Stocks Reversing Higher into Final Hour on Less Financial Sector Uncertainty, Diminishing Economic Fear, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Medical longs, Retail longs and Computer longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. Investor anxiety is also above average. Today’s overall market action is bullish. The VIX is falling 3.52% and is very high at 43.76. The ISE Sentiment Index is below average at 110.0 and the total put/call is around average at .83. Finally, the NYSE Arms has been running around average most of the day, hitting 1.56 at its intraday peak, and is currently .70. The Euro Financial Sector Credit Default Swap Index is falling 8.01% today to 149.0 basis points. This index is now back below its high of 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is falling .99% to 218.80 basis points. The TED spread is rising .98% to 96 basis points. The TED spread is now down 371 basis points in about four months. The 2-year swap spread is falling .78% to 63.75 basis points. The Libor-OIS spread is falling .17% to 100.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.00%, which is down 171 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 .29%, which is down 1 basis point today. The sharp reversal higher in the (XLF), on volume, after investors heard more details on the bank “stress tests” is a large broad market positive. The Bank Index(BKX) is jumping 6.7%. Semi, Telecom, REIT, Education, Disk Drive and Energy stocks are also posting strong gains. Market leading stocks have been relatively strong throughout the day. Another large decline in gold and jump in the 10-year yield indicates fear is diminishing. Asia should see gains tonight. Nikkei futures indicate an +30 open in Japan and DAX futures indicate an +54 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on diminishing financial sector pessimism, short-covering, bargain-hunting and less extreme economic fear.

Today's Headlines

Bloomberg:

- Federal Reserve Chairman Ben S. Bernanke said there may be a benefit in resurrecting a rule that restricts short-selling stocks when share prices are falling amid the current bear market. “In the kind of environment we have seen more recently” the so-called uptick rule “might have had some benefit,” Bernanke said in testimony before the House Financial Services Committee today. The Standard & Poor’s index has tumbled 50 percent since the SEC dropped the uptick rule 16 months ago. New SEC Chairman Mary Schapiro said in January she may resurrect the provision.

- Washington’s respite from congressional pet projects known as earmarks appears to be over. President Barack Obama, who insisted on keeping his economic stimulus package free of money for lawmakers’ projects, may soon be faced with a bill stuffed with thousands of them. The U.S. House plans today to approve a $410 billion spending bill providing $7.7 billion for more than 8,500 special projects, according to Taxpayers for Common Sense, a Washington- based group that tracks earmarks.

- Goldman Sachs Group Inc.(GS), recipient of $10 billion of federal rescue funds, would be a buyer of assets if the U.S. government sets up a so-called “bad bank” to acquire toxic investments, an analyst said. “Goldman appears almost excited to participate in the bad- bank process,” Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone wrote after meeting with Goldman Sachs Chief Financial Officer David Viniar yesterday. “We note Goldman’s highly successful investments in the energy space during the post-Enron meltdown.”

- Two officers of WG Trading, a broker- dealer based in Greenwich, Connecticut, were charged with conspiracy in what authorities called a $550 million securities- fraud scheme dating to 1996. The two, Paul Greenwood and Stephen Walsh, were among four suspects arrested today by the Federal Bureau of Investigation after three securities-fraud complaints were unsealed in U.S. District Court in New York, said Jim Margolin, an FBI spokesman.

- Regulators set a six-month deadline for the biggest 19 U.S. banks to raise any new capital deemed necessary after a review of their balance sheets. The regulators will complete their so-called stress tests by the end of next month, the Treasury said in a statement in Washington.

- Crude oil rose to a two-week high after a government report showed that U.S. gasoline inventories fell as refineries cut operating rates and demand strengthened.

- Cia. Vale do Rio Doce, Rio Tinto Group and BHP Billiton Ltd., the world’s largest iron ore producers, may get 30 percent less for the raw material this year under annual contracts after a slump in steel demand.

- The yen is off to its worst start in nine years against the dollar as Japan’s tumbling exports and the fastest economic contraction since 1974 end a rally sparked by investors seeking a refuge from the financial crisis. The currency slumped 6.4 percent against the dollar this year as global stock markets extended 2008’s losses.

