Stocks Rising into Final Hour on Stable Long-Term Rates, Short-Covering, Less Economic Fear

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Defense longs, Technology longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is about average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling 5.01% and is high at 28.28. The ISE Sentiment Index is about average at 144.0 and the total put/call is about average at .83. Finally, the NYSE Arms has been running above average most of the day, hitting 1.66 at its intraday peak, and is currently 1.16. The Euro Financial Sector Credit Default Swap Index is falling .16% today to 103.70 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 2.82% to 123.06 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling .52% to 48 basis points. The TED spread is now down 415 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is declining 8.34% to 46.0 basis points. The Libor-OIS spread is rising 3.06% to 42 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 2.0%, which is down 64 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. It is a big positive to see long-term rates stable after today’s Treasury auction. The (XLF) is .6% higher today, but has been basing for about 4 weeks. Any meaningful reversal lower in rates, after tomorrow’s more important Treasury auction, could help push the (XLF) up through its 200-day moving average, which should further boost the broad market. It is noteworthy that gold is only .2% higher on the day despite the sharp US dollar decline. Despite relative weakness in defense stocks today, one of my longs (ASEI), is breaking out on above-average volume. This stock would make an excellent acquisition for a larger firm and I still see substantial upside in the shares from current levels. Nikkei futures indicate an +64 open in Japan and DAX futures indicate an +17 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, investment manager performance anxiety, technical buying, stable long-term rates and less economic fear.

Today's Headlines

Bloomberg:

- JPMorgan Chase & Co.(JPM), Goldman Sachs Group Inc.(GS) and Morgan Stanley(MS) were among 10 lenders that won U.S. Treasury approval to buy back $68 billion of government shares, freeing them from added oversight that curbed lending practices, hiring and pay.

- Warren Buffett’s Berkshire Hathaway Inc. doubled its municipal-bond holdings in nine months amid record swings in the value of the securities that the billionaire investor labeled “unthinkable.” Berkshire increased its investment in debt issued by state and local governments to $4.05 billion as of March 31 from $2.05 billion on June 30, 2008, the Omaha, Nebraska-based company said in regulatory filings. Berkshire added $1.09 billion to the bet in last year’s third quarter and $985 million in the first three months of 2009.

- Treasury Secretary Timothy Geithner said federal bank regulators and the Securities and Exchange Commission will play key roles in the administration’s effort to change the way financial executives are paid. Geithner said the Obama administration is moving ahead with its guidelines on corporate compensation, part of a broader plan for an overhaul of financial regulation that will be announced next week.

- Treasury notes maturing in five years and less gained as yields near a seven-month high helped spur investor demand at the government’s record-tying auction of $35 billion of three-year securities.

- France plans to sell 30-year and inflation-protected bonds this year as the economic slump forces the country to raise a record amount of debt.

- Goldman Sachs Group Inc.(GS) and UBS AG will stop publishing independent stock-research reports in the U.S. next month after a settlement forcing banks to produce them expires. Goldman Sachs and UBS both said in e-mailed statements today that they will stop offering third-party research after the agreement expires on July 26.

- The Standard & Poor’s 500 Index is approaching a so-called golden cross that’s considered a buy signal by analysts who make predictions based on patterns in price charts. A golden cross occurs when the 50-day moving average, which is currently at 878.04 for the S&P 500, rises above the 200-day moving average, which is at 918.33, Bloomberg data show. The formation implies further gains for the stock market, according to this type of technical analysis.

- U.S. 10-year Treasury yields may have peaked, MIG Investments SA said, citing technical indicators. The TD Combo indicator, which examines a security’s price patterns to determine whether a trend is losing momentum, signaled the increase in 10-year yields may be coming to an end, according to Paul Day, chief market analyst at MIG in Neuchatel, Switzerland. A second technical indicator, called the TD D-Wave, also shows a possible top in yields, he said.

- The Wall Street firms that trade directly with the Federal Reserve say speculators betting that interest rates may head higher this year are wrong. Policy makers will keep the target for overnight loans between banks in a range of zero to 0.25 percent this year, according a survey of 15 of the 16 primary dealers of U.S. government securities that trade with the central bank. A majority predict no increase until at least the second half of 2010.

