Stocks Mixed into Final Hour as Rising Oil, Credit Angst Offset Bargain-Hunting and Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Computer longs, Alternative Energy longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is light. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 3.2% and is still above-average at 20.59. The ISE Sentiment Index is low at 101.0 and the total put/call is above-average at 1.03. Finally, the NYSE Arms has been running around average most of the day and is currently .93. The Euro Financial Sector Credit Default Swap Index is rising .15% today to 88.33 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 1.96% today to 144.35 basis points. The TED spread is rising 9.11% to 1.11. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 3 basis points to 2.19%, which is still the lowest since October 14, 2003 and down 44 basis points in about six weeks. Again today, many financial pundits are proclaiming that “oil demand is still very strong,” despite the fact that OECD demand is set for the biggest fall in 25 years and non-OECD demand growth is plunging. As well, Goldman Sachs saying today that a rising US dollar doesn’t impact oil is a ridiculous statement, in my opinion. It appears as though the people that have helped inflate the current US negativity bubble are trying their very hardest to keep it inflated. So far, they aren't having as much success as prior attempts. Considering the action in (FNM)/(FRE) and rise in oil, the (XLF)’s mild rise is a big positive. As well, a couple of months ago the broad market would have likely been down badly on this news. Given the recent drop in market volume and rise in angst, it appears to me that many traders are breaking the rule of “never short a dull market.” Recent broad market action continues to indicate more of a consolidating of recent gains rather than a topping before another move lower, in my opinion. It is also a big positive that the US dollar is able to rally today given the news. On the negative side, gauges of credit angst continue to rise and the tech sector was unable to rally today on (HPQ)’s positive report. Nikkei futures indicate an +29 open in Japan and DAX futures indicate an +4 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- A zinc supply surplus widened in the first half of the year, led by gains in Chinese production, the International Lead and Zinc Study Group said. World output outpaced usage by 72,000 metric tons in the period, compared with a surplus of 11,000 tons a year earlier, the Lisbon-based group said today. Output in China, the biggest producer, increased 3 percent to 1.92 million tons.
- Crude oil fell more than $1 a barrel after a government report showed the biggest U.S. inventory gain in more than seven years. Stockpiles rose 9.39 million barrels to 305.9 million barrels, the biggest gain in since March 2001, the Energy Department said. U.S. fuel demand averaged 20.2 million barrels a day during the past four weeks, down 3 percent from a year earlier, the department said. Gasoline consumption averaged 9.46 million barrels a day over the period, down 1.6 percent. Refineries operated at 85.7 percent of capacity in the week ended Aug. 15, down 0.2 percentage point from the week before and the lowest since the week ended May 2, the report showed. Regular gasoline, averaged nationwide, fell 1.3 cents to $3.717 a gallon, the AAA said today on its Web site. Prices reached a record $4.114 a gallon on July 17.
- Andy Lipow, president of Lipow Oil Assoc. LLC, calls oil supply rise ‘bearish factor’ for oil prices. (video)
- Iraq's Oil Minister Hussain al- Shahristani will visit Beijing at the end of this week to conclude a contract to develop the Ahdab oil field with a unit of China National Petroleum Corp., an official at the ministry said. The contract may be signed after al-Shahristani meets officials from China National's Al Waha Petroleum Co. unit, the official, who declined to be identified for security reasons, said by telephone yesterday. The government has said the Ahdab field in southern Iraq may produce about 90,000 barrels a day. Iraq is currently preparing its first exploration licensing round that may render the technical service negotiations redundant as companies bid for access to help develop the untapped reserves, which may exceed 200 billion barrels of crude, according U.S. Energy Department estimates.
- The euro fell to near the lowest level against the dollar in six months as Germany's economic outlook deteriorated and crude oil prices declined. The pound approached a two-year low versus the dollar as minutes of the Bank of England's August meeting indicated British inflation risks may have ``eased a little'' while the outlook for the economy worsened. The dollar has risen 8 percent versus the euro from the record low set in July. ``The market was waiting for a big correction after such a massive dollar rally, but they never got it,'' said Steve Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto.
- Goldman Sachs Group Inc.(GS), Morgan Stanley(MS) and Lehman Brothers Holdings Inc.(LEH) had their earnings estimates reduced by Sanford Bernstein & Co.'s Brad Hintz, at least the third analyst to lower profit predictions this week.
- The yuan climbed by the most in three weeks after U.S. Treasury Secretary Henry Paulson urged China to let its currency appreciate to curb inflation and deter Congress from introducing trade penalties.

