Stocks Soaring into Final Hour on Less Economic Pessimism, Declining Financial Sector Pessimism, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs and Medical longs. I covered all of my (QQQQ)/(IWM) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is very bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is below average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is falling 15.7% and is elevated at 47.72. The ISE Sentiment Index is low at 90.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running around average most of the day, hitting .93 at its intraday peak, and is currently .57. The Euro Financial Sector Credit Default Swap Index is rising 5.52% today to 120.33 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising 1.88% to 224.84 basis points. The TED spread is falling .55% to 101 basis points. The TED spread is now down 365 basis points in just over three months. The 2-year swap spread is rising 2.04% to 68.63 basis points. The Libor-OIS spread is falling 1.40% to 92 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 2 basis points to .58%, which is down 212 basis points in just over six months and at the lowest level since Bloomberg record-keeping began in August 1998. 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 .11%, which is up 1 basis point today. Market-leading stocks are especially strong today. The sharp reversal higher in shares of (USB) and (BAC) were catalysts for the 12% surge in the (XLF) today. The surge in oil, sell-off in bonds and strengthening of the euro indicate economic fears are subsiding a bit. (AAPL) reports after the close today. I suspect they will exceed estimates and lower forward guidance. This should be priced into shares at current levels and any initial kneejerk sell-off will likely be short-lived. Nikkei futures indicate an +180 open in Japan and DAX futures indicate an +89 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing economic pessimism and declining financial sector worries.

Today's Headlines

Bloomberg:

- Almost 70 percent of Chinese readers rated U.S. President Barack Obama’s inaugural address “a masterpiece,” in an online poll by the country’s biggest Web portal. Make that a censored masterpiece. The Chinese version of Obama’s speech posted by Sina.com, with poll questions embedded at the top, did not contain a reference to fighting Communism nor a paragraph about leaders who keep power by silencing dissent.

- Hedge-fund investors withdrew a record $152 billion in the fourth quarter as the industry posted its worst returns in almost two decades, according to Hedge Fund Research Inc. Global assets dropped to $1.4 trillion at the end of the year, the same level as 2006 and $525 billion less than a peak of $1.93 trillion in June, the Chicago-based firm said in a statement today.

- A proposed change to bankruptcy law to allow judges to reduce homeowners’ mortgages may boost the capital needs of banks and insurers by hundreds of billions of dollars, First Pacific Advisors LLC’s Julian Mann said. The issue, identified by investors such as Mann and analysts at JPMorgan Chase & Co., stems from language buried in the more than one hundred pages of prospectuses for many “prime jumbo” and “Alt-A” home-loan securities. Some of the contracts state that bankruptcy-related losses greater than an amount sometimes as little as $100,000 get allocated equally among all investors in bonds backed by the loan pools, rather than lower-ranking debt first. Holders such as banks and insurers of senior classes may see their payments cut or interrupted, potentially forcing writedowns and ratings downgrades. That, in turn, could raise their capital needs.

- China’s economy faces an “extremely sharp” slowdown this year that will trail most economists’ growth forecasts, according to Balestra Capital’s Ryan Atkinson. Declining electricity output and tumbling exports are two signals China’s economic growth may slow to as low as 2% in 2009, said Atkinson, chief market analy6st at the NY-based hedge-fund manager. That compares with the 7.9% expansion forecast by economists in a Bloomberg survey.

- Brad Golding, manager of CRC Income Products Short Only Fund, more than doubled his investors’ money in 2008. They responded by pulling most of their cash from the Christofferson, Robb & Co. hedge fund in the final two months of the year. Assets in the Short Only fund declined to $35 million at year-end from as much as $145 million on Oct. 31, according to a letter to clients from Golding, 44. The drop reflects how the global credit crunch has buffeted even top-performing fund managers as potential clients shun risk-taking while current investors seek to raise cash.

NY Times:

- Police Departments Look for More Fuel-Cutting Cars.

Finextra.com:

- Continuing to provide index solutions that better meet the changing needs of the investing public, Standard & Poor's Index Services today announced the launch of the S&P CDS U.S. Indices. The Indices are designed to measure the performance of the approximately $29 trillion(1) (notional) Credit Derivatives Market.

Morningstar:

- The Morningstar 1000 Hedge Fund Index lost 10.3% in the fourth quarter of 2008 and 22.2% for the year, wiping out the last two years of gains. The index bounced back slightly after extreme market illiquidity and volatility in January and March, but since May, hedge funds have been on a steady decline. Massive losses in September and October of 7.9% and 9.8%, respectively, quashed any hope of salvaging the year, even though it ended on a positive note - December posted a 2.1% gain.

