Stocks Finish Mixed as Gains in Airline, Retail, Healthcare and Financial Shares Offset Losses in Commodity and Construction Stocks

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In Play

Stocks Miex into Final Hour as Global Growth Worries Offset Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Retail longs, Medical longs and Commodity/Emerging Market shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mixed as the advance/decline line is slightly lower, sector performance is mostly positive and volume is below average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 2.85% and is still above-average at 19.76. The ISE Sentiment Index is low at 115.0 and the total put/call is above average at .97. Finally, the NYSE Arms has been running below average most of the day and is currently .65. The Euro Financial Sector Credit Default Swap Index is falling 1.07% today to 79.26 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 .79% today to 134.21 basis points. The TED spread is rising 2.37% to .98. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis point to 2.19%, which is still the lowest since October 14, 2003 and down 44 basis points in six weeks. Based on a quick scan of many leading hedge funds’ 13Fs yesterday and a Bloomberg story today, my suspicions of a massive overweighting in commodity stocks by these funds were confirmed. This is likely the reason that many leading growth stocks are underperforming today, as these funds cut risk across the board again. Gold is poised to finish the week convincingly below its 65-week moving-average for the first time since its major bull move began in 2001. Nikkei futures indicate a -54 open in Japan and DAX futures indicate an +13 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower commodity prices and less financial sector pessimism.

Today's Headlines

Bloomberg:
- The US dollar headed for a fifth weekly gain against the euro, its longest winning streak in more than two years, as crude oil prices declined and the European and Japanese economies contracted. The U.S. currency rose to the strongest level in almost six months against the euro and a seven-month high versus the yen. The pound dropped for an 11th day against the dollar, the longest run of declines in at least 37 years, on speculation a recession will force the Bank of England to cut interest rates. ``The world is finding the dollar is very, very cheap,'' said Steven Englander, a currency strategist at Lehman Brothers Holdings Inc. in New York.
- Hedge funds had far bigger bets on energy stocks at the start of the third quarter than they did three months earlier and may now regret their investments. The Bloomberg Chart Of The Day shows energy producers accounted for 15.6% of the funds’ assets on June 30^th, up 3.3 percentage points from March 31. Last quarter’s shift was the biggest increase among the 10 main industry groups in the S&P 500. It also surpassed a 2.9-point increase in energy’s S&P 500 weighting last quarter. Commodity producers accounted for 7.1 percent of the funds’ holdings, well about their 3.8% share of the S&P 500 when the current quarter began. “These weightings help explain why July was one of the worst months on record for hedge funds and why August may not be any better,” analysts at Bespoke Investment Group LLC wrote. Energy stocks are the S&P 500’s worst performers this quarter. Their industry index fell 17% through yesterday as the S&P 500 added 1%.
- Commodities, measured by the CRB, are down 20 percent from a record July 3, descending into a bear market. Declining raw- materials prices may help ease global inflationary pressures. ``There will be a precipitous slowdown in global growth and that means a lot less demand for things like energy and base metals,'' said Michael Pento, a senior market strategist at Delta Global Advisors in Huntington Beach, California. ``It would be insane to step in and buy oil or metals now. These markets will be vulnerable for the next four of five months.'' Assets linked to commodity indexes have almost quadrupled to $297 billion as of June, from about $76.7 billion in January 2006, according to an estimate by Lehman Brothers Holdings Inc. A ``buying orgy'' in commodities was inflating prices and increasing the risk of a collapse, Paul Touradji, founder of Touradji Capital Management LLC, said in March.
- Bush, Merkel Demand Russia Withdraw From Georgia, Denounce ‘Intimidation’.
- MBIA Inc.(MBI) and Ambac Financial Group Inc.(ABK), the bond insurers that have lost at least 79 percent of their market value this year, rose in New York trading after Standard & Poor's affirmed the company's credit ratings and called steps to shore up their businesses positive. MBIA climbed 61 cents, or 5.9 percent, to $10.93, the highest since May, at 11:56 a.m. in New York Stock Exchange composite trading. Ambac rose 70 cents, or 15 percent, to $5.26.
- Lehman Brothers Holdings Inc.(LEH), whose shares have fallen 74 percent this year, received votes of confidence as billionaire investor George Soros, T. Rowe Price Group Inc. and Wellington Management Co. increased their stakes.
- Corn and soybeans plunged the most in a week as the dollar approached a seven-month high, reducing the appeal of commodities as an investment hedge against inflation. ``It is about unwinding all these trades,'' said Thomas Uhlmann, a floor broker for Penson GHCO in Chicago. ``Open interest is plummeting'' because the surge in China's economic growth that boosted raw-material demand before the Olympics is now over, he said. In the past two weeks, some of the biggest dealers in China have declined to take delivery of palm-oil shipments and sold back five cargoes of soybeans, said Gao Yingbin, an analyst at the China Cereals and Oils Business Net. It is common for smaller buyers to ditch cargoes when prices drop, a process called ``washout,'' and it happened last month as well, Gao said. ``Now it's happening to some of the big traders, who are probably trying to recover their losses on the futures market.'' U.S. exporters reported overseas buyers canceled more soybean cargoes than they purchased during the week ended Aug. 7, the U.S. Department of Agriculture said yesterday in a report. Cancellations exceeded new purchases by 49,700 metric tons, including 56,300 tons canceled by China. ``It appears that China has likely overbooked their needs to fight internal food inflation, and now that prices are falling, they are able to back out of some of these purchases,'' said James Gerlach, president of A/C Trading Inc. in Fowler, Indiana.
- Gold fell, heading for the biggest weekly slide in more than 25 years, as the dollar surged against the euro, reducing the appeal of the precious metal as an alternative investment. Silver dropped as much as 14 percent. The dollar headed for a fifth straight weekly gain against the euro as economies in Europe slow.
- Oil fell more than $3 a barrel in New York to a three-month low as the stronger dollar curbed the appeal of commodities as an inflation hedge. Oil has tumbled 24 percent from the record $147.27 a barrel reached on July 11. Consumers spent more on gasoline than vehicles and parts for the first time in 26 years in May and June, as U.S. pump prices headed for a record. Regular gasoline at the pump, averaged nationwide, fell 0.7 cent to $3.771 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.114 a gallon on July 17. The global economic outlook led the Organization of Petroleum Exporting Countries to leave its forecast for 2009 oil demand growth unchanged today at the lowest rate in seven years. The oil price and the dollar have shown a long-term correlation whereby increases in one coincide with a drop in the other, said Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Switzerland. ``Oil is still overvalued on the basis of the long-term correlation,'' he said.
- Colombia's central bank left borrowing costs unchanged as policy makers bet a slowing economy and 16 interest rate increases in the past 28 months are enough to stem inflation. Policy makers held the overnight interbank rate at a seven- year high of 10 percent.
- Republican presidential candidate John McCain raised a record $27 million in July and got a boost in Internet donations from an advertisement that painted Democrat Barack Obama as a celebrity, his campaign said.
- J.C. Penney Co.(JCP), the third-largest U.S. department-store chain, and teen-apparel retailer Abercrombie & Fitch Co.(ANF) reported second-quarter profits that fell less than some analysts estimated, causing the shares to rise in New York trading.
- Health-care costs for U.S. consumers rose at the slowest pace in 36 years in the first half of 2008 as insurers resisted price increases and more lower-cost generics replaced brand-name drugs.
- Hong Kong's growth cooled more than economists expected to the slowest pace since the third quarter of 2003, when the economy began to recover after shrinking during the severe acute respiratory syndrome epidemic. Gross domestic product rose 4.2 percent in the second quarter from a year earlier, after gaining a revised 7.3 percent in the previous three months, the government said today at a press conference.
- Staar Surgical Co.(STAA) insiders and investors are buying stock as they bet the company's $3,081 lens implants to correct nearsightedness will gain on less-costly Lasik treatments, increasing the potential for a takeover.

