Stocks Finish Lower, Weighed Down by Commodity, Gaming and Construction Shares

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Stocks Lower into Final Hour on Healthcare Reform Worries, Budget Deficit Concerns, Profit-Taking

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Medical longs, Biotech longs, Defense longs and Commodity/Emerging Market shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is about average. Investor anxiety is high. Today’s overall market action is mildly bearish. The VIX is rising 4.28% and is very high at 26.06. The ISE Sentiment Index is below average at 106.0 and the total put/call is slightly above average at .89. Finally, the NYSE Arms has been running around average most of the day, hitting 1.64 at its intraday peak, and is currently .93. The Euro Financial Sector Credit Default Swap Index is falling 2.40% today to 79.33 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 falling 1.27% to 116.0 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling .56% to 31 basis points. The TED spread is now down 435 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is plunging 13.17% to 35.44 basis points. The Libor-OIS spread is falling .94% to 29 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.84%, which is down 80 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is unch. today. The bears remain unable to gain any meaningful downside traction despite potential catalysts and the market’s overbought technical state. Defense, software, telecom, I-Bank, medical, biotech, hospital, retail, education and airline stocks are all higher on the day. The only real significant weakness today is seen in commodity-related shares. The decline in commodity prices is a short-term broad market negative, but a huge positive intermediate/long-term for the majority of US stocks. Nikkei futures indicate an +12 open in Japan and DAX futures indicate an +3 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, investment manager performance anxiety, less economic fear, lower energy prices and earnings optimism.

Today's Headlines

Bloomberg:

- The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18% during the past 90 years. The 30-stock gauge climbed to more than 10% above its mean level from the previous 200 days, rebounding from 34% below the so-called 200-day moving average in November, according to Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10% below the 200-day level to 10% above, it posted gains during the next 12 months, Bloomberg data since 1921 show. “This rally, while it will have its fits and starts, is the beginning of a new trend, not just a bounce,” said Michael Williams, managing director of NY-based Genesis Asset Management, which oversees about $42 billion. “It is a significant opportunity.” The Dow posted an average advance of 18% during the 12-month period following buy signals since 1921. In the six-month period, there were 17 advances for an average gain of 8.2%. In three months, it climbed 18 times, averaging an increase of 5.7%.

- The Standard & Poor’s 500 Index will rally 22 percent as the world economy rebounds from the first global recession since World War II, and Japanese stocks are attractive, investor Barton Biggs said. Consumer spending and the housing market will recover, boosting earnings for U.S. companies, said Biggs, who runs New York-based hedge fund Traxis Partners LP. “I’m still bullish,” Biggs, the chief global strategist for Morgan Stanley until 2003, said in an interview with Bloomberg radio. “We’re going to have a pretty strong recovery in earnings both this year and next year.” Cost cuts at U.S. businesses during the recession will boost earnings, Biggs said. Companies have reduced expenditures by firing workers and curbing business expansion, leading them to beat analysts’ profit projections on a per-share basis by 9.9 percent while topping revenue expectations by only 0.2 percent, according to data compiled by Bloomberg. Sales will start to rise by the end of the current quarter, Biggs said, with a pickup in retail spending by the end of 2009.

- Crude oil fell the most in three months after a government report showed an unexpected gain in U.S. inventories as imports jumped and refiners reduced operating rates. Stockpiles surged 5.15 million barrels to 347.8 million in the week ended July 24, the Energy Department said. It was the biggest weekly increase since April. Supplies were forecast to decline by 1.5 million barrels, according to the median of analyst estimates in a Bloomberg News survey. “The main problem with this market is the fact that there’s too much oil out there,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “We may test $60 before the week is over as these numbers are absorbed.” The inventory increase left crude-oil stockpiles 9.5 percent higher than the five-year average for the period, according to the Energy Department. Stockpiles at Cushing, Oklahoma, where New York-traded West Texas Intermediate crude oil is delivered, rose 1.31 million barrels to 32.1 million, the highest since March. “A lot of oil is going into storage,” Francisco Blanch, head of global commodity research at Bank of America-Merrill Lynch in London, said in an interview with Bloomberg Radio. “Supply is exceeding demand at the moment. It tells you that maybe we will see another few dollars drop from the oil price.” Crude-oil imports climbed 8.9 percent to 10 million barrels a day last week, the highest since January, the report showed. Refineries operated at 84.6 percent of capacity, down 1.5 percentage points from the prior week and the lowest since May. “Refiners are making a rational economic decision,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “Distillate supplies are very high and there’s a lack of gasoline demand, so refiners are doing all they can to protect their very thin profit margins.” Stockpiles of distillate fuel rose 2.2 million barrels to 162.6 million, the seventh straight increase, the report showed. The gain left supplies at the highest level since January 1985 and 27 percent higher than the five-year average for the period. Total U.S. daily fuel demand averaged 18.7 million barrels last week, down 1.1 percent from the prior week, the report showed. Goldman Sachs Group Inc., the bank that makes the most money from commodities, fixed-income and currency trading, said attempts to curb speculation may be “disruptive” to markets. CFTC Chairman Gary Gensler, a former Goldman Sachs employee, said yesterday that the agency should “seriously consider” setting strict federal position limits to curb speculation in commodity markets.

