Stocks Slightly Higher into Final Hour on Short-Covering, Less Financial Sector Pessimism, Falling Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Retail longs and Commodity/Emerging Market shorts. I covered all my (IWM)/(QQQQ) hedges and took profits in some of my commodity shorts this morning, 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 mixed and volume is above average. Investor anxiety is above average. Today’s overall market action is neutral. The VIX is falling 3.0% and is still above-average at 23.31. The ISE Sentiment Index is low at 108.0 and the total put/call is above average at 1.04. Finally, the NYSE Arms has been running high most of the day, hitting a peak of 1.57, and is currently .81. The Euro Financial Sector Credit Default Swap Index is rising 1.99% today to 97.67 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 +2.38% to 148.75 basis points. The TED spread is falling .93% to 1.13 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to 1.96%, which is down 66 basis points in about seven weeks and at the lowest level since August 2003. Despite more negative comments from Goldman Sachs this morning about Merrill Lynch(MER), the stock is trading at session high, rising .4%. As well, the (XLF) continues to trade very well given perceived headwinds, bouncing off its 50-day to session highs, rising 2%. Barton Biggs, of hedge fund Traxis Partners, just said on Bloomberg TV that he thinks the market is “pretty close” to a bottom from which it can mount a “powerful rally” and that falling energy prices will boost consumer spending. I agree with these statements. Oil continues to trade very poorly in the face of numerous potential upside catalysts. A test of $100/bbl. is likely next week barring any significant hurricane damage. I still think a clear break below $100/bbl. would be a big boost to the global economy, especially developed markets. Nikkei futures indicate a -27 open in Japan and DAX futures indicate a +63 open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting, less financial sector pessimism and falling commodity prices.

Today's Headlines

Bloomberg:
- Russian stocks plunged and the cost to protect government bonds from default jumped to the highest in four years after the central bank shored up the ruble. Russia's RTS Index dropped 3.8 percent today, capping its worst week since May 2006, and credit-default swaps on the government's debt rose 14 basis points to 166, the highest since November 2004. Investors in Russia pulled out a net $4.6 billion since the invasion of Georgia last month, according to the central bank, contributing to the worst quarterly slump in stocks since the government's debt default a decade ago.
- Corporate bond sales in Europe fell 25 percent this week as the extra yield investors demand to buy the debt jumped to the highest in at least a decade.
- Copper fell the most in a year in London as the largest surge in inventories in three years signaled slowing demand in China, the biggest buyer. Prices extended their drop after the U.S. economy lost jobs in August. Stockpiles rose 18,775 metric tons, or 10 percent, to 200,875 tons, the steepest climb since August 2005, figures from the London Metal Exchange today showed. Almost 90 percent of new metal added went into warehouses in South Korea, the biggest source of LME-monitored copper inventories in Asia. ``This is clear proof that demand from China is growing less dynamically than previously expected,'' said Peter Fertig, a consultant for Dresdner Kleinwort in Hainburg, Germany. Copper will probably decline next year, he said. Copper is the ``most vulnerable'' among metals, Sanford C. Bernstein Ltd. analysts Andrew Keen and Nik Stanojevic wrote in a report today.
- Crude oil fell to a five-month low as the dollar gained, curbing demand for commodities as a hedge, and a government report showed employers in the U.S. cut more jobs last month than forecast, a signal that demand may drop. ``Demand destruction and the strength of the dollar are tailor-made to send oil prices lower,'' said Daniel Flynn, a broker with Alaron Trading Corp. in Chicago. ``If it weren't for the active hurricane season, prices would be below $100.''
- The euro may extend its decline to $1.3355 should it close this week below so-called support between $1.4310 and $1.4365, technical analysts at Citigroup Global Markets Inc. said.
- China, the world's biggest grain consumer, plans to grow genetically modified corn and soybeans for the first time starting next year, the country's largest independent agricultural researcher said. The country now has the technology and is ready to use it to create ``sustainable growth'' in farming incomes and boost grain output, Hanver Li, managing director of Shanghai JC Intelligence Co., said in an interview at a forum in Chengdu.
- John McCain's campaign expects to leave the Republican National Convention with $200 million in the bank and be able to match the Democrats' spending in the next two months, an aide said.
- ADC Telecommunications Inc.(ADCT), the maker of phone equipment for AT&T Inc., rose the most in three months in Nasdaq trading after projecting annual sales that topped analysts' estimates.

