Stocks Finish at Session Highs, Boosted by Transportation, Education, Hospital, Steel, REIT and Homebuilding Shares

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Stocks Rising into Final Hour on Falling Credit Market Angst, Short-Covering, Lower Long-Term Rates

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Financial longs and Biotech 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 slightly higher, most sectors are rising and volume is around average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 2.68% and is very high at 30.82. The ISE Sentiment Index is above average at 192.0 and the total put/call is slightly below average at .76. Finally, the NYSE Arms has been running above average most of the day, hitting 1.42 at its intraday peak, and is currently 1.16. The Euro Financial Sector Credit Default Swap Index is falling 4.41% today to 115.67 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 4.41% to 139.19 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 1.53% to 53 basis points. The TED spread is now down 410 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 6.47% to 39.75 basis points. The Libor-OIS spread is falling .92% to 46 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.84%, which is down 80 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is down 1 basis point today. The 10-year yield is down 16 basis points today and down 30 basis points from yesterday’s high of 3.75%, which is a huge positive. As well, the US sovereign debt credit default swap is falling 6.1% today to 45.0 basis points, which is a big positive. The Transportation Index, which found support at its 50-day moving average, is jumping 3.2% today and looks poised to head higher over the short-run. I expect US stocks to build on this week’s gains next week. Nikkei futures indicate a -27 open in Japan and DAX futures indicate an +1 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism, declining credit market angst and lower long-term rates.

Today's Headlines

Bloomberg:

- Today, yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds declined 0.21 percentage point to 4.36 percent as of 11:30 a.m. in New York, according to data compiled by Bloomberg. That’s still up from 3.94 percent on May 20. Buying jumped today because yields rose high enough to draw demand, said Scott Simon, the head of mortgage-bond investing at Pacific Investment Management Co. The Federal Reserve has been buying so-called agency mortgage securities to bolster consumers with cheap refinancing and home prices with low borrowing costs; the recent increase undermined that effort. “Mortgage rates are probably going to be down about 35 basis points today, that’s unambiguously good for the homeowner,” Simon, whose Newport Beach, California-based firm is the world’s largest fixed-income manager, said when yields were slightly lower.

- (JCP), (F) and (BLL) were added to US 1 List at BofA/Merrill.

- JPMorgan Chase & Co. and BNP Paribas SA added the most new clients in over-the-counter energy derivatives trading last year, according to a survey by Greenwich Associates. The two are among a group of commercial banks that expanded their commodity businesses via their credit relationships as the counter-party risk of financial institutions led firms to spread trading with more dealers than before, the Stamford, Connecticut-based consultant said. Goldman Sachs Group Inc. and Morgan Stanley had the biggest share of the OTC derivatives client trading relationships, while JPMorgan and Barclays Plc’s investment banking arm Barclays Capital “have emerged as a new tier of tough competitors,” Greenwich said. BNP Paribas, Citigroup Inc., Deutsche Bank AG, and Societe Generale are in the “third tier of up-and-coming dealers,” Greenwich said.

- China’s $586 billion stimulus, which has fueled record imports of iron ore and copper for rail, road and power projects, probably won’t be enough to sustain overseas purchases as demand from consumer- and export-led manufacturers lags, JPMorgan Chase said. Government spending, particularly since late 2008, has stoked demand for infrastructure to stimulate the economy and mitigate unemployment, JPMorgan said in a report. “Private demand continues to be weak, suggesting raw-material imports cannot be sustained at such elevated levels,” wrote analyst Amir Hoosain and Jing Ulrich, managing director for China equities. In April, China had its third-consecutive month of record iron ore imports, “despite elevated stockpiles at major ports and clear sings of serious production surpluses in the country’s steel industry,” the analysts wrote.

- Steel prices in the U.S. dropped 6.7 percent in May to a five-year low as builders and manufacturers withheld orders amid the worst recession in at least half a century. The average price of hot-rolled steel sheet, the benchmark product used in cars and appliances, fell to $392 a ton from $420 in April, Purchasing Magazine said today in a monthly update. That was the lowest since the spot-market price averaged $350 in January 2004, the magazine said. Cold-rolled sheet declined 5 percent to $477 a ton, the lowest since February 2004. Hot-rolled steel prices have plunged by 63 percent from a record $1,068 a ton in July as the slowing global economy reduced demand for automobiles, appliances and homes. “In the current market environment of meager demand and sufficient supply, price slippage in May was evident in all flat-rolled, plate, merchant bar and structural mill products,” the magazine said today. “The steel price index may slip again in June.”