Journal Register:

- The new Obama administration circulated a draft executive order Wednesday that calls for closing the controversial detention center at Guantanamo Bay within a year and halting any war crimes trials in the meantime. While some of the detainees currently held at Guantanamo would be released, others would be transferred elsewhere and later put on trial under terms to be determined. There are an estimated 245 detainees currently held at Guantanamo, out of some 800 who were sent there during the Bush administration. The order circulated as the judge in one war crimes case agreed to Obama's request to suspend proceedings pending a 120-day review.

Boston Globe:

- Boston City Hall, the public library, and police headquarters are joining an energy-management network that will pay the city to reduce the buildings' electricity use during peak demand times, officials are expected to say today. Under the contract with EnerNOC Inc., a Boston-based company that helps customers manage electricity usage, the city also will have access to software that will allow it to analyze and streamline electricity use, potentially further reducing costs.

Crain’s NY Business:

- Avon Products Inc.(AVP) may be better positioned to withstand economic weakness than other cosmetics makers, an analyst said Tuesday.

Miami Herald:

- What if you didn't have a separate work computer to deal with anymore? Instead, you and your co-workers would use personal laptops to access work files and software -- without having to download anything on your computer. It's part of the workplace future that Citrix Systems(CTXS) and Intel(INTC) are working to make a reality.

Silicon Alley Insider:

- Apple(AAPL) Earnings Preview: How Are Sales? How Is Steve?

Reuters:
- Hours after taking office, U.S. President Barack Obama ordered military prosecutors in the Guantanamo war crimes tribunals to ask for a 120-day halt in all pending cases and a judge granted the request on Wednesday in the case against a young Canadian. When defence lawyers did not oppose the move, a judge froze the proceedings against Canadian Omar Khadr, who was captured at age 15 and is accused of murdering a U.S. soldier with a grenade during a firefight in Afghanistan. Another judge was expected to rule as early as Wednesday in the death penalty case against five prisoners accused of plotting the September 11 hijacked plane attacks that killed nearly 3,000 people. Obama's order to the prosecutors was issued several hours after his swearing-in on Tuesday and if all the continuances are granted it would halt proceedings against 21 prisoners.

- Oil demand may never return to growth in the United States, Europe and parts of Asia, easing the strain on long-term supplies and prices as emerging countries burn ever more fuel. The surge in oil to a record near $150 a barrel last year heightened concern the world will run out of crude and supply will start to dwindle -- a theory known as "peak oil". Now a deepening recession and oil price collapse have raised the issue of whether demand, not supply, is nearing its peak. "There is a reasonable likelihood that OECD oil demand has peaked," said Peter Davies, former chief economist at BP Plc who was in charge of preparing BP's annual Statistical Review of World Energy, a standard reference work.

Bear Radar

Style Underperformer:
Mid-cap Value (+.46%)

Sector Underperformers:
Airlines (-6.76%), Homebuilders (-3.58%) and Semis (-2.04%)

Stocks Falling on Unusual Volume:
USB, NXY, WFR, TYC, HBHC, SYNT, FCFS, EZPW, UAUA, MELI, CSH, BLK, AF, COH and COF

Stocks With Unusual Put Option Activity:
1) USB 2) UAUA 3) SHW 4) NTRS 5) AMR

Bull Radar

Style Outperformer:
Large-cap Growth (+1.38%)

Sector Outperformers:
Computer Service (+6.53%), I-Banks (+3.72%) and Banks (+2.60%)

Stocks Rising on Unusual Volume:
BK, UBS, IBM, KTC, WNR, VRSN, PHG, STO, SI, ABT, HES, IPSU, RVBD, NTRS, CREE, WGOV, ZION, JNPR, ATE, STT, PNC, SPW and CS

Stocks With Unusual Call Option Activity:
1) RYL 2) NTRS 3) SPW 4) UTX 5) USB

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Wednesday Watch

Late-Night Headlines
Bloomberg:

- International Business Machines Corp.(IBM), the biggest computer-services provider, forecast full-year profit that beat analysts’ estimates, defying an industrywide slump that has curbed growth at other technology companies. The shares rose as much as 5.3 percent in extended trading after IBM said today that net income will rise to at least $9.20 a share in 2009, topping the $8.75 average of estimates compiled by Bloomberg. Fourth-quarter profit also exceeded projections as overhead costs declined 3.1 percent.

