Stocks Finish Mixed as Gains in Commodities, Homebuilders Offset Losses in Airline, Financial Shares

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

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Gaming longs, Alternative Energy longs and Medical longs. I added to my (WMS) long and took profits in another long 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 mostly positive and volume is light. Investor anxiety is about average. Today’s overall market action is bullish. The VIX is falling 5.2% and is still above-average at 19.34. The ISE Sentiment Index is about average at 154.0 and the total put/call is about average at .93. Finally, the NYSE Arms has been running below average most of the day and is currently .64. The Euro Financial Sector Credit Default Swap Index is rising 1.5% today to 89.83 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 rising .96% today to 145.99 basis points. The TED spread is falling 1.91% to 1.11. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 4 basis points to 2.23%, which is still down 40 basis points in about six weeks. Once again, considering the decline in financials and rise in oil, the broad market trades very well. I still believe recent broad market action indicates more of a consolidating of recent gains before another surge higher rather than a topping before another move lower. The many bears have had several days of bad headlines and have not been able to capitalize. One of my longs, Apple Computer(AAPL), is down another 1.1% today and has pulled back 6 points from its recent high. This morning RBC Capital said Mac market share could hit 4.2% in calendar 09. I think this number is very conservative and overall analyst forward estimates are still way too low. The stock looks attractive at current levels for both long and short-term investors, in my opinion. Nikkei futures indicate an +73 open in Japan and DAX futures indicate an +58 open in Germany tomorrow. 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:
- Lehman Brothers Holdings Inc.(LEH), the fourth-biggest U.S. securities firm, is a candidate for a hostile takeover, Ladenburg Thalmann & Co. analyst Richard Bove said. He raised his rating on the shares to ``buy.'' ``Management is unwilling to sell out at a deeply distressed value,'' Bove wrote in a note to clients. ``The stage is set for a hostile bid to take over the whole company.''
- Billionaire Sam Zell, founder of the largest publicly traded apartment landlord in the U.S., is investing in distressed debt instead of real estate stocks or property and expects a housing recovery early next year. ``We believe that the opportunities, particularly in difficult situations, are in the debt,'' said Zell, who is looking to buy both real estate debt and distressed corporate debt now trading at a discount. Zell declined to put a dollar value on his expected debt investments, saying only that they would be ``significant.''
- Russia began withdrawing some tanks, artillery and troops from Georgia, stepping up a military pullout required under a cease-fire, as Georgia's leader said Russia is expanding its ``occupation'' of the country. All Russian troops and hardware sent into Georgia on Aug. 8 will be pulled back into a peacekeeping zone by the end of the day tomorrow, Anatoly Nogovitsyn, deputy chief of Russia's General Staff, told reporters today in Moscow.
- The market for short-term debt backed by assets including mortgages and car loans jumped a seasonally adjusted 3.5%, the biggest gain in at least seven years, according to the Federal Reserve. The US asset-backed commercial paper market rose $25.4 billion to $749.9 billion for the week ended Aug. 20, the Fed said.
- Inflation’s Peak Signaled by Tame Labor Costs: John Berry.
- Fadel Gheit, managing director of oil and gas research at Oppenheimer, says oil prices are ‘inflated,’ should fall. (video)
- Russia risks running out of storage capacity for corn, wheat and barley after the best harvest in at least 15 years, threatening a government plan to expand agricultural output and exports.
- U.S. and Iraqi negotiators produced a draft agreement on how long U.S. troops will stay in Iraq and the scope of their mission after 2008, Foreign Minister Hoshyar Zebari said, adding that a process leading to parliamentary consideration will begin tomorrow.
- Oil jumped more than $5 as the US dollar slumped and worries over the potential of Russian pipeline disruptions rose.
- Dick's Sporting Goods Inc.(DKS) climbed the most in four years in New York trading after posting second- quarter profit that fell less than some analysts estimated.
- Bally Technologies Inc.(BYI), second- largest U.S. maker of slot machines, climbed as much as 6.9 percent in New York trading after reporting fourth-quarter profit rose 69 percent and reiterating its full-year forecast.
- Argentina’s government may increase price caps on crude oil, a measure that would lower profits for Exxon Mobil(XOM) and Royal Dutch Shell, who buy outside supplies for their refineries in the South American country, oil-pricing service Platts said.

NY Times:
- We have all the oil we need.

- Rumored iTunes Music Subscription: $130 Per Year.

