Stocks Mostly Higher into Final Hour on Reveral Lower in Oil, Less Economic Pessimism, Diminishing Credit Market Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Gaming longs, Computer longs, Medical longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is bullish. The VIX is falling 1.9% and remains above average at 20.82. The ISE Sentiment Index is slightly below average at 141.0 and the total put/call is slightly above average at .92. Finally, the NYSE Arms has been running about average most of the day and is currently .92. Oppenheimer said today that the prevailing crude oil market fundamentals should have resulted in oil prices at or below last year’s level of around $65/bbl., but instead, oil prices soared by more than 100% over the last year. Oppenheimer believes the government’s inability, or unwillingness, to curb rampant speculation has significantly contributed to the current oil bubble. I completely agree. On the positive side, the Euro Financial Sector Credit Default Swap Index is falling 3.4% today to 74.0 basis points. This is up from a low of 52.66 on May 5^th, but still down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is falling 5.9% today to 107.73, which is also a large positive. Lehman Brothers(LEH), the source of much recent angst, is jumping another 6.2% today. Leading growth stocks are especially strong again today, substantially outperforming the broad market and value stocks. Corporate insider activity remained bullish again last week. (HD), (CHK), (MAS), (VHI), (JAH), (EPD), (DNR), (GE), (DISCA), (HTBK) and (VRX) all saw notable insider buying in their shares last week. Hedge funds remain positioned net short equities. As I said on Friday, given the recent parabolic surge in short interest, positive action in the financial sector and spike in bearish sentiment, I suspect this rally has some legs, as long as commodities behave. Nikkei futures indicate an +51 open in Japan and DAX futures indicate an +26 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, less economic pessimism, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- General Electric Co.(GE) fell as much as 2.2% after JPMorgan Chase(JPM) downgraded the stock to “neutral” from “overweight,” saying slower economic growth may reduce profit.
- Crude oil fell from a record on signs that Saudi Arabia will increase production to stabilize prices. ``When you put in a new record and fail to see any follow- through, it suggests that there is some underlying weakness in the market,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York.
- Goldman, Morgan Stanley Profits Conceal Reliance on Commodities. On Wall Street ,where just about everyone has lost confidence in financial assets, Goldman Sachs(GS) and Morgan Stanley(MS) are making money the old-fashioned way: Buying and selling commodities. The two NY-based companies accounted for about half of the $15 billion of revenue that the world’s 10 largest investment banks generated from commodities last year. Goldman and Morgan Stanley, the two largest U.S. securities firms by market value, don't report commodity revenue separately, lumping it instead into the same line as fixed-income and currency trading. That makes it difficult to assess just how much commodity revenue has cushioned earnings. ``There's just a lot of money chasing these markets,'' said Peter Fusaro, chairman of New York-based Global Change Associates, which advises hedge funds on energy investments. The number of energy-related hedge funds his company lists has more than tripled to 634 in less than four years. Global trading in commodity derivatives on exchanges rose 52 percent to 489 million contracts in the first quarter from a year earlier, according to data compiled by the Bank for International Settlements. Energy and agricultural products led the climb. In the over-the-counter market, the value of outstanding commodity- derivative contracts jumped 26 percent to $9 trillion in December 2007 from a year earlier, the most recent BIS data show. The dominance of Goldman and Morgan Stanley in commodity trading comes as a 60 percent increase in food prices over the past 18 months has sparked riots in 30 countries and as record oil prices have led to hearings in Congress on energy markets. Goldman's value-at-risk in commodity prices, a statistical measure of how much it estimates it could lose in a day of trading, rose to $38 million in the first quarter from $26 million in the prior quarter, the firm reported in March. At the same time, it lowered risk in equities and kept it unchanged in interest rates. Morgan Stanley lifted trading VaR in commodities to $40 million from $34 million, while reducing the risk in equities and currencies, the firm reported.
- Dazzling Dandelions Foment New Commodities Craze.
- Lehman Brothers(LEH) CEO Richard Fuld declared his “confidence” in the valuation of the firm’s mortgage assets.
- Richmond Federal Reserve Bank President Lacker said downside risks to growth have “diminished” and reversing previous interest rate cuts makes “eminent sense” as the economy recovers.

