Stocks Finish Sharply Lower, Weighed Down by Financial, REIT, Homebuilding, Alternative Energy, Steel and Oil Service Shares

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Stocks Sharply Lower into Final Hour on Rising Credit Market Angst, Greater Financial Sector Pessimism, More Shorting, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Technology longs, Retail longs and Financial longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% 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 heavy. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 16.12% and is very high at 39.41. The ISE Sentiment Index is below average at 123.0 and the total put/call is slightly above average at .90. Finally, the NYSE Arms has been running very high most of the day, hitting 2.53 at its intraday peak, and is currently 2.22. The Euro Financial Sector Credit Default Swap Index is rising 10.74% today to 164.33 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 rising 4.18% to 185.26 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising .71% to 98 basis points. The TED spread is now down 365 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 5.91% to 62.75 basis points. The Libor-OIS spread is falling .30% to 90 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 6 basis points to 1.22%, which is down 142 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 .12%, which is down 1 basis point today. Financials, REITs and the most cyclical shares are under the most pressure today. Much of today’s weakness is likely related to profit-taking after recent sharp gains, however the large jump in the euro financial sector credit default swap index is a large negative. As I suspected last week, the US Dollar Index is busting up through its 50-day moving average today. I expect this index to continue to trend higher over the intermediate-term. While US stocks likely have a bit more downside in the near-term, I still suspect the pullback will be relatively mild and short-term in nature. Too many large funds are too short or underexposed to US stocks and will likely look to cover quickly on signs of stabilization. Nikkei futures indicate a -225 open in Japan and DAX futures indicate a -9 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:

- Oracle Corp.(ORCL) agreed to buy Sun Microsystems Inc. for about $7.4 billion in cash, stepping in after International Business Machines Corp.’s talks to purchase the server maker collapsed. The per-share price is $9.50, 42 percent more than what Sun closed at April 17. The acquisition probably will add $1.5 billion to Oracle’s operating profit, excluding some items, in the first year, the companies said today in a statement.

- The United Steelworkers union asked President Barack Obama to cap automobile-tire imports from China, saying the lower-priced goods are costing U.S. jobs. The union, which represents tire-factory workers, filed a petition with the U.S. International Trade Commission today to cut imports of automobile tires from China by more than half to 21 million, the level in 2005. China sent 46 million tires to the U.S. in 2008, valued at $1.7 billion, the union said.

- Some delegates at a United Nations conference on racism in Geneva staged a walkout as Iranian President Mahmoud Ahmadinejad criticized Israel. During his speech, Ahmadinejad said racism posed a serious threat to world peace and, in a clear reference to Israel, called for an effort against racism by “Zionists.” “The word Zionism personifies racism that falsely resorts to religion and abuses religious sentiments to hide their hatred and ugly faces,” Ahmadinejad told the conference. Delegates from countries including France, Finland and Denmark walked out to protest the remarks. The Czech Republic, which holds the rotating presidency of the European Union, also said its delegates are withdrawing from the conference.

- Companies with the most debt and lowest returns on assets are turning the biggest six-week rally in stocks since 1938 into a bloodbath for last year’s best- performing trading strategy. Investors in so-called quantitative momentum funds -- which speculate that the worst stocks in the past 12 months will continue to decline -- have become this year’s biggest losers after banks and companies that rely on consumer spending surged. Quant momentum managers may have tumbled 27 percent this month in the U.S., the most since at least 1993, while those in Europe may have lost 20 percent in March and 24 percent in April, according to data compiled by JPMorgan Chase & Co. “Not in a million years would we have expected this gyration to be as vicious and enduring as it has been,” Steven Solmonson, the head of Park Place Capital Ltd., a hedge fund that oversees $150 million, said in an interview from New York. “The quants got whipsawed badly.”

- The 42 percent, four-month rebound in rubber prices may be coming to an end as global tire demand plunges the most in three decades. Tire makers, the biggest consumers of rubber, may report a 6.8 percent sales slump in 2009 as the global recession cuts auto demand, according to the government-funded International Rubber Study Group in Singapore. Supplies from Thailand, the top exporter, will increase after a seasonal drop, producers say. Prices of $1,530 a ton are 18 percent higher than alternatives made from oil, data compiled by Bloomberg show. Michael Coleman, who helps manage a commodity fund that returned 24 percent last year, and Felix Yeo, trading manager at the Singapore unit of Marubeni Corp., say prices may weaken as much as 35 percent. Bridgestone Corp., the world’s largest tire company, said Feb. 19 that lower rubber and raw material costs may add 99 billion yen ($1 billion) to earnings this year.

