Stocks Lower into Final Hour on Bank Nationalization Fears, Tech Sector Earnings Worries and Higher Energy Prices

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Education longs and Computer longs. I added to my (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mostly negative and volume is below average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is falling 3.78% and is very high at 46.62. The ISE Sentiment Index is extremely low at 49.0 and the total put/call is above average at 1.07. Finally, the NYSE Arms has been running above average most of the day, hitting 1.51 at its intraday peak, and is currently 1.05. The Euro Financial Sector Credit Default Swap Index is falling .83% today to 136.0 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 falling 3.69% to 206.42 basis points. The TED spread is rising .36% to 95 basis points. The TED spread is now down 372 basis points in about four months. The 2-year swap spread is falling 3.96% to 63.63 basis points. The Libor-OIS spread is rising 2.27% to 100.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to 1.16%, which is down 154 basis points in about seven 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 .30%, which is down 2 basis points today. Worries over impending financial sector nationalizations are high again today and, as I said earlier in the week, the longer the new administration waits to release its new rescue plan details the more likely that scenario becomes. The broad market is weaker than the major averages suggest today. Homebuilding, education, insurance, bank, semi, computer and gold stocks are all falling more than 3%. On the positive side, the ISE Sentiment Index is hitting the lowest level since November 12^th today and the total put/call ratio is above average again. Credit angst is lower today. One of my longs, (GME), is 7% higher today after boosting its earnings forecast. This retailer is relatively insulated from many of the headwinds affecting the sector. I still see significant upside in the stock from current levels. Nikkei futures indicate an +8 open in Japan and DAX futures indicate a -35 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on rising financial sector pessimism, higher energy prices and more shorting.

Today's Headlines

Bloomberg:

- Iran may agree to hold face-to-face talks with Barack Obama’s administration, providing there is a concrete change in U.S. policy, Agence France-Presse cited Foreign Minister Manouchehr Mottaki as saying. “We are considering this offer,” Mottaki was quoted as saying today by AFP. “We need to wait to see differences in Barack Obama’s policy compared to that of George Bush.”

- The effect of the Obama administration’s housing plan on home-loan bonds and borrowers will be limited by restrictions on which mortgages are eligible, according to Bank of America analysts. Only about 50% to 60% of securitized prime jumbo or Alt-A loans meet the loan-modification standards requiring borrowers to live in mortgaged properties and owe no more than Fannie and Freddie’s loan limits, according to a report by Bank of America strategists including Akiva Dickstein and Vipul Jain. The refinancing plan will be limited by a standard preventing homeowners from qualifying if they owe more than 105% of their homes’ value, they said. Jumbo loans are larger than Fannie and Freddie, the government-chartered mortgage companies under federal control, can buy or guarantee, currently $417,000 in most areas and as much as $729,000.

- Eastern European currency hedges gone bad may prove to be the catalyst for a resumption in the euro’s slide, according to Kathy Lien, director of currency research at GFT, an online currency trading firm. “As troubles continue to brew in eastern Europe, additional losses on foreign-exchange derivative contracts will increase the risk of eastern European borrowers defaulting on their loans,” said Lien, who is based in NY. “This would create a domino effect which will most certainly hit Western Europe. That could lead to an exodus out of euros.” The euro will decline to a two-year low of $1.233 as a result of the exposure of western European economies to falling growth and banking losses in eastern Europe, Lien said.

- The average U.S. rate on a 30-year fixed mortgage fell this week as President Barack Obama signed an economic stimulus measure into law and pledged $275 billion to reduce foreclosures. The rate fell to 5.04 percent from 5.16 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today. Mortgage rates are falling as the Federal Reserve buys mortgage-backed securities to encourage lenders to lower rates.

- Venezuela plans to boost oil output at least 12 percent in a joint venture with foreign investors that will cost more than twice what the government previously estimated, a confidential document shows. The project would increase Venezuela’s daily output of 3 million barrels a day by 400,000 barrels a day within seven years, according to the document, which was obtained by Bloomberg News.

