Stocks Falling into Final Hour on Hedge Fund Concerns, Global Growth Worries, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Alternative Energy longs and Computer longs. I added (IWM)/(QQQQ) hedges, added to my (EEM) short, sold my (AMSC)/(PWR) longs and took profits in some of my Commodity/Emerging Market shorts 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, almost every sector is lower and volume is above average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising 10.82% and is high at 25.10. The ISE Sentiment Index is very low at 84.0 and the total put/call is high at 1.13. Finally, the NYSE Arms has been running high most of the day, hitting a peak of 1.50, and is currently 1.03. The Euro Financial Sector Credit Default Swap Index is rising 6.03% today to 92.33 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 +2.7% to 143.16 basis points. The TED spread is rising 4.65% to 1.17 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis points to 1.93%, which is down 69 basis points in just over seven weeks and at the lowest level since August 2003. The Goldman Sachs Hedge Fund VIP Index(49 of the most common hedge fund long positions) is falling another 5% today. However, the selling in the broad market looks a bit more rational today. The commodity/emerging market bubble stocks remain under severe pressure, but are getting extremely oversold and are due for a bounce. I have an unusual number of stocks on my monitor pages that are higher today, given broad market damage. Even Russian stocks, which fell another 7.4% today, are due for a bounce. The BankRate.com average 30-year fixed rate mortgage has plunged 27 basis points in two days to 5.88%, which is a large positive. Nikkei futures indicate a -200 open in Japan and DAX futures indicate a -45 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as lower commodity prices and bargain-hunting offset global growth worries, financial sector pessimism and more shorting.

Today's Headlines

Bloomberg:
- Russia's RTS Index fell the most in more than two years, led by oil producers after crude sank to a five-month low and Energy Minister Alexei Kudrin said oil companies shouldn't expect further tax relief. The dollar-denominated RTS posted the largest fluctuation among national markets included in global benchmarks, tumbling 7.5 percent to 1,395.11.
- Copper fell to a 7 1/2-month low in London, leading declines in industrial metals, after a gain in stockpiles signaled weaker demand. Copper stockpiles monitored by the London Metal Exchange rose 1,300 metric tons, or 0.7 percent, to 202,125 tons, the highest since March 2007. Inventories have jumped 65 percent this quarter. Copper, aluminum and zinc may drop further because of slowing global economic growth, Anil Agarwal, the billionaire who controls Vedanta Resources Plc, said today. ``Further stock builds could see copper plumb new depths,'' said John Reade, head of metals strategy at UBS AG in London. ``We are seeing no signs of strong demand from bargain hunters,'' he wrote today in a report.
- Posco(PKX), Asia's largest maker of stainless steel, plans to extend an output cut this month on weak demand following similar reductions in July and August. Chinese makers said last month demand in China, the world's largest producer, will remain weak in September amid concerns that economic growth is faltering. The slowdown may deter stainless producers from buying more nickel, used to make the rust-resistant metal, and hurt prices that have dropped 28 percent this year. The South Korean government is considering measures, including lower taxes, to boost the domestic property market, which is struggling with the highest number of unsold homes in more than 10 years.
- Crude oil fell to a five-month low, leading commodities lower, after Saudi Arabia's oil minister said supplies are sufficient to meet demand. The oil market is ``well-balanced'' and inventories are ``healthy,'' Saudi Oil Minister Ali Al-Naimi said today in Vienna, suggesting the Organization of Petroleum Exporting Countries will maintain output. Oil is down 29 percent from a record in July. ``When you see oil lose close to a third of its value in a pretty short time, it shows you that commodities aren't worth what people once thought,'' said Ron Goodis, a futures trading director at Equidex Brokerage Group in Closter, New Jersey. ``Many markets are coming back to reality.'' ``Commodity charts speak for themselves -- not much hope for the bulls,'' said Ralph Preston, an analyst at Heritage West Futures Inc. in San Diego. ``Look for pension funds and endowments to sell on any bounces.''
- U.K. manufacturing production declined in July to the lowest level in 1 1/2 years as oil rose to a record, dragging on economic growth. Factory output fell 0.2 percent from June, the Office for National Statistics said today in London, declining for a fifth month.
- McDonald's Corp.(MCD), the world's largest restaurant company, reported August sales that rose more than some analysts estimated as consumers battered by higher gasoline and grocery bills bought $1 sodas in the U.S. and snack-sized chicken wraps in France.
- Lehman Brothers Holdings Inc.(LEH) fell as much as 43 percent in New York trading after talks about a capital infusion from Korea Development Bank ended. The Wall Street firm is continuing to negotiate with other potential investors, a person briefed on the matter said.
- Apple Inc.(AAPL) Chief Executive Officer Steve Jobs introduced thinner iPod media players that can hold twice as many songs, showing off new designs to entice consumers during the holiday shopping season.