- Intel Corp.(INTC), the world’s largest chipmaker, raised the possibility of reporting a loss this quarter, ending its more than 21-year run of profitability. “We are not going to wake up in six months with everything rosy again,” Chief Executive Officer Paul Otellini told employees last week in an internal memo obtained by Bloomberg News. After 87 quarters of profit, the first quarter is “too close to call,” the memo said.

- Emerging-market bonds fell as concern the U.S. banking crisis is spreading to Europe led investors to avoid higher-yielding assets. The yield to the 2015 call date on Brazil’s 11 percent bond due in 2040, one of the most widely traded emerging-market securities, jumped 37 basis points, or 0.37 percentage point, to 6.42 percent at 4:10 p.m. in New York, according to JPMorgan Chase & Co.

- Bank of England Governor Mervyn King said officials may start buying assets within weeks to loosen credit markets as the lowest interest rates since 1694 fail to avert a “marked” recession. The U.K. central bank may acquire securities such as corporate bonds and commercial paper to bolster lending to companies and consumers as banks rebuild balance sheets damaged by the global financial crisis, King said yesterday.

- Iraq needs continuity not “change” from President Barack Obama’s administration as it holds elections this year and moves closer to taking over the security of all 18 provinces, its foreign minister said. “Nobody can afford in 2009 to contemplate any change in military policy,” Hoshyar Zebari said in an interview in Kuwait late yesterday after Obama’s inauguration. We can’t “give any impression that there will be draw-downs, reductions, redeployment because this year Iraq has three elections.” Obama, who campaigned with the slogan of “change” and stood for president as an opponent of the Iraq War, said repeatedly that he would withdraw all combat troops within 16 months, leaving behind a residual force. Since the Nov. 4 election, Obama has reaffirmed that goal, while saying he wants to draw down forces in a safe and responsible manner and will consult with military commanders before making any decisions. “We’ll begin to responsibly leave Iraq to its people and forge a hard-earned peace in Afghanistan,” Obama said in his inaugural speech yesterday. The U.S. won’t abandon Iraq, Zebari said. Even if Afghanistan gets more attention, Iraq is very important in the Middle East and the Persian Gulf for the balance of power, he said.

- Singapore said its economy may shrink an unprecedented 5 percent this year, fanning speculation the government will announce record spending in its budget tomorrow to help companies hurt by the global recession.

- Foreign direct investment in developing nations will drop by $180 billion, or 31 percent, this year as a global recession prompts multinationals to cut spending on factories and mines, according to the World Bank. The decline will put renewed pressure on emerging-market currencies, even as asset sales by fund managers slow, according to Mansoor Dailami, manager of international finance in the global development prospects group. Rallies in the South Korean won, Brazil’s real and the Polish zloty have all faltered since the end of 2008 as companies including Rio Tinto Group and Honda Motor Co. put expansion plans on hold.

- Chinese stock valuations must fall further before they become “more attractive and defensive,” according to Frank Gong, JPMorgan’s China strategist.

Wall Street Journal:

- Amid a devastating period for most retailers, videogame seller GameStop Corp.(GME) has posted big sales gains, in part by aggressively marketing used products to cash-strapped consumers. GameStop this month reported a 22% jump in overall sales and a 10% increase in sales at stores open more than 12 months for the holiday sales period ended Jan. 3. It didn't hurt that videogame sales climbed 9% in December to a record $5.3 billion, according to market research firm NPD Group.

- Timothy Geithner will call for a comprehensive and aggressive approach to tackling the U.S. financial crisis when he appears Wednesday at hearings on his confirmation as Treasury secretary, while also trying to assure lawmakers that he simply erred by failing to pay some payroll taxes earlier this decade. At the hearing, Mr. Geithner will likely be grilled over his tax missteps and his role in helping to craft the Bush administration's financial-sector rescue. But senators' seeming reluctance to derail his confirmation while the economy is sputtering and the lending freeze is worsening makes it likely he will be confirmed for the cabinet post.

MarketWatch.com:
- Health care saw a net gain of 419,000 jobs in 2008 and its growth outlook continues to be strong through 2016, according to the Bureau of Labor Statistics.

CNBC.com:
- Qualcomm Inc.(QCOM) CEO Paul Jacobs said “business continues to be strong” as people buy higher-end smart phones. Jacobs said handset shipment may rise 25%.

- If Warren Buffett liked Burlington Northern Santa Fe(BNI) in the high $70s, he must love it in the low $60s. Buffett's Berkshire Hathaway reports in an SEC filing tonight that it bought almost 4.4 million shares in the freight railroad over the last three trading days at prices between $61.65 and $63.43.

