Bullish Calls:

WR Grace (GRA): "I like Grace, we recommended Grace in the teens, it hit a 52 week high."

Meredith Whitney: Goldman Sachs (GS), Bank of America (BAC)

Bullish Calls:

Old National Bancorp (ONB): "It is a really, really good bank. I would keep buying more. It is not an interesting situation, but it is a cheap situation."

Why all the buzz about rare earths elements (REEs)? In this exclusive Energy Report interview, industry expert Clint Cox, The Anchor House, tells how he separates the hype from reality, and what a challenging and complex market it is. It's estimated that 25% of new technologies such as hybrid cars use rare earths, and that demand is increasing. Clint talks about China's current market dominance and the potential for production in North America. In a companion article, Alternative Energy Becoming a Little Less Alternative, Victor Goncalves of The Green Money Report examines how the growth of hybrid vehicles on the road will affect the rare earth market.

The Energy Report: Clint, can you please clarify the difference between rare metals and rare earth?

Laissez-faire capitalism is alive and well in the rare earth mining sector of the economies of the United States, Canada, Australia, and the Republic of South Africa. None of these top tier industrial economies issues or funds government mandates for the exploration for, production of, or production of end-use products of the rare earth elements and/or thorium. Thus the world’s most competent, experienced, and educationally qualified mining exploration and engineering groups, have only the “free” marketplace to look for funding for such endeavors. The governments of some other nations, particularly, China, but also now including Korea and Japan as well as, most recently, the central governmental regulatory bodies of the European Union take a more pro-active role in securing for themselves, for their domestic use, supplies of materials that they consider critical to their heavy and high tech industries and to their military-industrial complexes. The rare earth elements and thorium are at the top of everyone’s list in the pro-active countries. The same is true for the “reactive” countries, such as today’s USA, Canada, and Australia, but the strength of the reaction has not yet been effective in producing civilian or military sector funding for rare earths or thorium.

At this very moment Australia's parliament is grappling with reacting to a Chinese "private" company's offer to buy 51%, i.e., control, of Australia's largest and best rare earth mining development, ASX listed Lynas Corp (LYSCF.PK), the huge Mt. Weld ore body of which is said to be ready for production.

From time to time we like to look at what's been working (or not) in the market over various periods of time. When the market was not moving +20% in 7 weeks, or -20% in 7 weeks on an alternating basis (student body left trading) I used to find a lot of interesting data in these sort of scans in terms of where the relative strength is. Nowadays, I think the overall market is dominant and stock picking is secondary. I've had this thesis since last summer; once the commodities trade blew up there was no place to hide and most asset classes seemed to simply trade in a monolithic nature. To that point Mike Santoli wrote in this week's Barron's a confirmation of my "gut" feel in "Not a Stockpicker's Market"

• Still, even as overall volatility and fear levels have ebbed, the market isn't yet making as many fine discernments among stocks as most would hope. On a three-month basis, the correlation among all stocks has been running above 0.8% (suggesting 80% of a stock's direction is market-determined).
• Robin Carpenter, a quantitative investment consultant at www.CarpenterAnalytix.com, finds evidence of emerging stock-by-stock variance lacking in recent market statistics. He does see some hints that stocks within industries are beginning to go their separate ways, but in general the market's overall direction retains sway.
• This is perhaps not a surprise in the present climate, in which short-term ETF rentals pass for investing in many quarters. But it adds to the list of challenges facing performance-pressed investors -- a list that includes a tendency for large day-to-day direction changes even in a range-trapped tape.

With that said, I wanted to take a look at what's been working the past "month" (which in my world is roughly 4 weeks) - obviously with commodities flying [May 30, 2009: Commodities Set for Best Month Since 1974] I expected this list to look very similar to what was working in latter 2007 or first half 2008. I was not disappointed - this list is chock full of old holdings of ours from that time frame...

Sentiment

Stocks are broadly higher late Friday, with better-than-expected employment data along with bouncing banks and commodities helping to lift the major averages for big gains on the day and the week. Stock index futures were higher before the start of trading in New York after a report on monthly payrolls showed the economy losing 539,000 jobs last month, which was not as bad as the 600,000 loss economists had predicted.

Stock index futures were already holding gains before the jobs numbers hit the newswires. The move higher started late Thursday when the government released details of bank industry stress tests, which concluded that 10 banks need to raise $75 billion. A number of banks rallied in after hours late Thursday, as the call for capital cushions were not as substantial as some market watchers had feared.

This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.

This week, turning the focus to global macro funds, we'll be checking in on Bruce Kovner's Caxton Associates. Do note that global macro funds are typically not equity focused funds. While they do indeed have equity exposure, the majority of their holdings are in other markets. So, we mainly check in on their sector exposure to see what types of global macro themes they may be investing in.