NY Post:
- CME Group's(CME) $8.4 billion takeover of the New York Mercantile Exchange(NMX) looks likely to close after executives of the Chicago futures giant won over two influential Nymex members.

Washington Post:
- Russia Imperils Western Ties, Says Talbott.

GlobeandMail.com:
- A tough year for these hedge fund laggards.

Interfax:
- A newly completed 10,000-ton copper smelting facility will allow trial refined copper production to commence at China's largest copper deposit, the Yulong Copper Mine, a company official from Western Mining Co. Ltd., the major stakeholder of the mine, told Interfax on Aug. 15."We plan to produce up to 2,000 tons of refined copper in the remainder of 2008. In 2010, we plan to expand the production capacity of our copper smelting facility to 30,000 tons per year, and are aiming for annual production capacity of 100,000 tons in total," a Western Mining official, who wished to remain anonymous, said. "We will strive to expand copper smelting capacity as quickly as possible, as current copper prices are at a peak," he added.

Handelsblatt:
- German Economy Minister Michael Glos said the government may reduce a forecast for economic growth of 1.2% in 2009, citing an interview.

O Estado de S. Paulo:
- Brazil’s government may own rights to 12 billion barrels of oil in pre-salt fields that haven’t been auctioned off to producers, citing HRT Solutions estimates. Brazil’s National Petroleum Agency hasn’t sold rights to offshore prospects in the Santos Basin since an auction was canceled in November. The pre-salt area, including the Tupi discovery announced in November, may contain between 50 billion and 70 billion barrels of oil.

