Stocks Lower into Final Hour, Weighed Down by Financial, Road & Rail, REIT Shares

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Stocks Lower into Final Hour on Financial Sector Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Alternative Energy longs, Computer longs and Medical 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 mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is rising .62% and remains above average at 21.10. The ISE Sentiment Index is below average at 110.0 and the total put/call is above average at .92. Finally, the NYSE Arms has been running about average most of the day and is currently .96. Financial equities are under pressure again today, despite a decline in their credit-default swaps and a positive report from Goldman Sachs(GS). This is weighing on the broad market. The Shanghai Composite fell to another new 52-week low last night. This index is now down 54.4% from its October high and down 46.9% ytd. On the positive side, the Euro Financial Sector Credit Default Swap Index is falling another 3.5% today to 71.4 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 2.6% today to 105.2, which is also a large positive. The TED spread is falling 5.2% today to .82 basis points. Leading growth stocks are substantially outperforming the broad market and value stocks again today. Despite a decline in the US dollar versus the euro, oil was unable to mount a rally today. Weekly retail sales rose 2.2% this week, up from a 2.1% gain the prior week and up from a .5% gain the week of March 4^th. One of my longs (NUAN) is seeing a huge spike in call option activity today, which could be related to (MSFT) acquisition rumors. Lazard reiterated its Buy today on (ISRG) and said it sees upside to its 2Q forecasts. It said that hospitals are getting financing and using the da Vinci for wider surgical uses. Nikkei futures indicate an +72 open in Japan and DAX futures indicate a -4 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, bargain-hunting, diminishing credit market angst and short-covering.

Today's Headlines

Bloomberg:
- Wall Street is losing its top oil analysts as securities firms suffer record losses and hedge funds offer the promise of higher pay.
- Kuwait followed Saudi Arabia in saying crude oil prices are too high as evidence mounts that energy costs are restraining growth and accelerating inflation.
- Goldman Sachs Group(GS), the world’s biggest securities firm, surpassed analysts’ estimates as gains in prime brokerage, asset management and commodities buoyed second-quarter profit. Goldman, which dominates the business of commodities trading along with Morgan Stanley, said revenue from commodities was higher in the second quarter than a year earlier. The firm doesn't provide any separate figures for the business, instead reporting it under the broader category of fixed-income, currencies and commodities. Crude oil futures doubled in the past year, and the price of products from gold to corn soared to record highs. Finance ministers from the Group of Eight nations said June 15 that surging food and fuel prices replaced the credit squeeze as the biggest threat to the world economy.
- The cost of protecting corporate debt from default fell as Goldman Sachs(GS) said its second-quarter profit fell less than analysts had estimated. Credit-default swaps tied to the debt of NY-based Goldman fell 8 basis points to 104 basis points. Contracts on Lehman(LEH) fell 10 basis points to 225 basis points. Contracts on Morgan Stanley(MS), which reports earnings tomorrow, fell 8 basis points to 160.

Wall Street Journal:
- Senator Barack Obama shed new light on his economic plans for the country, saying he would relay on a heavy dose of government spending to spur growth, use the tax code to narrow the widening gap between winners and losers in the US economy, and possibly back a reduction in corporate taxes.
- US Car, Truck Fuel Efficiency May Get Even Better.
- Help For Holders of Auction-Rate Securities May Be on the Way. Regulatory doors appear to have opened that could permit the creation of a new type of security to rescue stranded auction-rate preferred shareholders.
- Suburbs a Mile Too Far for Some. Demographic Changes, High Gasoline Prices May Hasten Demand for Urban Living.
- Hedge Funds Heart Goldman Sachs(GS), But Not Bear Stearns.

NY Times:
- Data Engineers Needed as Internet Demands Grow.
- In a Twist, a Hedge Fund Boss Defends MBIA(MBI).

AP:
- A major labor union and the liberal organization MoveOn.org are joining forces to air a provocative new ad portraying John McCain’s Iraq policy as a prolonged presence that would involve a new generation of Americans. McCain has stressed that his goal is to reduce American casualties, shift security missions to Iraqis and, ultimately, have a non-combat US troop presence in Iraq similar to that in South Korea. Polls show that while a large majority of the public opposes the war, they split almost evenly between McCain and Senator Barack Obama over who would better handle Iraq.

USA Today:
- European and Asian companies are beating their American rivals into Iraq now that security has improved the investment climate, Iraq and US officials say. “It’s starting to turn…and the people who are getting in on the ground floor are not American,” said Paul Brinkley, the Pentagon official who is leading US efforts to help Iraq rebuild its economy. “It’s ironic.” Foreign companies, including US investors, have committed to deals worth about $500 million so far this year and Brinkley expects at least $1 billion in foreign investment by the end of the year. Some US and Iraqi officials say American companies risk losing an early opportunity to establish long-term strategic ties with Iraq. Many of the companies active in Iraq now are from countries, including France, Russia and Turkey, that did not send combat troops into the country. China has also aggressively pursued the Iraqi market, selling machinery to the government and electronic products to consumers. “My question is, ‘Where are you guys in terms of investment, in terms of economic engagement?’” said Naufel al-Hassan, Iraq’s commercial counselor in Washington. “Iraqis need your support. Why let someone else do that?”

NY Post:
- Phil Falcone’s Harbinger Capital Partners – the hedge fund that won a battle to land board seats at The NY Times(NYT) – is expanding its size and presence to capitalize on its newfound clout. Falcone is seeking to use the reputation gained from the Times fight and winning bets against US subprime mortgages to springboard Harbinger, which now has $25 billion in assets, towards new goals.

