Stocks Falling into Final Hour on Parabolic Rise in Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Internet longs and Software longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is very 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 very bearish. The VIX is rising 21.8% and remains above average at 22.7. The ISE Sentiment Index is below average at 126.0 and the total put/call is above average at 1.12. Finally, the NYSE Arms has been running high most of the day and is currently 1.58. The spike is oil is a major negative for the broad US stock market. However, it has gotten to the point that any rise in oil from current levels will likely result in a corresponding spike in global demand destruction, which should accelerate the bursting of the commodity bubble. Nigeria just said that “OPEC is ready to intervene to cool world oil prices.” Prices anywhere near current levels are doing massive irreparable long-term damage to the future of the Middle East’s major export, in my opinion. This is one of the main reasons that the Middle Eastern bourses remain in their bear markets that began two years ago, in my opinion. The Saudi Tadawul Index is down 52% from its high set in February 2006. Nikkei futures indicate a -389 open in Japan and DAX futures indicate a -11 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering.

Today's Headlines

Bloomberg:
- President Bush said the administration is seeing signs that the economic stimulus is beginning to work and urged Congress to make permanent his tax cuts. “The last thing America needs is a tax increase,” he said.
- Industrial Production in Germany, Europe’s largest economy, unexpectedly declined in April, the second report in as many days to suggest Europe’s largest economy is cooling.
- Crude oil soared more than $11/bbl. as historic investment fund speculation continues unabated after the US dollar weakened and an Israeli deputy made aggressive comments towards Iran.
- American Superconductor(AMSC), a leading energy technologies company, announced today that it has licenses one of its proprietary wind turbine designs to Taiwan-based TECO Electric & Machinery, Ltd.(TECO), the world’s third-largest motor manufacturer. Under the terms of the contract, AMSC's wholly owned AMSC Windtec(TM) subsidiary will license to TECO the design for its FC-2000, a proprietary 2 megawatt (MW) IEC Class I (high wind speed) wind turbine.

NY Times:
- The FTC has opened a formal antitrust investigation of Intel(INTC), the world’s largest maker of computer microprocessors, for anticompetitive conduct, government officials and lawyers involved in the proceeding said Friday.

NY Post:
- Lehman Brothers(LEH) is considering releasing its second-quarter earnings a week earlier, and tying that announcement to news about a plan to raise capital, as the investment bank looks to quiet doubts about its future.

Washington Post:
- Senate Democrats May Pull Climate Bill. If this week’s Senate debate on a proposed cap-and-trade system for greenhouse gases was supposed to be a dress rehearsal for climate legislation, things are not looking too good for opening night.

Payrolls Fall Less Than Estimates, Unemployment Rises, Earnings Accelerate, Wholesale Inventories at Record Low

- The Change in Non-farm Payrolls for May was -49K versus estimates of -60K and -28K in April.

- The Unemployment Rate for May rose to 5.5% versus estimates of 5.1% and 5.0% in April.

- Average Hourly Earnings for May rose .3% versus estimates of a .2% gain and a .1% increase in April.

- Wholesale Inventories for April rose 1.3% versus estimates of a .4% gain and a .1% increase in March.

BOTTOM LINE: The decline in non-farm payrolls was slightly less than economists had expected and the unemployment rate rose more than expectations, Bloomberg reported. Payrolls at builders fell 34,000 versus a 52,000 decline the prior month. Financial firms pared payrolls by 1,000 versus a 1,000 gain the prior month. Service industries, which include banks, insurance companies, restaurants and retailers, added 8,000 workers. The rise in the unemployment rate, due to an apparent surge in teenage unemployment, is surprising given the other data I analyze. However, it is still around the 20-year average of 5.4%. Moreover, Average Hourly Earnings are growing at a healthy 3.5% rate year-over-year versus the 20-year average of 3.3%. I still expect the job market to improve modestly through year-end.

