Stocks Finish Near Session Lows on Lingering Housing-related Concerns, Profit-taking

Indices
S&P 500 1,511.04 -1.98%
DJIA 13,716.95 -1.62%
NASDAQ 2,639.86 -1.89%
Russell 2000 811.86 -2.84%
Wilshire 5000 15,198.09 -2.04%
Russell 1000 Growth 606.64 -1.75%
Russell 1000 Value 850.80 -2.26%
Morgan Stanley Consumer 726.66 -1.40%
Morgan Stanley Cyclical 1,088.48 -1.97%
Morgan Stanley Technology 642.41 -1.85%
Transports 5,265.10 -1.90%
Utilities 496.84 -3.45%
MSCI Emerging Markets 140.88 -1.76%

Sentiment/Internals
Total Put/Call 1.42 +79.75%
NYSE Arms 1.58 +118.28%
Volatility(VIX) 18.55 +10.35%
ISE Sentiment 112.0 -34.50%

Futures Spot Prices
Crude Oil 73.42 -1.96%
Reformulated Gasoline 204.0 -3.05%
Natural Gas 5.86 -2.95%
Heating Oil 202.90 -1.32%
Gold 682.30 +.12%
Base Metals 266.03 -1.0%
Copper 360.40 -1.44%

Economy
10-year US Treasury Yield 4.91% -3 basis points
US Dollar 80.11 -.31%
CRB Index 317.89 -.38%

Leading Sectors
Airlines +.31%
HMOs +.10%
Hospitals -.33%

Lagging Sectors
I-Banks -3.71%
Homebuilders -3.96%
Coal -5.6%

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Afternoon Recommendations
Citigroup:
- Upgraded (CHKP) to Buy, target $31.

Afternoon/Evening Headlines
Bloomberg:
- Emerging-market bonds tumbled, pushing yields over US Treasuries to the widest since December, as concern that losses in the US subprime mortgage market may spread prompted investors to sell riskier assets.
- Crude oil fell more than $1 a barrel, the biggest decline in almost a month, on speculation US refineries are increasing their fuel production and a signal that OPEC might be willing to pump more.
- Gasoline futures fell to the lowest in almost four months on speculation a government report tomorrow will show that US supplies are adequate to meet demand in the last weeks of the summer driving season.
- Amazon.com(AMZN), the world’s biggest online retailer, said profit more than tripled after it reduced technology spending and boosted sales of electronics. The company also increased its sales forecast, causing the shares to soar 17% in after-hours trading.
- Linear Technology(LLTC), whose chips are used by Cisco Systems(CSCO) and Apple Inc.(AAPL), said fourth-quarter profit fell 17% as sale jumped. The stock surged 5% in extended trading.

Wall Street Journal:
- Brian Hunter, whose bad energy bets led to hedge fund Amaranth Advisors’ fall, is trying to block a possible enforcement action from the Federal Energy Regulatory Commission.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, I-Banking longs and Software longs. I added an (XLE) short, added 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 very negative today as the advance/decline line finished substantially lower, almost every sector declined and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was very bearish. Commodity and housing-related equities were especially weak today. There is definitely an air of panic around those sectors. While we are likely not at the absolute bottom in those stocks, I sense we are nearing one. The 10-year yield finished at session lows, down 3 basis points, to 4.92%. While the major averages were very ugly, an unusual number of stocks I monitor were higher or just posted slight losses. "Growth" stocks are now substantially outperforming "value" stocks year-to-date. Here is a summary:

Large-cap growth +10.3%
Large-cap value +5.4%

Midcap growth +12.6%
Midcap value +7.2%

Small-cap growth +8.1%
Small-cap value -.4%

One of my predictions at the beginning of the year was that growth stocks would outperform value stocks and their outperformance would gain steam throughout the year. This appears to be happening now. One of my longs, American Superconductor (AMSC) had a very good day, and I still see substantial upside in the shares from current levels. It was also good to see my largest long, Google (GOOG) gain on the day, especially considering recent commentary on the shares. As well, Broadcom (BRCM) hung tough, and Gilead Sciences (GILD) finished with minor losses. All present longer-term investors great entry points, in my opinion. As I wrote a few weeks ago, I believe oil is in the process of making a major double-top and will begin a substantial decline this quarter that will have major positive implications for the U.S. broad market. I have begun adding to my energy-related shorts and plan to add meaningfully to them over the next month into any hurricane-related spike in the price of oil. The gasoline crack spread plunged another 8.2% today and has collapsed almost 70% in a little over two months. Natural gas is also dropping below $6 for the first time since December of last year and is down 63% from its highs. Finally, reformulated gasoline futures have declined 16% in less than three months.

