Stocks Finish at Session Lows on Retail Earnings and Credit Fears

Indices
S&P 500 1,426.54 -1.82%
DJIA 13,028.92 -1.57%
NASDAQ 2,499.12 -1.70%
Russell 2000 762.87 -2.17%
Wilshire 5000 14,321.99 -1.84%
Russell 1000 Growth 575.11 -1.87%
Russell 1000 Value 797.67 -1.79%
Morgan Stanley Consumer 704.08 -1.60%
Morgan Stanley Cyclical 997.48 -2.69%
Morgan Stanley Technology 613.49 -1.64%
Transports 4,850.25 -3.22%
Utilities 482.39 -2.25%
MSCI Emerging Markets 127.02 -2.01%

Sentiment/Internals
Total Put/Call 1.37 +37.0%
NYSE Arms 1.91 +125.40%
Volatility(VIX) 27.68 +4.18%
ISE Sentiment 101.0 -5.61%

Futures Spot Prices
Crude Oil 72.37 +1.05%
Reformulated Gasoline 197.40 +1.88%
Natural Gas 6.98 +2.77%
Heating Oil 198.0 +.69%
Gold 680.20 -.10%
Base Metals 243.47 +.60%
Copper 333.70 -2.81%

Economy
10-year US Treasury Yield 4.73% -3 basis points
US Dollar 81.48 +.54%
CRB Index 311.27 -.10%

Leading Sectors
Biotech +.71%
Medical Equipment -.72%
HMOs -.89%

Lagging Sectors
Road & Rail -3.70%
Homebuilders -4.18%
Oil Tankers -4.54%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Newark, NJ, will install acoustic sensors and 50 additional security cameras around the city as part of an effort to reduce gun violence and cut crime, Mayor Cory Booker said today.
- Agilent Technologies(A) said third-quarter profit dropped 19%, more than analysts estimated. The shares fell 11% in after-hours trading.
- Applied Materials(AMAT) said third-quarter profit fell 7.5% after the company filled fewer orders from memory-chip makers. The stock fell $.50 in after-hours trading.
- Copper in NY fell for the fourth time in five sessions on concern that demand for the metal will decline as global economic growth slows.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, Retail longs and Medical longs. I added to my (EEM) short and (QQQQ)/(IWM) hedges in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished lower, almost every sector fell and volume was about average. Measures of investor anxiety were elevated into the close. Today's overall market action was bearish. Weekly retail sales rose 2.3% vs. a 2.9% gain the prior week. This is still mildly below average levels but up from 1.4% a month ago. The U.S. Dollar was higher again. As I cautioned a few weeks ago, sentiment had grown far too pessimistic on the greenback. Further modest upside is likely for the US Dollar, in my opinion, which will provide another headwind for commodities. Biotechs were relatively strong today. My favorite remains Gilead Sciences (GILD), and the recent pullback in the stock is providing investors an excellent entry point, in my opinion. The market reacted harshly to any new bit of negative news throughout the day regardless of its validity, which is not the type of action bulls would like to see at a bottom. Volume was only around average on today’s sell-off and the NYSE Arms was very high throughout the day, which are positives. The Nikkei is indicating a down 275 open in Japan.

Today's Headlines

Bloomberg:
- VMware Inc.(VMW) shares soared as much as 91% in their first day of trading, giving the software market a bigger market value than Ford Motor(F).
- Mattel Inc.(MAT) is recalling Chinese-made products for the second time in two weeks on concerns that children will swallow magnets attached to the toys.
- NASA has revised climate data to show 1934 as the hottest US year on record, ousting 1998 and challenging the argument that national temperatures are reaching new highs amid global warming.
- Sentinel Management Group, the Illinois-based firm that manages $1.6 billion, said it asked regulators for permission to freeze client withdrawals because credit-market turmoil made it impossible to trade.

Wall Street Journal:
- BMW AG, Volkswagen AG and other European automakers are gearing up to expand production in the US.
- Many Facebook Inc. users are willing to give such personal information as phone numbers, home addresses and e-mail addresses to strangers, citing a study carried out by Sophos Plc, a computer-security firm.
- Verizon Wireless may be the main beneficiary of a FCC auction of airwaves spectrum early next year.
- A wave of investment in steel mills in the US is a long-term gamble on the strength of the country’s steel market and its manufacturing industries.
- Small US investors who borrowed money, sold stocks short and took out complex options are finding that market volatility has undermined their investments. Many non-professional investors turned to foreign stocks and currencies, so-called “market neutral” funds, commodities futures and short-selling to avoid a possible market decline. Instead, they’re finding that many hedges aren’t working as expected.
- US index funds are going through a price war over expenses, partly because of competition from ETFs.

