Stocks Lower into Final Hour on Tax Hike Worries, Rising Economic Pessimism, Commercial Real Estate Concerns

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Defense longs and Commodity/Emerging Market shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is mildly lower, most sectors are declining and volume is below average. Investor anxiety is high. Today’s overall market action is mildly bearish. The VIX is falling 1.21% and is high at 29.41. The ISE Sentiment Index is low at 102.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running very high most of the day, hitting 2.40 at its intraday peak, and is currently 1.87. The Euro Financial Sector Credit Default Swap Index is rising 2.62% today to 112.0 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 .62% to 145.0 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 1.54% to 34 basis points. The TED spread is now down 432 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.06% to 38.44 basis points. The Libor-OIS spread is rising 1.62% to 31 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 4 basis points to 1.51%, which is down 113 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is down 1 basis point today. (XLF) is trading heavy today and is near session lows. (JPM) has been especially weak. As well, healthcare shares area a drag on continuing worries over government reform. The S&P 500 has been rangebound for three days after its recent decline, which is a negative. Moreover, the market’s internal action remains a concern. On the positive side, volume is anemic today and the NYSE Arms has been very high. As well, market leading tech stocks have traded well throughout the day. Finally, given today's weak consumer confidence report and emerging markets weakness, today's broad market action isn't too bad. Nikkei futures indicate a -32 open in Japan and DAX futures indicate an +10 open in Germany on Monday. I expect US stocks to trade mixed into the close from current levels as bargain-hunting, tech sector optimism, lower energy prices and lower long-term rates offset commercial real estate worries, tax hike concerns, rising economic pessimism and more shorting.

Today's Headlines

Bloomberg:

- Sentiment among U.S. consumers, whose spending is critical to an economic recovery, dropped in July after four months of gains as unemployment approached 10 percent. The Reuters/University of Michigan preliminary index of consumer sentiment fell by more than forecast to 64.6 from 70.8 in the prior month. Consumers in the survey said they are less likely to buy cars or appliances, suggesting that the recovery may be weaker than anticipated. “There’s a lot of concern about job losses, and people think they won’t be able to earn more,” said Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York. “Until the employment picture clears up, we can’t anticipate persistent gains in consumer spending.”

- Goldman Sachs Group Inc.(GS) is poised to report the largest profit since it set earnings records in 2007, marking the return of a business model that was the envy of Wall Street before the financial crisis devastated competitors and spurred a government bailout. Chief Executive Officer Lloyd Blankfein, who helped make Goldman Sachs the highest-paying securities firm by wagering capital and fueling the bets with borrowed money, may report the most second-quarter profit per share among the 15 biggest U.S. banks, analysts estimate. While rivals have pared risks, New York-based Goldman Sachs has ratcheted up trading gains and reaped more fees from stock and bond sales, according to Barclays Capital analyst Roger Freeman. The results come on the heels of a rescue effort that funneled about $200 billion from taxpayers to U.S. financial firms, including $10 billion to Goldman Sachs, after the bankruptcy of Lehman Brothers Holdings Inc. and near-failure of American International Group Inc. ignited concern that the credit contraction might cripple the world economy. “Once all the government support mechanisms were in place, they were able to basically go about business as usual,” Freeman, who’s based in New York, said in a phone interview. Compensation at Goldman Sachs may rise 64 percent to $17.9 billion this year from $10.9 billion last year based on projected revenue gains, Moszkowski estimated. The firm set a record for Wall Street pay in 2007 when it doled out a total of $20.2 billion, including $68.5 million for Blankfein, 54. Executives at companies such as AIG, Bank of America and Citigroup reaped bonuses when the risks they took paid off. Then, when the banks’ bets went awry and they began amassing losses on subprime mortgages and other devalued assets, taxpayers wound up footing the bill through bailout programs, Wilmarth noted. “It would be disingenuous to ignore the government assistance in helping to generate those earnings,” Mason said. “Those institutions, especially Goldman, played their cards really beautifully obtaining that assistance and using that to help them weather the crisis.”

- The U.S. Securities and Exchange Commission sued an Illinois hedge-fund manager over claims he fed more than $2 billion in client assets to an alleged Ponzi scheme run by a Minnesota businessman. Gregory Bell, of Highland Park, Illinois, and Lancelot Management LLC fueled the scheme and “received millions of dollars in fraudulent fees at the expense of investors,” the SEC said today in a statement announcing its suit at U.S. District Court in Minneapolis.

