Stocks Mostly Higher into Final Hour on Falling Energy Prices, Less Economic Pessimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Biotech longs, Internet longs and Commodity shorts. I covered my (IWM)/(QQQQ) hedges and then added them back today, thus leaving the Portfolio 75% net long. The tone of the market is slightly bullish as the advance/decline line is mildly higher, sector performance is mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 4.8% and remains above average at 21.2. The ISE Sentiment Index is below average at 126.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running above average most of the day and is currently 1.12. I am very surprised at the severe negative investor reaction to the (MBI)/(ABK) news, which should have been mostly priced in. The (XLF) is down .74%, despite an upside reversal in (LEH) shares. A government official just said the Fed, SEC are not ordering Lehman to raise capital and that the co. is not facing a Bear Stearns-type bank run. He also said that the Fed, SEC are in daily contact with Lehman and that the Fed loan program helps avoid a Bear-type run. This should help calm fears. The European Financial Sector Credit Default Swap Index is increasing another 4.4% today to 75.27 basis points. On the positive side, growth stocks are substantially outperforming value stocks, with tech shares especially firm. As well, considering the 2-3% losses in many major emerging markets last night and this morning, our major averages are holding well. The US dollar continues to trade very well and oil remains very “heavy.” I still expect a substantial increase in demand for US stocks from the global “herd” of underweight portfolio managers over the intermediate-term. Nikkei futures indicate a -5 open in Japan and DAX futures indicate a -14 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on lower and short-covering.

Today's Headlines

Bloomberg:
- Michael Fitzpatrick, vice president for energy risk management at MF Global sees potential for oil near $86/bbl. (video)
- American Express(AXP), the biggest credit-card company by US purchases and cash advances, led the Dow higher after affirming profit this year may be higher than some analysts expected.
- China’s stocks fell to a six-week low on speculation government measures to control prices will dent earnings for steel and coal producers. The benchmark CSI 300 has plunged 34% this year, the most among the world’s 20 biggest equity markets.
- The OECD cut its forecast for global growth, while cautioning central banks against reducing interest rates. Economic expansion in the OECD’s 30 members will slow to 1.8% this year and 1.7% in 2009.
- European Retail Sales Drop by Record on Gas, Food Costs.
- Dollar Trades Near Two-Week High Versus Euro on U.S. Resilience.
- Monsanto(MON), the world’s largest seed producer, pledged to develop seeds that will double yields for three major row crops to meeting rising global demand for food, fuel and fiber.
- Copper Declines to Two-Month Low in NY on Demand Concerns.
- Carlyle Group co-founder David Rubenstein said private-equity firms will buy smaller asset managers to expand beyond the leveraged-buyout business.
- MBIA, Ambac Credit Ratings Under Threat at Moody’s.
- Lehman Brothers(LEH) snapped a three-day decline in NY trading after Merrill(MER) told clients to buy the shares.
- Malaysia will raise fuel and power prices as record oil costs force the government to cut subsidies that keep domestic prices artificially low. The price of 97-RON grade gasoline will increase 41% tomorrow.
- The cost of protecting the debt of Lehman Brothers(LEH) fell after a Merrill analyst said that funding concerns at the securities firm are exaggerated. Credit default swaps on Lehman fell to 260 basis points from 275 basis points earlier in the morning.

Wall Street Journal:
- Dangers spared outweigh Iraq war origins says Fouad Ajami.
- Washington’s push for tougher measures to rein in energy and agricultural commodities markets gained steam Tuesday.
- Drake Capital Closes Two More Hedge Funds After Losses.

NY Times:
- On Long Island, a Push to Nurture Biotech Work.
- Lehman(LEH) Battles an Insurgent Investor. For eight months now, David Einhorn of Greenlight Capital, a rabble-rousing hedge fund manager, has pilloried the venerable Lehman Brothers in an effort to drive down the bank’s stock prices, which he is short. Critics says he is needlessly fanning fears about the health of the financial industry at the very moment executives are struggling to stabilize their ailing companies. Many on Wall Street still wonder if hedge funds like Greenlight helped bring down Bear Stearns(BSC) and spread false rumors about the bank, a possibility the SEC is investigating. Mr. Einhorn instigated the latest dive in Lehman’s stock price two weeks ago when he encouraged other investors to short the stock at a large conference in NY. It is impossible to quantify Mr. Einhorn’s influence on Lehman’s stock price. But hours before his speech two weeks ago, trading volume exploded for Lehman stock puts, which are options to sell the stock and profit if it falls in value.
- The priest whose mocking of Senator Hillary Clinton stirred more racially tinged controversy in the presidential campaign was effectively placed on leave from his pastoral work Tuesday.