Wall Street Journal:
- Oil companies in Alaska are paying more money in taxes than ever before. The state's oil and gas tax revenues for its just-ended fiscal 2007 topped $10 billion. That's twice as much as fiscal 2006 and four times more than 2004. Some supporters of Barack Obama see that money coming in and say that John McCain's running mate, Alaska Gov. Sarah Palin, must have done what Sen. Obama wants to do -- sock those companies with a big fat windfall profit tax. This is a deeply misleading reading of her 2007 tax reform. Mrs. Palin's plan -- called "Alaska's Clear and Equitable Share" (ACES) -- improves incentives for developing new resources. It ensures the state does well in boom times -- as it is doing now -- when oil prices are high. But it also hedges against low prices in the future by ensuring that oil companies exposed to commodity price swings don't face a crushing tax burden when commodity prices fall.
- Top Citadel Investment Group executive Joe Russell, a key architect of the hedge fund's investments in E*Trade Financial Corp. and hedge fund Sowood Capital, has resigned from the firm, according to people familiar with the matter.
- Dell Inc.(DELL) is seeking to sell all of its manufacturing plants worldwide and has approached contract computer manufacturers.

NY Times:
- ESPN, Electronic Arts(ERTS) Merge Game Graphics, Anchors.

CNBC.com:
- Hedge Funds: Another Superman Falls to Earth.

Boston Globe:
- The One Laptop Per Child Foundation will sell its $200 computers at Amazon.com(AMZN) later this year, citing the group’s founder.

TradeWinds:
- Dry-bulk shipping rates won’t rebound any time soon because of weaker demand for raw materials from Chinese steelmakers, citing Shagang Shipping Managing Director Shen Wen Fu. Steelmakers are less willing to hire ships because higher raw-material costs and falling prices are squeezing margins, TradeWinds cited Shen as saying. A weakening Chinese property market is curbing demand for steel, Shen said.

LA Times:
- The average cost of a new vehicle in the second quarter was $25,632 -- a 2.3% decline from the year-earlier period and the steepest drop recorded in the bank's 41-year-old survey.

CBS News:
- The presidential race between Barack Obama and John McCain is now even at 42 percent, according to a new CBS News poll conducted Monday-Wednesday of this week. Twelve percent are undecided according to the poll, and one percent said they wouldn't vote.

TechCrunch:
- Use of Chrome among TechCrunch readers is much higher: 6.23% since Tuesday, making it the fourth most popular browser among TechCrunch readers after Firefox, IE and Safari. Nearly all the market share was taken from IE.

USDA Commodity Intelligence Report:
- With sown area up by 4 percent from last year and yields forecast to increase by at least 10 percent, Russian grain production for 2008/09 will likely reach at least 94 million tons, the largest harvest in 15 years.

Reuters:
- Blackstone Group LP (BX) and Kohlberg Kravis Roberts & Co are each looking to buy parts of Lehman's real estate and asset management units, sources familiar with the situation said on Friday.