- The main U.S. market for energy trading has repeatedly let investors exceed levels meant to keep one firm from amassing too much control, underscoring the need for stricter limits, the top commodities regulator said. Traders in the past 12 months sometimes held two to three times the so-called accountability levels set by the New York Mercantile Exchange for crude oil, natural gas, heating oil and gasoline contracts, according to a report by the Commodity Futures Trading Commission. About 70 traders exceeded the levels. Nymex often failed to intervene, CFTC Chairman Gary Gensler said.

- Treasuries fell for a second day after the government’s record $39 billion auction of five-year notes drew a higher-than-forecast yield, renewing concern the deluge of U.S. debt being sold will overwhelm investor demand.

- Orders for U.S. durable goods, excluding automobiles and aircraft, unexpectedly rose in June, signaling manufacturing may expand in the second half of the year. Excluding transportation equipment, demand for goods meant to last several years climbed 1.1 percent, the most in four months, the Commerce Department said today in Washington. The durable-goods figures used to calculate economic growth indicate companies plan to boost investment in coming months, adding to evidence the worst recession in five decades is starting to ease. Bookings for non-defense capital goods excluding aircraft, which economists consider a proxy for future business investment, rose at a 0.4 percent annual pace in the third quarter after plunging at a 44 percent rate in the first three months of the year. Shipments of those items, used in calculating gross domestic product, fell at a 16 percent three-month annual rate in June, less than half the decrease in March and signaling that the decline in business investment eased last quarter. Ongoing inventory drawdown in manufacturing is setting the stage for future growth. Stockpiles fell at an $87 billion annual rate in the first quarter, the biggest drop on record, according to figures from Commerce. Companies cut inventories by 0.9 percent in June, today’s report showed. The economy will grow at an average 1.5 percent rate in the last six months of the year, according to economists surveyed by Bloomberg in the first week of July.

- The return of an El Nino climate pattern to the Pacific Ocean may relieve the worst Texas drought in 90 years and may reduce the threat of hurricanes ravaging orange groves in Florida. El Nino, characterized by warming waters in the Pacific, “could bring relief” in the fall and winter to Texas, where farms are suffering from the lack of rain, the National Weather Service said July 16. The El Nino will last through the Northern Hemisphere winter and into 2010, presaging winter storms in the Southwest and a reduction in Atlantic hurricanes, the U.S. National Oceanic and Atmospheric Administration said July 9.

- Gold futures fell to a two-week low as the dollar’s rebound reduced the appeal of the precious metal as an alternative investment. Silver tumbled the most in five weeks. The dollar is up 1 percent in two days against a basket of six major currencies, partly on demand for a haven amid slumping equities in China. “Having taken out supports at $948 and at $942, bullion is tasked with proving that it can attract supporters at just about this level, lest it should ease back toward the previous $905 price, from which it did manage the last bounce,” Jon Nadler, a Kitco Inc. senior analyst in Montreal, said in a report. Yesterday, holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, fell 3.36 metric tons to 1,083.25 tons. “Leakage continues to be manifest in the gold ETF,” Nadler said.

- Police in Jersey City, New Jersey, are investigating the death yesterday of Jack Shaw, a political consultant arrested July 23 and accused of funneling bribes to a local official in a federal corruption probe.

