Stocks Sharply Lower into Final Hour on Rising Financial Sector Worries, Increasing Economic Pessimism, Surging Credit Market Angst, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Retail longs and Biotech longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short and exited by (GME) long this morning, thus leaving the Portfolio 50% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 6.0% and is elevated at 50.39. The ISE Sentiment Index is below average at 107.0 and the total put/call is above average at 1.00. Finally, the NYSE Arms has been running low most of the day, hitting .49 at its intraday trough, and is currently .63. The Euro Financial Sector Credit Default Swap Index is soaring 17.25% today to 187.33 basis points. This index is making a new record high at 187.33. The North American Investment Grade Credit Default Swap Index is rising 3.44% to 251.35 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is rising 5.14% to 108 basis points. The TED spread is now down 355 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.18% to 74.75 basis points. The Libor-OIS spread is rising .79% to 104.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is dropping 7 basis points to .88%, which is down 176 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 .20%, which is down 5 basis points today. Many gauges of investor angst still remain stubbornly low given the carnage that is taking place. The 10-year TIPS spread is rolling over again. I suspect another meaningful surge higher in long-term US govt. treasuries is underway given how bearish the crowd is on these securities. Barney Frank reiterated again today that Congress shouldn’t do away with the market-to-market rule. Asia will likely come under significant pressure tonight. On the positive side, the AAII % Bulls fell to 18.92% and the % Bears jumped to 70.27% this week. The % Bears is now at a new record high, eclipsing the 67.1% seen the week of Oct. 18^th 1990. Some market leading stocks are holding up relatively well today. Nikkei futures indicate a -260 open in Japan and DAX futures indicate a -8 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic pessimism, more shorting, rising financial sector pessimism and tax hike worries.

Today's Headlines

Bloomberg:

- General Electric Co.(GE) Chief Financial Officer Keith Sherin said investors’ speculation about risk at GE Capital is “overdone” and that the finance arm will be profitable in the first quarter.

- Intercontinental Exchange Inc.’s(ICE) bid to become the top U.S. guarantor of credit-default swap trades moved a step closer after the Federal Reserve approved its proposal, leaving the Securities and Exchange Commission as the futures market’s final regulatory hurdle.

- The cost of protecting against default on bonds sold by European banks and insurers rose to a record, according to traders of credit-default swaps. The Markit iTraxx Senior Financial index roses 14 basis points to 175, according to JPMorgan Chase & Co. prices at 9:26 a.m. in London. The index for subordinated financial debt soared 47 basis points to 345.

- Steven Leuthold, whose Grizzly Short Fund makes money for investors by betting companies will fail, says he wouldn’t invest in his own fund now because the U.S. stock market is close to its bottom. Leuthold, who helps manage $3.2 billion as founder of Minneapolis-based Leuthold Weeden Capital Management, told investors to keep money out of the Grizzly fund yesterday after it rose 74 percent in 2008. He joined Bill Fleckenstein, who shut a 13-year-old bearish fund in December, and Marc Faber, who covered bets against U.S. stocks.

- Subic Bay in the Philippines is the busiest it’s been since the U.S. Navy moved out 16 years ago. The traffic surge is coming from ships all carrying the same cargo --nothing. Last week, 19 vessels were anchored in the mountain-lined bay awaiting charters near an empty container terminal. The authorities at the port, 110 kilometers west of Manila, were expecting another eight this week.

- Goldman Sachs Group Inc. predicted a deeper global recession than it previously anticipated and said the slump could yet worsen. Goldman Sachs now expects worldwide gross domestic product to shrink 0.6 percent in 2009 compared to a previous forecast for a 0.2 percent contraction, London-based economist Binit Patel said today in a report to clients.

- The European Central Bank cut interest rates to a record low in an attempt to stem the worst recession since World War II. Officials meeting in Frankfurt reduced the benchmark lending rate by half a percentage point to 1.5 percent, as forecast by all 55 economists in a Bloomberg News survey. That’s the lowest since the ECB took control of monetary policy in 1999. The bank may wait until May to cut rates further, another survey of economists shows.

- European banks may need to raise as much as 40 billion euros ($50 billion) of additional capital by 2010 because of loan losses in central and Eastern Europe, JPMorgan Chase & Co. analysts said. Nordic banks including Swedbank AB, SEB AB and Danske Bank A/S may need 8 billion euros for bad loans in the Baltics, while Austrian banks such as Raiffeisen International Bank-Holding AG and Erste Group Bank AG may need 5 billion euros because of non- performing loans in central and eastern Europe, JPMorgan analysts including Paul Formanko said in the note today.

