Stocks Lower into Final Hour on Forced Selling, Global Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Semi longs and Alternative Energy longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is about even, sector performance is mostly negative and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is falling 1.09% and is still above-average at 21.75. The ISE Sentiment Index is low at 107.0 and the total put/call is about average at .89. Finally, the NYSE Arms has been running high most of the day, hitting a peak of 1.53, and is currently 1.23. The Euro Financial Sector Credit Default Swap Index is rising 2.85% today to 91.35 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 +.89% to 143.62 basis points. The TED spread is rising .02% to 1.13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is dropping 4 basis points to 2.0%, which is down 62 basis points in about seven weeks and at the lowest level since October 2003. I continue to see evidence of forced selling. I suspect the many hedge funds that had massively overweight commodities are seeing redemption notices right now, which is leading to pressure in many non-commodity stocks as they are forced to liquidate holdings to meet these redemptions. As well, margin calls are likely a factor. We should see the broad market lift when this forced selling subsides. A number of sectors are higher today. Paper, telecom, financial, medical, biotech, hospital, insurance, reit and retail shares are all higher on the day. As well, breadth has been decent all day. Weekly retail same-store-sales rose 1.7% this week from a 1.5% increase the prior week. The Lehman(LEH) credit default swap is falling 5.3% today, which is a positive. It has declined 75 basis points in 8 days on takeover speculation. Russian stocks fell another 4.3% today and are back near recent lows, declining 33% in just over 4 months. I still see more downside there. Nikkei futures indicate a -49 open in Japan and DAX futures indicate an +1 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, falling commodity prices, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- The euro fell to the lowest in more than seven months against the US dollar after reports showed business investment, exports and retail sales declined, adding to evidence of an economic slump in the single-currency region. The 15-nation currency also dropped to a five-month low versus the yen on speculation the European Central Bank will signal concern tomorrow the economic outlook in the region is deteriorating. The pound traded near a two-year low against the dollar on concern the U.K. is headed for a recession. The South Korean won was at the weakest in four years on speculation international investors are selling the country's assets.
- Russia's ruble slid against the dollar and the euro amid concern about stability in the region as neighboring Ukraine's ruling coalition split and U.S. Vice President Dick Cheney prepared to visit Georgia this week. The currency had its biggest drop versus the dollar since Aug. 8, when Russia sent tanks into Georgia over the breakaway region of South Ossetia, a move criticized by the U.S. and Europe.
- BlackRock Inc.,(BLK) the biggest publicly traded U.S. asset manager, is seeking as much as $3 billion for a fund to buy loans that banks are selling for losses, said two investors with knowledge of the matter.
- Ospraie Management LLC may be the latest casualty from price swings in natural gas, the commodity responsible for the $1.9 trillion hedge-fund industry's biggest blowup with Amaranth Advisors LLC. New York-based Ospraie told investors yesterday it will close its biggest hedge fund after losing 38.6 percent this year on bad bets on commodity stocks. Holdings in natural gas-related companies made up almost a fifth of Ospraie's investments at the end of June, before the commodity's price dropped 41 percent. ``With natural gas I sometimes feel there's a game of Russian roulette going on,'' said Jeremy Charlesworth, founder of London-based Moonraker Fund Management Ltd., which runs a commodities fund of hedge funds. ``Natural gas goes through these periods where it goes up two or three times and fortunes are made. And every time it collapses, fortunes are lost and there's a casualty.'' ``It swings enormously,'' said Charlesworth, who tries to invest in funds run by managers experienced with its ``mercurial nature.'' ``If you've got too much of the stuff coming out of the ground, there's no place to put it, and the price just collapses. It's almost manic depressive: one minute you've made a fortune and then next it's all gone.''
- Crude oil fell as Royal Dutch Shell Plc and ConocoPhillips said that Hurricane Gustav caused no damage to platforms in the Gulf of Mexico. ``The next number we are going to test is $100,'' said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $4.5 billion energy-company bond portfolio. ``One hedge fund has shut down and the demand picture here has been ugly, so the market will remain under downward pressure.'' ``The U.S. economy is now looking stronger then Europe's, which is giving the dollar strength and reducing the appeal of commodities,'' said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. The dollar's recovery will cause the decline in oil prices to continue, OPEC President Chakib Khelil said today in a phone interview, adding that he expects supply to outstrip demand by as much as 1 million barrels a day in the first half of 2009. ``The news from Ospraie will cause hedge funds to look at the market with a jaundiced eye, which will spur them to further reduce their exposure,'' Mueller said.
- Aluminum fell for an eighth day, the longest losing streak since 2001, on signs manufacturers are delaying purchases until economic growth improves. Stockpiles of aluminum climbed 2,650 metric tons, or 0.2 percent, to 1.17 million tons, the highest since April 2004, the London Metal Exchange said today. European company investment fell 1.2 percent in the second quarter, the first decline in five years, the European Union's statistics office said today.
- Wall Street fired employees last month at the slowest pace in a year, a sign that financial-services firms may be emerging from a credit crunch that cost the industry more than 100,000 jobs. Financial firms eliminated 2,182 jobs in August, the fewest since July 2007, Chicago-based placement company Challenger, Gray & Christmas said today. The total compares with 14,400 reductions on average in the first seven months of 2008 and was a fraction of the 35,752 people who lost their jobs last August.

Wall Street Journal:
- Amid a national debate over offshore oil drilling, the federal government is preparing to unleash development of another offshore energy source: wind.

NY Times:
- A drug being developed by Regeneron Pharmaceuticals sharply reduced the number of gout flare-ups in a clinical trial, the company is expected to announce Wednesday.
- Boeing(BA) Machinists Voting on Whether to Strike.

