Stocks Higher into Final Hour on Plunge in Oil, Less Economic Pessimism, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Alternative Energy longs, Biotech longs, Computer longs and Internet longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is mostly positive and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is bullish. The VIX is falling 3.5% and is still above-average at 22.60. The ISE Sentiment Index is low at 110.0 and the total put/call is about average at .85. Finally, the NYSE Arms has been running slightly above average most of the day and is currently 1.08. The Euro Financial Sector Credit Default Swap Index is rising 2.2% today to 79.67 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 +.65% today to 135.33 basis points. The TED spread is falling another 7.22% to 1.07. The TED spread is now down 40 basis points in 10 days. It is down 133 basis points from its August 2007 high. The 10-year TIPS spread, a good gauge of inflation expectations, has dropped 32 basis points in 14 days to 2.32% on the fall in commodities. This remains a large positive. The fact that the broad market is able to move higher today with weakness in the financial sector is also a positive. Small-caps and growth stocks are especially strong. Russian stocks plunged 5.6% last night and are now down 22% from their record high. Russian equities now join the other BRIC markets in bear market territory(Shanghai -53.2%, India -32.7% and Brazil -22.6%). I still see further weakness in all four over the intermediate-term. The Citi US economic surprise index is now up to +35.10, while the Eurozone economic surprise index has fallen to -149.80. This is the largest discrepancy I have ever seen. I suspect the US dollar, which rose .92% this week, will make another push higher next week. Nikkei futures indicate an +116 open in Japan and DAX futures indicate an +10 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, short-covering and less economic pessimism.

Today's Headlines

Bloomberg:
- Crude oil fell to a seven-week low as a report showed that OPEC is bolstering output to lower prices and fuel consumption in the U.S. and Asia drops. The Organization of Petroleum Exporting Countries increased output by 200,000 barrels a day in July, according to preliminary estimates from PetroLogistics Ltd. Oil has slipped more than $24 a barrel from the $147.27 record on July 11 as fuel use declined. ``The oil market over the last two weeks has begun to focus on the larger fundamentals, which are bearish,'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York. ``Today's PetroLogistics report on OPEC output points to further increases in supply. The U.S. gasoline market is about as weak as I've ever seen during the summer months.'' U.S. fuel demand averaged 19.9 million barrels a day last week, the lowest since January 2007, the Energy Department reported on July 23. U.S. gasoline consumption fell 3.3 percent from a year ago, the 13th consecutive weekly decline, a MasterCard Inc. report on July 22 showed. Japanese oil imports fell for the first time in nine months, the government said yesterday. South Korea consumed less fuel for the eighth straight month in June, state-run Korea National Oil Corp. said on July 22. The U.S., Japan and South Korea are the world's first, second and fifth biggest oil importers, according to the U.S. Energy Department.
- Legg Mason Inc.(LM) reported a second straight quarterly loss as subpar investment returns led to $18.4 billion in customer redemptions and the Baltimore-based company bailed out money funds saddled with bad debt. Legg Mason rose as much as 4.6 percent in New York trading on signs the worst may be over.
- The Baltic Dry Index, a measure of shipping costs for commodities, had its biggest decline in an 11-day reverse on a lack of cargoes to haul. The index of international transport costs fell 134 points, or 1.5%, to a more than three-month low of 8,637. “There is an oversupply of ships,” Dorian Benson, a director at freight-derivatives brokerage GFI South Africa, said. Investors expect rate to drop, according to forward freight agreements which be on future rates.
- Nickel headed for the biggest weekly decline in London in four months as stainless-steel mills, the biggest users of the metal, said demand is weakening. Copper and aluminum increased. Jinchuan Group Co., Asia's biggest nickel producer, cut prices by 11 percent from today. Acerinox SA, the world's largest stainless-steel producer, and Finland's Outukumpu Oyj said this week that orders from construction slowed. Nickel has fallen 30 percent this year, the worst among all LME-traded metals. Prices are now below production costs of so- called nickel pig iron. LME-monitored copper stockpiles jumped 2,600 tons, or 2 percent, to 133,475 tons, the highest since March 7. They have increased 8.9 percent this month. Including those at commodity exchanges in New York and Shanghai, inventories totaled 181,027 tons, or 3.5 days of global consumption, according to Bloomberg calculations. Last year's average was 4.9 days.
- Russia's dollar-denominated RTS Index fell the most in six months, plunging it into a bear market, after Prime Minister Vladimir Putin said OAO Mechel billionaire shareholder Igor Zyuzin may need a ``doctor.'' The 50-stock RTS index sank for a fourth day, dropping 5.5 percent to 1,952.96 at 3:37 p.m. in Moscow, bringing its decline from its May 19 high to 22 percent. A drop of 20 percent from a peak within a year is the common definition of a bear market.
- Honda Motor Co., Japan's second- largest automaker, posted an unexpected 8.1 percent gain in fiscal first-quarter profit after record gasoline prices spurred demand for its fuel-efficient Fit and Civic cars.

Wall Street Journal:
- Gap Is Narrowing in Battleground States. McCain Chips Away At Obama’s Lead In Four Key Races.

CNBC.com:
- Washington Mutual(WM) boosted its liquidity by $10 billion, to $50 billion, in the moth since the end of the second quarter. (video)

NY Post:
- Blackstone Group LP(BX) has allocated $1.25 billion to buy troubled subprime mortgage loans through Bayview Financial Holdings LP. Bayview has already used about 40% of Blackstone’s capital to acquire loans and will renegotiate terms with borrowers who have stopped payment.

