Stocks Finish Higher, Boosted by Oil Service, Utility, Computer Service, Telecom and Homebuilding Shares

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Stocks Higher into Final Hour on Less Severe Economic Pessimism, Falling Credit Market Angst, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Technology longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 4.21% and is elevated at 45.23. The ISE Sentiment Index is below average at 112.0 and the total put/call is below average at .76. Finally, the NYSE Arms has been running high most of the day, hitting 1.96 at its intraday peak, and is currently 1.19. The Euro Financial Sector Credit Default Swap Index is falling 5.86% today to 112.67 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 4.27% to 204.09 basis points. The TED spread is rising .87% to 108 basis points. The TED spread is now down 358 basis points in over three months. The 2-year swap spread is rising 1.13% to 67.0 basis points. The Libor-OIS spread is rising 3.10% to 94 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 5 basis points to .77%, which is down 193 basis points in over six months and near 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 .10%, which is unch. today. Considering the news today, I am surprised the major averages aren’t up more, which is a negative. (AFL) and (USB) are weighing on the (XLF), however the bears have been unable to gain downside traction. Considering recent OPEC comments, the rise in the euro and today’s better economic data, oil is trading poorly. The decline in home inventories, reported today, is a large positive. The Citi US economic surprise index is now up to -68.50, while the eurozone index is now -126.80. It is also a large positive to see the various credit default swap indices begin to roll over. Nikkei futures indicate an +248 open in Japan and DAX futures indicate a -16 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing economic pessimism, bargain-hunting and declining credit market angst.

Today's Headlines

Bloomberg:

- Sales of previously owned homes in the U.S. unexpectedly rose in December. Purchases rose 6.5 percent to an annual rate of 4.74 million from 4.45 million in November that was less than previously estimated, the National Association of Realtors said today in Washington. The number of previously owned unsold homes on the market at the end of December represented 9.3 months’ worth at the current sales pace, down from 11.2 months’ at the end of the prior month.

- The index of leading U.S. economic indicators unexpectedly increased in December as the money supply expanded, masking signs of a worsening recession. The Conference Board’s gauge rose 0.3 percent, the first gain in six months, after a 0.4 percent drop in November, the New York-based group said today. Also contributing to the index’s rise were interest rate spreads, manufacturers’ new orders for consumer goods and new orders for non-defense capital goods.

- The cost of protecting European corporate bonds from default fell, extending a decline, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 30 basis points to 1,070, according to JPMorgan Chase & Co. prices at 2:15 p.m. in London. The Markit iTraxx Europe index of 125 companies with investment-grade ratings fell 6 basis points to 166, JPMorgan prices show. The Markit iTraxx Financial index of 25 European banks and insurers slipped 9 basis points to 120.

- Pfizer Inc.(PFE), the world’s biggest drugmaker, will buy Wyeth(WYE) for about $68 billion after failing to reduce its dependence on the cholesterol pill Lipitor with new drugs from its own research labs. The deal, the largest pharmaceutical acquisition in almost a decade, is a cash-and-stock transaction valued at $50.19 a share, 29 percent more than Wyeth’s closing price on Jan. 22, the day before talks were reported, the companies said today in a statement.

- Former Merrill Lynch & Co.(MER) Chief Executive Officer John Thain, ousted last week after his firm posted an unexpectedly large fourth-quarter loss, apologized for paying $1.2 million last year to renovate his office and said he will repay the costs. “They were a mistake in the light of the world we live in today,” Thain said in a memo to top executives dated yesterday. “I will therefore reimburse the company for all of the costs incurred.”

- Barclays Plc(BCS) jumped the most in at least two decades in London trading after saying it won’t need funding from the government because revenue increased last year. Barclays’s investment bank and the Lehman Brothers Holdings Inc. assets acquired last year are driving profit and “record revenue,” cushioning the London-based company against about 8 billion pounds ($11 billion) of credit-related writedowns in 2008, it said today in a statement. Barclays rose 73 percent after saying it exceeds regulators’ capital requirement by 17 billion pounds.

