Stocks Building on Recent Gains into Final Hour on Earnings Optimism, Less Economic Pessimism, Short-Covering, Lower Long-Term Rates

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Defense longs, Biotech longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is about average. Investor anxiety is very high. Today’s overall market action is very bullish. The VIX is falling 4.29% and is high at 24.78. The ISE Sentiment Index is below average at 114.0 and the total put/call is slightly below average at .74. Finally, the NYSE Arms has been running very high most of the day, hitting 2.08 at its intraday peak, and is currently 1.44. The Euro Financial Sector Credit Default Swap Index is rising 1.49% today to 102.50 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 1.83% to 134.88 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 1.89% 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 falling 4.18% to 44.38 basis points. The Libor-OIS spread is rising .71% to 32 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 3 basis points to 1.78%, which is down 86 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Economically sensitive and small-cap shares are outperforming again today. (XLF) is consolidating recent gains in an orderly fashion. The market is taking the (CIT) news very well. US stock bearishness remains relatively high, which is a large positive. Economic bellweather, (FDX), made negative comments yesterday afternoon, yet the stock is blasting up through its 200-day moving average on volume. (IBM) and (GOOG) are also trading well ahead of their earnings reports after the close. I will closely monitor the market’s reaction to these reports and tomorrow morning’s financial sector earnings releases. While the market is extended near-term, I suspect the high levels of bearishness and investment manager performance anxiety will keep any pullback relatively mild and short-lived in nature. Nikkei futures indicate an +160 open in Japan and DAX futures indicate an +43 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, short-covering, investment manager performance anxiety, earnings optimism and less economic pessimism.

Today's Headlines

Bloomberg:

- Mortgage rates in the U.S. fell to the lowest since May as home-loan refinancings surged on lower borrowing costs. The average 30-year rate fell to 5.14 percent from 5.20 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. The 15-year rate was 4.63 percent.

- Confidence among U.S. homebuilders rose this month to the highest since September as sales of single-family units increased and more prospective buyers expressed interest. The National Association of Home Builders/Wells Fargo index of builder confidence gained to 17 this month from 15 in June, the Washington-based NAHB said today. “Builders are seeing slightly better sales conditions this month as consumers take advantage of the first-time buyer tax credit, low interest rates and attractive home prices,” NAHB Chairman Joe Robson, a builder from Tulsa, Oklahoma, said in a statement. The gauge of buyer traffic increased to 14, also the highest since September, after holding at 13 for three months.

- The number of Americans filing claims for unemployment benefits fell last week to the lowest level since January, depressed by shifts in the timing of auto plant shutdowns. The number of people collecting unemployment insurance plunged by a record 642,000, also reflecting seasonal issues surrounding the closures at carmakers. A Labor analyst said the distortions may play havoc with claims data for another couple of weeks. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, plunged to 4.7 percent in the week ended July 4, from 5.2 percent the prior week.

- Corn and soybean prices dropped as cool weather relieves stress on plants in the Midwest, boosting yield potential of the two biggest U.S. crops.

- Natural gas surged more than 9 percent, the biggest gain in six weeks, after a government report showed a narrowing U.S. stockpile surplus.

- Iranian leaders are turning inward and rejecting engagement with the West as they blame outsiders for street protests, even as President Barack Obama’s administration pushes for curbs on Iran’s nuclear program. The leadership has denounced foreign governments as “enemies” for encouraging demonstrations over last month’s presidential election and plans to put a British Embassy employee on trial for inciting the protests, which were violently suppressed. A French student also has been detained on spy charges.

- Treasuries rose for the first time in four days after commercial lender CIT Group Inc.(CIT) said it probably won’t receive a federal bailout and a gauge of manufacturing fell, renewing the refuge appeal of U.S. debt. Ten-year note yields fell as China stepped up its purchases of U.S. financial assets in May, according to the Treasury Department, even as Russia, Japan, and Caribbean banking centers trimmed their holdings. Treasury Secretary Timothy Geithner said the U.S. can’t afford to blunt measures aimed at pulling the economy out of recession.

- JPMorgan Chase & Co.(JPM), the second- largest U.S. bank, said profit rose for the first time since 2007 on record investment-banking fees.

- A split among Federal Reserve officials widened last month: Depending on who is doing the forecasting, economic growth will either remain stalled next year or will accelerate to the fastest rate since 1999.

- The Bank of Japan raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports.

