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Stocks Mixed into Final Hour as Less Financial Sector Pessimism, Short-Covering, Lower Long-term Rates Offset Profit-Taking

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Financial longs, Retail longs, Biotech longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, sector performance is mixed and volume is about average. Investor anxiety is high. Today’s overall market action is neutral. The VIX is rising .14% and is high at 28.08. The ISE Sentiment Index is above average at 177.0 and the total put/call is around average at .82. Finally, the NYSE Arms has been running about average most of the day, hitting 1.02 at its intraday peak, and is currently .91. The Euro Financial Sector Credit Default Swap Index is rising 3.38% today to 106.33 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 falling .36% to 124.49 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising .02% to 46 basis points. The TED spread is now down 417 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 3.2% to 42.56 basis points. The Libor-OIS spread is falling .73% to 41 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 7 basis points to 1.93%, which is down 71 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Conflicting reports about the outcome of the Iranian election appear to be impacting trading today. The fact that US stocks rallied so easily on the news is a positive. REITs(IYR) have been leaders all day and the (XLF) trades well again on the decline in long-term rates. I still expect the (XLF) to convincingly break above its 200-day moving average over the coming days. As well, defense, utility, software, computer hardware, disk drive, telecom, medical equipment, biotech, drug, retail, restaurant, road & rail and airline shares are all higher on the day despite losses in the major averages. Barring an unexpected move back near the lows in the major averages, I plan to maintain my market exposure into the weekend. Nikkei futures indicate an +65 open in Japan and DAX futures indicate an +2 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, technical buying, lower long-term rates, diminishing financial sector pessimism, less economic fear and investment manager performance anxiety.

Today's Headlines

Bloomberg:

- Paulson & Co., the hedge fund that made more than $3 billion betting the U.S. housing market would collapse, is buying so-called distressed debt and mortgage- backed securities. John Paulson’s $28 billion company used borrowed assets to bet against housing prices amid the 2007 subprime crisis in a strategy known as shorting. Now it’s seeking to profit from the global financial crisis by picking assets that look cheap. “We’ve been adding pretty steadily to our long distressed positions,” Sandra Lee, a senior vice president at the New York-based fund, said at a Euromoney conference in Hong Kong yesterday. “Where we shorted the lower quality subprime securitizations, we’re now going long the better-quality jumbo, prime securitizations.”

- Credit-default swaps are “instruments of destruction” and should be “outlawed,” said George Soros, the billionaire hedge fund manager who made money last year while most peers posted losses. “Some derivatives ought not to be allowed to be traded at all,” Soros, 78, told a conference in Beijing today, citing credit-default swaps. “The more I hear about it, the more I realize that they’re truly toxic.” Derivatives should be as tightly regulated as stocks, he added.

- Yields on Fannie Mae and Freddie Mac mortgage securities fell for a second day from the highest level since the Fed announced plans to buy home-loan bonds in November, largely tracking declining Treasury rates. Yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds fell .09 percentage point to 4.85% as of 12:05 pm in NY. That is down from this year’s high of 5.07% on June 10, and up from 3.94% on May 20.

- European industrial production dropped by the most on record in April as the worldwide recession ravaged demand for goods. Production in the euro region plunged 21.6 percent from a year earlier, the most since the data series started in 1986, the European Union’s statistics office in Luxembourg said today. Economists expected a 19.8 percent decline, according to the median of 14 estimates in a Bloomberg News survey.

- Oil fell from a seven-month high after a record plunge in European industrial production prompted speculation that bets on an economic recovery are premature. Futures declined more than $1 a barrel after a report showed that output in the euro region dropped 21.6 percent from a year earlier. The dollar strengthened, undermining the attractiveness of commodities as an alternative investment. OPEC said members raised production in May for a second month, straying further from quotas.

- BlackRock Inc.(BLK) Chairman and Chief Executive Officer Laurence Fink said the worst of the financial crisis is over as he agreed to buy Barclays Global Investors for $13.5 billion and become the world’s largest money manager. “Armageddon is behind us,” Fink, 56, said in a Bloomberg television interview in New York today.

- The U.S. Securities and Exchange Commission and Alabama regulators sued Aura Financial Services Inc. and six employees claiming they reaped $1 million in fees and commissions through “rampant churning” of client accounts.

