Stocks Surging into Final Hour on Less Economic Pessimism, Diminishing Financial Sector Worries, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Technology longs, Retail longs and Biotech longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, sector performance is mostly positive and volume is above average. Investor anxiety is also above average. Today’s overall market action is bullish. The VIX is falling 10.15% and is elevated at 45.77. The ISE Sentiment Index is low at 95.0 and the total put/call is high at 1.02. Finally, the NYSE Arms has been running high most of the day, hitting 1.64 at its intraday peak, and is currently 1.42. The Euro Financial Sector Credit Default Swap Index is falling 4.66% today to 156.33 basis points. This index is still below its all-time high of 164.0 on Feb. 24^th. The North American Investment Grade Credit Default Swap Index is rising .94% to 243.0 basis points. This index is still well below its Dec. 5^th record high of 285.99. The TED spread is rising .73% to 103 basis points. The TED spread is now down 360 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 3.97% to 72.0 basis points. The Libor-OIS spread is falling .01% to 102.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis point to .95%, which is down 169 basis points since July 7th. 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 .25%, which is down 2 basis points today. Stocks globally are rising on optimism over the possibility of a rebound in the Chinese economy. As well, a few minutes ago Reuters reported that the House Financial Services Sub-committee is holding a hearing on March 12^th related to mark-to-market accounting. I have said in the past that revising this rule would result in a large financial sector rally. I am surprised the stocks aren’t up more on the news. If the rule isn’t revised, today’s gains will likely evaporate over the coming weeks. For today’s rally to have staying power, financials must at least participate. Nikkei futures indicate an +200 open in Japan and DAX futures indicate a +29 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on less economic pessimism, more shorting, diminishing financial sector worries, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:

- The proposed tax increase on stocks and derivatives trading that is intended to help pay for the Wall Street bailout would have a “severe impact” on investors, NYSE Euronext Chief Executive Officer Duncan Niederauer said. “It would decimate liquidity in the market in an unprecedented way,” he said late yesterday at the Museum of American Finance in New York. “That would be about the worst thing that could happen, but I don’t believe it will get any traction.” Representative Peter DeFazio, an Oregon Democrat, introduced legislation last month that would require exchanges to collect a tax equal to 0.25 percent of a trade’s value. The proposal, backed by seven other Democratic representatives, could raise $150 billion a year to mitigate the costs of the U.S. Treasury’s rescue plan for banks and brokerages, according to the Feb. 13 draft of the legislation.

- The Obama administration set loan modification guidelines for its $75 billion homeowner rescue plan, agreeing to pay lenders for altering troubled mortgages while reducing borrowers’ interest rates to as low as 2 percent. The voluntary initiative, announced on Feb. 18, would require applicants to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.

- Steve Leuthold, whose Grizzly Short Fund returned 74 percent last year betting against U.S. stocks, said now is the time to buy equities because investors are too fearful about the economy. “These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid,” he told Bloomberg Television in an interview today. “We’ve been in much worse, much more panicked and more scary situations in the U.S.” The economy isn’t as bad as it was in 1974, when stocks began rebounding, said Minneapolis-based Leuthold. He predicted the Standard & Poor’s 500 Index will surge to at least 1,000 in 2009, representing a gain of 44 percent from yesterday’s 12-year low of 696.33. Because a rally is likely, Leuthold said investors shouldn’t buy his Grizzly Short Fund. It has returned 26 percent in 2009. The Leuthold Core Investment Fund, which bets on stock gains, is most concentrated in biotechnology companies, automotive retailers and education providers, he said. (video)

- General Electric Co.(GE) shares dropped below $6 for the first time since December 1991, plunging as much as 18 percent in its fourth straight day of declines on investor concerns its finance unit may require more capital. GE fell 41 cents, or 5.8 percent, to $6.60 at 11:07 a.m. in New York Stock Exchange composite trading. Earlier the shares traded as low as $5.73. The shares are being driven down by selling by sovereign wealth funds anticipating a downgrade of the company’s AAA credit rating, and that’s also pushing its credit-defaults swaps higher, Pacific Investment Management Co.’s Bill Gross said in an interview on CNBC.

- India’s iron-ore exports in March will slump as China, the world’s largest consumer of the steel- making raw material, reduces purchasing after stockpiles rose. “Demand has dried up since the last week of February,” Rahul Baldota, president of the Federation of Indian Mineral Industries, said in a telephone interview today. Indian iron ore prices have fallen by $15 from $85 a ton in February, he said.

