Stocks Finish Sharply Higher, Boosted by Airline, REIT, Homebuilding, Financial, Technology and Steel Shares

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Stocks Surging into Final Hour on Diminishing Financial Sector Pessimism, Lower Credit Market Angst, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Healthcare longs, Retail longs, Financial longs and Medical longs. I added to my (GME) long and took some profits in another long today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is about average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 5.8% and is very high at 39.80. The ISE Sentiment Index is slightly below average at 137.0 and the total put/call is below average at .70. Finally, the NYSE Arms has been running above average most of the day, hitting 1.22 at its intraday peak, and is currently .84. The Euro Financial Sector Credit Default Swap Index is falling .08% today to 108.67 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 3.08% to 192.88 basis points. The TED spread is falling 5.28% to 100 basis points. The TED spread is now down 366 basis points in over three months. The 2-year swap spread is plunging 15.28% to 55.63 basis points. The Libor-OIS spread is falling .21% to 95 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 7 basis points to .89%, which is down 181 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 .18%, which is up 5 basis points today. It is a large positive to see many of the “fear” assets trading lower again today. As well, the North American Investment Grade Credit Default Swap Index appears to be breaking down, which is also a huge positive. Many market-leading stocks are rising 2-3x more than the gains in the major averages. US stocks are getting extended very short-term and could see a pullback materialize over the coming days, but another meaningful surge higher is likely soon thereafter. Nikkei futures indicate an +304 open in Japan and DAX futures indicate an +40 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less financial sector pessimism and declining credit market angst.

Today's Headlines

Bloomberg:

- The Federal Reserve left the benchmark interest rate as low as zero and said it’s prepared to purchase longer-term Treasury securities to resuscitate lending and the economy. The Fed is “prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement after meeting in Washington.

- U.S. Treasury Secretary Timothy Geithner said the department is considering a “range of options” for its financial rescue plan, with the goal of preserving the private banking system. Geithner was asked about the prospects of bank nationalization before a meeting with several officials charged with providing oversight for the $700 billion financial rescue effort. He said the administration would move “relatively soon” to announce its strategy.

- The cost of protecting corporate bonds from default fell to the lowest in 11 weeks amid speculation the U.S. government may create a so-called bad bank to hold toxic assets blamed for causing the global credit crisis. Benchmark credit-default swap indexes tied to companies in North America and Europe reached the lowest since Nov. 11. Contracts on Bank of America Corp., Morgan Stanley and Barclays Plc reached two-week lows on optimism central banks and governments may stabilize the financial system. Contracts on Wells Fargo & Co., which reported its first quarterly loss since 2001, narrowed as the bank said it doesn’t need more federal aid. Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada, which fall as sentiment improves, dropped 8.5 basis points to 190.5 basis points as of 9:53 a.m. in New York, according to Barclays Capital. The Markit iTraxx Financial index of 25 European banks and insurers dropped two basis points to 115.

- Iranian President Mahmoud Ahmadinejad said the change promised by Barack Obama during his presidential campaign means he must apologize for U.S. “crimes” against Iran, including American support for a 1953 coup in the country and the backing of Iraq during the Iran-Iraq war.

- Credit-default swaps dealers will preview a new standard for contracts in North America tomorrow as the industry pushes to curb risks and smooth the transition to a central clearinghouse for the $28 trillion market. Markit Group Ltd., a data provider and owner of benchmark indexes in the privately traded market, will host a conference in New York where creators of the contract will discuss the changes, the London-based company said in an e-mailed statement this week. Rule makers for the market are making trading more transparent and uniform as regulators press them to mitigate the risk of industry losses from the bilateral contracts. “The new contract has strong implications for reducing systemic risk and improving operational efficiency,” Markit said in an invitation to the event.

- Gold dropped the most in two weeks in London as shares advanced around the world on speculation government measures will help revive the global economy, reducing demand for the precious metal as a haven. “Gold might have reached a temporary peak, and profit- taking is of course another factor,” Fertig said, adding that the metal may fall to $850 an ounce in coming days. Bullion has also lost its negative correlation with the dollar in the past week, he said.

- Copper prices, headed for the first monthly gain since June, are poised to drop at least 33% as slowing growth in China erodes metal demand, said Gijsbert Groenewegen, a Gold Arrow Capital Management fund manager. Copper prices rose in January, even after the latest data available show China’s electricity output slid for four straight months through November, a sign of slower growth. An economic slump in China, the world’s biggest copper user, will spur a drop in copper prices as consumption slips, Groenewegen said. “All you need to do is look at China’s electricity use to see that growth there is going to be worse than people are expecting,” said NY-based Groenewegen. Prices will drop to at least $1 a pound and may trade as low as 70 cents, he said.

- Veteran startup investor Dixon Doll’s firm is close to raising a $505 million fund, making it the second Silicon Valley venture-capital company to attract money this year in the midst of a recession.

