Stocks Finish Higher, Boosted by Financial, Commodity, Insurance, REIT and Rail Shares

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Stocks Mostly Higher into Final Hour on Bank Stress Test Results, Less Economic Fear, Short-Covering, Declining Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Financial longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is higher, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 2.46% and is very high at 32.54. The ISE Sentiment Index is around average at 149.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running around average most of the day, hitting .94 at its intraday peak, and is currently .75. The Euro Financial Sector Credit Default Swap Index is falling another 4.15% today to 136.33 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 dropping 3.15% to 151.75 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling another 1.30% to 80 basis points. The TED spread is now down 383 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is plunging another 11.0% to 46.50 basis points. The Libor-OIS spread is falling 1.60% to 77 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 3 basis point to 1.47%, which is down 117 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 .18%, which is down 1 basis point today. The (XLF) is jumping another 5.4% today. The most heavily-shorted financials are seeing the largest gains on the stress test results. Gauges of credit market angst continue to meaningfully improve. The 2-year swap spread is breaking down to the lowest level since June 2007, which is a major positive. The US sovereign debt credit default swap is plunging 18.0% today to 41.0 basis points, which is also a big positive. Cisco Systems(CSCO) reports after the close today. Short interest is a near-record 75.1 million shares. The put/call open interest ratio for (CSCO) is .84, which is at the high-end of its 2-year range. While they may only meet or slightly miss 3Q revenue estimates, I wouldn’t be surprised to see a slightly more optimistic outlook from the company, which could help boost tech shares tomorrow. As well, economic data could slightly exceed estimates tomorrow. Nikkei futures indicate an +483 open in Japan and DAX futures indicate an +57 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on less economic fear, short-covering, technical buying, declining financial sector pessimism, investment manager performance anxiety and diminishing credit market angst.

Today's Headlines

Bloomberg:

- U.S. stocks advanced, recouping yesterday’s losses, as investors speculated that banks don’t need as much capital as had been projected and after employers cut fewer jobs than economists estimated. Citigroup Inc. surged 18 percent after a person familiar with the matter said the lender needs about $5 billion. Goldman Sachs Group Inc. and Morgan Stanley climbed at least 2.4 percent as people with knowledge of the situation said they don’t need more money following the government’s stress test. The market also advanced after ADP Employer Services said U.S. companies eliminated 491,000 positions last month, less than the 645,000 estimated in a Bloomberg survey of economists.

- You can call the plan to merge Chrysler and Fiat good for the economy. You can think it creative. You can say it’s the start of “a vibrant new company,” as Chrysler LLC Chairman Robert Nardelli did last week. But there’s one word that you can’t call the Chrysler bankruptcy package: legal. The plan would overturn basic rules of bankruptcy by setting up a sort-of sale to sidestep pesky legal requirements. It would bulldoze well-established rights of secured creditors, property rights the U.S. Constitution guarantees. So if U.S. Bankruptcy Judge Arthur Gonzalez follows the law, the Chrysler rescue plan dies. If he blinks and approves it, secured creditors everywhere should feel a shiver of unease, and quick sales of insolvent companies to avoid court scrutiny would multiply.

- The spread between the rate to exchange floating for fixed interest payments and Treasury yields for two years fell to the lowest level since the global credit market rout began as risk aversion eases. The 2-year swap spread narrowed to 46.85 basis points, the lowest since August 2007, when the collapse of the subprime mortgage market triggered the worst financial crisis in decades. The spread, which is based in part on expectations for the London interbank offered rate, or Libor, and a gauge of investor perceptions of credit risk, reached a record 167.25 basis points in October. “The plunge in the two-year swap spread is very good news for risk assets,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. “Swap spreads tend to lead the structure of other credit spreads over time. Forward Libor spreads are also collapsing and the Libor rate itself has moved to a record low of below 1%.”

- The cost to protect against a default on North American corporate bonds fell for a third day, trading in a benchmark credit-default swaps index shows. Credit swaps on the Markit CDX North America Investment- Grade Index Series 12, linked to the bonds of 125 companies in the U.S. and Canada, declined three basis points to 153 basis points as of 8:30 a.m. in New York, according to broker Phoenix Partners Group. The index, which typically falls as investor confidence improves, has dropped 44 basis points since the end of March. Contracts on Bank of America Corp. fell 30 basis points to 270 basis points, Phoenix prices show. swaps on Citigroup Inc. fell 10 basis points to 540 basis points.

- Crude oil rose above $56 a barrel for the first time since November after a U.S. government report showed a smaller-than-expected increase in stockpiles. “The speculators are piling into oil on signs that the economy is recovering,” said Sean Brodrick, natural resource analyst with Weiss Research in Jupiter, Florida.

