Stocks Falling into Final Hour on More Economic Pessimism, Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Healthcare longs, Medical longs and Internet longs. I added back (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 substantially lower, most sectors are declining and volume is below average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is falling .75% and is elevated at 42.25. The ISE Sentiment Index is below average at 133.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running very high most of the day, hitting 2.14 at its intraday peak, and is currently 1.62. The Euro Financial Sector Credit Default Swap Index is falling 1.51% today to 96.17 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 1.65% to 200.25 basis points. The TED spread is down 6.52% to 120 basis points. The TED spread is now down 346 basis points in about three months. The 2-year swap spread is falling .93% to 54.25 basis points. The Libor-OIS spread is falling 8.01% to 1.08 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 4 basis points to .58%, which is down 217 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 .06%, which is down 2 basis points today. Volume is light again on today’s sell-off with a high NYSE Arms reading. However, the stock and bond market’s reactions to today’s news are negatives. I am also seeing a number of conflicting moves is various securities. While another stock rally could materialize at any time, I am going to leave my hedges on until I gain more clarity on these moves next week. Nikkei futures indicate an +14 open in Japan and DAX futures indicate an +24 open in Germany on Monday. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting and economic pessimism.

Today's Headlines

Bloomberg:

- The US dollar rose against the euro and headed for its biggest weekly gain since October after a U.S. government report showed payrolls shrank last month less than some economists forecast. The euro was poised for the biggest weekly drop against the pound since its debut in 1999 on speculation the European Central Bank will cut its main refinancing rate next week to the lowest level since 2005.

- U.S. corporate bond sales soared to $41 billion this week, the most in almost eight months, as companies took advantage of investor demand to raise cash in a weakening economy.

- The ruble may fall when Russia’s financial markets open on Jan. 11 after a seven-day holiday as companies and banks demand foreign currency to repay more than $80 billion of debt this year, according to Societe Generale SA. The ruble may slump 10 percent this month against the central bank’s target basket of dollars and euros, Societe Generale analysts said. The currency lost 20 percent against the dollar and 11 percent versus the euro between August and the end of last year as the Russian economy weakened because of the falling price of oil, its main export earner.

- Genentech Inc.(DNA) rose as much as 5.2 percent on a Financial Times report that Swiss drugmaker Roche Holding AG is preparing to raise its bid for the biotechnology company to $95 a share.

- The Baltic Dry Index, a measure of shipping costs for commodities, advanced to the highest in more than two months on demand for capsize vessels to haul coal and iron ore to make steel. The index rose 51 points, or 6.2%, to 872 points. Shipping rates are benefitting from increased congestion at Australian ports that cut the number of ships competing for cargoes, Philippe Van den Abeele, managing director at shipping hedge fund Castalia Fund Management(UK) Ltd. said.

- India should act quickly to shore up investor confidence after an alleged accounting fraud at Satyam Computer Services Ltd. triggered a plunge in stocks, a former regulator and executive said. More than two days after chairman Ramalinga Raju claimed he’d padded Satyam’s books by $1 billion, the company’s auditors and interim management have yet to confirm any irregularities. The government should appoint outside managers and accelerate the probe to clear up the case, said Richard Rekhy, chief operating officer of KPMG in India.

Wall Street Journal:

- The Illinois House of Representatives voted overwhelmingly to impeach Gov. Rod Blagojevich, one month after he was arrested and charged with corruption. Impeachment required just 60 votes. The final result was 114-1. A Senate trial will follow in coming days or weeks. "You ought to be angry, you ought to be disgusted, you ought to be mad as hell," said Rep. Tom Cross, before urging his colleagues to join him in voting to impeach.

NY Times:

- Numerous money-losing hedge funds have curtailed investor withdrawals over the past few months as redemption requests piled up. But “raising the gates,” as it’s known in the industry, can cost investors dearly, according to a recent study from the Vanderbilt University’s Owen Graduate School of Management and Columbia University. According to the study, the implied costs to a hedge fund investor of redemption restrictions can range from 5 percent to 15 percent depending on how long the fund has been in business, the expected return and the loss generated by liquidation of assets. Firms that have raised the gates include the Citadel Investment Group, D.E. Shaw, Farallon Capital Management and Magnetar Capital.