Wall Street Journal:

- The Obama administration is backing away from seeking a major reduction in the number of agencies overseeing financial markets, people familiar with the matter say, suggesting that the current alphabet-soup of regulators will remain mostly intact. Administration officials had suggested they might push for major regulatory consolidation in the wake of the financial crisis. But now they expect to call for most existing agencies to have broader powers to limit risk-taking by financial institutions, say the people familiar with the planning.

- Internet traffic will increase fivefold over the next five years, driven in large part by a jump in the amount of video transmitted across the network, according to Cisco Systems. The finding highlights a study of the demand on communications networks between 2008 and 2013 that the computer-equipment maker plans to release Tuesday. By 2013, Cisco expect Internet traffic—in this case a broad category that includes delivery of content to televisions and mobile phones—to reach about 56 exabytes per month, up from about nine exabytes per month in 2008. More than 90% of this traffic will come from video–be it television, video on demand, or file sharing between computers. Cisco also predicts that video chat will increase tenfold between 2008 and 2013. Another place where Cisco predicts the amount of data will explode is mobile, as the amount of data flowing to mobile devices will double each year, increasing 66 times by 2013. Again, video will be the fastest growing category.

- Hedge fund assets continued to shrink in the first quarter, but outflows have started to slow, according to the newest Lipper TASS Asset Flows report. Net outflows amounted to US$115.71 billion in the first three months of the year, 21% less than outflows in the previous quarter. Globally, hedge fund assets are estimated to have decreased to US$1.18 trillion at the end of March, from US$1.29 trillion at the end of December 2008. All hedge fund strategies continued to post outflows in the first quarter as the industry faced more investor redemptions amid volatile global markets. Equity long-short funds recorded the most outflows, losing US$34.04 billion, followed by event-driven and multi-strategy funds.

- Suicide attackers in a truck launched an assault Tuesday on a luxury hotel commonly used by foreigners in Peshawar, firing guns as they stormed past guards and then setting off a huge blast that killed at least five people and wounded 65 more, Pakistani officials said. No one immediately claimed responsibility for the attack in the largest city in Pakistan's restive northwest, but it fit the pattern of recent Taliban attacks the militants said were in retaliation for a military campaign against militants in the Swat Valley region.

CNBC:

- A Senate committee has approved opening the eastern Gulf of Mexico to oil and gas drilling within 10 miles (16 kilometers) of the Florida Panhandle and within 45 miles (72 kilometers) of the rest of the state's coastline.

NY Times:

- The crisis has presented the European Union with its greatest challenge, but even many committed Europeanists believe that the alliance is failing the test. European leaders, their focus on domestic politics, disagree sharply about what to do to combat the slump. They have feuded over how much to stimulate the economy. They argue about whether the European Central Bank should worry more about the deep recession or future inflation. And they have rushed to protect jobs in their home markets at the expense of those in other member countries.

LA Times:

- Broadcasters compete to put TV on cellphones. The digital switch will let live video be sent to mobile devices -- phones, computers, car systems -- on the newly available analog spectrum. Contenders include MobiTV, Qualcomm's(QCOM) Flo TV and Transpera.

FINalternatives:

- Renaissance Technologies finally turned the corner in May, although its positive return paled in comparison to that of its fellow hedge funds and of the broader markets. RIEF rose between 0.61% and 0.8% in May, depending on which of its eight share classes one invests with. But the fund is still down by double digits after a brutal March and April; through the first four months of the year, the fund was down between 16.86% and 17.61%, while the average hedge fund is up in excess of 10%.

Reuters:
- Global revenue in the chip foundry market is expected to post a sequential rise in the second quarter after three quarters of declines, but 2009 will remain challenging for foundries, market search firm iSuppli said. Global revenue for foundries, or contract chipmakers, including sector leaders TSMC, UMC and Chartered Semiconductor, was set to rise to $3.6 billion in the second quarter, iSuppli Corp said in a statement seen by Reuters on Tuesday. That would be an increase of about 60 percent from the first quarter's $2.25 billion, iSuppli said.

- As the economic crisis squeezes U.S. government budgets and priorities shift beyond defense, the world's top defense contractors will likely turn to acquisitions to ensure they can keep growing. They won't be looking for blockbuster deals but takeovers for less than $1 billion in niche areas that have been identified by governments as high priorities.

