Stocks Soaring into Final Hour on Plunge in Oil, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Internet longs, Alternative Energy longs, Medical longs and Commodity shorts. I covered all of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, most sectors are rising and volume is heavy. Investor anxiety remains high. Today’s overall market action is very bullish. The VIX is falling 10.0% and is still high at 25.65. The ISE Sentiment Index is low at 97.0 and the total put/call is above-average at .98. Finally, the NYSE Arms has been running below average most of the day and is currently .81. The Euro Financial Sector Credit Default Swap Index is falling 2.71% today to 89.83 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 declining 2.6% today to 139.81. The TED spread is falling 2.4% to 142.0. Yesterday, I said I believed the market had made a tradable low that morning. Today’s action makes me more confident of further upside, after some backing and filling. Bear complacency had become higher than at any time I have ever seen as evidenced by the parabolic rise in short interest, notwithstanding recent sharp broad market losses. Shorting the financials was viewed as free money. Today, at the very least, 15%+ moves in stocks such as FNM, FRE, LEH, WFC, WM and ZION will at least give the many bears pause. The US Dollar Index is trading at session highs and the weekly energy inventory data was very bearish for the price of crude. If the oil bubble is finally bursting, I suspect recent market lows will hold and stocks will see far greater upside through year-end. Nikkei futures indicate an +185 open in Japan and DAX futures indicate an +90 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, falling energy prices, diminishing credit market angst, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Wells Fargo & Co.(WFC), the second-biggest U.S. mortgage lender, rose the most since at least 1980 after reporting profit that topped analysts' estimates and raising its dividend.
- Mortgage applications in the U.S. rose for a third week, led by a gain in refinance applications as mortgage rates dropped.
- Industrial production in the U.S. rose more than forecast in June, led by a jump in production of autos and parts after the end of a supplier strike.
- Cleveland-Cliffs Inc.(CLF), North America's largest producer of iron ore, agreed to buy coal-mining company Alpha Natural Resources Inc. for $10 billion as demand surges for the ingredients used to make steel.
- Crude oil futures fell more than $4 a barrel in New York after a surprise increase in U.S. inventories and as a slowing U.S. economy sapped demand for energy. Supplies rose 2.95 million barrels to 296.9 million barrels last week, an Energy Department report showed. Stockpiles were forecast to drop 2.2 million barrels, according a Bloomberg News survey. Fuel demand averaged 20.3 million barrels a day in the past four weeks, down 2 percent from 2007, the department said. ``This report is very bearish both in the absolute numbers and in light of the expectations,'' said Kyle Cooper, an analyst at IAF Advisors in Houston.
- Some Federal Reserve policy makers in June said an increase in the benchmark U.S. lending rate ``would be appropriate very soon,'' minutes released in Washington today showed.
- The dollar increased the most against the euro in almost two weeks as declining crude oil prices and better-than-estimated earnings at Wells Fargo & Co. pushed U.S. equities higher.
- U.K. unemployment jumped the most in June since the aftermath of the last recession in 1992 as the economic slowdown forced housebuilders and banks to cut jobs and stop hiring.
- Lehman Brothers Holdings Inc.(LEH), the securities firm shaken by speculation it's losing clients, ranked highest among fixed-income dealers by market share and service quality, according to a Greenwich Associates survey.
- China needs to stick with a “tight” monetary policy and a “prudent” fiscal policy to cool excessive price increases, state radio reported, citing the legislature’s Financial and Economic Affairs Committee. Inflation is still a prominent problem, China National Radio reported, citing a statement by the committee after it met with the central bank, the statistics bureau and the top economic planning agency.
- William Ackman, the activist hedge- fund manager, increased his $2 billion bet on Target Corp.(TGT) as shares of the second-largest U.S. discount retailer declined 38 percent in the past year, according to two people with knowledge of the matter.

Wall Street Journal:
- Spain Girds for More Pain as Housing Stalls. Supply Glut Coupled With Recession Fears Prolong Slowdown.

NY Times:
- A US envoy will attend a meeting where an Iranian negotiator will give his country’s formal response to economic and diplomatic incentives six countries offered for the suspension of its uranium-enrichment program. William Burns, the undersecretary of state for political affairs, will attend a July 19 meeting in Geneva arranged by the EU with Iran’s nuclear negotiator. Burns will be the highest level official to meet with an Iranian official since the Islamic Revolution of 1979.
- Massachusetts officials expect to gain millions of dollars in revenue as gay couples come to the state to marry. About 32,200 couples will travel to Massachusetts to wed over the next three years, creating 330 permanent jobs and adding $111 million to the economy from weddings and tourism.