Stocks Sharply Lower into Final Hour on Lingering Housing-related Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, I-Banking longs and Software 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 falling and volume is above-average. My intraday gauge of investor angst is above average levels. Apple (AAPL) shares are under pressure today on reports of slowing demand for the iPhone. I believe any weakness in the shares will prove short term in nature and plan to add to my long on any meaningful decline from current levels. Apple remains my second-largest long position, behind Google (GOOG). I think worries over the credit market "seizing up" are overdone. The Johnson Redbook weekly retail sales rose 2.8% this week vs. a 2.7% gain the prior week. This is up from a 0.1% average gain from mid-April to mid-May. It is also up from a 1.4% gain the first week of this month, and it is the highest level since the 4.2% gain seen in the first week of April, which was the high for the last 52 weeks. Weekly retail sales are now just marginally below long-term average rates. I continue to believe retail sales will move back to above-average levels this fall as energy prices fall substantially from current levels, stocks rise further, housing fears subside, interest rates remain historically low, inflation decelerates further, wages continue to substantially outpace inflation, unemployment remains historically low and consumer confidence improves meaningfully. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, short-covering and lower energy prices.

Today's Headlines

Bloomberg:
- Volatility on options for interest-rate swaps may decline as concern eases that losses in subprime mortgage loans and other risky debt will spread, according to RBS Greenwich Capital.
- US company bond risk fell from a two-year high today, according to credit-default swap traders who bet on corporate creditworthiness.
- Morgan Stanley(MS) says investors should reduce bets on European credit quality deteriorating because prices of credit-default swaps overstate the risk of companies missing debt payments.
- Crude oil fell for a third day on speculation that US refineries are increasing output and that OPEC might pump more.
- Eli Lilly(LLY) won the backing of a US panel to sell its osteoporosis medicine Evista for the prevention of breast caner in women after menopause.
- The US and Iranian ambassadors to Iraq agreed to establish a forum on security challenges in the war-torn country, including the threat posed by al-Qaeda.

Wall Street Journal:
- Nokia Oyj(NOK) will say today that it has purchased Twango Inc., an online photo- and video-sharing start-up, as the Espoo, Finland-based company seeks to move beyond mobile phones and into Web-related services.
- Lockheed Martin(LMT) is finding it hard to meet its production schedule for the new “Marine One” helicopter designed to carry US presidents.
- Foreign governments are increasing their investments in US and European companies, prompting concern over a political backlash and rise in prices for speculative assets.

Dow Jones:
- TPG Inc., a private-equity company, has made a bid to buy Ford Motor’s(F) Jaguar and Land Rover units.

NY Post:
- Time Warner’s(TWX) AOL unit plans to acquire the “behavioral targeting” advertising firm Tacoda for $200 million to $300 million.

AP:
- New Haven, Connecticut, today will become the first US city to issue identification cards to illegal immigrants.

CNBC-TV18:
- India’s Wipro Ltd. may pay as much as $550 million to buy a US company.

Sueddeutsche Zeitung:
- German intelligence authorities are bracing for possible terrorist attacks by members of the al-Qaeda network, citing senior security officials.

Islamic Republic News Agency:
- The Iranian Oil Ministry said OPEC will increase production if required. “If the oil market needs it, OPEC will inject more oil into it,” said Javad Yarjani, head of OPEC affairs at the country’s oil ministry.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- BHP Billiton Ltd.(BHP) posted record annual production in eight of its 19 main commodities, setting up for its largest yearly profit.
- Suncor Energy said its oil-sands production is returning to full strength after a 50-day shutdown at a Canadian processing plant.
- French President Nicolas Sarkozy, Deutsche Telecom AG shareholders and American lawyers are laying the groundwork to make Europe the next battleground for US-style class-action lawsuits.
- Newmont Mining Corp.(NEM) needs to rebuild its credibility with investors and may consider takeovers, CEO Richard T. O’Brien said.
- Midwest Air Group’s(MEH) largest investor, hedge fund Octavian Management LLC, renewed its call fro the carrier to “immediately engage” with AirTran Holdings about AirTran’s hostile takeover offer.
- Pakistan told the US to refrain from any military action on its territory against al-Qaeda members, saying Pakistani security forces are responsible for anti-terrorist operations.