- LG Display Co., the world’s second- largest maker of liquid-crystal displays, reported profit that beat analyst estimates and forecast prices will rise, fueled by rising demand for the panels.

- The ruble may drop 16 percent by yearend as Russia’s shrinking economy makes it “too expensive and harmful” for the central bank to support the currency, according to Alfa Bank, Russia’s biggest privately-owned lender.

- Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger. A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said. “OPEC don’t realize the magnitude of the cuts they need to make,” which would total about a further 2 million barrels a day, Verleger added. “Storage is going to become tight. It’s not clear if there’s going to be enough storage available.”

- The S&P 500 may rise further after breaking a “major resistance” level yesterday and crossing its 233-day moving average for the first time since December 2007, according to analysts at Credit Suisse Group AG who use price charts to make forecasts. “A rise above the June highs is expected in the coming 2-3 weeks,” technical analysts at the Swiss bank including Zurich-based Mensur Pocinci wrote in a report today. “With yesterday’s advance most stock markets have triggered upgrade levels on the short- and medium-term horizon.”

Wall Street Journal:

- Let Private Equity Help the Banks. Taxpayers will be on the hook for more losses than necessary if we turn this source of capital away.

- The long-time head of Iran's atomic agency, who also served as vice president under President Mahmoud Ahmadinejad, told state media Thursday he had resigned his two posts.

- Americans trying to understand the nail-biting financial trauma of the past several months are flocking by the millions to a surprisingly lively source of enlightenment: blogs written by economists.

- So what's a president to do when the promises he made about his economic stimulus program fail to materialize? If you're Barack Obama, you redefine your goals and act as if America won't remember what you said originally. That's a neat trick if you can get away with it, but Mr. Obama won't. His words are a matter of public record and he will be held to them.

CNBC:

- Financials Rally Set to Continue: Dick Bove.

LA Times:

- In a major boost to its satellite-making operation in El Segundo, Boeing Co.(BA) is expected to announce today that it has won a contract potentially worth nearly $1 billion to build satellites for telecommunications giant Intelsat Ltd.

NY Times:

- Treasury Secretary Timothy F. Geithner said Thursday that financial markets were sending “important signs of recovery,” as he also sought to play down concerns about a new wave of bonuses on Wall Street. The comments were in part a reaction to the quick resurgence in earnings at two of the largest United States investment banks this week. JPMorgan Chase announced a $2.7 billion second-quarter profit from stellar trading and investment banking results on Thursday, while Goldman Sachs announced a $3.4 billion quarterly profit on Monday.Goldman has earmarked $11.4 billion so far this year to compensate its workers, raising the prospect that high bonus incentives might prompt another period of excessive risk-taking.

ABCNews:

- Claiming they needed to learn how to reduce stress because of a growing number of death threats being made against them, nearly 700 executives from the Social Security Administration (SSA) gathered for a lavish three-day conference in Phoenix, AZ last week, costing taxpayers about $700,000. The conference, which included a performance by a motivational dance company that was captured on tape by Phoenix affiliate ABC15, was held at the Arizona Biltmore, a hotel described as the "Jewel of the Desert" with an oasis of 39 acres of lush gardens, swimming pools and a golf course. Some of the government managers brought along their relatives, and there was a night excursion to a local casino. The SSA said such in-person meetings are essential, and this Phoenix gathering was just one in a series of such regional meetings, at a cost of over $1 million in the last year alone. Congressman Kevin Brady, R-TX, was outraged to learn how the financially-troubled SSA, which is expected to be insolvent in less than 30 years unless taxes are raised substantially, is spending its dwindling money.

NY Post:

