Stocks Slightly Higher into Final Hour on Diminishing Credit Market Angst, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Biotech longs and Medical longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is neutral as the advance/decline line is slightly lower, sector performance is mixed and volume is below average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is falling 1.16% and is elevated at 45.31. The ISE Sentiment Index is low at 105.0 and the total put/call is about average at .91. Finally, the NYSE Arms has been running high most of the day, hitting 1.94 at its intraday peak, and is currently .90. The Euro Financial Sector Credit Default Swap Index is rising 3.4% today to 105.0 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 5.4% to 217.92 basis points. The TED spread is plunging another 10.3% to 99 basis points. The TED spread is now down 367 basis points in just over three months. The 2-year swap spread is falling another 6.11% to 51.88 basis points. The Libor-OIS spread is falling 5.45% to 93 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 5 basis points to .63%, which is down 212 basis points in just over 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 .11%, which is up 5 basis points today. The US dollar continues to trade very well and is getting extended short-term. I wouldn’t be surprised to see some temporary weakness in the currency, after the ECB rate decision, before another move higher. The major averages are being held back today by a few large-caps. Cyclicals are relatively weak again. The broad market is performing better, with small-caps taking the lead. I expect the Russell 2000 to outperform the S&P 500 for the year. The 2-year swap spread is now near long-term average levels of 43.10, which is a big positive. Nikkei futures indicate an +37 open in Japan and DAX futures indicate an +14 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing credit market angst, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:

- The premium that banks pay to borrow money compared with the U.S. Treasury narrowed to the least in five months, signaling the freeze in credit markets that began 18 months ago is starting to thaw. The difference between the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars and the yield on the three-month Treasury bill, fell 12 basis points to 98 basis points today. The so-called TED spread last closed below 100 basis points Aug. 15. Dollar Libor dropped to 1.09 percent today, the lowest level since June 2003.

- Options traders are betting stock swings in the Standard & Poor’s 500 Index will decrease at the fastest rate since the aftermath of the market crash in 1987, a sign that equities may keep rallying. The difference between the benchmark index’s historic volatility and a gauge of so-called implied volatility based on expected swings rose to the highest in 21 years, according to data compiled by Credit Suisse Group AG and Bloomberg.

- Saudi Arabia, the world’s largest oil exporter, said it will take the lead among OPEC oil producers in trying to halt a six-month slide in prices.

- Barack Obama will order the Treasury Department to limit executive compensation and dividend payments by financial institutions that get “exceptional assistance” from the financial rescue fund, Larry Summers, a top economic adviser to the president-elect, told Congress.

- Kia Motors Corp., South Korea’s second-biggest carmaker, will slash production at domestic factories by 24% from a year earlier as demand slows.

- Federal Reserve Chairman Ben S. Bernanke warned that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth. “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said in a speech today at the London School of Economics. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”

- Vikram Pandit may split Citigroup Inc.’s investment bank from commercial banking in an attempt to assure the company’s survival, the Financial Times reported, citing people close to the situation. Pandit, the bank’s 51-year-old chief executive officer, may abandon his support for the “financial-supermarket” business model pursued over the past decade, the newspaper said.

Wall Street Journal:

- Investors are abandoning riskier stock strategies in favor of the relative calm and lower costs of plain-vanilla exchange-traded funds.

- There may have been a silver lining for the economy in the horrific December job losses reported Friday by the Labor Department. Companies are cutting back so aggressively that they actually might be increasing their productivity even in the face of a wrenching economic shock. The contraction in the number of hours worked might have been greater than the contraction in overall economic output for the quarter, which will be reported later this month. In other words, businesses appear to have squeezed more out of the workers they kept on staff, increasing business productivity.

- With investment bankers desperate for deals and traders disgraced by losses, everyday stockbrokers suddenly are back in vogue on Wall Street.

CNBC.com:
- US automakers “may not need access to more than what they applied for and got in December” in direct financial help from the federal government, Michigan Governor Jennifer Granholm said.

- 10 Reasons for Hope…Really.

NY Times:

- A new book defending vaccines, written by a doctor infuriated at the claim that they cause autism, is galvanizing a backlash against the antivaccine movement in the United States. But there will be no book tour for the doctor, Paul A. Offit, author of “Autism’s False Prophets.” He has had too many death threats.

