Stocks Finish Lower, Despite Late Surge, on Healthy Profit-taking and Lingering Sub-prime Concerns

Indices
S&P 500 1,546.17 -.21%
DJIA 13,918.22 -.38%
NASDAQ 2,699.49 -.47%
Russell 2000 845.91 -.47%
Wilshire 5000 15,575.12 -.22%
Russell 1000 Growth 616.86 -.17%
Russell 1000 Value 877.03 -.24%
Morgan Stanley Consumer 737.20 -.27%
Morgan Stanley Cyclical 1,124.38 -.19%
Morgan Stanley Technology 649.08 -.66%
Transports 5,429.83 +.59%
Utilities 511.44 +.87%
MSCI Emerging Markets 140.09 -.84%

Sentiment/Internals
Total Put/Call 1.12 +20.43%
NYSE Arms .94 -9.21%
Volatility(VIX) 16.0 +2.37%
ISE Sentiment 156.0 -5.45%

Futures Spot Prices
Crude Oil 75.18 +1.57%
Reformulated Gasoline 219.50 +4.49%
Natural Gas 6.52 +3.46%
Heating Oil 209.90 +3.24%
Gold 673.80 +1.19%
Base Metals 256.98 +.62%
Copper 356.30 +.30%

Economy
10-year US Treasury Yield 5.02% -2 basis points
US Dollar 80.43 -.14%
CRB Index 323.60 +1.57%

Leading Sectors
Gold +3.74%
Road & Rail +2.06%
Energy +2.0%

Lagging Sectors
Banks -1.32%
I-Banks -1.68%
Semis -1.78%

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Afternoon Recommendations
Bank of America:
- Rated (BHI), (HAL), (SLB), (SII) and (WFT) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Federal Reserve Chairman Ben Bernanke said hedge funds and private-equity firms offer “important benefits” for the US economy, including a way to share risk and increase liquidity in the markets.
- Washington Mutual(WM), the biggest US savings and loan, said second-quarter profit rose 8.2%, beating analysts’ estimates as the retail banking and credit card units grew and losses on mortgage lending narrowed. The stock rose 4% in extended trading.
- International Business Machines(IBM), the world’s biggest computer-services company, reported a 12% gain in second-quarter profit after bolstering sales through software acquisitions. The stock is surging $3/share in after-hours trading to $114.10.
- EBay Inc.(EBAY) said earnings rose for the fourth straight quarter after higher fees increased auction revenue and its PayPal unit added more corporate customers. The stock was mostly unch. in extended trading.
- Juniper Networks(JNPR) reported second-quarter net income of $86.2 million as new products boosted sales. The stock rose $.50/share to $27.25 in after-hours trading.
- Labor Ready(LRW) reported revenue for the second quarter of $351.1 million, an increase of 3.3% from $339.8 million for the second quarter of 2006. The stock is soaring 11.1% in extended trading.

AP:
- Iran confirmed that a second round of talks with the US about Iraq will be held in the “near future,” citing Iranian officials.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Semi longs and I-Banking longs. 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, sector performance was mixed and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish as the major averages and breadth finished lower, but trimmed losses substantially into the close. Many stocks I monitor finished with gains. I suspect today's morning losses had more to do with option expiration than "real" selling. I also suspect many large investors that have been expecting a pullback or correction built short exposure further into morning weakness and are now left trapped again as stocks surged meaningfully into the close, leaving little time to exit morning positions. The brokers rebounded, but not as sharply as I would have expected. However, I suspect stocks will build on today's closing surge tomorrow.