At the end of each week, our market direction radar scans the Hillbent 3000 universe (minimum average daily volume of 100k and largest 3000 market capitalization stocks) for the top 3 and bottom 3 sectors based upon aggregate performance and analyzes their winners and losers.

Using this weekly sector report on a regular basis allows Hillbent.com’s readers to efficiently monitor sector rotations and investor sentiment biases.

This is the Third Quarter 2008 edition of our ongoing hedge fund tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F's here. We've already covered:

• Timothy Barakett's Atticus Capital
• Whitney Tilson's T2 Partners
• Peter Thiel's Clarium Capital
• Bill Ackman's Pershing Square
• Bret Barakett's Tremblant Capital
• John Paulson's Paulson & Co
• David Einhorn's Greenlight Capital
• Dan Loeb's Third Point
• Paul Tudor Jones' Tudor Investment Corp.
• Louis Bacon's Moore Capital Management

Next up is Bruce Kovner's Caxton Associates. The $10 billion firm is one of many global macro oriented funds which we cover. This is a switch from some of the more value oriented funds we've been covering, like the 'Tiger Cub' funds including Stephen Mandel's Lone Pine Capital, Lee Ainslie's Maverick Capital, John Griffin's Blue Ridge Capital, and Andreas Halvorsen's Viking Global.

The rare earth metals are, in fact, not that rare.

The most commonly occurring rare earth metals - cerium, lanthanum, neodymium and yttrium - are actually more common in the Earth's crust than lead. And even silver.

Keycorp (KEY) -  Option traders sold implied volatility on Keycorp today with the overall reading down by 37% to 90% as its shares rose by 6.25% to $10.35. The drop in volatility shows up as lower premiums on both calls and puts, which in the case of the November 10 straddle (call and put premium) saw a decline from 3.25 to 2.35 today. The company announced a quarterly loss as reserves for bad loans increased, but the tone of preparedness from CEO Henry Meyer apparently assured investors that the 58% share price decline in 2008 was overdone. Elsewhere investors took interest in the May puts at the 7.5 strike where 2,825 lots changed hands trading to sellers most heavily at premiums of 2.5 and 2.70. 

Motorola (MOT) – News that number-three handset maker Motorola had managed to wring a small profit during the second fiscal quarter sent shares 12.6% higher to $8.66 – well within the 14% move that front-month options were pricing in yesterday. While Wednesday’s volume showed traders taking advantage of a 22% pullback in implied volatility from Monday’s elevated levels to buy into defensive put positions at the 6 and 7 strikes, today’s earnings move richly rewarded the holders of $7 calls, who bought those positions for 94 cents yesterday and appeared willing to take profit on them today at $1.65. Fresh buying pressure extended as high as the front-month 9.00 strike, while those 7.0 puts that traders readily accumulated yesterday sold off for just 3 cents apiece – down 89% in value overnight. Stepping over the market’s confetti, analysts were quick to point out that Motorola still has a long road ahead in terms of maintaining its position on the North American market and keeping costs under control. One option trader appeared to side with this rather muted forecast via a 3,000-lot put spread in October between strikes 8 and 9. A long buyer of this position would pay a 48-cent premium in the belief that current share prices are about as good as it’s going to get for Motorola over the next few months, but would curtail the downside at $8.00.

EMC Corp. (EMC) – Aggressive call-buyers have zeroed in on EMC Corp, whose shares are up 5.3% to $14.76, but with options volume in excess of 200,000 lots ranks among the top-five volume movers on our scanner – outmoving even most major financial issues today. Implied volatility is up nearly 43% on the session – more than almost any other ticker on our platform as option traders seek fresh positions in August and September calls at the 15 strike, which are trading primarily to buyers on volume as much as three times the open interest (in the case of the August contract).

Fed watch. Despite a surprise 0.75% rate cut last week, Wall Street still expects the Fed's target rate to drop 0.5% to 3% this Wednesday.

(DAL) - An article in the Chicago Tribune on the cusp of last week’s Thanksgiving peak-travel period reported that Delta Airlines pilots are vowing to fight tooth and nail any forced merger between Delta and United Airlines parent company UAL. Some weeks back, Pardus Capital Management, a Delta minority shareholder, imploring the company to pursue a consolidation with Delta, and its management responded if not in the glaring affirmative, then certainly with a wink and a nudge, announcing that an exploratory committee had been established in the interest of seeking partnerships to allay the effects of higher fuel costs and tighter competition. Option action in Delta Airlines this morning suggests option traders deferring their expectation of deal making from the December calls, where lots at the 15 strike were sold, to the March contract, where contracts at the 17.50 strike were bought. A look at the ratio of calls to puts in Delta shows bullish calls outnumbering bearish puts by a staggering 5 to 1, which on the surface indicates a high level of confidence among shareholders that the company is on a course to do right by its market and shareholders. Call volume in Delta is at its highest level since the first merger mumblings emerged earlier in November, and again, option implied volatility at 82% shows a sustained and substantial gap above the 67% historic reading.