Stocks Soaring into Final Hour on Short-Covering, Lower Energy Prices, Less Financial Sector Pessimism, Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Medical 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, almost every sector is rising and volume is above average. Investor anxiety is about average. Today’s overall market action is very bullish. The VIX is falling 10.06% and is very high at 44.68. The ISE Sentiment Index is slightly below average at 134.0 and the total put/call is below average at .74. Finally, the NYSE Arms has been running low most of the day, hitting .25 at its intraday trough, and is currently .53. The Euro Financial Sector Credit Default Swap Index is falling 5.20% today to 194.33 basis points. This index is down from its record high, set this morning, of 208.75. The North American Investment Grade Credit Default Swap Index is falling 3.84% to 247.34 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is falling 1.05% to 110 basis points. The TED spread is now down 353 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 5.23% to 77.0 basis points. The Libor-OIS spread is rising 1.06% to 107.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 3 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 .23%, which is up 3 basis points today. Comments from Citigroup, hope for a relaxation of the mark-to-market rule and the possibility of bringing back the “uptick” rule are boosting stocks substantially today. While I am happy to hear talk of bringing back the uptick rule, its positive impact on stocks will likely be minimal as long as credit default swap manipulation persists and ultrashort etfs exist. If mark-to-market is relaxed, the uptick rule returns, credit default swap manipulation ends and ultrashort etfs are banned, I would expect to see an incredibly explosive and sustained rally in US stocks. Nikkei futures indicate an +320 open in Japan and DAX futures indicate a -6 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices, declining credit market angst, technical buying, bargain-hunting and less financial sector pessimism.

Today's Headlines

Bloomberg:

- Citigroup Inc.(C) Chief Executive Officer Vikram Pandit said his bank is having the best quarter since 2007, when it last posted a profit. The shares rose as much as 38 percent and helped spur gains for finance company stocks. “I am most encouraged with the strength of our business so far in 2009,” Pandit wrote in an internal memorandum obtained today by Bloomberg. “We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.”

- Federal Reserve Chairman Ben S. Bernanke urged a sweeping overhaul of U.S. financial regulations in an effort to smooth out the boom-and-bust cycles in financial markets. “We should review regulatory policies and accounting rules to ensure that they do not induce excessive” swings in the financial system and economy, the central bank chief said today in remarks prepared for an address to the Council on Foreign Relations in Washington. Bernanke recommended that lawmakers and supervisors rethink everything from the amounts firms set aside against potential trading losses and deposit-insurance fees to protections for money-market funds.

- Gold fell for a second day in London as a gain in equities may reduce demand for the precious metal as an alternative investment. Silver and platinum also declined. Trading of gold options and other derivatives through ICAP Plc, the world’s largest broker of transactions between banks, and spot gold through its EBS electronic trading platform has declined because of limited credit, said Michael Greenacre, manager of precious metals at ICAP in London. “A lot of our customers’ customers are the funds, and the funds are having a tough time,” he said. More trading is going to exchanges, he said. Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, were unchanged yesterday while investment in Gold Bullion Securities Ltd. on the London Stock Exchange rose 2,485 ounces to 4.09 million ounces, the highest since March 5, the ETF Securities Ltd. Web site shows.

- Chinese home prices fell by a record last month, paced by a 15 percent plunge in the southern export hub of Shenzhen, where factories closed as growth in the world’s third-biggest economy slowed. About 40 percent of the factories in Guangdong, which accounts for 12 percent of China’s gross domestic product, extended their Lunar New Year, or Spring Festival, holiday this year because of the global recession, said Stanley Lau, vice chairman of the Federation of Hong Kong Industries last month.

- The U.S. reduced its forecast for global crude oil consumption this year as the economic slowdown cuts fuel purchases. World oil demand will average 84.27 million barrels a day this year, down 400,030 barrels from a forecast in February, the Energy Department said in its monthly Short-Term Energy Outlook. The estimate is down 1.38 million barrels from demand in 2008, according to the report, released today in Washington.