Wall Street Journal:
- Foreign governments, flush with cash and no longer content with the meager returns to be had on safe but low-yielding investments like Treasurys, are becoming increasingly aggressive players on the equity front.
- With states around the country working on bills to force their public pension funds to unload shares of foreign companies doing business in Iran, a coalition of large public funds has begun pressuring companies to reconsider their ties to that nation.

NY Times:
- So it seems as Virgin Atlantic Airways and British Airways are indicating that they may compete with four start-up carriers for a market that no one knew existed just a few years ago: all-business-class flights.

TheStreet.com:
- Huge iPhone Fees Juice Apple

USA Today:
- Gasoline prices fall to 3-month low

MarketWatch.com:
- Managers see M&A activity bidding up stock prices. Individual investors likely to move off sidelines over next three months.

Financial Times:
- Crude prices ‘could be poised for rapid fall’ Crude oil prices fell more than $1/bbl. At one stage yesterday as hedge funds took profits after their rise to near-record levels.
- Baugur, the Icelandic investment group that has bought up much of the UK shopping scene, is turning its attention to the US luxury retail sector, with a $250 million investment in Saks(SKS), the department store chain.

Economic Daily News:
- Taiwan’s central bank may raise benchmark interest rates before its regular scheduled quarterly meeting.

Australian:
- James Packer’s Publishing & Broadcasting and partners proposed building the tallest tower in the US for their Crown Las Vegas casino.

China Securities Journal:
- China should focus on using interest rate increases to curb rising investment and asset prices, according to a research note by the nation’s top economic planner.

Xinhua News Agency:
- Chinese propaganda officials signaled increased scrutiny of the media after the government said a television report showing cardboard being used as an ingredient in steamed buns was faked. The reporter on the story, Zi Beijia, has been arrested and three other Beijing Television employees have been fired over the report, which showed cardboard being used as a substitute for pork.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (AKAM), target $68.
- Reiterated Buy on (MRK), target $61.

Night Trading
Asian Indices are +.25% to +.75% on average.
S&P 500 futures -.14%.
NASDAQ 100 futures -.19%.

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Earnings of Note
Company/EPS Estimate
- (AFL)/.81
- (AKS)/.68
- (AMZN)/.25
- (T)/.67
- (BIIB)/.63
- (BJS)/.56
- (BOW)/-.75
- (BNI)/1.23
- (CDWC)/.98
- (CEC)/.34
- (CTX)/-.06
- (CERN)/.41
- (CAKE)/.31
- (CB)/1.38
- (CME)/3.66
- (CFC)/.91
- (DPZ)/.24
- (LLY)/.82
- (EMC)/.16
- (ENR)/.83
- (ESV)/1.65
- (ILMN)/.13
- (JBLU)/.11
- (KMB)/1.03
- (LRCX)/1.17
- (LM)/1.24
- (LMT)/1.53
- (MCD)/.71
- (NBR)/.81
- (NOC)/1.24
- (PNRA)/.39
- (PEP)/.89
- (RJF)/.53
- (SWK)/1.02
- (TLAB)/.06
- (TIE)/.40
- (UPS)/1.03
- (X)/2.35
- (XTO)/1.13

Upcoming Splits
- (DIOD) 3-for-2
- (GMCR) 3-for-1

Economic Releases
- None of note

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Poole speaking, Richmond Fed Manufacturing Index and weekly retail sales reports could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by 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.

Stocks Close Higher on Buyout Activity, Strong Earnings Reports, Falling Energy Prices

Indices
S&P 500 1,541.57 +.49%
DJIA 13,943.42 +.67%
NASDAQ 2,690.58 +.11%
Russell 2000 835.62 -.10%
Wilshire 5000 15,514.96 +.36%
Russell 1000 Growth 617.46 +.48%
Russell 1000 Value 870.43 +.34%
Morgan Stanley Consumer 736.99 +.88%
Morgan Stanley Cyclical 1,110.34 +.04%
Morgan Stanley Technology 654.50 +.19%
Transports 5,367.0 +.13%
Utilities 514.60 +.54%
MSCI Emerging Markets 143.52 +1.54%

