Stocks Finish at Session Lows, Weighed Down by Homebuilding, Financial, Networking and Steel Shares

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

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs, Alternative Energy longs, Medical longs and Software longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is declining and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is jumping 11.3% and is still above-average at 23.90. The ISE Sentiment Index is below-average at 129.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running extraordinarily high most of the day, hitting a peak of 2.80, and is currently 2.09. The Euro Financial Sector Credit Default Swap Index is rising 4.74% today to 95.83 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 +1.33% to 145.0 basis points. The TED spread is rising .12% to 1.13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is dropping 5 basis points to 1.95%, which is down 67 basis points in about seven weeks and at the lowest level since August 2003. The forced selling that has characterized trading over the last few days has intensified. However, it is a positive that the NYSE Arms is soaring with volume only around average levels. This indicates to me that it won’t take much to send stocks higher as the forced selling subsides. Besides the forced selling, the main problem today is Europe. The ECB seems content to break inflation at any cost to the global economy. I still expect the ECB to change to a more dovish stance during 4Q. Several pundits on CNBC have insinuated that falling energy prices are a negative for stocks, which I believe couldn’t be further from the truth. The commodity bubble is the main reason for the end to the global economic boom that has occurred over the last several years. Runaway inflation in emerging markets and hesitant central bankers in developed markets are a direct result of the commodity bubble. As well, the commodity bubble is the driving force behind the current “US negativity bubble.” As of now, the overwhelming majority of investors and pundits think oil will bottom around current levels. Oil hasn’t moved much over the last 10 days and is still doing major economic damage at current levels. A clear break below $100/bbl. would be a big boost to the global economy, especially developed markets. Nikkei futures indicate a -287 open in Japan and DAX futures indicate a -30 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as falling commodity prices and bargain-hunting offset more shorting, forced selling and global growth worries.

Today's Headlines

Bloomberg:
- The Broad Institute, an affiliate of Harvard University and the Massachusetts Institute of Technology, will get $400 million from Eli and Edythe Broad, the philanthropists who started the genetics laboratory.
- Wal-Mart Stores Inc.(WMT) said sales increased 3 percent in August, beating its forecast after price cuts on groceries, back-to-school supplies and consumer electronics drew shoppers.
- Boeing Co.'s(BA) largest union rejected a contract and its leaders gave the world's second-largest planemaker 48 hours to improve their offer and avert a strike that might further delay the 787 Dreamliner.
- The ruble fell to the lowest level in almost a year against the US dollar as concern about Russia's intentions in the region spurred investors to sell the country's assets. Investors have taken about $30 billion out of Russia since the start of its five-day war with Georgia on Aug. 8, according to BNP Paribas SA, with concern heightened by U.S. and European condemnation of the invasion and this week's split in nearby Ukraine's ruling coalition. ``Six weeks ago Russia was touted as a safe haven; now it's a pariah state,'' said Ian McCall, London-based director of Argo Capital Management, where he helps manage about $1 billion in emerging-market, including Russian, debt.
- Goldman Sachs Group Inc.(GS) downgraded U.S. steel stocks and reduced its price forecast for the metal in the next 16 months because of slowing economic growth in China and a strengthening U.S. dollar. The steel industry was downgraded to ``neutral'' from ``attractive,'' Goldman analysts led by Sal Tharani in New York said today in a note to investors.
- Hedge fends, pensions funds and other speculators may have had ``enough of the commodity business'' and will sell assets, driving the price of oil to below $100 a barrel, economist Dennis Gartman said. ``A lot of portfolio managers and pension funds that started owning commodities generally owned a lot of crude oil and they are finally saying, `You know what? This is not quite what it is cracked up to be,''' Gartman said in a Bloomberg Television interview in New York today. ``The markets wants to go under $100, and I think it's going to go at least there.'' Investors are ``just saying, `We've had enough of this commodity business. This is no fun. We were told this was an asset class, and it's proven not to be,''' said Gartman, editor of the Suffolk, Virginia-based Gartman Letter who correctly predicted in June that gold and other commodities would fall. ``The trend right now is down,'' said Gartman. ``There's not much one can be long on in the commodity market.''
- Crude oil fell more than $2 a barrel as the euro weakened to the lowest against the dollar this year, curbing the appeal of commodities as an inflation hedge. Oil tumbled 6.5 percent this week as the euro dropped amid signs that Europe's economy is slowing.
- The euro fell to the lowest level against the US dollar this year as European Central Bank President Jean-Claude Trichet said the countries that use the currency are in an ``episode of weak activity.'' The 15-nation euro dropped against the yen and the pound after Luxembourg Finance Minister Jean-Claude Juncker said the currency is ``overvalued.''
- Sales of distressed Miami properties have begun, signaling a bottom for south Florida's real estate market and the end of waiting for vulture funds armed with about $30 billion to spend. The sale of 120 condominiums last month to a Philadelphia private equity firm and Related Group of Florida, a development company led by Jorge Perez, ``broke the logjam'' for investors targeting the oversupply of condos in downtown Miami, said Peter Zalewski, owner of the Condo Vultures LLC consulting firm in Bal Harbour, Florida.
- U.K. house prices plunged at the fastest annual pace in at least a quarter century in August as banks withheld finance for new homes and consumers lost confidence in the economy, HBOS Plc said.
- German factory orders unexpectedly fell in July, extending their longest-ever declining streak and increasing the likelihood that Europe's largest economy is heading for a recession.
- The European Central Bank kept interest rates at a seven-year high to fight inflation even as the euro-region economy teeters on the brink of a recession.

