Stocks Finish Mostly Lower on Lingering Sub-prime Concerns and Profit-taking

Indices
S&P 500 1,549.52 -.19%
DJIA 13,950.98 +.31%
NASDAQ 2,697.33 -.36%
Russell 2000 848.47 -.85%
Wilshire 5000 15,609.34 -.28%
Russell 1000 Growth 617.24 -.16%
Russell 1000 Value 880.35 -.30%
Morgan Stanley Consumer 742.34 -.32%
Morgan Stanley Cyclical 1,125.11 +.01%
Morgan Stanley Technology 649.21 -.04%
Transports 5,378.68 +.17%
Utilities 507.43 -1.57%
MSCI Emerging Markets 141.46 -.54%

Sentiment/Internals
Total Put/Call .83 -10.75%
NYSE Arms .90 +26.82%
Volatility(VIX) 15.59 +2.90%
ISE Sentiment 169.0 -6.63%

Futures Spot Prices
Crude Oil 74.20 +.37%
Reformulated Gasoline 214.32 -3.67%
Natural Gas 6.40 -4.01%
Heating Oil 206.05 -2.37%
Gold 665.90 -.21%
Base Metals 258.84 257.26 +.20%
Copper 356.0 -.92%

Economy
10-year US Treasury Yield 5.04% -5 basis points
US Dollar 80.56 -.01%
CRB Index 320.64 -1.37%

Leading Sectors
Telecom +.54%
Wireless +.43%
Semis +.34%

Lagging Sectors
Utilities -1.57%
Oil Tankers -2.71%
Coal -3.25%

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Afternoon Recommendations
Deutsche Bank:
- Rated (WNR) Sell, target $48.

Afternoon/Evening Headlines
Bloomberg:
- US Energy Secretary Samuel Bodman sees alternative fuel “breakthroughs” in the next few years.
- Gasoline futures fell 4.4%, the biggest drop in more than eight months, on forecasts a government report this week will show a rise in US inventories with oil inventories near decade highs.
- IBM(IBM) shares reached a five-year high after the company announced a $1.4 billion contract to manage information technology for AstraZeneca Plc, the UK’s second-biggest drugmaker.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs and (TLT) long. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, most sectors fell and volume was below average. Measures of investor anxiety were about average into the close. Today's overall market action was mildly bearish. Despite weakness in the major averages, many market-leading growth stocks traded very well again today. The 10-year yield finished at session lows, which is a positive. Commodity prices fell today, with natural gas(-3.6%), gasoline (-4.0%) and corn (-5.6%) especially weak. As well, the Shanghai composite came under renewed pressure overnight, falling 2.4% on talk from government officials that inflation in the country is accelerating. Some well known bears today were pointing to the CNBC Trillion Dollar Survey and suggesting it is evidence of investor complacency. However, that survey says 80% think the DJIA will close "around 14,000 or higher" at year-end. We are already "around 14,000," so theoretically, 100% of the respondents could believe that stocks will trade "around 14,000 or lower" by year-end. I would hardly call this one survey evidence of investor complacency. I continue to believe the herd has never been more bearish in US history given the recent run we have had and records in the major averages.

Stocks Mixed into Final Hour as Lower Rates, Buyout Activity, Positive Economic Data Offset by Subprime Concerns, Profit-taking