- Crude oil rose for a second day on speculation China will broaden efforts to boost economic growth, bolstering fuel demand in the world’s third-largest economy.

- Bridgewater Associates Inc., run by Ray Dalio, overtook JPMorgan Chase & Co. to become the biggest U.S. manager of hedge-fund assets, according to a survey. Bridgewater managed $38.6 billion on Jan. 1, according to Absolute Return magazine. JPMorgan ranked second after losing $11.8 billion in hedge fund assets in the second half of 2008, leaving the New York-based bank with $32.9 billion. Paulson & Co. rose to third place from fourth even as the New York-based firm’s assets declined to $29 billion from $34.4 billion, according to the magazine. The total value of U.S. hedge funds that managed at least $1 billion each fell 32.3 percent in the second half to $1.1 trillion, according to Absolute Return, which is published by London-based HedgeFund Intelligence.

- China’s exporters are calling on the government to weaken the yuan after the biggest slump in overseas sales in more than a decade, putting them on a collision course with the central bank’s intent on keeping the currency stable. “A 2 to 3 percent depreciation in the yuan against the dollar would help as we are on the line between life and death,” Wang Hanmin, a sales manager at Yixing Bochangyuan Garments Co. in Jiangsu province, said at the East China Trade Fair in Shanghai this week.

Wall Street Journal:

- Amazon.com Inc.(AMZN) plans to release a program Wednesday for reading electronic books on Apple Inc.'s(AAPL) iPhone, extending Amazon's sales of digital books to devices beyond its Kindle e-book reader. Amazon's software application, which can be downloaded free of charge, allows iPhone and iPod Touch users to read books or periodicals purchased on the Web or through their dedicated Kindle device, usually for $9.99.

- President Barack Obama told AFL-CIO union leaders Tuesday in a videotaped address that the controversial Employee Free Choice Act will pass, signaling his full backing for legislation that makes union organizing easier. "We will pass the Employee Free Choice Act," President Obama told more than 100 top labor officials in a closed-door meeting at the labor federation's winter gathering in Miami, according to people at the meeting. The bill would make it easier for unions to recruit workers because it would let them join unions simply by signing cards rather than through secret-ballot elections in which companies can campaign against the union. The U.S. Chamber of Commerce and other business organizations have been campaigning against the legislation.

- The Wall Street stages of grief go something like this: Anger, bargaining, acceptance, tell-all biography. Deal Journal exclusively brings you two detailed excerpts from House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan, to be published in March, 2009 by Doubleday, a division of Random House, Inc. Cohan brings lively quotes about the tensions surrounding the death of Bear Stearns.

NY Times:

- The A.F.L.-C.I.O.’s executive council will call on the Obama administration on Wednesday to speed the nationalization of problem banks to stimulate lending and lift the sagging economy. The labor federation, a lobbying powerhouse that represents 10 million workers, will thus become one of the first groups — and certainly the most powerful — to call for moving more aggressively on nationalization, both to counter Republican and business cries against it and to press the Obama administration not to vacillate over such a move.

- Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering. So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.

NJ.com:

- Chris Christie, the leading Republican challenger in the New Jersey November gubernatorial election, leads Gov. Jon Corzine in a head-to-head matchup, with 41 percent favoring Christie and 32 percent for Corzine.

Detroit Free Press:

- On the eve of Fiat CEO Sergio Marchionne’s meeting with the presidential automotive task force to discuss his company’s proposed alliance with Chrysler, the Italian automaker unveiled a new engine technology it says can reduce fuel consumption as much as 25%. The system is expected to be available to all Fiat’s current and future partners, including Chrysler, Fiat powertrain chief Alfredo Altavilla said at Geneva's annual auto show. The first engine using the system goes on sale in the Alfa Romeo MiTo sporty compact in Europe later this year.

electronista:

- Nearly one quarter of US phones are smartphones and are driven by trends the iPhone put in place, findings from the NPD Group show. About 23 percent of phones fit into the advanced category by the end of 2008, or double the share of a year earlier. Exactly half of these were touchscreen devices, a feat which NPD directly credits to Apple popularizing the format through the iPhone and pushing other carriers and phone makers to follow suit.

