Stocks Finish Sharply Lower, Weighed Down by Transportation, Commodity, REIT, I-Banking and Defense Shares

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Stocks Sharply Lower into Final Hour on Technical Selling, More Shorting, Government Uncertainty, Rising Economic Angst

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Technology longs, Medical longs and Defense longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is high. Today’s overall market action is very bearish. The VIX is rising 5.17% and is very high at 30.52. The ISE Sentiment Index is around average at 136.0 and the total put/call is above average at 1.03. Finally, the NYSE Arms has been running high most of the day, hitting 1.44 at its intraday peak, and is currently 1.39. The Euro Financial Sector Credit Default Swap Index is falling 2.09% today to 106.67 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 .65% to 141.70 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 9.86% to 36 basis points. The TED spread is now down 428 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 3.46% to 38.31 basis points. The Libor-OIS spread is down 1.93% to 34 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 1.62%, which is down 102 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is up 3 basis points today. I am seeing signs that some market leading stocks are now ignoring good news, which is always a red flag. As well, the macro news today was just mixed, yet the major averages are seeing meaningful declines. (TLT) is breaking above its 50-day moving average. Given the rise in German May manufacturing orders, the US dollar continues to trade well. The most economically sensitive shares are again badly underperforming the broad market. I think increasing rhetoric regarding the need for a second stimulus package is spooking investors to an extent. As well, the constant uncertainty over what the government plans to do in certain sectors appears to be taking its toll. Nikkei futures indicate a -87 open in Japan and DAX futures indicate a -9 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on rising economic anxiety, more shorting and technical selling.

Today's Headlines

Bloomberg:

- House Ways and Means Committee members are likely to propose a surtax on high-income Americans to help pay for an overhaul of the health-care system, according to people familiar with the plan.

- The deepest recession in a half century has bottomed and U.S. companies’ second-quarter earnings probably beat analysts’ estimates, Laszlo Birinyi said. The Standard & Poor’s 500 Index will resume the rally that pushed it up as much as 40 percent from a 12-year low in March, Birinyi said. He predicted in May that U.S. stocks were at the start of a bull market that would propel the S&P 500 to a record in two to three years.

- Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported. Delinquencies on home-equity loans climbed to 3.52 percent of all accounts from 3.03 percent in the fourth quarter, and late payments on home-equity lines of credit climbed to a record 1.89 percent, the group reported today. An index of eight types of loans rose for a fourth straight quarter, to 3.23 percent from 3.22 percent in October through December, the group said. “The number one driver of delinquencies is job losses, which we’ve seen build and build,” James Chessen, the group’s chief economist, said in a telephone interview. “Delinquencies won’t come down without a dramatic improvement in the economy and businesses will have to start hiring again.”

- The Baltic Dry Index, a measure of shipping costs for commodities, posted a fifth consecutive drop on easing port congestion and weaker demand for haul iron ore. The index fell 159 points, or 4.7%, to 3,216 points, according to the Baltic Exchange today.

Rates to hire capsize ships that typically carry iron ore for making steel dived 8.1% to $61,060 a day, the most in more than a month. “There’s more ships coming out of congestion in China,” Stuart Rae, joint managing director at shipping hedge-fund company M2M Management Ltd. in London, said.

- Gold and natural gas led commodity investment inflows in the first half, ETF Securities Ltd. said. New cash put into its exchange-traded commodities minus redemptions came to $3.75 billion, with $1.45 billion in gold, $503 million in natural gas and $495 million in agriculture, Nicholas Brooks, head of research at ETF Securities, said in a phone interview from London today. The total increase compared with $2.5 billion of inflows for all of 2008, he said. Assets under management, including price changes and the inflows, climbed $5.2 billion to $11.68 billion by the end of June, he said.

- Copper imports by China may plunge 64 percent in the second half after record shipments this year led to excess stocks, UBS AG said. China, the world’s largest consumer of the metal, may cut refined copper imports to around 100,000 metric tons a month in July to December, from an average of 280,000 tons in the first five months, UBS analysts led by Peter Hickson said in an e- mailed report dated July 6. There are “clear indications that China is now overstocked” as the Strategic Reserve Bureau is offering up to 100,000 tons of copper to the market and traders are preparing for exports of the metal, the UBS report said. UBS estimated that China may have stockpiled 500,000 to 700,000 tons of copper in excess of its industrial needs in the first quarter, 300,000 tons of which “is apparently destined for the Strategic Reserve Bureau.”

