Stocks Sharply Lower into Final Hour on China Bubble Worries, Profit-Taking, More Shorting, Technical Selling

BOTTOM LINE: The Portfolio is slightly lower the final hour on losses in my Technology longs, Financial longs and Medical 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 very negative as the advance/decline line is substantially lower, every sector is declining and volume is above average. Investor anxiety is high. Today’s overall market action is very bearish. The VIX is rising 9.46% and is very high at 28.47. The ISE Sentiment Index is below average at 115.0 and the total put/call is above average at .93. Finally, the NYSE Arms has been running very high most of the day, hitting 3.98 at its intraday peak, and is currently 2.74. The Euro Financial Sector Credit Default Swap Index is rising 3.32% today to 84.33 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 rising 1.26% to 120.78 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 6.86% to 21 basis points. The TED spread is now down 445 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 9.29% to 37.56 basis points. The Libor-OIS spread is falling another 7.24% to 15 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 1 basis point to 1.66%, which is down 100 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is unch. today. Considering today’s positive economic news, the action in the most economically sensitive shares is worrisome. As well, (IYR)/(XLF) have been very heavy throughout the day. The US dollar is trading as if another tradable move higher has begun in the currency, which could further pressure commodities. On the positive side, most tech sector leaders are holding up relatively well. Road & Rail and Retail shares are also substantially outperforming. I would expect to see Asia come under pressure again tonight. I will closely watch the market's reaction to the ADP employment report, released tomorrow morning, which should be around expectations. Nikkei futures indicate a -200 open in Japan and DAX futures indicate a -3 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, technical selling and China bubble worries.

Today's Headlines

Bloomberg:

- U.S. stocks fell, led by financial shares, as concern banks will report more losses overshadowed manufacturing and pending home sales data that topped estimates. Europe’s Dow Jones Stoxx 600 Index slid 1.8 percent, the most in two weeks, as HSBC Holdings Plc and UBS AG slumped.

- Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery. Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities. “If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

- EBay Inc.(EBAY) agreed to sell 65 percent of its Skype Internet-calling unit to an investor group led by Silver Lake for about $2 billion to focus on reviving sales at its main e-commerce site. The buyers will pay $1.9 billion in cash and will also give EBay a $125 million note, the company said in a statement today. Ebay, which had planned an initial public offering for Skype, will retain 35 percent of the business. The deal values Skype at $2.75 billion.

- American manufacturing expanded for the first time in 19 months, and pending sales of existing homes rose more than forecast, indicating the worst recession since the 1930s has ended. The Institute of Supply Management’s factory index posted its biggest two-month gain since 1983, rising to 52.9 in August; readings higher than 50 signal an expansion. The National Association of Realtors said signed purchase agreements for existing properties jumped 3.2 percent in July, for a record sixth consecutive gain. “We’re now in a recovery; for the next few months, the data should look relatively strong because of all the stimulus,” Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said in a Bloomberg Television interview. “The worry is for early next year when the benefit of the stimulus begins to fade.” The jump was led by new orders, with that measure increasing to 64.9, the highest level since December 2004. The production index reached 61.9. A gauge of export orders advanced to 55.5.

- Corn fell the most in a week and soybeans declined for a second day on signs that cool, wet weather in July and August improved prospects for crops in the U.S., the world’s biggest producer and exporter. About 69 percent of corn plants were in good or excellent condition as of Aug. 30, compared with 61 percent a year earlier, the U.S. Department of Agriculture said yesterday. An estimated 69 percent of soybeans got the top ratings, up from 57 percent a year earlier, the USDA said.

- Contracts on the Markit iTraxx Crossover Index of 44 companies with mostly high-yield credit ratings climbed 11 basis points to 609 basis points, according to JPMorgan Chase & Co. prices in London.

- Crude oil fell to the lowest price in almost two weeks as U.S. equities slipped on concern that the recent stock-market rally has outpaced the outlook for financial-company earnings. Crude oil for October delivery fell $1.38, or 2 percent, to $68.58 a barrel at 11:41 a.m. on the New York Mercantile Exchange. The contract touched $68.43, the lowest since Aug. 19.