- The cost to protect against default by Citigroup Inc.(C) and Bank of America Corp.(BAC) declined for a second day after Federal Reserve Chairman Ben S. Bernanke downplayed fears of nationalization and President Barack Obama vowed to fix the banking system. Credit-default swaps protecting senior unsecured bonds sold by New York-based Citigroup dropped 25 basis points to 435 basis points, according to broker Phoenix Partners Group. The contracts rose to as high as 525 basis points yesterday before a rally. Contracts on Bank of America fell 10 basis points to 255 basis points after reaching 320 basis points yesterday, Phoenix prices show. San Francisco-based Wells Fargo & Co. fell 13 basis points to 217 basis points, according to CMA DataVision. Morgan Stanley declined 10 basis points to 382 basis points, CMA data show, and Goldman Sachs Group Inc. fell seven basis points to 285. In London, the Markit iTraxx Financial index of 25 European banks and insurers declined 13 basis points to 154 basis points, according to JPMorgan Chase & Co.

Wall Street Journal:

- A top U.S. House Democrat is warning of signs that Japan is considering steps to devalue its currency, a move that could hurt the ailing U.S. auto industry, and he urged President Barack Obama to step up pressure on the Japanese government. House Financial Services Chairman Barney Frank, D-Mass., echoing concerns of U.S. auto makers and their congressional allies, called on Obama this week to pressure Japan to resist the temptation to devalue the yen.

CNBC.com:
- Republican Representative Eric Cantor said Congress may respond to calls for action to relieve companies of accounting rules such as so-called mark-to-market. Cantor said there “is some appetite” for making the changes, which “wouldn’t cost the taxpayers any money.”

NY Times:

- Big Drug Makers May Seek to Fill Holes in Roster.

TradersMagazine.com:

- Trading industry experts said the passage of a new bill to tax each buy and sell transaction by up to 25 basis points would devastate liquidity in the equities market. The proposed House of Representatives' bill-H.R. 1068: Let Wall Street Pay for Wall Street's Bailout Act of 2009-would, they say, dramatically increase trading costs, widen bid-ask spreads, kill off high-frequency market making firms, slash volumes and move trading to overseas markets. The proposed bill would add 5 cents per share to the cost of trading an average stock, at around $20 a share.

Boston Herald.com:

- HBO on your PC? It could happen sooner than you think. Wary of the growing number of consumers watching TV shows online for free — and yet reluctant to upset viewers by yanking shows from the Internet — the nation’s largest cable operators are in talks with media conglomerates to take back control. They would create a platform to release cable TV shows online, but exclusively for paying subscribers.

The Detroit News:

- Negotiations between General Motors Corp. and its bondholders are progressing, with major investors signaling that they are now willing to accept less money than originally sought in exchange for forgiving billions in unsecured notes -- but only if the federal government guarantees the new debt.

Europa:

- State aid: Commission provides guidance for the treatment of impaired assets in the EU banking sector.

Cinco Dias:

- Repsol YPF SA, the Spanish oil company, will bid for contracts in Iraq as the government there seeks to boost oil output. The Iraqi government will offer engineering and construction contracts in as many as 19 oil fields this year and Repsol will seek to win a share of the business.

Interfax:

- Russia will soon sign a contract with Iran to supply nuclear fuel for at least 10 years, citing Sergei Kiriyenko, CEO of Rosatom Corp., Russia’s state-owned nuclear holding company.

Bear Radar

Style Underperformer:
Small-cap Value (-3.19%)

Sector Underperformers:
Airlines (-5.60%), HMOs (-5.60%) and Insurance (-4.93%)

Stocks Falling on Unusual Volume:
GMXR, LNC, CLF, TI, KNDL, FSLR, WYNN, ASTE, GTIV, FWLT, ODFL, SPWRB, AMED, ZN, HEI, HLF, CCH, RUK, CNP, CRT, AP, SJM and DWA

Stocks With Unusual Put Option Activity:
1) CI 2) MUR 3) FSLR 4) TEX 5) CF

Bull Radar

Style Outperformer:
Large-cap Growth (-2.04%)