- Chinese property developers fell in mainland and Hong Kong trading on concern regulators will clamp down on mortgage lending to cool growth in housing prices. With real estate prices in some cities approaching “bubble” levels, “the government may want to adopt a pre- emptive measure,” Raymond Cheng, a Hong Kong-based analyst at Credit Suisse AG, said by phone today. “The government may want to control over-lending to speculators to protect the safety of the banking system.” Rapid credit growth poses a risk to the nation’s lenders and a concentration of credit to some industries may damage the financial system, Wang Huaqing, disciplinary secretary of the China Banking Regulatory Commission, said in a speech posted on the agency’s Web site today. The state-run media also said prices may have risen too fast. A front-page story in the China Daily newspaper on July 3 said a “bubble” is being felt in real estate in major cities across the country.

- U.S. President Barack Obama lauded Prime Minister Vladimir Putin for his service to Russia, continuing a three-day push to overcome the animosities of the George W. Bush era. “I am aware of not only the extraordinary work you have done on behalf of the Russian people in your previous role as prime minister -- as president -- but in your current role as prime minister,” Obama told Putin after more than an hour of talks at the premier’s residence near Moscow.

- Goldman Sachs Group Inc.(GS) may lose its investment in a proprietary trading code and millions of dollars from increased competition if software allegedly stolen by a former employee gets into the wrong hands, a prosecutor said.

- Hundreds of Chinese from rival ethnic groups fought each other with machetes, metal pipes and bricks in the northwestern city of Urumqi, overcoming police attempts to quell the deadliest clashes in decades. Police fired tear gas to prevent a mob of Han Chinese from avenging rioting by ethnic Uighurs that left at least 156 dead. The fighting came after thousands of Chinese armed with knives and steel bars clashed with police in Urumqi, capital of the westernmost province of Xinjiang.

- Deere & Co.(DE), the world’s largest maker of agricultural equipment, said sales in Russia have plunged more than 50 percent this year after the country imposed tariffs and loan limits on foreign farming machinery.

- Treasuries pared gains after weaker- than-forecast demand at a U.S. auction of $35 billion in three- year notes as traders focused on the unprecedented amount of debt the government will sell this year.

Wall Street Journal:

- Speaking to the American Medical Association last month, President Obama waxed enthusiastic about countries that "spend less" than the U.S. on health care. He's right that many countries do, but what he doesn't want to explain is how they ration care to do it. Take the United Kingdom, which is often praised for spending as little as half as much per capita on health care as the U.S. Credit for this cost containment goes in large part to the National Institute for Health and Clinical Excellence, or NICE. Americans should understand how NICE works because under ObamaCare it will eventually be coming to a hospital near you.

- General Electric(GE) is used to dealing with political risk in developing markets. Not so much at home in the U.S. But amid the fallout from the financial crisis, that is where it faces the greatest challenge. The reason: The Obama administration's financial-system reforms. These could push GE to spin off its large lending subsidiary, GE Capital, and turn it into a bank-holding company, with tighter regulation, higher capital ratios and bigger loan-loss reserves. Granted, the administration's proposals could change significantly before they become law. Even if they don't, some believe that GE has the influence to secure an exception for itself. A split looks more likely and could cause immediate challenges. Moody's Investors Service says a stand-alone GE Capital, without support from the GE parent, would be rated single-A. Being downgraded to that level could trigger large collateral calls. GE Capital also may have to reduce assets that banks typically aren't allowed to hold in size, like real-estate equity investments, which totaled more than $36 billion at the end of 2008. Another big question is what happens to capital and reserves.

- The alternative investment community Tuesday came out in force against the European Commission's plans to regulate the industry, calling them anti-competitive and misguided. Reiterating criticism of the draft E.U. directive published April, leaders of the hedge fund and private equity industry told the U.K. government that implementation of the regulation in its current form would drive investors away from Europe. "Around 60% of all private equity that occurs in the E.U. takes place in London - a directive which made Europe a significantly less attractive area for the highly international industry that is private equity would do far more damage to London and the United Kingdom... than to anywhere else in this continent," Simon Walker, chief executive of the British Private Equity and Venture Capital Association, told the House of Lords E.U. subcommittee. "At a time of recession it strikes me as astonishingly counter-productive for the European Union to contemplate hostile action against one of the very few sectors which has both the cash on hand to invest and the instinct and appetite to do so," he added. Walker said private equity should be removed entirely from the scope of the directive, noting that industry guidelines on transparency and disclosure were put in place in the U.K. some 18 months ago. However, Andrew Baker, chief executive of the Alternative Investment Management Association, didn't rule out some form of regulation.