- Prime Minister Vladimir Putin’s trade measures are starting to keep Deere & Co.(DE) combines and Caterpillar Inc.(CAT) trucks out of Russian wheat fields and coal mines, dimming the companies’ prospects for expansion abroad. Deere and Caterpillar, reeling from the longest U.S. recession in a quarter century, were the companies most affected by loan restrictions and tariffs of as much as 25 percent that Putin imposed this year, according to a U.S. Chamber of Commerce survey of the top 50 American businesses operating in Russia. Putin is trying to boost Russian industries with tariffs on everything from drugs to farm equipment as declining oil revenue saps the nation’s economy. The policies are hurting sales by Caterpillar, Deere and Agco Corp. in a market where revenue was forecast to rise as much as sixfold in the next decade.

- American International Group Inc., Morgan Stanley and other companies squandered more than $5 billion on executive pay since 2005 and must recoup the payments or face lawsuits, a pension fund said. The Service Employees International Union’s pension fund said today it sent letters to 29 companies, including AIG and Morgan Stanley, demanding that directors recover “incentivized executive pay” based on derivatives or other investments whose value was later written off. “The collective choices of top executives to reward themselves despite their failure to deliver a profit on their investments negatively impacted our pension fund and left our economy in shambles,” Andy Stern, the union’s president, said in a statement.

- Gold, down 8% in the past year, closed April 17 below the 100-day moving average, on weak volume, a sign the metal’s decline may steepen, said Ralph Preston, a commodity analyst at Heritage West Futures Inc. The most-active gold contract slid below the 100-day line on April 16 and April 17 while volume this month averaged about 17% less than the previous 100 sessions. The last time the price slipped below the 100-day line on weakening volume, gold fell 21% in about two weeks, from $906.50 on Oct. 8 to $714.70 on Oct. 23. Gold may trade near $800 by June 30, said analysts including Preston. “We see a decrease in indirect investments, and this also weighs on gold prices,” said Bayram Dincer, a Dresdner Bank commodity analyst in Zurich.

- Oil fell the most in seven weeks as a stronger dollar reduced the appeal of commodities and on speculation supplies will rise as the recession reduces demand. Oil dropped as the dollar rose to a one-month high versus the euro, making crude less attractive as a currency and inflation hedge. An Energy Department report last week showed U.S. crude oil inventories climbed to the highest level since September 1990 as demand dropped. “This weakness is being driven by deteriorating oil demand,” Goldman analysts David Greely in New York and Jeffrey Currie in London said in a report dated April 17. “In the U.S., oil demand has fallen to its lowest level since October of last year, while implied oil demand in China and the non-OECD countries fell back to 2007 levels in February.”

- Crude prices around $50 a barrel will help the economy recover while supporting investment, the oil minister of the United Arab Emirates said today. A price of “$50 provides support for the global economy while sustaining investment,” Mohamed al-Hamli said in Dubai.

- China, the world’s second-biggest energy user, will continue to have a surplus of coal in the short term as a slowing economy restrains demand, an industry official said. Some small mines may also reopen, exacerbating the oversupply, Wang Xianzheng, head of the China National Coal Association, said at an industry conference in Beijing today.

- UBS rated Bidu(BIDU) “Sell,” saying the company faces rising competition from Google(GOOG).

Wall Street Journal:

- As consumers focus on the bottom line, investors should focus on Priceline.com(PCLN). Leisure travel is down sharply, part of the reason shares of Priceline.com are off 29% in the past year. But the online-travel agency is grabbing business from rivals and is in a prime position to benefit from the economic downturn, making its shares tempting, despite a recent rally.