- Chevron Corp.(CVX), the second-biggest U.S. oil company, is drilling 43 major prospects from Australia to Canada after posting its biggest drop in output since 2003. New fields will allow Chevron to meet its target of 4 percent production growth this year without acquisitions, Chief Executive Officer David O’Reilly said today in a meeting with analysts in New York.

- OPEC, supplier of about 40 percent of the world’s oil, needs full compliance with production quotas before discussing a further reduction in output, Qatar’s oil minister said. “We cannot discuss another cut until we see the compliance at 100 percent,” Qatar’s Oil Minister Abdullah bin Hamad al- Attiyah said in an interview in the capital Doha today. “The first step is to make sure we see full compliance.”

- China faces a “grave” employment situation as the global recession increases the difficulty of finding jobs for the 24 million people entering the nation’s workforce each year, Labor Minister Yin Weimin said. China lost 3 million jobs in the fourth quarter, when economic growth hit a seven-year low, Yin said. About 11 million migrant workers that traveled to towns and cities from the countryside in search of work after the Lunar New Year holiday in January are still unemployed, he said. In previous years, the government has only been able to create enough jobs for half the new workforce, which in 2009 will include 6 million new graduates, Yin said. China has an estimated 225 million surplus laborers composed of farmers from rural areas. Of that total, 140 million have left their homes in search of work in other towns and cities. About half of those 140 million migrants went home for the Lunar New Year holiday and 80% of those who went home returned to the cities to look for jobs after the break, he said. Of those, 45 million have found work and 11 million are still looking.

- Hedge funds may cut 20,000 workers worldwide this year, a record 14 percent of the industry’s jobs, as investment losses and client withdrawals erode fees. The dismissals will come on top of the 10,000 jobs that disappeared last year at the investment partnerships, according to estimates by New York-based Options Group, an executive-search firm. Employment peaked at 155,000 in 2007, and has since dropped to about 145,000, the firm said.

- Brazil’s economy shrank the most on record in the fourth quarter, going against predictions that Latin America’s largest economy would be a bright spot in the deepening global recession. Gross domestic product fell 3.6 percent in the fourth quarter from the previous three-month period as companies slashed output, the national statistics agency said today in Rio de Janeiro. The drop exceeded forecasts from all 31 analysts surveyed by Bloomberg. The biggest quarterly contraction since the series started in 1996 may lead central bank policy makers to cut lending costs 1.5 percentage points tomorrow to bolster the economy. Analysts predict the bank will trim the lending rate to 11.25 percent, matching a record low reached in September 2007, according to the median estimate of 49 economists surveyed by Bloomberg.

Wall Street Journal:

- Barely a week after the third rescue of Citigroup Inc.(C), U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.

- Over a third of U.S. companies in China -- a percentage that has grown sharply in the past year -- say they expect their revenues to drop in 2009, according to a survey by the American Chamber of Commerce in China, reflecting the slowdown in the Chinese economy. The annual survey to be released Tuesday shows that 35% of Amcham members expect revenue to decrease this year, up significantly from 13% who projected a decline last year. In all, 39% of respondents are postponing or have canceled planned investments this year, while 21% expect to shrink their China work force. Almost half the companies surveyed are pessimistic about this year's business prospects, and only 5% are optimistic. The Amcham investment numbers are in line with official Chinese data, which show that foreign-direct investment plunged 33% from a year earlier to $7.5 billion in January. This year's Amcham survey showed that 84% of U.S. companies felt China is losing some of its competitive edge because of rising labor and regulatory costs, compared with 72% last year.

- Honda Motor Co. said orders for its recently launched Insight hybrid vehicle are more than triple the budget-priced vehicle's monthly sales target. The Japanese auto maker said it had received orders for about 18,000 Insights as of Monday.