Vanity Fair:

- The five hotshots who took Fortress Investment Group public were worth billions at first. Today they look like arrogant showboats, and their story helps explain why hedge funds are imploding by the thousands—and why there’s still a truckload of money to be made.

Reuters:
- OPEC's president Angola considers the group should not cut output when it meets on March 15 and instead take more time to assess the impact of record curbs made so far, while for others, it it too soon to tell, OPEC sources said on Wednesday. Although it holds the presidency, Angola has only been a member of OPEC since 2007 and independent observers have said its compliance with output curbs has been less strict than that of core Gulf producers. If prices, which are hovering above $40 a barrel, stay low, one source in the group said the Organization of the Petroleum Exporting Countries would call an extra meeting, rather than cut again in March.

Les Echos:

- France’s public debt may rise to 74% of GDP in 2009 and 77.5% of GDP in 2010, up from 67% last year.

Interfax:

- Russia increased its forecast for unemployment this year and now expects as many as 2.8 million people to be officially registered as jobless, citing Health Minister Tatiana Golikova. The previous forecast was for 2.2 million people to be officially registered as unemployed. The number of unemployed, both registered and unregistered, is currently more than 6.1 million.

Arabian Business.com:

- A Dubai-based developer has reduced the price of its properties by as much as 30 percent as a result of falling property prices across the UAE.

Bear Radar

Style Underperformer:
Small-cap Value (+1.33%)

Sector Underperformers:
Banks (-5.40%), Education (-4.81%) and Gaming (-4.46%)

Stocks Falling on Unusual Volume:
GMXR, IOC, USB, JPM, CECO, DV, POT, AXP, MANT, AFAM, RATE, GYMB, APOL, FAST, WGOV and MMP

Stocks With Unusual Put Option Activity:
1) LEN 2) DTV 3) SCHW 4) JOYG 5) SHW

Bull Radar

Style Outperformer:
Mid-cap Growth (+3.39%)

Sector Outperformers:
Steel (+8.62%), Construction (+7.20%) and Semis (+5.63%)

Stocks Rising on Unusual Volume:
NIHD, ARD, FCX, DNR, USMO, CLF, STO, TOT, NETL, HANS, FMX, APA, JOYG, SHOO, DRIV, GENZ, CBRL, USMO, IDCC, BIDU, PCAR, SOHU, XLNX, WPPGY, SNDA, CMED, ALTR, AIPC, AVAV, NUVA, MGG, IGN, XSD, WBD, BIG, GB, MTZ and MET

Stocks With Unusual Call Option Activity:
1) PMCS 2) CA 3) BX 4) WDC 5) JNPR

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Wednesday Watch

Late-Night Headlines
Bloomberg:

- The cost to protect against a default by the finance division of General Electric Co. jumped to distressed levels as its shares plunged to a 16-year low and UBS AG said it may have to raise additional capital.

- The cost of protecting investors in Asia-Pacific bonds from default rose, climbing to a record in Australia after the economy unexpectedly shrank in the fourth quarter for the first time in eight years. The Markit iTraxx Australia index rose 13 basis points to 418 as of 1 p.m. in Sydney, according to Citigroup Inc. prices. Contracts on the senior debt of Macquarie Group Ltd., Australia’s largest investment bank, widened 50 basis points to 725, according to Citigroup.

- The cheapest oil in five years, a sign of the global recession, may deliver the biggest boost in purchasing power since at least 1980, Longview Economics said. oil spending will be about 2 percent of worldwide gross domestic production in 2009, down from 4.9 percent in 2008, Longview Chief Executive Officer Chris Watling said in March 2 report. Assuming an average price of $41.90 this year, the world is poised to save $1.72 trillion on oil compared with last year, Watling estimates. “It’s a savings which is approximately three times larger than the entire announced 2009 fiscal stimulus of China and the western economies combined,” Watling said. “The savings from the fall in the price of oil will go straight into consumers’ and businesses’ pockets, will not be impeded by bureaucracy and will happen, unlike parts of the fiscal stimulus, which are likely to be delayed.”