- M.D.C. Holdings Inc.(MDC) is unique among homebuilders: most analysts recommend buying the stock. The builder is the top-rated stock in the industry not for the double ovens it puts in its gourmet kitchens or the Spanish tile roofs but for the $1.4 billion in cash and investments it holds. Six of eight analysts advise buying M.D.C., giving it a 75 percent positive rating. Toll Brothers Inc.(TOL) ranks second with a 44 percent favorable outlook. “It’s one of the few homebuilding companies that I think really has been on top of things,” said Mark Levine, director of the Burns School of Real Estate and Construction Management at the University of Denver.

- Lawyers at Kirkland & Ellis LLP, home to former Whitewater prosecutor Ken Starr, are asking as much as $1,110 an hour for bankruptcy work while creditors are recovering less of their loans through company restructurings. Professionals’ fees in bankruptcy cases are growing at four times the rate of inflation, estimated Lynn LoPucki, a professor of bankruptcy law at the University of California, Los Angeles. Total fees paid for lawyers, accountants and other professionals in bankruptcies from 1998 to 2007 doubled, while the consumer price index rose about 25 percent, he said. “As the economy gets worse, the bankruptcy lawyers are charging more,” LoPucki said. “It seems that each month one sets a new record for hourly billing rates. $1,110 is, to my knowledge, a record for the debtor’s bankruptcy counsel.”

- U.S. Treasury Secretary Timothy Geithner’s call for China to loosen restrictions on its currency was criticized by economists and policy makers at the World Economic Forum. Allowing the yuan to strengthen would be “economic suicide” amid an economic slump, Stephen Roach, Morgan Stanley’s Asia Chairman, told a panel in Davos, Switzerland, today. “I’ve never seen an economy in recession voluntarily raise their currency. It’s horrible advice.”

- The United Auto Workers union will end its so-called jobs bank for General Motors Corp.(GM) employees on Feb. 2, one of the conditions set by the government when it agreed to lend the biggest U.S. automaker $13.4 billion. GM has 1,600 workers in the program, which pays UAW members even when they have no work to do, company spokesman Tony Sapienza said today in an interview. Those leaving the jobs bank will get state unemployment benefits and some GM pay, he said.

- President Barack Obama said he is confident that the economy can be reinvigorated, starting with the passage of a stimulus package, after meeting with the chief executive officers of some of the nation’s biggest companies.

- European Central Bank President Jean- Claude Trichet said the bank’s next important meeting is in March, suggesting it won’t cut interest rates next week. “I said that the next important rendez-vous is in March,” Trichet told Bloomberg Television in an interview in Davos, Switzerland, today. “In March we’ll have a lot of new information, we’ll have our own staff projections,” he said. “The market will not like the notion of the ECB’s wait-and- see policy,” Dustin Reid, director of currency strategy at RBS Greenwich Capital Markets in Chicago, wrote in an e-mailed note. “I suspect the euro eventually trades lower on this.”

- Robert Rubin, who quit his post as senior counselor at Citigroup Inc. this month, said an accounting rule forcing companies to mark down assets every quarter to reflect market value has “done a great deal of damage.” “I spent my whole life at Goldman Sachs believing in mark- to-market accounting, and having said that, if you look at the experience from the last two years, I think mark-to-market accounting has led to terrible vicious cycles in asset prices,” Rubin, the former U.S. Treasury secretary, said during a discussion at the 92nd St. YMCA late yesterday. Companies including Citigroup and American International Group Inc. say mark-to-market, also known as fair-value accounting, doesn’t work when few buyers are willing to trade assets like subprime mortgages.

Wall Street Journal:

- The new chief of staff to Treasury Secretary Timothy Geithner was a top lobbyist for Goldman Sachs Group(GS) Inc. until last year, and will have to recuse himself from some government duties under new White House ethics rules. Before Mr. Patterson left Goldman in April, he was vice president for government relations, and was registered to lobby Congress on legislation including energy tax credits and Indian gaming, according to disclosure forms filed with Congress.

- U.S. Federal Reserve officials on Wednesday signaled they're prepared to move forward on a controversial idea to purchase longer-dated Treasury securities, which would mark a dramatic escalation of their efforts to unclog credit markets. The Federal Open Market Committee voted 8-1 to maintain the target federal funds rate for interbank lending at a record-low range of zero to 0.25%. The interest rate and balance sheet decisions are aimed at combating a worsening recession and deflationary spiral of falling employment and spending. The Fed also held the discount rate for direct loans to commercial and investment banks unchanged at 0.5%. Rates will likely stay where they are well into the year if not into 2010, the accompanying policy statement suggested.

- On his second full day of work, U.S. Treasury Secretary Timothy Geithner said the U.S. is pulling together a comprehensive plan to stabilize the economy and that his team wants to preserve the private banking system. He declined to provide specifics on any plans to create a "bad bank" to buy up the toxic assets that have been weighing down bank balance sheets, but said details of a comprehensive plan to stabilize the financial sector should begin emerging in the near future. When asked about the possibility of nationalizing the country's banks, Mr. Geithner noted the virtues of a private banking system, saying "we'd like to do our best to preserve that system."