- Crude oil rose more than 10 percent in New York after a U.S. government report showed an unexpected drop in inventories. Gasoline inventories rose 1.11 million barrels to 218.7 million barrels, the department said. Supplies were forecast to fall by 500,000 barrels, according to the median of responses by 16 analysts in the Bloomberg News survey. Oil also climbed as the euro strengthened against the U.S. currency on speculation that Europe will take steps to address the financial crisis.

- Google Inc.’s(GOOG) Android operating system, after making inroads into the mobile-phone market, may be running on portable computers within the next year, challenging the dominance of Microsoft Corp. Google, which owns the most popular Internet search engine, could use its brand name and community of developers to get the software onto low-cost notebooks, said Ray Valdes, an analyst at Gartner Inc. One chipmaker, Freescale Semiconductor Inc., is already working on designs for an Android computer.

- China’s stock rally this year may falter as a so-called momentum indicator showed the benchmark Shanghai Composite Index crossed a level that some traders use as a trigger to sell shares. The 14-day relative strength index, or RSI, for the Shanghai Composite rose above the 70 threshold this month for the first time since October 2007, when the index peaked. “Getting into the market now is really for the most speculative of investors,” said Fraser Howie, head of structured products at CLSA Singapore Ltd. “People are losing their jobs and export growth is still weak,” he said.

- Taiwan may weaken the local dollar to the lowest level in more than two decades to stimulate economic growth given it has limited room to cut interest rates further, according to HSBC Holdings Plc. Europe’s biggest bank and Goldman Sachs(GS) forecast the currency will drop 3.7% to NT$36 per US dollar by the end of June, a level not seen since 1986. Government reports this month showed Taiwan’s exports, which account for 70% of the economy, fell by a record, while gross domestic product shrank at an unprecedented pace.

- The rising cost to protect buyers of Japan’s sovereign bonds against default signals the yen may start to lose its status as a “haven” currency, said Barclays Capital, the world’s third-largest foreign-exchange trader. Credit-default swaps for Japan surged as high as 120.7 this week, the most in more than four years, on signs the world’s second-largest economy will fare worse than Europe and the U.S. Japan’s gross domestic product shrank the most since 1974 last quarter, a government report showed Feb. 16. Finance Minister Shoichi Nakagawa quit a day later amid accusations he was drunk at a press conference, eroding confidence in the government.

- Technology stocks offer a refuge for investors because the biggest companies in the industry, including Apple Inc.(AAPL) and Cisco Systems Inc.(CSCO), have “strong” balance sheets, according to Jefferies Group Inc.

Wall Street Journal:

- The Financial Industry Regulatory Authority plans to name veteran regulator Richard Ketchum as its new chief executive, succeeding Mary Schapiro, who just became chairman of the Securities and Exchange Commission, according to people familiar with Finra.

- U.S. steelmakers are preparing a raft of complaints against foreign steel imports, a move that could result in stiff tariff increases later this year and escalate trade tensions with China, say people familiar with the matter.

Detroit Free Press:

- Bottom line: US auto industry says it needs $97.4 billion to live.

- As General Motors Corp.(GM) intensifies negotiations to restructure its debt, the automaker is running into resistance from bondholders who are questioning whether the company's viability plan goes far enough to fix the struggling automaker. Despite seeking as much as $30 billion in federal aid, GM already is signaling that it might need additional financial support as soon as four years from now to fully fund its U.S. pension obligations. "It's not clear they've pushed it hard enough," a person familiar with the committee representing the bondholders said Wednesday, a day after GM unveiled the plan. The person noted that bondholders "are very concerned."

paidContent.org:

- Google(GOOG) Maps has overtaken AOL’s MapQuest in terms of unique visitors— with 42.2 million monthly uniques in January, to MapQuest’s 41.5 million—according to the latest stats from comScore.

