Stocks Finish Sharply Lower, Weighed Down by Financial, Commodity, Construction and Semi Shares

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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 5^th, but down from 157.81 on Sept. 16^th. 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.

Today's Headlines

Bloomberg:

- U.S. regulators accused R. Allen Stanford of running a “massive, ongoing fraud” while selling about $8 billion in certificates of deposit through Antigua- based Stanford International Bank Ltd. The bank made “improbable and unsubstantiated” claims about its ability to generate “safe” returns of more than 10 percent, and it misled investors about exposure to Bernard Madoff’s alleged Ponzi scheme, the Securities and Exchange Commission said today in a complaint against Stanford, firms he controls and two colleagues. The agency asked the Dallas federal court to freeze assets and appoint a receiver to return money to investors.

- Richard Bove, the equity research analyst who recommended investors sell brokerage stocks in May, left Ladenburg Thalmann Financial Services Inc. after a disagreement with the firm over settling a defamation lawsuit. Bove, who joined Stamford, Connecticut-based Rochdale Securities LLC this week, was sued in July by BankAtlantic Bancorp, which said he defamed the company by saying it might fail in a report titled “Who is Next?”

- Sharks don’t get cancer. Scientists who are interested in understanding the dynamics of cancer, therefore, say the study of sharks may be rewarding. Similarly, looking at stocks doing well in a sour market can sometimes yield insights. One might get a clue to the market’s future leaders or discover individual stocks worth buying. Of 1,665 U.S. stocks with a market value of $500 million or more, 117 have gained 20 percent or more this year.

- Crude oil fell below $35 a barrel in New York on speculation a deepening recession in the U.S., Europe and Asia will reduce fuel demand. Oil declined as much as 8.2 percent as stocks dropped on concern banks may face ratings downgrades and further losses as economies slow.

- Harvard Narcissists With MBAs Killed Wall Street.

- Las Vegas Sands Corp.(LVS) and Wynn Resorts Ltd.(WYNN) joined hoteliers in lambasting U.S. lawmakers’ criticism of corporate travel, saying hundreds of thousands of jobs are in jeopardy. President Barack Obama’s warning this month that companies receiving government bailout money “can’t go take a trip to Las Vegas or go down to the Super Bowl on the taxpayers’ dime” is causing more convention and meeting cancellations in the city, already hurt by the U.S. recession, executives of the four biggest Las Vegas Strip casino owners said in interviews. “It’s very anti-stimulus, it’s pro-recessionary, pro- unemployment,” Las Vegas Sands Chief Executive Officer Sheldon Adelson, the pioneer of Vegas conventions, said by telephone. Instead of “making companies embarrassed” to bring employees together in a resort town, government officials should be encouraging them “to get together and really sit and strategize,” said Harrah’s Entertainment Inc. government relations chief Jan Jones, Las Vegas mayor from 1991 to 1999. Business travel creates 2.5 million U.S. jobs, including 1 million in meetings and events alone, U.S. Travel Association said. The travel industry was forecast to lose about 450,000 jobs in 2008 and 2009 “before politicians found this to be a good political punching bag,” Freeman said. “How many jobs will they cost?”

- International demand for long-term U.S. financial assets rose more than economists forecast in December as foreign investors bought the most corporate debt since June. Total net purchases of long-term equities, notes and bonds increased to $34.8 billion, compared with net selling of a revised $25.6 billion in November, the Treasury Department said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $74 billion, compared with net buying of $61.3 billion the previous month.

- The euro fell below $1.26 for the first time since early December after Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe, adding to concern financial turmoil will deepen. The US dollar and yen gained against most of their major counterparts as stock markets fell, making the U.S. and Japanese currencies more attractive as havens.