- Crude oil rose, heading for its biggest monthly gain in a decade, as economic indicators from Asia and falling U.S. stockpiles pointed to a global recovery.

- Louis Susman has one thing in common with many of his predecessors nominated to be the U.S. ambassador to the United Kingdom: money. Susman, 71, a retired Citigroup Inc. senior investment banker, raised between $200,000 and $500,000 for President Barack Obama’s presidential campaign and another $300,000 for his inauguration. On Wednesday, Obama nominated Susman to the post formally known as the Court of St. James.

- Harrah’s Entertainment Inc., the world’s biggest casino company, and Leap Wireless International Inc. led companies selling $21.9 billion of speculative-grade bonds in May, the most since June 2007, as the riskiest borrowers raise cash to repay bank loans. Proceeds from about 60 percent of high-yield, high-risk bond sales this year are being used to pay down bank debt, according to Standard & Poor’s LCD.

- Public support for the U.S. is declining in Pakistan because of military strikes there that the U.S. conducts from Afghanistan, according to the top American commander in the Middle East. “Most polling data reflects” an increase in anti-U.S. sentiment, General David Petraeus said, without identifying the source of the polling. Pakistanis are angered by “cross-border operations and reported drone strikes” that they believe “cause unacceptable civilian casualties,” Petraeus wrote.

- Loans to households and companies in Europe grew at the slowest pace on record in April as banks tightened credit standards and demand for debt wilted.

- The euro region’s inflation rate fell to zero for the first time in at least 13 years in May as energy costs retreated and the worst recession in more than six decades prompted companies to cut prices.

- Royal Dutch Shell Plc’s U.S. joint venture with Saudi Aramco cut production at its Norco, Louisiana, refinery after shutting a unit, curbing gasoline output as the summer travel season returns. The 220,000 barrel-a-day refinery run by Motiva Enterprises LLC is operating at “reduced rates” after idling a unit for work, said Kevin Thompson, a spokesman for the plant, in a telephone interview. The company closed a catalytic reforming unit yesterday after a compressor failed, said Eric Zammit, an emergency coordinator for the St. Charles Parish. The refinery accounts for 2.6 percent of Gulf Coast refinery capacity, according to data compiled by Bloomberg.

- Google Inc.(GOOG) said it will allow advertisers in the U.S. and most non-European Union countries to place advertisements on results pages based on searches using competitors’ trademarked terms, reversing a previous policy.

- China is at the forefront of major developing nations that must help reduce greenhouse-gas emissions in a new treaty to stem global warming, U.S. climate envoy Todd Stern said. The Asian nation, the world’s biggest producer of heat- trapping gases, will need to make commitments in the worldwide agreement planned under United Nations leadership this year, Stern said, without naming specific actions.

Wall Street Journal:

- John Paulson, the hedge-fund manager who racked up big profits from betting against U.S. subprime mortgages and recently doubled the minimum amount investors need to buy into his funds, recorded losses on all but one of his products last month. Paulson’s flagship Advantage Plus fund, which held $9.1 billion at the end of last year, fell the most in April, down 5%. News of the April losses follows filings Thursday detailing that investors would now have to stump up $10 million–twice as much as previously–to put money into Paulson’s funds.

- Genetic research is making another big advance in the battle against cancer.

CNBC:

- Everyone should closely read today’s Washington Post story on the value-added tax or VAT. The cat is now out of the bag. For months I have argued that Team Obama and the Democratic Congress were going to be forced to consider a VAT in order to pay for their extravagant spending. Now borrowing almost 50 cents on every new dollar spent, the Democrats will at some point begin to deal with the politics of deficit reduction as a way of countering Republican criticisms about deficit expansion. And the VAT’s part of their answer.

NY Times:

- A group of banks and money managers plan to release a letter to the Federal Reserve Bank of New York and other U.S. and overseas regulators to help fend off some rules proposed by the Obama administration that seek to control trading in the derivatives market, The Wall Street Journal reported.

Yahoo.com:

- Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up? Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don't always apply to oil prices. Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year.

Washington Post:

- The Obama administration's push to resettle at least 50 Guantanamo Bay prisoners in Europe is meeting fresh resistance as European officials demand that the United States first give asylum to some inmates before they will do the same. Rising opposition in the U.S. Congress to allowing Guantanamo prisoners on American soil has not gone over well in Europe. Officials from countries that previously indicated they were willing to accept inmates now say it may be politically impossible for them to do so if the United States does not reciprocate. "If the U.S. refuses to take these people, why should we?" said Thomas Silberhorn, a member of the German Parliament from Bavaria, where the White House wants to relocate nine Chinese Uighur prisoners.

