Stocks Finish at Session Lows, Weighed Down by Airline, Insurance, Biotech and Financial Shares

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Stocks Lower into Final Hour on Financial Sector Pessimism, Global Growth Concerns, Higher Commodity Prices

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Software longs, Alternative Energy longs, Medical longs and Emerging Market/Commodity shorts. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 5.8% and is still above-average at 21.4. The ISE Sentiment Index is below average at 106.0 and the total put/call is above average at 1.01. Finally, the NYSE Arms has been running above average most of the day and is currently 1.32. The Euro Financial Sector Credit Default Swap Index is unch. today at 83.66 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 rising 2.5% today to 133.95 basis points. The TED spread is falling 1.75% to 1.14. The 10-year TIPS spread, a good gauge of inflation expectations, is falling another 2 basis points to 2.21%, which is the lowest since January 28th and down 42 basis points in about a month. Growth stocks are relatively strong again today. The MS Tech Index is just .6% lower on the day despite the bounce in oil and 5.8% decline in the (XLF). The Semiconductor Index(SOX) is today’s best-performer, rising .4%. (INTC) is leading the way with a 4.0% gain on heavy volume. The stock is rising above its 200-day moving average for the first time since May. The AAII % Bulls fell to 35.6% this week, while the % Bears rose to 42.4%. I would expect to see some more weakness in US stocks tomorrow morning, with a possible rally into the afternoon. Nikkei futures indicate an -30 open in Japan and DAX futures indicate an +13 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on a bounce in commodity prices, global growth worries, financial sector pessimism and more shorting.

Today's Headlines

Bloomberg:
- John W. Henry & Co., the investment firm run by the Boston Red Sox baseball team's owner, is among hedge funds that suffered their worst drops in almost 18 months in July as oil and other commodities retreated from records. John W. Henry lost 17 percent on its JWH GlobalAnalytics fund, the firm said on its Web site. Altis Partners Ltd.'s $1 billion global futures program fell 18 percent, paring its gain for the year to 10 percent. London-based Man Group Plc'sAHL Diversified Futures Ltd., the computer program that trades about $25 billion of investments, dropped 5.5 percent through July 28, or a loss of about $1.37 billion in the month. Oil, natural gas, nickel and corn prices all tumbled in July, making it the worst month for the Reuters/Jefferies CRB Commodity Index in 28 years. Hedge funds overall declined 6.3 percent through the end of July, the worst performance in five years, the index shows.
- Crude oil was little changed after rising as much as $3.20 a barrel earlier as Turkey said a pipeline carrying crude to the Mediterranean from Azerbaijan may remain shut for two weeks following an explosion on Aug. 5.
- The euro touched the lowest in almost eight weeks against the dollar after European Central Bank President Jean-Claude Trichet said economic growth will slow, reducing expectations policy makers will raise interest rates. The European single currency also declined against the yen and the Canadian dollar as the ECB kept its main rate at a seven-year high of 4.25 percent.
- Canada's dollar fell for the sixth consecutive day, reversing earlier gains, as the U.S. dollar strengthened again most major currencies. The Canadian dollar has traded near a year low this week as economic growth slows and gold and oil drop from record highs. Commodities account for about half of the nation's exports, while the U.S. is Canada's biggest trading partner.
- Citigroup Inc.(C), the largest U.S. bank by assets, agreed to buy back or help clients unload $19.5 billion in auction-rate securities and pay a $100 million fine to settle U.S. regulatory claims it improperly saddled customers with untradeable bonds.
- Roche Holding AG may have to boost its bid for Genentech Inc. by almost 50 percent once test results show the cancer drug Avastin, sold by both companies, works against an expanding list of tumors.
- A Sudanese-born runner who is a member of an athletes group critical of China's policies toward Darfur was chosen to carry the U.S. flag in the opening ceremony of the Beijing Olympics.

Wall Street Journal:
- Metropolitan areas across the US continue to get more diverse as minorities, especially Hispanics, increase their share of the population.
- Paul Tudor Jones and James Pallotta may end their association in the Tudor Investment Corp., raising questions about the future of their $18 billion dollar financial empire.
- Notwithstanding the hype about Barack Obama, here is where the presidential race stands: John McCain was within an average of 1.9% of his Democratic opponent in last week's daily Gallup tracking poll.

FoxBusiness:
- Hedge funds tracked by Hennessee Group LLC fell 1.95% on average in July, partly because a popular trade of betting against financial-services stocks and investing in energy-related securities backfired. "Hedge funds underperformed in July due to sharp reversals in the equity markets during the second half of the month," said E. Lee Hennessee, Managing Principal of Hennessee Group. "One of the most common and profitable themes among managers for the first half of the year - short financials and long energy - experienced a very sharp reversal in July." The S&P Banking Index surged almost 50% from its low point in mid-July, while managers who were long energy suffered losses as the S&P Energy Sector dropped 14% last month, Hennessee explained.