- It is more important that health-care legislation inject stiff competition among insurance plans than it is for Congress to create a pure government-run option, White House Chief of Staff Rahm Emanuel said. "The goal is to have a means and a mechanism to keep the private insurers honest," he said in an interview. "The goal is non-negotiable; the path is" negotiable. President Barack Obama has campaigned vigorously for a full public option. But he's also said that he won't draw a "line in the sand" over this point. On Tuesday, the White House issued a statement reiterating his support for a public plan.

- Cabinet officials pressed President Barack Obama's case for climate-change and clean-energy legislation at a Senate hearing on Tuesday as lawmakers clashed over whether a "cap-and-trade" system for cutting greenhouse gases would help the U.S. economy or hurt it. "Denial of the climate-change problem will not change our destiny; a comprehensive energy and climate bill that caps and then reduces carbon emissions will," said Energy Secretary Steven Chu in remarks before the Senate Environment and Public Works Committee. Sen. James Inhofe of Oklahoma, the panel's top Republican, said the cap-and-trade system would amount to the largest tax increase in American history, a statement echoed by many Republicans but shot down by Democrats including Sen. Barbara Boxer of California, who chairs the committee. Meanwhile, the political climate for the cap-and-trade system remains tough in the Senate. Democrats hold a 60-seat majority thanks to the victory of Al Franken in the long-disputed race for a Senate seat from Minnesota. However, the cap-and-trade system makes even some Democrats nervous, especially those from states that extract energy and minerals and rely on heavy industry.

CNBC:

- A second round of economic stimulus would only steepen the government's debt problems and likely do little to boost the stock market, financial experts say.

AP:
- Oil shed more than $1 to fall below $63 a barrel Tuesday, adding to a sharp drop over the last week on investor doubts about a global economic recovery. Prices reached an eight-month high last week above $73, but quickly tapered off as dismal unemployment figures suggested that the U.S. and Europe would be slower to rebound out of recession than expected. "The bulls, for the first time in months, now have to play defense," wrote trader and analyst Stephen Schork, in his Schork Report. "Failure in the oil markets to hold support here clears a path towards the $60 critical point of reference."

Dallas Morning News:

- T. Boone Pickens' plan to build the world's largest wind farm is off. Instead, Pickens said he will build five or six smaller wind farms, in the Midwest and possibly Texas, though he hasn't settled on locations. Still, Pickens already ordered the initial round of wind turbines. GE will start delivering them in the first quarter of 2011. Pickens has about 18 months to find a place to put them. Before the markets declined, Pickens managed more than $4 billion in the funds. Now the funds hold about $1.5 billion.

MarketWatch:
- China could be an unexpected laggard to any global recovery, with its economy set to remain sluggish after a long run of bubble-like investment in factories and other fixed assets wears off, some analysts say. The world's third-largest economy is likely to struggle with a "W"-shaped recovery, with another big down leg is coming, as growth in government-led fixed-asset investment eases to around 10% during the next 12 months, Deutsche Bank analysts said in a research note Monday.

Washington Post:

- The Commodity Futures Trading Commission will consider new measures to curb speculation in the markets for energy and other commodities, the agency is set to announce today. The move aims to reduce the volatility of prices but faces resistance from top Wall Street firms, which fear the efforts could cut into profits. Regulators and lawmakers increasingly worry that these firms have used their size and power to inflate the prices of commodities, booking profits in the process.

NY Post:

- After spinning his wheels with his Sears-Kmart gambles, Eddie Lampert is now cashing out smartly on his bet on auto-parts chain AutoZone. The billionaire investor, whose personal fortune dived by more than half in the past two years to $2 billion, has been selling large blocks of AutoZone stock for as much as double what he paid.

- Federal Deposit Insurance Corp. boss Sheila Bair may have overstepped her authority with last week's proposal to limit how private-equity firms can snap up fallen banks. That's the assessment of some banking regulators, who are expressing concern that Bair's plan may keep private-equity players away from buying banks that have gone into receivership.