- Venezuelan President Hugo Chavez pulled his ambassador to Colombia and froze imports from the neighboring country, the second time in as many years he’s recalled his top diplomat in Bogota. Chavez, 55, said he is taking the actions in response to accusations by Colombia’s vice president that Venezuela provided Swedish anti-tank weapons to Colombian guerrillas, and to a proposal to allow the U.S. military to use Colombian bases. He threatened to expropriate Colombian companies in Venezuela.

- U.K. utilities may need to mothball power plants and cut investment plans as the country faces the biggest electricity glut in almost 20 years.

- The euro is poised for further declines, testing support levels starting at the 55-day moving average of $1.40, as the market grows “uncomfortable,” according to a Citigroup Inc. technical analysis report. Europe’s 16-nation currency lagged behind gains in stocks last week and failed to surpass resistance levels beginning around $1.43, Citigroup analysts Tom Fitzpatrick in New York and Shyam Devani in London wrote in a report today.

- American Express Co.(AXP), the biggest U.S. credit-card company by purchases, bought back the last of the government’s stake by paying $340 million for warrants held by the Treasury’s bailout program.

- Investors should close bets the euro will gain against the dollar, Goldman Sachs Group Inc. said, recommending ending the trade before the common currency reached the bank’s target of $1.45. “We do not see any near-term macro catalyst for an extension of the move in the direction we hoped for,” Goldman Sachs analysts wrote today in a report.

- The Federal Reserve said most of its 12 regional banks detected a slower pace of economic decline in June and July, further signs the worst U.S. downturn in at least five decades is closer to an end. “Economic activity continued to be weak” in June and July, the Fed said today in its Beige Book business survey, published two weeks before officials meet to set monetary policy. San Francisco, the district with the biggest economy, and three others “pointed to signs of stabilization,” while Chicago and St. Louis showed a “moderating” pace of decline.

CNBC:

- The Commodities Futures Trading Commission will seriously consider imposing strict position limits on traders placing bets on energy contracts, and that's just fine with hedge fund manager Mike Masters. The head of Masters Capital Management blew the whistle on oil speculators last year when he testified before Congress regarding the rapid run-up in oil prices as it reached its record high of $145 a barrel. He is scheduled to testify at the CFTC hearings Aug. 5. "We compiled data from the CFTC and aggregated it together which showed excessive speculation in oil markets," Masters said. "Currently, the crude oil market (when classified correctly on a reasonable pro-forma CFTC classification scheme), is approximately 80 percent or so speculative (non commercial) versus 10 years ago, when it was approximately 25 percent).

- U.S. cities, first hit by slumping property tax revenues in the housing downturn, are now vexed by surging unemployment with 18 metropolitan areas recording jobless rates of more than 15 percent in June, a Labor Department report said on Wednesday.

Rasmussen:
- The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 29% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. Thirty-nine percent (39%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -10. The President’s Approval Index rating is down four points over the past week and 11 points over the past month (see trends). Just 23% believe health care costs will go down if health care reform is passed. Most (53%) expect prices would rise and 50% expect the quality of care would decline.

- Nearly one-out-of-two U.S. voters (49%) now say the nation’s best days are in the past, a five-point jump from last month and the highest level of pessimism on this question in a year.

Politico:

- Energy and Commerce Committee Chairman Henry Waxman (D-Calif.) has cut a deal to reconvene his committee and vote on the Democrats' sweeping health care bill, with a goal of completing work by the time lawmakers leave town for the summer on Friday. There won’t be a vote before the full House before the August recess, but the committee breakthrough – after tense negotiations with Blue Dog Democrats – is a significant step for the Democrats.

- Democrats giddy with possibilities only six months ago now confront a perilous 2010 landscape signaled by troublesome signs of President Barack Obama’s political mortality, the plunging popularity of many governors and rising disquiet among many vulnerable House Democrats. The issue advantage has shifted as well, with Democrats facing the brunt of criticism about the pace of stimulus package spending, anxiety over rising unemployment rates and widespread uneasiness over the twin pillars of Obama’s legislative agenda: his cap-and-trade approach to climate change and the emerging health care bill.