- Congressional plans to fund a massive health-care overhaul could have a job-killing effect on New York, creating a tax rate of nearly 60 percent for the state's top earners and possibly pressuring small-business owners to shed workers. New York's top income bracket could reach as high as 57 percent -- rates not seen in three decades -- to pay for the massive health coverage proposed by House Democrats this week. The $544 billion tax hike would violate one of President Obama's ironclad campaign promises: No family will pay higher tax rates than they would have paid in the 1990s. Asked if Obama supports the surtax on wealthiest Americans even though it would break a campaign pledge, White House spokesman Robert Gibbs said only, "It's a process that we're watching." "Placing a big tax burden on the small-business community would rob them of the resources they need to create the jobs that will lead us out of the recession," said Tom Donohue, president of the US Chamber of Commerce. "If there's one sure way to kill the goose that lays the golden egg, this is it." Richard Lipsky, a lobbyist for small stores and businesses in New York City, warned that "in the middle of a recession, it's a very strange way to legislate." "According to what we've read, the House health-insurance plan would have a job-crippling impact on neighborhood stores and other small businesses because they put mandates on these businesses that would prevent them from hiring people because of the cost of the plan," Lipsky said. Adding to this burden, said Michael Moran of the State Business Council of New York, is that New York is already a high-tax state. "Any additional taxes make New York even less competitive," he said. New York would become the third-most-hostile place for top earners to live under the proposed new surtaxes supported by House Democrats and championed by Rep. Charles Rangel (D-NY). Kathryn Wylde, president of the Partnership for New York City, an umbrella organization representing the city's major businesses, said that the estimated top marginal tax rate of 57 percent for New York actually underestimates the potential impact on businesses. That's because it doesn't include the city's burdensome unincorporated-business tax, which snares many entrepreneurs. "It could be between 62 and 63 percent," she said. If the House plan passes, Wylde said, "There literally, at this point, is very strong reason to relocate your family and your business outside New York."

SeekingAlpha:

- Following last week's market declines, this week's rally hasn't been enough to lift investor spirits. The charts below show the spread between bulls and bears based on the weekly surveys from Investors Intelligence and the American Association of Individual Investors (AAII). As shown, neither one is positive. Investors Intelligence shows an equal number of bulls and bears (35.6%), while in the AAII survey, bears (47.1%) outnumber bulls (26.7%).

ITWorld:

- Microsoft(MSFT) retail stores coming this fall.

Rassmussen:

- Seventy-eight percent (78%) of U.S. voters say it is at least somewhat likely that taxes will be raised on the middle class to cover the cost of health care reform. Fifty-six percent (56%) say it’s very likely. A new Rasmussen Reports national telephone survey finds that just 15% of voters think it’s unlikely that the cost of health care reform will require raising taxes on the middle class. Those who earn between $20,000 and $75,000 per year believe even more strongly that health care reform will require raising taxes on the middle class.

Politico:

- The Republican National Committee launched a website Thursday to harness grassroots opposition to Democratic health reform plans moving through Congress. The website, BarackObamaExperiment.com, is the first in a series of Republican efforts to reach out to voters and give them ways to contact lawmakers, radio shows and newspaper editorial boards. It paints Obama’s health care efforts as a risky experiment the country can’t afford.

- Senate Majority Leader Harry Reid blasted the Democratic National Committee Thursday for its decision to run ads against Democratic senators concerned about President Obama's health plan. On Wednesday, the DNC's "Organizing for America" committee — President Barack Obama’s campaign-in-waiting — announced that it would begin running ads in the home states of Democrats like Byron Dorgan of North Dakota, who has expressed concern about the cost of the legislation. Asked about the ads, Reid responded: "It's a waste of money."

Washington Post:

- Instead of saving the federal government from fiscal catastrophe, the health reform measures being drafted by congressional Democrats would worsen an already bleak budget outlook, increasing deficit projections and driving the nation more deeply into debt, the director of the nonpartisan Congressional Budget Office said this morning. Under questioning by members of the Senate Budget Committee, CBO director Douglas Elmendorf said bills crafted by House leaders and the Senate health committee do not propose "the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount." "On the contrary," Elmendorf said, "the legislation significantly expands the federal responsibility for health-care costs." Though President Obama and Democratic leaders have said repeatedly that reining in the skyrocketing growth in spending on government health programs such as Medicaid and Medicare is their top priority, the reform measures put forth so far would not fulfill their pledge to "bend the cost curve" downward, Elmendorf said. Instead, he said, "The curve is being raised."

- With leaders of the U.S. Equal Employment Opportunity Commission warning yesterday that the American workforce faces "an equal opportunity plague" of age discrimination, workers' advocates urged commissioners to support new federal protections. Workers filed nearly 30 percent more age discrimination charges last year than in 2007.

Unwiredview.com:

- Apple(AAPL) is developing a headset than can store settings and data.

- When I use my phone, there is actually one time, when I wouldn’t really mind listening to some short audio adverts. It’s that time between when I dial the number and the person I called answers the phone. Filled with those boring beeps or stupid ringback tones from the operator. This is exactly the place where Google wants to insert their short audio advertisements, described in a patent app “Ringback advertising”.

