Stocks Soaring into Final Hour on Diminishing Credit Market Angst, Less Financial Sector Pessimism and Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs, Gaming longs and Retail 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, almost every sector is rising and volume is about average. Investor anxiety is about average. Today’s overall market action is bullish. The VIX is falling 6.56% and is still above-average at 21.95. The ISE Sentiment Index is slightly below average at 138.0 and the total put/call is below average at .73. Finally, the NYSE Arms has been running slightly above average most of the day and is currently .92. The Euro Financial Sector Credit Default Swap Index is falling 4.75% today to 80.83 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 falling 1.5% today to 131.50 basis points. The TED spread is falling 3.39% to 1.07. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another 4 basis points to 2.25%, which is the lowest since May 1st and down 38 basis points in a month. Energy-sensitive Russian equities fell another 4.42% today and are now down 27.5% in less than three months. I think part of the reason US equities are lifting as much as they are today is due to the fact that the large fund or funds that were cutting risk across the board yesterday is done selling. The (XLF) is at session highs, rising 4.1%. I view the Fed’s policy statement as a positive for stocks. The US dollar is maintaining recent gains on the announcement, which is a large positive. I keep hearing investors on CNBC make the case that commodity stocks are cheap because of their “low p/e ratios.” However, historically commodity stocks always appear the cheapest before substantial declines as their earnings growth peaks. Weakening earnings and falling stocks prices then lead to substantial p/e multiple increases in these types of stocks. That is what makes the fertilizer stocks so dangerous, in my opinion. Potash Corp.(POT), an investor favorite, currently has a trailing p/e of 27.3 even after recent losses and as earnings growth is likely near a multi-year peak. This company carried a p/e of around 7.0 in 2001. The fertilizer stocks are getting very oversold on a short-term basis. However, as I said a couple of months ago, I still view these stocks as carrying the most downside risk of any group in the market over the intermediate-term. Nikkei futures indicate an +250 open in Japan and DAX futures indicate an +57 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower commodity prices, diminishing credit market angst, less financial sector pessimism and short-covering.

