Stocks Finish Higher, Boosted by Financial, Technology, Insurance, REIT, Education and Airline Shares

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Stocks Higher into Final Hour on Short-Covering, Bargain-Hunting, Falling Credit Market Angst, Investment Manager Performance Anxiety

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Financial longs, Retail longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges this morning, 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 about average. Investor anxiety is above average. Today’s overall market action is very bullish. The VIX is falling 6.18% and is very high at 31.57. The ISE Sentiment Index is around average at 141.0 and the total put/call is slightly above average at .90. Finally, the NYSE Arms has been running around average most of the day, hitting 1.62 at its intraday peak, and is currently .61. The Euro Financial Sector Credit Default Swap Index is rising .61% today to 128.19 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 1.06% to 154.44 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling another 2.59% to 70 basis points. The TED spread is now down 393 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 2.66% to 43.38 basis points. The Libor-OIS spread is rising 8.74% to 65 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.48%, which is down 116 basis points since July 7th. The 3-month T-Bill is yielding .16%, which is down 1 basis point today. REITs, Financials and Insurers are propelling the major averages higher today. Technology shares are also outperformers. I suspect many funds that had covered their financial shorts ahead of the bank stress test results reloaded upon their release, thus today’s gains are likely quite painful for many. Tomorrow is option expiration. The Dow has been up 5 of the last 7 May option expiration days. I suspect we will extend today’s gains tomorrow on better-than-expected economic data. Nikkei futures indicate an +107 open in Japan and DAX futures indicate an +24 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit market angst, investment manager performance anxiety and bargain-hunting.

Today's Headlines

Bloomberg:

- The cost of borrowing in dollars between banks fell the most in eight weeks as government and central bank efforts to unlock credit markets showed signs of bearing fruit and deposits at financial institutions grew. The London interbank offered rate, or Libor, for such loans fell almost three basis points to 0.85 percent today, according to the British Bankers’ Association. The so-called TED spread, the difference between what the U.S. Treasury and banks pay to borrow for three months, dropped to its lowest since the day before BNP Paribas SA halted withdrawals from three of its funds on Aug. 9, 2007, because of subprime-mortgage related losses. The Libor-OIS spread, a measure of the unwillingness of banks to offer each other cash, narrowed three basis points to 64 basis points today, its lowest level since June 16. The TED spread dropped three basis points to 69 basis points.

- Volkswagen AG, Europe’s largest carmaker, will build a bigger factory than planned in Chattanooga, Tennessee, to take advantage of slumping set-up costs while U.S. competitors struggle to survive. “This is great timing,” Frank Fischer, who will run the plant, said yesterday in an interview at the site as he prepared for the project’s wall-raising ceremony. “Construction prices are down and the availability of resources is immense.” Volkswagen is adding to assembly and body-shop facilities, expanding the plant’s area to 226,000 square feet (20,900 square meters) from 200,000 in the initial blueprint and enabling it to build 900 cars a day rather than the 560 vehicles planned. The worst is over in the U.S. car market, which may start to recover toward the end of this year, Fischer said.

- The US dollar will appreciate against the euro after the 16-nation currency was unable to break above $1.38 amid a pullback in US stocks and a rise in Treasury debt prices, according to Brown Brothers Harriman Inc.

- Ford Motor Co.(F), the only U.S. automaker to forgo federal aid, may return to profitability by 2011 because of progress in cutting costs and making cars more fuel-efficient, Chief Executive Officer Alan Mulally said. “We’re on a good glide slope to get back to profitability in 2011,” Mulally told shareholders today at the automaker’s annual meeting in Wilmington, Delaware. “We have sufficient liquidity, we’ve got a good product plan and we’ve got the restructuring in line with that product plan. Now it’s just staying on that plan.”

- President Barack Obama said there aren’t enough votes in the Senate to pass “card-check” legislation sought by labor unions and only a revamped measure would have a chance getting through Congress.

- The European Central Bank said inflation expectations for this year and next have declined. Professional forecasters surveyed by the ECB lowered their inflation projections to .5% for 2009 and 1.3% for 2010.

- European Central Bank policy makers clashed over the bank’s asset-buying program less than a week after President Jean-Claude Trichet engineered a truce.

