Stocks Mostly Lower into Final Hour on Iran Tensions, Global Growth Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Software longs and Computer 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 modestly negative as the advance/decline line is about even, sector performance is mostly negative and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is falling 1.44% and is still above-average at 22.61. The ISE Sentiment Index is depressed at 70.0 and the total put/call is above average at 1.02. Finally, the NYSE Arms has been running high most of the day and is currently 1.33. The Euro Financial Sector Credit Default Swap Index is rising 2.0% today to 83.46 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 -.3% today to 132.98 basis points. The TED spread is rising .3% to 1.14. The 10-year TIPS spread, a good gauge of inflation expectations, is stable at 2.29%, which is the lowest since May 2nd and down 34 basis points in less than 3 weeks. Given Iran and Israel’s saber-rattling comments today, oil’s small rise is a large positive. Oil tanker rates have plunged 33.9% this week, which could indicate less hoarding. As well, the US dollar continues to trade very well, rising another .2%, despite today’s perceived disappointing economic data, which bodes well for another decline in commodities next week. According to Intrade.com, notwithstanding Israel’s comments today, the percent chance of a US/Israeli air strike on Iran before October is only 11%, down from 30% at the beginning of April. Financial shares continue to consolidate recent gains even better than I would have expected, which has to worry the many bears. The (XLF) is at session highs, rising .42%. The (XLF) is 26% higher from its July 15^th lows. The BankRate.com average 30-year fixed mortgage rate is now 6.26%, which is down 25 basis points in a week. I expect mortgage rates to continue to trend lower over the intermediate-term. Nikkei futures indicate an +16 open in Japan and DAX futures indicate an +35 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- The cost of protecting US corporate bonds from default fell after a government report showed the economy lost fewer jobs in July than economists had projected. Credit-default swaps on the Markit CDX North America Investment Grade Index fell .75 basis point to 133.75 basis points as of 8:35 am in NY.
- Copper and aluminum fell in London on indications that demand growth in China, the world's largest consumer of all industrial metals, may slow after manufacturing contracted for the first time since a survey began in 2005. ``For years the Chinese have tried to slow down the economic growth to avoid a bubble and that's probably taking effect now,'' said Andrew Silver, a trader at Natixis Commodity Markets in London. ``Once the slowdown takes hold, we will see impacts on consumption,'' he said today by phone from London. Copper inventories expanded 2,250 tons, or 1.6 percent, to 144,650 tons, the highest since Feb. 28, according to the exchange's daily data.
- The US dollar rose to a one-month high against the euro as a government report showed employers in the U.S. eliminated fewer jobs last month than analysts forecast. The euro weakened as German retail sales dropped in June more than twice as much as forecast, undermining the case for the European Central Bank to boost interest rates again this year. The pound headed for its biggest weekly drop since mid- June as U.K. manufacturing shrank by the most in a decade.
- Corn and soybeans fell for a second straight day on speculation that rainfall next week will ease the stress of hot weather and improve crop conditions in the U.S., the world's largest producer and exporters. Corn futures for December delivery fell 14.5 cents, or 2.4 percent, to $5.93 a bushel at 10:53 a.m. on the Chicago Board of Trade, the second straight drop. A close at that price would leave corn down 0.5 percent for the week, the fifth straight decline. Most-active futures fell 20 percent in July, the most in 22 years, and are down 25 percent from a record $7.9925 on June 27.
- Crude oil was little changed after falling more than $2 a barrel, capping the biggest one-month decline since December 2004, as a slowing U.S. economy caused fuel consumption to weaken to the lowest in three years. ``With demand so poor, we have to re-examine price expectations. The market will be guided by the economic outlook here, in Europe and in the emerging markets.'' Pump prices are following changes in futures. Regular gasoline, averaged nationwide, fell 1.7 cents to $3.909 a gallon, AAA, the nation's largest motorist organization, said on its Web site yesterday. Pump prices reached a record $4.114 a gallon on July 17. ``We found a slowdown in same-store diesel of 4 to 4.5 percent across the board,'' Marathon Oil Corp. refining chief Gary Heminger said on a conference call yesterday with analysts. One reason is that truckers are driving at lower speeds, ``which has really taken an improvement of about 4 percent in their miles per gallon, which has dropped demand.'' Marathon is the U.S. Midwest's largest refiner.
- Iran is driving toward a ``major breakthrough'' in its nuclear development effort that poses an ``unacceptable'' danger, Israeli Deputy Prime Minister Shaul Mofaz told a Washington audience today.
- Ford Motor Co.(F) and Toyota Motor Corp.'s July U.S. sales declined as record gasoline prices damped demand for trucks and a slowing economy kept consumers away from dealer lots.
- Ambac Financial Group Inc.(ABK), the bond insurer that lost its AAA credit rating this year, will pay Citigroup Inc.(C) $850 million to extricate itself from a guarantee of a $1.4 billion collateralized debt obligation. Ambac rose as much as 60 percent in New York trading after the company said it will record a gain of $150 million on the contract because it had previously written down its value by $1 billion.