Bear Radar

Style Underperformer:

Small-cap Growth (-1.07%)

Sector Underperformers:

Oil Tankers irlind (-3.84%), Utilities (-2.15%) and Steel (-1.89%)

Stocks Falling on Unusual Volume:

TSRA, OIS, NGS, EXC, FCX, PCU, REP, ASTE, PEC, ABM, NOK, CAE and GNI

Stocks With Unusual Put Option Activity:

1) CELG 2) WLP 3) SWY 4) SUN 5) MT

Bull Radar

Style Outperformer:

Large-cap Value (-.88%)

Sector Outperformers:

Tobacco (+3.22%), Disk Drives (+2.06%) and Airlines (+.72%)

Stocks Rising on Unusual Volume:

SNDK, UST, ALK, ZNH, MO, ADTN, DLB, IOC, MATK, ULTA and FUJI

Stocks With Unusual Call Option Activity:

1) SNDK 2) UST 3) MF 4) LO 5) HUN

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Friday Watch

Late-Night Headlines
Bloomberg:
- The euro slumped to an 11-month low against the US dollar on speculation a credit-market slump will push European economies into recession. The currency headed for its biggest weekly decline versus the yen in more than a year after European Central Bank President Jean-Claude Trichet said the economy is ``weak'' and Luxembourg Finance Minister Jean-Claude Juncker said the euro is ``overvalued.''
- Ospraie Management LLC, the New York- based investment firm that this week shut down its biggest hedge fund, told clients its investment in XTO Energy Inc.(XTO) contributed to its losses in the past two months, according to investors.
- Mitsui & Co., Japan's second-largest trading company, will close its New York hedge fund business as it shifts to investments including property and utilities.
- Crude oil fell to a five-month low in New York as the U.S. dollar rallied, reducing the appeal of commodities as an inflation hedge. Oil is headed for its biggest weekly decline in a month, falling more than 6 percent this week as the euro dropped to the lowest this year against the dollar amid signs that Europe's economy is slowing. ``The outlook looks bearish and funds are selling off on fundamental weakness.''
- Soybeans fell for a third straight day on speculation Midwest rains will boost the yield potential of the second-biggest U.S. crop.
- Russia Inherits ‘Enormous Problems’ by Adopting Georgia Regions.
- Chile's central bank raised its target interest rate to 8.25 percent, the highest in almost a decade, as policy makers step up the fight against inflation. Inflation reached a 13-year high of 9.5 percent in July.
- Philippine inflation accelerated to the fastest pace in more than 16 years, adding pressure on the central bank to increase borrowing costs further in October. Consumer prices climbed 12.5 percent in August from a year earlier after rising a revised 12.3 percent in July.
- South Korea's won rose from near a four-year low on speculation the central bank intervened to slow a decline in the currency, Asia's worst performer this year.

Wall Street Journal:
- Sen. John McCain seized the Republican party nomination he has sought for almost a decade by pledging to rise above Washington's acrimony as president and strike a new tone by reaching across partisan divides.

Fox News:
- The troop surge in Iraq has been more successful than anyone could have imagined, Barack Obama conceded Thursday in his first-ever interview on FOX News’ “The O’Reilly Factor.” As recently as July, the Democratic presidential candidate declined to rate the surge a success, but said it had helped reduce violence in the country. On Thursday, Obama acknowledged the 2007 increase in U.S. troops has benefited the Iraqi people.

NY Times:
- Altria Group is in advanced talks to buy UST, the maker of the popular Skoal and Copenhagen smokeless tobacco brands, for more than $10 billion, people with close knowledge of the negotiations said late Thursday. The terms could not be learned.
- The People’s Bank of China needs more capital and is in talks with the nation’s finance ministry on how to get it.
- “Palin Power” may represent conservative principles and women’s ascension, but it could just as well mean purchasing power. After Gov. Sarah Palin’s acceptance speech last night, merchandise with her name or likeness is super hot. Amazon.com is “temporarily out of stock” of the only Palin biography, “Sarah: How a Hockey Mom Turned Alaska’s Political Establishment Upside Down.” The Alaska governor has pulled off a remarkable coup, snagging a higher Amazon sales rank than the Democratic memoir writer she scorned last night. The Palin biography now sits at No. 13, while Senator Barack Obama’s “The Audacity of Hope” is No. 26.
- Scientists have for the first time recorded individual brain cells in the act of summoning a spontaneous memory, revealing not only where a remembered experience is registered but also, in part, how the brain is able to recreate it.