- Using the human hand as a model, scientists at Johns Hopkins University and its medical school have developed a microscopic tool that might one day be used inside the body. The tool, a clawlike gripper less than a millimeter in diameter, could grab cells from tissue for a biopsy, for example.

- As analysts peg the price of the upcoming battery-powered Chevrolet Volt at roughly $40,000, the high cost of its lithium-ion batteries is widely viewed as a key obstacle to mass adoption by consumers. But at a G.M. press conference offering details on its battery-powered future, Prabhakar Patil, a leader in electric propulsion, offered this surprising assessment: Lithium-ion batteries have become cost competitive with the more-primitive nickel-metal hydride batteries that power the Toyota Prius and other current hybrids.

- Hedge funds lost $350 billion worldwide in 2008, the most on record, as the global financial crisis crippled returns and caused investors to pull money out, according to an industry report. About 90 percent of the money was lost in the three months to the end of November, according to a preliminary report published Tuesday by the Singapore-based data provider Eurekahedge Pte, Bloomberg News reports.

NY Post:

- Morgan Stanley(MS) and Citigroup(C) are looking at setting aside between $2 billion and $3 billion to keep top brokers at the wealth-management shop the two banking giants are close to combining, The Post has learned.

Washington Post:

- Bowing to widespread Democratic skepticism, President-elect Barack Obama will drop his bid to include a business tax break he once touted in the economic stimulus bill now taking shape on Capitol Hill, aides said last night. Obama suggested the $3,000-per-job credit last week as one of five individual and business tax incentives aimed at winning Republican support.

IBD:

- A thaw may be under way in frozen credit markets. Mortgage rates are falling to record lows, key credit measures have improved, and corporate bond sales have started off strong in the new year.

Lloyd’s List:

- Container lines are offering spot rates as low as zero dollars, before surcharges, on Asia-Europe routes because of slumping demand, citing people in the industry. Zero rates are widespread.

Reuters:
- Boeing Co (BA) won a contract on Monday valued at $1.1 billion to support the U.S. Air Force's fleet of C-17 transport planes, more good news for one of Boeing's biggest aircraft programs.

- When the MBA students at India's top business schools began their studies their future was full of promise as companies tripped over each other to lure graduates. But 24 months of study and a financial meltdown later, prospects are glum for the estimated 120,000 business school graduates who will enter the job market in March after their final exams.

Folha de S. Paulo:

- BG Group Plc plans to invest $4 billion in Brazil’s so-called pre-salt oil fields, citing Chairman Robert Wilson. The majority of that amount will go toward prospecting for oil in the reserves around the Tupi field in Brazil’s Santos Basin, Wilson said.

Rheinische Post:

- Germany’s public-sector deficit will jump above 6% of gross domestic product this year as new borrowing surges to $79.6 billion, Steffen Kampeter, budget spokesman for Chancellor Angela Merkel’s Christian Democrats, said.

Bear Radar

Style Underperformer:
Mid-cap Value (-.40%)

Sector Underperformers:
Road & Rail (-3.53%), Computer Hardware (-3.50%) and HMOs (-2.40%)

Stocks Falling on Unusual Volume:
ADBE, CGV, BAS, IX, UBS, BAC, GE, APOL, ALGT, CSGS, AFG, WLP, LXK and SVU

Stocks With Unusual Put Option Activity:
1) LAMR 2) INFY 3) CIT 4) SAY 5) TEVA

Bull Radar

Style Outperformer:
Mid-cap Growth (+.91%)

Sector Outperformers:
REIT (+3.0%), Biotech (+2.52%) and Steel (+2.28%)

Stocks Rising on Unusual Volume:
IOC, ALXN, INFY, CTSH, VRTX, JPM, USB, IPCM, PRSP, NNDS, RAIL, MASI, MDAS, ICLR, SYNA, IIIN, LLTC, NTES, SOHU, PCLN, IAI, HEP, VAR, DSC, XBI, HQH and SMH