- A glut of steel at ports in China, the world’s biggest maker of the alloy, shows mills were to quick to boost output on expectations the government’s $585 billion economic stimulus package unveiled in November would spur demand, according to Bank of Nova Scotia. Steel stockpiles at Shanghai’s main port have jumped 44% this year to 2.1 million metric tons on Feb. 27, the highest since Bloomberg began compiling the data in June 2006. Prices for iron ore, the raw material used to make steel, had the biggest weekly drop since October, falling 8.5% to $75 a ton, according to Metal Bulletin. The number of ships waiting to unload imported iron ore at ports in China surged 50% in February from a month earlier due to lower demand from steel mills, Liu wrote. A total of 75 ships were at anchor on Feb. 28, compared with 21 at the start of the year, Macquarie Group Ltd. said yesterday. “This strong increase in the ships waiting to unload cargo is clearly a negative sign for the Chinese iron ore market,” Macquarie analysts led by Shanghai-based Bonnie Liu said. Iron ore prices may drop 30%, the first decline in seven years, from April, according to the median estimate of eight analysts surveyed by Bloomberg.

- Mortgage “cram-down” legislation that stalled in Congress last week will require homeowners to exhaust all options before they could use bankruptcy to reduce their loan payments, according to a summary of the revamped bill. The House of Representatives may vote as early as March 5 on the amended legislation, which would let federal judges lengthen loan terms, cut principal payments and reduce interest rates for borrowers in Chapter 13 bankruptcy protection, House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today.

- The Federal Reserve and U.S. Treasury eliminated executive-compensation limits for companies that bundle loans accepted under a new $1 trillion program, indicating the rules may have hampered efforts to start the plan. The rules won’t apply to the Term Asset-Backed Securities Loan Facility out of “desire to encourage market participants to stimulate credit formation and utilize the facility,” the New York Fed said in a document on its Web site today. The government separately said it will expand the TALF to support vehicle-fleet leases and loans for business, construction and farm equipment.

- China’s parliament convenes its annual meeting tomorrow, seeking solutions to an economic slump that is fueling pockets of social unrest after 20 million workers lost their jobs.

- The US dollar rose to the highest level in almost four months against the euro after a government report showed Australia’s economy unexpectedly shrank last quarter, boosting demand for the U.S. currency as a refuge. The greenback climbed versus all 16 most-active currencies as Australia’s gross domestic product contracted 0.5 percent in the fourth quarter from the previous three months, compared with economists’ estimates for 0.2 percent growth. The Dollar Index rose to the strongest since April 2006 on speculation Federal Reserve officials today will reiterate the need to expand aid to the banking system.

- Chinese Premier Wen Jiabao will announce a new stimulus package at the opening of the annual meeting of lawmakers tomorrow, former statistics bureau head Li Deshui said.

Wall Street Journal:

- Republicans opened a new front in their attack on the Obama administration's budget, charging that its ambitious climate-change plan would impose hefty costs on consumers and businesses. Despite the Obama administration's claim that its budget wouldn't raise taxes on families earning less than $250,000 a year, "the budget before us assumes large amounts of money" from the climate-change legislation, Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee, said at a hearing Tuesday. "And that means higher prices for Americans for food, for gas, for electricity, and in a state like Michigan for home heating -- pretty much anything that they buy."

- In a sign that pension funds and other institutional investors are about to get clobbered by losses in commercial real estate, Morgan Stanley(MS) told investors to expect up to a 60% fourth-quarter write-down on the equity in a marquee $8.8 billion real-estate fund, according to a letter to investors. Morgan Stanley hailed the commercial-property MSREF VI International fund as "the largest-ever real-estate fund" when it announced its debut in June 2007. The Wall Street firm projected a 22.4% overall average annual return for the vehicle, which made big, highly leveraged investments on commercial properties scattered in Japan, Germany, China and ...

- Layoffs at Apple(AAPL)? Unlikely.

- Lockheed Martin Corp.(LMT) won a 10-year contract worth up to $5 billion to supply U.S. military commandos with logistics support, unseating L-3 Communications Holdings Inc.(LLL), which previously held the contract.

Washington Post:

- Health Care, Technology and Even Espionage Jobs Still Plentiful Amid the Gloom.

Seeking Alpha:

- Jim Chanos’s Kynikos Suffers Withdrawals and Perry Cuts Performance Fee. Short seller Jim Chanos has undoubtedly had a solid year given that the market has declined so much. Yet, despite his performance, he is still seeing clients redeem almost 20% of their investment in his Kynikos Associates hedge funds. Chanos cited that, "We were like an ATM machine."

