Stocks Mildly Lower into Final Hour on Lingering Credit Fears and Rise in Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs and I-Banking longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is neutral today as the advance/decline line is neutral, sector performance is mixed and volume is very heavy. My intraday gauge of investor angst is at an elevated level. LoopRumors.com is reporting that today's rumor that Apple (AAPL) is scaling back production of the iPhone is unfounded. The other rumor floating around that iPod production is being cut is also likely unfounded, according to Piper Jaffray. The Piper analyst also thinks that if an iPod production cut is occurring, it may be a sign of a new version coming, which is a positive. I continue to believe that AAPL will move much higher longer term and view any near-term pullbacks as just another buying opportunity. Heavily shorted Under Armour (UA), one of my longs, is soaring 15% to a new record high on a very positive earnings report. As I have said before, I have never seen more reckless shorting in my life. Numerous stocks with 10%+ of the float short have risen by stunning amounts over the last year. As I have said before, I think the days of throwing short darts at stocks with high P/Es and hitting a bull's-eye with little in the way of downside catalysts are over as the “growth style” continues to significantly outperform the “value style.” Weekly retail sales came in with a 2.8% gain for the second straight week. This is up from a weekly average of 0.1% gains from mid-April through mid-May and up from a 1.4% gain earlier this month. I still expect retail sales to head back above average levels this fall as energy prices fall, stocks rise, the job market remains healthy, inflation decelerates to low levels and housing fears subside. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, more economic optimism and short-covering.

Today's Headlines

Bloomberg:
- Crude oil is rising above $78 a barrel in NY, nearing a record, on historic investment fund speculation.
- American Home Mortgage Investment(AHM) said it’s unable to fund new loans and may have to liquidate assets.
- The Fed’s Poole said last week’s slump in benchmark US stock indexes was a “typical market upset.” “The market understands, I believe, that the Fed will act in due time if and when evidence accumulates that action would be appropriate,” he said.
- Democratic NY Governor Eliot Spitzer rejected a state senator’s request to appoint a special prosecutor with power to compel sworn testimony in an investigation of allegations the governor’s aides used state police to gather information on a political rival.
- The risk of owning corporate bonds fell by the most in at least three years after GMAC LLC’s mortgage unit posted improved results and Citadel Investment Group LLC bought the assets of a failed hedge fund.

Wall Street Journal:
- US Republican presidential candidate Rudy Giuliani plans to propose a tax deduction of as much as $15,000 per family to purchase health-insurance, citing Giuliani.
- Deutsche Bank AG and Commerzbank AG plan to cut most of their business ties to Iran after increased US pressure on companies to end links to the Middle Eastern nation because of its nuclear policy.
- Some investors may want to bet that pending mergers and acquisitions will be completed because some deals are being discounted on concerns that restricted financing will jeopardize the transactions.
- Bancroft family members controlling 32% of Dow Jones(DJ) favor a sale to News Corp.(NWS/A), likely giving Rupert Murdoch enough support to complete a takeover.

NY Times:
- Builders of new nuclear plants in the US may be eligible for billion of dollars in loan guarantees during the next two years under a one-sentence provision included in the energy bill recently approved by the Senate.
- Liz Claiborne(LIZ) CEO William McComb is trying to reduce the company’s dependence on department stores such as Macy’s in a strategy that may result in the company opening thousands of its own stores.

AFP:
- French President Nicolas Sarkozy outlined cuts in health-care reimbursements paid by the national welfare system during a hospital visit today in Dax, Southern France. The money saved will be shifted to fund research into cancer, Alzheimer disease, and hospice care, the president said.

Xinhua News Agency:
- North Korea cooperated with United Nations inspectors after shutting down its Yongbyon nuclear reactor, citing Adel Tolba, head of the UN monitoring team.

Personal Incomes Rise, Spending Decelerates, Inflation Tame, Purchasing Manager Declines, Consumer Confidence Surges to Cycle Highs

- Personal Income for June rose .4% versus estimates of a .5% gain and a .4% increase in May.

- Personal Spending for June rose .1% versus estimates of a .1% increase and an upwardly revised .6% increase in May.

- The PCE Core for June rose .1% versus estimates of a .2% increase and a .1% gain prior.

- The 2Q Employment Cost Index rose .9% versus estimates of a .9% gain and a .8% increase in 1Q.