Wcbstv.com:
- Barack Obama's campaign has received roughly 10 times more money from declared U.S.Germany, France and Britain than his Republican rival, reflecting his popularity in Europe as he makes his first tour of the continent as the presumed Democratic nominee. donors living in

AP:
- Iran wants to increase its cooperation with the International Atomic Energy Agency, the country’s chief IAEA delegate said. “We will continue our cooperation with the agency in accordance with our legal obligations,” Ali Ashgar Soltanieh, who represents Iran at the IAEA, said. Soltanieh told the AP a meeting yesterday between VP Gholam Reza Aghazadeh and IAEA Director-General Mohamed ElBaradei focused on “the promotion of cooperation” with the agency.

Reuters:
- Brazilian energy giant Petrobras (PBR) plans to install two production units every two years from 2010 to pump oil from sub-salt reserves in the off-shore Santos basin, an official from the firm said on Thursday. Assistant director for Exploration and Production, Alvaro Costa, estimated future production of 1 million barrels per day from the sub-salt layers of the Tupi field.

La Tribune:
- French vehicle fuel consumption plunged 10% in June because of higher prices at the pump, citing Jean-Louis Schilansky, director of the Union Francaise des Industries Petrolieres. The decline was “enormous,” he said. During the previous five months of the year, fuel use was almost unchanged compared with 2007.

Bear Radar

Style Underperformer:

Large-cap Value +.24%

Sector Underperformers:

I-Banks irlind (-3.09%), Banks (-1.71%) and Gaming (-1.68%)

Stocks Falling on Unusual Volume:

ABAX, CPHD, VLCM, IBKR, LNCE, COLM, POWI, HITT, VSEA, UTEK, IDXX, CYMI, YRCW, ANF, BMC, WDC and GPN

Stocks With Unusual Put Option Activity:

1) BMC 2) TOL 3) DTV 4) CTXS 5) CROX

Durable Goods Orders Surge, New Home Sales Substantially Exceed Estimates, Home Inventories Fall, Confidence Improves

- Durable Goods Orders for June rose .8% versus estimates of a .3% decline and an upwardly revised .1% increase in May.

- Durables Ex Transportation for June rose 2.0% versus estimates of a .2% decline and an upwardly revised .5% decline in May.

- Final Univ. of Mich. Consumer Confidence for July rose to 61.2 versus estimates of 56.4 and prior estimates of 56.6.

- New Home Sales for June were 530K versus estimates of 503K and an upwardly revised 533K in May.

BOTTOM LINE: Orders for US durable goods unexpectedly increased in June, Bloomberg reported. Excluding orders for transportation equipment, which are volatile, bookings rose 2%, the most this year. The gains reflected increasing demand for machinery defense gear, autos and metals. Bookings for non-defense capital goods ex aircraft, a gauge of future business investment, jumped 1.4% versus a .1% decline the prior month. Shipments of those items, which is a number used to compute gdp, rose .7% versus a .2% gain the prior month. Economists are now projecting 2Q GDP to grow 2.0%. Orders for autos rose 1.8%, the most since July 2007, which may have reflected the end to the American Axle strike. As I said during 1Q, I think that strike was hurting overall US economic data more than perceived and it got very little attention in the press.

Sales of new homes in the US, which usually lead overall home sales, came in solidly ahead of forecasts last month, Bloomberg reported. Moreover, the number of properties on the market plunged by the most in 45 years, indicating builders are making large strides in lower inventory. There were 426,000 homes for sale at the end of June at an annual pace, the least since December 20904. The median new home price fell 2% from a year earlier to $230,900. Housing starts have fallen 53% from a peak rate of 2.27 million at an annual rate in January 2006. I continue to believe overall home sales have bottomed around current levels and will trend modestly higher through year-end, which will greatly curtail inventories.

Confidence among US consumers unexpectedly rose in July, a sign that tax rebates and a rally in the stock market may have improved Americans’ moods, Bloomberg said. The Expectations component for the next six months rose to 53.5 versus 49.2 the prior month. The Current Conditions component, which gauges Americans’ perceptions of their current financial situation and whether it is a good time to buy big-ticket items, jumped to 73.1 from 67.6. Consumers expect inflation to average 3.2%, down from 3.4% the prior month. I expect consumer confidence to trend higher through year-end on falling food/energy prices, a rising US dollar, a stabilizing housing market, rising stock prices, decelerating inflation, an improving job market and an end to the election uncertainty.

Bull Radar

Style Outperformer:

Small-cap Value (+1.27%)

Sector Outperformers:

Airlines (+6.72%), Networking (+3.03%) and Homebuilders (+2.70%)

Stocks Rising on Unusual Volume:

JNPR, PCTI, BCS, CLF, AVID, PFG, KGC, PLXS, NUVA, RVBD, SONO, VISN, NTCT, MSCC, ISYS, SAIA, SWIR, FDML, GBCI, CYBS, ANGO, CSGS, BUCY, COLB, CPSI, TGI, MTL, DVA, TYL, MTD, HUB/B and PKI

Stocks With Unusual Call Option Activity:

1) LO 2) CA 3) DTV 4) BMC 5) CROX

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