Rocky Mountain News:

- R. Allen Stanford sure could draw an impressive crowd. During the Democratic National Convention in August, Stanford hosted a high-profile cocktail party in downtown Denver that drew such notables as House Speaker Nancy Pelosi and former Secretary of State Madeleine Albright. The crowd, which numbered several hundred, also included foreign ambassadors and local business bigwigs. "All the players in the Democratic Party were there," said one attendee, who spoke on condition of anonymity because he has ties to one of Stanford's companies. "He also gave a short speech, saying that we were in a period of change, that we have to find new ways to move humanity forward." The cocktail party is one of several ties embattled Texas financier Stanford has with Colorado. On Tuesday, the Securities and Exchange Commission filed a civil lawsuit against Stanford, several companies he controls and two colleagues, claiming they misled investors while selling $8 billion in certificates from an affiliated bank in Antigua.

Charlotte Observer:

- Thousands of N.C. jobs and millions in wages created from the federal economic stimulus package could wind up going to illegal immigrants. Congress stripped language from the $789billion package that would have required employers to verify the legal status of workers paid with stimulus money.

USAToday:

- Although President Obama's stimulus package provides about $144 billion directly to state and local governments, a few Republican governors are suggesting they might reject some of the money. No state has yet refused any of the funding from the $787 billion stimulus package, which Obama signed into law on Tuesday. But Republican governors, including those in South Carolina, Texas, Louisiana and Alaska, have said they are looking closely at the strings attached to the federal funding before they decide what to do with it. Two of their concerns: The restrictions on some of the money could further crimp state budgets, and programs created or expanded with stimulus funds may have to be cut once the stimulus funds are depleted. "You get this huge slug of money. It funds programs for a couple of years, and then what?" says South Carolina Gov. Mark Sanford, who heads the Republican Governors Association. "You get it started, you get a constituency established, and then we're supposed to yank the rug out from under people when the federal money runs out?"

Reuters:
- China’s Shanghai Stock Exchange may resume allowing initial public share offerings before July, the bourse’s executive vp Zhou Qinye said.

- U.S. and Canadian labor unions called for changes in agriculture, energy, investment and other provisions of the North American Free Trade Agreement on the eve of a meeting on Thursday between U.S. President Barack Obama and Canadian Prime Minister Stephen Harper. "We need to address the worsening economic crisis in a coordinated manner, reopen and fix the flaws with the North American Free Trade Agreement and move on a range of complementary policies dealing with energy, climate change and green jobs, industrial policy, migration and development," the AFL-CIO labor federation and the Canadian Labour Congress said in a joint letter to the two leaders. Obama, who is making his first foreign trip as president to Canada, promised last year to "fix" NAFTA by adding enforceable labor and environmental provisions to the core of the pact and and by changing an investment measure that critics say gives business too much power to challenge government regulations. Three-way trade between the United States, Mexico and Canada has tripled to nearly $1 trillion since NAFTA went into force in 1994, and together Canada and Mexico buy more than one-third of U.S. exports.

- A top U.S. Senate leader played down prospects on Thursday for a swift improvement in relations with Syria until Damascus curbs support for Islamist militant groups and addresses other U.S. concerns. "Nobody takes words at face value, particularly in this part of the world. We've learned that actions are what speak, and it's going to be important for Syria to show a willingness to do a number of things," John Kerry, chairman of the Senate Foreign Relations Committee, said during a visit to southern Israel. Kerry, a member of U.S. President Barack Obama's Democratic party, met Secretary of State Hillary Clinton before setting out on his Middle East tour.

- Citigroup Inc shares fell to 17-year lows on Thursday, with Bank of America Corp stock also plunging, amid renewed fears that growing losses could lead to government control of troubled U.S. banks, wiping out shareholders.

