Stocks Finish at Session Highs, Boosted by Financial, REIT and Homebuilding Shares

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Stocks Surging into Final Hour on Bank "Stress Test" Details, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Retail longs and Computer longs. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is above average. Investor anxiety is also above average. Today’s overall market action is very bullish. The VIX is falling 15.45% and is very high at 44.48. The ISE Sentiment Index is slightly below average at 122.0 and the total put/call is around average at .85. Finally, the NYSE Arms has been running low most of the day, hitting .39 at its intraday trough, and is currently .48. The Euro Financial Sector Credit Default Swap Index is rising .96% today to 161.0 basis points. This index is hitting a new record again today, eclipsing its high of 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising 3.53% to 220.99 basis points. The TED spread is falling 2.98% to 95 basis points. The TED spread is now down 372 basis points in about four months. The 2-year swap spread is rising 4.40% to 65.25 basis points. The Libor-OIS spread is falling .71% to 100.0 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 11 basis points to 1.00%, which is down 170 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 .30%, which is up 3 basis points today. Fed Chairman Bernanke’s detailed comments regarding the forthcoming bank “stress tests” have alleviated some uncertainty surrounding this plan, which is a large positive. The most heavily-shorted groups are seeing the largest gains today. The MS Cyclical Index is rising 6.4%, as well. Inflation expectations have taken another meaningful fall over the last few days. Moreover, less safe-haven buying is also weighing heavily on gold again today. I suspect we will see another follow-through surge higher in US stocks at some point over the next few days, but it is too early to tell whether yesterday’s low was “the low.” Nikkei futures indicate an +270 open in Japan and DAX futures indicate an +88 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on diminishing financial sector pessimism, short-covering and less forced selling.

Today's Headlines

Bloomberg:

- President Barack Obama, who spent the last month warning of the dangers facing the U.S. economy to win support for his recovery plan, is under pressure to begin fostering public optimism. Obama has rolled out three major initiatives -- a $787 billion stimulus bill, a bank-rescue plan and an effort to limit home foreclosures. Now, as he addresses his first joint session of Congress before a nationwide audience tonight, he must encourage lawmakers and voters to believe the plan can work, political analysts and economists say. Obama, a Democrat who structured his presidential campaign around a message of change and hope, began to tamp down the hope theme after the credit crunch turned into a full-blown financial meltdown in September. Since winning the election and taking office, he has sounded graver still. The specter of enduring economic distress is also spelled out on the White House Web site, which quotes the president as saying the recession could “linger for years” without quick and strong government action. Such rhetoric has alarmed some people, including former President Bill Clinton. Obama would be mistaken to engage in “inane happy talk and false promises,” Clinton said on ABC News’s “Good Morning America” on Feb. 20. Still, he said, “I just would like for him to end (his speeches) by saying that he is hopeful and completely convinced we’re going to come through this.” Douglas Holtz-Eakin, a former Congressional Budget Office director, said he shares Clinton’s concern. “If you’ve already got a major slowdown, you certainly don’t need to be exacerbating it,” said Holtz-Eakin, who advised Republican Senator John McCain during his 2008 presidential bid. Such talk could become “a self-fulfilling prophesy,” he said. “He needs to flip from complaining about the terrible circumstances he’s inherited and give people cause for optimism,” said Kevin Hassett, director of economic policy studies at American Enterprise Institute and a Bloomberg News columnist.

- Gold is falling $30/ounce as demand ebbed following last week’s rally that sent the precious metal above $1,000 an ounce for the first time in 11 months. For the first time since Jan. 28, investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, was unchanged for two consecutive sessions. Assets in the fund rose 4.4 percent last week to a record 1,029 metric tons. In 2009, assets in the SPDR Gold Trust have grown 32 percent, and investment in Barclays Plc’s iShares Silver Trust, the biggest ETF backed by silver, increased 20 percent, reaching a record 8,180 metric tons yesterday.

- Crude oil fell in New York after a report showed that confidence among U.S. consumers plunged to a record low in February, signaling spending will slump further. Oil retreated after the Conference Board’s index declined more than forecast to 25 this month, the lowest level since data began in 1967, the New York-based research group said today.

- Retailers Home Depot Inc., Nordstrom Inc. and Macy’s Inc. reported fourth-quarter earnings that beat analysts’ estimates after they curbed costs and inventory. The Standard & Poor’s 500 Retailing Index advanced 2.3 percent today as Atlanta-based Home Depot gained as much as 8.8 percent. Nordstrom jumped as much as 18 percent in New York Stock Exchange composite trading, and Macy’s rose 6.9 percent.

