Friday Watch

Late-Night Headlines
Bloomberg:

- U.S. hedge funds are buying more of the nation’s stocks than they’re selling for the first time since October, while mutual funds and most other investors remain net sellers, according to UBS AG. In the four weeks ended March 13, net purchases of equities by hedge fund clients of UBS averaged $140 million, according to a March 18 report by David Bianco, the New York-based chief equity strategist at Switzerland’s biggest bank. The inflows into stocks followed 22 straight weeks of outflows. “Those who are supposedly experts at assessing and managing risk are more confident putting capital to work than they were in October and November,” said Peter Kenny, managing director in institutional sales at Knight Equity Markets LP Jersey City, New Jersey. “That’s an indication that the market has made some constructive moves toward building a base.” Mutual funds and other long-only investors such as pension funds and insurance companies, so-called because unlike hedge funds they don’t usually engage in short selling to bet on stock price declines, were net sellers of an average $144.8 million of U.S. shares over the same four-week period.

- Intel Corp.(INTC), the world’s largest chipmaker, had its 2009 profit estimate increased to 30 cents a share from 20 cents at Goldman Sachs Group Inc.(GS), which cited “an uptick in shipments and lower underutilization charges.”

- BlueMountain Capital Management LLC, the New York-based firm overseeing $4.6 billion, began a new fund that will buy high-yield, high-risk corporate loans, betting that the worst of a sell-off in the market is over.

- BlackRock Inc.(BLK), the manager of the world’s largest mining funds, said it’s “too early” to talk of a recovery in metals consumption. Users this year have been “restocking,” or rebuilding inventories, said Evy Hambro, managing director of BlackRock’s $5.2 billion World Mining Fund.

- Oil’s rally above $50 may encourage OPEC members to start releasing more crude into the market before production cuts have had a chance to reduce stockpiles, causing prices to fall again, PetroMatrix GmbH said. Oil’s recovery to a three-month high hasn’t been accompanied by a decline in US crude inventories. Stockpiles are at a two-year high as fuel consumption drops and refiners reduce output. “The current rally could become OPEC’s worst nightmare as it is occurring before oil stocks have been sufficiently reduced,” said Olivier Jakob, managing director of the Zug, Switzerland-based consultant Petromatrix.

Wall Street Journal:

- President Barack Obama reacted coolly to a House bill that would use the tax system to try and confiscate nearly all the bonuses paid to American International Group Inc. employees. It's important, he said, not to "lurch from thing to thing" in trying to address the nation's big problems. "Look, I understand Congress' frustrations," he said on "The Tonight Show with Jay Leno." But he suggested that legislators were being more vindictive than constructive. "Everybody's angry... but I think that the best way to handle this is to make sure that you close the door before the horse gets out of the barn. And what happened here was the money's already gone out, and people are scrambling to try to find ways to get back at them," he said. From there, he went on to pitch his long-stated proposals to change the tax code by increasing taxes on all upper-income Americans, specifically families earning more than $250,000 a year and individuals earning more than $200,000 annually.

- The Federal Reserve's decision this week to pump an extra $1.15 trillion into the financial system was driven in part by a worry that the U.S. economy has become plagued by increasing slack in the economic chain. From empty hotel rooms to idle factory equipment to workers in part-time jobs, the economy is stuck with excess capacity. This signals that even if the economy turns around tomorrow -- and there have been glimmers of stability in recent weeks, including higher stock prices -- the economy is likely to be operating well below its potential for many months, if not years, to come. Signs of slack are everywhere. The number of vacant homes dotting American neighborhoods was 19 million in the fourth quarter of 2008, up more than three million over three years. Hotel occupancy rates have fallen from 65.5% a year ago to 55.2% in early March, according to Smith Travel Research, a Tennessee firm that tracks the industry. Manufacturing plants ran in February at 67.4% of their capacity, the lowest utilization rate since the Fed began keeping records in 1948. One example of the slack comes from Union Pacific Railroad, the nation's largest railroad. It has the capacity to run 200,000 carloads weekly, but is running only 150,000. "As volumes remain soft, we are acting aggressively to right-size our resources, furloughing 3,600 employees, storing over 1,400 locomotives, and parking 53,000 freight cars," Rob Knight, the firm's chief financial officer, told investors in a conference call last week. The clearest signs of slack are in the job market. On Thursday, the Labor Department reported that new claims for unemployment benefits slid last week by a seasonally adjusted 12,000 to 646,000, but the four-week average rose slightly to 654,750, a 26-year high. The total number of Americans drawing weekly benefits jumped to nearly 5.5 million, a new high.

