Stocks Slightly Higher into Final Hour on Less Economic Fear, Short-Covering, Technical Buying, Earnings Optimisim

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs and Financial longs. I added to my (CREE) and (ISRG) longs this morning and took profits in another long, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is above average. Investor anxiety is very high. Today’s overall market action is bullish. The VIX is falling -3.21% and is high at 20.23. The ISE Sentiment Index is slightly below average at 132.0 and the total put/call is slightly above average at .89. Finally, the NYSE Arms has been running around average most of the day, hitting 1.06 at its intraday peak, and is currently .95. The Euro Financial Sector Credit Default Swap Index is rising +.10% today to 64.0 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 +1.24% to 97.62 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising +1 basis point to 22 basis points. The TED spread is now down 442 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling -3.41% to 35.44 basis points. The Libor-OIS spread is unch. at 12 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 2.0%, which is down 65 basis points since July 7th. The 3-month T-Bill is yielding .06%, which is down -1 basis point today. Cyclical shares are outperforming today with the MS Cyclical Index rising another 1.2%. Oil Service, Coal, Alt Energy, Energy, Gold, Steel, Disk Drive, Homebuilding and Gaming shares are especially strong, rising 1.75%+. Copper is breaking higher from the trading range it has been in since July. Oil continues to trade well on US dollar weakness. The Baltic Dry Index is +7.03% over the last five days. The CMBS Super Senior AAA 10-year Treasury Spread is dropping another -7.2% this week to the lowest level since the week of Oct. 3^rd, 2008, which is a major positive. One of my longs, (ISRG), is falling -5.6% today on worries over net new unit installs and general med tech weakness on healthcare reform concerns. I think the reaction is overdone and still see tremendous upside for the shares from current levels over the long-term. Nikkei futures indicate an +70 open in Japan and DAX futures indicate an +1 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as short-covering, investment manager performance anxiety, diminishing economic fear, technical buying and earnings optimism offset higher energy prices, higher long-term rates and healthcare reform worries.

Bear Radar

Style Underperformer:
Mid-Cap Value (+.25%)

Sector Underperformers:
Airlines (-5.79%), Semis (-1.63%) and I-Banks (-1.58%)

Stocks Falling on Unusual Volume:
CAL, ALK, PLCM, PFCB, NITE, NUVA, ISRG, NTRS, SONC, GENZ, MBFI, PVTB, MAN, JEF and KCI

Stocks With Unusual Put Option Activity:
1) LCC 2) RTN 3) CHRW 4) GENZ 5) CENX

Bull Radar

Style Outperformer:
Small-Cap Value (+.91%)

Sector Outperformers:
Steel (+3.49%), Oil Service (+2.31%) and Homebuilders (+1.93%)

Stocks Rising on Unusual Volume:
BEXP, USB, MBT, FCX, PBR, BCS, SU, CREE, VLTR, ACL, SFSF, HBHC, SNDK, ICLR, GNTX, PENN, RCRC, POWR, PRSC, PNFP, AAPL, HOGS, CRXL, SHPGY, CYOU, ZOLL, NVEC, AMAG, CNH, SLM, TUP, MEG, FUN, CYD, FCE/A, SYK, MSM and LXK

Stocks With Unusual Call Option Activity:
1) EXPE 2) CREE 3) ZMH 4) SNDK 5) GTXI

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Wednesday Watch

Late-Night Headlines
Bloomberg:

- Former U.S. Treasury Secretary Henry Paulson met privately with Goldman Sachs Group Inc.’s board in Moscow last year and kept the occasion off his official calendar, according to a new book about the financial crisis. Paulson, who was chief executive officer of Goldman Sachs before taking the Treasury post in 2006, arranged the meeting when he realized he’d be in the Russian city on business at the same time as the New York-based firm’s board was meeting there, according to Andrew Ross Sorkin’s“Too Big to Fail.” In his almost two years leading the Treasury Department, Paulson had only had one other private event with a company’s board, attending a cocktail party hosted by BlackRock Inc., according to the book. The meeting with Goldman’s board in late June 2008 was deemed a “social event” to ensure it didn’t violate U.S. government ethics rules, the book said. Still, Paulson aide Jim Wilkinson asked John Rogers, the firm’s chief of staff, to keep the plans quiet, the book says.