Sector Outperformers:
Education (-.15%), Semis (-.32%) and Retail (-.76%)

Stocks Rising on Unusual Volume:
NEM, SSRI, KR, SWY, HPQ, KTC, FCX, JCOM, PZZA, TRMK, CPSI, APSG, DISCA, SXCI, EPIQ, DLTR, BCPC, MELI, CHSI, HURN, ONXX, SNDA, TNDM, HITT, CECO, LIHR, CRI, TFX, HRL, TYN, TRA and POR

Stocks With Unusual Call Option Activity:
1) LRCX 2) LLY 3) CBI 4) FSLR 5) RMBS

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Wednesday Watch

Late-Night Headlines
Bloomberg:

- Canada’s dollar, down 20% in a year as the global financial crisis spurred investors toward the safest of assets, may remain depressed against the US dollar as an expected rebound in oil prices fails to materialize, according to RBC Capital Markets. While the wide spread between spot oil and longer-term oil futures was taken to signal a recovery in the global economy, the spread’s narrowing to below $20 from $20-$30 per barrel “highlights the risk that oil demand will remain very sluggish and that prices could well languish near or below $50 per barrel through 2009 and into 2010,” Watt said.

- The cost of protecting Asia-Pacific bonds from default fell. The Markit iTraxx Japan Index of credit-default swaps fell 5 basis points to 470 at 10:15 am in Tokyo, according to BNP Paribas SA prices. The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan dropped 15 basis points to 425 at 9:15 am in Hong Kong, according to Barclays Plc prices. The Markit iTraxx Australia index was quoted 10 basis points lower at 362.5 as of 10:50 am in Sydney, Citigroup Inc. data show.

- More than 1 million households would benefit from seeking protection from creditors under a proposed law that would let bankruptcy judges modify mortgage terms, the Congressional Budget Office said. The House of Representatives is scheduled to vote Feb. 26 on legislation with a so-called cram-down provision allowing federal judges to order banks to reduce the mortgage principal payments and interest rates for homeowners that file for Chapter 13 bankruptcy protection.

- China’s real-estate developers don’t expect the property market to recover until at least the second half of this year, as prices need to fall further before attracting more buyers, according to Goldman Sachs Group(GS). “A sustainable property market is out of sight,” Goldman Sachs analysts Thomas Deng and Kinger Lau wrote in a report, which was based on observations from company visits in southern China and published today.

- Hong Kong’s economy shrank by the most since the first quarter of 1999 as the worst financial crisis since the Great Depression sent exports tumbling and unemployment climbing. Gross domestic product fell 2.5 percent in the fourth quarter of 2008 from a year earlier, the Census and Statistics Department said today on its Web site, after growing 1.7 percent in the third quarter. Economists surveyed by Bloomberg News had estimated a 2 percent contraction.

Wall Street Journal:

- President Barack Obama addressed the nation in a State-of-the-Union-style speech aimed at building realistic hopes for an economic turnaround while persuading ordinary Americans that his ambitious plans ultimately will help them and won't reward irresponsible bankers and speculators. Seeking to ease Americans' growing anxiety about the complex and increasingly global downturn, Mr. Obama sought to refocus the country's attention on the country's historic sources of strength -- its ideas and innovative spirit. "While our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before," Mr. Obama said.

- A potential blueprint for European finance regulation will propose establishing a supervisor to watch over the region's biggest banks and insurers, according to people familiar with the matter. But the report, slated for release on Wednesday, won't call for a continent-wide set of regulations.

- Leaders at Ford Motor Co.(F) will take a sizeable cut to their compensation this year, a move announced one day after the auto maker exacted new concessions from its hourly workers. In a memo from Ford Executive Chairman William Ford Jr. and Chief Executive Alan Mulally, the top leaders of the company said they agreed to accept a 30% reduction in their salaries over the next two years. Ford's board of directors will also forgo the cash portion of its members' compensation this year, according to the memo sent to all Ford employees Tuesday afternoon. Performance bonuses for salaried employees and senior executives for 2009 will be eliminated.