- U.S. regulators may impose the same price reporting and transparency requirements on over-the- counter derivatives that reduced bank profits by almost half in the corporate bond market when the Trace system was adopted seven years ago. “I think it’s something we’ll look at very closely as a potential model,” Securities and Exchange Chairwoman Mary Schapiro said yesterday at a news conference in Washington, in which regulators laid out potential structural changes to improve policing of the $684 trillion OTC derivatives market.

- The 2009 Atlantic storm season will produce six hurricanes, down from an earlier prediction of eight, and 10 named storms rather than 13, AccuWeather.com said today. Cooler water temperatures in the Atlantic, a weak El Nino system in the Pacific and stronger winds across Africa will all combine for a less-severe hurricane season, AccuWeather’s Joe Bastardi said in an e-mailed statement. The season runs from June 1 to Nov. 30. “As we predicted in our early season forecast, we’re anticipating a major reduction in the number of overall storms compared to last year,” said Bastardi, the private forecaster’s chief long-range and hurricane forecaster.

- The U.S. Federal Reserve may revise rules that currently favor Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, Fed Chairman Ben S. Bernanke said in a letter released today by Connecticut Attorney General Richard Blumenthal.

- U.S. prosecutors have subpoenaed New Mexico’s $11.8 billion state endowment funds for documents regarding investment activities, according to a state spokesman. The New Mexico Investment Council, which includes Governor Bill Richardson, received the request earlier this month, said spokesman Charles Wollman, in a telephone interview. He declined to describe the contents of the subpoena, issued by the U.S. Attorney in Albuquerque. The Justice Department is already investigating whether a California financial adviser was awarded $1.5 million in bond and interest-rate swap work in New Mexico in 2004 in exchange for $100,000 in donations to Richardson political committees.

- Thanks to the commonwealth of Massachusetts, crusading attorneys general throughout the land now have a road map for extracting multimillion-dollar checks from Wall Street banks such as Goldman Sachs Group Inc.: Don’t accuse them of anything at all. The big news from Goldman and Massachusetts Attorney General Martha Coakley this week was a $60 million settlement, under which the investment bank resolved her office’s investigation into its packaging of mortgage securities backed by subprime home loans. Per the usual custom in such accords, Goldman didn’t admit any wrongdoing. The odd part is that Coakley’s office didn’t accuse Goldman of any wrongdoing, either. It filed no lawsuit. And it made no allegations that Goldman had violated any statutes or rules. Why did Goldman pay if Coakley’s investigators couldn’t identify any infractions to allege?

- Elliott Management Corp., the hedge fund that almost pushed the government of Peru into default in 2000, is now seeking to profit from the failure of distressed companies. About 11 percent of Elliott’s $13 billion of assets were in so-called basis trades at the end of the first quarter, meaning it bought bonds and credit-default swaps that protect against losses on the debt, according to a report dated April 29 sent to investors and obtained by Bloomberg News. “These trades are among the most interesting arbitrage trades in our book, and they are especially attractive given their extra profitability in the event of default of the underlying referenced obligation,” Elliott said in the letter. New York-based Elliott, founded by Paul Singer in 1977, joins Deutsche Bank AG and Citadel Investment Group LLC in seeking to make money from the trades, pitting them against traditional creditors as defaults reach the highest since 2002.

- The International Energy Agency cut its oil-demand forecast for a ninth consecutive month, predicting consumption this year will fall the most since 1981 as the recession lingers. The Paris-based adviser to 28 nations cut its global oil demand estimate “slightly” to 83.2 million barrels a day this year, down 3 percent from 2008, it said today in its monthly report. That is 230,000 barrels a day lower than it forecast last month. The revision comes a day after OPEC reduced its 2009 forecast, predicting oil demand of 84.03 million barrels a day. “Demand continues to look very, very weak,” David Fyfe, head of the IEA’s oil industry and markets division, said in a phone interview from Paris. Demand is weakest in the world’s most developed nations, where consumption will drop by 5.1 percent this year, the IEA said. The IEA cited “very weak” demand data in April for the U.S., and to a lesser extent, Europe. Crude inventories in the industrial economies of the Organization for Economic Cooperation and Development are at their highest since 1993, according to Fyfe. Stockpiles were equivalent to 62 days of consumption as of the first quarter of the year, according to the IEA. The energy adviser said it expects consumption in developing economies to contract for the first time since 1994 as China and Russia “continue to exhibit sustained weakness.” Demand in these economies will average 38.1 million barrels a day this year, a decline of 0.4 percent, or 140,000 barrels a day compared with 2008.

