Stocks Finish Near Session Lows on Another Bout of Subprime Fears

Indices
S&P 500 1,510.12 -1.42%
DJIA 13,501.70 -1.09%
NASDAQ 2,639.16 -1.16%
Russell 2000 837.48 -1.85%
Wilshire 5000 15,251.64 -1.42%
Russell 1000 Growth 602.35 -1.18%
Russell 1000 Value 858.48 -1.63%
Morgan Stanley Consumer 725.12 -1.29%
Morgan Stanley Cyclical 1,085.34 -1.73%
Morgan Stanley Technology 633.48 -.86%
Transports 5,198.15 -1.54%
Utilities 500.49 -1.18%
MSCI Emerging Markets 137.70 -1.08%

Sentiment/Internals
Total Put/Call .99 +22.22%
NYSE Arms 1.87 +64.50%
Volatility(VIX) 17.57 +15.90%
ISE Sentiment 157.0 -8.0%

Futures Spot Prices
Crude Oil 72.65 +.64%
Reformulated Gasoline 236.05 +.68%
Natural Gas 6.68 +4.26%
Heating Oil 211.84 +1.22%
Gold 664.50 +.30%
Base Metals 256.77 -1.38%
Copper 359.80 -.87%

Economy
10-year US Treasury Yield 5.02% -12 basis points
US Dollar 80.82 -.75%
CRB Index 323.04 +.56%

Leading Sectors
Computer Hardware -.63%
Alternative Energy -.79%
Drugs -.87%

Lagging Sectors
Homebuilders -2.65%
Retail -2.66%
I-Banks -2.88%

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Afternoon Recommendations
Bank of America:
- Rated (RPM) Buy, target $27.
- Rated (USG) Sell, target $42.

Afternoon/Evening Headlines
Bloomberg:
- Palestinian Authority President Mahmoud Abbas accused Hamas of allowing al-Qaeda into the Gaza Strip.
- Emerging-market bonds fell after Moody’s Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages and S&P said it may cut ratings on $12 billion of the securities.
- Nasdaq Stock Market(NDAQ) gained approval for a new rule that will allow companies that it lures from rival exchanges to keep their three-letter trading symbols.
- Continental Resources(CLR) announced that it entered into fixed-price swap contracts covering 10,000 barrels of oil per day for the period from August 2007 through April 2008. During each month of the contract, Continental will get $72.90/bbl. and will pay counterparties the average of the NYMEX crude oil futures contract settlement prices for such month.

Financial Times:
- BHP Billiton(BHP) probably won’t team up with a private equity firm and bid for Alcoa Inc.(AA) and is in no rush to bid for Alcan(AL).

Die Welt:
- Adidas AG expects to have a “record year” in 2008 as the European soccer championship boosts sales, citing CEO Herbert Hainer.

BOTTOM LINE: The Portfolio finished higher today on gains in my (TLT) long, Biotech longs, Computer longs, Software longs, Semi longs and Commodity shorts. I added back to my (EEM) short and added (IWM)/(QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was negative today as the advance/decline line finished substantially lower, every sector declined and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was bearish. It appeared to me that Bernanke’s speech was more dovish than expected, thus leading traders to conclude that the Fed may be more worried about housing than before. This helped push the 10-year yield down 12 basis points to session lows. I suspect it will take more earnings reports from the brokers to really help lift some uncertainty, which should help push the I-banking sector higher from current levels. I will look to add to my Goldman Sachs (GS) long on any further significant weakness. On the positive side, many true “growth” stocks rose today, despite losses in the major averages. This is the best environment I have seen in years for truly good stockpickers to substantially outperform the broad market.

Stocks Lower into Final Hour on Subprime Worries, Weakness in Europe

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my (TLT) long, Semi longs, Computer longs, Biotech longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative today as the advance/decline line is substantially lower, every sector is declining and volume is above average. Large speculators are the most net short the S&P 500 since June 2004. This also corresponds with SentimenTrader's All-Index, All-Product Dollar-Weighted Stochastic, which continued to move to an even more extreme reading this week at 99.2, which is right at the level seen during the trough of the February/March market pullback. Readings at or above 80 are historically followed by a 13.6% gain in the S&P 500 89% of the time on average over the next 12 months. This is especially noteworthy considering the major indices have moved back near highs, with a parabolic surge in short interest. I continue to believe that overall investor sentiment toward most U.S. stocks has never been this poor in history with the averages near records. This is a huge positive for stocks that continues to be underestimated by most market participants. I still believe this will eventually result in the "mother of all short-covering rallies" as large investors tire of the poor risk-adjusted returns associated with many low-correlation U.S. stock strategies and sentiment regarding the long-term prospects for U.S. equities improves. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, lower long-term rates and short-covering.