Forbes.com:
- Emerging equities hit 17-month lows on Wednesday, hurt by lower commodity prices affecting emerging economies' exports, while the cost of insuring Ukraine's debt rose on the collapse of the ruling coalition. Emerging market currencies dropped sharply against the broadly stronger dollar, which found support from a fall in the price of oil. 'It's a story of demand destruction -- the realisation that slower economic growth will lead to lower demand for oil and other commodities,' said Jeff Chowdhry, head of emerging equities at fund manager F&C. 'Emerging markets are down because about 40 percent of the emerging market benchmark is comprised of commodity-related stocks and that is headed in one direction.'

Global Pensions:
- For the first time, The Conference Board’s latest Institutional Investment Report tracked hedge fund investments by pension funds and found, as of September 2007, some $1.8trn in assets was estimated to have been managed by about 10,000 hedge funds worldwide. The report showed pension funds had been increasing the investments they made in hedge funds during the past three years, with the largest 200 US employee retirement plans with defined benefit assets in hedge funds.

Guardian:
- US to Help Combate AIDS, Malaria in Tanzania. The US pledged $69 million to help the east African country reduce the human toll of AIDS and malaria, citing Tanzania’s Foreign Minister Bernard Membe.

Le Temps:
- George Clooney raised more than $900,000 in a sold-out fundraising event in Geneva to support Barack Obama’s presidential campaign, citing Charles Adams, the organizer. Clooney spoke at a reception where 170 attendees spent $1,000 to participate. That was followed by a dinner where 75 donors, who each gave $10,000, ate with the actor in Geneva’s historic center.

Kommersant:
- Russia’s central bank is preparing regulatory changes to toughen requirements for collateral against loans. Most collateral is overvalued by 30% to 50%, with car loans and mortgages the worst affected areas in retail.

Le Monde:
- Jean-Claude Juncker, who chairs a group of finance ministers from countries sharing the euro, sees a “substantial” economic slowdown in Europe.

Chosun Ilbo:
- HSBC Holdings Plc is interested in buying a stake in Lehman Brothers Holdings(LEH), citing finance industry officials. London-based HSBC, a Chinese bank and US hedge funds are competing separately with Korea Development Bank for a stake in Lehman

Khaleej Times:
- Gulf Arab states including Saudi Arabia and the United Arab Emirates have less reason to drop their currency’s pegs to the US dollar as the US currency is strengthening, citing Mohsin Khan, the International Monetary Fund’s director for the Middle East.

Graph: Inflation Expectations Continue to Plunge

10-Year TIPS Spread Graph


(click on image to enlarge)

BOTTOM LINE: The 10-year TIPS Spread, a good gauge of inflation expectations, is falling another 5 basis points today to 1.99%. This is down 63 basis points in about seven weeks and the lowest since October 2003 when deflation was the worry. The CRB Index had been the driving force behind inflation fears. The CRB Index is now down 21%, in bear market territory, in just two months. The secular trend of disinflation is likely resuming as the commodity bubble bursts. In my opinion, one of the primary factors behind the recent parabolic rise in commodity prices was institutional money chasing performance and hedging against the perception of higher inflation. Falling prices and diminishing inflation expectations should lead to less demand for commodities from institutions over the intermediate-term.

Bear Radar

Style Underperformer:

Mid-cap Growth (-2.19%)

Sector Underperformers:

Coal irlind (-5.80%), Construction (-3.82%) and Oil Service (-3.40%)

Stocks Falling on Unusual Volume:

GLW, ANW, WFR, MRVL, HES, GDP, CLF, AWC, NOK, IMO, JOYG, TTWO, ACGY, CRDN, BUCY, AKAM, FRX, PVG and ETH

Stocks With Unusual Put Option Activity:

1) FRX 2) BHP 3) TTWO 4) JOYG 5) EP

Factory Orders Rise More Than Estimates

- Factory Orders for July rose 1.3% versus estimates of 1.0% and an upwardly revised 2.1% increase in June.

BOTTOM LINE: Factory orders in the US increased more than forecast in July, Bloomberg reported. Excluding demand for transportation equipment, which tends to be volatile, orders gained 1% versus a 2.7% gain in June. Factory inventories increased .5%, led by metals and machinery, and manufacturers had enough supplies on hand to last 1.2 months at the current sales pace versus 1.22 months in June. Bookings for capital goods ex military hardware, a gauge of future business spending, jumped 6.3% in July. Mortgage Applications jumped 7.5% this week, the largest gain since the first week of June. The Citi eurozone economic surprise index is now -151.20, while the US economic surprise index is +71.60. The US Dollar Index is rising another .24% and the 10-year yield is down 3 basis points to 3.70% on today’s news. I expect Factory Orders to continue to trend higher over the intermediate-term on inventory rebuilding, better-than-expected demand and lower input prices.

Bull Radar

Style Outperformer:

Small-cap Value (+1.61%)

Sector Outperformers:

Airlines (+4.15%), Retail (+1.72%) and Banks (+1.03%)

Stocks Rising on Unusual Volume:

NWL, HMC, HD, JCP, LOW, WNR, FTO, MDVN, REGN, CLNE, SNDA, NEWP, UNFI, TISI, ZUMZ, AMRI, UFPI, VOLC, CHCO, WSBC, IPCM, QSII, CEDC, PETM, AMAG, PETS, UAUA, CPS, AITP and RZV

Stocks With Unusual Call Option Activity:

1) EP 2) MDVN 3) FRX 4) FTO 5) NCC