Tuesday, February 17, 2009

Stocks Sharply Lower into Final Hour on More Extreme Economic Pessimism, Increasing Financial Sector Worries, Rising Credit Angst

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Computer longs, Internet longs and Financial longs. I was stopped out of some trading longs, added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, almost every sector is declining and volume is above average. Investor anxiety is above average. Today’s overall market action is very bearish. The VIX is rising 12.32% and is very high at 48.16. The ISE Sentiment Index is below average at 121.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running very high most of the day, hitting 4.80 at its intraday peak, and is currently 1.40. The Euro Financial Sector Credit Default Swap Index is rising 9.75% today to 134.67 basis points. This index is up from a low of 52.66 on May 5th, but down from 157.81 on Sept. 16th. The North American Investment Grade Credit Default Swap Index is rising 4.25% to 209.50 basis points. The TED spread is rising .53% to 96 basis points. The TED spread is now down 371 basis points in about four months. The 2-year swap spread is rising 5.05% to 70.50 basis points. The Libor-OIS spread is down .71% to 98 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 1.17%, which is down 153 basis points in about seven months. 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 .29%, which is unch. today. Economic problems in Europe and Asia are weighing heavily on US stocks today. The most economically sensitive companies, along with financial shares, are under the most pressure today. Emerging market shares(EEM) are also seeing significant weakness. While these shares have recent displayed relative strength, I still expect them to continue to underperform developed markets over the next few years. It is interesting to note, given the recent hype regarding the Chinese stimulus plan, that the China sovereign debt credit default swap is rising 10% today to 241.50, the highest level since October of last year. On the positive side, growth continues to outperform value. Education, retail, Drug, Biotech and Medical Equipment shares are seeing just mild losses. The market badly needs more details on the new financial rescue plan to alleviate uncertainty. Worries over impending financial sector nationalizations are high and the longer the new administration waits to release the rescue plan details the more likely that scenario becomes. Nikkei futures indicate a -165 open in Japan and DAX futures indicate a -1 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, increasing financial sector pessimism, higher credit market angst and rising economic pessimism.

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