- Jean-Claude Trichet’s decision this month to keep interest rates unchanged will push Europe’s economy deeper into a recession, the region’s bond prices show. The European Central Bank President said Feb. 5 that following the Federal Reserve and Bank of Japan in cutting rates to near zero has “drawbacks” that are “inappropriate.” Even so, investors drove yields on two-year German bunds to the lowest level relative to longer-maturity debt since 1997 in a sign that they are betting he will have to do just that. “The bond market is telling the ECB they need to wake up to reality,” said Komal Sri-Kumar, chief global strategist at Los Angeles-based TCW Asset Management, which has about $118 billion in assets. “They didn’t do their job on time or adequately, and need to cut rates again as soon and as much as they can. They also need to start thinking of unconventional measures.”

- Wal-Mart Stores Inc.(WMT), the world’s largest retailer, reported fourth-quarter profit that fell less than analysts estimated after discounts on groceries and drugs attracted consumers. Wal-Mart climbed $1.59, or 3.4 percent, to $48.12 at 9:36 a.m. in New York Stock Exchange composite trading.

- The Obama administration’s Environmental Protection Agency said it will reconsider a memo issued in the final weeks of the Bush administration that may have eased approval of new coal-fired power plants.

- General Motors Corp.(GM) and Chrysler LLC, already relying on government aid to survive, take their case to the U.S. Treasury today that they can undo past mistakes and justify more U.S. aid to return to profit.

- Russia agreed to supply China with oil for 20 years in return for a $25 billion credit, as the world’s largest energy producer seeks to expand its presence on East Asian markets. Russia signed the accord in Beijing today to deliver 15 million metric tons a year (301,000 barrels a day) for the next two decades, as well as build a branch from a new Siberian pipeline to the Chinese border, Deputy Prime Minister Igor Sechin said on Russian state broadcaster Vesti-24.

- Russian stocks fell the most in almost five weeks, triggering trading halts in the nation’s largest bourses, as lower oil prices and a forecast for deeper economic contraction dragged down energy producers and banks. OAO Lukoil, the country’s second-largest oil company, and OAO Sberbank, the biggest lender, slumped more than 7 percent. The 30-stock Micex Index lost 6.7 percent to 664.3 at 5:15 p.m. in Moscow, as trading resuming on the Micex Stock Exchange following an hour stoppage because of the declines. The RTS Index sank 7.1 percent to 566.03. The ruble weakened for a second day versus the dollar.

Wall Street Journal:

- While most American corporations pinch pennies, Oracle Corp.(ORCL) is quietly going on a shopping spree. The software giant completed 10 acquisitions in the past year, ranging from a maker of insurance-policy-writing tools, to a designer of "plan-o-gram" software used by stores to maximize their use of shelf space. This month it bought mValent Inc., a tiny maker of software that helps configure other software. These deals, whose terms haven't been reported previously, put Oracle in a small club of cash-rich companies bargain-hunting.

- In a sign that the recession is forcing phone companies to take bold measures to hold onto landline customers, Verizon Communications Inc. is considering a $5 monthly voice plan that would let customers receive calls but dial only 911 and Verizon customer service.

- At a dinner hosted by Barack Obama on the eve of his inauguration, John McCain said of the new president: "His success will be our success." The dinner, hosted by the Democrat for his vanquished Republican foe, was intended to signal a new era of "bipartisanship," a cause both men have made themes of their careers. Mr. McCain said Friday that Mr. Obama's Washington has failed to live up to that promise, less than a month into the new administration. In an interview in his Senate office, Mr. McCain said Democrats have simply tried to pick off a few Republicans to support their agenda, rather than sitting down and negotiating.

- The Obama administration is betting that an extra $8 a week in most Americans' paychecks will boost consumer spending and help pull the U.S. out of its downturn. One piece of the $787 billion economic recovery package, which President Barack Obama plans to sign Tuesday in Denver, is an experiment in consumer behavior. The $116 billion in tax credits for 95% of Americans will come largely through reduced tax withholding from paychecks, over two years, rather than one-time payments. The idea: let money trickle out to consumers so it feels like a permanent income boost.

