Stocks Higher into Final Hour on Less Economic Pessimism, Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Gaming longs, Computer longs and Software longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly bullish as the advance/decline line is slightly higher, most sectors are rising and volume is below average. Investor anxiety is around average. Today’s overall market action is mildly bullish. The VIX is falling 2.2% and remains above average at 17.75. The ISE Sentiment Index is n/a and the total put/call is slightly below average at .85. Finally, the NYSE Arms has been running about average most of the day and is currently .94. Tech stocks are relatively strong again today. The MS Tech Index is now flat for the year. I expect tech stocks to continue to outperform over the intermediate-term. This year’s best performing style, Mid-cap Growth, is rising another .9% today and is now .49% higher for the year. The Citigroup US Economic Surprise Index is rising to -11.0 today, up from -100 in March. As well, the EU Index and Japanese Index are still below the US at -26.70 and -26.50, respectively. The European Financial Sector Credit Default Swap Index is falling another 3.58 basis points today to 63.12 basis points, despite weakness in financial equities. This is down from 78.0 basis points just 4 days ago. As well, the North Amer. High-Yield CDS Index is falling 12.32 basis points to 551.97 basis points, which is down from a high of 786.65 basis points on March 18th. Despite the .6% gain in crude oil today, heating oil is falling another 1.0%. The CRB RIND Index, which is a measure of price movements of 22 sensitive basic commodities that are used in the initial stages of production, has declined 5% over the last two weeks and is close to testing its 200-day moving-average. Nikkei futures indicate a +102 open in Japan and DAX futures indicate a +24 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as less economic pessimism and diminishing credit market angst offset profit-taking and higher energy prices.

Today's Headlines

Bloomberg:
- Yields over benchmark rates on securities backed by credit card and auto loan payments narrowed this month in a sign that demand is returning for debt tied to consumer payments, according to Merrill Lynch(MER).
- Vietnam’s dong weakened, completing a fourth weekly loss, on speculation accelerating inflation and a widening trade deficit will increase the demand for US dollars. “Demand for US dollars is very high at the moment, particularly after the inflation and trade deficit reports,” said Bui Thi Kim Oanh, who manages a Vietnam equity fund.
- Global grain stockpiles will be 1.6 percent higher than previously forecast, led by gains in wheat production, the International Grains Council said.
- Canada’s economy unexpectedly shrank in the first quarter, the first drop in almost five years, dragged down by lower automobile exports, giving the Bank of Canada more reason to cut borrowing costs again next month.
- India’s economic growth held at the weakest pace since 2005 as the highest interest rates in six years discouraged consumer spending and investment.
- The US dollar was headed for a second straight monthly gain against the yen and euro as gains in stocks signaled traders are more optimistic the economy will improve.

NY Times:
- NY Governor Paterson Focuses on Gay, Lesbian Rights.

Washington Post:
- CIA Director Michael Hayden said the terrorist network al-Qaeda is essentially defeated in Iraq and Saudi Arabia and on the run in the rest of the world. Hayden said Osama bin Laden is losing the battle for hearts and minds in the Islamic world and has lost the ability to exploit the Iraq war to win new recruits. “The ability to kill and capture key members of al-Qaeda continues, and keeps them off balance – even in their best safe haven along the Afghanistan-Pakistan border,” Hayden said. Those comments are a marked positive change from a CIA assessment from two years ago.

USA Today:
- Hurricane high-risk areas have lost residents.

Reuters:
- Oil bubble could prove threat to pension funds. Pension funds and other investors who rushed into oil through commodity indexes this year chasing big returns as other assets classes tanked could face steep losses if prices fall from record highs. A sell-off in oil could spell big losses for the pension funds, municipal funds, college funds, unions and other groups that jumped out of equities-market plays and into the indexes, but have little experience or flexibility to deal with fundamental changes in commodities. “A lot of the accounts that have moved into commodities over the last 8-12 months clearly don’t belong in this forum,” said Peter Beutel, president of Cameron Hanover. “It means that when this market turns, these people are going to get hurt badly, and there will be tons of lawsuits because they have no understanding how quickly commodities markets can turn and leave them in the dust,” he explained. Analysts said that while speculators such as hedge funds, which can be long or short markets, are frequently blamed for driving up prices, it may actually be pension and college funds investing money for average citizens that are helping cause fuel and food riots around the globe.

Financial Times:
- On Wall St: Hedge funds take ‘plain vanilla’ approach. With the average hedge fund in the $2,500bn global industry posting negative returns so far this year, investors must start to question just what they are paying for when they hand over their hefty fees to managers.