NY Times:
- Deutsche Bank AG Chairman Josef Ackermann believes the turmoil in the world financial system will be over “within a few months.”

Washington Post:
- Bank officials named in an unfolding Senate investigation have directed more than $2 million into this year's congressional and presidential campaigns, some of it arriving just as investigators finished a report accusing the bank of helping clients hide billions of taxable dollars from the Internal Revenue Service. At the heart of the probe is UBS of Switzerland, one of the world's largest banks, which in June alone distributed $98,000 to members of Congress through its political action committee.

Newsday.com:
- Sen. Hillary Rodham Clinton (D-N.Y.) will not be Barack Obama's running mate, but she will be the keynote speaker at the Democratic National Convention - at least that is what some of her boosters are saying. "Because of your work, Senator Obama asked Hillary to be his keynote speaker at the Democratic National Convention!" said Vote Both founders Adam Parkhomenko and Sam Arora on their Web site. "Regretfully, this means that Senator Hillary Clinton is no longer under consideration as Senator Obama's running mate." Asked how he knows, Arora told The Associated Press, "All indications we have from people close to Senator Clinton and Senator Obama are that Hillary is not on the short list."

New York Post:
- In a move similar to what Merrill Lynch(MER) has done, Lehman Brothers'(LEH) CEO Dick Fuld is trying to shop tens of billions of dollars in mortgage securities on its balance sheet in order to reduce leverage at the embattled investment bank, The Post has learned. Lehman is engaged in talks with prospective buyers about offloading some $30 billion in commercial mortgage assets and other hard-to-value securities that have dogged its balance sheet for months and ultimately resulted in the demotion of Chief Financial Officer Erin Callan and President Joseph Gregory.

greentechmedia:
- New Energy Finance says the number of specialist hedge funds focused on clean energy and the environment is growing, as is the number of funds that invest in other cleantech funds.

USA Today:
- AT&T Inc.’s(T) exclusive distribution of Apple Inc.’s(AAPL) iPhone 3G was extended a year to 2010 in exchange for the wireless company helping subsidize the cost of phone. AT&T pays Apple $300 per phone to keep the iPhone’s retail cost at $199 so consumers can afford it.

International Herald Tribune:
- As the first anniversary of the August 2007 subprime mortgage meltdown approaches, and world markets still reel, you would think that the people who have received much of the blame - the math wizards, computer geeks and other quantitative analysts collectively known as financial engineers - would be in disgrace. Yet by all evidence, the field of financial engineering is thriving - and, in fact, growing. Far from disowning financial engineers, or quants as they are also known, financial institutions - and their regulators - are embracing them as partners in an increasingly complicated game that, it seems, only the very brainy can understand well enough to play safely.

Business Timesonline:
- Investors almost halved the money they put into Asia-focused hedge funds in the second quarter compared to the first three months of the year as a selloff in stocks hurt appetite for risky assets, data showed. Asia-focused hedge funds received a net US$530 million from investors in the April-June quarter, down from US$1 billion in the first quarter, Chicago-based Hedge Fund Research said in a statement released late on Thursday.