CNBC.com:
- The S&P 500 is trading in a range that shows it’s at a bottom for the current economic cycle, Bob Doll, BlackRock vice chairman and chief investment officer at BlackRock Inc., told CNBC. “I think we are making a bottoming process, albeit the climb back out is going to be very slow as the economy is going to remain sluggish,” Doll said. He said BlackRock is buying health-care stocks. “People get sick, unfortunately, even in recessions,” he said.

NY Post:

- Citigroup's(C) quest to raise cash by selling the assets it doesn't want is falling flat, as would-be suitors have more interest in the parts of the business that Citi would like to keep. One investor on the prowl is Texas billionaire Gerald J. Ford, who sources said is interested in buying back bank assets and branches that make up the former Golden State Bancorp, a Glendale, Calif.-based savings and loan that Citi bought from Ford seven years ago for nearly $6 billion.

The Philadelphia Inquirer:

- To hear Collegeville builder Gustavo Perea tell it, the prospect is frightening. Some ambitious union organizer would take his carpenters out to a bar, buy them a couple of beers, get them to sign some union cards, and the next thing Perea knows, he'd wake up in the morning with a union shop. That's how he imagines the future if the federal Employee Free Choice Act is passed - a proposed law that unions say would make it easier for them to bring unions into workplaces. It would allow workers to bypass traditional union-establishing elections if a majority sign cards that would authorize a union, a process known as card check. "It's a bad law," said Perea, president of Adams-Bickel Associates Inc. Union organizers such as Harry Arnold disagree. "We are not afraid of elections," said Arnold, who works locally for the Communications Workers of America and specializes in organizing cable and telecom employees. "It's what happens during the time the company gets to intimidate the workers [before the election]" that worries organizers, he said. Other provisions in the bill stiffen penalties for unfair business practices against pro-union workers and require binding arbitration if both sides cannot agree on a first contract. Perea and thousands of other businesses are behind a big push to defeat the bill - President Obama's top promise to organized labor, which provided important parts of the grassroots machinery that helped elect him. Experts say the bill might be introduced in the House in March or April, but the key Senate vote probably won't occur until June. The national Chamber of Commerce has spent $10 million in recent months opposing the proposed legislation, while labor, through the AFL-CIO and affiliate organizations, launched a $3 million advertising campaign in mid-January. In the first week of February, both sides sent their troops to Washington to lobby in well-publicized events. Union workers delivered a petition with more than a million signatures supporting the act. The National Association of Manufacturers dispatched 50 chief executives. Perea's not surprised that passing the bill is organized labor's top priority this year." Unions have been losing ground," Perea said. "The world has changed. It's an archaic and antique method of working."

Politico:

- Railroads made Chicago, and now a Chicago-rich White House wants to return the favor: remaking rail with a huge new federal investment in high-speed passenger trains. The $787.2 billion economic recovery bill — to be signed by President Barack Obama on Tuesday — dedicates $8 billion to high-speed rail, most of which was added in the final closed-door bargaining at the instigation of White House chief of staff Rahm Emanuel. It’s a sum that far surpasses anything before attempted in the United States — and more is coming. Administration officials told Politico that when Obama outlines his 2010 budget next week, it will ask for $1 billion more for high-speed rail in each of the next five years.

- House Majority Leader Steny H. Hoyer (D-Md.) is pushing Speaker Nancy Pelosi (D-Calif.) to take a harder line with the Senate after a trio of Republican senators forced Congress to trim billions from the $787 billion economic stimulus package.

USAToday:

- Despite President Obama's vow to open government more than ever, the Justice Department is defending Bush administration decisions to keep secret many documents about domestic wiretapping, data collection on travelers and U.S. citizens, and interrogation of suspected terrorists.