BOTTOM LINE: The Portfolio is higher into the final hour on gains in Retail longs, Internet longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative today as the advance/decline line is lower, most sectors are declining and volume is below average. It is interesting to note the recent uptick in “bull-mocking” by the “permabears.” I would expect to see this near a major market bottom, not anywhere near a top. This is just further evidence of the “U.S. negativity bubble”, in my opinion. It appears the bears' strategy is to take investors' focus off of their own numerous failed calls as the major averages surge once again to records. By chastising the bulls, however, the "fearleaders" are just drawing more attention to their own analysis. Investors would be well-served to perform historical searches on the bears' dire commentary to remind themselves of what they have been told since the major bear market lows of October 2002. The bears' scary predictions during periods of high market stress have been especially telling. The S&P 500 is up 111.5% since the 2002 low, averaging a 17% return on an annualized basis. It is also notable, considering the view by most that oil can only go higher, that the gasoline crack spread has collapsed 40% in five days and is down 17% just today. Moreover, the spread has plunged 57% from the highs seen in mid-May, around when gasoline futures peaked for the year. As well, gasoline futures are dropping another 3.5% today and convincingly breaking down through the uptrend that has been in place since December of last year. The contango in the oil futures market, which encouraged hoarding, is also beginning to reverse meaningfully for the first time in years. This is also occurring when crude oil large speculative traders have never been more net long oil futures and commercial hedgers, historically the “smart money,” have never been more net short oil. I suspect we are within six weeks of another major tradable top in oil, similar to the one seen last year before the commodity plunged $28 per barrel in less than six months. Like last year, this decline should provide another huge upside catalyst for the broad market. I plan to meaningfully increase my energy-related short exposure again over the next six weeks. I expect US stocks to trade mixed-to-higher into the close from current levels on lower long-term rates, buyout speculation and lower commodity prices.

Today's Headlines

Bloomberg:
- Ihop Corp.(IHP), the largest US pancake-house chain, agreed to buy Applebee’s Intl.(APPB) for $1.9 billion and sell securities backed by franchisee fees to finance the purchase.
- Lear Corp.(LEA) shareholders turned down Carl Icahn’s $2.9 billion buyout offer, handing a victory to a group of investors who led a five-month battle against the sale of the automotive-seat maker.
- ReAble Therapeutics Inc., an orthopedic device maker controlled by the private equity company Blackstone Group, agreed to purchase DJO Inc.(DJO) for $1.6 billion to add leg braces and post-surgery pain therapies.
- Natural gas futures are plunging 4.5% in NY, heading towards their biggest decline in five months, on forecasts for below-normal temperatures and lower demand in the key consuming markets of the Midwest and Northeast.
- Gasoline futures are dropping another 4.3% a breaking down convincingly through the uptrend that has been in place since mid-December.
- Corn is plunging 5.4%, the maximum daily limit, and soybeans are falling on speculation rains will help to replenish Midwest soils after two months of dry weather.
- US Treasuries are rising for a second day on speculation mounting losses in securities backed by subprime mortgage loans will fuel demand for US government debt.

Wall Street Journal:
- Sony Corp.’s(SNE) Sony Pictures Entertainment has revamped its Grouper video-sharing Web site, now known as “Crackle,” to help new filmmakers.
- Charles Schwab(SCHW), E*Trade(ET) and TD Ameritrade(AMTD) may be boosting their business by adding services such as asset management.
- US real-estate investment trusts with strong management records may be good bets following a sell-off of REITs amid concern that rising interest rates may hurt future returns.

NY Times:
- Casinos in the US Gulf Coast are performing better than before Hurricane Katrina struck the region in 2005. Harrah’s Entertainment(HET) casino in New Orleans, the largest in the city, is heading for its best year, with gambling revenue up 13.6% during the first five months of the year compared with the same period in 2005 prior to the storm.

NY Post:
- TiVo Inc.(TIVO) will start a ratings service today that ranks television commercials from 15 networks on a second-by-second basis compared with Nielsen’s minute-by-minute system.

Tuoi Tre:
- Merrill Lynch(MER) has warned investors that liquidity in Vietnamese equities may be low after the central bank reduced money in the system, citing a research report.

Etemaad:
- Iranian police in the capital Tehran will arrest men with “Western-inspired” haircuts and clothing, citing a top policing official.

Empire Manufacturing Strong, Inventories Plunge to Lowest Since July 2002

- Empire Manufacturing for July rose to 26.5 versus estimates of 18.0 and a reading of 25.8 in June.