- New research suggests that on days when the indexes make big moves, leveraged exchange-traded funds could trigger a trading cascade, turning the market close into a buying or selling frenzy. Leveraged ETFs offer double or even triple the daily return of a market index. Some of them, called "inverse" ETFs, move opposite to the market -- for example, going up twice as much as an index goes down. These funds are the hottest thing on Wall Street. In March alone, $3.4 billion of new money poured into ETFs that use leverage to magnify the returns on U.S. stocks. Further amplifying the ETFs' actions: Every day, trading desks at big banks and brokerage firms blast out customized spreadsheets to favored clients. These tools, linked to live data feeds, predict whether the leveraged ETFs will be buying or selling as 4 p.m. approaches. That enables hedge funds and other big investors to trade ahead of the ETFs. The excessive trading set off by releveraging is perfectly legal -- but upsetting to many people. "The market doesn't seem like a fair, level playing field," says Andrew Brooks, head of U.S. equity trading at T. Rowe Price in Baltimore.

CNBC:

- Warren Buffett says you should judge a banker by how they bank, not by their speeches or PR: "It's what they do and what they don't do. And what Wells (Fargo) didn't do is what defines their greatness.” Buffett tells Fortune’s Adam Lashinsky that Wells didn't do "dumb things" just because all the other banks were doing them:

- A sharp decline in deep water and ultra-deepwater dayrates expected for late 2010 and 2011 will cut away at profits for Transocean Ltd.(RIG), said an analyst Monday as he downgraded the offshore drilling contractor. Jefferies & Co. analyst Judson Bailey lowered his rating for Transocean to "Hold" from "Buy" due to expectations that the deep water rig market will be oversupplied by late 2010 and 2011, which will drive down dayrates and earnings.

- A U.S. congressional watchdog panel for financial bailouts will grill U.S. Treasury Secretary Timothy Geithner on Tuesday over his handling of the program and his plans to purge problem assets from bank balance sheets. The Congressional Oversight Panel for the Troubled Asset Relief Program said Geithner will testify at 10 a.m. EDT on Tuesday.

- Berkshire Hathaway Chairman Warren Buffett said his firm retained its stake in Bank of America(BAC) in the first quarter. The Web site’s “Warren Buffett Watch” wrote that CNBC reporter Becky Quick spoke with Buffett, who said Berkshire owned 5 million shares as of March 31.

MarketWatch:
- The recent spurt in deal making is an encouraging sign for portions of the stock market -- with further action expected in cash-rich sectors, specifically health care and technology, stock-market analysts say.

Briefing.com:

- Apple(AAPL): Channel checks suggest consumer spending may have found a floor, according to Friedman Billings.

The Detroit News:

- Ford Motor Co.(F) says it is working with battery suppliers and university researchers to speed the development of lithium-ion battery systems for a new generation of hybrids and electric vehicles that it expects to begin building next year. "Ford is strongly positioned to accelerate its electric vehicle strategy this year thanks to the significant research we've already completed," said Susan Cischke, Ford group vice president in charge of sustainability, environment and safety engineering.

Boston Globe:

- Senator John F. Kerry will hold hearings in Washington next week on the financial problems facing the newspaper industry, as dwindling advertising dollars push many US papers to the brink of closure. "The increase in media conglomerates has resulted in an increase in agenda-driven reporting and over time, if those of us who value a diversity of opinion and ideas, and are unafraid to be confronted with pointed commentary and analysis, do not act, it is a situation which will only get worse," Kerry wrote. The senator has received political endorsements over the years from the Globe's editorial page, which is operated separately from its news-gathering operation.

- As Congress returns today from a two-week recess, Senators Edward M. Kennedy and Max Baucus reaffirmed their intention to push through a healthcare overhaul this year. Baucus, a Montana Democrat who is chairman of the Senate Finance Committee, and Kennedy, a Massachusetts Democrat who leads the Senate Health, Education, Labor, and Pensions Committee, have been leading the charge so far. In a letter to President Obama, they announced what they called an "aggressive" schedule for their committees to draft comprehensive healthcare legislation in early June.

FINalternatives:

- An adviser to some of the world’s largest hedge funds is heading back to the Federal Reserve to manage its growing balance sheet. Brian Sack has been named head of the Federal Reserve Bank of New York’s markets group, where he will oversee both the Fed’s portfolio and all open-market operations. Sack joins from Macroeconomic Advisers, where he specialized in Fed analysis. Macroeconomic Advisers boasts 50 of the world’s largest money managers and hedge funds as clients.