CNN:

- U.S. satellite imagery has spotted "vehicle activity" at a North Korean ballistic missile site, two Defense Department officials said Friday. This activity is similar to that before a long-range missile launch by North Korea earlier this year. North Korea test-fired a short-range missile Friday off the country's east coast, a South Korean military source said. It would be the sixth such missile test since the country conducted a nuclear test Monday. Also Friday, North Korea upbraided the U.N. Security Council for slamming its nuclear test, calling the members of the body "hypocrites" and warning of "stronger self-defense countermeasures" as the world body considers more sanctions against the country. "There is a limit to our patience," the Foreign Ministry said in a combative statement.

The Detroit Free Press:

- With its membership declining and facing ever more demands for concessions, the UAW may need to consider a merger with another union to remain viable. That's the opinion of labor relations experts who point to the UAW's declining membership as a spur to a possible merger. From a peak of 1.5 million members in the late 1970s, UAW membership dropped to 431,000 at the end of 2008.

- Former President George W. Bush defended on Thursday his decision to allow harsh interrogation of the terrorist who ordered the Sept. 11, 2001, attacks on the United States, saying it was cleared by his lawyers to prevent what his advisers believed was another, imminent attack. "I made a decision within the law to get information so I can say, I've done what it takes to do my duty to protect the American people," he said. "I can tell you, the information gained saved lives." "We should care about poverty overseas, for our own self-interest," he said. "Ideologues can only recruit when they find hopeless people."

USAToday:

- Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows. The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security. The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined. "We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it's not backed up by a house," says David Walker, former U.S. comptroller general, the government's top auditor. Bottom line: The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion.

FierceFinance:

- It's hard to generalize from single month's performance. For what it's worth, John Paulson, the man in the hedge fund universe, had a rough April.

Financial News:

- New investments in credit funds exceeded money taken out by the “greatest ever margin” in the past three months, with 60% seeing net inflows, citing Bank of America Corp. research.

Reuters:
- Network equipment maker Juniper Networks Inc (JNPR) and IBM (IBM) are in talks to step up their sales partnership, but no agreement is imminent, sources familiar with the situation said on Thursday.

- Advisers to General Motors Corp (GM) bondholders representing $27 billion in the automaker's debt urged investors on Friday to support a debt swap negotiated over the past week with the Obama administration. Bondholders have until Saturday to register their support for the terms of a deal that would give them up to 25 percent of a reorganized GM. That offer is contingent on the U.S. Treasury determining that enough investors have signed on in support.

- UnitedHealth Group Inc's (UNH) chief executive envisions more consolidation in the health insurance sector over the next few years as healthcare reform shifts the competitive landscape.

Financial Times:
- Dow Jones is revamping its enterprise media division with a focus on web-based applications, as the newswire operator seeks to become less dependent on the data terminal business now dominated by Bloomberg and Thomson Reuters, write Kenneth Li and Andrew Edgecliffe-Johnson.

Bear Radar

Style Underperformer:
Large-cap Value (+.25%)

Sector Underperformers:
Defense (-1.82%), HMOs (-1.21%) and Telecom (-1.10%)

Stocks Falling on Unusual Volume:
CETV, CMCSK, MRVL, MAPP, QSII, BEAT, HANS, LEAP, CTAS, FLIR, ROS, ESL and BMA

Stocks With Unusual Put Option Activity:
1) CTX 2) LFC 3) AEM 4) SWY 5) GOLD

Bull Radar

Style Outperformer:
Mid-cap Growth (+.80%)

Sector Outperformers:
Education (+4.01%), Road & Rail (+3.16%) and Steel (+2.61%)

Stocks Rising on Unusual Volume:
AEM, CEO, EVEP, PCZ, SU, BBL, MRK, FNF, FAF, TV, OVTI, CSIQ, IPCM, RYAAY, PAAS, MELI, STAR, SYNO, SSRI, ACGY, VSAT, PALM, AAUK, APOL, GOLD, BRCM, NVTL, LOPE, DTSI, CORE, JCG, TEX, RBA, YPF and GFI

Stocks With Unusual Call Option Activity:
1) KG 2) JCG 3) TIF 4) ODP 5) LFC

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