- Hebei Iron & Steel Group, China’s second-biggest steelmaker, cut prices of reinforcing bars by 19 percent, the first reduction since April, according to Umetal Research Institute. The Hebei province-based mill cut benchmark prices of the product, used in buildings, by 950 yuan to 3,950 yuan ($578) a metric ton for September delivery, Hu Yanping, Beijing-based analyst with Umetal, an industry publication, said today. Benchmark spot steel prices in China have dropped 13 percent since Aug. 4 after gains this year led buyers to run down inventories.

- Threats by President Barack Obama and congressional leaders to push health-care legislation through the Senate without Republican support may be undercut by some Democrats whose support they need. With bipartisan efforts stalled, Democratic leaders are considering abandoning protocol to pass a measure with as few as 50 votes. Senate Budget Committee Chairman Kent Conrad and West Virginia’s Robert Byrd, the longest-serving senator in history, have warned against the idea. They aren’t alone. Democrats are looking at the reconciliation process because it provides a way around the 60-vote requirement, allowing a simple majority to pass measures aimed at cutting the federal budget deficit. “Using reconciliation to ram through complicated, far- reaching legislation is an abuse,” Byrd said in an April 29 statement. Besides Byrd and Indiana Senator Evan Bayh, one of the four Democrats who voted against the budget was Pennsylvania’s Arlen Specter, who said he disagreed with the provision allowing reconciliation for health care. The fourth, Nebraska Senator Ben Nelson, “opposes using reconciliation,” though he hasn’t ruled out voting for it, said spokesman Jake Thompson. Connecticut Senator Joseph Lieberman, an independent who caucuses with Democrats, told CNN on Aug. 23 the process would be a “real mistake.” Leaders may not be able to count on votes from Bayh and Democrat Senators Mary Landrieu of Louisiana and Blanche Lincoln and Mark Pryor of Arkansas, who prefer bipartisan legislation. “There are a number of moderate Democrats who are going to feel uncomfortable voting for a bill that no Republicans support,” said Andrew Laperriere, managing director of the International Strategy and Investment Group in Washington.

- US companies will spend less on land, buildings and equipment through next year than analyst anticipate, according to David J. Kostin, Goldman Sachs’ chief US investment strategist. Kostin and his team expect S&P 500 companies to lower so-called capital spending by 22% this year and 15% next year, according to a report. Such a drop would be the worst in more than 25 years. The team’s projection contrasts with the outlook of Goldman’s own industry analysts. The analysts expect a smaller decline – 18% - in 2009, followed by a 2% increase in 2010. Companies with relatively high levels of capital spending will benefit as investors “shift their focus from cost-cutting to sales growth” in the next two quarters, Kostin wrote.

- Ford Motor Co.(F) said August U.S. sales rose 17 percent and Chrysler Group LLC reported a 15 percent decline as the government’s “cash for clunkers” rebates lured shoppers to showrooms. The results trailed analysts’ estimates.

NY Times:

- The Case Against a Super-Regulator by Shelia C. Bair.

- Unemployment in the 16 countries that use the euro rose in July to the highest level in more than 10 years, showing that despite signs of recovery, the European economy continues to struggle. The jobless rate in the euro zone rose to 9.5 percent in July, the highest reading since May 1999, from 9.4 percent in June, Eurostat, the statistical service of the European Union, said Tuesday in Luxembourg.

Rapaport News:
- Chain store sales across the U.S. for the week ending August 29, 2009, fell 0.7 percent on a same-store basis, according to the weekly sales snapshot provided by the International Council of Shopping Centers (ICSC) and Goldman Sachs. The reading was the third consecutive slide for chain store sales as measured against comparable weeks in August 2008. ICSC predicts that this past month's same-store sales at the major chains will fall between 3.5 percent and 4 percent from one year ago. “Although the back-to-school calendar shifts will, on balance, boost year-over-year sales in August a tad, there was little discernible improvement in the trend during the entire month otherwise,” said Michael P. Niemira, ICSC chief economist.