Wall Street Journal:
- In an early sign that investors are starting to pounce on the billions of dollars of troubled land and construction loans that banks are looking to unload, a venture headed by LandCap Partners is buying $40 million of such assets from Wachovia Corp.(WB).
- When U.S. futures regulators recently reclassified one of the largest traders in the oil market as a speculator, they didn't identify the firm. But people familiar with the matter now say the company whose activities helped change perceptions about the escalating pace of oil speculation is Vitol Group, a large commodity-trading company with headquarters in Europe. Though less well-known in the U.S., the company is one of the biggest players in the oil market, linking buyers and sellers of physical crude oil and refined products.

Reuters:
- U.S. retail gasoline demand dropped 7.8 percent from the same period last year despite a dip in gasoline prices, MasterCard Advisors said Tuesday. A better indication of consumption trends is the four-week moving average, which shows a gasoline demand decline of 4.8 percent from year-ago levels, McNamara said. The average price of gasoline in the U.S. slipped 7 cents last week to $3.77 per gallon, but prices will have to drop further for U.S. consumers to ramp up their consumption of the motor fuel, McNamara said.
- Syrian President Bashar al-Assad said on Wednesday he would use this week's visit to Russia to expand military ties with Moscow whose arms sales to the Middle Eastern state have angered the West. Israel and the United States have long urged Russia not to sell weapons to Syria -- a key Moscow ally during the Cold War now at the centre of Kremlin ambitions of reviving Russia's Soviet-era role in the Middle East.

International Herald Tribune:
- I got an e-mail the other day from a friend at the New America Foundation, a Washington public policy institute, inviting me to participate in a panel on "whether the media can handle good news - whether it's on Iraq" or whatever. I accepted, although there's not much to discuss: The media are lousy at good news (a virtual oxymoron).

Kuwait News Agency:
- Abu Dhabi Investment Council, the sovereign wealth fund which this year acquired the Chrysler Building, plans to target investments in Japan, the US and Europe.

Bear Radar

Style Underperformer:

Small-cap Value -.88%

Sector Underperformers:

Gaming irlind (-1.48%), Airlines (-1.43%) and HMOs (-1.4%)

Stocks Falling on Unusual Volume:

BT, ALNY, JKHY, UAUA, SIRO, FSYS, PDO and ADI

Stocks With Unusual Put Option Activity:

1) NWA 2) ENR 3) ATVI 4) EBAY 5) AMLN

Bull Radar

Style Outperformer:

Small-cap Growth (+1.01%)

Sector Outperformers:

Steel (+1.76%), Homebuilders (+1.62%) and Computer Hardware (+1.32%)

Stocks Rising on Unusual Volume:

BZP, CEO, CHL, CNP, FCX, BBL, IMO, PDLI, VPHM, OTEX, UHAL, XLTC, SDXC, GIII, MENT, TTWO, CETV, TSRA, OMTR, SOLF, OFIX, CHNR, FWLT, SINA, PWRD, DPTR, ENER, PAY, TWI, TY, STP, EXP, SKM, SHO and GFF

Stocks With Unusual Call Option Activity:

1) MEA 2) STP 3) PAY 4) PENN 5) RYL

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Former Virginia Governor Mark Warner, now running for the U.S. Senate, called for an end to the congressional ban on offshore drilling for oil and gas. ``I think we have to lift the congressional moratorium on drilling and it's got to be part of the portfolio,'' Warner said. Drilling should be one element of a broad energy plan that also includes alternative energy sources, nuclear power and coal, Warner, 53, said during an interview on Bloomberg Television. Democrats have been under increasing pressure to allow offshore drilling as Republicans push the issue as a way to lower gas prices. Mark Warner is scheduled to give the keynote address at the Democratic National Convention next week and is to campaign tomorrow in Virginia with presumptive Democratic presidential candidate Barack Obama. He said that he would not accept an invitation to join the ticket as vice president.
- Hewlett-Packard Co.(HPQ), the world's largest personal-computer maker, reported a 14 percent increase in third-quarter profit, beating analysts' estimates, as international demand and new notebook designs spurred sales. The shares rose as much as 4.4 percent in after-hours trading.
- Barack Obama and John McCain are locked in a tight battle for president. With the nominating conventions set to begin next week, Illinois Senator Barack Obama edges Arizona Senator John McCain 42 percent to 41 percent among registered voters, according to the latest Bloomberg/LA Times poll.
- Gold, down 21 percent from a record $1,033.90 an ounce in March, may be headed down after open interest in New York futures contracts for the precious metal plunged to the lowest level in 11 months. Open interest reached 365,611 on Aug. 12, down 26 percent from a four- month high on July 18 and the lowest since Sept. 10. Commercial users of the metal, including investors or mining companies, also have reduced their bets on price gains to the lowest since September. Net-long positions fell by 20 percent from a week earlier to 130,660 contracts on Aug. 15, the biggest drop and the lowest level since September. ``An outflow of passive and active investment money'' means ``it is hard to be positive about the out for precious metals over the next month or so,'' John Reade, the head of UB AG metals strategy in London.
- This year's drop in agricultural stocks, whose rally since 2003 outpaced the gains in technology shares that preceded the dot-com crash, may deepen as the economic slowdown reduces profits, according to Citigroup Inc. ``Investors have been stung of late in farm equipment and fertilizer stocks, but more pain could be coming,'' Tobias Levkovich, Citigroup's chief U.S. equity strategist, wrote in a research note on Aug. 18. ``There are significant cracks in the agricultural economy story. We have been very anxious that investors had gotten carried away with the global growth theme.'' Note the 842 percent rise in the agricultural index during the five-year period before its peak in June. That surpassed the 755 percent gain in the S&P 500 technology index from March 1995 to March 2000, when the industry and the rest of the U.S. stock market began a 2 1/2-year descent. Levkovich wrote that he's ``worried about what has been dubbed the `dot-corn' stocks relative to the dot-com names of the late 1990s.'' Low price-to-earnings ratios for agricultural shares ``should not provide any valuation comfort since that often reflects the market's ability to sniff out the likelihood of peak earnings,'' the New York-based strategist wrote.
- Chevron Corp.(CVX) resurrected plans to tap a 700 million-barrel oil field off Canada's east coast more than two years after the project collapsed amid a dispute with the provincial government over ownership stakes. Hebron's reserves would be worth about $80.3 billion at current oil prices. The field could supply every refinery on the U.S. East Coast for more than 16 months.
- A higher percentage of Wall Street job applicants passed the final test in a three-step process that may give them a hiring edge as the financial-services industry cuts jobs at the fastest pace in at least five years. Fifty-three percent passed the third stage of the Chartered Financial Analyst test, up from 50 percent last year, the CFA Institute said in a statement today. A record 92,081 people took the exam in June, including 14,569 who cleared two preliminary exams to qualify for the test that lets them obtain CFA designation, the Charlottesville, Virginia-based institute said.
- VeriFone Holdings Inc.(PAY), the biggest maker of electronic-payment equipment, soared 33 percent in extended trading after restating previous results and forecasting 2009 sales and profit that beat analysts' estimates.
- A worldwide food crisis that sent wheat, corn and rice prices to records and sparked riots earlier this year may be over after farmers boosted plantings, a top official in India's food ministry said. ``I don't think there's a crisis now,'' said T. Nanda Kumar, the country's food secretary, who is responsible for formulating food security policy in the world's second-most populous nation. ``Food will be available.''
- The Philippines cut its 2008 economic-growth forecast for the second time this year as faster inflation hurt consumption, adding pressure on the government to boost spending on food and fuel subsidies to the poor.

Wall Street Journal:
- Been Riding the Russian Boom? It’s Time to Cash In Your Chips. At the last count, ordinary Americans had more than $3 billion at stake in mutual funds that invest in Vladimir Putin’s Russia. Recent events in central Asia show why they’re playing with fire. The risks in that country are far greater than most ordinary investors realize. And at current prices, shareholders aren’t being paid enough to take them.
- Mortgage giant Freddie Mac(FRE) was forced to offer unusually rich terms to investors in a $3 billion auction of its debt, raising anew concerns that the Treasury Department might be forced to intervene to prop up a company that is vital to the housing market.
- Dubai Corporate Probes Grow As Emirate Tightens Oversight. A police dragnet continues to widen among senior corporate executives here, in what appears to be a concerted push by government officials to put the shine back on this Mideast boomtown's damaged reputation.
- India's information-technology industry, the engine of the nation's economic resurgence, is losing steam.