Stocks Lower into the Final Hour on Healthy Profit-taking, Lingering Sub-prime Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semi longs and I-Banking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very negative today as the advance/decline line is substantially lower, most sectors are declining and volume is above average. Yesterday afternoon, a fellow RealMoney Silver contributor said that he was considering building his long airline position in a meaningful way. I have to say that I am considering an airline long as well. This group is always despised, and, while not historically good long-term investments, they make excellent trading vehicles at times. I sense one of those times is fast approaching. Oil has moved up to $75 per barrel, stories of horrific waits on runways fill the airwaves, and analysts have recently turned more negative on the group. However, the Airline Index has been trending higher since mid-June, ignoring this news. According to my data, large speculative oil traders have never been this net long crude in history. This was the case last year when I wrote my post "17 Reasons for Energy Prices Peak" on Street Insight, with oil above $70 per barrel and right before it plunged $28 per barrel in less than six months, which sent the broad market and airlines flying. In my opinion, the fundamentals for oil are even worse this year, and its recent spike higher is solely a function of the mania for the commodity by funds trying to make up for recent relatively poor performance. The average commodity fund fell around 7% last year and is just marginally higher year-to-date. While a downside catalyst for oil could occur, I suspect crude will begin another meaningful decline anyway as the peak in hurricane season approaches over the next six weeks. My favorite airlines to consider for a long trade are Delta Air Lines (DAL), AMR Corporation (AMR) and Continental Airlines (CAL). I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower long-term rates and bargain-hunting.

Today's Headlines

Bloomberg:
- Fed Chairman Bernanke predicted American economic growth will pick up slightly next year and inflation will gradually recede.
- Emerging-market bonds fell after Bear Stearns(BSC) told investors in its failed hedge funds they will get little if any money back, reviving concern that losses on US subprime mortgage-backed securities may widen.
- Lehman Brothers(LEH) denied speculation that it may face greater potential losses from subprime mortgages than previously disclosed.
- Rio Tinto Group(RTP), the world’s third-largest mining company, said iron-ore production climbed to a record in the second quarter.
- Airports worldwide handled a record 4.4 billion passengers in 2006, up 4.8% from a year earlier, an industry group said.
- North Korea said it will disclose all of its nuclear programs and disable them within six months, South Korean nuclear negotiator Chun Yung Woo said, after he met his North Korean counterpart Kim Kye Gwan in Beijing.

Wall Street Journal:
- The US newspaper industry is facing a major decline in advertising revenue as classified, national and retail sales all recorded a drop during the first quarter, citing the Newspaper Association of America.
- American Airlines(AMR) will focus its marketing on environment concerns from August, citing an interview with David Cush, senior vp of global sales at the AMR Corp. unit.

NY Times:
- Google Inc.(GOOG) plans to announce today the expansion of a program allowing advertisers to purchase newspaper space through its online system.

Salon:
- Elizabeth Edwards said that her husband, Democratic presidential candidate John Edwards, would be a better advocate for women’s issues than rival Hillary Clinton.

Women’s Wear Daily:
- Kohlberg Kravis Roberts plans to offer $24 billion to acquire Macy’s Inc.(M), the second-largest US department-store chain.

Financial Times:
- Microsoft Corp.(MSFT) will have to introduce some truly innovative products to keep Google Inc.(GOOG) and Apple Inc.(AAPL) from gaining more ground on the Redmond, Washington-based software company.
- Coca-Cola(KO), General Mills(GIS) and nine other leading food makers will today announce new voluntary curbs on marketing to children as the industry seeks to head off US regulation or lawsuits over childhood obesity.

Apple Daily:
- Nvidia Corp.(NVDA) may acquire Via Technologies’ chipset division, citing market speculation.

Inflation Below Long-term Average Rates, Housing Starts Rise, Building Permits Fall

- The Consumer Price Index for June rose .2% versus estimates of a .1% gain and a .7% increase in May.

- The CPI ex Food & Energy for June rose .2% versus estimates of a .2% increase and a .1% gain in May.

- Housing Starts for June rose to 1467K versus estimates of 1450K and a downwardly revised 1434K in May.

- Building Permits for June fell to 1406K versus estimates of 1480K and an upwardly revised 1520K in May.

BOTTOM LINE: Consumer prices in the US rose .2% in June, the smallest gain in five months, as gasoline prices retreated, Bloomberg reported. The CPI year-over-year rose 2.7%, below the 20-year average of 3.1%. Core prices are now rising at a 2.3% pace, versus 3% in the first half of last year. Today’s report showed energy prices fell .5% in June as gasoline fell 1.1%. Clothing prices fell .6% versus a .3% decline the prior month. Auto prices were unch. versus a .2% decline the prior month. Moreover, Bernanke said in his speech today that the PCE core, the Fed’s favorite inflation gauge, will rise between 1.75-2.0% next year, below the 20-year average of 2.5%. I continue to believe inflation fears have peaked for this cycle and that measures of inflation will continue to decelerate through year-end as energy and food prices fall meaningfully from current levels.

