Stocks Sharply Lower into Final Hour on More Economic Pessimism, Shorting, Forced Selling

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Medical longs and Computer longs. I added to my (IWM)/(QQQQ) hedges and to my (EEM) short today, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, sector performance is mostly negative and volume is about average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 5.42% and is elevated at 51.99. The ISE Sentiment Index is below average at 117.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running low most of the day, hitting .38 at its intraday trough, and is currently .51. The Euro Financial Sector Credit Default Swap Index is rising 8.73% today to 159.67 basis points. This index is hitting a new record today, eclipsing its high of 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling .42% to 213.45 basis points. The TED spread is falling .52% to 97 basis points. The TED spread is now down 370 basis points in about four months. The 2-year swap spread is falling 2.72% to 62.50 basis points. The Libor-OIS spread is falling .49% to 101.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.11%, which is down 159 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 .27%, which is up 1 basis point today. Market leading stocks are even weaker than the broad market. It is a large negative to see the financial sector cds index take out its record high from last year. As well, the NYSE Arms has been extremely low today given the damage. On the positive side, banks, airlines and homebuilders are actually up today. Nikkei futures indicate a -221 open in Japan and DAX futures indicate a -51 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic sector pessimism, shorting and forced selling.

Today's Headlines

Bloomberg:

- UnitedHealth Group Inc.(UNH), Humana Inc.(HUM) and Coventry Health Care Inc.(CVH) each tumbled more than 11 percent in New York trading after the Obama administration said it plans to curb spending increases for Medicare-backed health plans. The U.S. government proposed fee increases in 2010 of 0.5 percent to companies providing subsidized health coverage for the elderly through what is known as Medicare Advantage plans. Humana today said the rates would have a “significant adverse impact” on premiums and benefits for plan members. The government spent $100 billion last year for almost 11 million Advantage members, who get extra benefits not offered by basic Medicare, the U.S. health plan for the elderly and disabled. President Barack Obama, who pledged to rein in spending on providers, may call for reducing the subsidies when he announces budget proposals this week, an administration official said yesterday.

- Obama Mortgage Plan Reflects ‘Denial,’ JPMorgan Analyst Says. Investors should avoid subprime- mortgage bonds because the Obama administration’s $75 billion home-loan plan, focused on lowering payments and not principal, is unlikely to succeed, according to JPMorgan Chase & Co. Flanagan, whose team was top-ranked for real-estate asset- backed securities in an Institutional Investor magazine poll last year, moved to an “underweight” recommendation on the most senior classes of subprime securities. On Dec. 17, he had switched to an “overweight” on the debt, writing that “the indications are quite strong that policy makers now ‘get it.’”

- The cost of protecting bonds sold by European banks and insurers surged to a record on concern that nationalized borrowers will be allowed to skip interest payments. Credit-default swaps on the benchmark Markit iTraxx Financial index of 25 European banks and insurers climbed 5 basis points to an all-time high of 159, according to JPMorgan Chase & Co. prices at 8:23 a.m. in New York. Contracts on the Markit iTraxx Financial index of subordinated debt rose 5 to 305 after reaching a record 320. The Obama administration may convert the U.S. government’s preferred shares in Citigroup Inc. into common equity, expanding its stake in the firm and fueling speculation the bank may be compelled to save taxpayer money by deferring interest on lower- ranking debt. “Governments take active positions in this market and change the rules of the game,” said Folkert Jan Van Der Veer, a credit strategist at Dresdner Kleinwort in London. “That is very negative for the market because you don’t know what to expect going forward.”

- Crude oil fell in New York on speculation demand will decline faster than the Organization of Petroleum Exporting Countries is curbing supply. The 11 members with output quotas, all except Iraq, reduced output 3.8 percent to 25.3 million barrels a day in February, according to consultant PetroLogistics Ltd. of Geneva. Iran, Venezuela and Iraq said last week that OPEC is prepared to cut production again when it meets on March 15.

- General Electric Co.(GE)l for a third straight day on increasing concern its finance arm may require additional equity that would threaten the dividend. GE fell 53 cents, or 5.7 percent, to $8.85 at 1:02 p.m. in New York Stock Exchange composite trading, the lowest value since March 1995.

