Stocks Finish Mixed as Strength in Commodity and Construction Shares Offset Weakness in Retail and Insurance Stocks

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Stocks Slightly Lower into Final Hour on Surging Credit Angst, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Software longs and Medical longs. I added to my (AAPL) long today and added back to an existing commodity short today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is about average. Investor anxiety is high. Today’s overall market action is slightly bullish. The VIX is rising 5.74% and is high at 25.79. The ISE Sentiment Index is low at 104.0 and the total put/call is above-average at .99. Finally, the NYSE Arms has been running around average most of the day, after peaking at 1.71 this morning, and is currently .83. The Euro Financial Sector Credit Default Swap Index is +1.9% today to 95.17 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 +2.2% at 149.71 basis points. The TED spread is rising 10.14% to 1.33 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.95%, which is down 67 basis points in seven weeks and at the lowest level since August 2003. Oil continues to trade very poorly given the OPEC production cut, recent price declines, today’s US dollar weakness, that it is at the psychologically important $100/bbl. level, a larger-than-expected inventory decline, hurricane worries and recent Iranian shipping sanctions. Refinery Utilization is now at 78.3%, the lowest since the historic hurricanes in 2005 wreaked havoc with the Gulf energy infrastructure and slashed oil demand by refiners. The (XLF) has been very resilient again given recent news. The etf continues to hold its recent range of $19.50-$23.50, which is a broad market positive. The Bank Index(BKX) is actually .73% higher today. Many market leading stocks are significantly outperforming the broad market again today. The broad market, in general, is behaving very well given the spike in credit market angst and financial sector pessimism. There remains massive bull firepower available as the worst case economic scenario is likely factored into most stock prices at current levels. The US dollar will likely pull back a bit further before embarking upon another surge higher next month. The Citi eurozone economic surprise index is now -157.60, while the US economic surprise index is +46.0. Apple(AAPL) may have a bit more downside here, but it isn’t worth waiting on, in my opinion. I suspect those intermediate/long-term investors that are selling around currently levels will greatly regret it by year-end. Nikkei futures indicate an +90 open in Japan and DAX futures indicate an unch. open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Citigroup Inc.(C) analyst Prashant Bhatia reiterated his “buy” rating on Merrill Lynch(MER) shares, saying the firm has “ample liquidity” and the stock is worth $40. Bhatia said NY-based Merrill’s stake in BlackRock Inc.(BLK) is worth $9 a share, its wealth-management business has $16 in value and the rest of the third-largest US securities firm is worth $15.
- Micron(MU) Slump Shows Sign of Bottom, End to Chip Glut.
- The cost of protecting bank bonds from default fell for the first day in four on speculation Lehman Brothers Holdings Inc. will be bought by one or more of its Wall Street rivals. Credit-default swaps on the Markit iTraxx Financial index of 25 European banks and insurers dropped 5 basis points to 88, according to JPMorgan Chase & Co. prices at 10:35 a.m. in London.
- Copper and aluminum may decline by as much as 29 percent in 12 months as slower global growth saps demand for metals, according to Ebullio Capital Management LLP, a U.K. money manager that has returned 63 percent this year. ``The markets can go lower than what a lot of people thought,'' said Steffensen, who has traded industrial and precious metals for 22 years including at companies such as Gerald Metals Inc. Slower global economic growth will likely means fewer Chinese exports, which in turn should curb the nation's growth in demand for metals, he said.
- Russia's ruble fell against its dollar-euro basket for a third week as oil and stocks declined. The currency slipped for a third week versus the dollar as oil extended losses from a record high in July and Russian equities slid 8.3 percent in the past five days, their fourth weekly drop. Investors have withdrawn more than $20 billion out of Russia since the start of the five-day war with Georgia Aug. 8, says UniCredit SpA analyst Vladimir Osakovsky. Investor sentiment toward Russia is worsening amid concern economic growth may falter, Credit Suisse equities analysts led by Hugo Swann in London wrote in a research note today. ``Further ruble weakening could amplify concerns of individuals and investors regarding its standing as a currency,'' he wrote in a client note today.
- Oil dropped below $100 a barrel in New York today for the first time since April amid forecasts that a slowing global economy will curtail energy demand. Futures traded as low as $99.99 a barrel and have erased almost a third of their value since reaching a record $147.27 on July 11. Traders have shrugged off forecasts that Hurricane Ike will hit the Texas coast later today, an OPEC call for reduced supplies and a decline in U.S. inventories. Demand for fuels averaged over the past four weeks declined 3.8 percent, the Energy Department report showed Sept. 10. OPEC's call for members to honor production quotas ``may be the most bearish signal to date in the oil market rout,'' said Antoine Halff, head of energy research at Newedge USA LLC in New York. ``The ministers appear genuinely concerned that the bottom is falling out of global demand and that once-depleted stocks are rebounding with a vengeance,'' he said in a Sept. 10 report. ``Their panic is a testament to how soft the market has become. It is likely to grow even softer.''
- World wheat production this year will be higher than expected a month ago as bigger crops in Europe, Russia and Ukraine offset smaller output in Argentina and Australia, according to the US Dept. of Agriculture. Global output will be a record 676.3 million metric tons, up 5.5 million from last month’s estimate and up 11% from last year’s crop of 610 million tons, the USDA said. Unsold supplies at the end of the year will total 139.9 million tons, up 2.7% from the August estimate, and up 18% from last year. Wheat futures on the Chicago Board of Trade have plunged 46% from a record $13.49 a bushel in late February.
- Cemex SAB(CX), the largest cement maker in the Americas, fell the most since listing its shares in New York after reducing its 2008 operating cash-flow forecast for a second time this year amid slumping demand.
- General Electric Co.(GE) fell the most in New York trading since cutting its annual forecast five months ago, dragged down by financial stocks including American International Group Inc. and Lehman Brothers Holdings Inc.