Bear Radar

Style Underperformer:
Small-cap Value (-1.19%)

Sector Underperformers:
Education (-7.0%), Homebuilders (-5.56%) and Banks (-3.33%)

Stocks Falling on Unusual Volume:
CCJ, HPQ, IM, WFC, BMRN, ITRI, NILE, NTRI, POOL, SHPGY, COCO, APOL, WST, HE, STC, TTC, ESI and ORB

Stocks With Unusual Put Option Activity:
1) JWN 2) MCO 3) AMAT 4) ESI 5) LDK

Bull Radar

Style Outperformer:
Large-cap Value (+.62%)

Sector Outperformers:
Oil Service (+3.43%), Construction (+3.10%) and HMOs (+2.70%)

Stocks Rising on Unusual Volume:
UNFI, PDE, WFT, HRL, SNPS, OMTR, WAG, WFMI, PCLN, ORLY, PDCO, LPHI, CYBX, DBRN, BEAT, BIDU, BJRI, HAYN, ABCO, ENOC, BWLD, TISI, CSTR, AAP, RS, WPI, AGP, HRL and HOS

Stocks With Unusual Call Option Activity:
1) PCLN 2) WFMI 3) AZO 4) GME 5) ADI

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Thursday Watch

Late-Night Headlines
Bloomberg:

- U.S. stocks are poised to rise because economic indicators are starting to improve, said Barton Biggs, managing partner at Traxis Partners LLC in New York. “There’s too much bearishness and the market is poised for a big, big rally,” said Biggs, whose Jan. 8 prediction that stocks would gain came two days after the Standard & Poor’s 500 Index reached its highest level this year. “We’re in the process of testing the lows.” Biggs said in an interview with Bloomberg Television that investors will continue to pull their money from hedge funds. Customers withdrew $74 billion last month from the largely unregulated investment vehicles that cater to wealthy individuals and institutions, according to a report from TrimTabs Investment Research. “Public and institutional investors are deeply wounded and are discouraged about equity investments,” Biggs said. Hedge funds “are going to be in a redemption mode for a considerable period of time.”

- Brazil stocks may drop in the “next few weeks” because valuations climbed too high given the outlook for a “very sharp” recession in Latin America’s biggest economy, according to Citigroup Inc.Brazilian shares trade for about 9.5 times estimated profits, above the long-term average price-to-earnings of 9, after the market rallied more than its developing-country peers since November, Citigroup strategist Geoffrey Dennis wrote in a research note dated yesterday. Investors should wait for the Bovespa to drop below 35,000 before they buy Brazilian stocks, he wrote.

- Kazakhstan’s credit risk is unjustifiably high and investors should instead buy “less expensive” Russian credit-default swaps to hedge against a default by the former Soviet republic’s government, UBS AG says.

- Hewlett-Packard Co.(HPQ), the world’s largest personal-computer maker, reported sales that missed analysts’ estimates and reduced its earnings forecast for the year. Hewlett-Packard, based in Palo Alto, California, fell 5.5 percent in extended trading to $32.22.

- Baidu.com Inc.(BIDU), operator of China’s most-used online search engine, posted a 31 percent increase in fourth-quarter profit after more of the nation’s citizens began using the Internet. The company’s ADRs rose $1.91, or 1.5 percent, to $130 in late trading.

- China’s stocks rally that’s made the Shanghai Composite Index the world’s best performer this year will falter as profits are “non-existent,” according to independent economist Andy Xie. The index is valued at 17.4 times earnings, the most expensive among the so-called BRIC markets of Brazil, Russia, India and China. The rally will run out of steam as “profits are non- existent and valuations are still expensive,” Xie, former chief Asian economist at Morgan Stanley, said in an interview yesterday. He correctly predicted in April 2007 that China’s stock market was a “bubble” and would burst. The Shanghai Composite peaked on Oct. 16 that year and tumbled more than 70 percent to its trough on Nov. 4, 2008, as the nation’s exports shrank and economic growth slowed. The rally has fueled concern that companies are using loans to speculate in stocks after new lending rose by a record 1.62 trillion yuan ($236 billion) in January as part of a government drive to boost the world’s third-largest economy. As much as 660 billion yuan of new lending may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said in a phone interview this week. “It’s a rampant practice,” said Xie. “Here you are borrowing at 1.5 percent and the stock market rises, so you put your money into stocks and hope to get out after making 20 percent.”