Bear Radar

Style Underperformer:

Large-cap Growth -1.43%

Sector Underperformers:

Coal irlind (-3.62%), Oil Tankers (-3.43%) and Steel (-3.16%)

Stocks Falling on Unusual Volume:

PCU, UDRL, TDW, TIE, NUE, BIIB, HNSN, EHTH, WINN, BOOM, CREE, VISN, VCLK, ELN, FMR and DLB

Stocks With Unusual Put Option Activity:

1) AMTD 2) BIIB 3) KFT 4) R 5) VNDA

Bull Radar

Style Outperformer:

Small-cap Value (+.15%)

Sector Outperformers:

Papers (+2.91%), Oil Service (+1.79%) and Gaming (+.73%)

Stocks Rising on Unusual Volume:

GDP, HP, WY, KWK, OIS, IP, KO, GFIG, BW, SCRX, PCZ, THOR, GXDX, IPHS, GPRO, RCRC, VPRT, MORN, TLEO, SUNH, PEET, SGMS, HMSY, USTR, CTSH, SCOR, SHPGY, IDCC, VRUS, AITP, CIB, GNI, MFE, SMG and AIQ

Stocks With Unusual Call Option Activity:

1) WY 2) BIIB 3) CI 4) SHPGY 5) MNST

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Friday Watch

Late-Night Headlines
Bloomberg:
- Investors in hedge funds that speculate on oil and natural gas prices would face higher taxes under legislation being readied by Oregon Senator Ron Wyden and Iowa Senator Charles Grassley. The measure, in circulation as a ``discussion draft'' at Washington lobbying firms, would force investors to pay short- term capital gains rates as high as 35 percent on their profits instead of the blend of long- and short-term capital gains rates they currently pay that result in a lower overall rate. ``The legislation, if enacted, would treat all of the income from the aforementioned commodities as being short-term regardless of the holding period,'' said Jonathan Schmeltz, a partner in the New York office of accounting firm Grant Thornton LLP. The bill may emerge as a leading legislative proposal to penalize market speculation that lawmakers have blamed for rising energy prices because Grassley is the top Republican on the tax- writing Senate Finance Committee. Wyden, a Democrat, is also a member of the panel. Speculation in the oil futures markets accounted for 37 percent of crude oil trading on the New York Mercantile Exchange in 2000, Wyden and Grassley said in a statement. Today, such speculation represents more than 70 percent of trading, they said in a statement. Tax-exempt institutional investors who typically don't owe taxes on their hedge fund investments would also be required to pay tax on any gains from speculative investments in the energy markets, according to the measure. The House and Senate have failed to approve other legislation intended to curb speculation in energy markets.
- Carlyle Group, the world's second- largest private-equity firm, is liquidating its Blue Wave hedge fund after assets fell by a third during the credit-market collapse. Blue Wave, a joint venture started last year with former Deutsche Bank AG executives Rick Goldsmith and Ralph Reynolds, is the second Carlyle-affiliated fund to close this year. Carlyle Capital Corp., an Amsterdam-listed fund, collapsed in March after defaulting on $16.6 billion of debt.
- Manufacturing in China, the world's fourth-biggest economy, contracted for the first time since a survey of purchasing managers began in 2005. The Purchasing Managers' Index fell to a seasonally adjusted 48.4 in July from 52 in June, the China Federation of Logistics and Purchasing said today. ``The size of the slowdown is unexpected,'' said Xing Ziqiang, a Beijing-based economist at China International Capital Corp., the nation's biggest investment bank. ``Production activity is weakening faster than we expected,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``Companies are less willing to invest as export growth slumps, credit gets tighter and the economic outlook worsens; factory closures ahead of the Olympic Games may also have had something to do with it.''
- Crude oil fell for a second day, extending the biggest monthly decline since 2004, on concern global consumption is falling amid slowing economic growth. Crude oil for September delivery declined as much as 83 cents, or 0.7 percent, to $123.25 a barrel on the New York Mercantile Exchange. They dropped 11 percent in July, the biggest one-month drop since December 2004.
- Corn fell, capping the biggest monthly drop since 1986, as warm, wet weather helped the U.S. crop recover from the worst flooding in 15 years. Soybeans declined as rain next week may east heat stress on crops.
- Amylin Pharmaceuticals Inc.(AMLN) rose the most in three years in New York trading on speculation the maker of the Byetta diabetes treatment may be acquired by its partner Eli Lilly & Co. Amylin gained 15 percent to $31.55 in Nasdaq Stock Market composite trading, leading a rally in drug stocks, after Bristol- Myers Squibb Co. offered to buy the portion of ImClone Systems Inc. it doesn't already own for $4.33 billion.
- New Jersey does the worst job among U.S. states maintaining and spending money on its highway system, while North Dakota's roads are the best-kept, according to an annual report released today by the Reason Foundation.
- Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo & Co., told investors to cut holdings of emerging-market stocks, reversing his recommendation earlier this year. China, the world's fastest-growing major economy, faces ``dangerous times'' as the country copes with higher fuel costs and slowing global growth that reduces demand for exports, the money manager wrote. ``The combination of rising inflation, commodity dependence and particularly high export ratios'' along with the slowdown make emerging-market stocks ``more vulnerable than I had thought,'' Grantham said.
- Biogen Idec Inc.(BIIB) and Elan Corp.(ELN) reported two confirmed cases of a deadly brain infection in patients taking the multiple sclerosis drug Tysabri, the first since the drug was reintroduced in the U.S. in 2006.
- Merrill Lynch & Co.(MER) Chief Executive Officer John Thain bought $11.3 million of stock in the firm's record public offering this week, regulatory filings showed. Thain, a former Goldman Sachs Group Inc. president who joined New York-based Merrill as CEO last December, bought 500,000 shares at $22.50 apiece, according to a filing with the U.S. Securities and Exchange Commission today. Merrill Lynch President Greg Fleming and brokerage head Robert McCann each bought 100,000 shares, according to separate filings.
- Venezuelan President Hugo Chavez is set to tighten his government's grip on the economy by taking over his first bank, the local unit of Spain's Banco Santander SA. Plans to nationalize the country's third-largest bank, announced yesterday, will give the state access to Banco de Venezuela SA Grupo Universal's 285 offices and $9.46 billion in deposits. It follows nationalizations in the oil, steel, cement, electricity and telecommunications industries.
- Dynamic Materials Corp.(BOOM), a maker of metal plates used in aluminum smelting and shipbuilding, fell the most in more than four years after the company's first-quarter profit and sales forecasts trailed analysts' estimates.