- The World Trade Organization said China must destroy counterfeit software of movies that are confiscated by authorities and provide more legal protection to foreign products, in a ruling on a complaint brought by the U.S. The WTO panel of judges sided with the U.S. in two of the three arguments in the complaint, while deciding that China doesn’t need to alter its laws that exempt small-scale counterfeiters from criminal prosecution. “Having achieved this significant legal ruling, we will engage vigorously with China on appropriate corrective actions to ensure that U.S. rights holders obtain the benefits of this decision,” Peter Allgeier, acting U.S. Trade Representative, said in a statement.

- Investors should maintain short “exposure” to the Canadian dollar, according to Citigroup Inc. analysts Michael Hart and Todd Elmer. The country’s budget may be rejected in parliament and lead to early elections, which will probably prompt investors to sell the Canadian dollar, Citigroup said today.

- Russia’s ruble may weaken as much as 25 percent, breaking the central bank’s widened trading range within two months, as lower oil prices weaken the economy, Citigroup Inc. said.

Wall Street Journal:

- Verizon Wireless and Research In Motion Ltd.(RIMM) have high hopes for the BlackBerry Storm, which they spent nearly two years developing as their big response to Apple Inc.'s(AAPL) iPhone. But despite a marketing campaign that cost more than $100 million, the smart phone has gotten off to a bumpy start.

NY Times:

- President Obama will direct federal regulators on Monday to move swiftly on an application by California and 13 other states to set strict automobile emission and fuel efficiency standards, two administration officials said Sunday. Once they act, automobile manufacturers will quickly have to retool to begin producing and selling cars and trucks that get higher mileage than the national standard, and on a faster phase-in schedule. The auto companies have lobbied hard against the regulations and challenged them in court.

NY Post:

- As the merger of Bank of America(BAC) and Merrill Lynch disintegrates into one of Wall Street's most dysfunctional marriages, the so-called "thundering herd" is on the verge of a massive employee exodus. Sources tell The Post that Merrill and BofA's 16,800-strong broker army is being enticed by big bucks from rivals big and small. Among those reportedly in the hunt are UBS and Morgan Stanley as well as several boutique shops, sources said, adding that some are dangling pay packages that are nearly triple what brokers are being offered in-house.

Washington Post:

- A new study from Italy adds to a mountain of evidence that a mercury-based preservative once used in many vaccines doesn't hurt children, offering more reassurance to parents.

Financial Times:
- Sales of Chinese bank shares by overseas investors are expected to continue this year as western financial institutions divest stakes to help bolster balance sheets. Over the past few weeks, UBS and Royal Bank of Scotland have given up their holdings in Bank of China, raising a combined $3.2bn, while Bank of America pocketed $2.8bn by selling a chunk of its stake in the China Construction Bank.

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Folha de S. Paulo:

- Brazil’s retail industry jobs cuts may rise by about 40% in the first quarter, citing Roque Pellizzaro Junior, president of the National Confederation of Shop Managers. Shop inventories have risen by about 50%, Pellizzaro said.

O Pais:

- OPEC will hold an extraordinary meeting before a scheduled gathering in March should oil prices “fall abruptly” below $40 a barrel, citing OPEC President Jose Maria Botelho de Vasconcelos. De Vasconcelos said not all of OPEC’s members are complying with a reduction in production quotas and this would be addressed in March.

Bear Radar

Style Underperformer:
Large-cap Value (+.51%)

Sector Underperformers:
Education (-4.58%), Banks (-2.39%) and Insurance (-1.60%)

Stocks Falling on Unusual Volume:
ROH, ESI, CAT, COCO, DOW, USB, PVTB, CRXL, PFE, MTR, FUN and AFL

Stocks With Unusual Put Option Activity:
1) CCI 2) PFE 3) CHRW 4) JOYG 5) YUM

Bull Radar

Style Outperformer:
Small-cap Value (+3.27%)

Sector Outperformers:
Oil Service (+5.02%), Homebuilders (+4.18%) and HMOs (+3.58%)

Stocks Rising on Unusual Volume:
LGCY, SM, ALJ, AXA, CS, HBC, DB, HES, AG, GSK, AZN, IAI, FUN, B, HMY, APA, FITBP, ANGO, IPSU, GMCR, DGIT, ATHN, NITE, JJSF, PAAS, ISRG, SHPGY, CYMI, AKAM, IDCC, NTCT, SBAC and ORLY

Stocks With Unusual Call Option Activity:
1) BCS 2) STLD 3) CCI 4) WYE 5) VMW

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