USA Today:

- We're seeing lots of "super zoom," point and shoot cameras here at CES.

Washington Post:

- Confronted with intense skepticism on Capitol Hill over the $700 billion financial rescue program, Treasury Secretary nominee Timothy F. Geithner and President-elect Barack Obama's economic team are urgently overhauling the embattled initiative and broadening its scope well beyond Wall Street, sources familiar with the discussions said. Geithner has been working night and day on the eighth floor of the transition team office in downtown Washington with Lawrence H. Summers and other senior economic advisers to hash out a new approach that would expand the program's aid to municipalities, small businesses, homeowners and other consumers.

Reuters:
- A top bank industry group said on Friday that it opposes an agreement between financial giant Citigroup Inc and Democratic senators that would rewrite U.S. bankruptcy law to help troubled mortgage borrowers avoid foreclosure. The American Bankers Association said in a statement that it did not participate in Citigroup's agreement with lawmakers and has consistently opposed giving bankruptcy judges broad authority to unilaterally modify mortgage terms. "ABA is opposed to the agreement because it will leave in place overly broad mortgage cram-down authority and other provisions that will harm thousands of banks across the country that have made, and continue to make, good loans," said Floyd Stoner, ABA's executive director for public policy.

Negocio:
- Consumer credit extended to families and companies in Spain fell 44% in the fourth quarter from a year earlier, citing the National Assoc. of Credit Establishments. The largest drop was a 56% decline in loans to buy cars.

MEES:

- Iraq may award a contract to develop its 4.35 billion barrel Nasiriyah oilfield before two bidding rounds for the rest of the country’s hydrocarbon resources. Eni SpA, Repsol YPF SA and Nippon Oil Corp. are “in the running” for the project, MEES said.

Bear Radar

Style Underperformer:
Small-cap Value (-2.85%)

Sector Underperformers:
Oil Service (-6.09%), Networking (-3.64%) and Homebuilders (-3.42%)

Stocks Falling on Unusual Volume:
ISRG, LUX, SHLD, OZRK, DB, RMBS, LHCG, AFAM, MASI, GTU, CVS, EBS, IX, MTN and KBH

Stocks With Unusual Put Option Activity:
1) LEN 2) PALM 3) CVS 4) BSX 5) CYPB

Bull Radar

Style Outperformer:
Large-cap Value (-1.60%)

Sector Outperformers:
Computer Hardware (+2.96%), Medical Equipment (+.11%) and Drugs (-.42%)

Stocks Rising on Unusual Volume:
AMMD, APOL, COCO, SYK, RAI, BTI, CALM, WMT, CHU, RTN, UBS, HWAY, STRA, CECO, DRYS, ICLR, CPLA, APEI, QSII, BCA, AZZ, ESI, SNX, IHS, SYK, CBI and DV

Stocks With Unusual Call Option Activity:
1) PALM 2) LEN 3) M 4) CVS 5) KBH

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Friday Watch

Late-Night Headlines
Bloomberg:

- U.S. stocks may keep rallying from their November lows as investors speculate the economy will improve, according to investors Barton Biggs and Robert Doll. Airline shares may gain after crude oil fell 71 percent from its July record, said Biggs, managing partner at hedge fund Traxis Partners LLC. Stocks with the biggest price swings will rise as the recession ends, said BlackRock Inc. chief investment officer Doll. Both spoke on Bloomberg television. “Sometime around the middle of the year there’s going to be pretty conclusive evidence that the economy has stabilized,” Biggs said. “That’s what the stock market is now looking forward and seeing, and that’s why I think that this rally carries further.”

- Brazil’s economy may grow as little as 1.5% this year as the global recession reduces demand for commodities and curbs consumer spending, said Itau Corretora de Valores SA, the brokerage unit of the nation’s biggest bank. JPMorgan Chase today reduced its 2009 forecast to 1.5% from a previous estimate of 2%. Brazil’s economy grew 5.6% last year. Vehicle production plunged 54% to a nine-year low last month., the country’s automaker assoc. said yesterday. JPMorgan joined Morgan Stanley in saying Brazil had entered a “technical recession,” as defined by two consecutive quarters of negative growth.

