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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Investors should buy agency mortgage-backed securities because the Federal Reserve has created new financing options for holders that will support the market and demand may be improving, according to Citigroup(C). New Fed lending programs, including facilities for investment banks announced this month, “increase the efficiency of the MBS market and are likely to stem the tide of forced liquidations,” analyst Brett Rose wrote in a report. He said demand amid higher-than-average yield premiums may come from: government-chartered Fannie Mae, Freddie Mac and Federal Home Loan Banks; US banks; and Japanese financial companies. “The headwinds against MBS have been swirling furiously but may have finally shifted to a tailwind,” Rose wrote.
- Top-rated securities backed by auto-loan and credit-card payments may be able to withstand a US unemployment rate of almost 20% without sustaining losses, according to Fitch Ratings. Unemployment would have to rise fourfold from the current rate of 4.8% for debt backed by auto-loan and credit-card payments with a AAA rating to take any losses, according to a report from Fitch analysts Kevin Duignan, Donald Powell and Ebru Demir in NY.
- Crude oil is falling for a fourth day in NY on signs that the slowing US economy will cut fuel demand in the world’s biggest energy-consuming country. Oil is likely to slide further this spring as lower economic growth encourages traders to exit commodity markets, Goldman Sachs Group(GS) said in a recent report. A government report on March 19 showed that US fuel demand in the four previous weeks was down 3.2% from a year earlier. US crude-oil inventories probably rose 1.5 million barrels last week. It would market the 10^th gain in 11 weeks. The Supreme Council of Petroleum and Mineral Affairs, chaired by King Abdullah, agreed to work with OPEC and non-OPEC countries to ensure oil-market stability and “prevent the effects of harmful speculation,” the government body said in a statement posted on its Web site.
- General Electric(GE) is in talks with Boeing(BA) to buy 40 to 50 of its 737 jetliners to meet demand from airlines upgrading their fleets.
- Valero Energy(VLO), the largest US refiner, said it expects first-quarter net income to plunge to as little as 10 cents a share as profit margins on gasoline and other fuels narrow. Per-share profit will be in the range of 10 cents to 35 cents. That would compare with net income of $1.86 a share in 2007’s first quarter. Valero was expected to net 96 cents a share in the current quarter, according to the average of two analyst estimates.
- CB Richard Ellis Group(CBG), the world’s biggest commercial real estate company by market value, rose 14% after hedge fund manager Stephen Mandel increased his stake to 6.6%.
- McCain Says Democrats Won’t Acknowledge Gains in Iraq.
- The US dollar is falling against the euro as a rally in Asian stocks encouraged investors to buy higher-yielding assets with loans in the US currency.
- A French court this month upheld a magazine’s right to print a Danish cartoon of the prophet Muhammad with a bomb in his turban. At the same time, it affirmed a lower court’s finding that the image, published two years ago, could be “shocking, even hurtful” for devout Muslims. The split decision illustrates how France, like the Netherlands, Denmark and Germany, is struggling to accommodate its growing Muslim minority without sacrificing principles such as separation of church and state and free speech, which form the heart of a cultural identity forged by Voltaire and other 18^th-century philosophers.

MarketWatch.com:
- Sirius-XM deal clears major regulatory hurdle. Department of Justice ends probe, says combination won’t hurt competition.
- Some stocks more vulnerable to commodities rout. Citigroup sees possible end to current ‘craze,’ putting several sectors at risk. “The notion of unwinding ‘crowded trades’ could make the declined sharper than probably is justified,” said Tobia Levkovich, chief US equity strategist at Citigroup. Levkovich said past sector booms, such as technology in the late 1990s and housing at the start of this decade, all started with robust growth stories that got overly dramatized. “The impressive economic development of Brazil, Russia, India and China has spawned a sense of never-ending growth that has stoked speculative juices,” he said. The sell-off could spread overseas, where stock markets dominated by natural resources companies have enjoyed steep runs. Citigroup noted a correlation between Brazil’s Bovespa and the Reuters/Jeffries CRB Index. “Some of the money that has been flowing to international markets could reverse and come back to the US,” Levkovich said.