- A Goldman Sachs(GS) International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion hosted by St. Paul’s Cathedral in London. The panel’s discussion topic was, “What is the price of morality in the marketplace?”

- Fidelity International’s Anthony Bolton said it’s not too late to benefit from the rally in global stocks as he expects markets to keep advancing for a “considerable” time. Low economic growth and low interest-rates worldwide are “good” for equities, and stock valuations are still “attractive,” according to documents released to reporters by Fidelity before a speech by Bolton in Seoul today.

- William Ackman said he bought shares of Corrections Corp. of America(CXW), giving his Pershing Square Capital Management LP hedge fund a 9.5 percent stake in the biggest U.S. operator of private prisons. “We’re in with two feet,” Ackman said today at the Value Investing Congress in New York. “You’ve got a real estate company, in our opinion, with the government as a tenant. We think this is a business that has very significant growth. It’s going to do well in any economic environment, as long as people commit crimes and as long as we punish them.”

- Congress approved holding trials in the U.S. for terrorist suspects held at Guantanamo Bay in Cuba as part of a homeland-security measure. A separate funding measure that sets defense policy also includes a provision allowing detainees to be transferred to the U.S.

- Iraq is recovering from the failure of its first oil licensing round in June by negotiating directly to get foreign investment for its war-torn energy industry. Eni SpA, which asked for more than double Iraq’s $2 a barrel maximum payment in June, may sign a contract to develop the Zubair field in days, Chief Executive Officer Paolo Scaroni said yesterday. Exxon Mobil Corp. and OAO Lukoil have agreed on a new fee for the West Qurna-1 oilfield, and Nippon Oil Corp. will get a contract for the Nasiriyah field next month. Iraq, home to the world’s third-largest oil reserves, aims to increase oil production to 3.5 million barrels a day by revamping existing fields and drilling new wells.

- Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should limit the securities on its balance sheet to Treasuries and create a policy for serving as lender of last resort.Palo Alto, California. Policy rules “would yield better economic outcomes for both monetary policy and financial stability policy,” he said. The Fed’s emergency-credit programs and inconsistency in bailout decisions created confusion and showed the central bank “lacked a well-communicated, systematic approach,” Plosser said in a panel discussion at

- Toshiba Corp. climbed to the highest level in six weeks in Tokyo trading after CLSA Asia-Pacific Markets raised its rating on the stock and production partner SanDisk Corp.(SNDK) forecast sales that topped analyst projections.

Wall Street Journal:

- Will the Barnes & Noble(BKS) Nook e-reader be a Kindle killer? According to details that Barnes & Noble appears to have inadvertently posted on its Web site prior to this afternoon’s launch event, the color touchscreen device will cost $259 and run on the AT&T’s 3G wireless network. It will likely be the biggest challenger yet to Amazon’s popular Kindle e-reader.

- Walt Disney Co.(DIS) is close to unveiling technology that it says will enable entertainment companies to adapt their business models to a new reality in which consumers increasingly rely on computers and cell phones in place of DVD players and TVs. The technology, code-named Keychest, could contribute to a shift in what it means for a consumer to own a movie or a TV show, by redefining ownership as access rights, not physical possession. The technology would allow consumers to pay a single price for permanent access to a movie or TV show across multiple digital platforms and devices—from the Web, to mobile gadgets like iPhones and cable services that allow on-demand viewing. It could also facilitate other services such as online movie subscriptions.

- Online shoppers this holiday season can expect a little something extra from retailers: more offers of free shipping. Free shipping has already become standard practice for certain retailers, like footwear and apparel sites Zappos.com and Shoebuy.com. Now, as competition heats up, free is becoming the new normal across even more sites.

- Wealthy Americans who operate family investment funds have launched a lobbying campaign to escape new rules being weighed by Congress aimed at more tightly regulating private investment groups. The legislation, part of the Obama administration's proposed overhaul of financial-services rules, would require private-equity funds and hedge funds to disclose more activities to the government. The goal is to provide regulators with more information so they can better monitor risks across the financial system. The legislation would also impose those regulations on so-called single-family offices, the private investment accounts of the wealthiest U.S. families.

