Stocks Lower into Final Hour on Rising Credit Market Angst, Global Growth Concerns

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Software longs, Internet longs, Computer longs and Alternative Energy longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is substantially lower, most sectors are declining and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 12.5% and remains above average at 20.04. The ISE Sentiment Index is low at 109.0 and the total put/call is above average at 1.10. Finally, the NYSE Arms has been running high most of the day and is currently 1.32. The (XLF) is down 1.4% today on the S&P downgrade news. I am somewhat surprised it isn’t down more. The European Financial Sector Credit Default Swap Index is rising 11.6% today to 70.72 basis points. As well, the North Amer. Inv. Grd. Credit Default Swap Index is rising 6.2% and the TED spread is gaining 7.1% today. While the financials aren’t as weak as I would have expected, the broad market is weaker than I would have expected given today’s news. This is likely due to increasing global growth concerns. One of my longs, (WMS), was rated Overweight with a target of $45 today by JPMorgan. I think the stock is at an attractive entry point for both long and short-term investors. Nikkei futures indicate a -240 open in Japan and DAX futures indicate a -8 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as less economic pessimism is offset by rising credit market angst.

Today's Headlines

Bloomberg:
- Commodities derivatives held by banks expanded 27% last year to $9 trillion, according to International Financial Services London. Banks held $3.6 trillion in commodities derivatives in 2005. “We estimate most of the growth was in energy,” said Marko Maslakovic, senior economist of the IFSL.
- The cost to protect the debt of banks and securities firms from default rose after S&P downgraded Lehman(LEH), Merrill(MER) and Morgan Stanley(MS) because of the potential for more writedowns.
- Abiomed Inc.(ABMD), the maker of the first fully implantable artificial heart, rose the most in almost five years after the FDA cleared its tiny heart pump for temporary use.
- BlackRock Inc.(BLK) plans to redeem more than $1.5 billion of tax-exempt auction rate securities from investors. The buyback exceeds the $1 billion target the NY-based company set in April.
- Avant Immunotherapeutics(AVAN) rose the most in more than five years in NY after two studies of a vaccine it is developing with Pfizer Inc.(PFE) delayed tumor growth in patients with brain cancer.
- Iran, OPEC’s second-largest oil producer, increased the number of oil tankers idling in the Persian Gulf to at least 14, indicating it may be storing more crude, ship-tracking data show.
- China’s central bank cautioned against “exaggerating” a slowdown in demand for the nation’s exports, signaling that it won’t loosen monetary policy.

Wall Street Journal:
- Boeing Co.(BA) and Airbus SAS production delays are giving the world’s airlines a break in their profit squeeze because industry capacity is growing more slowing than expected, giving rise to increased demand.
- Nvidia(NVDA) to Introduce Chips for Pocket-Size Gadgets.

NY Times:
- US deaths in Iraq fell to the lowest monthly level since 2003, as security improved and enemy attacks declined. The total number of attacks last week dropped to their lowest in any one week since March 2004.
- Barack Obama’s speech at Wesleyan University about public service tellingly failed to mention the military as an admirable form of service.
- Investors Sue Hedge Fund Over Redemptions.

WardsAuto.com:
- The US may be addicted to oil, but a leading scientist says it’s a habit the nation probably could kick. “Energy independence is a realistic goal for the United States of America,” says David Greene, a corporate fellow at the Oak Ridge National Laboratory, the Department of Energy’s largest science-and-energy research unit. “Make the cost of oil independence to the economy so small it will have no affect on economic, military or foreign policy,” he says. Greene estimates that the Energy Independence and Security Act(EISA) signed into law last year by President Bush, which includes an increase in the corporate average fuel economy standard to a US-fleet average of 35 mpg by 2020, will trim light-vehicle consumption by the equivalent of 3 million barrels of oil per day. At the same time, the law will increase daily biofuels use by the equivalent of 1.5 million barrels of oil. Greene’s estimates would trim US oil dependence about $100 billion a year by 2030, .5% of GDP. Put another way, US oil consumption would decline 33% from today’s pace and US oil supplies would increase by 33% its current state. The EIA confirms the trend. Accounting for a rise in ethanol use, the EIA forecasts US petroleum consumption will fall by 330,000 barrels daily in 2008. Its long-term outlook shows consumption of liquid fuels and substitutes, such as ethanol, declining 41% in 2030 from 2005.

NY Post:
- Wall Street executives are abandoning expensive limo rides and their gas guzzlers as soaring fuel costs make them sweat – and are opting to bike to work.
- The US share of initial public offerings added to the Russell Global Index has declined from 44 percent in 1997 to 27 percent in 2007 - and it may drop to a new low this June when Russell Investments reconstitutes its indexes at the end of the month, the company said. In 1997, the US accounted for 226 of the 519 IPOs added to the index compared to only 151 of the 566 IPOs added in 2007.