Sentiment/Internals
Total Put/Call .79 -35.77%
NYSE Arms .73 -66.14%
Volatility(VIX) 16.81 -.83%
ISE Sentiment 171.0 +29.55%

Futures Spot Prices
Crude Oil 75.06 -.96%
Reformulated Gasoline 210.75 -2.64%
Natural Gas 6.03 -6.4%
Heating Oil 206.0 -1.54%
Gold 682.0 -.39%
Base Metals 268.72 +.57%
Copper 364.90 -1.52%

Economy
10-year US Treasury Yield 4.95% +1 basis point
US Dollar 80.32 +.04%
CRB Index 319.09 -1.65%

Leading Sectors
Oil Service +2.32%
Telecom +1.55%
Restaurants +1.09%

Lagging Sectors
Coal -1.21%
Hospitals -2.23%
Homebuilders -2.28%

Evening Review
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In Play

Afternoon Recommendations
Oppenheimer:
- Rated (ROSG) Buy, target $11.
- Rated (HALO) Buy, target $14.

Afternoon/Evening Headlines
Bloomberg:
- Crude oil fell $.67/bbl. after Reuters reported that OPEC was concerned about high oil prices and their impact on the world economy.
- Corn futures fell in Chicago, extending their decline to an eight-month low, and soybeans dropped on speculation rains and a lack of severe heat will promote development of the two biggest US crops.
- Natural gas fell in NY to its lowest closing price since December as a combination of mild temperatures and high inventories served to undercut demand and push down prices.
- Texas Instruments(TXN) reported a 74% drop in second-quarter profit after the sale of a sensors business last year. The shares fell 3.6% in after-hours trading.
- Wal-Mart Stores(WMT) will reduce prices in the US on more than 16,000 back-to-school items as it works to reinforce its image as a discounter and lure back customers lost to Target Corp.(TGT).
- American Express(AXP) said second-quarter profit climbed 12% as customer spending and merchant fees increased. The stock fell $.97 to $63.69 in after-hours trading.
- NYC apartment prices climbed 16% in the second quarter as the country’s most expensive urban market sidestepped declines in the rest of the country.
- JDA Software(JDAS) reported total revenues of $90.8 million and software revenues of $18.6 million for second quarter 2007. This represents a 75% increase over the $51.8 million in total revenues and an 80% increase over the $10.4 million in software revenues reported for second quarter 2006. The shares soared 13% in after-hours trading.
- Treasury Secretary Paulson said today the US economy is at or near the bottom in the housing slump, that the consumer is strong, the subprime fallout is contained, a strong dollar is in the nation’s interest and the US economy is very healthy.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Networking longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was neutral today as the advance/decline line finished slightly lower, sector performance was mostly positive and volume was above average. Measures of investor anxiety were about average into the close. Today's overall market action was mildly bullish. Corn fell another 2.6% today, which helped spur the Goldman Ag commodity index to a 1.15% decline. Corn has plunged 29% from its February highs and its 50-day moving average is breaking down through its 200-day moving average for the first time since October 2005. I continue to believe that inflation fears have already peaked for this cycle, and this will help keep the 10-year yield contained as the myth of problematic inflation is further dispelled. Barron's had an excellent cover story (subscription required to read entire article) over the weekend by Michael Santoli on the lack of participation by the "little guy" in U.S. stocks' recent bull run and records. I would also add that many hedge funds seem to be missing out on sharp gains as well. Tony Crescenzi highlighted today how the short base in the S&P futures continues to grow, which corresponds with SentimenTrader's COT All-Index Stochastic. Moreover, I recently pointed out the Greenwich Associates survey that showed hedge fund managers were only 12% bullish, the lowest reading since 2004. As I highlighted earlier this afternoon, I still think the parabolic rise in short interest matters greatly and is mainly a result of the massive inflow of capital into low-correlation U.S. stock strategies over the last few years. There are several other gauges of hedge fund sentiment registering some pessimism, as well. It is also interesting to note that the Yale Institutional Buy-On-Dips Index is the lowest since late 2000 after the bubble had already burst and stocks were crashing. Also, more financial advisors were recently predicting a correction in U.S. stocks than at any other time in almost a decade, according to Investors Intelligence. The only place I see some relatively normal levels of sentiment given recent gains is the long-only institutional investor, which don’t account for nearly as much of daily trading as they used to. I still believe overall investor sentiment regarding U.S. stocks has never been worse in history with the DJIA materially advancing and soaring to new records.