Wall Street Journal:

- Central and Eastern Europe are shaping up to be the European banking sector's very own subprime crisis. Results on Thursday from two of the biggest lenders to the region confirmed the crisis in these markets is getting worse.

- Intel’s(INTC) Venture Capital Arm Sees No Signs of Slowing Down

- Unions vs. Taxpayers.

CNBC:

- Chrysler & GM expect to close thousands of dealerships starting today. Discussing what this will mean for the industry, with Chris Ortiz, Great American Chevrolet and Jim Anderer, Jeep dealership. (video)

- Does anybody really believe that adding 50 million people to the public health-care rolls will not cost the government more money? About $1.5 trillion to $2 trillion more? At least. So let’s be serious when evaluating President Obama’s goal of universal health care, and the idea that it’s a cost-cutter. Can’t happen. Won’t happen. Costs are going to explode.

NY Times:

- Congressional Democrats are voicing growing unease over the Obama administration’s national security policies, including the seemingly open-ended commitment in Afghanistan and the nettlesome question of what to do with prisoners held at Guantánamo Bay, Cuba. “With respect to Afghanistan and Pakistan, I am extremely dubious that the administration will be able to accomplish what it wants to accomplish,” Mr. Obey said last week. “The problem is not the administration’s policy or its goals. The problem is that I doubt that we have the tools there that we need to implement virtually any policy in that region.” Some liberal Democrats are expressing outright opposition to continuing the operations in Iraq or Afghanistan, and are planning to vote against the spending bill. Representative John P. Murtha, Democrat of Pennsylvania and chairman of the defense appropriations subcommittee, said the administration had not provided a clear enough plan to reassure lawmakers about the operations in Afghanistan. “We keep asking for a plan,” Mr. Murtha said. “I think the Democrats are nervous just because they haven’t seen a plan yet.” “The public is not focused on the war at all,” Mr. Murtha said. “But they are going to be focused on it if it goes bad.”

MarketWatch:
- U.S. financial stocks stepped firmly into the green on Thursday as the banking sector caught a lift from a pair of industry upgrades by Morgan Stanley. Morgan's large-cap and mid-cap bank analysts, Betsy Graseck and Ken Zerbe, late Wednesday upgraded their industry views to attractive from in-line. The analysts believe that, "nonperforming loan growth will peak sooner, rather than later, due to stabilizing jobless claims; improved liquidity in credit markets and increased competition among lenders should lower corporate borrowing rates; and, pre-provision earnings are running above the bear case, which is accelerating capital repair."

NY Post:

- Hedge-fund bigwig Jim Simons, who won the title last year of top hedge-fund earner for pocketing a whopping $2.5 billion, is battling questions of poor performance in an equity fund set up for outside investors such as pension funds. Simons' Renaissance Institutional Equities Fund, known as RIEF, has been falling short of its mandate to beat the S&P 500 index this year. The fund's B shares are down roughly 17 percent through April, according to documents obtained by The Post. Investors say RIEF was tripped up by shorting stocks when the market unexpectedly surged in recent months. RIEF is marketed as a US equities fund that buys and shorts stocks. It's been down before -- including a 16 percent drop last year -- but in the past it tended to overcome criticism by generally outperforming the S&P 500. Simons, a mathematician who founded hedge fund firm Renaissance Technologies in 1982, took the unusual step of holding a conference call yesterday to address investors' concerns.

Naked capitalism:

- Stanford Law Review has a great interview with Warren Buffett's longstanding partner, Charlie Munger.

Seeking Alpha:

- This video, which I recently created, ignores Lehman's balance sheet and its long-term prospects, focusing instead on presenting evidence suggesting that the mid-September, 2008 sell-off which devastated Lehman's stock price -- directly resulting in the company's bankruptcy a few days later -- was a consequence of an enterprise designed to enrich a small handful of short-selling hedge funds. As I demonstrate, in place of gasoline, the perpetrators used a deluge of price-depressing naked short positions as their accelerant, with much the same results.

Politico:

- The CIA has rejected Dick Cheney's request to release classified information on interrogations -- info he believed would prove waterboarding and other techniques were effective in extracting information from terror detainees. The reason: The docs are the subject of pending litigation -- a reference to lawsuits filed by detainees.

delawareonline:

- Sports betting is officially the law of the land. Gov. Jack Markell signed the sports betting bill into law this morning at Delaware Park.