- The government's $200 billion program to revive the market for securities backed by consumer loans may end up excluding the very industry that needs it most: U.S. auto makers. As the Federal Reserve hashes out final terms of its Term Asset-Backed Securities Loan Facility, or TALF, it is becoming clear that securities that help finance auto dealers mightn't meet some criteria. That would block a form of funding that auto companies had hoped would provide immediate relief as they fight for survival.

- Bank stocks soared, leading the broader market higher Tuesday after Federal Reserve Chairman Ben Bernanke made the strongest comments yet against nationalizing major Wall Street firms.

MarketWatch.com:
- The Hearst Corp. said Tuesday that unless the San Francisco Chronicle can undertake "critical" cost-cutting measures including job cuts within weeks, the media giant will be forced to sell or close the 144-year-old newspaper.

CNNMoney.com:
- House Democratic leaders have killed the Bush administration's plan to double the size of the U.S. emergency crude oil reserve, while the Obama administration may create gasoline and diesel fuel stockpiles.

Reuters:

- Northern Trust Corp(NTRS) took a pounding on Tuesday from U.S. lawmakers who said the bank must repay millions of taxpayer bailout dollars spent on "lavish parties" during a Southern California golf tournament. The Chicago-based bank's sponsorship of the expensive bash prompted Sen. John Kerry, a Massachusetts Democrat, to say he will introduce a bill this week to end "extravagant spending practices of U.S. banks" that receive taxpayer bailouts.

Financial Times:
- Cash-strapped investors have put more than $540m (€420m) of private equity and hedge fund stakes up for sale on a new platform launched Tuesday, aiming to draw out possible buyers for the otherwise illiquid holdings. The platform introduced by newcomers SecondMarket is a bold move to break the log-jam in markets for second-hand private equity and hedge fund stakes, where prices have plunged to record lows as sellers have far outweighed buyers. Hundreds of pension funds, endowments, banks, insurance companies, and wealthy individuals are looking to sell their private equity and hedge fund holdings to cover losses elsewhere in their investment portfolios.

- Russia’s economy contracted at an annual rate of 8.8 per cent in January, according to the economy minister. The figures provide the latest pointer to a sharp slowdown last month. Last week, Elvira Nabiullina, economic development minister, said the economy shrank by 2.4 per cent between December and January. Industrial production also fell 16 per cent year-on-year in January, while Russia saw a 17 per cent decline in construction, alongside a modest 2.4 per cent rise in retail trade. Officials predict that gross domestic product will contract by 2.2 per cent in 2009 overall. But economists are extremely pessimistic.

The Standard:

- Stronger measures are needed to boost domestic consumption so that China can sustain economic growth, President Hu Jintao said yesterday. He warned that the risk of deflation is rising, putting pressure on society. "China's advantageous economic conditions have not fundamentally changed, but downward pressure on economic growth has intensified," Hu was cited by state radio as saying during a State Council meeting.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (MGA), target $38.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 futures -.79%.
NASDAQ 100 futures -.69%.

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Earnings of Note
Company/EPS Estimate
- (MSO)/.18

- (ZLC)/.48

- (SJM)/.86

- (SPW)/1.86

- (DLTR)/1.12

- (DLM)/.22

- (EV)/.19

- (TJX)/.50

- (ESRX)/.83

- (FLS)/1.89

- (CRM)/.07

- (FLR)/.91

- (DNR)/.14

- (LTD)/.65

Economic Releases

8:30 am EST

- Existing Home Sales for January are estimated to rise 1.1% versus a 6.5% gain in December.

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,250,000 barrels versus a -138,000 barrel decline the prior week. Gasoline supplies are expected unch. versus a +1,105,000 barrel increase the prior week. Distillate inventories are expected to fall by -1,200,000 barrels versus an-813,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.10% versus a +.72% the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- Fed Chairman Bernanke gives monetary policy report before House panel, weekly MBA mortgage applications report, Jeffries Internet Conference, UBS Industrials Conference, BMO Capital Global Metals & Mining Conference, Robert Baird Business Conference, Merrill Lynch Insurance Conference, CSFB Global Services Conference, Goldman Tech & Internet Conference, Pacific Crest Technology Summit and the (VOLC) analyst meeting 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 100% net long heading into the day.