Forbes:

- Polygon's Reade Griffith is a poster child for what's wrong with the hedge fund industry these days. A year ago, Griffith, heading into a disastrous year where he wound up losing 48%, gated investors, barring them from yanking out their money. Now he is getting the word out that he is trying to raise money for two new hedge funds, a Convertible Opportunity Fund and the European Equity Opportunity Fund. The funds, Griffith said in a recent letter to investors, have been launched with partner and employee capital.

Blogging Stocks:

- Schapiro said that regulators need the data to construct an audit trail to find out who is doing insider trading and market manipulation. The U.S. Senate is investigating the derivatives markets but is up against a brick wall because it cannot pin down who it is that actually pulled the trigger on the trades. So they are relying on the SEC to provide this data. Schapiro said that the SEC is having difficulty identifying derivative investors and the size of their trades.

NY Post:

- Disgraced former Gov. Eliot Spitzer has been privately talking with friends about a possible comeback, and is considering a run for statewide office next year, several sources told The Post. Less than 18 months after he left Albany in a prostitution scandal, Spitzer has held informal discussions in recent weeks about the possibility of making a bid for state comptroller or the US Senate seat currently held by Kirsten Gillibrand, sources said.The hooker-happy Democrat has also discussed his own halfway-decent poll numbers in recent surveys, which have shown him more popular than Gov. Paterson, whose own numbers have tanked.

Vanity Fair:

- Like the economy, V.F.’s annual ranking of the top 100 Information Age powers has been truly shaken up, with new blood emerging. Who’s in? Who’s out? Who’s top dog?

AP:

- Farmer’s Almanac predicts numbing cold this winter. Americans, you might want to check on their sweaters and shovels — the Farmers' Almanac is predicting a cold winter for many of you. The venerable almanac's 2010 edition, which goes on sale Tuesday, says numbing cold will predominate in the country's midsection, from the Rocky Mountains in the West to the Appalachians in the East. Managing Editor Sandi Duncan says it's going to be an "ice cold sandwich." "We feel the middle part of the country's really going to be cold — very, very cold, very, very frigid, with a lot of snow," she said. "On the East and West coasts, it's going to be a little milder. Not to say it's going to be a mild short winter, but it'll be milder compared to the middle of the country."

Rassmussen:

- Forty-two percent (42%) of U.S. voters say a group of people randomly selected from the phone book would do a better job than the current Congress. The latest Rasmussen Reports telephone survey finds that an identical number (42%) disagree, but 16% are not sure.

Politico:

- The raucous debate over health care could thwart the Senate’s enactment of sweeping energy and climate legislation this year, say Democratic aides, energy lobbyists and environmentalists. If Democrats fail to push through a health care bill — or get embroiled in even more contentious debate this fall — experts fear they’d lose much of the momentum necessary to get the controversial climate and energy legislation through the Senate.

- Democratic lawmakers will not be able to count on the AFL-CIO's support if they drop the public insurance option from the health care reform legislation, union officials said Tuesday. The AFL-CIO’s incoming president, Richard Trumka, outlined "three absolute musts" in any overhaul package: a public option, an employer mandate and no tax on employer-provided health benefits.

- White House officials are increasingly worried liberal, anti-war Democrats will demand a premature end to the Afghanistan war before President Barack Obama can show signs of progress in the eight-year conflict, according to senior administration sources. These fears, which the officials have discussed on the condition of anonymity over the past few weeks, are rising fast after U.S. casualties hit record levels in July and August.