CNNMoney:

- Nearly five months after President Obama signed the $787 billion stimulus bill, a still-worsening economy has many wondering if stimulus is a bunch of baloney. In February, Obama promised that funds would be paid out quickly and save or create 750,000 jobs by early August. Further, the boost to the economy would keep the unemployment rate from surpassing 8%, according to a January study by Obama administration economists Christina Romer and Jared Bernstein. Without it, the study said, unemployment could rise to 9% in 2010. With August quickly approaching, roughly $75 billion, or 10% of stimulus funds, have been paid out, and the unemployment rate has already risen to 9.5%. As a result, there's debate about whether stimulus has put the economy on a path to recovery or is merely a broken promise. Some economists are already calling for a second stimulus bill as the economy continues to falter, arguing the stimulus wasn't strong enough and isn't being paid out fast enough. On the other hand, many Republicans and even some Democrats are saying that parts of the plan were a waste of money.

Rassmussen:

- The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 33% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. Thirty-six percent (36%) Strongly Disapprove giving Obama a Presidential Approval Index rating of –3. Those figures reflect the highest level of strong disapproval measured to date and the lowest level recorded for the overall Approval Index (see trends).

Politico:

- A new Quinnipiac poll shows President Obama’s approval rating has dropped 13 points over the last two months in Ohio, a key battleground state with plenty of critical Congressional contests in 2010. Obama now only holds a 49 percent approval rating, with 44 percent of voters disapproving. It’s his lowest approval rating in any Quinnipiac statewide poll taken since Obama’s inauguration. In May, Obama held a 62 percent approval rating in the Buckeye state. Meanwhile, a 48 percent plurality of Ohio voters disapprove of the way Obama is handling the economy, with 46 percent approving. "The economy in Ohio is as bad as anywhere in America. These numbers indicate that for the first time voters have decided that President Barack Obama bears some responsibility for their problems," said Quinnipiac pollster Peter Brown. The changed environment in Ohio could have serious implications for Democratic members of Congress, many of whom benefited from Obama’s coattails in 2008.

Mlive.com:

- Sequenom Inc.(SQNM), a San Diego company under federal investigation, still plans to expand its Grand Rapids laboratory when it begins marketing some of its prenatal tests later this summer, a company official said Monday.

All Things Digital:

- Looks like Apple (AAPL) may have another hit on its hands with the 13-inch MacBook Pro. The company is reportedly having a hard time keeping the machine in stock as it heads into the back-to-school buying season. And for good reason, it’s a significant upgrade at a lower price. Starting at $1199, it’s $100 less than the original aluminum MacBook it replaces. In a message to clients Tuesday, Piper Jaffray analyst Gene Munster noted that Apple’s online store is currently showing 7 to 10 day lead times for its new lower-priced 13-inch MacBook Pros and a number of the company’s retail stores are reporting dwindling supplies. “… Our records show that Apple has never had a 7-10 day delay on its most popular 13-inch model, with the most recent significant delay being 5-7 days over 2 years ago,” Munster wrote.

Reuters:
- Libya's National Oil Corporation expects international oil companies to invest more than $7 billion in exploration activities by 2015, an official said on Tuesday. He also said the company expected to find further 100 billion barrels of oil through their own exploration projects. "This is the potential that we think is there. We believe that 1,445 billion barrels has been generated, 893 (billion barrels) expelled, we discovered 144 (billion barrels) and we look to finding 100 billion barrels more," El-Haj said.

- Credit default swaps nearly brought down the world financial system last fall when it was discovered that AIG (AIG) Financial Products had written hundreds of billions of dollars worth of credit protection without setting aside sufficient reserves. Yet since then, pathetically little has been done to get this corner of the derivatives market under control. There's a simple way to fix the problem. Regulate CDS as insurance. That could happen if some state insurance legislators get their way. Treating these financial weapons of mass destruction as insurance instead of as merely swaps would subject them to sensible regulation. But Wall Street is fighting the idea because it would hammer profits and, more importantly, force them to reduce leverage.

- US chain store sales fell 4.2% last week, according to Johnson Redbook.