Wall Street Journal:
- Will Barack Obama and John McCain's picks for their running mates affect the election? I asked some leading political science professors what research on this topic revealed. Their answer: Running mates usually don't matter, but this may be an unusual election.
- Credit is mostly paralyzed, but one of the first corners of the debt market to lock up last year appears to be moving again. The amount of outstanding commercial paper -- short-term debt issued by companies to finance their operations -- has risen for the past three weeks to $1.79 trillion, its highest level since April.

The Washington Post:
- Democrats officially warned Sen. Joseph I. Lieberman on Wednesday that he could face repercussions for delivering a speech at the Republican National Convention in which he called Democratic presidential nominee Barack Obama an "eloquent young man" who lacked the experience to be in the White House. Most of Lieberman's speech focused on McCain's credentials, but toward the end, he pointedly said Obama "has not reached across party lines to get anything significant done, nor has he been willing to take on powerful interest groups in the Democratic Party." Democratic leaders have considered stripping him of his chairmanship of the Homeland Security and Governmental Affairs Committee. The strongest reprimand would be to strip him of all his committee assignments, which would effectively be a banishment from the Democratic caucus.

AppleInsider:
- With its competitors struggling to catch up with multi-touch technology introduced last year as part of the iPhone, Apple(AAPL) is already conceptualizing new versions of the technology that would fuse a variety of secondary inputs with today's touch-based gestures to produce more efficient data input operations.

MoneyNews.com:
- It might seem like only oil-rich foreign governments have any cash to invest these days. And they have lots, more than $2.5 trillion by a Morgan Stanley estimate. But don't count out cash closer to home. Merrill Lynch reports that total investable money right now in hedge funds has hit $156 billion, the highest since data collection began in 1992. "Hedge funds have de-leveraged and continue to increase their record cash balances, which will be a very powerful source when they decide to come back to the market," Merrill Lynch analyst Mary Ann Bartels tells Bloomberg. "The significant amount of cash on the sidelines is a contrarian bullish'' indicator for U.S. stocks, she says. The news wire service calculated that the cash horde would be nearly enough to buy General Motors, Alcoa, DuPont, Caterpillar, and American Express combined. The five companies have a combined market value of $159.9 billion.

USA Today:
- Several colleges and universities in Texas, Ohio, Maryland and New York are freezing 2008-2009 tuitions at last year's levels in an effort to make college more affordable for the nation's middle class.

Reuters:
- Commodity market regulators are probing whether energy market players are injecting false crude oil supply data into the marketplace, the Wall Street Journal said. Regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but may not be accurate, the paper said, citing people familiar with the probe.
- Vedanta Resources Ltd expects aluminium output to rise to about 500,000 tonnes in the year to March 2009, up 28 percent from about 390,000 tonnes in the previous year, a senior company official told Reuters.

Financial Times:
- Oil companies' profitability fell last year as rising costs eroded gains from the rise in oil prices, an industry study has found. The companies' return on capital from their oil and gas production fell to 19 per cent, 3.5 percentage points lower than in 2006, according to the study from IHS Herold, a research firm, and Harrison Lovegrove, a corporate finance firm owned by Standard Chartered bank.
- Too much is being made of the economic impact of the Beijing Olympics on China and the rest of Asia. China was slowing before the onset of the XXIX Olympiad and is likely to continue to slow in the year ahead. Elsewhere in Asia, a similar outcome appears to be in the offing.