Financial Times:
- Standard & Poor’s, the ratings agency, on Tuesday warned that sovereign ratings of a number of Asian economies had come under pressure as their massive economic stimulus measures put a strain on their budgets. The warning came as Fitch Ratings cut Malaysia’s long-term currency rating from A+ to A on concerns over the country’s mounting budget deficit. Malaysia has introduced M$67bn (US$19bn) in stimulus packages. “The worst of the economic dislocation in Asia Pacific appears to be over, if recent indicators are to be believed, but fiscal deterioration resulting from stimulus and banking sector support measures will continue to put pressure on a number of sovereign ratings in the medium term,” it said. Fitch Ratings did not appear to agree with S&P that the worst was over, as it downgraded the outlook for a number of Asian economies on Tuesday.

Telegraph:

- Lord Rothschild, the head of the English branch of the banking dynasty, has withdrawn his investment from Atticus Capital, the hedge fund where his son is co-chairman.

YnetNews.com:
- Palestinian officials said Monday they were close to reaching an agreement with the US according to which the Obama administration would demand an Israeli withdrawal from positions that were manned by Palestinian forces prior to the outbreak of the second intifada at the end of September 2000.

Emirates Business 24/7:
- Emirates NBD's (ENBD) non-performing retail loans (NPLs) have increased by double digits in the past six months. The bank has also seen an increase in fraudulent activities, primarily in documentation, a senior bank executive said. "For the retail business, NPLs have increased by double digits in the past six months especially from unsecured business such as personal loans and credit cards," Suvo Sarkar, Executive Vice-President and General Manager, Retail Banking, Emirates NBD told Emirates Business.

Haaretz.com:

- Prime Minister Benjamin Netanyahu believes that U.S. President Barack Obama wants a confrontation with Israel, based on Obama's speech in Cairo last week, Netanyahu's confidants say. In Netanyahu's opinion, the Americans believe an open controversy with Israel would serve the Obama administration's main objective of improving U.S. relations with the Arab world, the aides say. Israel historically has depended on the White House to balance the consensus of officials in the state and defense departments; this consensus usually leans toward the Arab side. Israeli officials say that under Obama, the White House has become the main problem in relations.

Aswat al-Iraq:

- Iraq started developing crude oil deposits near its borders with Kuwait and Iran, citing an Oil Ministry spokesman.

Bear Radar

Style Underperformer:
Mid-cap Value (+.06%)

Sector Underperformers:
HMOs (-1.62%), Defense (-.88%) and Hospitals (-.45%)

Stocks Falling on Unusual Volume:
VIP, CRDN, BTH, CI, PMTI, ULTA, ARL and CAE

Stocks With Unusual Put Option Activity:
1) VMED 2) KMP 3) NAV 4) AMX 5) AET

Bull Radar

Style Outperformer:
Mid-cap Growth (+.70%)

Sector Outperformers:
Semis (+2.52%), Alt Energy (+2.20%) and Road & Homebuilders (+1.52%)

Stocks Rising on Unusual Volume:
MRVL, STEC, BLK, OMTR, INFY, SEIC, NOK, CLMT, PCZ, OSK, MFW, PFWD, CSKI, FUQI, CRAI, JOYG, MCHP, URBN, OGXI, SLAB, SPTN, FWRD, TRMB, MPWR, ECLP, CEPH, ASEI, GIII, BCA, CRT, MW, TXN and AXR

Stocks With Unusual Call Option Activity:
1) MIR 2) LEA 3) TXN 4) MCHP 5) VRSNS

Links of Interest

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- Texas Instruments Inc.(TXN), the second- largest U.S. semiconductor maker, raised its second-quarter sales and profit forecasts as customer replenish inventories. The shares advanced 4.5 percent in extended trading.

Wall Street Journal:

- Lack of a coordinated and aggressive cleanup plan for euro-zone banks could hamper economic recovery in the 16 countries that share the euro, the International Monetary Fund said Monday in a report that suggests recent glimmers of hope could yet be quashed by banking-sector weakness across Europe's economic heartland. "To secure recovery and a return to self-sustaining growth, policy makers need to take further decisive action, especially in the financial sector," the IMF said in its twice-yearly assessment of the euro-zone economy.

- Two pressure points are emerging in Congress's rush to pass health-care legislation by the August break: how to pay for the package and whether to create a new public health-insurance plan.