- The Chicago Purchasing Manager Index for July fell to 53.4 versus estimates of 58.4 and a reading of 60.2 in June.

- Consumer Confidence rose to 112.6 in July versus estimates of 105.0 and an upwardly revised 105.3 in June.

- Construction Spending for June fell .3% versus estimates of a .2% rise and an upwardly revised 1.1% gain in May.

BOTTOM LINE: Personal spending in the US increase in June, while a gauge of inflation rose less than forecast, suggesting price pressures are easing, Bloomberg reported. While personal spending decelerated, it is rising around average rates over the last three months. As well, personal income growth continues to trend above long-term average rates. The core PCE, the Fed’s favorite inflation gauge, rose just 1.9% year-over-year. This is the smallest increase since March 2004 and within the Fed’s comfort zone of 1-2%. As I have steadfastly said over the past couple of years, I believe we have experienced a mild cyclical uptick in inflation of late, but the secular trend of disinflation remains firmly in tact.

Employment Costs in the US rose at a faster pace in the second quarter as companies spent more on employee benefits, Bloomberg said. Companies are offering better benefit packages to retain skilled employees at a time when the jobless rate has hovered near a six-year low. Strength in the job market has continued to boost consumer spending even as gas prices stay high. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

A measure of US business activity fell more than forecast in July, Bloomberg reported. The New Orders component of the index fell to 53.4 versus 65.7 the prior month. The Inventories component fell to 55.1 versus 55.9 the prior month. The Prices Paid component rose to 73.1 versus 68.1 the prior month. This gauge had been at very strong levels over the last few months. I suspect it will bounce higher next month.

Consumer confidence in the US soared to a new cycle high in July, spurred by job and income growth and lower gas prices, Bloomberg reported. The Present Conditions component of the index rose to 139.2 from 129.9 the prior month. The Expectations component for the next six months rose to 94.8 versus 88.8 the prior month. The percentage of people saying jobs are plentiful rose to 30.5%, the highest since August 2001, from 27.6% the prior month. The proportion of consumers that said jobs are hard to get fell to 18.4% from 20.5% the prior month. The proportion of Americans that think business conditions are poor is only 14.4%, down from 16.1% the prior month. Those planning to buy an automobile rose to 7.2% versus 6% of consumers the prior month. Consumers in the Central Northeast region are now the lone bastion of extreme pessimism. Confidence in the Central Northeast region came in at a depressed 76.80, notwithstanding recent stock gains, near the level seen at the major bear market lows during 2002. As I forecast early in the year, this measure of confidence reached a new cycle high. I suspect the other main gauge of consumer sentiment will hit a new cycle high this fall as energy prices falling meaningfully, inflation decelerates to low rates, interest rates remain low, housing fears subside, stocks rise further, wage growth continues to substantially outpace inflation and unemployment remains historically low.

Spending on US construction projects unexpectedly fell last month as cutbacks in residential construction surpassed gains in non-residential projects, Bloomberg said. The prior month was revised higher. Private residential construction fell .7%, the 16^th consecutive decline. Non-residential construction rose .1% and was up 14% from year-ago levels. The drag from housing has been diminishing since reaching a 25-year high of 1.3 percentage points of GDP during the third quarter of last year. I continue to believe construction will remain muted over the intermediate-term as homebuilders work down inventories.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Billionaire investors Nelson Peltz said he might pay as much as $41 a share for hamburger chain Wendy’s Intl.(WEN).
- Japan’s households increased spending for a sixth month in June and the jobless rate fell, suggesting consumer spending will help extend the economy’s longest postwar expansion.
- The yen fell for a second day against the euro as a rebound in US stocks gave investors confidence to buy higher-yielding assets funded by loans in Japan.
- Nicolas Sarkozy is rolling out the welcome mat for thousands of rich French people who fled one of Europe’s most onerous tax regimes. Few may heed his call.
- The US aims to reach agreements with China on food and drug safety by December as a US delegation started the first of a series of talks with the Chinese government in Beijing.
- Confidence among South Korean manufacturers for August increased for the first time in four months, suggesting companies may ramp up production and spur growth in Asia’s third-largest economy.
- MySpace.com co-founder Brad Greenspan made a new proposal to invest $600 million in cash and stock in three joint ventures with Dow Jones(DJ) and said he has received interest from five “credible” investor groups.
- Northrop Grumman Corp.(NOC) won satellite system-modification work from the US Air Force valued at as much as $2.34 billion.
- Smoking one marijuana joint has the same detrimental effects as smoking as many as five cigarettes, a study said.