Reuters:
- To counter the global food crisis, Africa could triple or quadruple food output quickly, a UN food expert said.

Financial Times:
- Latin America pays the price for fuel subsidy.

AFP:
- Iran is against any plan by Saudi Arabia to increase oil production without the consensus of OPEC, citing an Iranian official.

La Tribune:
- NYSE Euronext(NYX) is in talks with possible partners to create a global stock index, citing an interview with exchange deputy CEO Jean-Francois Theodore.

Sueddeutsche Zeitung:
- Almost three quarters of Germans say that income and wealth are not fairly distributed in Europe’s largest economy, citing a survey by Bertelsmann Foundation.

Die Welt:
- Germany’s ruling coalition government plans to water down measures to reduce carbon-dioxide emissions to ease the burden on homeowners from rising energy prices.

Bear Radar

Style Underperformer:

Small-cap Value -.55%

Sector Underperformers:

Banksirlind (-2.29%), I-Banks (-2.28%) and Road & Rail (-1.99%)

Stocks Falling on Unusual Volume:

CCC, GWR, PJC, UNP, WB, CINF, INFN, CDNS, SMTC, ZION, CTXS, LMNX, HTZ, OFG and CCH

Stocks With Unusual Put Option Activity:

1) RF 2) CTXS 3) ALL 4) CCL 5) IPI

PPI Accelerates, Housing Starts Decline, Industrial Production Declines, Capacity Utilization Falls

- The Current Account Deficit for 1Q widened to -$176.4 billion versus estimates of -$172.5 billion and -$167.2 billion in 4Q.

- The Producer Price Index for May rose 1.4% versus estimates of a 1.0% increase and a .2% gain in April.

- The PPI Ex Food & Energy for May rose .2% versus estimates of a .2% increase and a .4% gain in April.

- Housing Starts for May fell to 975K versus estimates of 980K and 1008K in April.

- Building Permits for May fell to 969K versus estimates of 960K and 982K in April.

- Industrial Production for May fell .2% versus estimates of a .1% gain and a .7% decline in April.

- Capacity Utilization for May fell to 79.4% versus estimates of 79.7% and 79.6% in April.

BOTTOM LINE: Prices paid to US producers rose more than forecast in May as fuel and food costs climbed, Bloomberg reported. The PPI is rising at a 7.2% rate year-over-year versus the 20-year average of 2.4%. This is also up from a 6.9% rate in September 2005. Core prices rose 3.0% year-over-year versus the 20-year average of 1.8%. This is also up from a 2.9% rate in July 2005. Producers paid 9.3% more for gasoline, the biggest increase since November, and diesel fuel costs jumped 11.2%. Natural gas prices rose 5.7% for the prior month. Passenger car prices fell 1% and light truck prices dropped .9%. Capital equipment costs rose .1%. “Thus far, the pass-through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand,” Fed Chairman Bernanke recently said. The 10-year TIPS spread, a good gauge of long-term inflation expectations, is down 4 basis points today to 2.52%. This is down 16 basis points from a 52-week high of 2.68% on March 13^th. I still believe inflation fears have peaked and gauges will show a meaningful deceleration later this year. All that is separating us from talk of disinflation is a bursting of the current commodity bubble.

Builders in the US broke ground in May on the fewest houses in 17 years, Bloomberg reported. Housing starts were down 32% from May 2007. Residential construction has subtracted from overall US growth since the first quarter of 2006. Builders have cut 208,000 workers so far this year. While home construction may improve gradually in the second half of the year, starts will remain muted over the intermediate-term as homebuilders reduce inventory.

Industrial production in the US unexpectedly fell in May as shrinking output by utilities and consumer-goods makers overshadowed a gain in auto manufacturing, Bloomberg reported. Capacity utilization fell to the lowest level since September 2005, when hurricanes disrupted manufacturing and oil production in the Gulf. Production of motor vehicles and parts rose 1%, the first gain since November. The resolution of the three-month strike by GM’s largest axle supplier helped lift auto output. GM plans to return to full production this month. The walkout, which ended May 26, stopped production of about 330,000 units, and cost GM $2.6 billion. Utilities output fell 1.8% in May. Milder-than-average temperatures last month limited utility use. The average temperature in May in the US was .7 degrees below the historical average, according to the National Climatic Data Center. I expect industrial production to accelerate over the coming months on warmer weather, inventory rebuilding, accelerating auto production and rising demand. The 10-year yield is down 6 basis points and the US Dollar Index is rising .02% on today’s reports. Fed fund futures indicate an 86.0% chance of no change and a 14.0% chance for a 25 basis point hike at the upcoming June 25 FOMC meeting.

Bull Radar

Style Outperformer:

Mid-cap Growth (+.24%)

Sector Outperformers:

Steel (+2.23%), Airlines (+1.83%) and Energy (+1.64%)

Stocks Rising on Unusual Volume:

GRT, SHLD, MEOH, CRK, SQM, ASMI, MENT, OCNF, CSIQ, TITN, DRYS, SAFM, AIMC, BOLT, XTRX, MALL, CPHD, CYBX, SPIR, TBSI, SOLF, RIMM, TEVA, SBLK, ELN, WYE and TWI

Stocks With Unusual Call Option Activity:

1) BBI 2) BBY 3) CREE 4) LULU 5) WYE