- The scope of the stalled FutureGen “clean coal” project in Mattoon, Illinois, was scaled back by the Obama administration in an effort to revive the plans for a coal-fired power plant that spews fewer gases into the air. The U.S. Energy Department said today it will support a modified version of the FutureGen proposal, seeking to build a plant that can capture and bury 60 percent of its carbon emissions. The Bush administration had crafted the original idea for a plant that could trap almost 100 percent of emissions, and then canceled it after costs exceeded estimates.

- A lobbying group for computer companies such as Google Inc.(GOOG) and Oracle Corp.(ORCL) petitioned the U.S. government to push China at a trade summit to drop Internet censorship. It may be the first time China’s censorship policies would be discussed as part of trade negotiations between the two nations.

- NYSE Euronext(NYX) halted trading in 242 companies on the New York Stock Exchange floor for more than 40 minutes due to a computer malfunction.

Wall Street Journal:

- Effective health-care reform must meet two objectives: 1) It must secure coverage for all Americans, and 2) it must dramatically lower the cost of health care. Health-care spending has outpaced the rise in all other consumer spending by nearly a factor of three since 1980, increasing to 18% of GDP in 2009 from 9% of GDP. This disturbing trend will not change regardless of who pays these costs -- government or the private sector -- unless we can find a way to improve the health of our citizens. Failure to do so will make American companies less competitive in the global marketplace, increase taxes, and undermine our economy.

- CBS Corp.'s Simon & Schuster book publishing arm has struck a deal to sell nearly 5,000 digital e-books titles on Scribd Inc., a Web site that allows people to post and read documents online.

- YRC Worldwide Inc. (YRCW) has backed off plans to seek $1 billion in federal bailout money under the Troubled Asset Relief Program, or TARP, although the struggling trucker says it still wants government help with pension obligations.

- Healthy U.S. banks were strong-armed into participating in a $700 billion federal bailout of ailing financial firms, BB&T Corp. Chairman John Allison said in a speech late Thursday to the Competitive Enterprise Institute.

- The United Nations Security Council on Friday unanimously adopted a resolution expanding sanctions and inspections against North Korea in response to its test of a nuclear device on May 25.

- Iranians poured into voting stations Friday, the culmination of an unprecedented campaign season and perhaps the most hotly contested presidential race since the founding of the Islamic Republic 30 years ago.

CNBC:

- EMC Corp.(EMC) plans to boost its bid for Data Domain(DDUP) to match a rival offer from NetApp Inc.(NTAP). Both companies are offering about $30 a share for Data Domain.

MarketWatch:
- Swindlers, con men, and thieves could siphon off as much as $50 billion of the government's planned stimulus package as the money begins flooding the economy in coming months, according to David Williams, who runs Deloitte Financial Services Advisory and counsels clients on fraud prevention. Williams predicted that about $500 million of the total $787 billion stimulus would be channeled into the traditional procurement network for government contracts, while the rest will be spent directly by the government or outside the corporate network.

The Detroit News:

- More than half of Americans oppose the government aid given to General Motors and believe the government should have let the market decide GM's fate, rather than rescuing the automaker, a Fox News-Opinion Dynamics poll released Thursday shows. Fifty-eight percent opposed the $50 billion in federal loans given to GM, to just 38 percent who supported the decision. And 52 percent said it would have been in the country's best interests to let the market decide GM's fate, to 44 percent who said the country is better off having rescued the automaker. The survey is just the latest in a string of opinion polls showing President Barack Obama's decisions on the auto industry to be among the least popular of his presidency. The survey also measured favorability ratings for all three Detroit automakers, as well as Honda. Ford Motor Co. was rated highest, with 72 percent saying they had a favorable impression of the company, to just 19 percent unfavorable. GM and Chrysler each had had narrow positive ratings: 48 favorable to 44 percent unfavorable for GM, and 46-42 for Chrysler.

NY Post:

- With the Treasury's efforts to sell banks' toxic loans in shambles, well-heeled investors like Pacific Investment Management Co. and bank billionaire Gerald J. Ford are mulling the creation of publicly traded entities to snap up the problem loans. According to people familiar with the matter, Ford, Pimco and Legg Mason's Western Asset Management Co. are among a growing group of big-name investors looking at establishing vehicles similar to real-estate investment trusts that would sell shares to the public and use the proceeds to buy troubled residential mortgages and commercial real estate. Sources told The Post that Ford is said to be prowling around for battered assets and is contemplating forming a REIT-like company or private-equity-like entity to buy undervalued assets.