- Investors should sell Australia’s dollar as prices of commodities that the nation exports may fall further and the central bank is likely to lower interest rates, according to Australia & New Zealand Banking Group Ltd., the country’s fourth largest bank.

- China and Hong Kong stocks had their weighting recommendations downgraded to “underweight” from “overweight” at Macquarie Group Ltd., while raising its rating on India. “China has now become a consensus trade, its relative earnings risk is growing and, while the market is not expensive, in the past valuations have not been a good predictor of future performance for China,” Hong Kong-based Daniel McCormack and Tim Rocks wrote.

- Hedge funds lost 18.3 percent in 2008, their worst year on record, as managers misjudged the severity of the biggest financial crisis since the Great Depression.

- The Bank of Korea cut its benchmark interest rate by a half-point to a record low, saying the economy is deteriorating faster than expected as domestic demand and exports falter.

- Israel pressed on with its military operation to end rocket fire from the Gaza Strip as the United Nations Security Council approved a resolution calling for an immediate cease-fire.

- Almost a month after Bernard Madoff was arrested for securities fraud, investigators are still struggling to learn how the investment adviser directed an alleged $50 billion Ponzi scheme and how widespread it may have been, a person familiar with the probe said.

Wall Street Journal:

- The pharmaceutical industry has a recurring nightmare: Drug-safety crusader Sidney Wolfe becomes a player at the Food and Drug Administration. Dr. Wolfe also has a nightmare: One of his children goes to work for a drug maker. Of the two, the doctor is sleeping more soundly. Over three decades, Dr. Wolfe, head of the health group at advocacy organization Public Citizen that Ralph Nader founded, has helped push 16 drugs off the market and slap restrictions on several multibillion-dollar products. He has been so hostile to the FDA under President George W. Bush that he decried its 100th-anniversary celebration in 2006 as a "propaganda campaign" to hide its "unprecedented assault on the American public." Now the outsider is going inside, mirroring a larger shift in the Washington pendulum toward tougher company regulation. To the consternation of the drug industry, Dr. Wolfe has been appointed to a four-year term on the FDA's Drug Safety and Risk Management Committee, which plays a key role in telling the agency which drugs are safe.

- Advanced Micro Devices Inc.(AMD) announced plans to build a massive supercomputer to process and electronically distribute games and other complex content to users -- avoiding the need for specialized hardware and software that adds to the cost of computers and other devices.

- The business of recruiting investors to hedge funds boomed over the past decade and helped drive the hedge-fund frenzy. Now, investors burned by big losses in hedge funds are dumping these middlemen. The combination of market losses and investor panic resulting from money manager Bernard Madoff's alleged Ponzi scheme is putting the heat on firms that pool money from clients and invest in hedge funds. Last year, these so-called fund-of-funds assets overall shrank for the first time since 1996, according to industry tracker Hedge Fund Research, or HFR.

- Fannie Mae(FNM) is testing a new program to stave off foreclosures by preapproving "short sales" of homes, in which mortgage companies allow homeowners to sell houses for less than the value of existing loans, forgiving the difference.

- President-elect Barack Obama has banned corporations and big donors from funding his Jan. 20 inauguration. But 90% of donations received so far have been raised by well-heeled fund-raisers, including Wall Street executives whose companies have received billions of dollars in federal bailout money. A total of 207 fund-raisers have collected $24.8 million of the $27.3 million in contributions disclosed by Mr. Obama through Thursday, according to an analysis by nonpartisan campaign finance group Public Citizen commissioned by The Wall Street Journal. Wall Street employees, as a group, have been the biggest single source of these private donations, according to the analysis. Much of their donations -- $5.7 million total -- has been channeled through financial-services executives who each have bundled together donations worth hundreds of thousands of dollars.