Reuters:
- Oscar-winning film director Steven Spielberg was so frustrated that no videogames catered for all of his seven children that he did what a entertainment maestro might do -- made his own game. "Boom Blox" was the first in a multi-franchise deal between Spielberg and videogame publisher Electronic Arts(ERTS) and has sold close to one million copies globally since it was released for Nintendo's Wii last May. On May 19, EA releases Spielberg's second game, "Boom Blox Bash Party."

- The family saga that's gotten the blogosphere riled up in recent days doesn't have to do with the president. It's the vice president's brother—Jim Biden—and his son, R. Hunter Biden, who've been drawing attention, thanks to a midsized, New York-based money-management firm they bought control of in 2006 called Paradigm Global Advisers. The Paradigm adventure has been a comedy of errors for Hunter and Jim Biden. They've been sued—and, in turn, countersued—by a man who was to be their partner in the venture. They're in litigation over it with a lawyer who once represented them (who's now in prison because of an unrelated conviction). They're facing still another lawsuit from one of Paradigm's other investors. Meanwhile, they've had to fend off queries about Paradigm's slight links with indicted financier Allen Stanford and a more tenuous connection with a failed hedge fund with which Paradigm shared office space. All of this has added up to headaches for the Bidens but to no clear improprieties. But the spotlight on Paradigm raises a fascinating question: Why did the Bidens want to run a hedge fund in the first place?

- U.S. steel companies are not too happy with President Barack Obama these days. Industry executives say that in the last 15 years, they have cut their carbon dioxide emissions by one-third. But now, they think the president's cap-and-trade rules, currently in Congress, would punish them for doing what they feel they have already done -- cut pollution. And they argue that the industry, recognized by the Environmental Protection Agency for making big strides in cutting emissions, is being lumped in with utilities and other heavy industries, which pump out much more pollution.

Financial Times:
- Anecdotal evidence suggests new hedge funds are raising an average of about $40m this year, compared with $200m to $250m two years ago. Leverage has been tamed, to about 1.3 times on average. Fees are sinking fast. The standard 2 per cent management fee and 20 per cent performance fee of the boom became 1 and 15 last year; management fees may now be 0.5 per cent, or lower. Performance fees could be halved, and subject to hurdles over Libor and clawbacks in the event of subsequent losses. Three-month redemption terms are becoming 30 days. For portfolio managers themselves, guarantees and signing bonuses are mostly history, replaced by “ghost shares”, or cuts of future profits.

Ramboell:

- The share of Danes wanting the euro fell to 43.7% from 49.8% in a January poll.

La Figaro:

- French Prime Minister Francois Fillon said “experts” see the country’s economy contracting around 3% this year. Fillon sees the jobs market worsening and said that Europe may see a slow economic recovery in 2010 after a “very difficult” 2009. He also said taxes will not be raised.

Zawya:
- The United Arab Emirates is prepared to invest in Iraqi oilfields, ambassador Sheikh Abdullah Ibrahim al-Zowi told Iraqi oil minister Hussein al-Shahrestani.

Haaretz.com:

- U.S. President Barack Obama has sent a message to Prime Minister Benjamin Netanyahu demanding that Israel not surprise the U.S. with an Israeli military operation against Iran. The message was conveyed by a senior American official who met in Israel with Netanyahu, ministers and other senior officials.

Bear Radar

Style Underperformer:
Large-cap Value (+.91%)

Sector Underperformers:
Utilities (-.23%), Computer Services (-.10%) and Drugs (+.25%)

Stocks Falling on Unusual Volume:
BT, CVLT, VNDA, MYL, CLF, ANW, ENS and BMA

Stocks With Unusual Put Option Activity:
1) FIG 2) CLF 3) WFMI 4) GOLD 5) MTW

Bull Radar

Style Outperformer:
Small-cap Value (+2.19%)

Sector Outperformers:
Homebuilders (+3.60%), Semis (+3.20%) and Education (+3.20%)

Stocks Rising on Unusual Volume:
RMBS, NVLS, PUK, BCS, UBS, PSMT, SU, STP, JACK, CSKI, AAWW, GOLD, CME, DDRX, CA, AMSF, SRDX, KNSY, HELE, WINN, MGLN, BEAT, FOSL, AIPC, CORE, CALM, GIL, EVN, YPF, IAI and URS

Stocks With Unusual Call Option Activity:
1) NVLS 2) PHM 3) GENZ 4) WFMI 5) KSS

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