US builders unexpectedly started work on more homes in June while permits for future construction fell to the lowest level in a decade, Bloomberg reported. The rise in starts was led by a 9% increase in the West and 2.4% gain in the South. Starts fell 3.7% in the Mid-west and 2.4% in the Northeast. I continue to believe the substantial, but diminishing, drag on the US economy from housing is an overall positive for US stocks. I still think home sales are stabilizing at relatively high levels by historic standards, however home construction will likely remain muted at least through year-end as homebuilders continue to work down inventories.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Bear Stearns(BSC) told investors in one of its hedge funds that they won’t get any money back after creditors forced it to sell assets at depressed prices, according to a letter sent by the firm.

NY Times:
- IBM(IBM) Showing That Giants Can Be Nimble.

MarketWatch.com:
- US markets stage technically valid breakout.
- Electronic shopping and shopping for electronics are expected to experience the biggest boosts in back-to-school spending this year, the National Retail Federation said Tuesday.

Reuters:
- Hedge fund firm Black Pearl Asset Management on Tuesday said it will launch portfolios to snatch up cheap subprime mortgage securities battered by the current crisis.

Financial Times:
- China’s air pollution will sicken 20 million people a year with respiratory diseases by 2020, citing estimates from the Organization for Economic Cooperation and Development. An OECD report projects that pollution will also cause 600,000 premature deaths in urban areas and 9 million person-years of work loss due to illness by that date.
- Market insight: Be bullish and watch the bears impale themselves. Headlines herald a US prime-time, subprime mortgage implosion leading to an upcoming credit crunch crisis – destined to sink shares, raise interest rates and impale economies. But this is demonstrable nonsense.

Xinhua News Agency:
- China’s economy showed a “more obvious” trend from fast growth to overheating in the first half of 2007, citing a legislative committee. An “excessive” trade surplus, lending growth and investment expansion were still “prominent” problems in the economy during the first half, the committee said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (WFC), target $40.
- Reiterated Buy on (TSCO), target $65.50.
- Reiterated Buy on (SBUX), target $40.

Keybanc:
- Rated (WAB), (RAIL) and (GBX) Buy.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.56%.
NASDAQ 100 futures -.62%.

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Earnings of Note
Company/EPS Estimate
- (ABT)/.68
- (ADS)/.83
- (ALL)/1.80
- (MO)/1.13
- (DOX)/.51
- (ASD)/1.08
- (BLK)/1.67
- (CTAS)/.54
- (CTXS)/.36
- (CMA)/1.22
- (DAL)/.62
- (DST)/.84
- (EBAY)/.32
- (GCI)/1.20
- (RX)/.39
- (IBM)/1.47
- (JCI)/1.98
- (JPM)/1.09
- (JNPR)/.20
- (LRW)/.35
- (MI)/.85
- (NE)/2.14
- (PFE)/.50
- (PJC)/.74
- (LUV)/.22
- (STJ)/.43
- (TER)/.12
- (UTX)/1.15
- (WM)/.89

Upcoming Splits
- (IOSP) 2-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for June is estimated to rise .1% versus a .7% gain in May.
- The CPI Ex Food & Energy for June is estimated to rise .2% versus a .1% gain in May.
- Housing Starts for June are estimated to fall to 1450K versus 1474K in May.
- Building Permits for June are estimated to fall to 1480K versus 1520K in May.

10:00 am EST
- Bernanke Report on Economy & Fed Policy.

10:30 am EST
- Bloomberg estimates call for a weekly crude oil drawdown of -500,000 barrels versus a -1,462,000 barrel decline the prior week. Gasoline supplies are expected to rise by 850,000 barrels versus a 1,143,000 barrel build the prior week. Distillate inventories are estimated to rise by 900,000 barrels versus a 760,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rises by .23% versus a .14% increase the prior week.

Other Potential Market Movers
- The weekly Mortgage Applications report, (LRCX) Analyst Meeting, AG Edwards E&P Conference and SEMICON West could also impact trading today.

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