- European Central Bank President Jean- Claude Trichet comments on monetary policy, the economic outlook, inflation and risks. He spoke during a press conference in Frankfurt today after the ECB lowered its key rate by 50 basis points to 1.5 percent.

- Majority Leader Steny Hoyer said House Democrats want to pass a climate-change bill by June and a health-care overhaul by August, and may use procedures aimed at letting the Senate pass the legislation without Republican votes. Hoyer, a Maryland Democrat, said the climate-change legislation may include a cap-and-trade system designed to help rein in carbon dioxide emissions. He said lawmakers may use special “reconciliation” procedures that would make the measures filibuster-proof in the Senate to overcome the need there for 60 votes. Democrats control the Senate with 58 votes.

- U.S. Bancorp and Northern Trust Corp. will return funds from the Treasury’s Troubled Asset Relief Program, according to Representative Barney Frank.

- Treasuries rose, led by 30-year bonds, on speculation the Federal Reserve may buy longer-maturity government securities after the Bank of England said it would buy sovereign and corporate debt. Yields on the bonds fell the most in two weeks, paring losses since the start of the year that have made them the worst- performing government security. The debt has fallen 2.8 percent since Feb. 18, when the minutes of the Fed’s Jan. 27-28 policy meeting suggested officials will wait before buying Treasuries to keep borrowing costs lower.

Wall Street Journal:

- President Barack Obama is meeting strong Democratic Party resistance to his proposal to reduce tax deductions enjoyed by upper-income Americans and could be forced to drop or modify the idea. Mr. Obama in his budget blueprint last week proposed a cap on itemized deductions for mortgage interest and charitable donations to help pay for his health-care overhaul. The plan would cost wealthier taxpayers about $318 billion in new taxes over 10 years, according to government estimates. But after objections from Democratic lawmakers, Treasury Secretary Timothy Geithner appeared to suggest at one point Wednesday that the administration was willing to consider dropping or modifying the proposal. The resistance from Mr. Obama's own party -- focusing on a single element of the president's tax plans -- could foreshadow broader troubles for the rest of his proposed tax increases. Republicans have already taken aim at rate increases planned for higher-income earners, as well as the administration's plans to raise hundreds of billions of dollars through climate-change legislation.

- The Securities and Exchange Commission said it will raise the transaction fees it charges exchanges to $25.70 per $1 million in securities sales from the current level of $5.60.

CNBC.com:
- Paul Ryan, the senior Republican on the US House Budget Committee, told CNBC that President Barack Obama’s budget plan for 2010 will require ‘huge’ tax increases. The spending package was written without regard to the fact “that the US is in recession,” Ryan, from Wisconsin, said. (video)

- Venezuela's top food company Empresas Polar called Thursday for talks with the government after President Hugo Chavez threatened to take it over and nationalized a unit owned by a U.S. food giant Cargill. With the threats and the move against Cargill, Chavez has renewed a two-year nationalization drive just weeks after he won a referendum allowing him to run for re-election.

- Exxon Mobil(XOM) said Thursday it was well-positioned to ride out weak oil prices and that it would hike its capital spending by nearly 12 percent this year. Exxon, the world's largest publicly traded company, said it would spend about $29 billion in 2009, the upper end of its five-year annual spending target of $25 billion to $30 billion per year, as part of its effort to meet long-term growth in world demand.

- The world would get a $1 trillion economic stimulus if oil prices stay at around $40 a barrel through 2009, the head of the International Energy Agency told Reuters on Thursday.

Barron’s:

- MANY INVESTORS ARE BEGINNING to think that certain stocks have fallen so far, they have no place to go but up. Taking that viewpoint, managed health-care stocks are beginning to look ripe for the picking. Down 29% since Feb. 23, the AMEX Morgan Stanley Healthcare Payor Index plunged last week, the bulk coming Thursday when President Obama outlined his budget and announced plans to cut payments to private health plans sold to Medicare beneficiaries, called Medicare Advantage. As is often the case, the sector-wide selloff has ensnared some promising stocks now selling at more attractive prices.