Forbes.com:
- An audience of 37.2 million people watched Alaska Governor Sarah Palin, the Republican vice presidential candidate, on ABC, CBS, NBC, CNN, Fox News Channel and MSNBC, Nielsen Media Research said Thursday. PBS estimated its audience at 3.9 million, based on a less reliable sample of several big cities. Nielsen does not count the audience for C-SPAN, which also showed the speech. Last week, Nielsen said 38.4 million people watched Obama speak at a Denver stadium on the six commercial networks, along with BET, TV One, Univision and Telemundo - four networks that didn't cover Palin's speech. PBS added an estimated 4 million to that total. Nearly 2 million more women were watching Palin than men, Nielsen said. Viewers were far more interested in Palin than Democratic vice presidential candidate Joe Biden. Biden's speech to Democrats last week was seen by an estimated 24 million people.

IBD:
- Quanta Services(PWR): Wind, Sun Are New Frontiers For Maker Of Electrical Infrastructure.

USA Today.com:
- Honda has a new budget-priced hybrid.
- Rates on 30-year mortgages averaged 6.35% this week, down from 6.40% the previous week, a third consecutive decline that dropped rates to the lowest level since mid-July, Freddie Mac reported Thursday.

Reuters:
- Lehman Brothers Holdings Inc (LEH) is considering a plan to put some $32 billion of its commercial real estate and mortgage assets in a new company and spin it off, Bloomberg reported on its website on Thursday.
- Hedge fund company Atticus Capital denied market rumors it was liquidating its positions and closing down and said it had a large net capital position and was looking for investment opportunities, the Wall Street Journal reported on Thursday.
- Goldman Sachs Hedge Fund Partners LLC, an investment fund comprised by five other hedge funds, fell in value by 2.6 percent in July, according to a Securities and Exchange Commission filing on Thursday.

Financial Times:
- Russia's central bank intervened heavily to support the rouble on Thursday as analysts said $21bn of foreign capital might have been pulled out of the country as Moscow paid the price for its conflict with Georgia.

TimesOnline:
- UK car sales fell to their lowest level for more than 40 years last month in the most dramatic sign yet that the country is heading into a recession.

Edaily:
- Samsung Electronics Co. is seeking to acquire SanDisk Corp.(SNDK). Samsung hired JPMorgan Chase(JPM) as the adviser for the deal about a month ago and the company’s semiconductor division is expected to lead the acquisition.

Commercial Times:
- Taiwan’s central bank bought the island’s currency during the opening and closing minutes of trading yesterday to help support it, citing traders.

Shanghai Securities News:
- Shanghai’s new home prices fell the most in three years in July as sales volumes declined. Prices fell 24% in July from the previous month, the largest decline since July 2005. The volume of new home sales slumped almost 70% in both July and August from a year earlier.

Late Buy/Sell Recommendations
Citigroup:
- Downgraded (ANF) to Sell, target $45.
- Reiterated Buy on (MOT), target $12.50.
- Reiterated Buy on (EL), raised target to $60.

Morgan Stanley:
- Rated (ABT) Overweight, target $67.
- Rated (COV) Overweight, target $64.
- Rated (AFFX) Underweight, target $8.
- Rated (WAT) Overweight, target $81.

Night Trading
Asian Indices are -2.75% to -1.0% on average.
S&P 500 futures -.32%.
NASDAQ 100 futures -.35%.

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Earnings of Note
Company/EPS Estimate
- (NSM)/.34

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for August is estimated at -75K versus -51K in July.
- The Unemployment Rate for August is estimated at 5.7% versus 5.7% in July.
- Average Hourly Earnings for August are estimated to rise .3% versus a .3% gain in July.

Upcoming Splits
- None of note

Other Potential Market Movers
- The Fed’s Yellen speaking, 2Q mortgage delinquencies report, (AGP) investor day, Kaufman Brothers Investor Conference, Morgan Keegan Equity Conference and Thomas Weisel Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and automaker shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.