MarketWatch.com:
- Consumers work hard this summer to cut gas intake. Analysts expect trend of lower consumption, easing gas prices to continue. "Demand has undergone significant deterioration in the U.S.," said Linda Rafield, Platts' senior oil analyst. So "inventories have been building at a time when they would normally decline." "We will not see gasoline demand rebound this year," said Tom Kloza, chief oil analyst at the Oil Price Information Service. Charles Perry, president of energy-consulting firm Perry Management, admits that "adjustment" in demand is a long-term project since "we are creatures of habit as far as our driving is concerned." But demand for gasoline has dropped and "will continue to drop as the public changes its driving habits and moves into smaller cars."
- Jobs report: Is the stage set for stocks to rally? Dollar firmness can also continue, while bonds may be ripe for profit-taking.

CNBC.com:
- U.S. officials think the dollar has fallen far enough, and a deeper decline would risk stoking already hot inflation while providing only a marginal added kick to exports.

NY Times:
- Boeing(BA), Airbus See Customers Delay New-Plane Orders on Soaring Fuel Costs.
- China has ended tax breaks and clamped down on labor and environmental laws at factories to encourage low-end manufacturers to innovate or stop operating. Textile mills that make cheap products for export are no longer needed at this stage of China’s growth, citing Andy Rothman, an analyst at investment bank CLSA Ltd.

BusinessWeek.com:
- How to Spend Apple’s(AAPL) Cash. Its stash may soon be bigger than Microsoft’s(MSFT). But should all those billions continue to lie dormant?

New York Sun:
- For Energy, Do Everything Now.