ICIS:
- China Petroleum & Chemical Corp. has cut ethylene production by 10-20% because of weak demand, citing company officials. The Yangtze plant in Nanjing city is running its two crackers, or units, with a combined annual capacity of 650,000 metric tons at about 80% of capacity.

Bear Radar

Style Underperformer:

Small-cap Growth -.39%

Sector Underperformers:

Coal irlind (-3.37%), Gold (-3.09%) and Oil Service (-2.76%)

Stocks Falling on Unusual Volume:

RES, DPTR, CCJ, MENT, AAUK, IPHS, KSP, DV, SLV, HAR, OME, GTU and CRD/B

Stocks With Unusual Put Option Activity:

1) JCG 2) ETFC 3) SPWR 4) CNQ 5) FLR

NY Manufacturing Expands, Long-term TIC Flows Decelerate, Industrial Production Rises Again, Confidence Improves Slightly

- Empire Manufacturing for August rose to 2.8 versus estimates of -4.0 and a reading of -4.9 in July.

- Net Long-term TIC Flows for June came in at $53.4 billion versus estimates of $60.0 billion and an upwardly revised $83.2 billion in May.

- Industrial Production for July rose .2% versus estimates of unch. and a .4% gain in June.

- Capacity Utilization for July rose to 79.9% versus estimates of 79.8% and 79.8% in June.

- Preliminary Univ. of Mich. Consumer Confidence for August rose to 61.7 versus estimates of 62.0 and a reading of 61.2 in July.

BOTTOM LINE: Manufacturing in NY unexpectedly grew in August as the cost of raw materials cooled, making companies more optimistic about the future, Bloomberg reported. The Prices Paid component fell to 65.2 from 77.9 in July, the largest decline in more than two years. The CRB Index, the main source of inflation fears, has plunged 19.6% in less than six weeks. The Outlook for the next six months component soared to 34.6, the highest level this year, from 15.6 in July. The New Orders component fell to -2.2 from 8.3 in July. The Employment component improved to -4.5 from -6.3. I expect manufacturing to continue to improve modestly over the next few months on inventory rebuilding and higher-than-expected demand as a result of plunging commodity prices.

International buying of US financial assets slowed in June as investors sold stocks and demand weakened for corporate bonds, Bloomberg reported. This report also showed that foreign demand for US agency debt from companies such as Fannie Mae and Freddie Mac strengthened from a month earlier on more buying by private investors. Buying of long-term agency debt rose a net $31.4 billion, the most since February. Net purchases of US Treasury notes and bonds rose $28.3 billion versus $5.7 billion the prior month. I expect foreign demand for US assets to rise back to robust levels over the coming months on US stock outperformance and a rising US dollar.

Industrial Production in the US unexpectedly rose in July, helped by gains in automobiles, metals and machinery, Bloomberg said. Demand for autos rose for a third month, reflecting a rebound from the American Axle strike. I continue to believe that strike had a far greater impact on overall US economic activity in the earlier part of the year than is generally perceived. Capacity Utilization at 79.8% is still below the long-term average of 81%, which is another positive on the inflation front. Excluding autos, factory output rose .2% after a .2% decline in June. I expect industrial production to continue to show modest improvement over the intermediate-term.

Confidence among US consumers showed the first back-to-back gain in almost two years in August as lower energy prices and a rebound in stock prices boosted sentiment, Bloomberg reported. The Expectations component of the index rose to 56.8 from 53.5, despite an end to the tax rebate stimulus checks. The Present Situation component fell to 69.3 from 73.1 the prior month. I expect Consumer Confidence to improve significantly during 4Q as stocks rise further, election uncertainty ends, energy/food prices fall more, the US dollar rallies further, employment improves modestly, interest rates remain low and inflation decelerates meaningfully. The Citi eurozone economic surprise index is now -166.1, while the US index is up to +46.5. The US Dollar Index is rising another .54% and the 10-year yield is falling another 5 basis points on today’s news.

Bull Radar

Bear Radar

Style Outperformer:

Small-cap Value +1.11%

Sector Outperformers:

Airlines irlind (+4.41%), Homebuilders (+2.23%) and Retail (+1.83%)

Stocks Rising on Unusual Volume:

DDS, KSS, LUK, PSEC, PFE, GEOY, NGS, ALJ, RICK, SPWR, VISN, ADSK, GSOL, OPLK, APEI, HRBN, RNST, VTIV, AMED, MTSC, STBA, ABCO, WIBC, SOLF, ACIW, CVBF, UAUA, SUSQ, IRF and CY

Stocks With Unusual Call Option Activity:

1) CIT 2) SPWR 3) JCG 4) UNM 5) KEY