LA Times:

- Relations between the United States and China are getting cozier as their battle against the global recession has drawn them closer together. But things aren't quite so warm when it comes to some hot-button topics, particularly climate change. U.S. and Chinese officials ended two days of high-level talks in Washington on Tuesday still at loggerheads on the issue, a top priority for President Obama. Global warming got little attention during the Bush administration. China is resisting a push to commit to targets for reducing greenhouse gas emissions and to open its market to U.S. clean energy technology. "China and the United States are different in their stages of development, national conditions and historic footprints, so I think they should shoulder different responsibilities in tackling climate change," Zhang Guobao, president of China's National Energy Administration, told reporters. It's just one of several areas in which U.S. and Chinese interests are at odds despite all the smiles and signs of mutual respect before the cameras as the Obama administration hosted its first Strategic and Economic Dialogue. Chinese officials, for instance, expressed deep concern about the ballooning U.S. budget deficit because of fears that the inflation that could follow would erode their huge investment in Treasury securities.

FINalternatives:

- The hedge fund industry standard fee structure of 2% management and 20% performance is going the way of the dinosaurs, thanks to pressure from investors who are demanding more for less. According to a Preqin survey, the mean hedge fund management fee stands at 1.63%, and the mean performance fee is 17.21%. But seven in 10 hedge funds still maintain a performance fee of 20%, demonstrating that investors are still willing to reward the alpha generated by top hedge fund managers.

NY Times:

- The problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market. Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care. Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines — and they’re playing games with real businesses and real people.

BusinessInsider:

- The official details of the Microsoft(MSFT)-Yahoo(YHOO) deal aren't much different than the leaks we reported last night. Here's our take: The deal is significantly worse than expected for Yahoo, as the company will get no money upfront. The deal is positive for Microsoft, but largely because Microsoft was nowhere in search without it. Saving the upfront payment is also a help. Ironically, the deal will likely be positive for Google(GOOG), which will now likely benefit from months of purgatory as Microsoft and Yahoo work to clear regulatory scrutiny and then go through the massive challenge of trying to integrate their sales forces and technology. Google itself will also now be able to argue persuasively that there is a big, viable (if discombobulated) competitor in the market.

Forbes:

- Russia and Cuba signed agreements to search for oil in the Gulf of Mexico, and Moscow extended the island $150 million in credit for construction materials and farm machinery, state media said Wednesday.

Reuters:
- Nearly 10,000 Uighurs involved in deadly riots in China's northwestern Xinjiang region went missing in one night, exiled Uighur activist Rebiya Kadeer said Wednesday, calling for an international investigation. Kadeer's visit to Tokyo was condemned by China.

Caijing:

- China’s stocks plunged amid speculation the central bank is poised to order lenders to set aside larger reserves, citing a “well-informed person.” The Shanghai Composite Index fell 5% today, the largest one-day decline in eight months.

Resalat:
- An Iranian political group has warned President Mahmoud Ahmadinejad of “consequences” should he fail to obey the country’s supreme leader, Ayatollah Ali Khamenei. “The Iranian nation and all the conservatives are following your deeds with attention and sensitivity for full obedience to the supreme leader and for your efficiency,” the Islamic Society of Engineers, which is loyal to the Islamic clerics who wield ultimate power over policy, said in an open letter to the president published by the newspaper today.

Bear Radar

Style Underperformer:

Mid-cap Value (-1.54%)

Sector Underperformers:

Steel (-4.33%), Oil Service (-3.97%) and Gold (-3.12%)

irlind

Stocks Falling on Unusual Volume:

EHTH, EAC, CMC, SLF, MBT, SNP, CHU, CLF, EPD, YHOO, HITK, PENN, SPTN, PNRA, BCRX, STLD, RS, NYB, TSL, SPN, RCL, TWP and TKR

Stocks With Unusual Put Option Activity:

1) ODP 2) ROK 3) SLM 4) MAS 5) MHK

Bull Radar

Style Outperformer:
Small-Cap Growth (-.54%)

Sector Outperformers:
HMOs (+1.82%), Education (+1.30%) and Hospitals (+1.20%)

Stocks Rising on Unusual Volume:
MCK, MMSI, HMC, PMTI, AOC, WSH, NUS, WMT, GLBC, FTI, LGCY, TRMB, LIFE, SYNT, DWA, SLAB, WRLD, CSGS, SVVS, COLM, WTFC, USNA, NICE, HSII, SMSI, ADVS, SSYS, AMED, PEGA, SEPR, LAZ, WTS, FIS, CRI, PLT, WXS and TE

Stocks With Unusual Call Option Activity:
1) WYN 2) ODP 3) MCK 4) DTV 5) WDC