TheStreet.com:
- Google’s(GOOG) Android Preview Mind-Blowing.

Boston Globe:
- Clinton backers push her for VP.

Guardian:
- Jimmy Carter tells Barack Obama not to pick Hillary Clinton as running mate.

Interfax:
- Russian consumer prices rose 7.7% through May. Price growth accelerated to a monthly 1.4% in May from .6% in the same month last year, citing a govt. official.

Bear Radar

Style Underperformer:

Large-cap Value -.39%

Sector Underperformers:

Coalirlind (-2.57%), Banks (-.97%) and Homebuilders (-.77%)

Stocks Falling on Unusual Volume:

WNR, CCOI, SUN, PZE, BEAV and TGI

Stocks With Unusual Put Option Activity:

1) AXL 2) VRSN 3) BJ 4) ALTR 5) STT

Productivity Accelerates, Service Sector Expanding, ADP Employment Jumps

- Final 1Q Non-farm Productivity rose 2.6% versus estimates of a 2.5% gain and prior estimates of a 2.2% increase.

- Final 1Q Unit Labor Costs rose 2.2% versus estimates of a 2.0% gain and prior estimates of a 2.2% increase.

- ISM Non-Manufacturing for May came in at 51.7 versus estimates of 51.0 and a reading of 52.0 in April.

- ADP Employment Change for May was +40K versus estimates of -30K and an upwardly revised +13K in April.

BOTTOM LINE: US worker productivity in the first quarter accelerated more than previously estimated, Bloomberg reported. Labor costs climbed at a revised 2.2% pace, the same as estimated and down from a 4.7% gain in 4Q 07. Unit labor costs account for about two-thirds of the cost to produce a good or service. Productivity at non-financial corporations, a gauge closely watched by former Fed chairman Greenspan and other policy makers, surged at a 4.6% rate during 1Q, almost twice as much as during 4Q 07. I still expect unit labor costs to remain muted and productivity to remain healthy over the intermediate-term.

US service industries, which make up almost 90% of the US economy, continued to expand in May, Bloomberg reported. The New Orders component rose to 53.6, the highest this year, versus 50.1 in April. The Employment component fell to 48.7 from 50.8 the prior month. The Prices Paid component increased to 77.0 versus 72.2 the prior month. I expect the ISM Non-Manufacturing Index to accelerate further this month and to continue to modestly improve through year-end on decelerating inflation, rising consumer confidence, a firmer job market, fiscal/monetary stimuli, relatively low interest rates and rising stock prices.

Companies in the US unexpectedly added jobs in May by the most since January, Bloomberg reported. As well, the ADP report does not include government jobs. Services providers added 77,000 workers and construction jobs declined by 13,000. Financial Services companies added 5,000 jobs. Large companies cut payrolls by 18,000, while small companies added 61,000 jobs in May. I expect Friday’s jobs report to modestly exceed estimates of -60,000 and the job market to show further improvement through year-end.

Bull Radar

Style Outperformer:

Large-cap Growth (+.74%)

Sector Outperformers:

Airlines (+3.26%), I-Banks (+2.41%) and Semis (+2.08%)

Stocks Rising on Unusual Volume:

WBMD, HMC, SWKS, VRSN, XLNX, NSANY, ORCC, DIS, GEOY, NGPC, AEHR, HOGS, BOBE, DSCP, AUXL, NVEC, NVTL, CPRT, AMWD, UCBI, CHKP, ACIW, ALTR, MDCO, SKYW, VRSN, KNDL, WFMI, GES, SJM, LEH and KCP

Stocks With Unusual Call Option Activity:

1) STT 2) HOT 3) GT 4) SBUX 5) MHP

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