Reuters:
- High-profile hedge fund manager Crispin Odey, who made money last year betting on falling bank share prices, has been buying into UK banks recently because he thinks they are now so cheap. Odey, who is founding partner of Odey Asset Management and manager of the 896 million euro Odey European fund, said in notes to clients this month that the risk/return on UK clearing banks' shares is now wrong and that over time these shares would do well. "We have become big buyers of the UK clearing banks. This reflects how cheap they are," said Odey, who earned nearly 28 million pounds in the year to April 2008. Holdings in the banks and financials sector rose to 5.4 percent of his European fund at the end of January from 3 percent at the end of December.

- European automaker Volkswagen AG's car venture in Shanghai has slashed prices by up to nearly 12 percent to lure buyers into the showroom.

Handelsblatt:
- German exports may decline more than 10% in 2009, citing a forecast by DekaBank.

London Stock Exchange:

- The Financial Services Authority (FSA) will launch a probe into the hedge fund industry's rigid performance fees once it wraps up an investigation into banking bonuses, an expert has predicted. PricewaterhouseCoopers' UK financial services tax leader Robert Mellor told Reuters that the FSA's focus would be on strengthening the link between fees and investments' underlying performance.

Interfax:

- Russia’s Economy Ministry revised its estimate of the country’s economic contraction in 2009 to 2.2% negative growth from a .2% contraction, citing Deputy Economy Minister Andrei Klepach. The ministry estimates that industrial output will shrink 7.4% this year, down from a previous forecast of 5.5% negative growth, citing Klepach.

Nature News:

- Researchers warn that the overuse of nitrogen fertilizer in China is poisoning air, soil and water and say farmers could cut their use of the fertilizers without compromising crop yields. Until recently, the use of fertilizer in China was actively promoted by scientists, government and the 'extension staff' who promote new agricultural practices to farmers. As a result, the average grain production per unit area of farmed land doubled between 1977 and 2005. The cost for that increase was a significant surge in fertilizer use from 7 million tons in 1977 to 26.2 million tons in 2005. "Most farmers believe that higher crop yields will be achieved with more fertilizer, whereas our study shows that sometimes less is more," says Zhang.

China Briefing Magazine:
- China’s yuan may weaken to around 7 per dollar as the economy worsens and unemployment rises, citing Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission. The currency may decline to 6.95 to 7 against the dollar, the official at the country’s top planning agency was quoted as saying. Zhang said 20 million jobs were cut in Guangdong, China’s export hub, over the past year.

MoneyNews.com:

- Global assets of hedge funds may drop to $1.2 trillion by the end of the first quarter, down 35 percent from 2007 as the number of managers decline and funds rely less on strategies that use leverage, a UBS executive said on Tuesday. "We are gonna see a reduction in hedge fund assets, we are gonna see decline in the number of hedge funds, we are gonna see some strategies that will not work in this environment," Timothy Bell, global head of hedge funds advisory at UBS Wealth Management, told reporters in Singapore.

Bear Radar

Style Underperformer:
Mid-cap Value (-5.31%)

Sector Underperformers:
Coal (-9.65%), Banks (-7.89%) and Steel (-7.38%)

Stocks Falling on Unusual Volume:
MBT, ANW, USB, PTR, APA, RAIL, PWRD, CEDC, SYNA, AMAG, AEE, BCA, SMG, PBT and DPL

Stocks With Unusual Put Option Activity:
1) WFT 2) DAI 3) ELNK 4) PWR 5) EXM

Bull Radar

Style Underperformer:
Small-cap Growth (-2.88%)

Sector Underperformers:
Medical Equipment (-.34%), Education (-.50%) and Retail (-1.41%)

Stocks Falling on Unusual Volume:
SA, BVN, WMT, DLTR, FOSL, THO, IWA, DCM, OSIS, CVLT, TEVA, AFAM, LPHI, GOLD, LIHR, STRA, CHE, RNT and FTI

Stocks With Unusual Put Option Activity:
1) PCLN 2) TEVA 3) CX 4) EGO 5) XCO

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