Wall Street Journal:
- Momentum is building in Congress to increase funding for public transportation as transit agencies struggle to accommodate increased demand from Americans seeking to escape high gas prices.
- The next U.S. president should put more emphasis on countering biological threats as part of a rethinking of national security strategy, according to early assessments from the leaders of a commission investigating the threat from weapons of mass destruction.

CNBC.com:
- A number of U.S. banks stand to gain after the government takeover of Fannie Mae and Freddie Mac, as the move, coupled with the Treasury decision to buy mortgage-backed securities, brought much-needed liquidity back into the market, Dick Bove, analyst at Ladenburg Thalman & Co., told CNBC.

CNNMoney.com:
- Started by a stock trading system guy, Brett Markinson, and an artificial intelligence whiz, Ben Goertzel, Quant the News's first product StockMood (stockmood.com) analyzes an aggregated feed of news from hundreds of sources to gauge the mood of coverage for companies and their stocks.

NY Post:
- Frustrated by the market chatter about its health, battered hedge-fund firm Atticus has decided to give the market the silent treatment. The $14 billion fund - which last week quelled rumors that it was liquidating - plans to "suspend indefinitely the reporting of mid-month performance estimates," it said in a Sept. 4 letter to investors.
- Hedge funds - the daredevils of Wall Street - are backing away from risk, fearful of getting beaten up by the market's persistent turbulence. JPMorgan Chase's Highbridge Capital and Phil Falcone's Harbinger Capital are among a growing number of big-name hedge funds that are hunkering down, moving into cash and reducing the use of borrowed money, or "leverage," to inflate returns, sources said. "A lot of smart hedge funds are sitting on cash right now, and that's the position we've taken," said an employee at Highbridge, the $28 billion hedge fund shop in which JPMorgan holds a big stake. The flight to safety reduces the chances of any surprise blowups in the coming months. But it also kills the likelihood that any new stars will be born; fund managers' nerves are too frayed to make the kind of big, directional bets that could reap big rewards. In some cases, hedge funds - especially the poor performers - are being pressured by their lenders, known as prime brokers, to reduce their risk. Goldman Sachs, for example, is "tightening up their risk management and forcing funds to deleverage," said a person familiar with the situation. The flight to safety, whether voluntary or forced, started at the end of July, when one of the few sure-fire bets of 2008 - that oil prices will go higher and financial stocks will fall - suddenly failed.

USA Today:
- A bipartisan group of 16 senators is promoting an energy proposal that includes allowing oil drilling off the coasts of Virginia, North Carolina, South Carolina and Georgia, if their governors and legislatures approve, and spending $20 billion on an effort to move away from gasoline-powered vehicles within 20 years. Four more senators are expected to sign on this week. "Most Americans believe that we ought to put the politics aside and actually try and pass an energy bill that would so something to reduce gas prices." First up on the Senate's agenda will be a bill to increase oversight of energy trading markets by the Commodity Futures Trading Commission to try to prevent companies from engaging in excessive speculation. That legislation could be expanded to other far-reaching energy proposals, said Bill Wicker, spokesman for the Senate Energy and Natural Resources Committee.

Reuters:
- North Korean leader Kim Jong Il may have had a stroke, citing a US intelligence official.
- Cuba increased the price of gasoline and diesel yesterday and will adjust prices quarterly based on changes in the global oil market, citing a note in the Communist Party newspaper Granma. The price of regular gasoline rose 69% and diesel rose 87%. Fuel import costs are stressing the government budget.

Le Figaro:
- European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said the European Commission will cut growth forecasts for the region. “Growth figures will be revised downwards and those for inflation upwards,” Almunia said.

Kommersant:
- Russia is “psychologically” unprepared for lower budget spending in the decades to come as the oil industry’s contribution to the economy drops, citing Finance Minister Alexei Kudrin.
- Accelerating August inflation is a “lesson” for Russia’s government that will keep it focused on ensuring a “civilized macroeconomic policy” next year, citing Finance Minister Alexei Kudrin. Companies are unable to plan long-term investments and secure loans for projects locally when inflation is higher than 7-8%, Kudrin said. Inflation accelerated faster than economists expected in August to an annual 15%.

