Stocks Finish Slightly Higher Boosted by REIT, Energy, Construction, Biotech and I-Banking Shares

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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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