Stocks Lower into Final Hour on Global Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Computer 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 lower, sector performance is mostly negative and volume is very light. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 4.1% and is still above-average at 20.22. The ISE Sentiment Index is below average at 137.0 and the total put/call is above average at .99. Finally, the NYSE Arms has been running high most of the day, hitting a peak of 1.5, and is currently 1.03. The Euro Financial Sector Credit Default Swap Index is falling 1.2% today to 89.50 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 +.4% to 143.43 basis points. The TED spread is rising 2.0% to 1.10 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 3 basis points to 2.14%, which is down 49 basis points in about seven weeks. Outside of energy, most commodities fell this week. The S&P Goldman Agriculture Spot Index fell 5.4% this week and is now back below its 200-day moving average. As well, the Base Metal Spot Index fell 3.63% for the week. I suspect energy prices will play catch up with these declines next week, notwithstanding any spike on Tuesday related to a possible direct strike on Gulf energy infrastructure by Hurricane Gustav. Finally, the Baltic Dry Index fell another 3.6% for the week. The Citi eurozone economic surprise index is now -162.0 versus a reading of +72.50 for the US economic surprise index. The US dollar continues to trade as if it is consolidating recent gains before another surge higher. The heavily-shorted (XLF) is rising another .3% today to session highs. I think the weakness in the tech sector today, related to Dell’s(DELL) report, is overdone. It is interesting to note that even though the S&P 500 is basically flat for the week, the NSYE Cumulative Advance/Decline line jumped 9.1% this week and breaking above the trading range it has been in since late June. I still expect that given recent positive developments in the financial sector, very bearish US stock market sentiment, oil’s poor trading action, much better-than-expected economic data and declining political fears, it is likely that stocks will break higher next week on better volume. Nikkei futures indicate a -150 open in Japan and DAX futures indicate an +9 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, falling commodity prices, less economic pessimism, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Yields on agency mortgage securities fell to the lowest in a month relative to U.S. Treasuries after buyers took advantage of some of the widest spreads since 1986. The difference between yields on Fannie Mae's current-coupon 30-year fixed-rate bonds and 10-year government notes narrowed 10 basis points this week to 197 basis points, data compiled by Bloomberg show, reducing the cost of new home loans. The spread fell from 215 basis points on Aug. 18, the widest since March, when the gap set a 22-year high of 238 basis points.
- Sugar dropped for a third day in New York on speculation demand for fuel made from cane may decline as the U.S. economy slows. Motor fuel demand will fall in 2009 unless gasoline prices drop sharply or the economy picks up, the U.S. Energy Department said this week. In the first six months of this year consumption was 1.5 percent lower than the same period last year and will average 0.2 percent less in 2009, it said. Sugar demand will exceed supplies by about 3.3 million tons next year after an 11 million-ton surplus in the year ending Sept. 30, London-based Czarnikow Group Ltd. said in a report this week.
- Crude oil rose .10/bbl. as producers evacuated rigs before the arrival of Gustav, forecast to be the largest hurricane in the Gulf of Mexico since Katrina.
- Nintendo Co. raised its full-year profit forecast by 26 percent because of higher-than-anticipated sales of Wii and DS game players, sending the company's shares to their biggest gain in nine months.
- Microsoft Corp.(MSFT), seeking to catch Google Inc. in the Internet-search market, agreed to buy Greenfield Online Inc.(SRVY) for $486 million to add Web sites that help consumers find product reviews and compare prices.
- India's economy grew at the slowest pace since 2004 last quarter as the fastest inflation in a decade and increased borrowing costs damped consumer spending.
- Europeans' confidence in the economic outlook fell more than economists forecast this month as the economy teetered on the brink of a recession.

Wall Street Journal:
- McCain Taps Governor Sarah Palin As Presidential Running Mate. Sen. John McCain picked first-term Alaska Gov. Sarah Palin as his running mate Friday, adding a little-known but reform-minded woman to his ticket. At a rally in Dayton, Ohio, he said she has "strong principles, a fighting spirit and deep compassion," and praised her record of fighting corruption.

Pacific Epoch:
- Rumor: China Mobile To Subsidize Apple’s(AAPL) iPhone.

MediaWeek:
- YouTube could soon carry advertising on its homepage for the first time, according to reports in the US. Bosses at the Google(GOOG)-owned video website are reportedly in talks to hand the site over to a sponsor, that would result in a banner ad spanning the width of the page.