Reuters:
- Apple Inc (AAPL) has agreed with Mobile TeleSystems on the sale of iPhones in Russia and retail sales will begin in October, a market source told Reuters on Thursday.

Alpha Bank:
- Russia’s economy will grow at a slower rate in the second half of the year because of higher borrowing rates in the wake of the country’s clash with Georgia and a slowdown in the construction industry. Interbank lending rates jumped as high as 10% as $7 billion left the country after Russia sent tanks into Georgia on Aug. 8. “The conflict with Georgia and the nervousness created by the government’s criticism of Mechel Steel have substantially damaged the economic outlook” in the second half, Natalia Orlova, Alpha Bank’s chief economist in Moscow, wrote today. Russia’s banking industry is already experiencing a liquidity shortage, with about $45.2 billion of tax payments looming in October. If capital inflow isn’t re-established in Sept., the central bank and the Finance Ministry will have to use “all the instruments available” to support the banking system, Orlova said. In the “worst-case scenario,” the central bank could be forced to cut the mandatory reserve requirements for lenders, which it raised this year to fight inflation, she said. Loans to the construction industry, particularly for residential housing, have become more expensive in the wake of the US subprime mortgage market collapse, Orlova said.

Het Financieele Dagblad:
- Higher prices are feeding into wages, European Central Bank Governing Council member Nout Wellink said.

Radio Television Hong Kong:
- Hong Kong Chief Executive Donald Tsang will make curbing inflation a priority, citing Tsang. Hong Kong’s inflation unexpectedly accelerated in July to 6.3%, matching the fastest pace in more than a decade.

Bear Radar

Style Underperformer:

Small-cap Value -.65%

Sector Underperformers:

Airlines irlind (-4.10%), I-Banks (-1.76%) and Biotech (-1.59%)

Stocks Falling on Unusual Volume:

SNPS, OREX, JDSU, ISYS and MPR

Stocks With Unusual Put Option Activity:

1) AXL 2) DKS 3) LTD 4) GME 5) NLY

Jobless Claims Decline, Unemployment Steady, Philly Fed Improves, Leading Indicators Decelerate

- Initial Jobless Claims for last week fell to 432K versus estimates of 440K and a downwardly revised 445K the prior week.

- Continuing Claims fell to 3362K versus estimates of 3405K and a downwardly revised 3379K prior.

- Philly Fed for August rose to -12.7 versus estimates of -12.6 and a reading of -16.3 in July.

- Leading Indicators for July fell .7% versus estimates of a .2% decline and an upwardly revised unch. reading in June.

BOTTOM LINE: Initial jobless claims fell more than expected last week, Bloomberg reported. The government’s extension of jobless benefits under the spending bill signed by President Bush in June has resulted in more unemployed workers seeking benefits, contributing to the recent increase in claims. The unemployment rate among people eligible for benefits, which tracks the US unemployment rate, was unch. at a below-average 2.5%. I expect jobless claims to fall slightly again next week and to trend modestly lower from current levels through year-end.

Manufacturing in the Philly region faired better than economists expected in August, Bloomberg reported. The New Orders component rose to -11.9 from -12.1 the prior month. The Prices Paid component plunged to 57.5 from 75.6 the prior month. The Outlook component for the next six months surged to 27.6 from 18 in July. The Inventories component rose to -6.6 from -7.5 in July. I continue to expect manufacturing to improve modestly over the coming months and prices paid to trend lower.

The index of leading US economic indicators fell more than economists expected in July, Bloomberg reported. The leading index has declined at a 1.8% annual pace over the past six months. A fall of around 4-4.5% at an annual pace usually signals a recession is likely. The Index of Coincident Indicators, a gauge of current economic activity, rose .1% to 106.8 versus an unch. reading the prior month. The gauge reached a high of 107.3 in October of last year. The Lagging Indicators gauge rose .4% versus unch. the prior month. Leading Indicators for August should show an improvement. I still expect inventory rebuilding, better demand and decelerating inflation to help boost GDP above modestly estimates during 3Q/4Q.

Bull Radar

Style Outperformer:

Large-cap Value (-.27%)

Sector Outperformers:

Energy (+1.88%), Oil Service (+1.67%) and Gaming (+1.34%)

Stocks Rising on Unusual Volume:

KGC, PCU, IMO, PLCE, SOLF, CTRN, ACTL, PRGO, SPWR, ASML, PTNR, KNSY, PAAS, LTD, DKS, SGK and RUK

Stocks With Unusual Call Option Activity:

1) GME 2) RDC 3) CRM 4) JDSU 5) DKS