- Big companies that sell to corporate customers are growing more bullish about their prospects for 2010, a sign that a revival of business investment could buoy the sluggish U.S. economy in coming quarters.

- President Obama has made serial promises that he will not sign a health-care bill that "adds one dime to our deficits, either now or in the future, period." This was never plausible, but now we can begin to understand what he meant: Democrats plan to make ObamaCare "deficit-neutral" by moving nearly a quarter-trillion dollars off the books, in the fiscal deception of the century. Later this week, or maybe next, Senate Democrats plan to vote on a stand-alone bill that strips a formula that automatically cuts Medicare physician payments out of "comprehensive" health reform. Rather than include the pricey $247 billion plan known on Capitol Hill as the "doc fix" as part of ObamaCare, they'll instead make this a separate contribution to the deficit, without compensating tax increases or spending cuts. Majority Leader Harry Reid explained at a press conference last week that "All we're doing is wiping the slate clean by adjusting the baseline to what is current policy. This is not new policy." Wiping the slate is right.

NY Times:

- Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis. “The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.” Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children. He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.

Politico:

- Speaker Nancy Pelosi told Democrats Tuesday night that she wants to move forward with the more liberal version of a House health reform bill that would peg government-run coverage to Medicare – setting up a clash with moderates in her caucus who oppose the plan. Pelosi told her rank-and-file that she has more than 200 votes for a public option tethered to Medicare and that she wants to "see if we can find the remaining votes," one member present said afterward. "We are very close and I count tough," Pelosi told the room, according to one person in the room. She asked Majority Whip James Clyburn (D-S.C.) to ask his deputies to survey members in the next 24 hours to see if she could get to 218 votes for the bill, several members said after the meeting.

- Senate Majority Leader Harry Reid is prepared to run a sharply negative campaign if that’s what it takes to win reelection next year, with a top adviser predicting that the Nevada Democrat will “vaporize” his Republican challengers with attack ads. Trailing in the polls and under constant attack from the GOP, Reid’s campaign has just launched a warm-and-fuzzy million-dollar ad campaign to reintroduce the veteran senator to his constituents.

Rasmussen:

- The GOP advantage over Democrats increased from two points to five in the latest edition of the Generic Congressional Ballot. The latest Rasmussen Reports national telephone survey shows that 42% would vote for their district’s Republican congressional candidate while 37% would opt for his or her Democratic opponent. Support for Democrats dropped two points this week, while support for the GOP slightly increased. Voters not affiliated with either party heavily favor the GOP, 40% to 23%.

Reuters:

- The Obama administration will shutter programs at the heart of a $700 billion financial bailout but remains focused on supporting a fledgling economic recovery, Treasury Secretary Timothy Geithner said on Tuesday. "We are now at the point where we can begin to wind down the programs that really defined TARP in its initial stages," Geithner told Reuters in an interview, referring to the Troubled Asset Relief Program. Instead, the administration will focus on "more-targeted programs directed at what are the principal areas where there's still weakness in access to credit," he said, specifically citing housing and small businesses.

- The U.S. government's $700 billion financial bailout program has increased moral hazard in the markets by infusing capital into banks that caused the financial crisis, a watchdog for the program said on Wednesday. The special inspector general for the U.S. Treasury's Troubled Asset Relief Program (TARP) said the plan put in place a year ago was clearly influencing market behavior, and he repeated that taxpayers may never recoup all their money. The bailout fund may have helped avert a financial system collapse but it could reinforce perceptions the government will step in to keep firms from failing, the quarterly report from inspector general Neil Barofsky said. He said there continued to be conflicts of interest around credit rating agencies that failed to warn of risks leading up to the financial crisis. The report added that the recent rebound in big bank stocks risked removing urgency of dealing with the financial system's problems. "Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior," the report said. "The firms that were 'too big to fail' last October are in many cases bigger still, many as a result of government-supported and -sponsored mergers and acquisitions."