- Sergey Aleynikov, the former Goldman Sachs Group Inc. computer programmer arrested last week for stealing software, told an FBI agent he uploaded proprietary code to an encrypted server he had used on “multiple occasions.”

- The ruble weakened the most since February as oil prices dropped, Russia cut interest rates and the budget deficit widened in the country’s worst economic slump in a decade. The currency depreciated as much as 3.1 percent to 32.7649 per dollar, extending losses in the worst week since January. The 30-stock Micex Index sank to a three-month low.

- Ford Motor Co.(F), gaining ground on its distressed domestic competitors, may surpass General Motors Co. this year to become the top-selling automaker in the U.S. for the first time since 1931.

- The Senate Finance Committee will approve a US health-care overhaul plan within a month, said Senator Kent Conrad, a top Democrat on the panel, even though setbacks have slowed the drive for a bipartisan compromise.

- Corporate ratings downgrades soared to a record in Europe last month as the number declined in the US, Moody’s Investors Service said in a report. The firm cut 76 issuers in Europe, or 6.2% of rated companies, NY-based analyst David W. Munves wrote in the report. Downgrades in the US dropped to 76, or 3.4% of issuers, from 104 in May and a peak of 165 in March. The decline in the US reflects greater ratings stability among banks, Munves wrote. The opposite is the case in Europe, where high-grade issuers account for an increasing share of ratings cuts as banks continue to be downgraded, he wrote.

- China’s exports fell for an eighth month as the global recession cut demand, highlighting the economy’s dependence on stimulus spending to revive growth. Overseas sales slid 21.4 percent in June from a year earlier, the customs bureau said today on its Web site, after a record 26.4 percent drop in May. The nation’s run of export declines is the longest since during 1995 and 1996. Higher commodity prices also have boosted the import bill, said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. An almost fivefold jump in new loans last month, announced by the central bank this week, extended a credit boom that’s fueling growth and may also be inflating bubbles in stocks and property. Besides weaker demand, protectionism may also be a threat as governments around the world seek to support local industries. China’s commerce ministry said June 29 that it’s “very concerned” about anti-dumping and anti-subsidy investigations of Chinese steel products in the U.S.

- The euro fell, heading for its worst week against the yen in two months, after Handelsblatt reported the International Monetary Fund is discussing aid programs with at least 10 Eastern European governments. Europe’s currency weakened versus 12 of its 16 major counterparts after the German newspaper cited unidentified IMF officials as saying the countries applying for loans for the first time included Bulgaria, Croatia and Macedonia. “There are lingering worries over the financial health of eastern and central European countries,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. The euro headed for a second weekly loss against the dollar after Finance Minister Peer Steinbrueck said yesterday Germany’s regional state banks are the “biggest systemic risk” to the nation’s financial industry. “As the ongoing recovery is still fragile, we can’t rule out the possibility of the Bank of Japan intervening in the market to prevent the appreciation of the yen if the currency breaches 90 per dollar,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co.

- The Baltic Dry Index, a measure of shipping costs for commodities, had its biggest weekly decline in almost four months on weaker Chinese demand for iron ore to make steel and coal. It slid 15% this week, the most since the week ended March 20. Rates to hire capsize vessels that haul iron ore and coal have dropped 36% over an eight-day slide. Iron ore stockpiles are the highest in almost 10 months in China. Ninety-eight bulk carriers were scheduled to arrive at Chinese ports in July’s first two weeks, joining the 100 anchored there, according to a report from Drewry Shipping Consultants Ltd. in London published today. “The Chinese have stopped purchasing,” Gavin Durrell, an official at Island View Shipping in Cape Town, said today. “They have full stockpiles and quite a queue of ships waiting to discharge, so there is no reason for them to start buying again.” China’s demand for coal “may be waning, due to high stockpiling and/or weaker physical demand,” according to a report yesterday from Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd. in Melbourne. Unsold coal inventory is rising at China’s ports and congestion in Australia is delaying shipments, Alan Heap and Alex Tonks, Sydney-based analysts with Citigroup Capital Markets, wrote today.

- Crude oil fell, headed for its biggest weekly decline since January on concern a prolonged global recession will sap demand for energy. Oil has dropped 11 percent this week on speculation fuel consumption in the U.S., the biggest energy-using nation, will remain subdued. Gasoline stockpiles increased over the Independence Day weekend, the peak of the summer driving season, a July 8 report showed. “The No. 1 factor is still demand -- it all goes back to the economy,” said Ken Hasegawa, a commodity derivatives sales manager at brokers Newedge in Tokyo. “It’s possible we’ll test yesterday’s low. If the market goes down further from here, we could see more selling orders.” “If the bulls are going to put up a defense, this is where it will occur. If they fail, the path toward a $40-handle will be wide open.”