Bear Radar

Style Underperformer:

Small-cap Growth (-3.15%)

Sector Underperformers:

Steel irlind (-5.89%), Homebuilding (-5.88%) and Coal (-5.02%)

Stocks Falling on Unusual Volume:

OLN, CMC, CLF, BCS, VIP, MBT, ABB, PBR, STO, WBD, TSN, CIEN, CAVM, ADTN, ATMI, JOYG, NETL, SHPGY, AFAM, AAUK, DIOD, MRVL, ORCL, POWI, TEX, BBV, VOL and BTH

Stocks With Unusual Put Option Activity:

1) CAG 2) IOC 3) TIVO 4) TEX 5) SINA

2Q Productivity Jumps, Unit Labor Costs Fall, Jobless Claims Rise, Service Sector Expanding Slightly, Prices Paid Declines

- ADP Employment Change for August was -33K versus estimates of -30K and +1K in July.

- Final 2Q Non-farm Productivity rose 4.3% versus estimates of a 3.5% increase and a 2.2% gain in 1Q.

- Final 2Q Unit Labor Costs fell .5% versus estimates of unch. and a 1.3% rise in 1Q.

- Initial Jobless Claims for last were 444K versus estimates of 420K and 429K the prior week.

- Continuing Claims were 3435K versus estimates of 3420K and 3429K prior.

- ISM Non-Manufacturing for August rose to 50.6 versus estimates of 49.5 and a reading of 49.5 in July.

BOTTOM LINE: US worker productivity in the second quarter increased more than previously estimated and labor costs unexpectedly declined, Bloomberg reported. 2Q productivity rose at a 4.3% annual rate, the highest since 3Q 2007 and more than double the long-term average of 1.9%. Productivity at non-financial corporations, a gauge closely monitored by the Fed, soared at a 5.6% rate in 2Q. 2Q Unit Labor Costs, the main component of inflation, fell at a -.5% annual rate, the lowest since 3Q 2007 and well below the long-term average of +3.0% increases. I still expect Unit Labor Costs to remain subdued over the intermediate-term and Productivity to remain above average rates.

First-time claims for unemployment insurance rose more than forecast, Bloomberg reported. However, the four-week moving average of initial claims fell to 438,000 from 441,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at 2.6% versus the long-term average unemployment rate of 2.9%. 23 states and territories reported a decline in jobless claims. The ADP Employment Change for August was -33K versus estimates of -30K and +1K in July. Companies with more than 499 workers cut their workforces by 28,000. Medium-sized businesses, with 50-499 employees, eliminated 25,000 jobs, while small businesses actually added 20,000 new employees. I expect the Change in Non-farm Payrolls for August, released tomorrow, to modestly exceed estimates of -75K.

US services industries, which make up almost 90% of the US economy, grew in August as a measure of prices fell by the most in almost two years, Bloomberg reported. The Prices Paid component fell to 72.9, the second straight decline, from 80.8 a month earlier. The New Orders component rose to 49.7 versus 47.9 in July. Supplier Deliveries rose to 55.5 from 53.5 a month earlier. The Inventory component fell to 53.5 from 54.5 in July. The Employment component of the index fell to 45.4 versus 47.1 in July. I suspect the ISM Non-Manufacturing Index will improve again next month on lower energy/food prices, better consumer sentiment, decelerating inflation and low interest rates. The Citi eurozone economic surprise index is falling to -164.2 and the US economic surprise index is rising to +73.60 today. The US Dollar Index is surging another .59% and the 10-year yield is falling another 3 basis points to 3.66% on today’s news. The BankRate.com average 30-year fixed mortgage rate is falling another 6 basis points to 6.19%, which is down 33 basis points in a little over five weeks, which is a big positive.

Bull Radar

Style Outperformer:

Mid-cap Value (-1.51%)

Sector Outperformers:

Airlines (+.77%), Computer Services (-1.28%) and Retail (-1.43%)

Stocks Rising on Unusual Volume:

UN, UL, STRA, KOK, WMT, CLMT, CLNE, BIOD, CRMT, CGRB, CACH, ZUMZ, CEPH, SPWR, MDVN, PPDI, BSI, UST, WF, GES, PSS, MR, BZC, MTR, OGE and EAS

Stocks With Unusual Call Option Activity:

1) MAS 2) MW 3) NUAN 4) PSS 5) TEX