Stocks Finish at Session Lows, Weighed Down by REIT, Financial, Semi and Insurance Shares

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Stocks Falling into Final Hour on Rising Long-Term Rates, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Financial longs. I added to my (IWM)/(QQQQ) hedges this morning and then covered them this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is falling and volume is below average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is falling rising 7.03% and is very high at 42.45. The ISE Sentiment Index is below average at 122.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running very high most of the day, hitting 3.88 at its intraday peak, and is currently 1.45. The Euro Financial Sector Credit Default Swap Index is rising 5.39% today to 114.67 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 rising 1.32% to 195.42 basis points. The TED spread is falling 5.21% to 95 basis points. The TED spread is now down 371 basis points in over three months. The 2-year swap spread is rising 8.22% to 59.25 basis points. The Libor-OIS spread is falling 1.25% to 94 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 13 basis points to 1.02%, which is down 168 basis points in over six months. 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 .23%, which is up 5 basis points today. Market-leading stocks are holding up relatively well. “Growth” stocks are again outperforming “value” shares. The AAII % Bulls fell to 25.27%, while the % Bears rose to 47.25% this week. I suspect the rise in gold and the 10-year yield is starting to bother the broad US stock market. Gold is likely rising on European buying as their economies and currency continue to weaken. The 10-year is supposedly falling on supply concerns. Economists expect US 4Q GDP, which is released tomorrow, to fall 5.5%. I suspect the decline in growth won’t be as bad as feared, which could also be pressuring bonds today. I expect the Fed’s quantitative easing initiative to kick into full gear on any meaningful rise in long-term rates from current levels. Volume has been light, with a high NYSE Arms reading, on today’s sell-off, which is a positive. Nikkei futures indicate a -175 open in Japan and DAX futures indicate a -22 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on more shorting, financial sector pessimism and rising long-term rates.

Today's Headlines

Bloomberg:

- European Central Bank President Jean-Claude Trichet said there’s no risk of Europe’s monetary union falling apart even as bond spreads between member states widen.

- A bill introduced by two senators today would subject hedge funds to regulation by the Securities and Exchange Commission, a requirement they said is necessary to protect investors and the U.S. financial system. The Hedge Fund Transparency Act, sponsored by Senator Carl Levin, a Michigan Democrat, and Charles Grassley, an Iowa Republican, would require hedge funds to register with the SEC, file an annual disclosure form, comply with SEC record-keeping standards and cooperate with SEC investigations.

- Exxon Mobil Corp.(XOM), coming off its worst share drop in 27 years, may be heading for its steepest profit decline since the 1999 merger that created the company. For Chief Executive Officer Rex Tillerson, it’s time to expand. Tillerson, starting his fourth year leading the world’s largest company by market value, said last month that he may increase capital spending by 20 percent this year to $30 billion. The increase will mark his biggest push to discover oil fields and boost fuel and chemicals production.

- German unemployment rose almost twice as much as forecast in January as an economic slump sparked by the global financial crisis spread to industries from cars to software. The number of people out of work rose by 56,000 in seasonally adjusted terms to 3.27 million, the Nuremberg-based Federal Labor Agency said today. Economists forecast an increase of 30,000, according to the median of 33 estimates in a Bloomberg News survey. The adjusted jobless rate rose to 7.8 percent from 7.7 percent.

- European confidence in the economic outlook fell to the lowest on record in January as the region faces its worst recession since World War II, adding to arguments for the European Central Bank to cut interest rates further. An index of executive and consumer sentiment dropped to 68.9 from a revised 70.4 in December, the European Commission in Brussels said today. That is the lowest since the index was first published in 1985. Euro-area capacity utilization fell to 75.2 percent, the lowest since 1990, in the current quarter, the report showed. A combined 2.25 percentage-point rate cut from the central bank and hundreds of billions of euros in stimulus measures have failed to reverse a slump in confidence, and ECB President Jean- Claude Trichet has signaled another reduction is likely in March.

- Russell Clark, the portfolio manager at Horseman Capital Management LP whose emerging markets fund returned 14.6 percent last year, told clients that emerging- market stocks and bonds are likely to fall in 2009. Low interest rates and stimulus spending will add to excess production capacity, resulting in poor company earnings, Clark said in a letter sent to clients last week.

- The US dollar advanced the most in almost a week against the euro and the yen strengthened as U.S. reports showing durable goods orders dropped and the number of Americans receiving unemployment benefits soared to a record renewed the haven appeal of the currencies.

- The ruble had its biggest two-day drop in a decade against the dollar, less than a week after Prime Minister Vladimir Putin defended Russia’s policy of devaluing the currency “gradually and carefully.” The ruble fell to 34.9835 per dollar, the weakest since January 1998, bringing the two-day decline to 5.5 percent, after the central bank said foreign-exchange reserves fell $9.7 billion last week to $386.5 billion.

- Treasuries tumbled as the government sold a record $30 billion of five-year notes at a higher yield than forecast, indicating weak demand. The auction, which caps a week when the Treasury raised $78 billion in notes and bonds, may signal investors will have trouble absorbing the as-much-as $2.5 trillion in debt the U.S. is likely to issue this year to pay for a $1 trillion budget deficit and programs to spur the economy.

Wall Street Journal:

- The launch of a block-trading venue at the New York Stock Exchange marks the Big Board's latest effort to bring trades back to the exchange, while catering to a growing preference of investors to buy and sell shares without showing their hand or moving the market. Thursday marks the first day of operations at the New York Block Exchange, a joint venture between Big Board owner NYSE Euronext Inc. and BIDS Holdings LP, a trading firm whose owners include large banks and brokerages such as Citigroup Inc., Credit Suisse Group and Goldman Sachs Group Inc.