Wall Street Journal:

- Outside advisers to the U.S. Treasury have started lining up the largest bankruptcy loan ever, talking with banks and other lenders about at least $40 billion in financing for General Motors Corp.(GM) and Chrysler LLC, in case the two auto makers need it, said several people familiar with the matter.

- Marvell Technology Group Ltd.(MRVL) makes chips for communications equipment, cellphones and other high-tech products. But it also hopes to be remembered for popularizing a new kind of computer. The Santa Clara, Calif., company is promoting the idea of computing devices that plug into an electrical socket -- and are about the same size -- yet have enough power to manage users' digital media and allow them to be viewed from outside the home over the Internet.

- Online video is cutting into television, albeit slowly. People are watching more video than ever on every type of screen -- television, the Internet and mobile devices -- according to a report on the nation's viewing habits to be released Monday by Nielsen Co.

- Citigroup Inc.(C) in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation. While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.Any such move would give federal officials far greater influence over one of the world's largest financial institutions.

CNBC.com:
- Senator Christopher Dodd’s executive compensation amendment is having unintended consequences that are damaging the very banks Congress is supposedly trying to help. On Friday, Standard & Poor’s said the Dodd provision changes the way they view the QUALITY of TARP money. The credit rating agency, which determines the ratings on the banks and decides whether a bank lives or dies, says the provision means that capital is on no longer "permanent" in their eyes. That's crucial because, as a result, they are no longer going to use it when determining certain capital ratios, which help them determine their ratings on banks.

MarketWatch:
- Ford Motor Co.(F)ares jumped as much as 21% in early trading Monday after the United Auto Workers union said it has reached a deal on how the automaker will fund a trust to cover retirees' health-care costs.

- The reversal of Russia's fortunes is nothing short of a Chekhov drama. A seven-year economic boom fueled by cheap credit and soaring commodity prices has come to an abrupt end, plunging the country into the worst financial crisis since its 1998 debt default. Russia's economy is expected to contract by at least 2% in 2009 after growing at an average rate of 7% in recent years. Stocks have fallen 18% this year, after losing three-quarters of their value last year, cementing Russia's place as one of the worst performing emerging markets. The ruble has lost nearly a third against the U.S. dollar since July.

NY Post:

- One of New York City's wealthiest residents, shrugging off the deepening recession, has been on a real estate buying spree - buying up parcels across the country at depressed prices. Len Blavatnik, a Russia-born oil tycoon-turned-New York billionaire, and companies he controls have snapped up multi-million dollar houses and parcels of land in Florida, Nevada, California and Texas, apparently hoping to turn a pretty profit once the real estate market turns around.

ITExaminer.com:

- Apple(AAPL) is certain to allow Verizon(VZ) to join its elite band of Iphone providers, bringing to an end the exclusive and somewhat stupid exclusivity deal in its biggest market. Deep throats in Apple claim that Iphones for Verizon Wireless will be announced soon.

Denverpost.com:

- The governors of Colorado, Utah and Wyoming are asking President Barack Obama to fund the development of clean-coal technologies in the West. Colorado Gov. Bill Ritter and Wyoming Gov. Dave Freudenthal, both Democrats, and Utah Gov. Jon Huntsman, a Republican, said in a letter Sunday to Obama that finding a cleaner way to use coal is vital for reducing emissions, promoting national security and create jobs. They say clean-coal technologies also could be used in rapidly industrializing nations such as China and India.

hedgeweek:

- Hedge funds investing in emerging markets concluded 2008 with seven consecutive months of performance declines, resulting in cumulative losses of nearly 37 per cent, according to Chicago-based industry data provider Hedge Fund Research. This was the worst year of performance since HFR began tracking emerging markets-focused funds in 1990, eclipsing the previous record decline of nearly 33 per cent in 1998. Investors withdrew USD6.7bn from emerging markets hedge funds in the fourth quarter of 2008, with total hedge fund capital committed to emerging markets falling to less than USD67bn globally. This represents an asset decline in 2008 of nearly 43 per cent from a peak at the end of 2007.