- The yen weakened beyond 96 against the dollar for the first time since November as Japan’s deteriorating economy eroded demand for the currency as a refuge from the global financial crisis.

- European small-cap fund managers may be stuck with $67 billion in shares that are too tough to trade. The number of stocks in the 1,122-company MSCI Europe Small- Cap Index that are difficult to sell, defined as taking at least one day to trade 1 million euros ($1.3 million) in holding, has jumped 85 percent to 724 last month from a year earlier, data compiled by Bloomberg show.

- Quadrangle Group LLC named two senior executives to run the buyout firm after the departure of Steven Rattner, the politically connected former journalist who will be the U.S. Treasury’s lead adviser on auto-industry restructuring.

- North Korea plans to launch a satellite, drawing condemnation from South Korea’s defense minister, who said the regime may instead be preparing a long- range missile test. Preparations for the launch of an “experimental communications satellite” are making “brisk headway,” the official Korea Central News Agency said today, citing an unidentified spokesman from the national space agency.

- Microsoft Corp.(MSFT) Chief Executive Officer Steve Ballmer said the company will face more competition from Google Inc. and Apple Inc. in the market for personal-computer software. Google’s Android operating system will probably be used on laptop computers, challenging Microsoft’s Windows, Ballmer said at a meeting with financial analysts in New York today. Apple gained 1 percentage point or more of market share in PC sales in the past year, he said.

- A satellite launched from California failed to reach orbit today, crashing into the sea near Antarctica and dooming a $273 million mission to study global-warming gases. “The mission is lost,” National Aeronautics and Space Administration spokesman Steve Cole said in a telephone interview from the launch site at Vandenberg Air Force Base in California.

- Elliott Wave International Inc.’s Robert Prechter, who advised shorting U.S. stocks three months before the bear market began, said investors should end that bet after the Standard & Poor’s 500 Index tumbled to a 12-year low. He warned of a “sharp and scary” for anyone still wagering on a retreat, according to this month’s “Elliott Wave Theorist.”

- East European economies may face a region-wide crisis as the global economic slump reduces demand for their exports and western banks that have been stung by credit losses cut off lending, Standard & Poor’s said. “All ingredients of a significant regional crisis are in place,” Jean-Michel Six, the Paris-based chief European economist at S&P, wrote in a report published today.

- The cost of shipping commodities such as iron ore and coal tumbled the most in three months as Rio Tinto Group said it may delay deliveries from Western Australia, increasing the supply of vessels seeking cargoes. Rio declared a force majeure, a legal clause allowing delays if an incident happens outside of the supplier’s control, according to a letter from the company dated Feb. 23 obtained by Bloomberg News.

Wall Street Journal:

- Bank of America(BAC) Internal Memo: We Are Not Being Nationalized, Okay?

CNBC.com:
- “If you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do.” Those dire words come from William H. Gross, who manages the largest bond mutual fund in the United States as the co-chief investment officer for the Pacific Investment Management Company.

- Poll: We've noticed some recent chatter about "mark-to-market." That's the 2-year-old accounting rule requiring companies to value an asset for its immediate sale price on the open market. The rule made sense following Enron, Worldcom and other scandalous debacles. It prevents companies from lying about what certain assets are worth. But now some folks claim the rule goes too far, forcing companies to write down the value of certain assets even though they could end up being worth something down the road. So why not suspend the rule?

Silive.com:

- A new poll shows New York Gov. David Paterson slumping to the lowest job approval and favorability ratings since he took office almost a year ago. The Siena College Research Institute also reports Paterson trailing in potential 2010 election matchups. The poll released Tuesday shows Paterson viewed favorably by 40 percent of voters -- down from 64 percent in November. His job performance got a favorable rating from 28 percent of those polled and only 19 percent said they'd vote for him in 2010.

Washington Post:

- Cuba is still waiting for its offshore oil rush. It has been four years since U.S. experts said the island may sit atop nearly 10 billion barrels of deep-sea oil, revealing for Cuba an enormous economic Catch-22. Cuba needs the technical expertise of major western oil companies to get to any of the unexploited crude. Yet on Feb. 7 the U.S. marked the 47th year of a trade embargo that has blocked producers with the technical ability to drill that deep, denying Cuba what could be a massive windfall.