CNBC.com:
- Hedge funds of funds, the middlemen that pension funds and endowments often use to create alternative portfolios, lost roughly one-third of their assets last year, according to new data released Tuesday. The industry's largest funds of funds, managing more than $1 billion, now jointly control $744 billion in assets, according to industry publication InvestHedge. In all, the hedge fund industry has $1.8 trillion under management, the magazine estimated. Some industry trackers have said that number is much lower — closer to $1 trillion or $1.5 trillion, after last year's worst-ever returns.

- The so-called uptick rule, which limits short-selling in stocks, could be restored soon, Rep. Barney Frank of the House Financial Services Committee said. "I've spoken to Chair (Mary) Schapiro of the SEC. I am hopeful the uptick rule will be restored within a month," Frank told reporters.

NY Times:

- Down Economic Times Elicit Upbeat Ad Campaigns.

- The five detainees at Guantánamo Bay charged with planning the Sept. 11, 2001, terrorist attacks have filed a document with the military commission at the United States naval base there expressing pride at their accomplishment and accepting full responsibility for the killing of nearly 3,000 people. The document, which may be released publicly on Tuesday, uses the Arabic term for a consultative assembly in describing the five men as the “9/11 Shura Council,” and it says their actions were an offering to God, according to excerpts of the document that were read to a reporter by a government official who was not authorized to discuss it publicly.

CNNMoney.com:

- Revealed: 15 AIG bailout counterparties. A list obtained by Fortune includes the names of many foreign banks – as well as US giants such as Goldman Sachs(GS).

NYPost:

- The top online publishers are moving beyond boring banners and other display ads that adorn most Web sites, seeking more attention-grabbing alternatives. The Online Publishers Association, whose members include ESPN, CNN, The Wall Street Journal and The New York Times, is unveiling several ad formats to breathe new life into the lowly banner ad.

Washington Post:

- The government's plan to strip banks of troubled assets could force some firms to record large losses, but the painful purge would help restore confidence in the banking system, according to Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. Bair said yesterday that the effort might require more money than the $700 billion Congress has approved to aid the financial industry, but she added that taxpayers would probably reap an eventual profit on the asset purchases. She said the greatest challenge was persuading banks and taxpayers to accept the necessity of the costly program.

- Democratic leaders in Congress did not expect much Republican support as they pressed President Obama's ambitious legislative agenda. But the pushback they are receiving from some of their own has come as an unwelcome surprise. As the Senate inches closer to approving a $410 billion spending bill, the internal revolt has served as a warning to party leaders pursuing Obama's far-reaching plans for health-care, energy and education reform. Climate-change legislation is months away from emerging, but some Democrats already worry about the political consequences of creating a cap-and-trade system that could result in higher utility bills.

Miami Herald:

- Imagine going to Burger King(BKC) and ordering barbecued ribs, a grilled salmon sandwich or a steak kabob. Those sound more like choices at a casual dining restaurant than a fast-food chain, but they are some of the more than 45 new menu items the Miami-based company has in various stages of testing.

Reuters:
- Shares of General Electric Co (GE) soared 15.9 percent on Tuesday amid a broad rally in U.S. stocks triggered by assurances from Citigroup Inc (C) that the big bank was profitable through the first two months of 2009.

Boersen-Zeitung:

- European Central Bank Executive Board member Lorenzo Bini Smaghi said the bank is ready to lower interest rates to zero if necessary. “If the situation deteriorates, the ECB is ready to lower interest rates further, even to zero,” Bini Smaghi said. “That’s especially the case if the economy is in fact threatened by sustained deflation. In such a situation, it would be the best strategy to react sooner rather than later.”