FINalternatives:

- President Obama is set to propose taxing the carried interest earned by hedge fund and private equity fund managers as ordinary income, rather than as capital gains. That could more than double the tax alternatives executives pay on the vast majority of their pay. Obama is also expected to propose allowing his predecessor’s much-debated tax cuts for wealthier Americans lapse next year.

Reuters:
- Large U.S. banks can seek to convert government preferred shares to common equity to shore up their capital, federal regulators said on Monday, adding that Washington stands ready to provide extra funds to institutions that need it. he regulators said they will begin assessing major institutions' capital needs on Wednesday under a new "stress test" program that will gauge their ability to weather a deeper recession.

Financial Times:
- Switzerland’s finance minister has accused US authorities of “shock” tactics to compel holders of undeclared UBS accounts to come forward, but warned that court action to discover the names of thousands of clients would not succeed. ans-Rudolf Merz, finance minister and Switzerland’s head of state this year under its rotating presidency, defended the Swiss government’s role in prompting the world’s biggest wealth manager to breach hallowed bank secrecy and last week reveal some 250-300 client names to the US.

AFP:

- Former US president Bill Clinton has urged his Democrat successor Barack Obama to be optimistic on the prospects for the US economy, in a interview broadcast on Friday. Speaking to the ABC television network, Clinton praised Obama's efforts to explain the breadth and depth of the current economic malaise, but urged the 44th president to talk-up a positive long-term vision."I just want the American people to know that he's confident that we are gonna get out of this and he feels good about the long run," Clinton told ABC's "Good Morning America." As stock markets continue to post multi-year lows, Obama has drawn fire in some quarters for painting an overly bleak view of the recession.

Bild:

- Italian Prime Minister Silvio Berlusconi doesn’t see a risk of the euro region breaking up, citing an interview.

Il Tempo:

- European Central Bank Executive Board member Lorenzo Bini Smaghi said that bank nationalizations are “counterproductive.” The sooner the banks are recapitalized the better, Bini Smaghi said.

Bear Radar

Style Underperformer:
Small-cap Value (-3.35%)

Sector Underperformers:
HMOs (-10.15%), Steel (-5.29%) and REITs (-5.28%)

Stocks Falling on Unusual Volume:
RIO, MCF, PTNR, CMC, APA, LECO, WMGI, IBOC, ADBE, SYNA, NTAP, PPD, DCO, HUM, RBA, TOD, NJ, PXE, BPT and KRO

Stocks With Unusual Put Option Activity:
1) ADS 2) HUM 3) LTM 4) ADSK 5) PWR

Bull Radar

Style Outperformer:
Large-cap Value (+.12%)

Sector Outperformers:
Banks (+1.66%), Airlines (+.98%) and Restaurants (+.11%)

Stocks Rising on Unusual Volume:
USB, WFC, SKYW, CAL, MDCO, TWC, MDRX, LUK, ITT, GRMN, GEOY, CECO, NILE, NCTY, WABC, JCOM, CPLA, SHPGY, LAYN, ZN, CIB, KDN, VAL and GPI

Stocks With Unusual Call Option Activity:
1) HUM 2) DISH 3) JBLU 4) ONXX 5) APOL

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Monday Watch

Weekend Recommendations
Barron's:
- Made positive comments on (HPQ), (L) and (NTRS).

Citigroup:

- Upgraded (LTD) to Buy, target $10.

- Upgraded (NILE) to Buy, target $30.

Night Trading
Asian indices are -1.25% to +1.75% on avg.
S&P 500 futures +1.04%.
NASDAQ 100 futures +1.07%.

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Earnings of Note
Company/Estimate
- (FST)/.30

- (ONXX)/-.65

- (MHK)/.24

- (JWN)/.30

- (CPB)/.64

- (HTZ)/.06

Upcoming Splits

- None of note

Economic Releases

- None of note

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Fisher speaking, (HON) investor conference and Dallas Fed Manufacturing Activity Index could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and technology shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the week.