Stocks Mostly Lower into Final Hour on Rise in Energy Prices, Profit-taking

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Medical longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly bearish as the advance/decline line is mildly lower, most sectors are declining and volume is about average. Investor anxiety is about average. Today’s overall market action is neutral. The VIX is falling .2%, but remains above average at 18.8. The ISE Sentiment Index is below average at 115.0 and the total put/call is around average at .91. Finally, the NYSE Arms has been running above average most of the day and is currently 1.12. The US dollar continues to trade well. Since March 26th, the Citi Eurozone Economic Surprise Index has fallen from +78.50 to -19.50, while the US Economic Surprise Index has climbed to -58.2 from -100.6. This is a large positive for the US currency. The G-7 Currency Volatility Index(VXY) is falling 4.6% to 10.4, which is the lowest reading since February 28^th. The TED spread is falling another 11 basis points today to 128 basis points, which is the lowest since February 29^th. According to Bankrate.com, the average 30-year fixed rate mortgage is falling 8 basis points today to 5.72%, which is the lowest in a couple of weeks and down from 6.12% in March. The European Financial Sector Credit Default Swap Index is falling another 10% today to 53.4 basis points. This is another new low and down from 131.41 on March 21, which is also a big positive. The financial sector(XLF) is flat on the day, but continues to trade well considering the news. Google Inc.(GOOG) is pulling back today ahead of a likely (MSFT)/(YHOO) deal announcement. I continue to believe that combination is a long-term positive for Google(GOOG) and will prove to be a large mistake for MSFT. Any further meaningful weakness in GOOG shares related to the deal would provide investors with another excellent entry point, in my opinion. Nikkei futures indicate an +116 open in Japan and DAX futures indicate an +17 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, technical buying and less economic pessimism.

Today's Headlines

Bloomberg:
- The cost to protect US corporate bonds from default fell after the US lost fewer jobls last month than economists had estimated. Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the US and Canada dropped another 10 basis points to 81.75 basis points in NY, according to CMA Datavision. In Europe, credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield ratings dropped 22 basis points to 396 basis points, JPMorgan said. The Markit LCDX index, a gauge of confidence in the US high-yield, high-risk loan market that rises as sentiment improves, climbed .4 percentage point to 99.8, according to Goldman Sachs.
- The Fed took another stab at coaxing banks into lending at lower rates. The Fed boosted its biweekly Term Auction Facility sales of cash to banks by 50% to $75 billion and expanded the collateral it takes from bond dealers through loans of Treasury securities. It also raised the amount of dollars it makes available to the European Central Bank and Swiss National Bank through swap lines to a combined $62 billion from $36 billion.
- The US dollar rose to a five-week high against the euro after a government report showed US employers eliminated fewer jobs in April than economists forecast.
- Buffett Plots $40 Billion Buying Spree as Crunch Diverts Bidders.
- The jump in the S&P 500 above 1,400 for the first time since January indicates US stocks may extend their seven-week rally, say analysts who make predictions based on trading patterns.
- Traders of credit default swaps may start using a clearing house this year to reduce the risk of counterparties failing to meet their obligations, Bank of America said.
- Iran, OPEC’s second-largest oil producer, more than doubled the amount stored in tankers idling in the Persian Gulf, sending ship prices higher as demand for some of its crude fell.
- Vietnam’s credit rating outlook was cut to negative at S&P, which said the country’s overheating economy was a risk to stability. “In April 2008, inflation increased to above 21% year-on-year, while we project the annual current account deficit to be maintained at close to 10% of GDP,” said King Eng Tan, a Singapore-based analyst at S&P.
- Endeavour Capital LLP, founded by former Salomon Smith Barney traders, will wind down its hedge fund and restart with another fund. The London-based money manager’s Endeavour Fund made bets on the differences between Japanese government securities and lost a third of its value in March.
- Said Rafat, managing director at Fitch Ratings says hedge fund investors are booting funds of funds managers. For the first time, more than half of the hedge fund assets of the 200 largest US pension plans were invested with individual managers last year. (video)
- Hedge Fund Fees Shrink as US Pensions Make Direct Investments.
- Crude oil rose more than $3 a barrel after government economic reports were better than economists had expected, prompting speculators to anticipate better demand from the US.
- Bank of America(BAC) May Not Guarantee Countrywide’s Debt.

Wall Street Journal:
- Let’s Pop the Deficit Bubble.
- Obama’s Other Radical Friends.

Forbes:
- Fitch: US Timeshare ABS Resisting Subprime Contagion. Total delinquencies on US timeshare ABS have receded in the first quarter this year.

Digitimes:
- Silicon shortage prompts strategy changes for photovoltaic industry, says iSuppli.

Financial Times:
- Hampson Industries Plc, a UK aircraft and car parts maker, will buy two Michigan-based specialist tooling suppliers in transactions worth as much as $314 million.

Dagens Industri:
- Nokia Oyj(NOK) forecasts that services in its Services & Software unit will grow on average 20% to 30% a year, citing Niklas Savander, head of the unit. The Services & Software unit should reach sales of more than $1.5 billion in two to three years with profitability on par with the mobile-phone division.