- A top executive for NYSE Euronext (NYX) will ask lawmakers Tuesday to put some pressure on the Securities and Exchange Commission to tighten its regulation of dark pools by regulating them just like exchanges.

- The Obama administration wants Europeans to put their banks through more rigorous public stress tests to help ensure that the institutions survive if the economy slips from bad to worse. Treasury Secretary Timothy Geithner will likely discuss the issue in Italy later this week during closed-door meetings with finance ministers from the Group of Eight leading nations. The U.S. has an ally in the International Monetary Fund, which on Monday warned that economic recovery in the euro zone could be retarded by banks burdened with bad assets.

- The Securities and Exchange Commission has asked investment and brokerage firms to turn over information concerning their dealings with public pension funds, people familiar with the matter say. The agency has asked firms to give them an array of information about their workings with public pension funds, including about advisory fees and the use of placement agents, the middlemen who earn fees by helping investment firms secure pension-fund business, a person familiar with the matter said.

- All the companies listed on the Nasdaq exchange will now get at least some form of research coverage, courtesy of the Nasdaq OMX Group Inc., including nearly 900 that currently don't get any analyst coverage. Nasdaq OMX said Monday that it entered an agreement with the Chicago-based independent research firm Morningstar Inc.(MORN) to provide research profiles targeted at retail investors.

CNBC.com:
- All 10 of the largest U.S. banks under orders to raise additional capital as a buffer against further economic shocks have submitted their plans to do so, the Federal Reserve said on Monday.

NY Times:

- After just a few months of relief at the pump, cheap gasoline is disappearing. Gas prices have risen 41 days in a row, to a national average of almost $2.62 a gallon. That is a sharp increase from the low of $1.62 a gallon that prevailed at the end of last year. Refinery problems are producing especially high prices in the Midwest, a region that was already reeling from the economic crisis. Michigan, the state with the highest unemployment rate, at 12.9 percent, is now paying the highest gasoline prices, averaging $2.93 a gallon. The national jump in prices, far larger than the normal seasonal increase, is pulling billions of dollars from the pockets of drivers. It threatens to curtail a modest recovery in consumer spending on items like apparel and electronics. “This hits everyone,” said Robert J. Shiller, an economist at Yale. “It has the potential to affect your confidence.” He said that the recent rise in gasoline prices could effectively offset the new $400 to $800 payroll tax cut most employees are receiving this year as part of the Obama administration’s effort to stimulate the economy. Consumers last summer were pulling $1.5 billion a day from their wallets to fuel their vehicles. By January, as oil prices collapsed, they were spending only $600 million a day. But now they are back to daily spending of around $1 billion, Tom Kloza, chief oil analyst at the Oil Price Information Service, said. The price increase mystifies some analysts, who say that oil demand remains weak. According to the International Energy Agency, worldwide demand is down 2.6 million barrels a day from last year, mostly because of declines in driving and slower economic activity in the United States and other industrialized countries. Oil inventories are high. “I’m scratching my head,” said Adam Sieminski, chief energy economist at Deutsche Bank, who attributes oil’s rise to an influx of investment dollars. Because of the economic downturn, petroleum refiners around the country slowed gasoline production at the end of last year, and more recently they took extra time to complete the switch from winter to summer fuel blends.

- After weeks of labor strife and 12-hours of voting, members of the Newspaper Guild at the Boston Globe narrowly rejected a proposed package of wage and benefit cuts, despite a threat from the newspaper’s owner, The New York Times Company, that such a rejection could precipitate a unilateral, 23 percent cut in pay.

Business Week:
- Google(GOOG) boosted its share of the fast-expanding China search business by three percentage points in the first quarter as the market boomed. Google took 32.8% of search revenues, up from 29.8% in Q4 and 25.8% a year ago, according to iResearch. However, its share of total searches fell to 20.9% from with 23.0% in Q4. Its share was 18.7% in Q1 2008. Google and market leader Baidu together accounted for 95.3% of search revenues in China in the first quarter, with the remainder taken by smaller rivals such as Yahoo China, Sogou, Sina and NetEase. China's search service market surged 41.2% year-on-year in the first quarter, boosted by an increase of search engine marketing activities by SMEs, iResearch said.