- Hiring in the United States remains stubbornly weak as employers added workers in May at the slowest pace in nearly nine years, government data showed on Tuesday. Job openings in the hard-hit manufacturing fell for a third straight month, the Labor Department said its monthly Job Openings and Labor Turnover Survey. The rate of hires, measured as a percentage of the total number of people employed, slowed to 3.0 percent in May, down from 3.1 percent in April and the lowest rate since the series began in December 2000, the Labor Department said.

Financial Times:
- When presidents Barack Obama and Dmitry Medvedev met on Monday for their first major summit, the main agenda items were arms control and Iran, and progress was made on the former, at least. This may encourage those who believe these issues can be dealt with in isolation from other challenges to US-Russia relations. As someone who has been familiar with the country for the past 15 years, I believe that approach ignores fundamental differences between Russia today and most other nations. Simply put, Russia is not a “state” as we understand it. Government institutions have been taken over as conduits for private interests, some of them criminal. Property rights no longer exist, people who are supposed to enforce the law are breaking it, innocent people are victimised and courts have turned into political tools. Rather than a normally functioning bureaucracy, Russia’s clans fight over control of government positions and the power to use state resources to expropriate assets. While corruption and legal abuse go on everywhere, the scale of them in Russia should affect the way all countries, particularly the US, deal with it. Some may argue the rule of law in Russia should not concern outsiders, but if corrupt officials can steal such a large amount of money from the state with no questions asked, it is not a very big leap for a similar group of corrupt officials to sell some loose Russian military hardware to terrorists, or even help rogue states to acquire nuclear technology. Moreover, when government officials act not in the interest of the state but for themselves, the normal tools of diplomacy simply do not work. It becomes impossible to trust international commitments, be it in the area of arms control or nuclear security. Perhaps there was a line in the past that Russians would not cross, but with the spectacular recent decline in the rule of law, anything is possible in Russia now. What should the US do in its dealings with Mr Medvedev? Most importantly, it should call a spade a spade. It doesn’t do the west or the Russian people any good to keep pretending that everything is normal in Russia. The “loss of state” needs to be made a primary issue for the west, both for our own security and for the 140m suffering Russians.

PressTV:
- Dust storms in Iran have added an extra concern to air pollution levels of some cities, raising the particulate concentration to 9 times greater than standard levels. Dust from the Arabian deserts has entered Iran from the neighbors of Iraq, Saudi Arabia, Jordan and Kuwait, forcing Tehran offices, educational and industrial centers to close. Particulate concentration in the capital has reached 936 micrograms per cubic meter over the last several days. The standard level is 150 micrograms per cubic meters. Silicon dioxide, calcium, potassium, carbon, and other elements are found in the haze, which can damage people's respiratory systems. The latest study by Tehran's Air Quality Control Company (AQCC) finds the level of pollution unprecedented in 30 years in Iran.

Haaretz.com:

- Vice President Joe Biden's statement that Israel can decide on its own whether to strike Iran's nuclear sites should not be construed as an American "green light" for such an action, the State Department said on Monday. "We are certainly not going to give a green light to any kind of military strike, but Israel is a sovereign country and we're not going to dictate its actions," State Department spokesperson Ian Kelly said on Monday. "We share the Israelis' deep concerns about Iran's nuclear program," Kelly said. "But you have to ask Israel if they are going to make a strike."

Bear Radar

Style Underperformer:
Large-cap Growth (-1.36%)

Sector Underperformers:
Road & Rail (-2.32%), REITs (-2.30%) and Oil Service (-1.87%)

Stocks Falling on Unusual Volume:
AGO, CBEY, BLKB, TNE, DDRX, ASTE, AMAG, ADTN, PWRD, CETV, ENER, RGS and KMT

Stocks With Unusual Put Option Activity:
1) AET 2) AIG 3) CIT 4) PBR 5) XRT

Bull Radar

Style Outperformer:
Small-cap Growth (-.66%)

Sector Outperformers:
HMOs (+4.82%), Hospitals (+2.75%) and Drugs (+.12%)

Stocks Rising on Unusual Volume:
CI, AET, OVTI, CYH, MKSI, CVH, PSMT, KGC, CTL, LFUS, SAIA, LEAP, ABFS, NWPX, VECO, CYOU, STLD, PLCE, ODFL, CFSG, AEIS, SNDA, AFAM, YPF, OSK, TKG, HUM, K, CEC, TWP and WLP

Stocks With Unusual Call Option Activity:
1) GFI 2) CIT 3) CEPH 4) NTAP 5) CRM