Stocks Finish at Session Lows, Weighed Down by REIT, Bank, Construction, Commodity and Alternative Energy Shares

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Stocks Lower into Final Hour on Profit-taking, Rising Financial Sector Pessimism, More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Retail longs. I added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is above average. Investor anxiety is about average. Today’s overall market action is mildly bearish. The VIX is rising 7.65% and is very high at 47.02. The ISE Sentiment Index is below average at 117.0 and the total put/call is slightly above average at .90. Finally, the NYSE Arms has been running high most of the day, hitting 2.28 at its intraday peak, and is currently 1.43. The Euro Financial Sector Credit Default Swap Index is dropping .24% today to 173.25 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 plunging 12.31% to 198.50 basis points. This index is still below its Dec. 5^th record high of 285.99. The TED spread is falling 1.56% 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 up 2.82% at 63.75 basis points. The Libor-OIS spread is falling .11% to 100 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.25%, which is down 139 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 up 1 basis point today. Weakness in Real Estate and Financial stocks has pressured the market again today. I expect these groups to stabilize early next week, which should lead to a stronger performance in equities by week’s end. Nikkei futures indicate a -75 open in Japan and DAX futures indicate a -35 open in Germany on Monday. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, rising financial sector pessimism and more shorting.

Today's Headlines

Bloomberg:

- The U.S. Securities and Exchange Commission is examining whether hedge funds let favored clients or employees withdraw their money while freezing redemptions or liquidating funds, Commissioner Elisse Walter said. A surge in redemption suspensions and liquidations in the past year has created “particular concern as to whether hedge- fund advisers may be favoring their own interests above others,” Walter said today in prepared testimony to the House Financial Services Committee. “Principals, employees or favored investors of the hedge-fund adviser may have received ‘preferential redemptions’ from the fund at issue.”

- The US dollar rose from almost a two- month low versus the euro as some traders bet the greenback’s record plunge on the Federal Reserve’s plan to buy Treasuries was too big to sustain. “The dollar’s decline this week has more or less priced in the policy response,” said David Woo, global head of foreign- exchange strategy at Barclays Capital in London, in an interview on Bloomberg Television. “Over the next three months, I don’t see much downside for the dollar to the extent other central banks will be under pressure to follow the Fed’s lead and essentially go down the route of quantitative easing.”

- The cost of protecting European corporate bonds from default fell as benchmark credit-default swaps indexes rolled into a new series. Contracts on the Markit iTraxx Crossover Index Series 11 of 45 companies with mostly high-risk, high-yield credit ratings cost 925 basis points, according to JPMorgan Chase & Co. prices. That compares with 1,105 basis points on the previous series yesterday, which referenced 50 companies. The Markit iTraxx Europe investment-grade index fell 13.5 basis points to 170.5. The Financial Index of credit-default swaps on senior bonds rose 3 basis points to 176 and the subordinated index fell 3 to 357, JPMorgan prices show.

- Aluminum may trade as low as about $1,000 a metric ton, the lowest since at least 1986, in what will be the worst year for European demand in more than a decade, according to Barclays Capital. The 15 percent rebound from a low this year of $1,251 a ton reached on Feb. 24 is unjustified, analysts including Gayle Berry wrote in a research note published yesterday. Government efforts to sustain output and save jobs from China to Venezuela are also preventing a necessary reduction in supply, it said. “Governments are propping up smelter output,” the analysts wrote. “This is very bad news for the health of the aluminum industry. Unless production is cut more aggressively in other locations, it is in danger of building a stockpile so large it might take years to work off.” The recent broad rebound in base metals, a result of some investors buying back in “a heavily shorted market” and on prospects of purchases by China, was also overdone, they wrote. The price gains are discouraging producers from cutting output. “Support in the form of production cuts has all but disappeared with higher prices enabling some producers at the margin to hold on for a little longer,” the note said. “For markets in surplus, like aluminum and nickel, this is particularly worrying.”