CNNMoney.com:
- Goldman Sachs (GS) has kept its hands clean the credit crisis, but now the firm may have to wallow in the mud with the rest of its peers. The Wall Street Journal reports that some pointed questions are being asked of Goldman chief executive Lloyd Blankfien by none other than Alan Schwartz, who was at the helm of Bear Stearns when it died in March. Schwartz would like to know whether there is any truth to talk that in the days preceding Bear’s fall, Goldman traders in London were manipulating the struggling firm’s stock. Back in 1998, the firm’s traders were accused of hammering positions taken by hedge fund Long Term Capital Management as it went belly up. Lehman Bros. (LEH) CEO Dick Fuld piled on too. “You’re not going to like this conversation,” Fuld told Blankfein, according to the Journal. Fuld was reportedly hearing “a lot of noise” about Goldman traders allegedly spreading negative rumors about Lehman, whose stock has been dropping like a stone. Fuld has reportedly spent the last few months contacting traders he thinks may have been bad-mouthing Lehman. Goldman Sachs was one of the most active parties in trading securities known as credit default swaps that it had bought from or sold to Bear Stearns — more than most other Bear trading partners.

Houston Chronicle:
- While home prices in other big cities continue to take their lumps, the Houston area is holding its own. The median home price reached a high point in June, rising 1.3 percent to a record $162,000, according to the Houston Association of Realtors.

MilitaryTimes:
- Iraq surge over, evaluation period begins.

Reuters:
- AOL talks with Microsoft(MSFT) and Yahoo(YHOO) heat up.

Die Zeit:
- The US Treasury will continue to “monitor markets very closely and do all that’s necessary” to ensure financial-market stability, Deputy Treasury Secretary Robert Kimmitt said.

La Repubblica:
- King Abdullah of Saudi Arabia said oil prices are too high and that price stability should be a shared objective of consumers and producers, citing an interview with the monarch. “When the price of oil rose above $100 a barrel, we were already contrary, let alone now that there’s talk of $200 a barrel,” he said.

Bear Radar

Style Underperformer:

Large-cap Growth +.98%

Sector Underperformers:

Coal irlind (-4.84%), Energy (-2.63%) and Oil Service (-2.18%)

Stocks Falling on Unusual Volume:

NITE, DRL, TWTC, CLF, ERES, ADTN, NAVG, CSGS, CBI, ESE, STX and BPT

Stocks With Unusual Put Option Activity:

1) MGG 2) MDTL 3) FDRY 4) CCU 5) TSN

Bull Radar

Style Outperformer:

Small-cap Value (+2.77%)

Sector Outperformers:

Airlines (+12.27%), Banks (+8.73%) and Retail (+3.87%)

Stocks Rising on Unusual Volume:

WFC, FMBI, NPBC, ALTR, BAC, TSL, SMG, CLMT, NLC, TSO, CSGP, LUFK, ODFL, BAGL, PFCB, MBFI, NTRS, TFSL, EURX, JBHT, IBOC, KNXA, SCHW, PRSP, NPBC, WERN, ONXX, ZION, STJ, VFC and VLY

Stocks With Unusual Call Option Activity:

1) IMCL 2) BRL 3) STJ 4) WFC 5) LUV

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Erin Callan, the former chief financial officer of Lehman Brothers Holdings Inc.(LEH), was hired by Credit Suisse Group AG to head a unit that advises hedge funds.
- Copper tumbled the most in a week as falling imports in China and a weakening outlook for the global economy increased speculation that metals demand will decline. China's imports of copper and alloys plunged 19 percent last month from a year earlier, data from the nation's customs office showed.
- Representative Barney Frank, the Democrat who chairs the House panel overseeing housing, aims to include penalties for Fannie Mae(FNM) and Freddie Mac(FRE) in legislation authorizing a rescue of the beleaguered mortgage firms.
- Intel Corp.(INTC), the world's biggest chipmaker, reported a 25 percent increase in second-quarter profit and gave a sales forecast that topped analysts' estimates after demand grew worldwide for personal-computer processors. The stock gained 20 cents to $20.91 in extended trading.
- SK Telecom Co., South Korea’s largest mobile-phone operator, declined to confirm or deny a CNBC report that the company may seek to buy Sprint Nextel Corp.(S). “There is nothing we can say on the report,” Ryu Mina, a spokeswoman for Seoul-based SK Telecom, said. Separately, Sprint and SK Telecom are in talks to forge a partnership to develop new phones and services, the Wall Street Journal reported.

Wall Street Journal:
- Just a few weeks ago, Europe thought it could escape the worst of the global slowdown. Now it looks like the euro zone, the world's second-largest economy, is headed for a hard landing and perhaps recession, compounding growth troubles around the world.
- Federal regulators are stepping up efforts to ensure the banking industry's access to short-term cash, amid concerns about bank runs and worries that liquidity-conscious lenders will hoard money and stop making loans.

MarketWatch.com:
- Sony Corp.(SNE) surprised some at the annual E3 conference on Tuesday by reducing the price of its high end PlayStation 3 console, following Microsoft Corp's(MSFT) earlier move to reduce the price of its Xbox 360.
- Holders of debt issued by Fannie Mae and Freddie Mac haven't broken a sweat over the mortgage agencies' financial situation, taking the mounting worries about their loan losses as a good excuse to snap up their bonds.
- Short sellers had their best month in more than seven years in June as the stock market slumped. The Strunk Short Index, which tracks a handful of managers that specialize in short selling, jumped 10.47% last month. That was the best performance since March 2001, when the index surged 12.45% during the dot-com bust.