Wall Street Journal:
- Marathon Asset Management LLC is starting a new fund that will buy mortgage-related assets in an effort to capitalize on problems in the sub-prime lending market. Marathon, a $9 billion hedge-fund focuses on debt markets, will start taking orders from investors for the Marathon Distressed Sub-Prime Fund in August, citing a letter sent to clients by Marathon President Bruce Richards.
- With deal-related financing markets in disarray, private-equity buyouts are being delayed around the world, giving corporate buyers an advantage over the cash-rich private-equity firms for the first time in years.
- News Corp.(NWS/A) and Dow Jones(DJ) edged closer to a final agreement on the sale of the publisher to the media giant late yesterday, as Dow Jones negotiated on an unusual deal for the company to cover advisory fees for its majority owners, the Bancrofts, in exchange for some holdout family members supporting the deal.

MarketWatch.com:
- Commentary: Why gold didn't profit more from the stock market's difficulties.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (CE) to Buy, target $45.
- Reiterated Buy on (CBG), target $47.
- Downgraded (RSH) to Sell, target $20.
- Reiterated Buy on (WMB), target raised to $40.
- Reiterated Buy on (HUM), target $88.
- Reiterated Buy on (AXP), target $78. We believe the recent weakness in AXP’s shares, which appears driven by broader market concerns about credit is significantly overdone. We believe the macro economic environment should continue to support AXP’s above average growth and returns. Citi’s economists/strategists are sanguine about the broader economy and view the high-end consumer as a source of relative strength. We see AXP’s premium brand, products, and customers as key drivers of its premium pricing relative to its network competitors over the foreseeable future. AXP’s pricing power is supported by its rewards programs and network partnerships. We think the market’s recent valuation of AXP’s shares(15 times our 2008 EPS estimate) significantly overestimates the company’s exposure to broader market credit issues and significantly underestimates the benefits of its positioning, strategy and processing-heavy mix of business.
- Added (WB), (EMN) and (JWN) to Recommended List; Removed (JCP).

Morgan Stanley:
- Reiterated Buy on (VZ), target raised to $45.

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures +.02%.
NASDAQ 100 futures -.11%.

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Earnings of Note
Company/EPS Estimate
- (AG)/.52
- (AEP)/.57
- (ADP)/.36
- (AVP)/.45
- (BEAV)/.38
- (BWLD)/.22
- (CBS)/.51
- (CEPH)/1.01
- (CMG)/.45
- (COH)/.41
- (CVH)/.95
- (DBD)/.37
- (DWA)/.33
- (FSLR)/.03
- (GM)/1.10
- (GMR)/.40
- (HLT)/.33
- (IACI)/.33
- (IMCL)/.31
- (LIZ)/.24
- (MRO)/2.14
- (MAS)/.47
- (MET)/1.33
- (NCR)/.58
- (NMX)/.58
- (PPC)/.62
- (RUTH)/.24
- (SAF)/1.54
- (SGR)/-.01
- (JOE)/.16
- (UA)/.03
- (VLO)/3.75

Upcoming Splits
- (SJR) 2-for-1

Economic Releases
8:30 am EST
- Personal Income for June is estimated to rise .5% versus a .4% gain in May.
- Personal Spending for June is estimated to rise .1% versus a .5% gain in May.
- The PCE Core for June is estimated to rise .2% versus a .1% rise in May.
- The 2Q Employment Cost Index is estimated to rise .9% versus a .8% gain in 1Q.

9:45 am EST
- The Chicago Purchasing Manager Index for July is estimated to fall to 58.4 versus 60.2 in June.

10:00 am EST
- Consumer Confidence for July is estimated to rise to 105.0 versus 103.9 in June.
- Construction Spending for June is estimated to rise .2% versus a .9% gain in May.

Other Potential Market Movers
- The Keefe Bruyette & Woods Community Bank Conference, S&P/CS Home Price Composite, weekly retail sales reports and (LSI) Analyst Day could also impact trading today.