OttawaCitizen.com:
- Why commodity investors better watch their potash. The problem with bubbles is that they’re great while they last, and those soapy ones are pretty to look at, but there’s always the unease of not knowing when they’re going to burst. Skyrocketing commodity prices have analysts talking of “atmospheric price levels” to come. Apart from the price of oil, one of the biggest talking points has been potash and its perpendicular rise. Potash Corp.(POT) has soared 234% from a 52-week low of $65.46 to a high of $218.50. “The lofty levels of fertilizer stock prices appear to be premised on the indefinite sustainability of recently higher potash prices,” said Merrill Lynch(MER) chief strategist David Wolf. Wolf made the following four observations: “First, there’s plenty of potash – nearly 300 years of known reserves at current consumption rates, according to the Intl. Fertilizer Assoc. Second, you could hardly have found a worse investment in modern times – according to the US Geological Survey, real potash prices have fallen 95% from their record peak in 1919 through the recent trough in 2003. Third, the current combined market cap of the three largest North American producers – Potash Corp.(POT), Agrium Inc.(AGU) and Mosaic Co.(MOS) – is bigger than the value of all of the potash ever sold in the history of the world. Fourth, and in our view most importantly, we believe that the euphoria in the fertilizer sector reflects a potentially dangerous broader trend across the commodity spectrum – investors mapping evident short-term supply/demand imbalances into expectations of persistent long-term supply/demand imbalances,” Wolf said.

Bear Radar

Style Underperformer:

Small-cap Growth -.50%

Sector Underperformers:

Airlines (-3.55%), Computer Hardware (-3.14%) and Road & Rail (-1.3%)

Stocks Falling on Unusual Volume:

MSTR, SEPR, QLGC, PMTI, MDVN, ERIC, ASFI, PNSN, BOOM, JAVA, BARE, RATE, EHTH, ENH, LZ and THO

Stocks With Unusual Put Option Activity:

1) BARE 2) MNST 3) JAVA 4) S 5) PPC

Unemployment Falls, Payrolls Better-Than-Expected, Factory Orders Jump

- The Change in Non-farm Payrolls for April was -20K versus estimates of -75K and -81K in March.

- The Unemployment Rate for April fell to 5.0% versus estimates of 5.2% and 5.1% in March.

- Average Hourly Earnings for April rose .1% versus estimates of a .3% gain and a .3% gain in March.

- Factory Orders for March rose 1.4% versus estimates of a .2% increase and an upwardly revised -.9% decline in February.

BOTTOM LINE: The US lost fewer jobs than forecasts in April, and the unemployment rate dropped, signaling that the slowdown may be milder than economists had expected, Bloomberg reported. The construction industry cut 61,000 jobs during the month. Service industries, which include banks, insurance companies, restaurants and retailers, added 90,000 jobs last month, the most this year. The advance was propelled by business and professional services, along with health and education jobs. The current unemployment rate of 5.0% remains well below the 20-year average of 5.4%, notwithstanding significant housing-related job losses. Average Hourly Earnings are now growing 3.4% year-over-year versus the 20-year average of 3.3%. I expect the job market to improve modestly over the intermediate-term as companies gain confidence in the economy, fiscal/monetary stimuli take hold, inflation decelerates, the American Axle strike ends, exports continue to boom and the drag from housing subsides.

Orders to US factories rose more than forecast in March on strong demand for US products from overseas customers, Bloomberg reported. The US trade deficit shrank in the first quarter to the lowest level in more than five years on record exports. Excluding orders for transportation equipment, demand rose 2.2%, the most in a year. Orders for machinery surged 6.4% during March. Shipments of non-defense capital goods excluding aircraft, which are used to calculate GDP, rose 1.1% versus a 1.7% decline in February. Orders for military gear fell 5.5% in March. Aircraft orders jumped 6.6% and automobile bookings increased 1.4%. Total sale at manufacturers rose 1.1% in March versus a 1.9% decline in February. The number of goods on hand was unchanged at 1.27 months’ supply at the current sales pace. I expect Factory Orders to rise again in April. The US Dollar Index is rising .21% and the 10-year yield is rising 10 basis points on today’s better-than-expected economic data.

Bull Radar

Style Outperformer:

Large-cap Value (+.63%)

Sector Outperformers:

Homebuilders (+2.82%), Construction (+1.9%) and Oil Service (+1.8%)

Stocks Rising on Unusual Volume:

CBEY, MRO, SM, VMED, PVTB, STO, PCBC, DLB, CAB, PHTN, IDTI, RBA, SCRX, AOB, CMVT, MFLO, SCOR, CSTR, BPHX, HNSN, MORN, RDEN, FORR, TSON, EZCH, NTCT, DRIV, UFPT, MNST, CNQR, APEI, SUNH, CPHD, GENC, TGI, B, WBD, CAB, GFA, CQB and ACS

Stocks With Unusual Call Option Activity:

1) DSCO 2) CEPH 3) IBN 4) MNST 5) JAVA

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