- UBS AG(UBS), Switzerland’s largest bank, will pay $780 million to avoid U.S. prosecution and settle regulatory claims that it helped thousands of wealthy Americans use Swiss bank accounts to evade taxes. The Justice Department filed a criminal charge accusing UBS of conspiring to defraud the U.S. by helping 17,000 Americans hide accounts from the Internal Revenue Service. The government will drop the charge in 18 months if UBS makes reforms, helps prosecutors, and makes payments under accords with the Justice Department and Securities and Exchange Commission.
- Hong Kong luxury-home rents fell to a 2 1/2-year low last month because supply increased as owners opted to lease their apartments rather than sell, real estate agent Ricacorp Properties Ltd. said. Rents at 35 luxury apartment buildings dropped 22 percent from a year earlier to an average HK$25.70 ($3.30) a square foot per month, the lowest since June 2006, Ricacorp said in an e- mailed statement yesterday. The average rent fell 4.8 percent from December, the seventh straight month-on-month drop, it said.

- Indian earnings estimates for the next fiscal year may be cut another 25 percent, led by revisions for banks, as the economy weakens, Credit Suisse Group said. Analysts will probably double the one-quarter reduction in forecasts since November for the year starting April 1, as profit growth at banks, brokerages and developers falters, Credit Suisse analysts Nilesh Jasani and Arya Sen wrote in a report.

- U.S. brokerage regulators fined R. Allen Stanford’s firm more than a year ago for misleading investors while selling certificates of deposit, raising new questions about watchdogs already under scrutiny for missing Bernard Madoff’s alleged $50 billion Ponzi scheme. Stanford Group Co. was fined $10,000 by the Financial Industry Regulatory Authority in November 2007 for distributing marketing material that “failed to present fair and balanced treatment” of the risks associated with CDs. The U.S. Securities and Exchange Commission yesterday filed a civil lawsuit calling the sales by the Houston-based firm a “massive, ongoing fraud.” “From what we know, the problem that led to the fine was a red flag,” said Robert Hillman, a securities law professor at the University of California, Davis. “If you have a red flag of this nature, then you have to do something more than simply levy a fine and close the file.” SEC Chairman Mary Schapiro last month said she would “reinvigorate” the agency’s enforcement unit after it failed for more than a decade to detect that Madoff was paying off old investors with money raised from new ones. Schapiro was chief executive officer of Finra when the private regulator fined Stanford’s firm in 2007.

Wall Street Journal:

- Cisco Systems Inc. (CSCO) appears to be teaming up with VMware Inc. (VMW) for a plan to offer servers and expand its presence in the data-center market, an analyst said Wednesday.

- New research at Genentech Inc.(DNA) is challenging conventional thinking about Alzheimer's disease, providing a provocative theory about its cause and suggesting potential new targets for therapies to treat it.

- Descendants of John D. Rockefeller are leading a new shareholder campaign demanding Exxon Mobil Corp.(XOM) loosen its embrace of fossil fuels.

- A group representing General Motors Corp. bondholders fears that the auto maker's latest restructuring plan fails to address all the challenges facing the company and doesn't cut costs enough in light of the deteriorating economy, a person familiar with the bond negotiations said Wednesday.

NY Times:

- Gov. Kathleen Sebelius of Kansas, an early Obama ally with a record of working across party lines, is emerging as the president’s top choice for secretary of health and human services, advisers said Wednesday.

CNNMoney.com:
- Netflix(NFLX) defies the naysayers.