MSN Finance:

- Canada is launching a major arm-twisting effort in Washington on Tuesday that targets American congressmen and senators vulnerable to tit-for-tat retaliation against U.S. protectionism. Trade Minister Stockwell Day said Canadian trade officials from across the United States are descending on Congress and will be meeting with lawmakers armed with numbers about how many jobs in their districts could be lost if Canada retaliates against Buy America provisions. "This is the ongoing full-court press to get the attention of Congress that the Buy America provisions as currently constituted are going to wind up hurting jobs, hurting business on both sides of the border," he said in an interview.

Rasmussen:

- Wal-Mart’s(WMT) still number one, and Costco has a way to go to catch up. Sixty-four percent (64%) of Americans have at least a somewhat favorable view of Wal-Mart, including 24% who are very favorable toward the merchandising giant.

CBS News:

- New York State Senate Republicans on Monday replaced Malcolm Smith as Majority Leader after two dissident Democrats switched sides, giving the GOP control, CBS 2 has learned. The flip of senators Pedro Espada Jr. of the Bronx and Hiram Monserrate of Queens gives Republicans a 32-30 edge in the chamber. Call it a coup, call it a devious plan to change leadership, but at the end of the day Democrats are out of power in the New York State Senate and Republicans were.

Politico:

- The Supreme Court delayed the pending sale of Chrysler to Italian carmaker Fiat Monday, dealing a potential blow to the Obama administration’s hopes for a quick sale of the ailing American giant. Justice Ruth Bader Ginsburg issued a stay of pending bankruptcy proceedings “pending further order.” The delay could just be a hiccup in the proceedings, or an indication of the Court’s intent to take a more in depth look at the deal. A group of Indiana-based secured debt holders filed suit against the deal, saying they had been treated unfairly by the way the Obama administration structured the bankruptcy.

USA Today.com:

- To launch its new Taurus sedan, Ford Motor(F) today embarks on a summer of bull sessions. CEO Alan Mulally is dispatching executives to 100 cities — from Olympia, Wash., to Winston-Salem, N.C. — to build enthusiasm before Taurus hits showrooms in August. Executives are supposed to talk up the Taurus and other new vehicles in the lineup as they visit broadcasters, newspapers and just about any other place.

AppleInsider:

- Apple(AAPL) on Monday closed out its presentation at WWDC 2009 by introducing the new iPhone 3G S, the fastest iPhone yet with up to twice the speed of the iPhone 3G, longer battery life, a high-quality 3 megapixel autofocus camera, easy to use video recording and hands free voice control. It goes on sale June 19th, while the existing 8GB iPhone 3G drops to $99 starting today.

Financial Times:

- Citigroup on Monday confirmed it would launch a long-awaited $33bn capital raising this week in a move aimed at allaying investors’ fears over the offering and concerns over mounting regulatory pressure. The announcement came as the Federal Deposit Insurance Corporation, one of Citi’s regulators, continued to press the bank to replace Vikram Pandit, Citi’s chief executive, and his closest lieutenants, according to people close to the situation. However, the FDIC has so far failed to persuade Citi’s other main regulators – the Treasury, the Office of the Comptroller of the Currency and the Federal Reserve – to oust Mr Pandit and his team.

Times of India:
- Are fake drugs manufactured in China being pushed into various African countries with the `Made in India' tag? The Indian government has long suspected this to be the case, but it now has definite evidence for the first time.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (VFC), target $73.

- Reiterated Buy on (STI), target $22.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 futures +.09%.
NASDAQ 100 futures +.27%.

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Earnings of Note
Company/EPS Estimate
- (TITN)/.13

- (TLB)/-.49

- (NDN)/.05

- (KFY)/-.05

- (THO)/.10

- (NAV)/.94

Economic Releases

10:00 am EST

- Wholesale Inventories for April are estimated to fall 1.2% versus a 1.6% decline in March.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, IBS/TIPP Economic Optimism Index, US selling $35B 3-Year Notes, UBS Tech & Service Conference, CSFB Convergence Conference, Needham Internet & Digital Media Conference, (IP) Investor Day, William Blair Growth Stock Conference, Piper Jaffray Consumer Conference, Goldman Sachs Healthcare Conference, Merrill Lynch Samurai Conference, RBC Capital Tech/Communications/Media Conference and the Morgan Stanley Shipping/Commodities Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.