O Globo:
- Brazil’s main stock index should extend 20% losses this year as a result of the US economic slowdown, director of Columbia University’s Center for Brazilian Studies, said. Trebat, who was the head of Latin American research for Citigroup Inc. until 2005, said that Brazil’s economy should grow no more than 3% next year, dragged down by lower exports to China and higher interest rates.

Bear Radar

Style Underperformer:

Mid-cap Growth (-2.58%)

Sector Underperformers:

I-Banks irlind (-7.20%), Coal (-7.09%) and Steel (-6.45%)

Stocks Falling on Unusual Volume:

TWTC, CRZO, PVA, CLF, MBT, CMC, PBR, STO, ADVS, SSRI, FWLT, JOYG, POWI, PAAS, FSLR, EGLE, VISN, MSB, GNI and TRA

Stocks With Unusual Put Option Activity:

1) TRA 2) FWLT 3) OIH 4) RRC 5) BHP

Bull Radar

Style Outperformer:

Small-cap Value (-.02%)

Sector Outperformers:

Airlines (+1.42%), Restaurants (+.87%) and Retail (+.86%)

Stocks Rising on Unusual Volume:

UNFI, MEND, BJRI, SCSC, CRDC, SBNY, SYUT, DXPE, TCBI, QSII, GSIC, QGEN, BRLI, CSTR, GOOG, FUJI, FSYS, MNRO, SNDA, CHCO, PERY, RIMM, CHTT, ATE, RBA, RFV, KFY, BSI and ADC

Stocks With Unusual Call Option Activity:

1) TRA 2) HL 3) MYL 4) XCO 5) MU

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Companies with the most hedge-fund ownership slid for the fifth time in six days, defying the rally spurred by the government's takeover of Fannie Mae(FNM) and Freddie Mac(FRE), as money managers sold shares to cover client redemptions, analysts said. Goldman Sachs Group Inc.'s(GS) index of the 49 most-common holdings of hedge funds lost 0.1 percent, led by Google Inc.(GOOG) and Potash Corporation of Saskatchewan Inc.(POT), extending its drop since Aug. 28 to 8 percent. ``Smart money is selling on the rallies, and that's happening because of an expectation for a heavy redemption flow,'' said Peter Kenny, a managing director for institutional sales at Knight Equity Markets in Jersey City, New Jersey. ``It's amazing the lemming effect that develops in the top companies,'' said Peter Rup, chief investment officer at New York-based Orion Capital Management LLC, which invests in hedge funds. ``There's clearly a network of information flow among friends and families.'' All but seven stocks in Goldman's index have dropped in the last three months. Freeport-McMoRan Copper & Gold Inc.(FCX), the world's largest publicly traded copper producer, and Petroleo Brasileiro SA(PBR), Brazil's state-controlled oil company, have both lost about 37 percent in U.S. trading during that period. The time of year also may contribute to the decline for stocks favored by hedge funds. ``Investors have annual redemption rights and you have to give 90 days notice, which means September is typically when that's done,'' Rup said.
- Google’s(GOOG) planned partnership with Yahoo! Inc.(YHOO) probably will survive government scrutiny, a Sanford C. Bernstein analyst said.
- The Australian dollar held losses after a government report showed home loans fell for a sixth month in July. The New Zealand currency declined as the nation may not recover from a recession this year. Both currencies dropped as the U.S. dollar gained to the highest level since October against the euro after a government takeover of Fannie Mae and Freddie Mac boosted confidence in global financial markets.
- Stephen Schork, president of the Schork Report, Says Crude Oil May Fall to $70 a Barrel. (video)
- Crude oil fell in New York as the dollar rose against the euro, limiting investors' appetite for commodities. The U.S. currency strengthened to the highest since October 2007 as the government's takeover of Fannie Mae and Freddie Mac encouraged investors to move funds into the stock market. ``You're starting to see some money going into the securities market and coming out of commodities,'' said Tetsu Emori, a fund manager with Astmax Ltd. in Tokyo.
- Orange juice fell by the exchange limit, dropping the most in nine years, after Hurricane Ike was forecast to miss Florida, cutting the risk to groves recovering from past storms.
- Al-Qaeda's second-in-command, Ayman al-Zawahiri, attacked Iran in a video posted on the Internet, accusing the country of letting the U.S. invade Afghanistan and Iraq. In the 90-minute Arabic-language video called ``Seven Years of Crusades,'' which was shown today on the Al-Jazeera television channel, al-Zawahiri said there was an ``Iranian-Crusade alliance that's targeting the Muslim world'' and that leaders in Tehran are ``collaborating with the Americans in their occupation of Iraq and Afghanistan.'' The recording comes three days before the seventh anniversary of the Sept. 11 attacks on the U.S.
- Wells Fargo & Co.(WFC), the California lender that skirted the subprime collapse, topped Citigroup Inc. by market value to become the third-most valuable U.S. bank.
- U.K. house prices dropped in August as the squeeze on mortgage lending pushed down sales to a record low, the Royal Institution of Chartered Surveyors said. The number of real-estate agents and surveyors saying prices fell exceeded those reporting gains by 81 percentage points, compared 83 percentage points in July, the group said today in London. Average sales per respondent in the past three months fell to 12.7, the least since the survey began in 1978.
- President George W. Bush said he'll withdraw as many as 8,000 troops from Iraq by February and simultaneously send additional forces to Afghanistan. Bush will announce his plan tomorrow in a speech at the National Defense University in Washington. The White House released the prepared text of his remarks today. ``While the enemy in Iraq is still dangerous, we have seized the offensive, and Iraqi forces are becoming increasingly capable of leading and winning the fight,'' Bush will say, according to the text. ``As a result, we have been able to carry out a policy of `return on success' -- reducing American combat forces in Iraq as conditions on the ground continue to improve.'' ``Afghanistan's success is critical to the security of America and our partners in the free world,'' Bush will say, according to the text. ``As we learned in Iraq, the best way to restore the confidence of the people is to restore basic security -- and that requires more troops.'' Bush's decision reflects recommendations of Army General David Petraeus, the top commander in Iraq, that were refined by Defense Secretary Robert Gates and Admiral Michael Mullen, chairman of the Joint Chiefs of Staff.
- Investors should use currency options to guard against losses as India's rupee heads for the steepest slide since 1991, when a balance of payments crisis forced the nation to pawn its gold, JPMorgan Chase & Co. said. Investors should buy rupee put options granting the right to sell the currency against the dollar, said Vikas Agarwal, a strategist at the third-biggest U.S. bank. The rupee will fall to a two-year low by Dec. 31 as funds pull money out of emerging markets, he said.