Wall Street Journal:
- Federal prosecutors are preparing to file criminal charges against managers of two Bear Stearns Cos. hedge funds whose collapse helped mark the start of the credit crisis.
- The staff of the FCC has proposed that the agency approve the merger of XM Satellite Radio(XMSR) and Sirius Satellite Radio(SIRI), setting the stage for a final vote on they multibillion-dollar deal in as little as three weeks if the companies meet several conditions.
- Moody’s Investors Service has started including online sales of major retailers as an important factor in its credit ratings.
- Wall Street’s specialty is chasing returns. And these days it’s chasing returns in places like Nigeria and Oman. While frontier markets offer high-return potential, they can also implode.

Washington Post:
- All Biofuels Are Not The Same. Last month the Wall Street Journal accused me of advocating subsidies for food-based ethanol. I ought to "take a vow of embarrassed silence," it said, for claiming that ethanol's contribution to the food crisis is "overblown." The Journal's claims would be laughable if the stakes were not so high. Cellulosic biofuels offer a chance to have an environmentally meaningful impact on petroleum use while benefiting farmers, entrepreneurs and consumers. We face an energy crisis, an environmental crisis and a terrorism crisis all related to oil.

FINalternatives:
- Rough Seas? Prime Brokerages Change Tack To Navigate Choppy Markets.

Reuters:
- Billionaire financier Carl Icahn, who launched a proxy battle in May to replace the board of Yahoo(YHOO) said on Sunday the subsequent deal Yahoo forged with Google(GOOG) “might have some merit.”

Financial Times:
- Almost $20 billion of real estate funds are to be launched this week as equity raising for property investment shows no sign of slowing, despite apparent difficulties in global property markets.

European Central Bank:
- ECB’s Papademos Says Downside Growth Risks Prevail.

Bear Radar

Style Underperformer:

Large-cap Value +.44%

Sector Underperformers:

Telecomirlind (-1.61%), Hospitals (-.93%) and Foods (-.77%)

Stocks Falling on Unusual Volume:

PPC, EAS, CQB, OESX, HLEX, SAFM, FDP, RSG and KV/A

Stocks With Unusual Put Option Activity:

1) XLNX 2) JOSB 3) CMC 4) TEVA 5) ADBE

Empire Manufacturing Below Estimates, Empire Outlook Healthy,

- Empire Manufacturing for June fell to -8.7 versus estimates of -2.0 and a reading of -3.2 in May.

- Net Long-term TIC Flows for April rose to $115.1 billion versus estimates of $63.3 billion and $79.6 billion in March.

BOTTOM LINE: Manufacturing in the NY region shrank slightly more than forecast in June, Bloomberg reported. The New Orders component fell to -5.5 from -.5 the prior month. The Inventories component rose to -2.3 from -6.5. The Prices Paid component fell to 66.3 from 69.6 in May. The Overall Outlook component, for the next 6 months, rose to 32.2, the highest this year and up from 19.44 in January, from 23.9 in May. The Hiring Outlook component, for the next six month, rose to 16.96 from 7.49 in May. The Capital Expenditures Outlook component, for the next six months, rose to 22.09 from 13.04 in May. Economists now expect 2Q GDP growth of .5%, up from estimates of a .1% increase a few weeks ago. I still think 2Q GDP will exceed this new estimate. Manufacturing gages should continue to trend higher through year-end.

Foreign buying of US financial assets rose more than forecast in April to an 11-month high as investors snapped up Treasuries and corporate debt, Bloomberg reported. Total purchases of Treasuries increased a new $80.3 billion, versus a net gain of $53.6 billion in March. The difference between the trade deficit and securities purchased by foreigners is an indication of how easily the US can finance its external debts. The large net gain in long-term flows was almost twice the size of the April trade deficit. International sales of US stocks totaled a net $15.9 billion in April versus net purchases of $10.8 billion in March. Foreigners accumulated a net $25.1 billion of US corporate bonds versus net sales of $4.6 billion in March. I expect foreign demand for US assets to remain strong over the intermediate-term.

Bull Radar

Style Outperformer:

Mid-cap Growth (+.83%)

Sector Outperformers:

Steel (+3.16%), Banks (+2.01%) and Semis (+2.0%)

Stocks Rising on Unusual Volume:

TSRA, AMKR, RF, FCF, BCS, VRUS, SRVY, TITN, XMSR, BOLT, ASMI, ENER, TEVA, CYBX, BARE, CTRN, ZEUS, JRCC, IPHS, GMXR, OYOG, AMKR, COMV, AIXG, LNY, ASA, IGW, OFG, CHU, FPO and KYO

Stocks With Unusual Call Option Activity:

1) KEY 2) IVGN 3) ONXX 4) BQI 5) SINA

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