Today's Headlines

Bloomberg:
- The cost of protecting corporate bonds from default fell amid speculation that the Federal Reserve will leave interest rates unchanged today and as declining oil prices helped ease inflation concerns. Credit-default swaps on the Markit CDX North America Investment Grade Index fell 2 basis points to 132 as of 11:02 am in NY.
- Corporate defaults in Europe are unlikely to reach levels triggered in 2001 when Internet-related companies collapsed and terrorists attacked New York, said analysts at S&P. European company defaults climbed to .47% in July from zero in June, according to S&P. The rate would increase to 4.4% if there are defaults at the eight companies that S&P rates B- or lower, and are most likely to be downgraded. That’s less than half the default rate to 10.6% at the nadir of the dot-com collapse in the second quarter of 2002, S&P said.
- Wachovia Corp.(WB), the fourth-biggest U.S. bank, rose as much as 8 percent in New York trading after Chief Executive Officer Robert Steel met with Wall Street analysts yesterday for the first time. Wachovia isn't likely to issue new capital and doesn't anticipate management changes after the chief financial officer and chief risk officer step down, Steel told about 20 analysts at the company's midtown Manhattan office.
- The US dollar touched the highest in more than seven weeks versus the euro on speculation Federal Reserve policy makers will highlight concern that inflation needs to be contained while leaving interest rates unchanged. The U.S. currency also rose against the South African rand, Norwegian krone and Canadian dollar after crude oil fell to the lowest since May. The Australian dollar fell to a four-month low after the central bank signaled it may cut borrowing costs for the first time in almost seven years.
- China, where auto plants are running at about 70 percent of their potential, said vehicle export growth slowed in the first half, stoking concerns about excess capacity in the world's second-largest car market. ``Tight monetary policies are making it difficult for automakers to find capital and that led to the decline in exports,'' Fu said. Concerns about excess capacity and falling prices have caused SAIC Motor Corp., China's largest automaker, to plunge 70 percent this year in Shanghai trading. China's stockpile of unsold vehicles rose about 50 percent in the six months ended June to a four-year high, the National Development and Reform Commission said last month. That helped cause average vehicle prices to fall about 3 percent.
- China, the world's biggest soybean importer, may slow buying of oilseeds and vegetable oil as domestic stockpiles surge amid easing demand. Cooking oil inventories are at capacity. Soybeans on the Chicago Board of Trade plunged to the lowest since May today and palm oil slumped to a nine-month low on prospects for a larger-than-expected U.S. oilseed output this year on improved weather conditions. ``At the moment soybean oil and soybean meal face large inventories and weak demand,'' with many crushers throughout China shutting down, the China National Grain and Oils Information Center said in an e-mailed report today.
- China's home-appliances makers, the world's largest exporters of the products, are cutting purchases of copper as shipments of air conditioners and fridges slow, Jiangxi Copper Co. said. Shares fell the most in four months. Metal consumption may grow less than 10 percent this year in China, slower than 2007, Zhao Mingwang, general manager of rod and wire sales at the nation's second-biggest maker of the metal, said today by phone. Slowing global economic growth and a rising yuan have sapped China exports growth, with shipments gaining at the slowest pace in four months in June. ``Small and medium-sized companies such as air-conditioner makers were seriously hurt by a slump in exports,'' Zhao said in an interview from Jiangxi. China's copper apparent consumption grew only 2 percent in the first half as higher prices prompted consumers to use up stockpiles.
- Corn fell to the lowest price since March and soybeans dropped to a three-month low on speculation that Midwest rains have boosted the yield potential of crops in the U.S., the world's largest producer. ``The crops are improving dramatically,'' said Roy Huckabay, the executive vice president at the Linn Group in Chicago. ``This week's rains are million-dollar-crop makers for soybeans,'' which are beginning to develop pods that will be filled with beans later this month, Huckabay said.
- Crude oil fell to a three-month low as meteorologists forecast Tropical Storm Edouard will miss most offshore production facilities in the U.S. Gulf Coast while approaching Texas.
- Delta Air Lines Inc.(DAL), the third- largest U.S. carrier, said it will add Internet and messaging service on all aircraft used for its main U.S. flights.
- Goldman Sachs Group Inc.(GS), the most profitable U.S. securities firm, had its third-quarter earnings estimate cut 35 percent by Merrill Lynch & Co. because the company may be hurt by results from its commodities and hedge fund businesses. Merrill's Guy Moszkowski trimmed his per-share estimate for New York-based Goldman to $2.80, which would be the lowest since the second quarter of 2005, from $4.28. He also lowered his price target to $205 from $212.
- Syngenta AG, the world's biggest maker of agricultural chemicals, dropped the most since January in Zurich trading after falling crop prices raised concerns about pesticide and fertilizer demand. Syngenta, based in Basel, Switzerland, dropped 5.6 percent, or 16.75 Swiss francs. ``A mix of several factors has caused crop prices to decline, and this directly affects the demand for pesticides and fertilizers,'' said Martin Schreiber, a Zuercher Kantonalbank analyst with an ``overweight'' rating on the stock. Crop protection accounts for about 8 percent of farmers' costs, so when prices fall it hits demand for pesticides.''
- European retail sales dropped by the most in at least 13 years in June as a surge in oil and food costs left consumers with less money to spend on other goods. Sales in the 15-nation euro area fell 3.1 percent from a year earlier, the largest annual decline since the European Union's statistics office in Luxembourg began collecting the data in 1995.
- U.K. factory production unexpectedly shrank for a fourth month in June as record commodity prices sapped economic growth, bringing the British economy closer to a recession. Factory output fell 0.5 percent from May and was 1.3 percent lower than a year earlier, the Office for National Statistics said today in London.

USA Today:
- There's a glimmer of hope in the neon city of Nevada, where home sales are starting to heat up after two dismal years. In fact, sales in Las Vegas have risen over the past six months. Bank-owned foreclosed properties are setting the pace. With prices falling, the homes are grabbing attention. The median home price was $225,000 in June, down from a peak of $315,000 in June 2006. Las Vegas was one of the first areas hit by the subprime mortgage collapse. Many foreigners love to visit the city, and some are eager to take advantage of the lower prices and favorable currency exchange rates. "We're getting a lot more people from Canada and other foreign countries who are able to pick up property that they can afford," Kelley says. Local residents may also help lift the housing market after some new casinos open at the end of the year and in late 2009 and produce jobs, Schwer says. While Las Vegas may have been one of the first cities to suffer from the housing crisis, it now may lead the way out of the slump, he says.

Reuters:
- Venezuelan President Hugo Chavez said on Tuesday "it's good" that oil prices have come down, saying $150 per barrel would be irrational. The leader of OPEC member Venezuela has said several times recently that $100 per barrel is a fair price for oil. Venezuela under the leadership of socialist Chavez has been one of OPEC's most ardent price hawks, consistently seeking higher oil prices even as other OPEC members express worries that high prices reduce global demand.