Boston Globe:
- Hologic(HOLX) expects its 3-D mammography to be ready in 2009.

AppleInsider:
- Apple's(AAPL) operating system market share rose nearly 6 percent during the month of May to 7.83 percent, according to access reports from web properties tracked by NetApplications. During the same period, Microsoft's(MSFT) combined share of the OS market dropped by just over a half a percentage point. On the browser front, Safari also saw its share rise by a little over 7.5 percent to close out the month with 6.25 percent of the overall browser market. Meanwhile, Microsoft's Internet Explorer lost nearly a full percentage point of browser share, falling to 73.75 percent. Telefonica-owned Movistar, which caters to 22 million customers, formally announced an agreement with Apple to distribute the next-generation iPhone in Spain.

Ethanol Producer Magazine:
- Verenium’s cellulosic ethanol demonstration plant opens.

Daily Mail:
- How the Masters of the Universe are murdering the middle class by gambling on black gold.

El Financiero:
- S&P said Mexico can’t afford to continue subsidizing food and gasoline for consumers. The government will have to lift price controls on gasoline and staple foodstuffs, while working to improve productivity in the agricultural and oil sectors, citing Victor Manuel Herrera, managing director of S&P in Mexico. Mexico’s President Felipe Calderon last week said the government plans to spend $19.3 billion on energy subsidies this year.

Nikkei Telecom 21:
- Nomura Holdings Inc. will begin investment trust services in the US.

Bear Radar

Style Underperformer:

Small-cap Value -1.73%

Sector Underperformers:

Networkingirlind (-4.52%), Airlines (-4.08%) and HMOs (-3.62%)

Stocks Falling on Unusual Volume:

IBN, HDB, IMCL, SGMO, KCAP, BRNC, CHTT, ZEUS and HRS

Stocks With Unusual Put Option Activity:

1) IBN 2) FMCN 3) PXP 4) ACOR 5) AMT

Construction Spending Falls Again, ISM Manufacturing Further Improves

- Construction Spending for April fell .4% versus estimates of a .6% decline and an upwardly revised .6% decline in March.

- ISM Manufacturing for May rose to 49.6 versus estimates of 48.5 and a reading of 48.6 in April.

- ISM Prices Paid for May rose to 87.0 versus estimates of 85.0 and a reading of 84.5 in April.

BOTTOM LINE: Spending on US construction projects in April fell for the sixth time in seven months, Bloomberg reported. Private residential construction spending fell 2.3% after a 3% decline the prior month. Private non-residential construction gained 1.6%, the third straight monthly gain. Total non-residential construction is up 11.6% from year ago levels. Homebuilding in 1Q fell at an annual pace of 25.5%, the most since 1981, and subtracted 1.17 percentage points from overall growth. However, the US economy still grew at an upwardly revised .9% rate during 1Q. While construction will remain muted over the intermediate-term as homebuilders pair inventories, it should begin subtracting less from overall growth as the rate of decline slows.

Manufacturing in the US came in better-than-forecast in May, easing concern the economic slowdown will intensify, Bloomberg reported. The New Orders component of the index rose to 49.7 versus 46.5 the prior month. The Production component rose to 51.2 from 49.1 in April. The Export component surged to 59.5, the highest since May 2004, versus 57.5 in April. The Inventory component of the index fell to 48.0 versus 48.1 the prior month. The Employment component of the index rose to 45.5 from 45.4 the prior month. ISM Manufacturing should show expansion, a reading above 50.0, over the coming months as companies rebuild inventories, the effects of fiscal/monetary stimuli take hold, exports remain strong and auto manufacturing accelerates. I still expect the Prices Paid component to fall meaningfully from current levels through year-end.

Bull Radar

Style Outperformer:

Mid-cap Growth (-.89%)

Sector Outperformers:

Construction (+.19%), Energy (+.18%) and Hospitals (-.06%)

Stocks Rising on Unusual Volume:

BEXP, WNR, MEE, ACI, HMC, GM, SNE, FFBC, WIND, FTBK, IWA, ACOR, ABMD, GEOI, GMXR, ULBI, GIFI, SNHY, EXAC, CSIQ, JRCC, TBSI, AXYS, LULU, IIVI, ACAP, SPSX, TKG and EDU

Stocks With Unusual Call Option Activity:

1) AMT 2) MAS 3) PSUN 4) ACOR 5) TSN

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