MarketWatch.com:
- China has increased its power prices for the second time in two months, raising on-grid rates by about 5% to head off a looming power crisis. The National Development and Reform Commission said on its Website that the move would take effect Wednesday, and analysts said more such moves are likely ahead. "Beijing will raise power rates and fuel prices again this year. The government may also find other ways to support power producers to ensure stable power supply," said Merrill Lynch economist Ting Lu in a research note Tuesday.
- Music to a bull’s ears. Corporate insiders still buying stocks at an above-average rate. Another bullish straw in the wind is insiders' behavior since the stock market's July 15th bottom. Contrary to the normal pattern, in which insiders markedly pick up the pace of their selling as the market rises, insiders over the past five weeks they have only slightly increased that pace. It is an encouraging sign that insiders did not use the occasion of the recent rally to sell more of their shares.

CNNMoney.com:
- 10 cool tools for your mobile phone.

Alpha:
- Daniel Loeb, CEO of the $5.6 billion New York–based activist hedge fund firm Third Point, has revealed in a letter to investors that his funds had suffered from a sharp reversal in energy and financial stocks during the first three full weeks of July, sustaining losses “in the high single digits” that effectively erased all of its gains for the quarter. (The Third Point Partners Fund was up 8 percent for the second quarter and 3.6 percent for the year before its July troubles.) In addition, Loeb disclosed in his July 25 second-quarter investor letter, a copy of which has been obtained by Alpha, that the Securities and Exchange Commission has begun a formal investigation into Third Point’s communications with portfolio managers at other hedge funds.

BusinessWeek.com:
- The Next Software Power? Peoplesoft founder Dave Duffield is building another software upstart that is attracting a lot of attention.

Financial Times:
- Barclays would consider buying a US wealth management company but is "highly unlikely" to bid for an investment bank, even with the depressed share prices of many Wall Street firms, Bob Diamond, the bank's president, said on Tuesday.

TimesOnline:
- Hedge funds at a loss to cope with mood swing. Investors are facing huge losses as hedge funds have been wrongfooted by change in market sentiment over the summer. The United States-based Pequot Global Fund is believed to have been badly hit, with one expert claiming that the fund suffered a “significant double-digit” percentage loss in July, which Pequot refused to comment on. For months hedge funds made money positioning themselves for energy prices and mining stocks to rise and financials to fall. But that trend reversed in July. Similarly, the US dollar regained investor popularity two weeks ago, badly burning anyone positioned for it to remain weak. John Godden, a hedge fund consultant with IGS Group, said: “Commodity trading funds, which had a storming year till June, have been hit by the falls in energy prices. They make money on trends and when trends unwind, they lose money.” Mr Godden said that other hedge funds were doing well, with merger arbitrage funds and dedicated short sellers “making out like bandits”.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (FSLR), target $450.
- Reiterated Buy on (OMTR), target $30, added to Top Picks Live list.
- Reiterated Buy on (SPLS), raised estimates and boosted target to $32.

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures +.28%.
NASDAQ 100 futures +.35%.

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Earnings of Note
Company/EPS Estimate
- (BJ)/.57
- (ROST)/.54
- (EV)/.46
- (LTD)/.20
- (GYMB)/.25
- (BYI)/.54
- (LDG)/.76
- (PVH)/.65
- (CRM)/.08
- (SNPS)/.39

Upcoming Splits
- (ALXN) 2-for-1

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,000,000 barrels versus a -316,000 barrel drawdown the prior week. Gasoline supplies are expected to fall by 3,000,000 barrels versus a 6,394,000 barrel decline the prior week. Distillate inventories are expected to rise by 1,000,000 barrels versus a 1,759,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise .35% versus a 1.06% decline the prior week.

Other Potential Market Movers
- The weekly MBA mortgage applications report could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and technology shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.