Zogby:

- President Barack Obama's job approval rating has sunk to a record low of just 45%, the latest Zogby Interactive poll shows. Fifty-one percent of likely voters now say they disapprove of the President's job performance. The Zogby Interactive survey of 2,530 likely voters nationwide was conducted Aug. 18-20, 2009, and carries a margin of error of +/- 2.0 percentage points. Zogby International also uses a four-point scale of job performance. Using that measure, this latest survey finds 16% rate his job performance as excellent and 27% as good. Another 11% gave him a fair rating while 45% said his job performance is poor. Both scales show a significant drop from a Zogby International telephone poll conducted July 31-Aug. 4, which showed 53% approving of Obama's job performance, and 38% disapproving.

The Hill:

- The nation’s largest labor union and some allied Democrats are pushing a new tax that would hit big investment firms such as Goldman Sachs reaping billions of dollars in profits while the rest of the economy sputters. The AFL-CIO, one of the Democratic Party’s most powerful allies, would like to assess a small tax — about a tenth of a percent — on every stock transaction. Small and medium-sized investors would hardly notice such a tax, but major trading firms, such as Goldman, which reported $3.44 billion in profits during the second quarter of 2009, may see this as a significant threat to their profits. “It would have two benefits, raise a lot of revenue and discourage speculative financial activity,” said Thea Lee, policy director at the AFL-CIO.

USA Today:

- If the economy is slowly rebounding, ticket sales for many NFL teams have yet to take the corresponding bounce for the upcoming season. Two teams — the San Diego Chargers and the Jacksonville Jaguars— say it's likely they will have home TV blackouts this season due to an inability to sell out their stadiums. At least 10 other teams could also face blackouts.

- Four chief executives whose government-funded non-profit corporations are paid to deliver U.S. foreign assistance earned more than half a million dollars in 2007, a USA TODAY review of public tax records shows. Although President Obama and Congress placed a $500,000 cap on salaries at companies getting taxpayer bailouts, there is no such restriction on those that subsist on federal grants — even those delivering aid to some of the world's poorest regions. Two senior senators say the pay is excessive. "It seems to me that these are salaries that are outrageous, particularly if they're government contractors," said Sen. Chuck Grassley of Iowa, the ranking Republican on the Finance Committee, which has jurisdiction over non-profit compensation.

Financial Times:
- Gordon Brown has pledged tough action to clamp down on excessive remuneration for bankers as part of an international effort to rectify the systemic weakness that led to the global financial crisis. The prime minister said in an interview with the Financial Times that pay and bonuses should be based on long-term success not short-term speculative gains; banks should “claw back” bankers’ rewards if their performance suffered in subsequent years; and regulators should be able to impose higher capital requirements on financial institutions.

Globe and Mail:

- The potash market won't recover until 2011, CIBC World Markets warned on Tuesday as it cut its price target on Potash Corp. of Saskatchewan(POT) – the industry's largest producer of the fertilizer component.

Bear Radar

Style Underperformer:
Small-Cap Value (-2.76%)

Sector Underperformers:
Airlines (-4.19%), Banks (-4.10%) and REITs (-3.78%)

Stocks Falling on Unusual Volume:
AIG, HIG, UBS, DLLR, REP, AMX, VIP, RMBS, CMED, BAMM, BCRX, AIXG, STEC, CLNE, VPRT, NETL, DECK, BOLT, RUSHA, CIEN, OGXI, EWQ, EWP, HCN, PRF, CPY, EWO, AU and CGV

Stocks With Unusual Put Option Activity:
1) DFS 2) RMBS 3) AFL 4) UNH 5) HBC

Bull Radar

Style Outperformer:
Small-cap Growth (+.10%)

Sector Outperformers:
Semis (+.97%), Road & Rail (+.77%) and Biotech (+.36%)

Stocks Rising on Unusual Volume:
ISIL, SRX, TTM, KSS, TXT, USMO, AHL, CRMT, NEOG, RDEA, SINA, EBIX, CISG, SGEN, ITWO, ULTA, ARST, ACAP, NICE, CYOU, BRLI, APSG, ACLI, CTRP, CME, SHPGY, DY, BJS, ALJ, HGT and CBE

Stocks With Unusual Call Option Activity:
1) NVAX 2) FDX 3) MOS 4) NOK 5) RMBS

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