BOTTOM LINE: Manufacturing in NY state unexpectedly expanded this month at the fastest rate in a year as orders climbed and employment rose, Bloomberg said. The New Orders component of the index rose to 26.5, the highest in 16 months, versus 17.2 the prior month. The Inventories component fell to -19.8, the lowest since July 2002, versus 3.2 the prior month. The Prices Paid component fell to 34.6 versus 42.6 the prior month. The Expectations component, that gauges the outlook for the next six months, surged to 48.2 versus 44.1 the prior month. I continue to believe inventory rebuilding will help spur trend growth mostly through year-end.

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Monday Watch

Weekend Headlines
Bloomberg:
- US stocks climbed for a third straight week, sending the S&P 500 Index and Dow Jones Industrial Average to records, after takeover speculation swept through the metals industry and companies announced $49 billion of share buybacks.
- The projected 7% increase in US tax revenue will help the US budget deficit shrink by 17% to about $205 billion for the fiscal year ending Sept. 30. As a result, the Treasury Department sold less securities from January through June than matured.
- China suspended imports of chicken and pork from Tyson Foods Inc.(TSN), the biggest US meat processor, and six other US companies, amid an intensifying dispute between the two countries over food safety.
- The LA Times’ cash flow fell 27% in the second quarter as advertising continued to decline. The result was “one of the worst quarters we have ever experienced,” Publisher David Hiller said. Sales slid 10%, led by a drop in ad pages that overwhelmed gains in Internet advertising and ad supplements, he wrote.
- Executives at the top US media companies attending this week’s annual Allen & Co. conference said they expect brisk merger-and-acquisition activity for the rest of the year.
- An unprecedented number of short sellers are attempting to exploit the uranium mania that prompted more than 12 mining companies to quintuple their share prices during the past four years.
- New Zealand’s annual inflation rate slowed to its lowest level in more than three years. Consumer prices rose 2% in the second quarter from a year earlier.
- China’s copper imports, the biggest in the world, fell 6.1% in June from May as rising prices made shipments of the metal unprofitable.
- Bank of Korea Governor Lee Seong Tae may increase interest rates for a second time this year to prevent money-supply growth from fueling bubbles in the stock and property markets, according to a survey of economists.

Wall Street Journal:
- Activist Investor Carl Icahn has a stake in Kraft Foods(KFT).
- The Teacher Retirement System of Texas plans to move one-third of its $112 billion in assets to hedge funds and real estate investments, citing the fund’s chief investment officer.
- More individual investors are rushing these days into the rough-and-tumble commodities pits, long considered a backwater of the investment world, as the prices of hard assets have boomed in recent years. But some are learning a hard lesson in the risks of these sometimes-volatile investments.
- As Dow Jones & Co.(DJ) continues to evaluate a bid from Rupert Murdoch's News Corp.(NWS/A), a key member of the controlling Bancroft family, Christopher Bancroft, has launched his own last-ditch, long-shot crusade to block the deal, according to people familiar with the matter.

NY Times:
- Vinod Gupta, founder of InfoUSA(IUSA), said he is no longer involved in the Democratic presidential campaign of US Senator Hillary Rodham Clinton after media attention to financial ties. He said the recent publicity surrounding the use of corporate aircraft to fly former President Clinton and Senator Clinton to events wasn’t “worth it.” A financial disclosure report filed in May by Bill Clinton showed he’d forfeited InfoUSA stock options potentially worth “several hundred thousand dollars.”
- North Korea said it shut down the Yongbyon nuclear reactor and allowed international inspectors back into the country, in an effort that may ease tensions with the US.
- NovaStar Financial(NFI), a subprime mortgage lender, may pursue a buyout as it seeks “strategic alternatives,” Gretchen Morgenson wrote.
- Online retailers were, for all the obvious reasons, the pioneers of Web advertising. When it comes to advertising on the mobile Web, though, they are treading carefully.

ABC News:
- A Taliban military commander says terrorist attacks are coming against the US that will dwarf the failed bombings in London and Glasgow, citing an interview.