Wall Street Journal:

- Exxon Mobil Corp.(XOM) has been scouring the globe for natural gas locked inside shale formations, and said it thinks it may have a world-class find in Canada. In an interview with The Wall Street Journal, Tim Cejka, Exxon's head of global exploration, said the company has been bullish on shale-gas exploration since 2003, locating promising gas-bearing rock formations and snapping up leases on them. Exxon is most encouraged by the exploration of 250,000 acres it has leased in the Horn River Basin, in northern British Columbia. Mr. Cejka said results from the first four wells lead the company to conclude that each well will produce between 16 million and 18 million cubic feet of gas a day. That's five times the size of average wells in Texas's Barnett shale and comparable to big wells in Louisiana's Haynesville shale, two major shale-gas fields that already have moved the U.S. natural-gas market from scarcity to abundance.

- Seventeen House lawmakers — including three Democrats — sent a letter to President Obama on Friday saying that a full investigation of the Federal Reserve’s role in Bank of America’s acquisition of Merrill Lynch is necessary before Congress should approve expanding the central bank’s powers by overhauling financial market rules. The letter was released by Rep. Scott Garrett (R., N.J.). Here’s the full text:

- Demonstrations flared up in Tehran and other big Iranian cities on Thursday evening, ending a week of effective clampdown on street protests, as thousands of opposition supporters took to the streets and clashed with security forces. The security forces fired tear gas and sprayed pepper gas at the crowd and beat them with batons, according to witnesses and participants. They fired gunshots in the air to disperse the crowds and arrested scores of people, adding to the waves of detention and unrest since the June 12 presidential election.

- Ethnic Anger Festers Amid Calm in Urumqi.

- Prime Minister Nouri al-Maliki struck a conciliatory tone ahead of his trip to Washington, talking about his gratitude for U.S. sacrifices in Iraq, and offering to negotiate a settlement between Iraq's federal government and the country's Kurdish enclave as tensions heighten between the two. In an interview with The Wall Street Journal as he prepared for a visit to the U.S. on July 21, Mr. Maliki said he planned to thank America for its shared sacrifice with the Iraqi people in the tumultuous post-Saddam Hussein years since the U.S.-led invasion in 2003.

- When Democrats recall their HillaryCare defeat, they like to decry those Harry & Louise ads. What they choose not to recall so publicly is the help they got -- and are getting again -- from folks like Karen Ignagni. The left today gets mileage out of claiming it was a unified private health sector that killed the 1993-94 Clinton health plan. It's a clever historical rewrite, offering not only an excuse for their prior defeat, but a bogeyman for today's health-care battle. It's also allowed them to obscure the real lesson they took away from HillaryCare. Namely that, handled properly, industry groups can be played like banjos. Democrats are employing the same tactic this time -- only more deftly and with more muscle -- and the titans of the private sector are rambling straight into the ambush.

NY Times:

- It has been a year and a half since Meg Whitman said she would hand the chief executive’s office at eBay to John Donahoe, and at least by some measures, the company continues to lose traction with both buyers and sellers. Ina Steiner, the editor of AuctionBytes, a news service for eBay sellers, just published an analysis of eBay’s Web traffic. EBay’s audience—measured by the number of unique visitors in a month—has historically been significantly higher than that of Amazon.com. But eBay’s traffic began to decline sharply last fall, and it dropped below that of Amazon in November, based on numbers from Nielsen.

MarketWatch:
- Although optimism over the next slate of tech earnings reports has been mostly muted, Goldman Sachs analyst David Bailey says now is the time to shift to go on the offensive with tech stocks, due in part to a likely upgrade cycle in corporate tech needs next year.

Washington Post:

- School-age children will be a key target population for a pandemic flu vaccine in the fall, and they may be vaccinated at school in a mass campaign not seen since the polio epidemics of the 1950s. The federal government should get about 100 million doses of vaccine by mid-October, if the current production by five companies goes as planned. But enough vaccine for wide use by the 120 million people especially vulnerable to the newly emerged strain of H1N1 influenza virus will not be available until later in the fall.