Bear Radar

Style Underperformer:
Large-cap Growth (+4.38%)

Sector Underperformers:
Gold (-6.14%), Foods (+2.23%) and Tobacco (+2.50%)

Stocks Falling on Unusual Volume:
GOLD, NEM, CMTL, AVAV, LIHR, SSRI and BF/B

Stocks With Unusual Put Option Activity:
1) ROH 2) NRG 3) PCAR 4) UTX 5) SNDA

Bull Radar

Style Outperformer:
Small-cap Value (+6.21%)

Sector Outperformers:
Homebuilders (+10.80%), I-Banks (+9.15%) and Banks (+8.98%)

Stocks Rising on Unusual Volume:
DB, RTP, JPM, MICC, E, PTR, CGX, ANDE, WAG, APA, CASY, PEGA, HELE, XNPT, DRIV, PENN, CWEI, CTXS, BWLD, BJRI, SGMS, PLCE, RAVN, WYNN, HIBB, NTRI, LBTYA, ARL, PVG, ROH, AZZ, KYE, KSP, PEO, NC, DEP and SUR

Stocks With Unusual Call Option Activity:
1) DIS 2) RCL 3) PCAR 4) CRM 5) CNQ

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- China’s consumer prices fell for the first time since 2002 after commodity costs declined, stoking concern that deflation will undermine efforts to revive the world’s third-biggest economy. Consumer prices dropped 1.6 percent in February from a year earlier, the statistics bureau said today, after gaining 1 percent in January. The median estimate in a Bloomberg News survey of 10 economists was for a 1 percent decline. Producer prices fell 4.5 percent, the most in a decade, after a 3.3 percent decline. The drop in prices raises the risk that deflation will become entrenched, squeezing company margins, prompting wage cuts and eroding consumer demand.

- China should let the yuan rise 3 percent against the dollar in 2009 to deter capital outflows and help the country make overseas acquisitions, said Wang Jian, a researcher affiliated with the nation’s top planning agency. People’s Bank of China Governor Zhou Xiaochuan pledged last week to maintain yuan stability as investors pull money out of emerging- market assets because of slowing global economic growth. “A weaker currency will prompt massive amounts of foreign capital to flee the country,” said Wang, secretary general of the China Society of Macroeconomics, a Beijing-based research institute under the National Development and Reform Commission that advises the government. “It won’t help exports. Foreign consumers still won’t have enough money to buy.”

- Texas Instruments Inc.(TXN), the second- largest U.S. chipmaker, predicted first-quarter sales that met analysts’ estimates after demand improved for wireless-equipment chips in China.

- International Business Machines Corp.(IBM) expects to prosper through the economic crisis by developing money-saving computer services and expanding deeper into the developing world, Chief Executive Officer Sam Palmisano said.

- Mexico’s peso, the worst performer among the world’s most-traded currencies in the past six months, will weaken another 14 percent by year-end as the nation’s twin deficits swell, said Rogelio Ramirez de la O, the economist who predicted the 1994 devaluation. The peso will slide to 18.2 per dollar from 15.5667 today, said Ramirez, the partner at Mexico City-based economic research firm Ecanal and former chief economic adviser to 2006 presidential candidate Andres Manuel Lopez Obrador. The peso tumbled 32 percent in the past six months as the recession in the U.S., the buyer of 80 percent of Mexican exports, deepened.

- South Korea’s economy may contract 4.5% this year, and growth will recover later and more gradually than previously expected, Goldman Sachs(GS) said. The brokerage had earlier forecast gross domestic product to shrink 1% in 2009, according to a report today.

- The cost of protecting investors in Asia-Pacific bonds from default rose on concern financial services companies will be hit by more losses after the World Bank predicted a global economic contraction. The Markit iTraxx Japan index of credit-default swaps jumped 22.5 basis points to 552.5 at 10:21 am in Tokyo, Barclays Capital prices show. The benchmark reached a record 554 basis points on Feb. 17, CMA DataVision prices show. The Markit iTraxx Australia index rose 7.5 basis points to a record 450 at 12:05 pm in Sydney, according to Citigroup Inc. Contracts on the subordinated debt of Macquarie Group Ltd., Australia’s largest investment bank, jumped 50 basis points to 1,200 while swaps on the subordinated debt of Suncorp Metway Ltd., Australia’s third-largest general insurer, rose 25 basis points to 700, Citigroup prices show.

- China’s slowing appetite for iron ore threatens plans to develop more than $6.4 billion of low-grade iron ore projects in Australia, the nation’s commodity forecaster said.