- In the latest sign of how the defense industry expects to resist the economic undertow, General Dynamics Corp.'s(GD) top official said he doesn't see the Obama administration cutting weapons programs that provide lots of manufacturing jobs.

- President Barack Obama's economic-stimulus legislation is headed for the Senate after a surprisingly partisan vote in the House of Representatives in which Republicans united in opposition and 11 mostly conservative Democrats defected.

- Gov. Rod Blagojevich vehemently insisted upon his innocence Thursday to Illinois state senators preparing to kick him out of office, saying, "I have done absolutely nothing wrong."

- U.S. President Barack Obama signed legislation into law Thursday making it easier for employees to sue for wage discrimination, a measure he said is an important step toward "fundamental fairness" for American workers.

CNBC.com:
- Millions of women who get an invasive test for Down Syndrome that carries a risk for miscarriage may soon have a safer alternative, with Harry Stylli, Sequenom(SQNM) CEO and CNBC's Mike Huckman. (video)

Rasmussen Reports:

- Public support for the economic recovery plan crafted by President Obama and congressional Democrats has slipped a bit over the past week. Forty-two percent (42%) of the nation’s likely voters now support the president’s plan, roughly one-third of which is tax cuts with the rest new government spending. The latest Rasmussen Reports national telephone survey shows that 39% are opposed to it and 19% are undecided.

Washington Post:

- A military judge in Guantanamo Bay has denied the Obama administration's request to delay proceedings for 120 days in the case of a detainee accused of planning the October 2000 attack on the USS Cole warship, an al-Qaeda strike that killed 17 service members and injured 50 others. The decision throws into some disarray the administration's plan to buy time as it reviews individual detainee cases as part of its plan to close the U.S. military prison at the Guantanamo naval base in Cuba. The Pentagon may now be forced to withdraw the charges against Abd al Rahim al-Nashiri, a Saudi citizen of Yemeni descent. In one of its first actions, the Obama administration instructed military prosecutors to seek 120-day suspensions of legal proceedings in the cases of 21 detainees who have been charged. There are approximately 245 prisoners held at Guantanamo.

- State regulators urged Congress on Thursday to restore their authority to protect investors from fraud in the banking sector and to beef up oversight of hedge funds. Hedge fund advisers should be subject to the same kind of scrutiny as investment advisers, the North American Securities Administrators Association told reporters. The NASAA said Congress should give the Securities and Exchange Commission explicit authority to regulate the $1.4 trillion industry, which has the potential to destabilize markets.

CNNMoney:

- Glenn Lurie knows Silicon Valley better than most telecom industry types. As AT&T's point man on the iPhone, he was the guy who camped out in Cupertino and hashed out the blockbuster iPhone launch with Apple. The next big game in his sights? The netbook. That's right, the netbook, that shrunken, low-priced laptop that lately has been a rare bright spot in the moribund PC industry. To hear Lurie tell it, AT&T's next hit phone might not be a phone at all, but a netbook with built-in Internet access that works anywhere you can get a cell signal. Get ready for the clincher: Sign up for a two-year contract, and you might get your new PC for $99 or less. The upshot is that the "free phone" phenomenon that helped make handsets ubiquitous in the U.S. isn't just for phones anymore.

Macworld:

- Intel(INTC) plans to detail an eight-core Xeon processor at the International Solid-State Circuits Conference in San Francisco next month, offering an early look at what appears to be the company's first eight-core chip.

Der Standard:

- Billionaire investor George Soros said the euro may not survive unless the European Union pushes for a global plan to deal with toxic debt, citing an interview.

Vedomosti:

- Russian rail cargoes may fall 33% in the first half of the year.

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Herald Sun:
- Google(GOOG) Australia is considering a plan to take on payments giants such as Visa(V), Mastercard(MA) and B-Pay in the booming online payments market. The move comes as the search giant secured a financial services licence from local regulators.

Haaretz:

- In the wake of Operation Cast Lead, a group of American university professors has for the first time launched a national campaign calling for an academic and cultural boycott of Israel. While Israeli academics have grown used to such news from Great Britain, where anti-Israel groups several times attempted to establish academic boycotts, the formation of the United States movement marks the first time that a national academic boycott movement has come out of America. Israeli professors are not sure yet how big of an impact the one-week-old movement will have, but started discussing the significance of and possible counteractions against the campaign.

Bear Radar

Style Underperformer:
Small-cap Value (-4.24%)

Sector Underperformers:
Semis (-7.36%), Homebuilders (-7.08%) and Insurance (-6.56%)

Stocks Falling on Unusual Volume:
AZN, UBS, SRDX, CTXS, PSSI, PLXS, LRCX, WBSN, QCOM, SCHW, OXPS, NSR, RPV, BDK, ZMH, FIC, ALL and ATK

Stocks With Unusual Put Option Activity:
1) TROW 2) SCHW 3) TXT 4) CCL 5) ALL

Bull Radar

Style Outperformer:
Large-cap Growth (-1.18%)

Sector Outperformers:
Education (+2.44%), Airlines (+1.12%) and Disk Drives (+.40%)

Stocks Rising on Unusual Volume:
GFI, SSRI, AEP, CL, CV, CLX, MO, RDS/A, HMY, SEPR, OTEX, LANC, ICLR, OSIS, SBNY, ODFL, SYMC, NFLX, AMLON, COCO, STEL, DDUP, GOLD, MELI, CVD, SYX, ALK, WDC, CAI and NTY

Stocks With Unusual Call Option Activity:
1) TXT 2) BSX 3) ZMH 4) ALL 5) SYMC

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