- The U.S. has abandoned calls for “regime change” in Iran under President Barack Obama and expects a response to its diplomatic outreach, Senate Foreign Relations Committee Chairman John Kerry said. “That is not the current policy of this new administration, and it is important for Iran to understand that,” Kerry said during a panel hearing in Washington today. “Just as we abandon calls for regime change in Tehran and recognize the legitimate Iranian role in the region, Iran’s leaders need to moderate their behavior.”

- BlackRock Inc., Franklin Resources Inc. and Federated Investors Inc. made preliminary offers to buy Bank of America Corp.’s mutual-fund unit, said people familiar with the matter. Additional companies may participate in the bidding, which isn’t open to leveraged-buyout firms, said the people, who asked not to be identified because the process is private.

- The World Health Organization has determined that at least two influenza shots will be needed to protect against both the seasonal form of the disease and the new swine flu. The United Nations health agency will hold off on announcing a definitive decision on whether drugmakers should start producing a swine flu vaccine until an advisory group meets May 14, Marie-Paule Kieny, director of the WHO’s initiative on vaccine research, told reporters today. The new vaccine would be produced after manufacturers finish making shots for the seasonal strain, she said.

- OppenheimerFunds Inc., Stairway Capital Management LP, Group G Capital Partners LLC and Schultze Asset Management LLC are among fund owners that tipped Chrysler LLC into bankruptcy and seek to stop its sale to Fiat SpA. The Arrow Distressed Securities Fund, Group G Partners LP and Foxhill Opportunity Master Fund LP are also members of the group previously identified only as non-TARP lenders, in reference to the Troubled Assets Relief Program that bailed out some of the banks that support Chrysler’s reorganization, according to court documents filed today.

- European retail sales dropped by the most on record in March as the worst recession since World War II battered the region and households curbed spending. Store revenue in the euro area fell 4.2 percent from a year earlier, the biggest drop since the data series began in 1996, the European Union’s statistics office in Luxembourg said today. The decrease was steeper than the 2.6 percent decline economists expected in a Bloomberg survey and followed a 4 percent drop in February. “The labor market is weakening rapidly and consumer confidence is still at pretty low levels,” said Jennifer McKeown, an economist at Capital Economics in London. “It is difficult to be very optimistic about the future.”

- Overall, Blue Dog Democrats submitted more than 2,500 individual earmarks totaling some $20 billion. That underscores the conflict between their eagerness to bring federal money home and the coalition’s criticism of the budget as laden with pork. “It’s really hard to smack government’s wrists with the one hand while the other hand is looking for as much earmark cash as you can grab and bring home to your district,” said Steve Ellis, vice president of Taxpayers for Common Sense, a Washington-based public-interest group.

- U.S. stocks may continue their two- month rally as investor appetite for risk returns, said Richard Bernstein, the former chief investment strategist at Bank of America Corp. “What’s happening is that we’re seeing a real rally and the world is not coming to an end,” Bernstein, 50, said in a Bloomberg Radio interview. “This rally has removed a lot of the risk aversion.”

Wall Street Journal:

- Electronic Arts Inc. (ERTS) has tried all sorts of management magic to improve its profitability. Now, it's hoping a magician will raise its net income. The Redwood City, Calif.-based videogame maker is hoping a game based on Harry Potter, the fictional wizard in training, will boost its sagging performance when it hits stores later this year.

- American International Group Inc. is expected to post a first-quarter net loss of about $5 billion as the recession and further write-downs continue to erode its bottom line, according to people familiar with the matter.

- So what is next for the city that has garnered the reputation, at least locally, as "Wall Street North?"

CNBC:

- Biggest Shorts on the S&P 500.

- Bernard Madoff's longtime secretary said Wednesday that she believes the disgraced financier is not cooperating with authorities to protect others, and that he was a flirtatious boss who frequented massage parlors.

NY Times:

- The first thing I notice about the new Kindle DX–shown at a press conference in New York Wednesday morning–is that it still seems small. That isn’t necessarily a bad thing. If it is going to replicate a newspaper or textbook, you don’t want some clunky thing to lug around. The DX has a 9.7-inch display, which the company says is 2 1/2 times the size of the Kindle 2. But the device doesn’t feel or look as large as a sheet of copier paper. It won’t give you the feeling of reading an entire page of a newspaper. You read the paper by flipping through it, article by article. That said, the text, photos and drawings replicate the experience of reading a newspaper or a textbook.

MarketWatch:
- The number of mortgage applications rose 2% in the week ending May 1, the Mortgage Bankers Association said Wednesday, with borrowers seeking both more refinance and home-purchase loans. The MBA's seasonally adjusted composite index of mortgage applications rose to 979.7 from 960.6 a week earlier. The refinance index was up 1.2% while the purchase index increased 5%. The purchase-index number adds to signs of housing market stabilization, as low mortgage rates and falling home prices have energized bargain hunters.