Today's Headlines

Bloomberg:
- Hedge funds are short-selling S&P 500 futures by the most in three years, a Merrill Lynch analyst said. Short positions have reached “crowded levels” and “we view this as a contrary indicator and readings continue to be bullish for stocks.”
- Paulson & Co., the hedge-fund firm that tripled its assets in the past year with bets on the decline in subprime mortgages, returned 40% in its largest credit fund in June. The Paulson Credit Opportunities Funds soared 129% this year through June 30. Paulson, whose assets have increased to $15 billion from $4.7 billion in July 2006, speculated that securities based on home loans to US borrowers with poor credit histories would drop in value as defaults increased.
- Oil is rising above $73/bbl. in NY for the first time since August as speculators increase bets to record levels on further refinery “problems.”
- Copper is falling in NY after a report showed imports declined in China, the world’s largest consumer of the metal.
- A plunge in the price of sugar and the need to cut output costs will likely help drive mergers in Australia’s cane industry, Maryborough Sugar Factory Ltd. said.
- Nickel declined in London to the lowest in almost six months as rising stockpiles of the metal indicated a slowdown in demand growth.
- Federal Reserve Chairman Ben S. Bernanke said unexpected changes in inflation today are much more likely to be transitory than before 1980s and that energy price rise only leads to inflation if expectations rise, wage price spiral ensues.
- US treasuries advanced the most in more than a week after Standard & Poor’s said it may cut credit ratings on $12 billion of bonds backed by subprime mortgages and Fed chairman Bernanke’s speech was more dovish than expected.
- China executed its former chief drug regulator for taking bribes in a crackdown on fake medicine, a warning that the country intends to deal sternly with corruption.
- Apple Inc.(AAPL) may introduce a model of its iPhone this year that is 50% cheaper than the handsets that went on sale in the US last month, JPMorgan analyst Kevin Chang said.

Wall Street Journal:
- Dell Inc.(DELL) started an advertising campaign based on colors to boost sales, which have fallen since 2005.
- Short-sellers are targeting credit-ratings firm Moody’s Corp.(MCO).
- Exxon Mobil Corp.(XOM) and Enbridge’s pipelines, which used to carry Venezuelan and Mexican oil to the US, have been reversed to import Canadian oil after political instability in Latin America threatened US supplies.
- Linear Technology(LLTC), whose chips are used by Cisco Systems(CSCO) and Apple Inc.(AAPL), has found a profitable niche making unglamorous chips for a market where competition is limited and margins are high.

NY Times:
- Ryan Crocker, the US ambassador to Iraq, said violence in the country will increase if American troops are withdrawn. A US troop reduction may bring violence that results in thousands of deaths and heightened conflict with Iraq’s oil-producing neighbors.
- Scientific groups around the world are developing robotic devices designed to help stroke patients regain function in impaired limbs.

Lloyd’s List:
- A sea-traffic control system similar to that used for aviation should be introduced to cut accidents involving merchant ships, Circuit Court Judge Jon Newman said.

AP:
- Users of TiVo Inc.(TIVO) digital video recorders can, from today, order movies from Amazon.com Inc.(AMZN) over their television sets.
- Nielsen/Net Ratings plans to drop online measurements based on page views and start recording how long people stay on Web sites.
- Al-Qaeda’s second in command, Ayman al-Zawahiri, issued an audiotape in which the group threatens to attack the UK in retaliation for honoring novelist Salman Rushdie with a knighthood.

USA Today:
- FCC Chairman Kevin Martin plans new broadband rules to let consumers bypass a carrier’s pre-packaged wireless service and choose the mobile device and software they want.

Financial Times:
- Markit Group, the financial data provider, plans to offer real-time prices for credit-default swaps, citing Kevin Gould, head of data.

Nottingham Evening Post:
- Bank of England policy maker John Gieve said higher interest rates may be slowing segments of the UK economy.

