Stocks Lower into Final Hour on Worries Over Housing, Terrorism and Iran

BOTTOM LINE: The Portfolio is slightly lower into the final hour as losses in my Medical and Retail longs are more than offsetting gains in my Base Metal and Energy-related shorts. I added to my (EEM) short and added (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are falling and volume is below average. The grind lower by stocks throughout the afternoon with elevated levels of angst is not a good sign. Bonds have now recouped all of their morning losses. It is interesting to note that gold is lower today despite rumors of Iranian nuclear developments, terrorism fears and a slightly weaker dollar. Due to record speculation by investment funds, I think gold, copper and oil are all much more correlated than most perceive. I expect US stocks to trade mixed into the close from current levels as short-covering offsets worries over developments in Iran.

Today's Headlines

Bloomberg:
- France lacks the military means to be part of an expanded UN force in Lebanon, Jean-Marie Le Pen, president of the nationalist National Front, said.
- Iran’s response to an incentives plan aimed at persuading it to stop enriching uranium “falls short” of the conditions set by the UN Security Council.
- Crude oil is falling more than $1/bbl. and gasoline plunged after an EIA report showed an unexpected increase in US inventories of the motor fuel.
- Dutch airport police detained twelve Northwest Airlines Corp. passengers at Amsterdam’s Schiphol Airport after the plane returned to the Dutch city at the pilot’s request.
- Tropical Storm Debby strengthened as it moved toward the open waters of the central Atlantic Ocean, where it may intensify into the first hurricane of the season.
- IBM(IBM) agreed to buy Internet Security Systems(ISSX) for about $1.3 billion to build its software business as revenue declines at the hardware and services units.

Wall Street Journal:
- PNC Financial(PNC) Bank is expected to say it will start refunding cash machine fees for customers using competitors’ ATMs as banks attempt to attract more customers.
- Oil companies have accumulated huge cash reserves as a result of soaring energy prices and they’ll spend much of the money on infrastructure projects for future extraction and refining.
- Walt Disney’s(DIS) ABC network is to start selling archived television news footage to users of Apple Computer’s(AAPL) iPod MP3 players.

NY Times:
- Jonathan Tasini, who is running against Hillary Rodham Clinton in the Democratic primary for senator, is attempting to use an anti-war stance similar to Connecticut’s Ned Lamont to unseat the former first lady.
- More shipping companies and retailers are turning to ports in Washington state’s Puget Sound area as congestion and labor shortages slow maritime cargo in Southern California.

Existing Home Sales Fall More Than Estimates

- Existing Home Sales for July fell to 6.33M versus estimates of 6.55M and 6.6M in June.

BOTTOM LINE: Sales of previously owned US homes fell in July to a two-year low, a slowdown that may lead the Fed to keep interest rates steady, Bloomberg said. The number of unsold homes on the market rose to 3.86 million, the highest since at least 1999 and 7.3 months’ supply at the current sales pace. The median price of an existing home rose .9% to $230,000. Sales of condos and co-ops rose 2.8%. Overall, sales fell 5.4% in the Northeast, 5.9% in the Mid-west, 1.2% in the South and 6.4% in the West. The Case-Shiller Housing futures are still only projecting a 4.6% decline in the average home price over the next 9 months, which would be considered a “soft-landing” considering the average home has appreciated over 50% over the last few years.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The rate of US highway fatalities last year increased for the first time since 1986 as the number of motorcycle deaths rose 13%. Motorcycle fatalities increased to 4,553 from 4,028, and almost 50% of those who died in such accidents last year were not wearing helmets.
- Striking BHP Billiton(BHP) workers at Chile’s Escondida copper mine said they have reduced their demand for improved wages and benefits as the walkout extends to a 16th day.

Wall Street Journal:
- Tome Cruise’s production company, based on the lot of Viacom’s Paramount Pictures since 1992, is setting up an independent operation funded by two hedge funds.

London-based Times:
- Sony Corp.(SNE) hasn’t started manufacturing its PlayStation 3 video game console, which is due to go on sale by the end of the year.

Late Buy/Sell Recommendations
Smith Barney:
- Rated (ALB) Buy, target $64.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/EPS Estimate
- (AMWD)/.66
- (BWS)/.40
- (CHS)/.30
- (CWTR)/.10
- (DLTR)/.27
- (EV)/.33
- (MIK)/.18
- (PSS)/.53
- (PVH)/.47
- (RGS)/.59
- (TECD)/.03

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Existing Home Sales for July are estimated to fall to 6.55M versus 6.62M in June.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 1,350,000 barrels. Gasoline supplies are expected to fall by 2,050,000 barrels. Distillate inventories are estimated to rise by 700,000 barrels. Finally, Refinery Utilization is expected to remain unchanged.

BOTTOM LINE: Asian indices are mostly lower, weighed down by exporting stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Higher after Mid-day Profit-taking

Indices
S&P 1,298.83 +.10%
DJIA 11,339.84 -.05%
NASDAQ 2,150.02 +.11%
Russell 2000 707.76 +.34%
Wilshire 5000 12,975.50 +.12%
S&P Barra Growth 601.24 +.10%
S&P Barra Value 695.79 +.10%
Morgan Stanley Consumer 630.37 -.14%
Morgan Stanley Cyclical 794.46 +.21%
Morgan Stanley Technology 497.79 +.31%
Transports 4,302.24 +.13%
Utilities 441.93 +.73%
Put/Call 1.16 -1.69%
NYSE Arms .98 -25.23%
Volatility(VIX) 12.18 -.33%
ISE Sentiment 58.0 -28.40%
US Dollar 85.17 +.64%
CRB 336.67 +.35%

Futures Spot Prices
Crude Oil 72.63 +.25%
Unleaded Gasoline 194.00 +.18%
Natural Gas 6.98 +5.37%
Heating Oil 203.75 +.24%
Gold 632.80 -.19%
Base Metals 232.76 +.53%
Copper 346.00 -.52%
10-year US Treasury Yield 4.80% -.04%

Leading Sectors
Papers +1.35%
Homebuilders +1.0%
Internet +.93%

Lagging Sectors
Retail -.51%
Restaurants -.59%
Insurance -.69%

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Afternoon Recommendations
Deutsche Bank:
- Rated (FPL) Buy, target $52.

Afternoon/Evening Headlines
Bloomberg:
- Medtronic(MDT) said its net income rose 87% in the fiscal first quarter.
- National Semi(NSM) cut its revenue forecast because of lower-than-expected sales to mobile-phone customers.
- Exxon Mobil(XOM) CEO Tillerson wants to expand the company’s oil business in Russia, the world’s biggest crude producer and home of the largest natural-gas reserves on earth.
- The euro dropped the most in a month against the dollar after investor confidence in Germany, Europe’s biggest economy, fell to the lowest since 2001.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Retail longs and Computer longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was slightly positive today as the advance/decline line finished modestly higher, most sectors rose and volume was below average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was neutral. The Johnson Redbook retail same-store sales index rose 3.2% year over year last week vs. a 3.2% rise the prior week. The long-term average is a gain of around 2.8%. I still see little evidence that a significant decline in consumer spending is beginning, even as investors continue to price this into stocks. I still expect the back-to-school selling season to exceed lowered expectations. Investors will likely soon begin to question their imminent consumer collapse thesis. Retail sales should stabilize around average levels over the intermediate term.