The Detroit News:

- The Obama administration's auto team will hold face-to-face talks with top executives from both General Motors Corp. and Chrysler LLC this week, even as the automakers face down a March 31 deadline to win key concessions from the UAW and bondholders. GM Chairman and CEO Rick Wagoner, Chief Operating Officer Fritz Henderson and Chief Financial Officer Ray Young are to have a lengthy meeting Thursday with key members of the administration's auto restructuring team, people familiar with the meeting said Monday.

Reuters:
- A fund of hedge funds run by two members of U.S. Vice President Joe Biden's family was marketed exclusively by firms controlled by Texas financier Allen Stanford, charged by regulators with an $8 billion (5.5 billion pound) fraud, the Wall Street Journal said. The $50 million fund was jointly branded between the Bidens' Paradigm Global Advisors and a Stanford Financial Group entity, and was known as the Paradigm Stanford Capital Management Core Alternative Fund, the paper said. Stanford-related companies marketed the fund to investors and also invested about $2.7 million of their own money in the fund, the paper said, citing a lawyer for Paradigm. Paradigm Global Advisors is owned through a holding company by the vice president's son, Hunter, and Joe Biden's brother, James, according to the paper.

- Teenagers who are preoccupied with their Internet time may be more prone to aggressive behavior, researchers reported Monday. In a study of more than 9,400 Taiwanese teenagers, the researchers found that those with signs of Internet "addiction" were more likely to say they had hit, shoved or threatened someone in the past year. The link remained when the investigators accounted for several other factors -- including the teenagers' scores on measures of self-esteem and depression, as well as their exposure to TV violence.

- Credit default swaps on General Electric Co's (GE) finance arm widened sharply on Tuesday, as financial debt weakened across the board and a day after Deutsche Bank warned the unit may modestly breach its fixed charge covenant.

- The U.S. government should not take over and run banks, but nationalization of zombie banks may have to be done as a last resort if management is replaced and the private sector is allowed to run the bank, a senior U.S. senator said on Tuesday. "If the government's going to take over and run the banks, that's a bad idea," New York Democrat Charles Schumer told reporters. The "government's not very good at that."

TimesOnline:

- Some of the City's shrewdest hedge fund investors, who made millions of pounds betting that UK bank shares would fall, have turned their guns on insurers amid heightened worry about the financial strength of the sector. Lansdowne Partners, which spent three years gambling on the collapse of Northern Rock, and made huge profits when the bet paid off in the fourth year, has gambled tens of millions that the share prices of four household-name insurance companies will fall.

Caijing Magazine:
- Royal Bank of Scotland Group Plc., the biggest government-controlled UK bank, is closing some of its operations in China as part of a plan to sell assets in Asia. RBS is considering selling all or part of its Australian division along with other assets in Asia, according to people familiar with the plan.

The Jerusalem Post:

- The Defense Ministry is concerned that US President Barack Obama will cut military aid to Israel in an effort to pressure the new government to take action against illegal outposts and settlement construction, defense officials said.

Ynet news.com:

- US Secretary of State Hillary Clinton plans to announce a $900 million pledge of US aid for Gaza and the Palestinian Authority at a donors' meeting in Egypt next week, a State Department official said on Monday. The money, which needs US congressional approval, will be distributed through UN and other bodies and not via Hamas, which rules Gaza, said one official. "This money is for Gaza and to help strengthen the Palestinian Authority. It is not going to go to Hamas," said the official, who asked not to be named.

Bear Radar

Style Underperformer:
Large-cap Growth (+1.15%)

Sector Underperformers:
Gold (-6.63%), Education (-2.97%) and Construction (-1.95%)

Stocks Falling on Unusual Volume:
WLL, SM, SSRI, ABX, MHK, MSFT, ESI, HMY, HURN, FWLT, NCTY, LIHR, GOLD, PAAS, MTR, SBR, DOM, HXM and SM

Stocks With Unusual Put Option Activity:
1) PX 2) SVU 3) LDK 4) WMB 5) SWN

Bull Radar

Style Outperformer:
Small-cap Value (+2.09%)

Sector Outperformers:
Homebuilders (+4.07%), Hospitals (+3.66%) and I-Banks (+3.12%)

Stocks Rising on Unusual Volume:
TM, HMC, TEF, RIO, CONN, ONXX, ASTE, UNFI, CBRL, QGEN, LBTYA, TRLG, AVCT, NTRI, VNUS, IPHS, CECO, SHPGY, GRMN, ESRX, RBCAA, ISRG, HSIC, COCO, YHOO, OB, HLS, ZN, GNI, MVL and NCI

Stocks With Unusual Call Option Activity:
1) JWN 2) ONXX 3) RMBS 4) TSM 5) FFIV

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