Politico:

- Sen. Roland Burris is rapidly losing any political support he once had among colleagues, with Democrats from the statehouse to the White House raising questions about his entanglements with ousted Illinois Gov. Rod Blagojevich.

Guardian:
- The UK government's multi-billion pound insurance scheme to ring-fence British banks' toxic assets and reboot lending to the recession-hit economy has run into a wall of opposition in the EU, the Guardian has learned. The European commission and several leading EU countries are understood to have objected that the UK proposals are a serious threat to competition and to the much-prized single market.

International Herald Tribune:

- North Korea said on Thursday it was ready for war with the South, just hours before U.S. Secretary of State Hillary Clinton was set to arrive in Seoul for talks on defusing the North's military threat. North Korea has repeatedly threatened in recent weeks to reduce the South to ashes. Pyongyang is thought to be readying its longest-range missile for launch in what analysts say is a bid to grab the new U.S. administration's attention and pressure Seoul to ease up on its hard line. "(The South Korean president's) group of traitors should never forget that the (North) Korean People's Army is fully ready for an all-out confrontation," the North's KCNA news agency quoted an unnamed military official as saying.

Sidney Morning Herald:

- Australia’s once-triumphant iron ore and coal miners face price cuts of between 30 and 50 per cent, which would slash export income by the equivalent of 4 per cent of gross domestic product and increase the likelihood of recession. Zou Jian, a director of the China Iron & Steel Association and head of the China Metallurgical Mines Association, told the Herald that benchmark iron ore price cuts of between 30 and 50 per cent would be "reasonable" - on top of eliminating a large "freight premium" handed to Australian miners last year.

The Standard:

- New World Development Ltd. and other Hong Kong builders are slashing prices of new residential projects as the economic recession reduces demand for new homes, citing the companies. New World has cut prices at its Wylie Court project in the Ho Man Tin district by as much as 40%. Asia Standard International Group sold 12 flats at its Jadewater project in Aberdeen last weekend after cutting prices by 40%.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.50% to +1.0% on average.
S&P 500 futures +.51%.
NASDAQ 100 futures +.11%.

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Earnings of Note
Company/EPS Estimate
- (HRL)/.51

- (B)/.11

- (PDE)/1.06

- (EXPE)/.24

- (PDCO)/.44

- (NBL)/.79

- (WMB)/.31

- (NEM)/.24

- (S)/-.04

- (CVS)/.69

- (APA)/1.26

- (RS)/.64

- (WBMD)/.29

- (MYL)/.14

- (OSIP)/.46

- (CECO)/.24

- (BUCY)/.91

- (INTU)/.27

- (XTO)/.78

Economic Releases

8:30 am EST

- The Producer Price Index for January is estimated to rise .3% versus a 1.9% decline in December.

- The PPI Ex Food & Energy for January is estimated to rise .1% versus a .2% gain in December.

- Initial Jobless Claims for last week are estimated to fall to 620K versus 623K the prior week.

- Continuing Claims are estimated to rise to 4830K versus 4810K prior.

10:00 am EST

- Leading Indicators for January are estimated unch. versus a .3% gain in December.

- The Philly Fed for February is estimated at -25.0 versus -24.3 in January.

11:00 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +3,200,000 barrels versus a +4,717,000 barrel increase the prior week. Gasoline supplies are expected to fall by -500,000 barrels versus a -2,662,000 barrel decline the prior week. Distillate inventories are expected to fall by -1,500,000 barrels versus a -1,026,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall -.25% versus a -1.94% decline the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Lockhart speaking, weekly EIA natural gas inventory report, (PVTB) Investor Day, (AIPC) shareholders meeting, (SAFM) annual meeting(CBE$) annual outlook, Oppenheimer REITs/Real Estate Forum, CSFB Paper Conference, Piper Clean Tech Conference, (CR) analyst conference, Oppenheimer Semi Summit and CIBC Institutional Investor Conference could also impact trading today.

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