USA Today:

- Though new ethics rules have curbed privately funded travel by members of Congress in recent years, taxpayers are increasingly picking up the tab for lawmakers' foreign travel, according to congressional travel records. In the 2007-08 term, Congress spent about $5.2 million on lawmakers' trips to countries such as France, Kuwait and Jordan, according to a USA TODAY analysis of Senate records contained in the Congressional Record and House of Representative records compiled by the non-partisan CQ MoneyLine. That's up 6% compared with the previous congressional session in 2005-06, when members spent about $4.9 million on foreign travel, and up 30% compared with 2003-04, the data show. Taxpayers also pay for the travel expenses of congressional aides on the official trips. In 2008 alone, Congress spent about $15.5 million on foreign travel for lawmakers and their aides, according to the analysis.

Reuters:
- U.S. lawmakers on Thursday slammed former Treasury Secretary Henry Paulson over the government's role in Bank of America's merger with Merrill Lynch, saying authorities suppressed information about losses and bullied executives into going through with the deal. "The American people, investors, and the Congress were kept in the dark," Rep. Edolphus Towns told Paulson at a hearing.

- Chipmakers Cypress Semiconductor Corp (CY) and Fairchild Semiconductor International Inc (FCS) posted quarterly losses, but guided third-quarter results above consensus as demand stabilizes and inventory levels deplete in the industry. Cypress, which makes computer hardware like clocks, memory and controllers, expects to turn in a profit after losing money for four quarters in a row.

Telegraph:

- In a surprising conclusion in what has been a real life David vs Goliath battle, Florida-based estate agent and investment adviser, Mike Morgan, will be allowed to keep his GoldmanSachs666.com site up and running. The bank, which on Tuesday reported a 65pc rise in second-quarter profits to $3.4bn (£2.07bn), has backed down after earlier threatening to shut down the site, which is designed to discuss what Mr Morgan considers to be the bank’s failings. Mr Morgan started the website after becoming incensed over the fall-out from Goldman Sachs’(GS) involvement with American International Group, when the bailed-out insurer’s $12.9bn payment to the bank to cover counterparty exposures went barely unnoticed while the American public became incensed over $165m bonus payments to AIG staff. Although the site’s original focus was to keep readers up-to-date on news surrounding the bank, one post, entitled “Does Goldman Sachs run the world?,” questions alleged links between former employees and various world governments. This time around Mr Morgan’s victory is somewhat pyrrhic, however, given he had a heart attack during the spat, and underwent quadruple bypass surgery soon after. As a result, he is stepping back from some of his business operations, and is looking for a willing volunteer to take over the day-to-day running of the site.

JerusalemPost:
- A day after an explosion uncovered a hidden Hizbullah arms cache in southern Lebanon, the IDF's Northern Command estimated that the group had turned hundreds of homes in the area into warehouses to store short- and medium-range Katyusha rockets. The IDF released video footage taken from an Israeli aircraft, showing a home that had exploded on Tuesday in the village of Hirbet Selm - located some 20 kilometers north of the Lebanese border. The roof is seen in the footage with dozens of holes, which IDF ballistic experts said were the size of 122-mm. Katyusha rockets. UNIFIL said that storing the ammunition was a "serious violation" of the UN-brokered ceasefire that ended the Second Lebanon War in 2006.

Bear Radar

Style Underperformer:
Large-cap Value (-.41%)

Sector Underperformers:
I-Banks (-1.09%), Utilities (-.84%) and Airlines (-.83%)

Stocks Falling on Unusual Volume:
BMRN, NOK, WDR, RECN, SGMS, LEAP, SKY and MAR

Stocks With Unusual Put Option Activity:
1) HGSI 2) CIT 3) STEC 4) XLNX 5) JCP

Bull Radar

Style Outperformer:
Large-cap Growth (-.03%)

Sector Outperformers:
Defense (+.82%), Medical Equipment (+.77%) and Gaming (+.42%)

Stocks Rising on Unusual Volume:
MOS, PPG, VNDA, MMSI, BAX, NVS, PLCM, CBSH, MBFI, ADTN, SWS, UFPI, STEC, SNDK, CSIQ, ARST, MMSI, JRCC, BIDU, VPRT, PTNR, BUCY, HUBG, FUQI, CPNO, ZEUS, STLD, CHE, HOG, CCK, ESL, WHR and SON

Stocks With Unusual Call Option Activity:
1) CA 2) WHR 3) STEC 4) AMR 5) SNDK

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