CNBC.com:
- Lehman CEO Dick Fuld issued a memo yesterday that many people inside Lehman consider an advertisement for the firm to be bought possibly by private equity or possibly a bank — at a level above its current market price.

NY Times:
- Seeing Oil Bubble, a Contrarian Bets on an Indian Airline. Wilbur L. Ross Jr.’s latest deal, an $80 million investment in the flailing Indian airline SpiceJet, announced on Tuesday, is hardly earth shaking, but the idea behind it is typically contrarian. Mr. Ross has decided that high oil prices have hit bubble territory, a bubble that should pop in the next 12 months. “We’re looking at everything that has been hurt by fuel” for deals, he said in a phone interview.

CFO.com:
- SEC Declares War on Short-Selling, Rumors. All short-sellers of Fannie Mae(FNM) and Freddie Mac must pre-borrow stock before shorting the shares of either of the mortgage-finance giants. The Securities and Exchange Commission is issuing an emergency order aimed at reducing short-selling in the stock of Fannie Mae and Freddie Mac and Wall Street brokerage firms and is considering extending those trading limits to the broader equity markets.

CNNMoney.com:
- iPhone 3G: Sold out in 21 states.

USA Today.com:
- Russian Coreflood Gang targets online bank accounts.

Fox Business News:
- The SEC handed out subpoenas to 50 hedge fund advisers as it investigates whether shares of Bear Stearns or Lehman Brothers were manipulated by false rumors, according to the Wall Street Journal. Some of the hedge funds receiving subpoenas are SAC Capital Advisors in Stamford, Conn. and Citadel Investment Group LLC in Chicago. Some of the hedge funds have already turned information in to the SEC, while others just received subpoenas on Monday.

Reuters:
- It's a bear market for Warren Buffett's Berkshire Hathaway Inc (BRKa.), too. The shares of the billionaire's insurance and investment company have dropped more than 20 percent from their most recent peak, the first time that has happened since February 2003.
- In Brazil, middle class dreams built on credit.

Financial Times:
- The past few years have been characterised by a dramatic surge in lending allied with a decline in lending standards. But this trend has not been restricted to the source of the subprime debacle: the US housing market. Some now fear that the recent rush to extend credit on any terms has set the scene for a raft of corporate defaults. Those fears are overdone.

TimesOnline:
- The Financial Services Authority (FSA) mounted a fierce defence of its regulation of the oil markets yesterday amid growing criticism that its approach may be contributing to manipulation and prices of nearly $150 a barrel.

Thestar.com:
- Royal Dutch Shell has nearly doubled its ownership in Ottawa-based cellulosic ethanol producer Iogen Energy Corp. and is "considering" investing in a full-scale commercial ethanol plant based on Iogen's proprietary technology. "This transaction sets the stage for successful large-scale cellulosic ethanol production." Officials from the ethanol industry warned against abandoning ethanol altogether, arguing that investment in first generation corn-based ethanol paves the way for second-generation cellulosic ethanol — produced by companies such as Iogen — that uses waste, not food, and is much more sustainable over the long term.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NUAN), target $24.

RBC Capital:
- Rated (CLWR) Outperform, target $17.

Night Trading
Asian Indices are -1.25% to +.25% on average.
S&P 500 futures +.33%.
NASDAQ 100 futures +.50%.

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Earnings of Note
Company/EPS Estimate
- (ABT)/.78
- (AMR)/-1.39
- (GCI)/1.04
- (NITE)/.34
- (STJ)/.55
- (WFC)/.50
- (MI)/-1.56
- (KMP)/.54
- (ADS)/1.00
- (PLCM)/.33
- (EBAY)/.41
- (YUM)/.42
- (XLNX)/.36
- (RECN)/.28
- (PJC)/-.17
- (DAL)/.10

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for June is estimated to rise .7% versus a .6% gain in May.
- The CPI Ex Food & Energy for June is estimated to rise .2% versus a .2% increase in May.

9:00 am EST
- Net Long-term TIC Flows for May are estimated to fall to $70.0 billion versus $115.1 billion in April.

9:15 am EST
- Industrial Production for June is estimated to rise .1% versus a -.2% decline in May.
- Capacity Utilization for June is estimated at 79.4% versus 79.4% in May.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,200,000 barrels versus a -5,840,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -100,000 barrels versus a 909,000 barrel increase the prior week. Distillate inventories are expected to rise by 2,000,000 barrels versus a 1,816,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .05% versus a -.07% decline the prior week.

1:00 pm EST
- The NAHB Housing Market Index for July is estimated at 18 versus 18 in June.

2:00 pm EST
- Minutes of June 24-25 FOMC Meeting.

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Hoenig speaking, weekly MBA Mortgage Applications report, (LDK) analyst meeting, (RTEC) analyst meeting and SEMICON West could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.