AP:

- Roland Burris seems to have weathered the storm. Fellow Democrats are no longer demanding his resignation. The new Illinois governor has stopped calling for a special election to replace him. And party leaders who control the Senate and Illinois Legislature are reluctant to risk losing his seat to Republicans. "He's not going to go anywhere. I'm convinced of that," said congressman Phil Hare, one of the first Illinois Democrats to call for Burris to step down. Burris has been under intense scrutiny because of the circumstances of his appointment by disgraced former Gov. Rod Blagojevich and for changing his story about it multiple times.

Reuters:

- The Senate's majority leader signaled on Tuesday that provisions to ease limits on trade and travel to Cuba were likely to be approved because they were attached to a larger bill that he did not want to stall. "I'm not wild about some of the Cuba provisions in this bill myself," Senator Harry Reid, a Democrat, told reporters. "There are a couple of those that I don't like very much, but it's not enough to bring the bill down, in my opinion." With Congress facing a deadline on Friday to pass the massive $410 billion bill to fund many government operations, an aide to Reid told reporters it did not appear that foes of loosening sanctions on the communist-run island had enough votes to strip the provisions.

Financial Times:
- AIG, the insurer controlled by the US government, still faces billions of dollars in potential losses on credit guarantees it provided for complex subprime mortgage securities, in spite of its $62bn fourth-quarter loss and regulatory efforts to unwind its holdings, company filings show. AIG filings this week show that the company retains $12bn in exposure to credit insurance on positions mostly involving subprime mortgages. As of February 18, AIG could have to pay counterparties up to $8bn on these positions, the filing showed.

- When Iceland’s banking system collapsed in October, even the most independent-minded islanders gazed across the North Atlantic to Europe for salvation. If only Iceland had been a member of the European Union and eurozone, the argument went, it would have escaped the crisis and humiliation. Four months later, as crisis-hit European countries such as Poland and Hungary consider joining the eurozone as quickly as possible, Icelanders are no longer looking overseas so rapturously. The latest polls reveal less than 40 per cent now back an application to join the bloc, compared with a mid-crisis high of nearly 80 per cent. The reasons for the fall-off are mixed. Fissures inside the eurozone between large members, such as Germany and France, and small ones, such as Greece and Ireland, are undermining the zone’s attractiveness to a tiny country. Icelanders see little point in enduring one currency crisis only to get embroiled in another.

Caijing:

- Overseas companies reduced their 2009 investment budget in southern China by 40% because of the global financial crisis, citing a report from the American Chamber of Commerce in the region. The budget for the next three years is about $11 billion. The report was based on a survey of 551 foreign companies, mainly from the US, between December 2008 and February 2009.

Economic Daily News:

- Corning Inc.(GLW) expects utilization of South Korean and Taiwanese display panel plants to rise as sales of liquid-crystal display televisions increase, citing President Peter Volanakis. The company expects global sales of LCD televisions will rise 9% this year.

Late Buy/Sell Recommendations
Citigroup:

- Upgraded (BMRN) to Buy, target $17.

- Reiterated Buy on (SUNH), target $14.

Night Trading
Asian Indices are -.50% to +2.25% on average.
S&P 500 futures +.93%.
NASDAQ 100 futures +.68%.

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Earnings of Note
Company/EPS Estimate
- (JOYG)/.75

- (LIZ)/-.10

- (BJ)/.86

- (PETM)/.59

- (CPRT)/.36

- (FL)/.17

- (BIG)/.93

- (TOL)/-.48

Economic Releases

8:15 am EST

- The ADP Employment Change for February is estimated at -630K versus -522K in January.

10:00 am EST:

- ISM Non-Manufacturing for February is estimated to fall to 41.0 versus 42.9 in January.

10:30 am EST:

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,000,000 barrels versus a +717,000 barrel increase the prior week. Gasoline supplies are estimated to decline by -800,000 barrels versus a -3,322,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,000,000 versus a +882,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise .04% versus a -.89% decline the prior week.

2:00 pm EST

- Fed’s Beige Book

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Fisher speaking, Fed’s Lockhart speaking, weekly MBA mortgage applications report, Challenger Job Cuts report, (ICGE) investor meeting, (TAP) analyst meeting, Morgan Stanley Tech Conference, UBS Nat Gas/Electric/Coal Conference, Citi Global Property Conference, Deutsche Bank Media/Telecom Conference and the Keefe Bruyette Woods Regional Bank Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial stocks in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the day.