- The acting chairman of the Federal Energy Regulatory Commission says the nation should have a new network of power lines to carry wind power across the country, providing a rationale for Democratic legislation that would give the agency authority to permit power lines where it sees fit even over state and local objections. FERC Chairman-designate Jon Wellinghoff says he envisions a new grid system that can carry electricity from the wind-rich Midwest to New York, Washington DC, Atlanta, and other eastern cities. Longer term, he says, wind turbines off the Atlantic coast that could generate wind energy that would flow in the other direction, from east to west. One way to avoid controversy over the location of new power lines could be to run them along railroad rights of way, Mr. Wellinghoff said in an interview.

- Opposition from the banking industry and moderate Senate Republicans and Democrats has stalled a proposal to allow judges to modify mortgages in bankruptcy court. The measure known as "cramdown," is endorsed by President Barack Obama and Congressional Democratic leaders as part of a sweeping administration plan to help strapped homeowners. But with Congress due to start a two-week spring recess April 6, Senate negotiators have been unable to lure a handful of moderate votes needed to pass the bill in the Senate.

- Amid the global downturn, a number of intrepid investors are dipping their toes into the waters of an unlikely haven: Iraq. Energy investors have long been sounding out opportunities in the oil-rich country. But as security here continues to improve, nonoil investors are giving Iraq a first serious look.

MarketWatch.com:
- Responding to the anger over $165 million in bonuses paid to AIG traders, the House approved a bill Thursday that would impose a punitive 90% tax on bonuses paid by American International Group Inc. and other financial companies that receive federal help. The vote was 328-93, with about half of the Republicans joining almost all Democrats voting in favor. Meanwhile, Treasury Secretary Timothy Geithner acknowledged in an interview with CNN late Thursday that he knew recently-passed stimulus legislation included a loophole that could allow AIG (AIG) to keep its controversial bonuses. Criticism had recently been leveled at Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, for including language in the stimulus bill that restricted bonuses and golden parachutes, but allowed AIG to retain its particular bonuses thanks to a "grandfather" clause.

- Sales of video game software in the U.S. saw modest growth during the month of February -- largely in line with Wall Street's estimates -- as action titles such as "Street Fighter" and "Killzone" drew in customers. For the month, sales of game software rose 9% to $733.5 million, according to data from NPD Group on Thursday. Analysts were expecting sales growth of 5-10% for the month.

CNBC.com:
- The White House and Congress are rushing to write legislation that allows the federal government to take over and unwind the businesses of a large financial institution—such as AIG(AIG) or Citigroup(C)—the way it now can with commercial banks, CNBC has learned.

- British luxury carmaker Jaguar surged to the top of J.D. Power and Associates' closely watched vehicle dependability study this year, tying Buick for the No. 1 spot and dethroning Lexus for the first time since the Japanese luxury brand has been a part of the survey.

NY Times:

- The question was direct and prescient. Representative Joseph Crowley, Democrat of New York, asked the Treasury secretary in an open hearing what could be done to stop American International Group from paying $165 million in bonuses to hundreds of employees in the very unit that had nearly destroyed the company. Timothy F. Geithner, the Treasury secretary, responded by saying that executive pay in the financial industry had gotten “out of whack” in recent years, and pledged to crack down on exorbitant pay at companies like A.I.G. that were being bailed out with billons of taxpayer dollars. The exchange took place before the House Ways and Means Committee on March 3 — one week before Mr. Geithner claims he first learned that the failed insurance company was about to pay a round of bonuses that have since caused a political uproar. Interviews with senior Federal Reserve and Treasury officials, as well as members of Congress, leave little doubt that the bonus program was a disaster hiding in plain sight. Mr. Geithner is not the only one who appears not to have understood the populist fury the bonuses would set off. Career staff officials at the Treasury, Fed and Federal Reserve Bank of New York exchanged e-mail messages about the A.I.G. bonus program as early as late February, according to a person familiar with the matter. A.I.G. itself revealed the bonus plan in regulatory filings last September. In early February, Mr. Geithner opposed a provision in the economic stimulus bill that would have slapped a steep tax on the kind of bonuses that A.I.G. was about to pay. If A.I.G.’s plan to pay out an additional $165 million in bonuses came as a surprise to Mr. Geithner, it did not come as a surprise to staff at the Treasury, the Federal Reserve in Washington or the New York Fed.

BusinessWeek:

- Iraq’s Oil Minister Speaks to BusinessWeek. Hussein Al-Shahristani is trying to persuade global oil giants to invest $35 billion to move Iraqi oil production to 6 million barrels a day. Iraq's Oil Minister, Hussein Al-Shahristani, finds himself in a crucial role. Iraqi oil production has been stuck at around 2 million to 2.5 million barrels per day since the ouster of Saddam Hussein. That's considered well below the country's capability.