- Posco, Asia’s third-biggest steelmaker, has settled the first pulverized coal contracts for 2009 at $90 a metric ton with several Australian producers, Macquarie Group Ltd. said, citing a Platts report. That is a 63 percent cut from fiscal 2008 prices which were between $240 a ton and $245 a ton, Macquarie analysts including Jim Lennon and Adam Rowley wrote in an investor note yesterday, citing Platts.

Wall Street Journal:

- Key Senate Democrats are wavering in their support of legislation that would give more power to labor unions, dealing a setback to labor's top priority as businesses warn of the damage the bill would cause. The battle over the "Employee Free Choice Act" -- expected to be introduced Tuesday -- is seen as a power struggle among labor unions and businesses, as well as a test of whether moderate Democrats and Republicans will push back on Democratic congressional leaders and the Obama administration. At least six Senators who have voted to move forward with the so-called card-check proposal, including one Republican, now say they are opposed or not sure -- an indication that Senate Democratic leaders are short of the 60 votes they need for approval.

- Some hedge funds are using a trading strategy called “latency arbitrage” to take advantage of differences in the speed of price quotations at U.S. exchanges and dark pools — a practice that reminds some investors of past abuses such as mutual-fund market timing. “High frequency” quantitative hedge funds at firms such as Citadel Group, D.E. Shaw Group and Renaissance Technologies have direct feeds to U.S. exchanges. These feeds cut the delay on quotes down to milliseconds. During the last two years, many funds have paid for “proximity hosting,” the installation of their servers in the same data centers as the exchanges, to shave more “microseconds,” or millionths of a second, off that latency. Latency, in electronic trading, is the amount of time a quote or an order spends in the ether, and it’s where many funds are eyeing an edge. “The fastest one wins,” said a technology officer at a major hedge fund who was sounding out exchanges with an eye to setting up a latency-arbitrage strategy. He said the first step is to maximize the speed of market-data software and exchange connections, and the second is to find the “golden egg” - a venue or counterparty whose information is slower. The only risk, he said, was that “everybody’s getting faster.”

- About 35% of US companies in China expect sales in the country to drop this year, more than double the year earlier figure, citing an American Chamber of Commerce in China survey. Of the respondents, 37% are delaying China investments and 21% expect to shrink their local workforce, the report said.

- Sports junkies or die-hard fans who have lost the battle for the remote control can see more games live over the Internet than ever -- though often for a premium. Television networks, including ESPN, CBS and the Tennis Channel, are airing more live games on their Web sites and adding features like extended interviews with players. The National Hockey League and Major League Baseball are teaming up to offer "bundled" subscriptions, where fans can see hockey and baseball games for $139.95. They're also giving fans different camera angles and the ability to view multiple games simultaneously. And so far, at least, sports fans appear happy with the growing menu of events available.

- Pilloried for missing credit problems in the nation's mortgage markets, credit-ratings firm Moody's Investors Service is trying to get ahead of corporate bankruptcies. The firm on Tuesday is publishing a list called the Bottom Rung, detailing the companies that Moody's says are most likely to default on their debts. With 283 companies, the list holds nearly every sector of the economy. The dominant industries on this at-risk list include much of the U.S. auto industry, the casino sector, and many retail chains, newspapers and broadcast-TV and radio-station networks. Energy firms, airlines and restaurant chains appear often.

- Apple Inc. (AAPL) is planning to launch a netbook computer with a touch screen monitor as early as the second half of this year, two people close to the situation told Dow Jones Newswires Tuesday.

- Chips called flash memory that have transformed many consumer products are beginning to shake up corporate computer rooms, with Sun Microsystems Inc. emerging as a surprise innovator. The computer maker, though it lags rivals in data-storage hardware, has been pushing a redesign of servers and storage systems to take advantage of flash-memory chips. In its latest gambit, Sun is trying to popularize a tiny circuit board that can squeeze more flash chips, saving money, space and electricity.