NY Times:

- Warning to rich New Yorkers: The tax man might be digging deeper into your pockets in the years ahead. There is a growing sense in the capital that legislators are likely to turn to an income tax increase on the wealthiest New Yorkers to help close the state’s $15 billion deficit, now that Democrats control the Senate, the Assembly and the governor’s office. The Assembly, where Democrats have an overwhelming majority, has long supported increasing taxes on the wealthy, and Sheldon Silver, the Assembly speaker, reiterated this month that there continued to be strong backing for the measure among his colleagues. Gov. David A. Paterson, a Democrat, did not propose any income tax increases in his budget proposal, but acknowledged in last month that “taxing the wealthy is probably going to be part of the solution if the deficit gets any worse, and all indications are that it probably will.” That could leave the matter in the hands of the Senate, where Democrats won a narrow majority in November. Senator Eric T. Schneiderman, a Manhattan Democrat, said that he planned to introduce a bill in the coming weeks that would increase taxes on the rich, and that he expected his colleagues to have an active debate about the issue.

Advertising Age:

- Walt Disney’s(DIS) ABC is seeking $1.4 million for 30-second ads during this year’s telecast of the Academy Awards. ABC initially sought $1.7 million for commercials during its “Oscar” broadcast on Feb. 22.

Reuters:

- Blackstone Group(BX) has invested more than $730 million in India since arriving three years ago, only to see much of it wiped out by the country's weakening economy and stock market plunge. Blackstone's tough start in India is a cautionary tale to other Western private equity firms such as Kohlberg Kravis Roberts & Co. and Permira that are opening offices in Mumbai. If newcomers weren't already wary of India's foreign investing rules, which forbid borrowing and set a purchase price range, certainly Blackstone's performance so far may give them pause. Entrenched firms, too, are likely to wait before pouncing. Shares of Nagarjuna Construction have fallen 71 percent since Blackstone agreed to invest $150 million in Aug. 2007. Garment maker Gokaldas Exports has also lost 71 percent of its value since Blackstone inked a deal that same month for $165 million.Last February, Blackstone said it would invest $60 million in transportation company Allcargo Global Logistics when its stock was at 735.4 rupees per share. Eight months later, the stock was worth less than half that amount.

- European Central Bank Executive Board member Juergen Stark said that there isn’t a general credit crunch in the euro zone and warned of aggressive monetary policy. “The European Central Bank has earned a lot of confidence in the last 10 years that we mustn’t gamble with,” Stark said.

Sueddeutsche Zeitung:

- Deutsche Bank’s US-based hedge funds CQ Capital and Distressed Opportunities will report a full-year loss of more than 40% for 2008, citing documents in an e-mailed preview of an article to be published tomorrow.

Sydney Morning Herald:

- Macquarie Airports has provided further evidence that the boom in Australians traveling overseas has ended, after reporting the sharpest fall in outbound passenger traffic through Sydney Airport since the SARS (viral pneumonia) crisis of 2003.

The Australian:

- Australia’s banks were yesterday sucked into the international crisis of confidence in banking stocks. This came amid renewed pressure on regulators to extend the stock shorting ban to ensure system stability. The corporate regulator, ASIC, is likely to make a decision this week, as fears grow that banks and financial stocks will be savaged by hedge funds. The ban is in place until next Tuesday, but ASIC is understood to be "monitoring closely" the overseas crisis that forced the British government to launch a secondary emergency package for the banking industry.

Late Buy/Sell Recommendations

Jefferies:

- Raised (CHKP) to Buy, target $27.

Night Trading
Asian Indices are -1.75% to unch. on average.
S&P 500 futures +.82%.
NASDAQ 100 futures +.31%.

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Earnings of Note
Company/EPS Estimate
- (BLK)/1.02

- (PGR)/.35

- (MMR)/-.27

- (COH)/.67

- (USB)/.26

- (ABT)/1.06

- (HCBK)/.27

- (NTRS)/.93

- (APD)/.98

- (UTX)/1.22

- (BNI)/1.74

- (FFIV)/.40

- (PLCM)/.40

- (EBAY).39

- (AB)/.21

- (SLM)/.19

- (NE)/1.48

- (AAPL)/1.40

- (KMP)/.54

- (ADTN)/.28

- (AMR)/-.70

- (ATI)/.89

- (MTH)/-1.01

- (RJF)/.35

- (UAUA)/-4.41

Economic Releases

8:30 am EST

- The NAHB Housing Market Index for January is estimated at 9.0 versus 9.0 in December.

Upcoming Splits
- None of note

Other Potential Market Movers
- None of note.

BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.