- Steel demand has fallen 30% in the first quarter and will suffer a “further significant decline” in the following three months, according to Eurofer, the Eruopean steel industry lobby group. Consumption has “collapsed” since the fourth quarter of last year, with order levels down almost 60%, the group said.

- The Baltic Dry Index, a measure of shipping costs for commodities, declined for a second consecutive week on falling demand for iron-ore transporters. The index fell 16% to 1,782 points this week. Rents for capsize vessels that typically haul iron ore to make steel slid 15% to $19,997 a day. Smaller panamaxes that compete for the same cargoes and also carry grains lost 32% to $11,804 a day. “Dry-bulk rates may see additional near-term downside, as China’s iron-ore imports will likely slow in coming months on elevated inventories,” Justin Yagerman, an analyst at Wachovia Corp. in NY, wrote today.

- The Organization for Economic Cooperation and Development may cut its forecast for China’s economic growth this year to as little as 6 percent because of the deepening global slump, Secretary-General Angel Gurria said.

In November, the estimate was 8 percent.

- The Organization for Economic Cooperation and Development may cut its forecast for China’s economic growth this year to as little as 6 percent because of the deepening global slump, Secretary-General Angel Gurria said. In November, the estimate was 8 percent.

- The rally that gave the Standard & Poor’s 500 Index a 16 percent gain in less than two weeks is poised to continue, according to some options traders. “The flattening of index skew has been dramatic and the market may be predicting a stronger likelihood of a rally in stocks,” said Pamela Finelli, head of European equity options research at Deutsche Bank in London. “Hedging demand has declined and more people are now using calls to position themselves cautiously for the upside.” A smaller skew is viewed as bullish because the measure tracks how much investors are willing to pay to protect their assets from price declines.

- European industrial production dropped by the most on record in January as the deepest global recession in more than six decades forced companies to cut output and curb investments. Production in the euro region fell 17.3 percent from the year-earlier month, the biggest decline since the data series began in 1986, the European Union’s statistics office in Luxembourg said today. The January plunge exceeded the 15.5 percent drop forecast by economists in a Bloomberg survey. From the previous month, output fell 3.5 percent.

- Treasury 10-year notes headed for the biggest weekly rally since December after the Federal Reserve’s plan to buy as much as $300 billion in government debt led to the largest one-day surge in more than four decades. U.S. securities of all maturities advanced this week on speculation the Fed’s program will put a ceiling on yields after the worst start to a year for Treasuries since 1980. Notes gained the most as the Fed said March 18 its purchases will concentrate on two- to 10-year maturities. Fed Chairman Ben S. Bernanke said in a speech policy makers are “generally encouraged” by the market’s reaction to the program.

- Venezuela’s bolivar sank to a 16- month low on speculation President Hugo Chavez will devalue the official exchange rate for the first time in four years to narrow a budget gap that swelled as oil prices declined. The bolivar fell 1.9 percent to 6.43 per dollar in unregulated trading at 12:25 p.m. New York time, said Nelson Corrie, head trader at Interacciones Casa de Bolsa in Caracas. Chavez said yesterday that he’ll announce economic measures this weekend in response to the tumble in oil, the source of more than 90 percent of the South American country’s exports.

- President Barack Obama’s budget will generate a $1.9 trillion deficit this year, $100 billion more than the administration projected, according to a person familiar with a Congressional Budget Office report to be released today. The person said next year’s shortfall will also be larger than projected, totaling $1.4 trillion. The administration said in its budget request to Congress last month that next year’s deficit would total $1.17 trillion.