Inventories at US wholesalers rose more than forecast in April, led by a surge in petroleum and metals, Bloomberg reported. Sales jumped 1.4% after climbing 1.8% in March. Distributors had enough goods on hand to last 1.09 months at the current sales pace, matching the record low set in November of last year. The increase in wholesale inventories was led by an 8.8% jump in petroleum, the largest since January 2006, and a 2.9% increase in metals, the most in more than a year. I still expect inventory rebuilding to help add to overall economic growth through year-end. The US Dollar Index is falling .7% and the 10-year yield is declining 12 basis points on today’s news. However, these declines, along with today’s stock market decline, are mainly the result of the sharp increase in oil. Despite some saber-rattling talk from an Israeli deputy regarding an attack on Iran, the Intrade.com odds of a US and/or Israeli air strike on Iran before year-end are just 27%, which is down from 50% in April. In my opinion, the recent spike in oil is mainly the result of the perception by traders that Congress is going to doing a lot of talking, but will intentionally refrain from any meaningful actions that would prick the commodities bubble. We are at the point that the odds of a severe global slowdown, or even contraction, rise with every uptick in crude from current levels. I continue to believe a bursting of the commodity bubble will lead to substantially higher US stock prices over the intermediate/long-run.

Bull Radar

Style Outperformer:

Mid-cap Growth (-.86%)

Sector Outperformers:

Oil Service (+.82%), Energy (+.61%) and Semis (-.12%)

Stocks Rising on Unusual Volume:

KWK, CHK, GLBL, SQNM, IPHS, MVSN, ASMI, EPAY, AMSC, SYNT, CIEN, CWEI, CSIQ, ENER, BUCY, PLLL, SOLF, STLD, CENX, NSM and ODC

Stocks With Unusual Call Option Activity:

1) SWN 2) DNR 3) FMCN 4) PX 5) CHK

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Friday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting company debt from default fell for the first time this week as stocks rallied the most in almost two months and Verizon Wireless(VZ) agreed to buy Alltel Corp.(AT) and assume $22.2 billion of debt.
- National Semiconductor(NSM) reported a smaller-than-expected drop in fourth-quarter profit and predicted earnings growth this year after it updated factories and focused on higher-priced chips. The shares surged 10% in after-hours trading.
- Lehman Brothers(LEH) may raise as much as $5 billion in capital by early next week. Lehman executives are talking to at least one US pension fund and an overseas investor to discuss terms of a transaction. “We are buyers of the stock on the assumption that CEO Dick Fuld will steady the Lehman ship and, with greater stability, the stock will appreciate,” said Deutsche Bank AG analyst Mike Mayo. Lehman shares already reflect “worst-case scenarios” for the investment bank, Mayo said.
- The Group of Eight industrialized countries may try to convince China and India to agree to monitoring of cuts in energy use that Japan says will fail without support from the world’s fastest-growing economies.
- Vietnamese stocks may extend this year’s worst slump among global markets as the government raises interest rates to quell inflation, Merrill Lynch said. The Ho Chi Minh Stock Index extended a record losing streak to 21 days on concern a widening trade deficit and inflation at a 16-year high will prompt overseas funds to sell local holdings. The benchmark index, at its lowest in 27 months, has lost 58% just this year.
- Short interest on the NYSE jumped 2.73% the last two weeks of May to a new record of 16,431,000,000 shares. Here are the top 5 short interest increases, decreases and total positions as of May 30^th.
- New NYSE short targets. Here are the 25 NYSE stocks with the largest percentage increase in short interest relative to their float from May 15^th through May 30^th.

MarketWatch.com:
- Bond timers are bearish. Dejected newsletters a good sign for contrarians.

Wall Street Journal:
- Chinese security forces are battling to contain antigovernment dissent across the Tibetan plateau, nearly three months after violent clashes started in Tibet’s capital, Lhasa.

BusinessWeek.com:
- Dimon May Go Shopping. The JPMorgan(JPM) CEO dodged subprime, bought Bear, and still has funds to spare.