Daily Telegraph:
- Asian countries begin to burst the oil bubble. One by one, countries across Asia and the Middle East are being forced to abandon price controls on fuel and energy, bring hundreds of millions of consumers face to face with the true market cost of oil. Egypt has raised prices 40%, Indonesia by 33%, Taiwan by 20% and Sri Lanka raised diesel/petrol prices by 25%. India may follow soon. “The situation is alarming. We need to stem the rot,” said India’s energy secretary. While China has so far resisted calls for price freedom, analysts predict a change in tack after the finish of the Beijing Olympics.
- Electric cars: The next big thing.

Dagens Industri:
- Scania AB and Ericsson AB are among Swedish companies meeting the Iraqi government in Stockholm today to discuss investments and business opportunities in the country. Iraq holds great potential, and the country used to be truckmaker Scania’s biggest export market in the early 1980s, citing a Scania spokesman.

Al-Rai:
- Iraq may resume crude oil exports to Jordan at discounted prices, citing Iraqi Vice President Tariq al-Hashemi. Supplies by truck were halted in 2003 after the US-led liberation of Iraq.

Bear Radar

Style Underperformer:

Small-cap Value -.54%

Sector Underperformers:

Airlinesirlind (-1.44%), Banks (-1.0%) and Papers (-.94%)

Stocks Falling on Unusual Volume:

JCG, DB, ARGN, OVTI, MDCI, SIGM, EDU and WY

Stocks With Unusual Put Option Activity:

1) LPX 2) MRVL 3) WYE 4) JCG 5) MHK

Incomes Rise More Than Estimates, Spending as Expected, Core Inflation Decelerates, Chicago PMI Rises Again, Confidence Extraordinarily Depressed

- Personal Income for April rose .2% versus estimates of a .1% gain and an upwardly revised .4% increase in March.

- Personal Spending for April rose .2% versus estimates of a .2% rise and a .4% gain in March.

- The PCE Core for April rose .1% versus estimates of a .1% gain and a .2% rise in March.

- The Chicago Purchasing Manager Index for May rose to 49.1 versus estimates of 48.5 and a reading of 48.3 in April.

- The final reading for the Univ. of Mich. Consumer Confidence reading for May came in at 59.8 versus estimates of 59.5 and a prior estimate of 59.5.

BOTTOM LINE: Personal income for April rose more than economists expected as spending met estimates and a gauge of inflation decelerated, Bloomberg reported. The PCE Core, the Fed’s favorite inflation gauge, rose 2.1% year-over-year, down from 2.5% during February of last year and below the 20-year average of 2.4%. Spending on services, which account for almost 60% of all outlays, increased .1% for the second straight month. The Treasury said last week that it had sent $4.9 billion in tax rebates in the fourth week of the program, bringing the total distributed so far to $45.7 billion. More than $110 billion will eventually be sent. I expect spending and income to accelerate modestly into year-end and inflation to decelerate meaningfully from current levels.

A measure of US business activity accelerated in May. The survey suggests export demand is bringing in new orders and kept manufacturing from slowing as much as prior economic slowdowns. The New Orders component surged to 56.1, the highest since December, versus 53.0 in April. The Order Backlog component jumped to 46.8 from 39.5 the prior month. The Inventories component fell to 42.2 from 51.9 the prior month. The Employment component of the index rose to 41.2 from 35.3 the prior month. The Prices Paid component rose to 87.5 from 82.9 in April. I expect manufacturing to continue to improve through year-end on inventory rebuilding, a falling prices paid component, an end to the American Axle strike, fiscal/monetary stimuli, an end to credit turmoil and strong exports.

Confidence among US consumers fell in May to the lowest level in 28 years, Bloomberg reported. The Expectations component fell to 51.1, the lowest since October 1990. The Present Situation component, which gauges consumer attitudes towards their current financial situation, actually rose to 73.3 from 71.7. I still expect confidence to improve meaningfully through year-end as the job market improves, extreme housing fears subside, energy/food prices fall, election uncertainty ends, inflation decelerates, interest rates remain relatively low, stocks rise, the US dollar strengthens and the effects of fiscal/monetary stimuli take hold.

Bull Radar

Style Outperformer:

Mid-cap Growth (+.83%)

Sector Outperformers:

Alternative Energy (+1.83%), Construction (+1.65%) and Networking (+1.41%)

Stocks Rising on Unusual Volume:

MRVL, GMXR, GDP, FSLR, CLWR, CBEY, HMC, TM, CMC, STP, CLF, UBB, DELL, WIND, DTSI, ENER, JRJC, CTRN, IMCL, JOYG, JASO, VOCS, DAKT, SPWR, VDSI, ATHN, RIGL, NDAQ, HRS, HXL and PVA

Stocks With Unusual Call Option Activity:

1) MAS 2) NT 3) HK 4) CIT 5) DELL

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