NY Times:

- Barely two weeks after Robert E. Rubin stepped down as senior adviser to Citigroup’s board amid the bank’s disastrous credit losses, Mr. Rubin warned against increasingly loud calls for troubled banks to be nationalized. “Nationalization as an alternative has some serious problems,” Mr. Rubin, a former Treasury secretary under President Clinton, said Tuesday night at a discussion sponsored by the 92nd Street Y in New York. “You certainly don’t want a bank’s lending practices subject to political

pressure.”

Business Week:

- Onyx(ONXX), a Sweet Deal for Bayer? The German drugmaker already has teamed up with Onyx to sell the smaller company’s drug to fight kidney cancer. Could it be the next pharma to make a move?

USA Today:

- All six of the law and accounting firms hired by the Treasury Department to help manage the $700 billion financial bailout have clients who received the federal money, contracting and regulatory records show. The firms also have been involved in structuring complicated financial instruments tied to risky assets such as sub-prime mortgages, according to their websites and Securities and Exchange Commission filings. The collapse in value of those assets is one cause of the financial crisis. One law firm, Thacher Proffitt & Wood, dissolved five days after Treasury announced its contract because its work arranging complex transactions had dried up. Sonnenschein Nath & Rosenthal, which took over the contract from Thacher Proffitt, also has clients that received bailout funds, its website shows.

San Francisco Chronicle:

- The nation's top military officer said Tuesday the United States did all it could to intercept a suspected arms shipment to Hamas militants in the Gaza Strip, but its hands were tied. Separately, Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff, and other U.S. officials said it is too soon to tell whether the prospect of new U.S. engagement with Iran will bear fruit. Mullen confirmed that a Cypriot-flagged ship intercepted in the Red Sea last week was carrying Iranian arms and that U.S. authorities suspect that the shipment was ultimately bound for the Gaza Strip, where Hamas and Israel are observing a shaky truce after three weeks of fighting. "The United States did as much as we could do legally," Mullen said, adding that he would like more authority to act in such cases. "We were not authorized to seize the weapons or do anything like that."

Washington Post:

- Iraq will send Syria its first ambassador since around the time Saddam Hussein became president in 1979, a government official said Wednesday. Alaa al-Jawadi would leave Wednesday to become Iraq's new envoy in Damascus, Mohammed al-Haj Hamoud, Iraq's deputy foreign minister, told Reuters. Last October Damascus posted its first ambassador to Iraq since Saddam's takeover in Iraq strained ties with Syria, which for decades has been governed by a rival branch of the pan-Arab Baath party.

AdWeek:

- CBS sees an opportunity in the continuous stream of disastrous economic news. In March the company plans to roll out MoneyWatch.com, a personal finance site conceived specifically with the ongoing financial meltdown in mind.

Financial Times:
- Gulf banks may have avoided most of the toxic assets polluting the global financial system but many are overexposed to a sector that rating agencies and analysts say may prove to be nearly as poisonous – property. After years of growth, Dubai’s real estate market is particularly exposed to the withdrawal of credit. Residential prices have dropped 23 per cent from their peak last September according to research by HSBC, the bank, and some experts are talking about a 50 per cent drop in property prices from top to bottom.

Financial Times Deutschland:
- Germany’s Christian Democratic Party is calling for a sale of the Bundesbank’s gold reserves to help weather the economic crisis. Steffen Kampeter, the CDU budget spokesman, wants the government to use the country’s gold and currency reserves to finance an economic rescue package.

Der Platow Brief:

- Deutsche Bank AG’s operating business may have had a “sensational” first three weeks of 2009. There is speculation the German bank may earn almost $1.3 billion in pretax profit in January, the newsletter said.

Die Zeit:

- Dominique Strauss-Kahn, the head of the IMF, said without more political coordination on economic policies the euro region is “in danger,” citing an interview.

The National:

- Property prices have fallen in Abu Dhabi by an average of 15 per cent in recent months, but a lack of finance is stalling the market, according to industry experts. Prices in the secondary property market have softened after peaking last summer, with big falls occurring at Al Raha Beach and Al Reem Island, according to LLJ Property, a property broker based in the capital.

Bear Radar

Style Underperformer:
Large-cap Value (+1.35%)

Sector Underperformers:
Gold (-1.36%), Drugs (-.23%) and Education (-.22%)

Stocks Falling on Unusual Volume:
SFG, DV, NVS, NEM, WBSN, AMLN, BDX, LM and PLT

Stocks With Unusual Put Option Activity:
1) MT 2) CENX 3) CX 4) GERN 5) RCL

Bull Radar

Style Outperformer:
Mid-cap Value (+3.70%)

Sector Outperformers:
Banks (+11.87%), Homebuilders (+8.43%) and Disk Drives (+8.09%)

Stocks Rising on Unusual Volume:
STT, WTFC, WFC, DB, PRU, PFG, PBR, PHG, ABB, SU, COCO, VPRT, ZION, TRMK, GPRO, WRLD, CATY, SPWRB, CHRW, PVTB, PRSP, FMBI, BEAT, STAR, YHOO, GMCR, SY, RGS, TOD, RHB, KIE, BBL, RKT and TDW

Stocks With Unusual Call Option Activity:
1) RHT 2) AMT 3) WLP 4) ITW 5) DISH

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