Wall Street Journal:
- Carlyle Group L.P. continues to have big ambitions for its financial services group, despite the departures of four members of the team in the past few months, including two former co-heads. The Washington-based firm told investors at its annual meeting on Monday and Tuesday that it plans to raise $3 billion to $5 billion for its first financial services fund, according to three prospective investors.

American Banker:
- JPMorgan Chase(JPM) is in “advanced talks” to buy Washington Mutual(WM), the biggest US Negotiations are being conducted “at the highest levels of both companies” and include JPMorgan CEO Dimon and WaMu CEO Fishman, citing sources. The government isn’t involved. savings and loan.

Reuters:
- Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday.

Financial Times:
- Bank of America (BAC) , JC Flowers & Co, the financial investor, and China Investment Co., the Chinese sovereign wealth fund, are considering a possible joint bid for Lehman Brothers (LEH) , the embattled Wall Street bank.

Bear Radar

Style Underperformer:

Large-cap Value (-.29%)

Sector Underperformers:

Retail irlind (-2.82%), Insurance (-2.50%) and Restaurants (-2.21%)

Stocks Falling on Unusual Volume:

AIG, GE, PDGI, DIOD, PNRA and POWI

Stocks With Unusual Put Option Activity:

1) GE 2) CMG 3) AMAG 4) FTO 5) DOW

Producer Prices Fall, Retail Sales Fall on Declining Gas Station Receipts, Consumer Expectations Jump Most in Over 17 Years

- The Producer Price Index for August fell -.9% versus estimates of a -.5% decline and a 1.2% increase in July.

- The PPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .7% increase in July.

- Advance Retail Sales for August fell -.3% versus estimates of a .2% gain and a downwardly revised -.5% decline in July.

- Retail Sales Less Autos for August fell -.7% versus estimates of a -.2% decline and a .3% increase in July.

- Preliminary Univ. of Mich. Consumer Confidence for September jumped to 73.1 versus estimates of 64.0 and a reading of 63.0 in August.

BOTTOM LINE: Prices paid to US producers fell in August, as lower energy prices eased inflation pressures, Bloomberg said. Import costs fell in August by the most in almost 20 years, Labor figures showed yesterday. Energy prices paid by producers fell 4.6%, the largest decline in almost 2 years. Prices for raw materials, or so-called crude goods, plunged 11.9% during August versus a 4.2% rise the prior month. Passenger car prices fell .3% and the cost of light trucks fell 1.9%, the most since October 2006. Consumer goods prices fell 1.2%. According to the median forecast in Bloomberg’s monthly survey of economists, the Fed will keep the benchmark interest rate unchanged at 2% through the first three months of 2009. The 10-year TIPS spread, a good gauge of inflation expectations, is 1.95%, the lowest in over 5 years. As I said a few months ago, I still believe inflation fears have peaked as the commodity bubble continues to burst and the secular trend of disinflation reasserts itself.

Sales at US retailers unexpectedly dropped in August, Bloomberg reported. Filling station sales fell 2.5% in August versus a .2% gain the prior month. The average price of a gallon of gas fell to $3.76/gallon last month versus $4.06/gallon in July. Excluding gasoline, retail sales were unch. versus a .6% decline in July. Sales at car dealers and parts stores increased 1.9%, the first gain since January and the biggest in a year. Weekly retail sales rose +1.8% this week, which was the third consecutive week showing improvement. As well, weekly retail sales are well above the +.5% gain seen during the first week of March. I expect retail sales to improve into year-end on pent-up demand, falling energy/food prices, decelerating inflation, low interest rates, rising stock prices, better consumer sentiment and diminishing housing fears.

Consumer Confidence rose the most in more than 4 years as a decline in gasoline prices boosted Americans’ spirits, Bloomberg reported. Americans expect inflation to subside, according to the report. Consumers thought prices will rise 3.6% in the coming 12 months versus expectations of a 4.8% increase a month ago. The Consumer Expectations component of the index surged to 70.9 from 57.9 the prior month. This was the largest monthly gain in Consumer Expectations since March 1991, which was the month after the end of the Gulf War. The Current Conditions component, which measures Americans’ perceptions of whether it is a good time to buy cars and other big-ticket items, climbed to 76.5 from 71.0 in August. I believe the rise in food/energy prices has had a much larger negative impact on consumer sentiment than generally perceived. I expect sentiment to improve modestly next month and substantially by year-end.

Bull Radar

Style Outperformer:

Mid-cap Value (+.13%)

Sector Outperformers:

Steel irlind (+4.87%), Construction (+3.15%) and Oil Service (+3.04%)

Stocks Rising on Unusual Volume:

RES, SQM, RTP, PBR, FWLT, LULU, AAUK, GOOG, FFIV, JRCC, ENER, FLI and WNS

Stocks With Unusual Call Option Activity:

1) HOLX 2) CMG 3) NIHD 4) NT 5) GT