MarketWatch.com:
- Shares of Whole Foods Market Inc.(WFMI) surged 22% Thursday after the investment fund run by Ron Burkle, who made a fortune in investing in supermarkets, bet the high-end grocery chain can turn its business around. In a regulatory filing Thursday, Yucaipa Companies LLC said it owned 9.8 million shares, or 7% of Whole Foods' outstanding common stock. Yucaipa's investment funds have been aggressive buyers of Whole Foods shares since Nov. 24, spending a net $98 million to amass the stake.

- Chevron Corp.(CVX), in its interim quarterly update, warned late Thursday its fourth-quarter earnings are shaping up to be "significantly lower" than third-quarter results due to a steep drop in energy prices and narrower refining margins.

NY Times:

- Accenture(ACN), IBM(IBM) May Benefit From Satyam(SAY) Scandal. The financial fraud at Satyam is rippling through the technology services industry, as customers scramble to line up other suppliers and rivals look to pick up business.

- Under pressure from federal authorities, the Swiss bank UBS is closing the hidden offshore accounts of its well-heeled American clients, potentially allowing their secrets to spill into the open. In a step that would have once been unthinkable in the rarefied world of Swiss banking, UBS will shut about 19,000 accounts that prosecutors suspect have gone undeclared to the Internal Revenue Service. UBS will transfer the assets to other banks or other divisions within UBS, or will mail checks directly to the account holders, creating paper trails for federal prosecutors who are examining whether UBS clients used such accounts to evade taxes.

Reuters:

- The chief executive of Nasdaq OMX (NDAQ) pushed for a merger of U.S. securities and futures regulators, saying it was incomprehensible that they both monitored the same products. "Two different agencies with two very different approaches essentially monitor the same securities," Nasdaq CEO Robert Greifeld said at a National Press Club event in Washington.

- Financial giant Citigroup Inc(C) will support a proposal in Congress to rewrite U.S. bankruptcy law to help troubled mortgage borrowers avoid foreclosure, Chief Executive Vikram Pandit said on Thursday.

- General Motors Corp (GM) Chief Executive Rick Wagoner said on Thursday he was confident the automaker will win the concessions it needs from the United Auto Workers union to meet the restructuring terms dictated by the $13.4 billion federal bailout. "I'm confident that we'll be able to get the kinds of changes we'll need," Wagoner told NBC's Matt Lauer in an interview for the "Today" show broadcast live from Detroit. GM and UAW officials are to meet on Monday in talks aimed at key changes in the union's 2007 contract.

South China Morning Post:

- Home buying on the Chinese mainland by Hong Kong residents dropped significantly last year because of the deteriorating market and the global financial crisis, property agents said.

- SAIC Motor Corp., the largest Chinese carmaker, and its parent will spend $878 million to develop hybrid and electric vehicles. The investment is part of a plan to introduce the company’s first “green” vehicle by 2010. SAIC is the second Chinese automaker after BYD Co. to announce plans to sell the environmentally-friendly vehicles.

Shanghai Securities News:

- Chinese steelmakers want contract iron ore prices to fall as much as 45% in negotiations with Brazilian and Australian suppliers. The demand echoes Japanese steelmakers’ comments this week that iron ore and coking coal prices next fiscal year should fall to at least 2007 levels.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (CELG), target $73, added to Top Picks Live list.

Night Trading
Asian Indices are -.50% to +1.0% on average.
S&P 500 futures +.19%.
NASDAQ 100 futures +.28%.

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Earnings of Note
Company/EPS Estimate
- (KBH)/-1.24

Economic Releases

8:30 am EST

- The Change in Non-farm Payrolls for December is estimated at -525K versus -533K in November.

- The Unemployment Rate for December is estimated at 7.0% versus 6.7% in November.

- Average Hourly Earnings for December are estimated to rise .2% versus a .4% gain in November.

10:00 am EST

- Wholesale Inventories for November are estimated to fall .7% versus a 1.1% decline in October.

Upcoming Splits
- None of note

Other Potential Market Movers
- The (GIS) analyst meeting, the Fed’s Lacker speaking and (MON) R&D Pipeline update could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial 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 100% net long heading into the day.