IBD:

- Americans have cut back sharply on new auto purchases. But that only means they're driving their old cars longer. And that translates into more sales of batteries, fuel pumps and other replacement parts sold by O'Reilly Automotive (ORLY).

Financial Times:
- Barack Obama stepped out from behind his teleprompter on Thursday for an off-the-cuff question-and-answer session with voters in California. But the spontaneity failed to quell growing criticism of his heavy use of the electronic speech aid, after a technical glitch this week highlighted its fallibility. US presidents have used teleprompters since their invention but Mr Obama relies on them more than his predecessors, reading from the see-through screens for even the briefest statements. Some critics have even labelled him the Teleprompter President. Perhaps it is not surprising that, at a time of economic crisis, the White House wants to ensure the president is word-perfect, in contrast to the frequent verbal slips made by his predecessor, George W. Bush. But Maureen Dowd, the influential New York Times columnist, argued on Thursday that the device was stripping Mr Obama of authenticity at a time of mounting populist anger over the economy. “Barack Obama even needs a teleprompter to get mad,” she wrote.

Shanghai Securities News:

- Ren Xingzhou, a researcher at the State Council’s Development Research Center, said China’s property market isn’t stable and it’s too early to say that it has recovered. The market will continue to “correct” this year because of the global financial crisis and slower domestic real estate investment and economic growth, Ren said.

Late Buy/Sell Recommendations
Citigroup:

- Upgraded (EXPE) to Buy, target $14.

Night Trading
Asian Indices are -.50 to +.50% on average.
S&P 500 futures -.49%.
NASDAQ 100 futures -.29%.

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- The Fed Chairman Bernanke speaking on “The Financial Crisis and Community Banking” could also impact trading today.

BOTTOM LINE: Asian indices are mixed, as losses in financial stocks are offset by gains in commodity 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.

Stocks Finish Lower, Weighed Down by Financial, Airline and REIT Shares

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In Play

Stocks Lower into Final Hour on More Shorting, Profit-taking, Rising Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Retail longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is heavy. Investor anxiety is about average. Today’s overall market action is neutral. The VIX is rising 8.06% and is very high at 43.27. The ISE Sentiment Index is above average at 180.0 and the total put/call is below average at .69. Finally, the NYSE Arms has been running around average most of the day, hitting 1.47 at its intraday peak, and is currently 1.39. The Euro Financial Sector Credit Default Swap Index is plunging 9.6% today to 170.0 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is falling 4.95% to 226.36 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is falling 5.0% to 104 basis points. The TED spread is now down 359 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is down 2.32% at 63.25 basis points. The Libor-OIS spread is falling 6.04% to 100.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 8 basis points to 1.33%, which is down 131 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 .19%, which is down 2 basis points today. It is a huge positive to see most gauges of credit market angst down significantly today. As well, despite the profit-taking in financials, the broad market is holding up very well considering recent gains. Today’s action, as a whole, appears to be a healthy consolidation of recent gains before another surge higher. On the negative side, the market is extended short-term and gauges of short-term investor angst are relatively low. Nikkei futures indicate a -25 open in Japan and DAX futures indicate a -1 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on declining credit market angst, less economic fear and bargain-hunting.

Today's Headlines

Bloomberg:

- UBS AG led a decline in the cost of protecting European bank bonds from default after Switzerland’s biggest lender offered to buy back 1 billion euros ($1.3 billion) of its subordinated debt to boost capital. Credit-default swaps on the Zurich-based bank’s junior bonds dropped 56.5 basis points to 365, according to CMA Datavision prices at 4:45 p.m. in London. The Markit iTraxx Financial index tied to the subordinated debt of 25 banks and insurers fell 36 to 360, JPMorgan Chase & Co. prices show. “As events in 2008 have shown, certain peers of UBS were able to raise capital faster and with greater flexibility in their choice of instruments than UBS due to the availability of existing authorized capital,” the UBS statement said. The bank’s plan triggered a decline in the cost of credit- default swaps on Credit Suisse Group Inc.’s junior debt, which fell 35.5 to 300, CMA prices show. The Markit iTraxx Financial index of credit-default swaps on senior financial company debt declined 13 basis points to 173, JPMorgan prices show. Contracts on UniCredit SpA, Italy’s second biggest bank, dropped 29 basis points to 176, CMA prices show. Frankfurt-based Commerzbank AG decreased 20 to 135, Banco Santander SA slid 18 to 136 and BNP Paribas SA fell 14 to 108.5.