Philadelphia Inquirer:
- Comcast Corp.(CMCSA) sees a new-customer boom on the horizon, thanks to the government-ordered transition to digital TV. The nation's largest cable provider says two million households that get free television in its cable-franchise areas may be forced to enroll with Comcast or another pay-TV company when the digital transition occurs.

USA Today:
- Venture capitalists today look far and wide for start-ups.

Reuters:
- The US dollar index on Friday was on pace for its best monthly performance since October 1992.

RIA Novosti:
- Russian Deputy Prime Minister Igor Sechin said a report that the country may cut oil exports should the European Union impose sanctions over South Ossetia was a “gross provocation.” Russia fulfilled its contractual obligations during the Cold War, and is a responsible and reliable energy partner. Russian oil groups are international companies with shares traded in Europe and the US, which means they could incur “negative consequences” should they fail to honor their commitments, he said.

Market News International:
- The European Central Bank won’t change interest rates this year as it weighs slowing economic growth against inflation risks, citing “well-placed sources.” The ECB needs to see a persistent decline in inflation before discussing a change in its benchmark rate, another official said. The bank is not sure whether the economy will grow in the third quarter, he said.

Bear Radar

Style Underperformer:

Large-cap Growth -1.22%

Sector Underperformers:

Computer Hardware irlind (-2.72%), Semis (-2.11%) and Coal (-1.74%)

Stocks Falling on Unusual Volume:

DELL, WIND, FUJI, MRVL and LG

Stocks With Unusual Put Option Activity:

1) TIVO 2) DELL 3) SUN 4) LMT 5) HUN

Spending/Incomes Decelerate, Chicago PMI Production Jumps Most Since 2004, Confidence Improves

- Personal Spending for July rose .2% versus estimates of a .2% gain and a .6% rise in June.

- Personal Income for July fell .7% versus estimates of a .2% decline and a .1% rise in June.

- The PCE Core for July rose .3% versus estimates of a .3% gain and a .3% increase in June.

- The Chicago Purchasing Manager for August rose to 57.9 versus estimates of 50.0 and a reading of 50.8 in July.

- Final Univ. of Mich. Consumer Confidence for August rose to 63.0 versus estimates of 62.0 and a prior estimate of 61.7.

BOTTOM LINE: Spending by US consumers slowed in July, Bloomberg reported. The PCE Core, the Fed’s preferred inflation gauge, rose 2.4% from year-ago levels, the most since February of last year. I expect spending and income growth to improve over the coming months and inflation to decelerate meaningfully.

A measure of US business activity in August showed expansion at the fastest pace in more than a year, as production accelerated the most since October 2004, Bloomberg reported. 50.0 is the dividing line between expansion and contraction. The index averaged 54.4 in 2007. The New Orders component of the index surged to 60.2 from 53.5 in July. The Production component jumped to 63.4, the highest since June 2007 and the biggest jump since October 2004, versus 49.2 in July. Order Backlogs soared to 63.0 from 45.7 in July. The Employment component fell to 39.2 from 45.9 in July. The Inventories component fell to 52.2 from 54.9 the prior month. The Prices Paid component fell to 80.6 from 90.7 in July. I expect the ISM Manufacturing Index for August, released next Tuesday, to exceed estimates of 49.6. I still expect manufacturing to continue to expect at modest levels over the intermediate-term on inventory rebuilding and better-than-expected demand. As well, the Prices Paid component has likely already made a long-term top.

Confidence among US consumers came in better than economists’ expected in August. The average cost of a gallon of gas peaked at $4.11 on July 16, according to AAA, versus $3.67/gallon yesterday. The Expectations component rose to 57.9 from 53.5 the prior month. The Current conditions component fell to 71.0 versus 73.1 the prior month. I still believe Consumer Confidence has bottomed and will improve meaningfully over the intermediate-term as energy prices fall, inflation decelerates, housing fears subside, election uncertainty ends, the job market improves, stock prices rise and interest rates remain low.

Bull Radar

Style Outperformer:

Large-cap Value (-.52%)

Sector Outperformers:

Telecom (+.57%), Steel (+.44%) and Road & Rail (+.37%)

Stocks Rising on Unusual Volume:

OMG, CCC, MO, CP, TM, OVTI, DLLR, CSIQ, SAY, JRJC, PETM, UEPS, RAVN, CSUN, ESL,

Stocks With Unusual Call Option Activity:

1) CBS 2) SUN 3) DELL 4) DSW 5) AMAT

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