Here is the City:

- Reuters reports that top-rated commodities traders are ditching the likes of Goldman Sachs and Morgan Stanley for hedge funds. And the reason is simple - hedge funds do not have the same compensation restraints that firms with TARP funding have. And as many TARP-firms have previously enjoyed strong revenues from commodities trading, losing talent like this looks certain to adversely impact the bottom line. No wonder Goldman Sachs raised $5bn last week to go towards the early repayment of their $10bn TARP funding. The news agency quotes New York-based headhunter George Stein from Commodity Talent, who said: 'There have been a slew of very high departures from Morgan Stanley and Goldman Sachs....people going off to the world of alternative asset management, hedge funds and private equity'. Reuters also reports that some traders have become frustrated at the lack of risk appetite at the bigger firms (especially the ones that have government-backing). Vikram Tandon from recruiter Options Group said: 'With the angst of everything else going on, there are 10 people you have to report to, and to get a trade approved, you have to jump through hoops. When you go to a hedge fund, you have your own portfolio, or you're just part (of a team) of one or two people. That makes a massive difference'.

Politico:

- Former House Speaker Newt Gingrich tore into President Barack Obama Monday for his friendly greeting of Venezuelan President Hugo Chavez, saying Obama is bolstering the "enemies of America.” Gingrich appeared on a number of morning talk shows comparing Obama to President Jimmy Carter for the smiling, hearty handshake he offered Chavez, one of the harshest critics of the United States, during the Summit of the Americas.

USAToday:

- The company that's made it so easy for television viewers to avoid watching ads will unveil Monday a plan to help stations sell them. TiVo (TIVO) will challenge Nielsen, whose audience ratings provide the basis for most ad sales, with Stop/Watch Local Markets. It will supplement TiVo's measurements of national TV audiences with data from all but the smallest of the nation's 210 markets.

Reuters:
- The U.S. Treasury said on Monday there was "no basis" for a report that said its "stress tests" on the health of the nation's 19 top banks showed several were "technically insolvent." A Treasury spokesman said the department has not yet received the results. The Turner Radio Network, which describes itself as a "free speech" blog, said 16 of the 19 are "technically insolvent," citing what it said was a U.S. government report. Shares of several banks fell sharply on the report. "There is no basis for that report; we do not even have results yet," Treasury Spokesman Andrew Williams said. The Obama administration has said the results would be released on May 4.

- A growing number of U.S. banks are repaying or planning to repay the bailout money they received from the government as they seek to escape the restrictions that come with the funds. Some banks have also said they believe repayment of the funds signals their management's confidence in their capital levels. While the funds under the Troubled Asset Relief Program, or TARP, were mostly intended for banks weakened by the credit crunch, a significant portion of the $700 billion fund went to banks that described themselves as well capitalized. Five of these banks have already repaid all the bailout funds they received, while some others said they plan to repay the money and have applied for permission to do so.

- American International Group Inc (AIG), which has received more than $150 billion in taxpayer support since last September, has closed a deal to access nearly $30 billion in additional federal funds. In a filing with the U.S. Securities and Exchange Commission on Monday, AIG said it would issue and sell to the U.S. Treasury 300,000 preferred shares, including warrants to purchase common stock, in exchange for up to $29.835 billion.

Bear Radar

Style Underperformer:
Small-cap Value (-7.05%)

Sector Underperformers:
Banks (-11.70%), Homebuilders (-7.91%) and Oil Tankers (-7.72%)

Stocks Falling on Unusual Volume:
STBA, STI, GDP, NTLS, BCS, TI, SU, TNDM, LMNX, CMED, LULU, WFSL, SONC, BCSI, SNDA, HTLD, LPNT, PXE, ROP, ROG, LZ, DCO and CYT

Stocks With Unusual Put Option Activity:
1) BAX 2) ANN 3) NWS 4) DTV 5) CF

Bull Radar

Style Outperformer:
Large-cap Growth (-2.70%)

Sector Outperformers:
Gold (+3.11%), Computer Hardware (+1.94%) and Education (-.83%)

Stocks Rising on Unusual Volume:
GOLD, DNDN, RGLD, ICUI, PAS, PBG and BF/B

Stocks With Unusual Call Option Activity:
1) SIRI 2) GIGM 3) BAX 4) JAVA 5) ACOR

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