- U.S. mortgage rates may fall to the lowest since World War II on the Federal Reserve’s plan to buy up to $300 billion of Treasuries and increase purchases of mortgage-backed bonds. Rates for 30-year fixed home loans dropped to 4.98 percent this week, Freddie Mac said today. They may reach 4.5 percent as the Fed’s purchases progress, said Mike Larson, real estate analyst at Weiss Research in Jupiter, Florida. “It’s a big bullet the Fed’s firing here,” he said. “The Fed is kind of going all in.”

- The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts. As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30. The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days. “We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”

- The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell by the most since Jan. 13 after the Federal Reserve said it will start buying Treasuries. The rate dropped six basis points to 1.23 percent, its seventh decline, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of bank reluctance to lend, fell seven basis points to 100 basis points. “We would expect money-market pressures to ease going forward,” said Matteo Regesta, an interest-rate strategist in London at BNP Paribas SA, France’s biggest bank. “After the Bank of England started quantitative easing, the pace of descent of Libor increased.”

- Retail sales of prescription drugs rose the slowest in the U.S. in at least 47 years, as cheaper pills and the recession cut spending. Sales for 2008 grew 1.3 percent to $291 billion, said IMS Health Inc., which compiled the data, in a statement today.

- The Standard & Poor’s 500 Index’s 17 percent ascent from March 9 through yesterday exceeded any advance by the main benchmark for American equities over a seven-day period since 1939.

- Commodities surged, led by precious metals and energy, on speculation that the Federal Reserve’s steps to revive the U.S. economy will spur demand for raw materials as a hedge against inflation. Silver headed for the biggest gain since 1979. Gold jumped the most since September, and crude oil topped $52 a barrel. Every commodity in the Reuters/Jefferies CRB Index of 19 prices climbed, while the dollar tumbled.

- General Electric Co.(GE) said its GE Capital finance unit won’t need more outside funding and at worst will break even under scenarios the Federal Reserve is using to test banks during a global recession and credit crunch. GE made the forecast at a meeting today in New York where Chief Financial Officer Keith Sherin and other executives are trying to allay investors’ concerns with the most detail yet about the unit’s funding, holdings, reserves and potential writedowns and losses. The unit’s businesses include credit cards, real estate, plane leasing and corporate lending. “We’re running GE Capital to be safe and secure in this environment,” Sherin told the audience, adding that GE is “committed” to having a finance business. “We have enough capital to be able to weather a very adverse set of cases.”

- Congressional Democrats are growing increasingly nervous about the ability of Treasury Secretary Timothy Geithner and the Obama administration’s economic team to manage the crisis and effectively convey a coherent policy. On the same day that President Barack Obama expressed “complete confidence” in Geithner, some Democratic lawmakers said the administration’s handling of the bonuses paid by American International Group Inc. was the latest in a series of missteps that have plagued Geithner and other top officials since the presidential inauguration. “The economic team has got to get its act together,” said Senator Ron Wyden, an Oregon Democrat. “I want the team to begin to get to dealing with these issues in a coordinated way.”

Wall Street Journal:

- Some of the most vocal critics of American International Group(AIG) Inc.'s bonus payments are also the biggest recipients of campaign contributions from the company, including President Barack Obama and Senate Banking Chairman Christopher Dodd. Last year, as both men were running for president, each raised $104,000 from AIG employees. Mr. Dodd, a Connecticut Democrat, is the top all-time beneficiary of AIG contributions, with a total of $280,000 in donations from the company's employees and fund-raising arm since 1990, according to campaign-finance data collected by the nonpartisan Center for Responsive Politics. Messrs. Obama and Dodd are among the top Democrats who have taken donations from AIG but now are criticizing the company. Another one, Sen. Charles Schumer of New York, threatened this week to increase taxes on the AIG bonuses if they aren't returned. Mr. Schumer has accepted $112,000 in donations from AIG's employees and its political action committee, making him the second-largest recipient among active lawmakers since 1990. That could prove awkward to the White House and Congress as they now move to crack down on the firm -- particularly for Mr. Dodd, who faces re-election next year. For much of his career, he has been close to the financial-services industry and has been a leading recipient of contributions from the sector. When Mr. Dodd was raising funds from AIG, his donor list included some executives from the company's financial-products division that created the instruments that brought billions of dollars in losses to the company and led to its collapse.

NY Times:

- Aiming to outdo Amazon.com(AMZN) and recapture the crown for the most digital titles in an e-book library, Sony is announcing Thursday a deal with Google(GOOG) to make a half million copyright-free books available for its Reader device, a rival to the Amazon Kindle.