Stocks With Unusual Call Option Activity:
1) TEVA 2) XLNX 3) COST 4) NTES 5) ALL

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- Yields on bonds backed by credit- card payments and auto loans, relative to benchmark interest rates, are falling from record highs as investors anticipate the start of the U.S. government’s program to bolster investment in consumer-finance assets. Demand for debt backed by consumer payments is picking up as details crystallize on the Federal Reserve’s plan to finance the purchase of as much as $200 billion in consumer asset-backed securities. The Treasury will commit as much as $20 billion in credit protection for soured loans under its Term Asset-Backed Securities Loan Facility, or TALF. “TALF is gaining interest among investors,” JPMorgan Chase & Co. analysts led by Christopher Flanagan in New York said in a Jan. 9 report. “Investors are homing in on the potential opportunities under the program.” The gap, or spread, on top-rated credit card-backed debt maturing in three years fell 75 basis points to 475 basis points more than the one-month London interbank offered rate, or Libor, during the week ended Jan. 8, according to JPMorgan Chase data. The spread on similar bonds backed by auto loans fell 25 basis points to 575 basis points more than Libor, the data show. One- month dollar Libor is 0.34 percent.

- JPMorgan Chase(JPM) announced it will be ready to issue fourth-quarter 2008 earnings on Thursday, January 15, 2009 at 6:30 a.m. (Eastern), rather than on Wednesday, January 21, the previously scheduled date.

- Barack Obama will direct his Treasury Department to restrict executive compensation and dividends for financial institutions that get “exceptional assistance” from the financial bailout fund, Larry Summers, a top economic adviser to the president-elect, told Congress. Summers sent a letter to congressional leaders today outlining the conditions that Obama supports in tapping the second half of the $700 billion Troubled Asset Relief Program.

- The Dalai Lama, Tibet’s exiled spiritual leader, blamed a lack of spirituality among people today for the global financial crisis. The Buddhist monk, speaking during a weeklong religious seminar in the Indian holy city of Varanasi, told followers that “rampant corruption in the world” is due to a decline in culture and spirituality. “People have become selfish and materialistic, which has led to the economic slowdown,” the 73-year-old Nobel Peace Prize winner said in an address at the Central Institute of Higher Tibetan Studies yesterday, Indian state-run broadcaster Doordarshan reported.

- Toyota Motor Corp., the largest seller of gasoline-electric autos, wants to sell batteries for plug-in cars to competitors to generate the biggest return from its investment. Along with making packs for a plug-in version of the Prius hybrid, Toyota wants additional revenue from supplying packs to rivals, Executive Vice President Masatami Takimoto said in an interview yesterday at the North American International Auto Show in Detroit.

- The euro traded near a one-month low versus the US dollar as traders raised bets the European Central Bank will reduce interest rates, decreasing the appeal of the region’s assets to overseas investors. “There is more than enough room for the euro to fall further,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd. in Tokyo, a unit of Japan’s largest brokerage. “The focus of the currency market is how far rates will fall in Europe, because the ECB is behind the curve compared to other central banks.” A Credit Suisse Group AG gauge of probability based on an overnight index-swap index indicated the ECB will cut its 2.5 percent main refinancing rate by as much as 0.75 percentage point this week. “The latest German stimulus package probably won’t be enough to turn back the tide of euro selling,” said Kengo Suzuki currency strategist at Shinko Securities Co. in Tokyo. “It will take time for these measures to kick in, and other European countries will need to join Germany and announce similar policies. During this time, the ECB is sure to lower rates.”

- FedEx Corp.(FDX), the second-largest U.S. package-shipping company, agreed to buy 15 more Boeing Co.(BA) 777 Freighter aircraft and took an option for another 15 as it expands overseas deliveries.

- Futures trading will fall as much as 20% this year in financial and energy contracts, while exchange stocks are now valued at attractive levels, according to Morgan Stanley(MS). The analyst raised his exchange-industry rating to “in- line” from “cautious.” The companies covered are CME Group, Intercontinental Exchange, NYSE Euronext and Nasdaq OMX Group Inc. He favors Intercontinental Exchange, also known as ICE, out of that group, giving it the only “overweight” designation. He rates Nasdaq and CME Group as “equal weight” and NYSE as “underweight.”

- Greg Salvaggio, vice president of capital markets at Tempus Consulting Inc. sees the euro falling on lagging ECB rate cuts. (video)

- Gilead Sciences Inc.(GILD) expects to begin the first trial to test the effectiveness of its experimental four-in-one AIDS-drug pill early in the second half of this year, President John Milligan said in an interview.

