Stocks Finish Mixed as Gains in REIT, Construction, Energy Shares Offset Losses in Airline, Homebuilding, Software Stocks

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

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Internet longs. I haven’t traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, most sectors are declining and volume is very light. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is falling .67% and is still above-average at 20.89. The ISE Sentiment Index is below average at 123.0 and the total put/call is above average at .90. Finally, the NYSE Arms has been running high most of the day, hitting 1.31 at its peak, and is currently 1.14. The Euro Financial Sector Credit Default Swap Index is rising 5.2% today to 91.34 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 +2.0% to 144.50 basis points. The TED spread is falling 2.8% to 1.11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis points to 2.17%, which is still down about 46 basis points in about six weeks. Given escalating tensions with Russia and the fact that analysts expect Hurricane Gustav to hit energy infrastructure in the Gulf, oil’s muted upside reaction is very surprising. While crude would likely temporarily spike higher on any direct hit to this infrastructure, lower lows in oil look likely thereafter as the US dollar continues to rise, supplies hit new records and global demand continues to meaningfully weaken. The Citi eurozone economic surprise index is now -172.30 versus a reading of +50.50 for the US economic surprise index. The (XLF) is trading pretty well, holding support at around $20, given recent concerns. If this doesn’t break lower soon, I suspect we will see some significant short-covering. Nikkei futures indicate an +27 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:
- The US dollar rose to a six-month high against the euro on speculation the greenback will be the main beneficiary of a global economic slowdown as German business confidence dropped in August more than forecast. The U.S. currency was headed for the biggest monthly gain since the 15-nation euro debuted in 1999, increasing to an 11- month high versus the Australian dollar and gaining versus the New Zealand dollar and the Swedish krona. British sterling declined to the weakest level versus the dollar in two years as mortgage approvals held last month near a decade low.
- Federal Reserve policy makers agreed this month that their next change in interest rates will be to raise them, while reaching no conclusion on the timing of such a decision.
- Crude oil rose $1.13/bbl. on forecasts showing that Hurricane Gustav may enter the Gulf of Mexico.
- Corn, soybeans and wheat fell as the US dollar headed for a second straight monthly gain, eroding the appeal of U.S. supplies to importers. The dollar has jumped 5.4 percent in August against a basket of the euro, yen and four other major currencies, and rose 1.1 percent in July. The Reuters/Jefferies CRB Index of 19 raw materials has declined 4.5 percent this month. Corn futures for December delivery fell 7.25 cents, or 1.2 percent, to $5.9275 a bushel at 10:45 a.m. on the Chicago Board of Trade. The price has declined 26 percent from a record $7.9925 on June 27 as crop conditions improved in July after floods in parts of the U.S. Midwest in June. Soybean futures for November delivery slumped 4.75 cents, or 0.4 percent, to $13.4225 a bushel in Chicago. The price has dropped 18 percent from a record $16.3675 on July 3. Wheat futures for December delivery tumbled 14.5 cents, or 1.7 percent, to $8.5025 a bushel in Chicago. The price has plunged 37 percent from the all-time high of $13.495 on Feb. 27.
- Copper dropped on signs that slumping economic growth is spreading globally, spurring concern demand will decline for the metal used in pipes and wires. Business and consumer confidence in Germany, Europe's biggest economy, dropped in July, separate reports showed today. U.K. mortgage approvals last month held close to the lowest in at least 11 years, the British Bankers' Association said. Before today, copper dropped 19 percent from a record in May.
- Russia's RTS Index fell to the lowest level in almost two years and the ruble dropped after the government's decision to recognize Georgia's breakaway regions threatened to deepen a rift with the West. The RTS index of 48 companies posted the biggest decline among 89 global equity measures tracked by Bloomberg, while Russia's currency slid to the lowest level in almost seven months against the dollar. Credit-default swaps on Russian debt climbed 8 basis points, according to CMA Datavision prices in London, as the U.K. Foreign Office ``categorically'' rejected President Dmitry Medvedev's move and Italy and France expressed regret. Investors have pushed the RTS to this quarter's steepest retreat among the world's stock markets as Russia invaded Georgia, tumbling oil prices sent energy producers lower and the government probed steel producer OAO Mechel. Medvedev's statement today accelerated a decline sparked by an earlier drop of more than 2 percent in crude and slumping metal prices.
- Lehman Brothers Holdings Inc.(LEH) may set up a company funded by outside investors to buy some of its mortgage assets, aiming to dispel concern the firm faces crippling losses, people familiar with the discussions said.
- Japanese companies are increasing overseas acquisitions, using their cash-hoards to snap up assets beaten down by the global credit crisis and economic slowdown. The value of foreign purchases by Japanese companies this year has already topped 2007's total by 91 percent, according to data compiled by Bloomberg.
- German business and consumer confidence fell more than economists forecast, heightening concern that Europe's largest economy may be slipping into a recession.
- Investors should buy options to insure themselves against a drop in European stocks by June, and sell similar contracts on U.S. shares as profits in Europe are more at risk, according to Barclays Capital.
- Teva Pharmaceutical Industries Ltd. said its Azilect pill is the first to slow the progression of Parkinson's disease in new findings that may increase sales of the medicine to more than $1 billion.
- New York Times Co.(NYT), the third-largest U.S. newspaper publisher, reported revenue fell 10.1 percent in July as a slumping U.S. economy led to the steepest monthly declines in retail and classified advertising sales this year. Ad sales decreased 16.2 percent to $129.4 million from a year earlier, led by drops of 30.1 percent in classifieds and 13.3 percent in retail ads, the New York-based company said today in a statement.