- The time for the U.S. Federal Reserve to start pulling back its extensive support for the economy is not close at hand and policymakers have time to decide what sequence of steps they will take, San Francisco Fed President Janet Yellen said on Tuesday. "We have used the language of an extended period," Yellen, a voting member of the Federal Open Market Committee, told reporters after a Fed conference.

- Intuitive Surgical Inc (ISRG) on Tuesday reported third-quarter profit rose 12 percent, helped by a jump in instruments and accessories revenue and sales of new, more expensive versions of its da Vinci surgical robots.

Financial Times:

- Some industries may never see demand return to pre-crisis levels as manufacturers learn to live with much lower growth rates in the coming years, according to leading chief executives. Hans-Paul Bürkner, chief executive of Boston Consulting Group, said companies such as manufacturers of trucks and machines – which have seen revenues plummet 50-70 per cent during the economic crisis – would struggle to return to the levels they achieved at the peak of the boom in 2007. “Some will never get back to those [levels] because they have lost competitiveness and will be taken over,” Mr Bürkner told the Financial Times in a video interview. His views were supported by several industrialists. Hakan Samuelsson, chief executive of MAN, the German truckmaker, said that if the 2007 level of demand was 100, “you can, of course, question: will we reach 100? We should maybe also not be too disappointed if the next peak is maybe a bit lower than 100.” Another leading German industrialist said demand levels would return, but would perhaps take longer than in the years following previous crises. “In my view, it will be four to seven years before we see a lot of industries get back to the levels of 2007-08 [demand]. The industries I am talking about here include chemicals, steel, cars,” he said.

- US plans for an aggressive crackdown on energy speculation are in danger of unraveling, with leaders at the USTwo of the Commodity Futures Trading Commission’s five commissioners have voiced worries that proposals to cap investors’ holdings in oil and commodities futures could drive trading from US exchanges. A third commissioner, who had been the most outspoken supporter of new limits, now says they should be set at generous levels, in effect softening any clampdown. The concerns echo those raised by the exchange industry and banks this year when they warned about the risk of regulatory arbitrage – the move by traders to a more benign regime. Gary Gensler, CFTC chairman, has made the reform a priority after lawmakers complained that speculators last year inflated the price of oil and other commodities. But advancing a plan requires a majority vote from commissioners, which looks elusive unless the push meets strict conditions. Lobbyists have focused attention on commissioner Michael Dunn, a Democratic appointee, like Mr Gensler. Early this year Mr Dunn said the CFTC should consider new speculative limits, but he has recently voiced doubts. commodity regulator raising doubts about proposed reforms.

TimesOnline:

- Martin Hughes, the high-profile hedge fund manager known as “the rottweiler” is bloodied but unbowed after his tussles with the collapsing stock market last year. He is predicting that the stock market is at the start of a five to ten-year bull run from which his shrunken Toscafund is poised to benefit. Mr Hughes, who earned his nickname for his aggressive positions in what he regards as undervalued equities, was unrepentant about the 65 per cent fall his fund racked up last year that triggered a flood of redemption requests.

The Scotsman:

- Commodities bubble is toil and trouble for central bankers. THIS week oil prices jumped above $80 a barrel for the first time since October last year.