CNBC.com:
- Investors wondering whether the agricultural commodities bubble has burst will get some important clues in next week’s annual crop plantings report, considered a bellwether for the direction of farming activity for the year.
- Which Tech Stocks Are Cheapest Right Now?

BusinessWeek.com:
- Gaming Trends: 2008. In a sea of economic woes, the US video game industry is thriving.
- BusinessWeek.com asked undergrads to rate their schools’ business specialties. Here are the results.

CNNMoney.com:
- ‘You’re working for gas now’ The people of Camden, Ala.., pay a bigger chunk of their income for fuel than anyone else in the country.

Portfolio.com:
- Google(GOOG): Consumers Could Use Broadband Devices by 2009.

USA Today.com:
- Plug-in prototype goes 80 miles on one charge, Mercedes says.

Reuters:
- China’s $200 billion sovereign wealth fund has invested more than $100 million in Visa Inc.’s(V) IPO.

Dow Jones:
- The amount of money that Federal Home Loan Banks will inject into the stifled mortgage-backed securities market under a new program is uncertain, but bank officials and analysts said Monday that the psychological benefit alone could be enough to help the housing market.

Financial Times:
- Ford Motor(F) is due to announce a long-awaited agreement to sell Jaguar and Land Rover to India’s Tata Motors on Wednesday.
- Fiat is talking to Detroit’s carmakers about sharing production of Alfa Romeos in the US as part of a three-pronged assault on the world’s largest market for vehicles. The weakness of the dollar is compelling Eurpean companies to manufacture in the US.

TimesOnline:
- World rice supplies are reaching dangerously tight levels as stores of South Asia’s staple food fall to 25-year lows and governments strive to stabilize domestic markets.

International Herald Tribune:
- The money management firm BlackRock(BLK) and a hedge fund, Highfields Capital Management, said Monday they were forming a new company that would buy up distressed US mortgages, betting that investors were ready to snap up bargains in the beaten down sector.

Late Buy/Sell Recommendations
Citigroup:
- Rated (PKX) Buy.
-Upgraded (THQI) to Buy, target $29.
- Reiterated Buy on (MCHP), (ISIL) and (SMTC).
- Upgraded (YHOO) to Buy, target $34.

Raymond James:
- Upgraded (CPA) to Outperform, target $45.
- Downgraded(DRL) to Underperform.

Night Trading
Asian Indices are +1.0% to +3.0% on average.
S&P 500 futures -.04%.
NASDAQ 100 futures +.05%.

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Economic Releases
10:00 am EST
- Consumer Confidence for March is estimated to fall to 73.5 versus 75.0 in February.

Other Potential Market Movers
- The weekly retail sales reports, S&P/CaseShiller Home Price Index, Richmond Fed Manufacturing Index, (ADP) analyst meeting, CSFB Global Leveraged Finance Conference, Sidoti Emerging Growth Conference and Edward Jones Mid-cap Utility Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Sharply Higher, Boosted by Homebuilding, Technology, Biotech, Retail, Gaming and Airline Shares

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In Play

Stocks Soaring into Final Hour on Lower Energy Prices, Diminishing Credit Market Angst and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Biotech longs, Retail longs, Computer longs and Alternative Energy longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is very bullish as the advance/decline line is substantially higher, almost every sector is rising and volume is about average. Investor anxiety is above average, despite recent gains. Today’s overall market action is very bullish. The VIX is falling 3.9%, but remains high at 25.6. The ISE Sentiment Index is a low 110.0 and the total put/call is a below-average .8. Finally, the NYSE Arms has been around average most of the day and is currently .9. Growth stock leaders are especially strong today, rising 4-6%. I continue to believe true growth stocks are in the early stages of a multi-year period of outperformance. On Thursday after the close, the NYSE reported short interest jumped another 7.0% to a record 16.01 billion shares. Short interest on the exchange is up an astonishing 97.7% over just the last two years. Oil continues to trade poorly as the US dollar gains strength. I suspect a close below $100/bbl. at week’s end is likely. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another basis point today to 2.31%, which is down 37 basis points in just one week. Fed fund futures now imply a 74.0% chance for a 25 basis point cut at the upcoming April 30^th meeting, up from 44.0% last Thursday. Futures now imply a 26.0% chance for a 50 basis point cut, down from 56.0% last Thursday. I think the Fed has finally found the right mixture of actions to achieve a firmer dollar, lower inflation expectations, higher stock prices and less credit market angst. This is a huge positive. The Shanghai Composite fell another 4.5% last night and is down 41% from its high of last October. As well, Vietnam fell another 4.5% and is down 53.2% from its all-time high. I still believe developed markets, especially the US, will significantly outperform emerging markets over the next five years. Nikkei futures indicate an +250 open in Japan and DAX futures indicate an +78 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 and falling energy prices.

