Stocks Finish at Session Lows on Lingering Credit Fears

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Stocks Sharply Lower into Final Hour on Lingering Credit Fears

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Biotech longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is lower, every sector is declining and volume is very heavy. My intraday gauge of investor angst is elevated again. Mall retail same-store sales, specifically at teen retailers, were disappointing. However, Cosco (COST, +7%), Target (TGT, +6.1%), TJX Corporation (TJX, +5%), Wal-Mart (WMT, +1.9%) and JCPenney (JCP, +10%) were bright spots. The brokers, led by Goldman(GS), are moving to session lows, and this is sending the broad market to new lows. This is one of the most bifrucated days I have ever seen: I have literally hundreds of stocks on my monitor pages higher or barely down today with the DJIA down 300. This is highly unusual and indicates underlying strength, in my opinion. As well, Nasdaq breadth is -929, which is mild considering the headline losses. I still believe longer-term investors should use pullbacks to add to high-quality growth stocks at current levels and use strength to cut back on the most economically sensitive and emerging-market stocks. I expect US stocks to trade higher into the close from current levels on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- The Federal Reserve added $24 billion in temporary funds to the banking system, the most since April, amid an increase in demand for cash from banks roiled by US subprime loan losses.
- President Bush said his administration opposes efforts in Congress to raised taxes on hedge funds and private-equity firms, saying the move could stifle economic growth.
- TJ Marta, a fixed-income strategist at RBC Capital Markets, said global markets are at the “peak of the hysteria” in the credit markets.

Wall Street Journal:
- Gannett Co.(GCI), the largest US newspaper publisher, amended several of its compensation plans to reflect a potential management buyout of the company.
- Goldman Sachs’ North American Equity Opportunities Fund, which relies on computer models to pick stocks, is down 15% this year. The fund had $463.5 million in assets under management and has sold down positions in response.

Forbes:
- A consortium of the nation’s leading investment banks have quietly created an index that is not only protecting them against the recent market meltdown but also promising to make them bundles of money in the process.

Mysteel.com:
- China’s steel-product exports soared 66% to 5.94 million metric tons in July from a year earlier, citing preliminary figures from the customs. China has exported 39.7 million tons in the first seven months, up 92% from a year earlier. Steel-product imports fell 9.2% to 1.39 million tons in July from a year earlier.

Forbes:
- Bear Stearns(BSC) is in talks to sell a minority stake to China’s Citic Group, citing a person close to the Beijing-based company.

AFP:
- China is unlikely to sell US dollar assets as long as there is no major disagreements with the US, citing a government economist.

Job Market Still Healthy

- Initial Jobless Claims rose to 316K this week versus estimates of 310K and 309K the prior week.

- Continuing Claims rose to 2559K versus estimates of 2520K and 2520K prior.

BOTTOM LINE: First-time claims for jobless benefits rose last week to a level that still indicates strength in the labor market, Bloomberg said. The four-week moving-average of jobless claims rose slightly to 307,750 from 306,000 the prior week. Forty-four states and territories reported a decrease in new claims, while nine reported an increase. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- The AFL-CIO is calling for a crackdown on hedge funds and buyout firms, urging lawmakers to raise taxes on the companies’ executives and asking pension funds to limit their investments in the private pools of capital.
- The risk of owning corporate bonds fell as concerns eased that losses from subprime mortgages will slow the US economy.
- Areva SA, the world’s largest maker of nuclear power stations, and General Electric(GE) are among four companies poised to share $14 billion of orders from India as nations prepare to lift a 33-year ban.
- Mark Zandi, chief economist at Moody’s Economy.com, says the US is not in a “credit crunch.”
- Samsung Electronics and Sony Corp.(SNE) executives visited flat-panel display makers in Taiwan seeking to ensure sufficient supply in a peak season for electronics exports. Taiwan’s production of flat panels for computers can only meet as much as 85% of demand.
- South Korea’s central bank unexpectedly raised its benchmark interest rate for a second time in as many months to reduce the risk that higher borrowing by households and small businesses will fuel asset-price bubbles.
- S&P analysts Tanya Azarchs, Rodrigo Quintanilla, Victoria Wagner, Scott Sprinzen said banking industry margins are at high levels.

Wall Street Journal:
- Computers don't always work. That was the lesson so far this month for many so-called quant hedge funds, whose trading is dictated by complex computer programs.
- Google Inc. began allowing participants in news stories to post comments about the articles through the Google News service, a move that is raising questions in the media industry.
- Movie-rental chain Blockbuster Inc.(BBI) secured a foothold in the small but potentially significant online movie downloading business by acquiring Movielink LLC, a downloading service owned by the major Hollywood studios.