Washington Times:

- President Obama's newly named Economic Recovery Advisory Board, the real-world Americans being asked to help solve the nation's financial crisis, includes a union executive who took the Fifth in a federal probe, a billionaire whose failed bank pioneered the subprime mortgage market, and deep-pocket donors who gave or gathered nearly $1.2 million for the president's campaign. In all, 11 of the 16 board members donated or raised money for Democrats in the last election, according to a Washington Times review of campaign finance records. They include the president and chief operating officer of the American arm of UBS Investment Bank, the Swiss-based bank now at the center of a widening tax evasion probe by the Justice Department and the Internal Revenue Service. In announcing the board's creation, Mr. Obama described its members as "distinguished citizens outside the government" who were qualified on the basis of achievement, experience, independence and integrity to "bring a diverse set of perspectives and voices from different parts of the country and different sectors of the economy to bear in the formulation and evaluation of economic policy."

Wealth Bulletin:

- More than one in every four hedge funds stopped reporting performance to a prominent central database last year in a sign of how investment losses and portfolio closures hit the $1.4 trillion industry during its worst year on record.

USA Today:

- A $410 billion bill that would keep the government running through September directs $227 million to pet projects for former lawmakers, including an ex-congressman facing corruption charges, a USA TODAY analysis shows.

Reuters:
- General Motors Corp on Thursday said its auditors had raised "substantial doubt" about its ability to survive outside bankruptcy if it fails to stem its losses and stop burning cash. The "going concern" warning from the struggling U.S. automaker had been expected, but underscored the stakes for GM as it seeks up to $30 billion in U.S. government aid to restructure outside a court-supervised bankruptcy process.

Estado:

- Brazilian Textile Exports Declined 36% in February.

Interfax:

- Russian airlines sold 20% fewer tickets in February compared with the same month last year, citing the Federal Transportation Agency.

RIA Novosti:

-Russian car imports fell 66% in January to 33,600, citing Federal Customs Service Data.

Bear Radar

Style Underperformer:
Mid-cap Value (-6.12%)

Sector Underperformers:
Oil Tankers (-9.39%), Banks (-9.1%) and Airlines (-9.03%)

Stocks Falling on Unusual Volume:
JCP, IBN, ASBC, USM, JPM, KALU, TKC, CLF, SNP, E, GYMB, MATK, VOCS, PETM, URBN, LMDIA, IDCC, YPF, DEP, GME, PEO, EMM, KNM, SUR, POR, KSP, ANF and IYJ

Stocks With Unusual Put Option Activity:
1) NSC 2) ACE 3) ADBE 4) CX 5) CA

Bull Radar

Style Outperformer:
Large-cap Growth (-1.84%)

Sector Outperformers:
Telecom (+.24%), Retail (-.48%) and Computer Services (-.99%)

Stocks Rising on Unusual Volume:
GFI, MO, AEM, WMT, DLTR, VZ, T, SIGM, MIDD, PLCE, NETL, STAR, CPRT, ADBE, SXCI, STRL, FRED, ROST, APOL, LEAP, BIDU, MASI, WTW, BKE, FDO, FIF, GCO and CRN

Stocks With Unusual Call Option Activity:
1) LM 2) FDO 3) F 4) CIEN 5) FL

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Thursday Watch

Late-Night Headlines
Bloomberg:

- U.S. stocks trading above their 200- day average price shrank to the fewest since at least 1994 this week as benchmarks dropped to the lowest level in 12 years, signaling that the market may rally because the decline was overdone. The percentage of common stocks listed on the New York Stock Exchange trading above their 200-day moving average fell to 1.2 percent on March 2, the smallest since Bloomberg data began in 1994.

- The euro fell, snapping two days of gains versus the yen, on speculation the European Central Bank will cut interest rates today and signal further reductions in borrowing costs to counter the region’s deepening recession. The euro also headed for a fourth weekly loss versus the dollar before a statistics office report that economists say will reiterate Europe’s economy shrank the most in at least 13 years last quarter. The yen traded near the weakest in four months against the greenback after government data showed Japanese companies slashed spending at the fastest pace in a decade.

- JPMorgan Chase & Co.(JPM), the second- largest U.S. bank, had its rating outlook cut to negative from stable by Moody’s Investors Service, reflecting expectations the lender will suffer from provisions for bad loans and credit costs for at least the next year.