MarketWatch.com:
- No irrational exuberance in sight. None of the stubborn optimism typically seen at market tops.
- Buyout for Macy’s(M)? The numbers add up. But management might not be able to stomach another LBO.

CNNMoney.com:
- The new Fortune global 500.
- Nine out of ten employers see higher competition for qualified graduates, according to a new survey. Why it pays to be a nerd. The students who made out the best were chemical engineers with an average salary 5.4% higher than last year, bringing their average to $59,361.

BusinessWeek.com:
- Broken China. Beijing can’t clean up the environment, rein in stock speculation, or police its companies. Why the mainland’s problems could keep it from becoming the next superpower.

Financial Times:
- China National Offshore Oil Corp., the nation’s largest offshore oil explorer, has won permission from Somalia’s government to explore for oil in the African country.
- News Corp.(NWS/A) will meet Dow Jones(DJ) directors this week in a session that could prove decisive in Rupert Murdoch’s pursuit of the media group and its crown jewel, the Wall Street Journal.
- The introduction of consumer-driven web 2.0 technologies into businesses is set to usher in a new phase of productivity growth that could surpass that achieved during the late-1990s internet boom, John Chambers, chairman and chief executive of Cisco Systems(CSCO), has forecast.

Observer:
- BHP Billiton(BHP) asked Merrill Lynch(MER) and JPMorgan(JPM) for advice on a possible bid for Alcoa(AA).

Sunday Times:
- Ford Motor(F) may sell Volvo Car Corp. for as much as $8 billion.

The Times:
- A group of shareholders of aluminum producer Alcoa Inc. is calling on the company to agree to a $50 billion takeover deal from either BHP Billiton(BHP) or Brazil’s Cia. Vale do Rio Doce.

Focus:
- Germany still has a long-term struggle with high unemployment that current economic growth can’t cure, Federal Labor Agency Chief Frank-Juergen Weise said.

China Business News:
- China’s consumer price index probably exceeded 3.8% in June, director of the Finance Study Center of Beijing Normal University.

Nihon Keizai:
- Honda Motor Co. will start operating a solar panel factory in October and organize 70 outlets to start nationwide sales of solar-generation systems.

Kuwait News Agency:
- Arab oil-producing countries earned $393.3 billion from selling crude in 2006, a 24% increase from the year before, as they benefited from higher international prices.

Etemade Meli:
- Iranian President Mahmoud Ahmadinejad lacks a “scientific basis” for his fiscal policies and may be losing a “unique opportunity” to improve economic and social problems, citing 57 economists who met him. The Iranian government has earned $120 billion in foreign currency in two years, bolstered by high energy prices. That makes it the richest government since the Islamic revolution of 1979, citing a letter from the Iranian economists. Policies benefiting people now may “leave behind heavy financial obligations for subsequent governments,” the letter said.

Weekend Recommendations
Barron's:
- Made positive comments on (SPWR), (EPG), (FTEK) and (PICO).
- Made negative comments on (COH).

Citigroup:
- Reiterated Buy on (MSFT), target $36.
- June appears to have been a strong month for Google Inc.(GOOG). Google’s year-over-year US search growth was 39.2%, the best we’ve seen since January. Google’s US share decreased 120 basis points month-over-month to 49.5%, down from last month’s record of 50.7% and breaking 11 months of gains. Excluding MSN Live Club, Google’s share increased 40 basis points month-over-month.
- Reiterated Buy on (INTC), raised target to $31.
- Reiterated Buy on (NTRI), target $96.
- Upgraded (NILE) to Buy, target $88.
- Reiterated Buy on (MRK), target $59.

Night Trading
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S&P 500 futures -.17%.
NASDAQ 100 futures -.13%.

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Earnings of Note
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- (GWW)/1.19

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Economic Releases
8:30 am EST
- Empire Manufacturing for July is estimated to fall to 18.0 versus a reading of 25.8 in June.

Today’s Other Potential Market Movers
- SEMICON West

BOTTOM LINE: Asian indices are slightly higher, boosted by automaker and energy shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the week.