BusinessWire:

- National Bank of Arizona (NBA), SolarCity® and First Solar (Nasdaq:FSLR) today announced plans to build a 222 kilowatt (DC) solar installation in Phoenix, which will be the city’s second largest commercial solar installation to date. The project, comprising two carport-mounted solar systems, will be the first commercial solar installation in Phoenix to utilize Tempe-based First Solar’s advanced thin film modules. SolarCity’s Phoenix office expects to complete the installation later this summer.

Washington Post:

- When Freddie Mac privately suggested to regulators last month how it planned to account for its mounting losses, the mortgage giant set off a firestorm. Freddie Mac's regulator pressed the company to withhold information related to the proposal from a federal filing, concerned that this seemingly arcane discussion of accounting practices could add billions of dollars to the government's cost of bailing out financial firms, two people familiar with the matter said. But the company's executives refused, the sources said. They worried that removing the information from the report to the Securities and Exchange Commission could expose them to accusations they'd hid required details from regulators.

- President Obama's passivity before the threatened foreign prosecution of Bush administration officials achieves by inaction what he fears doing directly. This may be smart politics within the Democratic Party, but it risks grave long-term damage to the United States. Ironically, it could also come back to bite future Obama administration alumni, including the president, for their current policies in Iraq, Afghanistan and elsewhere. Obama has taken ambiguous, and flatly contradictory, positions on whether to prosecute Bush administration advisers and decision makers involved in "harsh interrogation techniques." Although he immunized intelligence operatives who conducted the interrogations, morale at the CIA is at record lows.

The Washington Times:

- President Obama's efforts to curb the spread of nuclear weapons threaten to expose and derail a 40-year-old secret U.S. agreement to shield Israel's nuclear weapons from international scrutiny, former and current U.S. and Israeli officials and nuclear specialists say. The issue will likely come to a head when Israeli Prime Minister Benjamin Netanyahu meets with Mr. Obama on May 18 in Washington. Mr. Netanyahu is expected to seek assurances from Mr. Obama that he will uphold the U.S. commitment and will not trade Israeli nuclear concessions for Iranian ones.

Reuters:
- Ford Motor Co's(F) restructuring is on track and the automaker has sufficient liquidity to fund the plan, which includes converting plants and investing in future products, company executives said on Wednesday.Ford, the only U.S. automaker not operating with emergency U.S. government loans, also has continued to consolidate its dealer network, but sees no need for the type of aggressive culling that rivals General Motors Corp and Chrysler plan, Chief Executive Alan Mulally told reporters.

- The pace of private-sector U.S. job losses slowed dramatically last month, while future planned layoffs also declined, and the hard-hit housing sector showed signs of improvement last week. Wednesday's reports are the latest indications that the U.S. economy is pulling out of freefall and may even be preparing to stop its descent, adding to hopes that have fueled a stock market rally over the last two months.

- Legislation aimed at reversing a 3-year-old ban on Americans placing online bets was introduced on Wednesday by U.S. House Financial Services Committee Chairman Barney Frank.

Digitimes:

- DRAM chipmakers Inotera Memories, Nanya Technology and Powerchip Semiconductor Corporation (PSC) have announced improved sequential growth in their unaudited net sales for April 2009.

Bear Radar

Style Underperformer:
Small-cap Growth (-.62%)

Sector Underperformers:
Homebuilders (-4.45%), Gaming (-1.81%) and Computer Services (-1.70%)

Stocks Falling on Unusual Volume:
ERTS, OTEX, IBN, NRGY, ALGT, GHDX, GRMN, MASI, GXDX, JCOM, ACIW, VCLK, FWLT, IART, MYGN, NETL, WYNN, GTU and CPY

Stocks With Unusual Put Option Activity:
1) CX 2) MCHP 3) WFR 4) AMX 5) GRMN

Bull Radar

Style Outperformer:
Large-cap Value (+.83%)

Sector Outperformers:
Banks (+4.77%), Oil Service (+2.86%) and Insurance (+2.21%)

Stocks Rising on Unusual Volume:
ZION, STI, GMXR, XTO, BAC, WFC, CLF, SU, PCZ, BBL, VIGN, SPSS, SIG, WLT, SHLD, AZO, TRLG, LINC, AMMD, LMDIA, VOLC, ACOR, TREE, ABCO, WPPGY, SPSS, SMTC, AAON, ATLS, DTV, NCIT, AFAM, WBMD, PZZA, NTES, RHB, WNR, CRL, TRK, PLT, IGT, ANR, FDP and VCP

Stocks With Unusual Call Option Activity:
1) ZMH 2) JEC 3) ABK 4) CEPH 5) S

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