Rassmussen:

- Sixty-two percent (62%) of Americans now oppose federal government bailouts for states like California that are experiencing major budget problems. A new Rasmussen Reports national telephone survey finds that just 20% of adults favor bailing out financially troubled states. Nineteen percent (19%) are not sure which course is best.

Boston Globe:

- Boston’s office market is experiencing the sharpest drop in rental rates in nearly a decade, with the supply of vacant space continuing to increase as employers cut back during the economic slowdown. Average asking rents in Greater Boston plunged to $28.11 per square foot in the second quarter of 2009, a 12 percent decline from the same period last year, according to Lincoln Property Co., a real estate services firm. Rents are at their lowest level since 2001.

USA Today:

- Pentagon health experts are urging Defense Secretary Robert Gates to ban the use of tobacco by troops and end its sale on military property, a change that could dramatically alter a culture intertwined with smoking. Jack Smith, head of the Pentagon's office of clinical and program policy, says he will recommend that Gates adopt proposals by a federal study that cites rising tobacco use and higher costs for the Pentagon and Department of Veterans Affairs as reasons for the ban. One in three servicemembers use tobacco, the report says, compared with one in five adult Americans. The heaviest smokers are soldiers and Marines, who have done most of the fighting in Iraq and Afghanistan, the study says. Along with a phased-in ban, the report recommends requiring new officers and enlisted personnel to be tobacco-free, eliminating tobacco use on military installations, ships and aircraft, expanding treatment programs and eliminating the sale of tobacco on military property. "Any tobacco use while in uniform should be prohibited," the study says. Strong leadership could make the military tobacco-free in five to 10 years, Kizer says. President Obama, he says, could set an example for the military by ending his own smoking habit once and for all.

Reuters:
- The Commodity Futures Trading Commission looks eager to move quickly to implement trading limits on commodity and energy futures, leaving opponents little time to argue that the agency is going too far, too fast. In response to gyrating oil and commodity prices, the CFTC announced this week it was planning to clamp down on big market players by implementing position limits on all commodity futures contracts of limited supply, focusing especially on energy.

EU Commission:

- Latest data covering the period up to May/June 2009 show that EU labour markets continue to deteriorate. Unemployment continued to rise in May, though more moderately than in the first four months of the year, with men and young people continuing to be hit particularly hard. Overall unemployment rose by 385 000 to reach 21.5 million, an increase of 5.1 million (or almost a third) compared to May 2008.

Globe and Mail:

- The United States is moving to develop its own source of medical isotopes as the lagging repair of a Canadian nuclear reactor leaves Americans “critically short” of the radioactive material. Nuclear watchers in this country say the loss of Canada's biggest customer could doom the nuclear-research and medical-isotopes industry that was pioneered here a half century ago, prompting a brain drain and leaving Canadians dependent on the United States.

DigiTimes:

- Intel(INTC) is reportedly in talks with Google(GOOG) to support the Android platform on Intel-based mobile Internet devices (MIDs), according to sources from Taiwan-based MID makers.

Bear Radar

Style Underperformer:
Large-cap Value (-1.12%)

Sector Underperformers:
Construction (-2.51%), Coal (-1.86%) and Hospitals (-1.59%)

Stocks Falling on Unusual Volume:
RDY, CVX, PSMT, SYNO, EZCH, ANDE, IPCR, GBCI, OFIX, QGEN, SIVB, SPWRB, CME, NUVA, POT, MOS, SGR, IX, RRD and SQM

Stocks With Unusual Put Option Activity:
1) TER 2) TXT 3) MOS 4) SGR 5) ENER

Bull Radar

Style Outperformer:
Large-cap Growth (-.10%)

Sector Outperformers:
Education (+.92%), Disk Drives (+.85%) and Restaurants (+.47%)

Stocks Rising on Unusual Volume:
NCI, PKI, RRGB, CPKI, INFY, CTSH, YHOO, RIGL, MLHR, QLGC, PPDI, PNRA, KMT and DCP

Stocks With Unusual Call Option Activity:
1) PLD 2) ISIL 3) YRCW 4) NVLS 5) SNDK

Links of Interest

Market Snapshot Commentary
Market Performance Summary
Style Performance
Sector Performance
WSJ Data Center
Top 20 Biz Stories
IBD Breaking News
Movers & Shakers
Upgrades/Downgrades
In Play
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
Option Dragon
NASDAQ 100 Heatmap
Chart Toppers
Real-Time Intraday Quote/Chart
HFR Global Hedge Fund Indices