Today's Headlines

Bloomberg:
- Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion.
- The cost to protect US corporate debt from default plunged after JPMorgan(JPM) quadrupled its offer for Bear Stearns(BSC), reflecting investor confidence that credit markets averted a crisis. Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 9 dropped 15 basis points to 140 basis points. The CDX index has now dropped 50 basis points since the Fed’s decision March 16 to back JPMorgan’s purchase of Bear Stearns. The Markit LCDX index, a gauge of confidence in the US high-yield, high-risk loan market that rises as sentiment improves, jumped 1.05 percentage point to 93.5, according to Goldman Sachs(GS).
- The US dollar rose against the yen and the euro on speculation the Fed’s interest-rate cuts and efforts to spur lending will help revive economic growth.
- Tiffany & Co.(TIF) rose the most in more than six years in NY trading after posting fourth-quarter profit that beat analysts’ estimates.
- JPMorgan(JPM) quadrupled its offer for Bear Stearns(BSC) to $10 a share and struck a deal to buy 39.5% of the company without a shareholder vote, making it unlikely opponents can block the takeover.
- Stanford Kurland, CEO of Private National Mortgage Acceptance and former president of Countrywide Financial sees opportunities in distressed mortgage assets. (video)
- Tobias Levkovich, Citigroup’s(C) chief US equity strategist, said a commodity “bubble” is poised to burst, increasing the risk of investing in mining and agricultural companies.
- Google(GOOG), owner of the world’s most popular Internet search engine, proposed a plan that may let wireless Internet devices use soon-to-be-vacant television airwaves without interfering with current equipment.

Wall Street Journal:
- Verizon’s(VZ) fiber-optic service, mainly available to suburbanites, is making a big push into Manhattan with a deal to connect an 11,232-unit apartment complex.
- New exchange-traded notes that investors use to bet against gold soared last week as prices of the precious metal dropped in response to the US Fed’s cut. The DB gold Double Short ETN, issued by Deutsche Bank AG, rose 21% in three days.

MSNBC.com:
- As the alternative energy movement picks up steam, researchers are increasingly looking to their local communities for tons of organic waste that could be transformed into more environmentally friendly biofuels.

Washington Times:
- Senator Barack Obama, whose campaign criticized outside political groups giving money to presidential candidates, has benefited the most from such groups, campaign records show.

Washington Post:
- Both Obama and Clinton Embellish Lawmaker Roles.

AFP:
- Al-Qaeda deputy commander Ayman al-Zawahiri today called for strikes against US and Jewish interests in an audio address released on the Internet.

International Herald Tribune:
- Asian balance sheets remain healthy and economic growth resilient despite the global credit crunch, but by one market measure, Asian bond issuers are at even worse risk than they were during the financial crisis a decade ago.

Daily Telegraph:
- Prudential Plc, a London-based insurer, may spend as much as $2 billion on a US acquisition in the next few months, probably in life insurance, citing an interview with Clark Manning, the CEO of Jackson National Life Insurance, the company’s US unit.

Gulf Times:
- Petroleum prices will range between $80 and $110 per barrel for the rest of 2008, OPEC President Chakib Khelil said yesterday.

arab news:
- Saudi Arabia yesterday reiterated its commitment to stabilize the international oil market by ensuring adequate supply.

TED Spread Graph

(click on image to enlarge)

BOTTOM LINE: The TED spread is plunging 45 basis points today to 159 basis points. This is the third-largest single-day drop over the last decade, according to Bloomberg records. The TED spread is still elevated, but this is a major positive. The 3-month T-bill yield is jumping 48 basis points to 1.05%.