS Estimate
- (TXI)/.15

- (SGR)/.66

- (SCHN)/-1.45

- (LWSN)/.07

- (APOL)/.97

- (MDRX)/.13

Economic Releases

8:30 am EST

- Initial Jobless Claims for last week are estimated to rise to 545K versus 492K the prior week.

- Continuing Claims are estimated to fall to 4483K versus 4506K prior.

3:00 pm EST

- Consumer Credit for November is estimated unch. versus a -$3.5B decline in October.

Upcoming Splits
- None of note

Other Potential Market Movers
- The ICSC chain store sales report, 10-year Treasury Auction, the Fed’s Hoenig speaking, (MON) R&D Pipeline update, Needham Growth Conference, Goldman Healthcare Conference, JPMorgan Tech Forum and Citi Entertainment/Media/Telecom Conference could also impact trading today.

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