- President Barack Obama urged Iran to opt for peace over “terror or arms,” forging diplomatic ties with the world, and an adviser to President Mahmoud Ahmadinejad responded that the U.S. should lift sanctions. Javanfekr said Obama must lift the sanctions imposed on Iran for pursuing its nuclear program, and admit past mistakes, such as support for Saddam Hussein’s Iraqi regime during the 1980-88 war with Iran, the 1988 downing of an Iranian airliner by the U.S. Navy in the Strait of Hormuz and support for a 1953 coup d’etat in Tehran to ensure oil supplies to the West. “There is a need for more than talks,” Javanfekr said. “Obama needs to show that he believes what he is saying.” In the video, Obama praised Iran’s “great and celebrated culture.” “We know that you are a great civilization, and your accomplishments have earned the respect of the United States and the world,” Obama said. Obama repeatedly has said he is prepared to engage in talks with Iranian officials to try to solve differences, in particular over Iran’s nuclear activities. Iran is “beyond the issue of suspension” of uranium enrichment activities, Ahmadinejad said in a Feb. 17 interview with Iranian state television.

Wall Street Journal:

- Credit-rating companies, widely assailed for their role in fueling the financial crisis with overly rosy debt ratings, stand to make a billion-dollar windfall in the government's latest attempt to heal the credit markets. The new rescue effort, run by the Federal Reserve, kicked off Thursday with bond deals totaling more than $7 billion. Each bond issue will need to be blessed by at least two of the three big rating firms: Moody's Investors Service, Standard & Poor's Ratings Services and Fitch Ratings.

- Even as new loans soar in China and economic stimulus spur a flurry of cash-hungry infrastructure projects, foreign banks in China are struggling to boost lending.

- Attorney General Eric Holder said some detainees being held at Guantanamo Bay, Cuba, may end up being released in the U.S. as the Obama administration works with foreign allies to resettle some of the prisoners.

- U.S. Federal Reserve Chairman Ben Bernanke said Friday that regulators may need to modify capital and accounting rules to make sure they don't magnify ups and downs in the financial markets.

CNBC.com:
- Wall Street Legends on Hedge Funds. (video)

- The economy is “starting to improve,” Omega Advisers Inc. founder Leon Cooperman told CNBC. In a roundtable discussion, Cooperman said signs of a recovery in included seeing stability in economic statistics, an improvement in financial stocks and a return of credit.

- Poll: Did Congress Overreact to AIG Bonuses?

NY Times:

- Democratic Senator Chris Dodd draws Connecticut voters’ ire for his AIG bonus role. Across Connecticut, anger is erupting against Mr. Dodd, the chairman of the Senate Banking Committee, whose stature in Washington once reflected the state’s beneficial ties with the financial industry. Now, he finds himself a symbol of the political establishment’s coziness with tainted corporations and a target of populist wrath over their excesses. On Thursday, the senator sought to defuse the furor over the latest revelation, holding a conference call with reporters to explain how legislation meant to limit executive compensation was changed at the last minute. That change exempted bonuses protected by contracts, like those at American International Group, a big campaign contributor to Mr. Dodd that received billions in federal bailout money. Mr. Dodd said that his staff revised the bill at the urging of Treasury officials, who he said were concerned that the compensation limits, which he had written in the original legislation, went too far and might invite lawsuits.

- Laser eye surgery has enabled millions of people to throw away their eyeglasses. Now several medical technology companies are hoping that lasers aimed at the feet will allow millions to take their socks off, even in public.

Hartford Courant:

- An executive at mortgage giant Countrywide Financial overrode the company's loan-writing policies to give a discount to Sen. Christopher Dodd, the powerful chairman of the Senate banking committee, according to an internal Countrywide document turned over to congressional investigators and obtained by The Courant. But paperwork, e-mails and other loan documents reviewed as part of the congressional probe include no direct evidence that Dodd was aware at the time that he was getting a discount, according to a source familiar with the investigation.

Politico:

- The AIG bonus imbroglio could deliver a one-two punch to President Barack Obama’s plans to help the economy. The insurance giant’s decision to pay out $165 million in bonuses will make it vastly harder to get future bailouts through Congress, and lawmakers’ efforts to get the money by imposing hefty taxes on bonuses could cause other private companies to steer clear of government recovery programs.