- The cost of protecting against default by Warren Buffett’s Berkshire Hathaway Inc. soared to record levels more typical of junk-rated companies amid concern the firm faces losses on derivatives. Credit-default swaps used to guard against losses on Berkshire’s debt climbed 15 basis points to 515 basis points at 3:45 p.m. in New York, according to CMA DataVision, and earlier reached 535. The contracts yesterday traded as if the company, rated Aaa by Moody’s Investors Service, were 11 grades lower at Ba2, according to data from Moody’s capital markets research group. The price may be rising on concern the Omaha, Nebraska- based firm will lose bets on the direction of world equity markets, high-yield corporate bonds and municipal debt. That scenario assumes Berkshire would drain its $25.5 billion cash hoard and then find itself unable to raise more from stock or bond sales or the company’s historically profitable insurance and utility businesses.

- Chinese steelmakers, the largest buyer of iron ore, want Cia. Vale do Rio Doce, BHP Billiton Ltd. and Rio Tinto Group to cut prices of the material by between 40 percent and 50 percent this year, Anshan Iron & Steel Group said.

- Steel prices in China, the world’s largest maker of the metal, have dropped below output costs and a further decline may lead to production cuts, Shougang Corp. said. “A 20% cut may be suitable for the current demand situation,” Shougang’s Chairman Zhu Jimin said today on the sideline of the National People’s Congress. Shougang is China’s eighth-largest steelmaker. Benchmark steel prices in China have fallen 13% since Feb. 4 after mills increased output on expectation of demand coming from the government’s $585 billion stimulus package. More than 60% of Chinese mills are losing money, the China Iron and Steel Assoc. said. Feb. 23.

Wall Street Journal:

- The Obama administration announced details of a housing-rescue plan it said would help as many as one in nine homeowners, from low-income Americans struggling to avoid foreclosure to well-off borrowers who owe more than their homes are worth.

- After a slew of downgrades, weakened sales and capital woes at many life insurers, the battered industry appears headed for consolidation. Slammed with back-to-back credit downgrades and its stock in free fall, Hartford Financial Services Group Inc.(HIG), which has both property-casualty and life-insurance units, has entertained options from selling the company to breaking it up, according to people familiar with the situation.

- Google Inc.'s(GOOG) YouTube and Universal Music Group are discussing a partnership under which YouTube would build a new hub for music videos. YouTube would also provide technology and advertising-sales support to help distribute Universal's video content to other Web sites, people familiar with the matter say.

- At a time when the news is filled with large companies announcing major layoffs, some small businesses are determined to buck the trend. For some companies, it's a matter of pride: They've never had a layoff and they don't want to start now.

- Foreign lenders who rushed into China in recent years are watching nervously as a number of companies there teeter on the brink of insolvency. Their worry: The nation's bankruptcy laws may leave them with virtually nothing. Several big Western investors -- Citigroup Inc., hedge-fund manager Citadel Investment Group LLC, Credit Suisse Group and CLSA Capital Partners -- are seeking to get back between $100 million and $200 million in loans extended to a Chinese steelmaker, according to people familiar with the matter.

NY Times:

- The billionaire financier Carl C. Icahn put another $250 million into his hedge fund at the beginning of the year after suffering further losses in the fourth quarter on investments in Motorola and Yahoo, according to a letter he sent to investors. The Icahn Fund Ltd. was down about 33 percent through the end of January after plummeting 22 percent in the fourth quarter, according to the letter. After receiving more than $1 billion in redemption requests from investors, Mr. Icahn put $250 million of his own cash into the fund in November to avoid selling shares to meet the redemptions.

Politico:

- Sen. Mel Martinez (R-Fla.) said Wednesday Republican opponents of the $410 billion omnibus spending bill are within "striking distance" of bringing down the massive measure. Derailing the spending bill would be a huge victory for Republicans, and they might accomplish the goal with the help of a few reform-minded Democrats. Opposition to the sprawling measure has been growing for a variety of reasons, including a proposed change of Cuba policy, the inclusion of thousands of earmarks and the spending bill's overall price tag.

Lloyd’s List:

- The world’s bloated bulk carrier orderbook “spells disaster” for shipping markets and could produce “a wave of destruction for banks to rival the sub-prime crisis”, one of London’s most respected shipbrokers forecast on Wednesday. Shipping is in “the eye of the storm” as the global economy and world trade faces its most serious crisis in 60 years, Howe Robinson said. At the same time there are more than 3,000 bulk carriers on order at 155 different yards in 15 countries by 479 known owners. All are scheduled for delivery by 2011. “Even if you slash the orderbook it’s still too big and banks may not realize that with these defaults and moving into a recession they may become one of the biggest shipowners around,” a Howe Robinson spokesman said. Analysis reveals a staggering mismatch between supply and demand. “The supercycle era is bust,” the report bluntly concluded.

newsday.com:

- Over budget $1 Billion, NASA gets $1 Billion more from stimulus; more discipline needed, auditors say.