Wall Street Journal:
- The last refuge for investment bankers is under siege. Fees in Asia are falling as stock and debt offerings evaporate and companies hold back on deals.
- Google Inc.(GOOG) will begin brokering some television ads on cable networks owned by General Electric Co.'s(GE) NBC Universal, according to people familiar with the matter, as the Web giant seeks to expand the reach of its nascent TV ad-selling business.

MarketWatch.com:
- United Airlines' parent company UAL Corp. saw about three-quarters of its share value briefly wiped out Monday within minutes of a six-year-old bankruptcy report hitting traders' screens. It's still not clear what caused the report to resurface. UAL accused the Florida Sun Sentinel of posting on its Web site a six-year-old story from the Chicago Tribune on UAL's 2002 bankruptcy. Apparently, the posting carried today's date.

ABC News:
- The latest ABC News/Washington Post poll has Senator McCain leading Senator Obama 49-47%. White women have moved from 50-42% in Obama’s favor before the conventions to 53-41% for McCain now, a 20-point shift in the margin that’s one of the single biggest post-convention changes in voter preferences. The other, also to McCain’s advantage, is in the battleground Midwest, where he’s moved from a 19-point deficit to a 7-point edge.

Forbes.com:
- Tech Trends For Growing Businesses.

CNNMoney.com:
- At least Michael Dell sees value in Dell (DELL). The company founder and CEO spent $100 million late last week to acquire 4.7 million shares, according to a Federal filing Monday.
- Gasoline prices continued to decline, easing for the eighth straight day, as Tropical Storm Hanna dumped heavy rain on the entire eastern coast of the United States, according to a nationwide survey of gas station credit card swipes.

USA Today.com:
- Interest rates on 30-year fixed-rate mortgages have plunged in the aftermath of the U.S. government's rescue effort for mortgage finance companies Fannie Mae and Freddie Mac. The 30-year fixed-rate mortgage has fallen to near 6% on Monday vs. 6.50% on Friday, according to Greg McBride, senior financial analyst at Bankrate.