NY Times:
- Airlines Rush to Go Small. With fuel prices almost double what they were a year ago, airlines have switched strategies from expansion to downsizing.

Forbes.com:
- Insiders Unload Energy, Buy Banks. Overall, insiders continue to be bullish, keeping the overall buy ratio at or near the historically high levels at which it has been perched for the past two quarters. Insiders in the banking industry group continue to remain bullish with extremely unusual buy ratios of well over 50%. Reversing from a bullish beginning of the year, the energy industry group’s insiders now appear to be taking profits. Some of the biggest examples of insider selling are at Hess Corp.(HES), Transocean(RIG) and Chevron(CVX).

c/net:
- BlueFire Ethanol expects to start construction of a plant within weeks that will convert landfill waste into the fuel ethanol. The company expects its first 3-million-gallon-per-year facility to be constructed this year in Lancaster, Calif. It expects to complete applications for a Department of Energy loan this year to build a second plant, capable of making 17 million gallons per year, in an undisclosed place. The third plant on the drawing board would produce 55 million gallons annually. After 2009, the company then intends to build more--at a pace between five and seven plants a year--in the Northeast and Southeast U.S. BlueFire also anticipates international expansion with its modular plant design.

redOrbit:
- In the UK, wind farms such as the Humber Gateway could help to make sure wind energy generates more power than the nuclear industry, according to industry leaders.

Automotive News:
- General Motors(GM) is close to a deal to buy Cobasys LLC, a supplier of batteries for some of the automaker’s hybrid-electric autos. Cobasys is jointly owned by Chevron Corp.(CVX) and Energy Conversion Devices(ENER).

Financial Times:
- Act now to prick the oil price bubble. Bubbles come to an end eventually but there is no guarantee that this will happen soon. The global economy is likely to be forced into a serious crisis if we do not explore the possibility that this is a bubble that needs to be burst quickly. Much of the rise in oil price is the result of activity on the New York Mercantile Exchange, the energy exchange. This is activity by index funds and pension funds that are investing in oil futures, not for direct use but as financial assets for profit. They have invested $260 billion in commodity markets, compared with $13 billion just five years ago. Much of this money is in oil. The Goldman Sachs Commodity Index is heavily weighted by oil - 78 per cent compared with less than 2 per cent for precious metals. The point is that this paper market is not driven by the pressures on demand and supply but entirely by price expectations. How large is the speculator activity? The total open interest - the number of open or outstanding contracts for which an individual is obliged to the exchange because that individual has not yet made an actual contract delivery - in the 2008 contracts on May 21 was 849.472 contracts, which equals 849 million barrels, or nearly 10 times the daily crude oil production. This is a problem that requires immediate action. There is no need for western governments to go down on their knees to Arab oil sheikhs, or to ration oil to the increasingly cash-strapped and angry consumers.

TimesOnline:
- The ECB's abrupt move to a state of high alert over inflation stunned markets and triggered a scramble by the City to reassess the outlook for interest rates on both sides of the Channel. Both the Bank and the ECB held rates yesterday despite worsening economic prospects, spurning pleas for action to buoy growth as they continued their fight to quell rising inflation.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (OI), target raised to $70.

Morgan Stanley:
- Reiterated Overweight on (NSM), target $28.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 futures +.01%.
NASDAQ 100 futures -.01%.

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Earnings of Note
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- (TSL)/.48

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- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for May is estimated at -60K versus -20K in April.
- The Unemployment Rate for May is estimated to rise to 5.1% versus 5.0% in April.
- Average Hourly Earnings for May are estimated to rise .2% versus a .1% gain in April.

10:00 am EST
- Wholesale Inventories for April are estimated to rise .5% versus a .1% decline in March.

3:00 pm EST
- Consumer Credit for April is estimated to fall to $7.2 billion versus $15.3 billion in March.

Other Potential Market Movers
- The Fed’s Evans speaking, Fed’s Bullard speaking, Canaccord Adams Diabetes/Obesity Conference and Sandler O’Neil Global Exchange Trading Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.