- Federal Reserve Bank of Atlanta President Dennis Lockhart says the Fed has more tools, sees recovery this year. (video)

- Wheat, corn and soybeans plunged the most allowed by the Chicago Board of Trade after the U.S. Department of Agriculture projected bigger supplies than forecast in December. World wheat inventories may rise to 148.4 million metric tons by the end of the marketing year on May 31, up 0.7 percent from a December estimate, the USDA said today in a report. Global corn supplies will jump to 136 million tons, up 9.9 percent from a December forecast, the USDA said. U.S. soybean stockpiles before the next harvest may increase 9.7 percent to 6.12 million tons. “We’ve got more inventory to work our way through, and we didn’t need that,” said Larry Glenn, an analyst at Prime Ag in Quinter, Kansas.

- Crude oil fell for a sixth day in New York, extending yesterday’s 7.9 percent slump on speculation oil inventories last week increased as demand declined. An Energy Department report tomorrow will probably show U.S. crude stockpiles increased 2.25 million barrels in the week ended Jan. 9, according to a Bloomberg survey. Goldman Sachs Group Inc. said in a Jan. 9 report that “weak underlying economic fundamentals” will dominate the oil market. The bank maintained a forecast that oil will fall to $30 a barrel this quarter. Oil inventories in Organization for Economic Cooperation and Development nations will probably rise to a 10-year high in the next two months, Goldman analysts Giovanni Serio and Jeffrey Currie said in the report.

- Erich Hunziker, chief financial officer of Roche Holding AG, said talks with Genentech Inc. are “on track,” and a takeover by the Swiss drugmaker wouldn’t cause the company to cut its dividend. Hunziker made the remarks in a speech at the J.P. Morgan Healthcare Conference in San Francisco. He declined to comment on a Financial Times report last week that said Basel, Switzerland-based Roche planned to raise the bid to $95.

- ZymoGenetics Inc.(ZGEN) jumped 35 percent in extended trading after Bristol-Myers Squibb Co. said it would pay as much as $1.1 billion for PEG-interferon lambda, an experimental treatment for the hepatitis C liver virus.

- Taiwan’s dollar may fall against the U.S. currency in the first six months of the year as the island’s economy slumps, Barclays Capital said. Falling interest rates around the world will also support the U.S. dollar, said David Woo, global head of foreign-exchange strategy at Barclays Capital, the third-biggest currency trader.

- China’s exports fell the most in almost a decade in December as the deepening global recession cut demand for the nation’s toys, clothes and electronics. Shipments dropped 2.8 percent, the customs bureau said on its Web site today. That compares with a 21.7 percent gain a year earlier. Waning export demand has led to protests by fired factory employees, an exodus of 600,000 migrant workers from the manufacturing hub of Guangdong, and an estimated urban unemployment rate of more than 9 percent. Shipments may fall 10 percent in 2009, Nomura’s Sun estimated, dragging down economic growth by 2.5 percent points.

- International Business Machines Corp.(IBM) and Accenture Ltd.(ACN) are in a stronger position to win new contracts after the fraud at Satyam Computer Services Ltd. tarnished the credibility of India’s outsourcing industry. Companies seeking to outsource some of their operations -- such as handling customer calls or testing software -- may turn to U.S. firms in the short term as they grow wary of the risks of working with smaller companies abroad, said Moshe Katri, an analyst at Cowen and Co. IBM and Accenture are the two largest U.S. computer-services providers.

Wall Street Journal:

- DTV, Broadband Access Top Agenda for New House Chairman.

- The head of the United Auto Workers union said Monday that he would like the government to appoint a "car czar" who "knows something about the auto industry" to oversee the restructuring of the Big Three.

- He boasts his own self-declared army and the support of 13 governors, 53 congressmen and 180 mayors, along with the Sierra Club and the American Lung Association. He has plugged his cause on countless news shows and spent $60 million of his own money on a massive ad spree. Now T. Boone Pickens is about to find out which has more oomph: all of the above, or a $100 drop in the price of oil. The flinty Dallas billionaire is going all out to sell lawmakers and the next administration on his plan to wean the U.S. off Middle East oil by ramping up the use of wind power and natural gas.

- Senate leaders and Roland Burris reached a deal for him to become the 58th senator to caucus with Democrats in the 111th Congress, following a two-week standoff between the Senate and impeached Illinois Gov. Rod Blagojevich. The deal to seat Mr. Burris was struck Monday afternoon, when the secretary of the Senate accepted Mr. Burris's paperwork, which had been in question since Illinois Secretary of State Jesse White refused to certify the appointment by the embattled governor.