MarketWatch.com:
- Publix Super Markets, a grocery chain in the Southeast, this week joined a growing group of retailers cutting prices on commonly prescribed generic drugs available at their stores' pharmacies. But Publix is taking it one step further by not just discounting but giving away some medicines for free.
- Is a bottom in place? Commentary: Indicator that has a good track record is close to a buy signal.

Boston Globe:
- Deal makers in the so-called clean technology business are mostly brushing aside recent market weakness and forecasting a healthy flow of venture capital and other transactions in the solar, biofuel and wind energy sectors for the remainder of the year.

CNNMoney.com:
- Leon Cooperman: Why I’m a bull. A hedge fund superstar explains in Fortune magazine why stocks are on track for solid gains – despite the market’s sudden selloff.
- Bear Stearns Cos. (BSC) this week began sending letters to clients reassuring them the firm was financially sound, in an effort to keep people from withdrawing their business.
- Retail stocks: Don’t bail out just yet. Despite high gas prices, housing slump and a credit crunch, Americans are still shopping. Could this boost retail stocks in the months ahead?

DigiTimes:
- Samsung Electronics raised prices of some flash memory chips by 19% after a power outage disrupted the company’s semiconductor production.

Financial Times:
- Rupert Murdoch on Wednesday said he had been willing to endure “criticism normally leveled at a genocide tyrant” during his three-month battle to acquire Dow Jones because he was so convinced that Dow Jones and News Corp. were a “perfect fit” for a digital age.
- Blackstone(BX) on Wednesday closed the world’s biggest private equity fund at $21.7 billion, setting a high-water mark for fundraising in the buy-out industry even as turmoil in global credit markets has raised questions about its future. In spite of the turmoil in corporate debt markets – whose previous health had fuelled an extraordinary dealmaking spree by buy-out groups – there has been no sign that credit conditions have also brought a slowdown in private equity fundraising.

Reuters:
- Forget exchanging letters, phone calls or e-mails. This year, Wal-Mart Stores Inc.(WMT) wants students heading to college to log on to Facebook to design their dorm room with their roommate.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ABK), target $103, and (MBI), target $74. Guarantors are finally recovering, but valuations are still compelling. Ambac(ABK) is trading at 1.12x year-end 2007 book value and MBIA(MBI) at 1.14x (75% and 83% of adjusted book, respectively). Last week the stocks were trading as though they were in distress; this week there isn’t enough stock to go around. Given the rapid change in director of the shares, we would allow further volatility, but would view current levels as very attractive. Guarantors are built to be a “port in a storm:” Bond exposures are diversified. Guarantors do not have to post collateral for mark-to-market losses. They are paid handsomely in times of market distress to get deals done. They exist despite the function of rating agencies tracking bonds. In 2001-2002- the worst credit environment seen in decades – and on the heels of less-than-perfect underwriting, they still did not incur losses. Since 2004, Ambac and MBIA have curtailed new business as a “lack of fear” undermined pricing and covenants. They have been waiting for wider spreads. While the stocks are trading off trough valuations, the guarantors are ramping up healthy new business.

Morgan Stanley:
- Reiterated Overweight on (RL), target $105.

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 futures +.01%.
NASDAQ 100 futures +.01%

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Earnings of Note
Company/EPS Estimate
- (NDN)/.06
- (AMSC)/-.20
- (AIT)/.47
- (ASN)/.16
- (BDY)/.17
- (BGG)/.68
- (EAT)/.48
- (CPKI)/.23
- (CAH)/.86
- (CUZ)/.26
- (DBD)/.37
- (DDS)/.02
- (DTV)/.36
- (DYN)/.05
- (EIX)/.63
- (ELX)/.28
- (GLBC)/-2.58
- (HB)/.68
- (HOC)/2.43
- (LLNW)/.00
- (MIR)/.42
- (NVDA)/.42
- (STP)/.23
- (URBN)/.19

Upcoming Splits
- (HCSG) 3-for-2

Economic Releases
8:30 am EST
- Initial Jobless Claims are estimated to rise to 310K versus 307K the prior week.
- Continuing Claims are estimated to fall to 2520K versus 2525K prior.

Other Potential Market Movers
- The monthly ICSC Chain Store Sales report, Fed’s Stern speaking, (BBY) Investor and Analyst Day, Leerlink Swann Emerging Life Science Tools Conference, CSFB Electric Equipment & Multi-Industry Conference, RBC Technology Conference and Canaccord Adams Global Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker 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.