MIT News:
- ‘Major discovery’ from MIT primed to unleash solar revolution. In a revolutionary leap that could transform solar power from a marginal, boutique alternative into a mainstream energy source, MIT researchers have overcome a major barrier to large-scale solar power: storing energy for use when the sun doesn't shine. "This is a major discovery with enormous implications for the future prosperity of humankind," said Barber, the Ernst Chain Professor of Biochemistry at Imperial College London.

Reuters:
- Republican White House hopeful John McCain accused Democrat Barack Obama on Thursday of playing racial politics in some of the most biting back-and-forth of the presidential campaign.
- Investors scrambled on Thursday for options on several pharmaceutical and biotechnology stocks, with many betting on future gains in the sector following news of a proposed buyout of ImClone Systems.

Financial Times:
- Russia plans to form a state grain trading company to control up to half of the country's cereal exports, intensifying fears that Moscow wants to use food exports as a diplomatic weapon in the same way as Gazprom has manipulated natural gas sales. The move by Moscow, the world's fifth-biggest exporter of cereals, has been sharply criticized by US agriculture diplomats as a "giant step back" to the Soviet era.
- ArcelorMittal is considering breaking up the $8.8bn takeover of US coal miner Alpha Natural Resources(ANR) by Cleveland-Cliffs(CLF) with a counter-bid.
- The Jefferies-Reuters CRB index, a global commodities benchmark, lost 10 per cent, its largest monthly decline since it fell 10.5 per cent in March 1980, amid worries about lower economic growth damping demand for raw materials. Natural gas, corn, wheat and freight costs plunged last month between 10 and 30 per cent. The general bullish outlook is cracking with Deutsche Bank's strategists warning today that oil prices would fall below $100 a barrel by the start of next year. "We expect the short-term cyclical factors that drove the price of oil from $60 to $145 over the past year to reverse in the coming 12 months," said Marcel Cassard, of Deutsche Bank."The impact of the decline in commodity prices on global inflation will be significant." Traders warned the key commodity indices and energy markets closed the month below the previous month's opening, resulting in a strong technical bearish signal, which could trigger further sales in August.

Guardian:
- Google Inc.(GOOG) will be allowed to introduce its Street View service, which allows ground-level pictures of streets, in the UK after the Information Commissioner’s Office said it had no complaints about the service.

International Herald Tribune:
- An activist British hedge fund has taken a 6 percent stake in Washington Mutual as the largest U.S. savings and loan tries to rebound from billions of dollars of mortgage-related losses. The London-based fund, Toscafund Asset Management, also reported a 5.1 percent stake in Sovereign Bancorp , the second-largest U.S. thrift.

Late Buy/Sell Recommendations
Citigroup:
- Maintained Buy on (MNST), target $30
- Reiterated Buy on (CVS), target $52.
- Reiterated Buy on (BWA), target $57.

Night Trading
Asian Indices are -2.0% to -.75% on average.
S&P 500 futures -.18%.
NASDAQ 100 futures -.35%.

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Earnings of Note
Company/EPS Estimate
- (ASF)/.43
- (BYD)/.27
- (CVX)/3.03
- (CI)/.97
- (CCU)/.39
- (CLX)/1.11
- (GM)/-2.63
- (IR)/.89
- (KBR)/.36
- (NT)/-.04
- (NYX)/.78
- (OSK)/1.05
- (PPL)/.55
- (JAVA)/.25
- (TDW)/1.52

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for July is estimated at -75K versus -62K in June.
- The Unemployment Rate for July is estimated at 5.6% versus 5.5% in June.
- The Change in Average Hourly Earnings for July is estimated at .3% versus a .3% gain in June.

10:00 am EST
- ISM Manufacturing for July is estimated at 49.0 versus 50.2 in June.
- ISM Price Paid for July is estimated at 88.0 versus 91.5 in June.
- Construction Spending for June is estimated to decline .3% versus a .4% decline in May.

Afternoon:
- Total Vehicle Sales for July are estimated at 13.6M versus 13.6M in June.

Other Potential Market Movers
- The (YHOO) shareholders meeting and (DRYS) shareholders meeting could also impact trading today.

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