Stocks Mostly Lower into Final Hour on Financial Sector Rumors

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Alternative Energy longs, Biotech longs and Software longs. I covered all of my (IWM/QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mostly positive and volume is about average. Investor anxiety is above-average. Today’s overall market action is mildly bearish. The VIX is rising .26% and remains above average at 23.50. The ISE Sentiment Index is low at 92.0 and the total put/call is above average at 1.02. Finally, the NYSE Arms has been running around average most of the day and is currently .94. The Euro Financial Sector Credit Default Swap Index is falling 5.42% today to 91.11 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is falling 1.5% today to 662.97, which is also a positive. The TED spread is falling 7.03% to 1.05. The heavily-shorted (XLF) is attempting to trim losses into the final hour despite more negative rumors regarding Lehman Brothers(LEH). One of my longs, (ILMN), is hitting another new all-time high today. The stock is up 48.4% for the year and is 116.6% higher over the last 12 months. The shares are extended again near-term, but I still see substantial upside over the intermediate-to-long-term from current levels. Nikkei futures indicate an +125 open in Japan and DAX futures indicate an +63 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, better economic data, quarter-end window dressing and bargain-hunting.

Today's Headlines

Bloomberg:
- Wheat plunged the most in 10 weeks after a government report showed US growers seeded more acres with spring crops to take advantage of prices that rallied to a record this year.
- Commodities Signal Bubble Bursting as First-Half Ends.

Wall Street Journal:
- Nearly four years after Merck & Co.(MRK) yanked the painkiller Vioxx off the market, beleaguered pharmaceutical-industry executives say they are facing a tough new regulatory climate that is altering the landscape of drug development. Over the past 16 months, Schering-Plough Corp.(SGP) CEO Fred Hassan and his top scientists have pulled the plug on two drug-development projects – one for obesity and the other for cholesterol – that had the potential to produce big sellers. And they’re considering scrapping a third.
- China’s Export Machine Threatened by Rising Costs. Orders Drop, Shops Idle in Sweater City; Losing Wal-Mart(WMT).
- The US Federal Aviation Administration gave the country’s airlines high marks for complying with maintenance standards, citing a study to be completed today. FAA inspectors found an “exceptionally high” level of compliance with the agency’s standards. Spot checks of maintenance jobs found compliance levels exceeding 99% and there were no cases of carriers deliberately trying to hide information from inspectors.

Lloyd’s List:
- New orders fro capsize commodity carriers fell 55% in the second quarter because of concern that too many vessels are being built, citing Francois Cadiou, a broker at Barry Rogliano Salles. Fifty-three such vessels were ordered in the second quarter compared with 117 a year earlier and 650 for all of last year. Orders will probably drop by half this year.

Reuters:
- Iraq will open six oil fields and two gas fields to international companies for long-term development contracts, citing the country’s Oil Minister Hussain al-Shahristani. Iraq has pre-qualified 41 US, European and Asian companies to participate in the licensing round.

Die Welt:
- The European Union plans to enable patients to seek and reclaim costs for medical treatment outside their home country, citing a confidential paper by Health Commissioner Androulla Vassiliou. Reimbursement rates in the country of residence will apply under the rules set to be approved July 2. Patients are to cover the difference if the cost of treatment is more expensive abroad.

Bear Radar

Style Underperformer:

Small-cap Value -.37%

Sector Underperformers:

Alternative Energy irlind (-1.91%), Insurance (-1.66%) and Homebuilders (-1.62%)

Stocks Falling on Unusual Volume:

MXWL, XL, WB, VLY, OSBC, MYGN, LPHI, PCLN, CRDN and DV

Stocks With Unusual Put Option Activity:

1) HMY 2) TSN 3) LLTC 4) WMB 5) AEO

Chicago Purchasing Manager Report Rises

- The Chicago Purchasing Manager report for June rose to 49.6 versus estimates of 48.0 and a reading of 49.1 in May.

BOTTOM LINE: A measure of US business activity for June unexpectedly rose, Bloomberg reported. Foreign demand for US goods continues to help buffer the manufacturing sector from a more pronounced slowdown. The trade deficit during 1Q was the lowest since 3Q 2002, which contributed .8 percentage point to overall US growth of 1.0%. The New Orders component fell to 52.0 from 56.1 in May. The Employment component of the index rose to 46.7 from 41.2 in May. The Inventory component of the index rose to 50.5 from 42.2 the prior month. The Prices Paid component fell to 85.5 from 87.5 in May. I expect the Chicago PMI to remain around current levels in July. The US dollar is rising .2% and the 10-year yield is gaining 2 basis points to 3.98% on today’s reports. The TED spread is down 11 basis points to 1.02 and the Euro Financial Sector CDS Index is falling 5.4% to 91.11, which are also positives.

Bull Radar

Style Outperformer:

Large-cap Growth (+.37%)

Sector Outperformers:

Energy (+2.27%), Road & Rail (+2.18%) and Telecom (+1.75%)

Stocks Rising on Unusual Volume:

FTE, CLF, IVN, GDP, PDO, VOD, NVS, PBR, BP, RADN, SAN, EIG, HBC, NNDS, DMRC, ILMN, AVCT, GMXR, AREX, MEND, JRCC, NVEC, RBCAA, AFAM, BOLT, FSYS, SCHN, OSIS, SMTS, CLNE, GTLS, Y, HRB, RBN and DR

Stocks With Unusual Call Option Activity:

1) HMY 2) CPN 3) MYGN 4) F 5) HK

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