FINalternatives:

- Hedge fund managers need to step up their game in order to compete effectively in today’s era of increasingly savvy investors. Amid the backdrop of recent high profile frauds, historic market declines, and related fund closures, the hedge fund industry faces a new set of concerns emanating from the heightened emphasis on investor due diligence.

Rassmussen:

- Fifty-one percent (51%) of Americans favor an across-the-board tax cut for all Americans to stimulate the U.S. economy, according to a new Rasmussen Reports national telephone survey. Thirty-four percent (34%) oppose such a tax cut, and 15% are undecided.

Politico:

- A coalition of more than 100 moderate House Democrats is hoping to unify as they attempt to limit the size and scope of a government-sponsored health insurance option — a key sticking point as health reform enters a delicate phase of negotiations. Members of the New Democrat Coalition have organized a meeting with their counterparts in the Blue Dog Coalition on Friday morning in a bid to show some strength in numbers as they haggle with party leaders and the three chairmen drafting the bill. The discussion will focus on the so-called public option in health care.

Intrade.com:

- The % chance that Iran’s President Ahmadinejad wins re-election has plunged to 22.5%, according to intrade.com. The % chance that Mir Hussein Moussavi wins has risen to 70.0%, according to trading in the contracts.

Reuters:
- A gauge of future U.S. economic growth rose along with its yearly growth rate,

reaffirming hope that yearly growth will turn positive in the summer months, a research group said on Friday. The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 34-week high of 115.4 for the week ending June 5, from 113.5 the previous week. The index's annualized growth rate spiked to a one and a half year high of minus 4.7 percent from the prior week's rate of minus 7.1 percent. It was ECRI's highest yearly growth reading since the week ended December 7, 2007, when it stood at minus 3.9 percent. "With WLI growth rising to its best reading in a year and a half -- namely, since the recession began -- economic recovery prospects are brightening rapidly," said Lakshman Achuthan, managing director at ECRI.

- Freed from the grip of the U.S. Treasury's bailout program, Goldman Sachs Group Inc(GS) might seek to shed its commercial bank holding company status and reclaim its role as Wall Street's iconic investment bank, some investors believe.

- Hedge funds meeting for their annual get-together in Monaco next week are hoping recovering profits will help placate clients, after the industry was heavily culled and suffered its worst year on record. An exodus of investors followed a year in which hedge funds saw performance losses of 19 percent, a stark contrast to a decade in which people scrambled to get access to an industry that claimed it could make money in any market. Significantly, one entire session of the June 16-18 GAIM conference in the Mediterranean resort is titled "The Rise of Investor Power."

- The furious rise in bond yields will force the Federal Reserve to "engage again" in the purchases of U.S. Treasuries and mortgage-backed securities, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said Friday.

- Chief White House economic adviser Lawrence Summers on Friday vigorously defended the administration's aid for banks and carmakers as necessary, temporary measures rather than lasting market intrusions. "Our objective is not to supplant or replace markets," Summers told the Council on Foreign Relations in New York. "Rather, our objective is to save them from their own excesses and improve our market-based system going forward."

The Herald:

- Up to a third of the Scottish population will be infected by swine flu as the pandemic declared by the World Health Organization runs its course, according to official predictions. The Scottish Government last night predicted that 25% to 35% of those living in the country would be hit by the virus, with up to 1.7 million people at risk.

Yonhap News:

- South Korea deployed more marines to two islands near the maritime border with North Korea to defend against surprise landings by the communist regime’s forces, citing a South Korean military source. North Korean soldiers are holding landing drills on its western coast.

Bear Radar

Style Underperformer:
Small-cap Value (+1.19%)

Sector Underperformers:
Oil Tankers (-4.12%), Coal (-3.93%) and Gold (-3.21%)

Stocks Falling on Unusual Volume:
NSM, BBL, DNR, COP, CBT, AMP, EZPW, FUQI and STEC

Stocks With Unusual Put Option Activity:
1) IVN 2) SVNT 3) HON 4) ADS 5) ATHR

Bull Radar

Style Outperformer:
Large-cap Value (-.02%)

Sector Outperformers:
Drugs (+1.80%), Road & Rail (+1.23%) and REITs (+.95%)

Stocks Rising on Unusual Volume:
SQNM, GSK, BAC, BAX, AMLN, AZN, KG, PMTI, KSU, CSX, RMBS, CGV, IPGP, TNDM, LULU, IPSU, DNEX, CCMP, PMTI, VMC, MFW and MR

Stocks With Unusual Call Option Activity:
1) ATHR 2) CAL 3) RMBS 4) ELX 5) AMD

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