NY Times:
- More than 100 communities across the US are trying to make neighborhoods safe, affordable and comfortable places to grow old.
- Google Inc.(GOOG) and Microsoft Corp.(MSFT) are developing plans to improve the US health-care system by giving more control to patients.

USA Today:
- US casinos, once confined to tourist destinations in depressed towns, are being built in or near major cities to maximize tax revenue.

Trade Deficit Shrinks, Core Producer Prices Decelerate

- The Trade Deficit for June shrank to -$58.1 billion versus estimates of -$61.0 billion and -$59.2 billion in May.

- The Producer Price Index for July rose .6% versus estimates of a .2% increase and a -.2% decline in June.

- The PPI Ex Food & Energy for July rose .1% versus estimates of a .2% gain and a .3% increase in June.

BOTTOM LINE: The US trade deficit unexpectedly narrowed in June as exports soared to a record, validating the Fed’s forecast that global demand will help the economy rise out the housing slump, Bloomberg said. An improving trade deficit helped boost US economic growth to an above-average 3.4% in 2Q. I expect the deficit to only improve modestly over the intermediate-term.

A measure of inflation at the wholesale level rose less than forecast in July, indicating inflation outside of energy costs remains contained. Food prices fell .1%, the third consecutive monthly decline. Core producer prices rose 2.3% year-over-year versus estimates of a 2.5% gain. Fuel prices rose 2.5% in July versus a 1.1% decline in June. Computer prices fell 3.3% in July. Since this report, energy prices have declined meaningfully. I expect next month’s PPI to show further deceleration in the headline number.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Citadel Limited Partnership added 208,891 shares of Google Inc.(GOOG) last quarter, making the stock its largest equity position worth $329,326,090.
- Starbucks Corp.(SBUX) will sell a new line of premium packaged coffees and add supermarket kiosks for its Seattle’s Best Coffee brand as the company seeks to expand sales beyond cafes.
- EMC Corp.’s(EMC) VMware software business raised $957 million in an IPO today, at the top end of the forecasted range.
- Demand for services in Japan unexpectedly rose in June as the best job prospects in nine years encouraged consumers to spend.
- Radian Group(RDN), which protects against defaults on mortgages and bonds, said it guaranteed collateralized debt obligations worth about $47 billion.
- Sales of bonds backed by European commercial property loans may reach a record this year, even if turmoil in global credit markets curbs the pace of issuance in the second half, Moody’s Investors Service said.
- China’s retail sales grew at the fastest pace in more than three years as rising stock prices and wages left consumers in the world’s most populous country with more money to spend.

Wall Street Journal:
- Best Buy(BBY) will begin selling Liz Claiborne(LIZ)-designed accessory bags for laptop computers, digital cameras, iPod music players and other products.
- Rule Change Ticks Off Some Traders.

MarketWatch.com:
- Quant quake shakes hedge-fund giants. Goldman, Renaissance, AQR see losses, but also sense opportunity.

CNNMoney.com:
- An electric car for the common man. One company is hoping to bring a $30,000, 80-mph battery-powered sedan to the market by 2009.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.05%.
NASDAQ 100 futures -.03%

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Earnings of Note
Company/EPS Estimate
- (A)/.48
- (AMAT)/.32
- (DDS)/.02
- (FIG)/.27
- (FOSL)/.19
- (HAR)/1.23
- (HD)/.73
- (LZB)/.02
- (LWAY)/.07
- (SCHS)/1.75
- (TJX)/.37
- (WMT)/.76

Upcoming Splits
- (SHEN) 3-for-1

Economic Releases
8:30 am EST
- The Trade Deficit for June is estimated to widen to -$61.0 billion versus -$60.0 billion in May.
- The Producer Price Index for July is estimated to rise .2% versus a -.2% decline in June.
- The PPI Ex Food & Energy for July is estimated to rise .2% versus a -.2% decline in June.