CNBC.com:
- Roche is in talks to buy the shares of Genentech(DNA) it does not already own for about $95 each, a source familiar with the situation said Monday.

Houston Chronicle:

- Help wanted: pharmacists, engineers and nurses. Believe it or not, even some banks are hiring, at least for their technology teams. While the recession has claimed 4.4 million jobs, the economy has created others, many of them for highly trained and specialized professionals. More than 2 million jobs openings now exist across a range of industries, according to government data.

Reuters:

- Cisco Systems Inc(CSCO) said it will unveil next week a new strategy to help customers build more efficient data centers, amid expectations for the network equipment maker to announce it will start selling servers.

- Google (GOOG) and Cisco (CSCO) are viewed as top contenders to enter the Dow Jones industrial average (.DJI) now that two constituents are trading below $2, making their status as blue chips tenuous. The Internet companies are among a variety of companies eyed as potential Dow replacements, a diverse list that also includes former investment bank Goldman Sachs (GS) and former Dow star US Steel (X).

Financial Times:
- Credit market indicators – barometers of stress since the financial crisis began 18 months ago – are once more flashing red. Heightened concern over the fate of US carmakers and worries about escalating losses at banks and financial institutions and at General Electric, the largest debt issuer in capital markets, are creating a grim mood. “We are in another round of the credit crunch where the intensity is spreading,” Mary Miller, director of fixed income at T. Rowe Price, says.

- Egypt’s real estate market loses its fizz.

- China will reduce export taxes to zero and give more financial support to exporters as it tries to increase its share of global trade in the current crisis, the country’s commerce minister said on Monday. The collapse in global trade in recent months led to a 17.5 per cent drop in Chinese exports in January and domestic media reports indicate the decline was even larger in February. The ruling Communist party wants to reduce the economy’s reliance on external demand for cheap Chinese exports, but such a rebalancing will take years. “Global trade and demand [are] collapsing and so are the currencies of many of China’s competitors and customers,” said Isaac Meng, economist with BNP Paribas. “This is putting huge pressure on China’s export industries and the government to push all the buttons to boost the economy.”

- European ministers said on Monday they had no plans to add to recent fiscal stimulus packages despite calls from the US for radical expansions in government action to boost ailing economies. Meeting in Brussels, finance ministers from the countries in the eurozone said they wanted first to see the effect of stimulus packages that had been passed. Peer Steinbrück, the German finance minister, said: “We are not debating any additional measures.” Jean-Claude Juncker, chair of the “eurogroup” of ministers, said: “The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.” European ministers are concerned that building up more government debt would threaten the stability of the eurozone and say that they want to assess the effects of spending boosts that have already been passed before considering more. The US Treasury declined to comment on their remarks on Monday. The G20 finance ministers meet near London this weekend amid deepening gloom over the world economy. A new European Union policy paper, due to be approved by finance ministers today, calls the prospects of a return to economic growth next year “highly uncertain”.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (TXN), target $16.

Night Trading
Asian Indices are -.50% to +.75% on average.
S&P 500 futures +.87%.
NASDAQ 100 futures +.79%.

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Earnings of Note
Company/EPS Estimate
- (DKS)/.52

- (KR)/.51

- (BF/B)/.80

- (JCG)/-.27

- (HOV)/-1.62

- (APEI)/.23

Economic Releases

10:00 am EST

- Wholesale Inventories for January are estimated to fall 1.0% versus a 1.4% decline in December.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, IDB/TIPP Economic Optimism Index, (ACIW) analyst day, (FIC) analyst meeting, Bernanke speaking on bank regulation, (CVX) analyst meeting, (TEL) meeting of shareholders, (DIS) meeting of shareholders, Raymond James Institutional Investors Conference, JPMorgan Aviation & Transportation Conference, Barclays Healthcare Conference, Deutsche Bank Hospitality & Gaming Conference, (AMAT) meeting of stockholders, (APC) investor conference and the (ADI) shareholder meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and automaker stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.