Reuters:
- The "smart money" on Wall Street might not be so smart after all. At least not what is publicly known when it comes to placing bets on its own industry. Some of the biggest hedge funds jumped into the maelstrom of sinking financial stocks in the fourth quarter soon after the dramatic bankruptcy of Lehman Brothers in mid-September. As a whole, hedge funds were overweight the financial sector during the quarter, according to a review of their equity holdings from U.S. regulatory filings by Thomson Reuters Ownership. However, the data also suggest the biggest hedge funds -- outside a few big stakes -- did not hold financials in the quarter to the degree of the smaller funds.

- Investors pulled a record $42.77 billion out of safe-haven money market funds during the week ended March 18, but where all that cash went is still unclear, data from fund tracker EPFR Global showed on Friday. "The overall tone of the flows this week is that money started flowing back into riskier asset classes such as high yield bonds, technology and a lot more money went into actively managed accounts," Cameron Brandt, global market analyst at EPFR Global in Boston. Brandt said it was not evidently clear from the data as to where the money went but it "is certainly a bullish sign."

Financial Times:
- The Federal Reserve’s bold action this week to boost the US economy with large-scale purchases of government debt created on Thursday fresh headaches for the European Central Bank, which is eschewing such steps in favor of fighting the economic crisis via eurozone banks. The Fed’s surprise move sent the euro sharply higher; on a trade-weighted basis. Europe’s common currency ended on Thursday at its highest this year. With the Swiss National Bank intervening this week to weaken the Swiss franc, the ECB is in danger of appearing to be standing idle as eurozone exporters suffer and deflationary risks build in the 16-country region. “The ECB is definitely under enormous pressure right now because pretty much every big central bank is starting to engage in traditional ‘quantitative easing’ – it has become the orthodoxy,” said Marco Annunziata, chief economist at Unicredit. Erik Nielsen, European economist at Goldman Sachs, argued that at its regular press conference this month, the ECB “should have torn up its usual statement and said ‘look we’re in a very different situation. This is what we’re doing’.” many believe that the ECB will yet be forced to follow the US Fed and Bank of England in embarking on outright asset purchases. Mr Trichet confirmed on Tuesday that “further measures” were being assessed. “That statement in itself – saying that they are looking at the possibility of implementing other measures – means that there must be some view that there are other solutions,” said Jacques Cailloux, European economist at Royal Bank of Scotland. The risks of deflation that would be posed by further euro appreciation, “increases the odds that the ECB will embark in some kind of purchase program even soon than we had anticipated”.

Bear Radar

Style Underperformer:
Small-cap Value (-3.11%)

Sector Underperformers:
Oil Tankers (-8.28%), REITs (-6.63%) and Oil Service (-5.43%)

Stocks Falling on Unusual Volume:
VIV, LUK, STAR, VOCS, INTU, CNQR, CA, ATHR, ASML, ARE, CRS, CGX, YPF and CAI

Stocks With Unusual Put Option Activity:
1) AN 2) DTV 3) HNZ 4) ACH 5) STP

Bull Radar

Style Outperformer:
Large-cap Growth (+.63%)

Sector Outperformers:
Education (+3.46%), Computer Service (+1.23%) and Drugs (+.96%)

Stocks Rising on Unusual Volume:
DELL, BBL, MRK, JNJ, COP, E, IBM, PEP, KO, UBS, BDC, CGV, JCOM, NTG, CNSL, LLL, PKY, CHFC, WSBC, FORM, MANT, SINA, GILD, SAFT, SHEN, CGRB, BRCM, WDFC, MNRO, THRX, CELG, STNR, AMGN, FAST, ESRX, GLRE, TCBK, BPT, AKO/A, ALG, JAS, UHT and CW

Stocks With Unusual Call Option Activity:
1) EXPE 2) NVLS 3) SINA 4) WIN 5) GLW

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