Other Potential Market Movers
- The weekly retail sales reports, (SE) Analyst Meeting, (ABI) Analyst Meeting, Keefe Bruyette & Woods Bank Conference, CSFB Communications Conference, Jeffries Industrial Conference and the UBS Engineering & Construction Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Mixed as Lingering Credit Fears Offset Healthy Retail Sales

Indices
S&P 500 1,452.92 -.05%
DJIA 13,236.53 -.02%
NASDAQ 2,542.24 -.10%
Russell 2000 779.81 -1.14%
Wilshire 5000 14,590.18 -.07%
Russell 1000 Growth 586.06 +.17%
Russell 1000 Value 812.20 -.15%
Morgan Stanley Consumer 715.56 +.28%
Morgan Stanley Cyclical 1,025.10 +1.48%
Morgan Stanley Technology 623.73 +.42%
Transports 5,011.49 +1.0%
Utilities 493.50 +.44%
MSCI Emerging Markets 129.61 +.60%

Sentiment/Internals
Total Put/Call 1.0 -8.26%
NYSE Arms .85 +16.09%
Volatility(VIX) 26.57 -6.11%
ISE Sentiment 107.0 +.94%

Futures Spot Prices
Crude Oil 71.53 +.08%
Reformulated Gasoline 193.45 -1.04%
Natural Gas 6.83 +.10%
Heating Oil 196.75 -.19%
Gold 679.90 -.25%
Base Metals 242.0 +2.51%
Copper 342.20 +1.86%

Economy
10-year US Treasury Yield 4.76% -5 basis points
US Dollar 81.10 +.53%
CRB Index 311.57 +.21%

Leading Sectors
Wireless +1.78%
HMOs +1.43%
Computer Hardware +1.31%

Lagging Sectors
Alternative Energy -2.78%
Homebuilders -3.23%
Coal -3.42%

Evening Review
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In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Aegon NV, the second-largest Dutch insurer, said it agreed to buy two life insurance units from Merrill Lynch(MER) for $1.3 billion in cash.
- Smokers are four times more likely to develop macular degeneration, the leading cause of blindness in the elderly, compared with people who never puffed a cigarette, Australian researchers said.
- Johnson & Johnson(JNJ) returned to the bond market after a four-year absence, raising $2.6 billion in its largest ever debt offering.
- Time Warner Cable Inc., the second-largest US cable company, plans to expand a service that lets viewers watch shows when they want as long as they sit through the commercials.
- Chinese toothpaste distributed to hotels worldwide by a US company has been recalled because it may contain a chemical used in antifreeze, adding to recent cases of unsafe food and drug imports.

Wall Street Journal:
- US retail gasoline fell another 6.7 cents/gallon to $2.77/gallon in the latest week, the lowest since April 9.

CNNMoney.com:
- Credit crunch: Blackstone smells opportunity. President Tony James says the private equity firm has an eye on debt that has been oversold in the market.

Times Online:
- Almost every big quantitative fund using a strategy similar to Goldman’s(GS) – known as equity market neutral (EMN) strategy – was suffering in its own way. The result has been a rout of one of the most popular types of quant fund. Hedge Fund Research’s EMN Index had lost 7.6% by last Thursday.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer longs, Biotech longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was slightly negative today as the advance/decline line finished mildly lower, sector performance was mixed and volume was above average. Measures of investor anxiety were elevated into the close. Today's overall market action was neutral. Growth outperformed value again today, with growth stock leaders especially strong. Areas of weakness were once again homebuilders, financials and commodities. Oil continues to trade very poorly. The long natural gas/short oil trade I suggested a couple of weeks ago has worked very well so far. I still think oil has put in place a major double top and will begin an accelerated downward move within the month. I would take off the long natural gas hedge as that move commences. The Nikkei, which barely rose last night, is indicated down about 60 on the open in Japan. While today's performance was likely frustrating for the bulls and bears, given the news after the close on Friday, I think a mixed performance was pretty good. Every day that goes by without another dip lower and more uncertainty lifting puts more pressure on the many bearishly positioned investors, in my opinion. For some time I have argued that the extreme popularity of the market neutral hedge fund strategy has been a large contributing force to the current US negativity bubble, helping to send short interest into the stratosphere. There are always exceptions, but in general this strategy has performed very poorly on a risk-adjusted basis for years. Last week, I wondered whether market neutral funds had really been run in a net short manner during this bull market. Then on Thursday when the market fell almost 3%, market neutral funds still fell 1.8%, according to Dow Jones. They are now down -5.3% for the month and -3.5% for the year. They had only returned an annualized 2.8% over the last 3 years even before the recent carnage. I continue to believe this strategy has seen its peak in popularity and that a majority of the vast amount of capital that has been deployed into these funds since the bubble burst in 2000 will begin to find its way into more positively correlated US stock strategies.