AP:

- Kansas Gov. Kathleen Sebelius, President Barack Obama's choice to head the Health and Human Services Department, is facing questions about increased state payments to a social services group whose board includes the chairman of the state Democratic Party.

Reuters:

- Google Inc(GOOG) CEO Eric Schmidt said the economic storm will affect all forms of advertising, including the online ads that Google depends on, but said that he doesn't expect Google to experience a decline in revenue.

- General Electric Co (GE) shares fell as much as 16 percent on Wednesday, touching their lowest point since 1991, as investors worried about a possible downgrade of GE's credit rating and how its finance arm would get through the recession.

TimesOnline:

- The European Commission has begun an inquiry into petrol pricing amid allegations that the full benefit of recent steep falls in the global price of oil are not being passed on to motorists. Details of the inquiry emerged in correspondence seen by The Times from Neelie Kroes, the EU’s Competition Commissioner.

Telegraph:
- European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements. The BIS said European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets. The currency mismatch has become a potential risk for banks as the dollar continues to climb against the euro and Swiss franc, and especially sterling and Sweden’s krona. “The build-up of large net US dollar positions exposed these banks to funding risk, or the risk that their funding positions could not be rolled over,” said the BIS. The report, entitled “US dollar shortage in global banking”, helps explain why there has been such a frantic scramble for dollars each time the credit crisis takes a turn for the worse. Many investors have been wrong-footed by the powerful rally in the dollar against almost all currencies, except the yen.

easyBourse:

- Hedge funds, once defined as investment pools for the rich, now get most of their assets from institutions such as pension funds, according to a report Wednesday.
High net worth individuals, who for a long time were the main investors in hedge funds, now account for slightly less than half of total assets, as they played the biggest role in a recent wave of hedge fund redemptions, the study said.

Straits Times:

- Minister Mentor Lee Kuan Yew yesterday raised the possibility of Singapore's economy shrinking by as much as 10 per cent this year. This would happen if the country's exports continue to drop at the same speed as they did earlier this year, he predicted. They fell 35 per cent in January. Said Mr Lee: 'If the second quarter shows a further drop of another 30, 40 per cent, it (economic growth) will go down to -10 (per cent).' If so, this would be a performance four times worse than 2001's record low when the economy shrank 2.4 per cent.

Business Standard:

- Global IT giant IBM(IBM) is understood to be the front-runner to acquire Satyam Computer Solutions, a company it named as one of its main competitors in a filing to the New York Stock Exchange in February.

Australian Financial Review:

- Australia’s securities regulator is expected to extend the ban on short-selling financial and property stocks.

South China Morning Post:

- Chinese Vice President Xi Jinping said unemployment in Hong Kong is likely to climb to 6.5% as exports decline, citing Xi. The worst of the financial crisis is yet to come, he said. Exports may drop by a double-digit percentage in the first half and the unemployment rate my increase to 6.5% or even higher, Xi said.

Late Buy/Sell Recommendations
Citigroup:

- Upgraded (LZ) to Buy, target $32..

- Reiterated Buy on (FL), target $10.

Night Trading
Asian Indices are -.25% to +1.75% on average.
S&P 500 futures -.64%.
NASDAQ 100 futures -.32%.

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Earnings of Note
Company/EPS Estimate
- (CIEN)/-.07

- (URBN)/.28

- (COO)/.39

- (WIND)/.12

- (IPI)/.29

- (GCO)/1.05

Economic Releases

8:30 am EST

- Final 4Q Non-farm Productivity is estimated to rise 1.0% versus a 3.2% prior estimate.

- Final 4Q Unit Labor Costs are estimated to rise 3.8% versus a prior estimate of a 1.8% increase.

- Initial Jobless Claims for last week are estimated to fall to 650K versus 667K prior.

- Continuing Claims are estimated to rise to 5155K versus 5112K prior.

10:00 am EST:

- Factory Orders for January are estimated to fall 3.5% versus a 3.9% decline in December.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Lockhart speaking, Geithner Testimony Before House Budget Cmte on FY10 Treasury Budget, ICSC Chain Store Sales for February, 4Q Mortgage Delinquencies, weekly EIA nat gas inventory report, (CUB) analyst meeting, (WTW) investor day, (XOM) analyst meeting, (CTCT) analyst meeting and the Keefe Bruyette Woods Regional Bank Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and construction 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.