Interfax:
- Russian weapons exports may exceed $8 billion this year, up from $7.5 billion in 2007, citing Mikhail Dmitriyev, head of the Federal Service of Military-Technical Cooperation. Dmitriyev said the Russian defense industry has 10-15 “regular trading partners,” including China, India, Algeria, Morocco and Venezuela.

Sueddeutsche Zeitung:
- The German economy shrank 1% in the second quarter from the first. Experts forecast the economy would shrink .5% and if the contraction continues in the third quarter Germany will have technically slid into a recession, Sueddeutsche said. The Federal Statistics Office will publish a first estimate of second quarter gross domestic product on Aug. 14. Record oil prices, accelerating inflation and a stronger euro weigh on the economic outlook and may prompt the German government to cut its forecast for full year growth from 1.2%.

Irish Times:
- The decline in commercial property values in Ireland is gathering pace with the latest property index showing that capital values fell by 7.2 per cent in the three months to the end of June. The fall in values has been triggered by a sudden collapse in investor confidence and is more than double the 3.3 per cent decline in values recorded in the first quarter of the year.

Bear Radar

Style Underperformer:

Mid-cap Growth +.77%

Sector Underperformers:

Gold irlind (-2.71%), Coal (-.98%) and Construction (-.21%)

Stocks Falling on Unusual Volume:

WTI, DNR, CLF, LIHR, SA, JRCC, RTP, RACK, TWGP, SNHY, OTTR, AMSC, GTLS, PTEN, PAAS, TAP, UTR, MVL, RRI, WTI and DNR

Stocks With Unusual Put Option Activity:

1) S 2) AMED 3) GRA 4) AVP 5) CCL

ISM Non-Manufacturing Rises More Than Estimates

- ISM Non-Manufacturing for July rose to 49.5 versus estimates of 48.8 and a reading of 48.2 in June.

BOTTOM LINE: Service industry activity in the US exceeded economists’ estimates during July as employment gained, Bloomberg reported. The New Orders component fell to 47.9 from 48.6 in June. The Prices Paid component fell to 80.8 from 84.5 the prior month. The Employment component jumped to 47.1 from 43.8 in June. Weekly Retail Sales rose 2.9% year-over-year this week, which is back to long-term average levels and the best showing since the week of April 10^th, 2007, despite the diminishing effects of the tax rebate checks and numerous perceived headwinds. Weekly retail sales have averaged 2.75% gains over the last month, up from a .6% average increase during the month of February. This is a large positive and now food and energy prices are falling dramatically. Investors are significantly underestimating the positive ramifications for the US economy from the recent plunge in commodities, in my opinion. This is likely for two main reasons. The overwhelming majority of investors don’t believe the commodity bubble has really burst and expect prices to inflate again. As well, the global economy is currently slowing too much and investors are worried about another down-leg developing in the US economy as a result of slowing exports. However, if the commodity bubble continues to deflate, the hugely positive ramifications for global inflation and growth could prevent the global economy from slowing much further. This would result in a massive move higher in developed market stocks, in my opinion. Emerging market stocks will participate, as well, but would likely underperform developed markets as their economies are heavily dependent on commodity exports. Most investors expect the Fed to leave rates unchanged and adopt slightly more dovish rhetoric this afternoon. However, I wouldn’t be surprised to see rhetoric regarding inflation concerns remain about the same as the last announcement. This may initially pressure stocks, but would be a longer-term positive as it would likely boost the US dollar further and pressure commodities even more, which should help keep long-term rates low as inflation expectations continue to fall at a meaningful rate. There are many reasons why the financial sector ETF(XLF) has a negative -.95 correlation with oil. Thus, this would also help the financial sector, in my opinion, which is of great concern to the Fed.

Bull Radar

Style Outperformer:

Small-cap Value (+2.04%)

Sector Outperformers:

Airlines (+5.21%), Gaming (+4.35%) and Retail (+3.65%)

Stocks Rising on Unusual Volume:

IRE, AIB, GEOY, USMO, PFG, AXA, FTO, EPL, BAS, TIE, BW, MASI, IIVI, CPHL, NNDS, BLKB, VRUS, AFAM, QGEN, CUTR, ATHN, CLDN, PTRY, TNDM, CEDC, SAFT, AIMC, HSIC, AAUK, AEIS, EVVV, NPO, HEW, AIN, PDX, ATE and WLK

Stocks With Unusual Call Option Activity:

1) VIP 2) MNST 3) AMCC 4) HNT 5) KMX

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