- President-elect Barack Obama intends to nominate his technology adviser, Julius Genachowski, to head the Federal Communications Commission, a Democratic source close to the Obama transition team said. Mr. Genachowski, 46 years old, is a former Harvard Law School classmate of Mr. Obama. He previously worked at the FCC during the Clinton administration. More recently, he co-founded LaunchBox Digital, a Washington, D.C.-based venture capital firm. He worked at Barry Diller's IAC/InterActive Corp. in various executive positions for eight years after leaving the FCC.

Barron’s:

- Google’s (GOOG) share of the U.S. search market increased to 72.07% in December, from 71.97% in November and 65.98% a year ago, according to research firm Hitwise.com. For all of 2008, Google accounted for 69.48% of all U.S. searches, up 8 percentage points from 2007.

MarketWatch.com:
- Alcoa kicked off the earnings season Monday after the close, reporting a loss of $1.2 billion last quarter, versus a gain of $632 million in the year-earlier period.

Wall Street appears to be betting that this upcoming earnings season -- covering the last quarter of 2008 -- will contain more of the same. Fear of worse-than-expected earnings was widely credited for the Dow Jones Industrial Average declining by 125 points on Monday. But a review of the historical patterns suggests that Wall Street may be overreacting. Because corporate earnings were already falling sharply a year ago, the benchmark is low for analyzing the current earnings season. So even an otherwise-mediocre earnings season might nevertheless look pretty good, relatively speaking.

Lloyd’s List:

- Shipowners face the prospect of placing vehicle carrier newbuildings directly into lay-up as new car sales slump, with those that ordered tonnage on a speculative basis during the recent boom staring at a miserable future unless they can wriggle out of contractual obligations.

- Car imports through the Baltic and into Russia have plummeted over the last three months. Not only has the global economic downturn affected sales, but also the collapse of the Russian rouble and a hike in import duty on new cars has knocked volumes into western Russian cities.

Reuters:

- General Motors Corp(GM) is planning to re-enter the vehicle lease business early this year and could see that form of financing amount to about 5 percent of its U.S. vehicle sales, a senior executive said on Monday.

Financial Times:
- Costs in the oil and gas industry have begun to fall for the first time this decade, bolstering the profits of companies hit by the steep drop in the price of crude. The shift could add to pressure on oil prices, which had been supported by soaring production costs. Analysts have argued that those costs put a floor under the oil price, because if the price fell below production cost, projects would be cancelled and oil supply would be cut. The leading survey of the industry’s capital spending costs, produced by Cambridge Energy Research Associates, a consultancy, is set to show a decline for the fourth quarter of last year, the Financial Times has learnt. Candida Scott of CERA said: “They are going to go down in 2009. Oil and gas, which are used as inputs, concrete, steel... they have all been falling in price.” Lower steel prices – they have fallen by more than 50 per cent since last summer – are particularly significant: steel typically accounts for 20-25 per cent of an oil project’s costs. Ms Scott said labor costs were generally hard to cut, but there were already signs that staff shortages were starting to ease.

South China Morning Post:

- Shanghai, Shenzhen ports see record throughput falls. Conditions expected to worsen as manufacturing contracts.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (AAPL), lowered estimates, target $132..

Night Trading
Asian Indices are -1.50% to +1.0% on average.
S&P 500 futures +.58%.
NASDAQ 100 futures +.60%.

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Earnings of Note
Company/EPS Estimate
- (LLTC)/.34

Economic Releases

8:30 am EST

- The Trade Deficit for November is estimated to shrink to -$51.0B from -$57.2B in October.

2:00 pm EST

- The Monthly Budget Statement for December is estimated at -$83.0B versus $48.3B in November.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales, IBD/TIPP Economic Optimism Index, Fed’s Bernanke speaking, Fed’s Lacker speaking, (HRB) Investment Conference, (MOS) Analyst Meeting, (MGAM) Analyst Meeting, JPMorgan Healthcare Conference, CSFB Homebuilding Conference, Deutsche Bank Auto Analysts Conference, Cowen Consumer Conference and BMO Capital Unconventional Gas Conference could also impact trading today.

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