Petroleum has gained fully 25 per cent in the past three months alone. Likewise, other commodities are soaring: on Monday, gold was trading near an all-time high. Copper and corn have also posted big gains this week, while rubber has just touched its highest price this year. The causes of this commodities rush are not difficult to discern. Ultra-cheap interest rates and massive quantitative easing have flooded the markets with cash. This has to go somewhere. First it went into equities, sending share prices soaring. Rising equity prices emboldened investors, who are now on the hunt for other places to park their money. Commodities are a logical next step. At the same time, the US authorities have been talking down the dollar, which has hit a 14-month low against the euro. What better time to get out of dollars and buy commodity futures as a hedge? The rise in the price of oil and other commodities is a reflex unconnected to any underlying fundamentals. True, economic growth in China has proved resilient, raising the real-time demand for fossil fuels and metals. A sharp rebound has also occurred in the Western economies. This will boost the demand for raw materials but not sufficiently to cause genuine supply shortages now or in the next few years. Instead, this week's rise in commodities prices comes courtesy of hedge funds looking for an investment outlet.
Should we worry? After all, oil prices are still half what they were in July 2008. Yet something fundamentally new is taking place in the commodities markets. Hedge funds are no longer simply putting their cash into futures contracts – trading promises to buy or sell commodities at some time to come. Increasingly they are demanding physical delivery of raw materials – i.e. they are becoming raw material traders themselves rather than pushing paper around. And that affects the real economy. Last year's oil price spike sent petroleum to nearly $150 a barrel. The hedge funds were blamed for speculating. As a result, US regulators are threatening to introduce "position limits" to futures markets, which would restrict the amount of futures contracts a trader can hold. But to escape such regulation is easy: hedge funds are simply buying physical commodities directly and hoarding them. As a result, a record amount of cash is being invested in commodities – not by manufacturers or power utilities but by hedge funds managing so-called exchange-traded commodities funds (ETFs) backed by oil, gold or other real assets. These perform like mutual funds but are backed by stuff you can touch or put in your car. The obvious danger is that massive direct investment by hedge funds in commodities trading will cause not only inflationary price increases but – for the first time – supply shortages. If a hedge fund buys a ship-full of copper, that ore is no longer available to smelters. Hedge funds have around $2 trillion under management – and a flight of all that hedge fund money into ETFs could crowd out those buying oil and metals for use as well as reduce global food stocks. These pressures first appeared during the commodities boom of 2008. But low interest rates have brought them back with a vengeance. Only higher interest rates can keep a new commodities bubble in check.

China Daily:

- SHANGHAI: State-owned firms looking to hedge their losses from rising crude oil prices will now be supervised more stringently. The State-owned Assets Supervision and Administration Commission (SASAC) has required companies under its control to scrutinize hedging deals more closely while signing financial derivatives contracts. The move follows rising book losses from hedging contracts suffered by such State-owned firms as China Eastern Airlines and Air China, who have only recently begun to narrow down such losses-on-paper from former hedging deals.

Late Buy/Sell Recommendations
Citigroup:

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

- Reiterated Buy on (GOOG), target $640.

- Reiterated Buy on (UTX), raised estimates, boosted target to $76.

- Reiterated Buy on (DGX), raised estimates, boosted target to $66.

- Reiterated Buy on (YHOO), boosted target to $22.

Night Trading
Asian Indices are -.75% to unch. on average.

Asia Ex-Japan Inv Grade CDS Index 105.50 +8.50 basis points.
S&P 500 futures -.20%.
NASDAQ 100 futures -.17%.

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Earnings of Note
Company/EPS Estimate
- (NTRS)/.81

- (CAL)/.00

- (USB)/.27

- (LLY)/1.02

- (APD)/1.12

- (FCX)/1.31

- (OMC)/.52

- (SWK)/.59

- (GENZ)/.43

- (MAN)/.17

- (NOC)/1.18

- (AMR)/-.95

- (MO)/.46

- (PFCB)/.30

- (KEY)/-.41

- (BA)/-2.10

- (STJ)/.59

- (MS)/.30

- (WFC)/.39

- (RHI)/.04

- (FFIV)/.41

- (KMP)/.36

- (QLGC)/.18

- (AMGN)/1.27

- (TEX)/-.33

- (NVLS)/-.04

- (VMW)/.20

- (ADS)/1.34

- (NE)/1.52

- (EBAY)/.36

- (BCR)/1.28

- (LRCX)/-.07

Economic Releases

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,500,000 barrels versus a +334,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -850,000 barrels versus a -5,230,000 decline the prior week. Distillate inventories are expected to fall by -1,000,000 barrels versus a -1,084,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by +.5% versus a -4.1% decline the prior week.

2:00 pm EST

- Fed’s Beige Book.

Upcoming Splits
- None of Note

Other Potential Market Movers
- The Fed’s Lacker speaking, Fed’s Tarullo speaking, Fed’s Rosengren speaking, BoE minutes, weekly MBA mortgage applications report, (SIG) investor day, (UTEK) analyst day, (WMT) investment community day and the (PWE) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Lower, Weighed Down by Homebuilding, Biotech, Medical, Defense and Commodity Shares

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