BusinessWeek.com:
- GMAT Cheating Scandal: Drawing to a Close. The b-school dreams of nearly 100 GMAT test-takers have been shattered, with GMAC canceling their test scores in what is likely the final chapter in one of the worst b-school cheating scandals in recent memory.

Reuters:
- Aerospace groups braced for global disruption from a potentially lengthy strike at Boeing(BA) on Monday as one of the planemaker's biggest suppliers lost no time in cutting production and working hours.Three days after 27,000 machinists halted assembly at the world's top-selling planemaker, Boeing supplier Spirit AeroSystems suspended its 2008 financial guidance and said it was cutting volumes on certain Boeing products.
- The U.S. Justice Department has hired Sandy Litvack, who was its former antitrust chief and Walt Disney Co's (DIS) former vice chairman, to consult on its probe of Google Inc's (GOOG) search advertising deal with Yahoo (YHOO), a source close to the investigation said.
- Mexico cut its forecast for economic growth this year to 2.4 percent from 2.8 percent.

Financial Times:
- Royal Dutch Shell is to become the first western oil company to sign a deal with the Iraqi government since the US-led liberation of 2003, agreeing a plan to capture and use gas in the Basra region that could be worth up to $4bn.
- Barack Obama is set to meet Bill Clinton at the former president's foundation headquarters in Harlem on Thursday in their first face-to-face meeting since Mr Obama defeated Hillary Clinton in the primary elections in June. The meeting comes as John McCain, the Republican candidate, moved into the lead in the polls for the first time in the campaign. Mr Clinton, the former two-term president, will offer advice to the Democratic nominee about how to deal with the coming 57 days before the election, amid Democratic worries about Mr Obama's shaky numbers in the polls. On Monday a Gallup-USA Today poll gave Mr McCain a double-digit lead at 54 per cent to Mr Obama's 44 per cent among "likely voters". Most analysts attributed Mr McCain's improving numbers to his selection of Sarah Palin, which has proved popular with voters well beyond the Republican Party's social conservative base.

TimesOnline:
- Alistair Darling is preparing to intervene to stimulate Britain's dormant housing finance market, according to senior government officials.
- Google(GOOG) has teamed up with John Malone, the media billionaire, and HSBC on a venture that will offer internet access to three billion people in Africa and other emerging markets as the US search engine continues to expand its presence across the Web.

China Daily:
- Consumers could turn their backs on US manufacturer Procter and Gamble (P&G) and British firm Unilever after they raised prices in July on consumer goods by up to 20 percent in China to offset surging raw materials costs. That's according to a recent Sina.com survey. More than 84 percent of 3,042 respondents surveyed by the website said the price hike was "unreasonable", while 87 percent threatened to switch to cheaper brands.

Tuoi Tre:
- Vietnam has about 400,000 metric tons of steel in stockpiles as demand falls, citing Pham Chi Cuong, chairman of the Vietnam Steel Assoc. Local companies that make steel ingots have been unable to find customers, citing Cuong.

Late Buy/Sell Recommendations
Piper Jaffray:
- Rated (SBAC) Buy, target $40.
- Rated (AMT) Buy, target $50.
- Rated (CCI) Buy, target $42.
- Rated (EQIX) Buy, target $100.
- Rated (NIHD) Buy, target $70.
- Rated (USM) Sell, target $42.

Night Trading
Asian Indices are -2.25% to -.50% on average.
S&P 500 futures -.28%.
NASDAQ 100 futures -.35%.

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Earnings of Note
Company/EPS Estimate
- (PBY)/.08
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- (CG)/1.41

Economic Releases
10:00 am EST
- Pending Home Sales for July are estimated to fall 1.5% versus a 5.3% gain in June.
- Wholesale Inventories for July are estimated to rise .7% versus a 1.1% gain in June.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, (OC) Investor Day, (CRA) analyst meeting, (NFX) analyst meeting, (MMM) investor day, (BBND) analyst meeting, (SRX) analyst meeting, (TXN) Mid-quarter Update, Wachovia Transport Conference, Deutsche Bank Tech Conference, Morgan Stanley Global Healthcare Conference and Lehman Financial Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and financial shares in the region. I expect US equities to open modestly lower and to maintain losses into the afternoon. The Portfolio is 100% net long heading into the day.