- Boutique investment firms and top hedge funds are slowly lapping up the cream of global banking talent as the financial crisis forces banks to cut staff and limit the pay of their top risk-takers, Reuters says. From Singapore to New York, leading traders and sales chiefs are making the switch as government pressure piles on Wall Street and European banks to cut multimillion-dollar bonuses. ‘‘The firms that still have a lot of assets under management, the hedge funds that have not been hit by redemptions, they are still picking up some of the money-makers from the big banks,’’ Pernille Storm at Hudson, an executive search firm in Singapore, told Reuters.

LA Times:

- Imports into the Los Angeles and Long Beach ports plunged even deeper into a recessionary hole in February, hitting lows not seen since 1997. With exports also sharply lower, the sluggish traffic at the nation's biggest cargo container complex is yet another symptom of the broad malaise that continues to grip world economies. In Southern California, the trade gateway supports more than 280,000 workers, and its slowdown is being felt across the region. But early signals suggest that the declines might be bottoming out.

Washington Times:

- As he empathized with recession-weary Americans, President Obama arranged in the days just before he took office to secure a $500,000 advance for a children's book project, a disclosure report shows. The terms of the book deal were disclosed in a Senate financial disclosure report filed Tuesday. Analysts say there don't appear to be any rules that would bar such transactions after a president takes office, but it's unclear whether an incoming or sitting president has ever signed a book deal upon entering the White House.

TheStar.com:

- Warren Buffett tarnished as Main Street oracle.

Detroit Free Press:

- The Obama administration announced today a $5 billion financing plan to aid struggling auto suppliers, the first move by the president toward a broader rescue of the U.S. auto industry.

Reuters:
- Citigroup Inc (C) said on Thursday it may conduct a reverse stock split as part of an exchange offer that could give U.S. taxpayers a 36 percent stake in the bank.

- Package delivery giant and U.S. economic bellwether FedEx Corp said on Thursday it was taking market share despite a recession that drove its profit down 75 percent, and its shares jumped. "If this is what FedEx can do in really tough times, imagine what they can do when things bounce back," said Sandeep Kar, a transportation analyst at consulting company Frost & Sullivan. "They are going to emerge as a lean and mean company that will experience rapid growth." "This is a good stock to get into," he added. FedEx shares rose more than 5 percent in early trading.

Handelsblatt:

- Pfizer Inc.(PFE) may acquire companies and licenses to expand in the market for generic drugs, citing David Simmons, president of the company’s established products unit.

Trend-Tendances:

- European Central Bank governing council member Guy Quaden said the bank could cut its benchmark interest rate further. “Inflation has rapidly diminished and today I’m hearing more often talk about the possibility of deflation that we need to eliminate,” Quaden said.

The Australian:

- George Soros is having a very good crisis. Other investors are wilting, political power structures are being upended and market economists are scrambling to fashion new theories, but the world’s most famous speculator is having a belated heyday. At 68 Soros had just predicted a global financial collapse which did not happen, just as he had done a decade earlier; his pet theory of market behavior, which he calls "reflexivity", had been largely ignored; and his political donations had bought him little sway in Washington. Yet today, he says, all those strands seem to have come together – "the American election, the financial crisis, the theory of reflexivity, so it is actually a very stimulating period". In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even. His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage.

Bear Radar

Style Underperformer:
Large-cap Value (-1.35%)

Sector Underperformers:
Banks (-6.54%), I-Banks (-5.37%) and Medical Equipment (-3.92%)

Stocks Falling on Unusual Volume:
MANT, PRGS, BK, PLCE, SOHU, NITE, CAKE, AIPC, CBRL, WTNY, ARE, CLC

Stocks With Unusual Put Option Activity:
1) DNR 2) UPL 3) CF 4) IDEV 5) COCO

Bull Radar

Style Outperformer:
Mid-cap Growth (+.40%)

Sector Outperformers:
Oil Service (+6.17%), Steel (+5.84%) and Energy (+3.64%)

Stocks Rising on Unusual Volume:
CLF, ORCL, CMC, GDP, DNR, NBR, SU, SNCR, MRX, NBTB, BT, BUSE, GHDX, PHI, WDR, APA, CTAS, SSRI, SCHS, GOLD, GHDX, YHOO, PTEN, KLAC, PAAS, ENER, FOSL, RGLD, SPWRA, CEDC, JRCC, TRLG, BUSE, BCH, MRX, CGV, BKS, IHS, SOR, X, WBK, FDX and BVN

Stocks With Unusual Call Option Activity:
1) AUO 2) ETFC 3) DB 4) AIG 5) ORCL