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

Stocks Finish Near Session Highs on Diminished Credit Fears, Bargain-Hunting, Short-Covering

Indices
S&P 500 1,473.91 +1.03%
DJIA 13,358.31 +.70%
NASDAQ 2,583.28 +.82%
Russell 2000 784.23 +.82%
Wilshire 5000 14,806.47 +.97%
Russell 1000 Growth 593.15 +1.08%
Russell 1000 Value 827.26 +.97%
Morgan Stanley Consumer 707.93 +.78%
Morgan Stanley Cyclical 1,046.76 +2.03%
Morgan Stanley Technology 639.23 +.89%
Transports 5,094.67 +1.10%
Utilities 478.42 +.76%
MSCI Emerging Markets 134.99 +1.49%

Sentiment/Internals
Total Put/Call 1.15 -11.54%
NYSE Arms .55 -60.02%
Volatility(VIX) 20.87 -13.65%
ISE Sentiment 133.0 +.76%

Futures Spot Prices
Crude Oil 76.69 -.43%
Reformulated Gasoline 208.56 -.77%
Natural Gas 6.54 +5.2%
Heating Oil 206.55 -.37%
Gold 676.80 +.67%
Base Metals 252.50 -.46%
Copper 358.90 +1.18%

Economy
10-year US Treasury Yield 4.80% +4 basis points
US Dollar 80.85 -.12%
CRB Index 320.99 +.43%

Leading Sectors
Alternative Energy +3.03%
Engineering & Construction +2.81%
Steel +2.08%

Lagging Sectors
Tobacco -.39%
Computer Services -.47%
Biotech -.81%

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Afternoon Recommendations
Piper Jaffray:
- Upgraded (VCLK) to Outperform.

Afternoon/Evening Headlines
Bloomberg:
- US stocks rebounded after the worst two-day skid since 2003 after Wall Street’s biggest securities firms, led by Citigroup(C), Goldman Sachs(GS) and Bank of America(BAC), said the sell-off made banks, homebuilders and retailers relative bargains.
- Sun Microsystems(SUNW), the world’s fourth largest maker of server computers, reported net income of $329 million, exceeding analysts’ estimates. The shares surged 9.8% in after-hours trading.
- Banks led by Bank of America(BAC) agreed to provide as much as $21 billion of debt financing to fund Blackstone Group’s(BX) leveraged buyout of Hilton Hotels(HLT), the second-largest US hotel chain.
- Treasuries declined the most in two weeks as US stocks rebounded, suggesting investors were becoming more comfortable with risk after last week’s global equity sell-off.
- CB Richard Ellis(CBG) today reported second quarter revenue increased 64.9% and raised 2007 guidance. The shares jumped 9.4% in after-hours trading.
- Ethanol in Chicago fell to a three-week low on concern there is an oversupply of the grain-based additive and as gasoline declined.
- The average US pump price for regular gasoline fell 8.2 cents to $2.88 a gallon in the week ended today, the government said.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, I-Banking longs, Semi 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 positive today as the advance/decline line finished mildly higher, most sectors rose and volume was heavy. Measures of investor anxiety were above average into the close. Today's overall market action was bullish. Many quality growth stocks posted gains substantially above those in the major averages once again. These stocks held up much better during the sell-off and are now leading to the upside. This is significant and continues to be ignored. Cyclicals were also outperformers today as extreme economic pessimism subsided slightly. The 10-year yield rose 4 basis points, finishing near session highs, as well. Recent worries over the advance/decline line seem overdone to me. The NYSE cumulative advance/decline line isn't even below its 50-week moving average yet, which is where it has found support a couple of times over the last five years since the 100% gain in the S&P 500 began. The CBOE total put/call finished at an above average 1.15. My intraday gauge of investor angst also finished at an above-average level, despite today's gains. I still suspect we will see some gains in Asia and Europe before the open tomorrow here that could further boost U.S. stocks. It is quite telling, in my opinion, that once again insider selling was very muted last week and remains near levels more associated with market bottoms than market tops. Why aren't I-banking execs selling if they know their firms' or clients' problems will lead to a systemic crisis that will result in a negative economic event? In fact, the banking, investment and savings/loan sectors saw the greatest insider buying last week. This is a key development that is also being ignored.