Nepszabadsag:
- Hungarian Environment Minister Gabor Fodor opened the country’s first bioethanol station, with as many as 50 more planned for this year.

Le Monde:
- OPEC needs to raise output and could do this “discreetly” in the coming months, Claude Mandil, executive director of the International Energy Agency said. Oil prices are “worrying” and “catastrophic” for consumers in developing countries who have to spend a greater proportion of their disposable income on energy.

AFP:
- A man convicted of adultery was stoned to death in Iran earlier this month., citing judiciary spokesman Alireza Jamshidi.

Haaretz:
- Comverse Technology(CMVT) is up for sale after its board instructed management to liquidate the company and its subsidiaries.

Wholesaler Inventories-to-Sales Ratio Makes New Record Low

- Wholesale Inventories for May rose .5% versus estimates of a .4% gain and a .3% increase in April.

BOTTOM LINE: Sales at US wholesalers rose faster than inventories in May, making it more likely companies will place more orders and factories will increase production, Bloomberg said. Wholesaler sales surged 1.3% versus a 1.5% gain in April. The sales gain was pace by computer and furniture wholesalers, which each saw about 4% gains. The ratio of inventories to sales hit a new record low at 1.11 months’ supply at the current sales pace. Inventory de-stocking subtracted about 1 percentage point from GDP in the first quarter. The surge in furniture wholesaler sales is noteworthy considering the slowdown in housing. I continue to believe 2Q US growth will likely come in around 3%+ for 2Q before decelerating modestly this quarter.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Shares of Cedar Fair LP(FUN) rose the most in 20 months after a report said the third-largest US theme-park operator hired Bear Stearns(BSC) to seek a buyer that will agree to keep the management team.
- Ford Motor(F) said it will team up with Southern California Edison to help develop rechargeable batteries for future plug-in vehicles.
- There is no evidence Turkey has massed troops on its border with Iraq, a Pentagon spokesman said.

NY Times:
- One of the suspects in the failed terror attempt in Glasgow, Scotland, worked as an aeronautical engineer for an Indian company that designs parts for Boeing Co.(BA) and Airbus SAS.

Financial Times:
- Chuck Prince, CEO of Citigroup(C), said turmoil in the US subprime-mortgage market is not so big a risk that it would slow down the company’s lending.

Commercial Times:
- Lee Chang Yung Chemical Industry Corp. plans to spend $1.6 billion over the next three years on alternative energy projects such as the production of methanol, ethanol and polysilicon.

Korea Economic Daily:
- SK Telecom Co. plans to acquire Sprint Nextel Corp.(S), the third-largest US mobile phone services business.

Bisnis Indonesia:
- At least 49 companies have received approval from Indonesia’s Investment Coordinating Board for plants that make biofuels.

Xinhua News Agency:
- The membership of China’s ruling Communist Party rose last year by 2.64 million to 72.39 million people.

Late Buy/Sell Recommendations
Citigroup:
- Financial players have now firmly moved ahead of refining as the main near-term driver of oil prices accounting for over $10 of the move higher since the start of the year versus over $7 for refining. Open interest increased 4% last week to a record 1.5 mm, while net speculators also reached an all-time high. We remain of the view that ex transitory factors, the upcoming shift to winter gasoline and restart of several major refineries are events that need to pass before adopting a more bullish stance on oil.
- Reiterated Buy on (GGC), target $23.
- Upgraded (DTV) to Buy, raised target to $30.

Citigroup:
- Rated (URBN) Underweight, target $18.
- Rated (ANF) Underweight, target $62.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
- (AYI)/.88
- (CHTT)/.77
- (ETP)/.69
- (ETE)/.34
- (GBX)/.45
- (HELE)/.30
- (PBG)/.63

Upcoming Splits
- (FTK) 2-for-1
- (TPL) 5-for-1

Economic Releases
10:00 am EST
- Wholesale Inventories for May are estimated to rise .4% versus a .3% gain in April.

Other Potential Market Movers
- The Fed’s Bernanke speaking, weekly retail sales reports, E3, CE Unterberg Towbin Emerging Growth Conference, CIBC Consumer Growth Conference, Roth Capital Semi Conference and Kaufman Brothers Defense Tech Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and commodity 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.