Wall Street Journal:
- Russell Led Hedge Fund Investors to Losses. Small-Stock Expert Is Winding Down Some Poor Funds.

NY Times:
- Honda Motor Gains in US From Fuel-Efficiency Focus.

hedgeweek:
- Just a day after Barack Obama named Senator Joseph R. Biden Jr. of Delaware as his vice presidential running mate, media reports are tying members of his family to an alleged hedge fund fraud scheme.

Reuters:
- Mozambique’s sugar production may rise to 500,000 metric tons in 2009, citing Antonio Fernando, the company’s trade and industry minister. Production this year will be 295,000 tons compared with 243,000 tons in 2007.

Financial Times:
- Credit Crisis Takes Toll on London.

Sueddeutsche Zeitung:
- European Central Bank Executive Board member Juergen Stark said faster inflation is pushing up euro-zone wages. “Inflation risks over the medium-term have increased,” Stark said. “Broad-based second-round effects add to this.” He expects a period of economic weakness in the euro region followed by a “gradual recovery.”

Kommersant-Ukraine:
- Standard & Poor’s forecast that gross domestic product in Ukraine will grow 6.5% this year and 2.5% in 2009. Annual inflation in 2008 will be 27%, S&P said.

Inquirer.net:
- Asian bond spreads widened Tuesday as renewed concerns over the financial sector and slowing global economic growth kept investors away from riskier assets. "The fixed income markets are signaling to central banks the need to prepare for protracted sub-trend growth," said Brett Williams, a credit analyst at BNP Paribas in an email to clients. "Consecutive quarters of negative growth are already a Japanese phenomenon, and are also being priced in for the UK and euro zone. We see prolonged asymmetric downside price risks to credit valuations."

Bear Radar

Style Underperformer:

Mid-cap Value -.07%

Sector Underperformers:

Airlines irlind (-4.01%), Restaurants (-1.94%) and Homebuilders (-1,39%)

Stocks Falling on Unusual Volume:

STP, MRVL, COCO, SAFM, KNSY, DRI, BIG and PPC

Stocks With Unusual Put Option Activity:

1) GT 2) TMA 3) AEO 4) WYE 5) BIG

Consumer Confidence Jumps, New Home Sales Rise, New Home Inventories Fall Most in Almost 50 Years

- Consumer Confidence for August rose to 56.9 versus estimates of 53.0 and a reading of 51.9 in July.

- New Home Sales for July rose to 515K versus estimates of 525K and a downwardly revised 503K in June.

- The 2Q House Price Index fell 1.4% versus estimates of a 1.5% decline and a 1.7% fall in 1Q.

BOTTOM LINE: Consumer confidence in August increased more than forecast in August as cheaper gasoline improved Americans’ moods, Bloomberg said. The Present Situation component fell to 63.2 from 65.8 in July. The Expectations component jumped to 52.8 from 42.7 in July. The percentage of Americans that said they expected fewer jobs six months from now fell to 30.6% versus 37.3% the prior month. The proportion of people expecting their incomes to rise over the next six months rose to 14.7% from 14.3% in July. Those Americans planning to purchase a home rose to 3.3%, which is back to the five-year average, from 2.8% in July. Those planning to purchase an automobile rose to 5.3% from 5.0% in July. The average cost of a gallon of regular gas peaked at $4.11 on July 16 versus $3.67/gallon yesterday. I expect confidence to continue to improve through year-end on an end to the election uncertainty, lower food/energy prices, a higher US dollar, rising stock prices, diminishing housing market fear, a modestly improving labor market, low interest rates and decelerating inflation.

New Home Sales in the US improved in July and a decline in home construction reduced the inventories of properties on the market by the most in almost 50 years, Bloomberg reported. The number of unsold homes on the market plunged 5.2%, the most since November 1963. Lower prices have made homes more affordable for Americans, stemming the slide in demand and making it more likely inventories will fall. The BankRate.com average fixed 30-year mortgage rate is currently 6.33%, down 18 basis points from 6.51% one month ago. I expect mortgage rates to decline meaningfully over the coming months as credit angst subsides. This should further boost affordability and help boost demand.

Bull Radar

Style Outperformer:

Large-cap Value (+.83%)

Sector Outperformers:

Gaming (+1.78%), HMOs (+1.63%) and Homebuilders (+1.55%)

Stocks Rising on Unusual Volume:

RRC, TIE, LFC, SRVY, DAKT, CLNE, TTWO, NDSN, ENG, IART, DGII, GYDX, SQNM, CYBX, AMLN, GSIC, PTEN and RMBS

Stocks With Unusual Call Option Activity:

1) DRI 2) TTWO 3) BIG 4) WCG 5) AXL