Lloyd’s List:
- Growth at Shanghai Port, the world’s second busiest box port, dropped to its lowest level in a decade last month, writes Sandra Tsui.

ZDNet:
- Demand appears to be stronger than expected for Intel’s Atom chip and the netbooks that they power, according to a Citi report.

MailOnline:
- There is something almost obscene about the revelation that hedge fund manager Crispin Odey has made a personal profit of £28 million by speculating on the credit crunch.

Diario de Noticias:
- Galp Energia SGPS SA, a Portuguese oil company, plans to invest about $10 billion to develop the Tupi offshore oil prospect in Brazil. Galp’s board yesterday approved the development plan for Tupi, which will involve total investment of $100 billion by all the partners in the project. Production at Tupi is due to start within seven months and may reach 20,000 barrels a day in that year. Brazil’s Petrobras SA said in November that Tupi may hold 8 billion barrels of recoverable oil equivalent.

Vedomosti:
- Construction in Moscow is slowing for the first time since 1999.

Ziarul Financiar:
- The number of Romanian companies that declared bankruptcy in the first half doubled from the year-earlier period, as debt loads increased.

Business Standard:
- Inflation in India at 12.01% for the first time in 13 years.

Alittihad:
- Abu Dhabi plans to invest $20.15 billion to increase its oil production capacity 30% by 2010, citing a report from the Dept. of Planning and Economy. The emirate plans to raise production capacity to 3.5 million barrels a day from 2.7 million barrels a day.

Khaleej Times:
- Property prices in Dubai are set to fall for the first time since 2002 as a flood of new housing units reaches the market, according to a forecast by Morgan Stanley. In a research note the global investment bank said, “In 2009 a predicted excess supply could trigger price declines that will culminate in 2010.” The report also said property prices that have increased 79 per cent since 2007 could drop 10 per cent by 2010. In a worst case scenario the report added that Dubai property prices could follow the pattern of Singapore in the late 1990s when property prices plunged 80 per cent in 18 months.

Bear Radar

Style Underperformer:

Large-cap Value -1.50%

Sector Underperformers:

Oil Tankers irlind (-6.72%), Insurance (-3.46%) and Banks (-3.22%)

Stocks Falling on Unusual Volume:

VRSN, BBBB, AIG, SKM, TSU, WMT, VTIV, MEND, CTRN, UHAL, MNTA, EXLS, OFIX, ATPG, SINA, CIEN, ACOR, FOSL, SVNT, TK, EW, GEO, CXW, FRZ, MR and KG

Stocks With Unusual Put Option Activity:

1) ACAS 2) JBHT 3) HANS 4) CTRP 5) VIP

3-Month Average of Pending Home Sales Best in Over 4 Years

(Click on image to enlarge)

BOTTOM LINE: Pending Home Sales jumped +5.3% in June versus estimates of a -1.0% decline. The 3-month average of Pending Home Sales is currently +2.5%, which is the best level since March 2004 when home sales were booming. Pending Home Sales have been improving since July of last year. Any meaningful bounce in actual home sales from current levels will greatly reduce inventories, which will help stabilize pricing.

Initial Jobless Claims Rise Slightly, Unemployment Steady, Pending Home Sales 3-Month Avg. Best in Over 4 Years

- Initial Jobless Claims for this week rose to 455K versus estimates of 425K and 448K the prior week.

- Continuing Claims rose to 3311K versus estimates of 3255K and 3280K prior.

- Pending Home Sales for June rose 5.3% versus estimates of a -1.0% decline and a -4.9% decline in May.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits rose slightly last week, Bloomberg reported. Some workers filing for extended benefits under a government-spending bill that was signed by President Bush in June were deemed eligible to enter the program as first-time claimants, according to the Labor Dept. That may have led to the jump in applications over the last few weeks, he said. The government can’t quantify the impact on claims and applications will likely remain elevated for a few more weeks, the spokesman said. The four-week moving average of jobless claims rose to 419,500 from 392,750 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at 2.5% versus the long-term average of 2.9%. 38 state reported a decrease in jobless claims. Jobless claims will likely trend around current levels for a couple of weeks before decelerating during 4Q.

More Americans unexpectedly signed contracts to purchase previously owned homes in June, a sign that lower prices are drawing buyers back into the market, Bloomberg reported. Purchase contracts jumped 9.3% in the South, 4.6% in the West, 3.4% in the Northeast and 1.3% in the Midwest. The three-month average of Pending Home Sales is +2.5%, which is the best level since March 2004. This is a large positive. I continue to believe overall home sales have bottomed and will trend modestly higher through year-end, which should make a significant dent in inventories.