Stocks Finish Lower, Weighed Down by Commodity, Homebuilding and Construction Shares

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Stocks Lower into Final Hour on Profit-Taking, Cyclical Sell-Off

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Medical longs, Biotech longs and Commodity/Emerging Market shorts. I added to a Commodity short and added to a Retail long today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, almost every sector is declining and volume is above average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 6.48% and is very high at 31.55. The ISE Sentiment Index is low at 105.0 and the total put/call is above average at .95. Finally, the NYSE Arms has been running very high most of the day, hitting 2.98 at its intraday peak, and is currently 2.78. The Euro Financial Sector Credit Default Swap Index is rising 1.17% today to 104.0 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising 1.96% to 126.92 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.0% to 51 basis points. The TED spread is now down 412 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is plunging 7.73% to 41.06 basis points. The Libor-OIS spread is falling 3.25% to 43 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 7 basis points to 1.92%, which is down 72 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is unch. today. The most cyclical stocks are catching the brunt of the selling today. The US dollar has likely put in another tradable low, which is pressuring commodities. I also suspect economic data will not surprise as much on the upside this month due to the recent rise in gas prices, auto plant/dealer shutdowns and jump in interest rates. However, many market leaders are just slightly lower or even higher on the day. As well, investor angst is jumping, which is a positive. Considering the losses in the major averages and the (XHB), the (XLF) and (IYR) are holding up well. As well, education, biotech, software, medical and retail shares are holding firm. Nikkei futures indicate a -161 open in Japan and DAX futures indicate a -18 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, bargain-hunting, lower energy prices and lower long-term rates.

Today's Headilnes

Bloomberg:

- Crude oil fell the most in two weeks, ending a rally, after a government report showed that U.S. supplies unexpectedly increased as fuel consumption plunged to a 10-year low. Inventories climbed 2.9 million barrels to 366 million in the week ended May 29, according to the Energy Department. The gain occurred as imports surged 9.9 percent and refineries increased operating rates to the highest level in six months. Fuel demand fell to the lowest since May 1999. “The high inventories and weak demand we’re seeing don’t justify prices in the $60s,” said Chip Hodge, who oversees a $9 billion natural-resource-company bond portfolio as managing director at MFC Global Investment Management in Boston. “The fundamentals are catching up with the market. Prices have gotten ahead of where they should be.” U.S. fuel demand fell 900,000 barrels to 17.7 million barrels a day last week, the biggest decrease since the week ended Jan. 9, the report showed. Gasoline consumption slipped 518,000 barrels to 9.02 million. The peak U.S. gasoline demand period lasts from late May’s Memorial Day holiday until Labor Day in early September, as Americans take to the highways for vacations. “It was surprising to see gasoline demand drop, because of the Memorial Day holiday,” said Mike Zarembski, senior commodity analyst at OptionsXpress Holdings Inc. in Chicago. “It’s probably a sign that consumers are cutting back on driving because of the run-up in retail prices.”

- European consumer spending and exports contracted the most in at least 14 years in the first quarter and investment slumped as the worst global recession in more than six decades prompted companies to cut output and jobs. Gross domestic product shrank 2.5 percent from the fourth quarter, matching an initial estimate and the most since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said. Household consumption contracted 0.5 percent while exports dropped 8.1 percent and imports fell 7.2 percent, all the most since the series began in 1995. Investment fell 4.2 percent after a 4.3 percent drop in previous quarter that also was the sharpest since 1995.

- Some of the 17 Chinese Uighur Muslims being held at Guantanamo Bay, Cuba, will likely be released in the U.S. in an effort to convince other countries to accept prisoners from the detention facility, according to current and former American officials.

- Al-Qaeda chief Osama bin Laden criticized President Barack Obama’s stance on the Muslim world in an audiotape released as the U.S. leader began a Middle East tour with a visit to Saudi Arabia, Al Jazeera television said. Saudi-born bin Laden said Obama has adopted the same “antagonizing” policies toward Muslims as his predecessor, George W. Bush, and that he and his administration are “sowing the seeds for revenge and hatred” against Americans. Bin Laden also said Obama is responsible for Pakistan’s U.S.-backed crackdown on Islamist militants in the Swat Valley along the border with Afghanistan. “Killing, fighting, bombing and destruction” led elderly people, children and women to flee the area and become refugees, bin Laden said.

- James Pallotta, the investment manager who split with longtime partner Paul Tudor Jones at the start of the year, plans to shut his Raptor Global hedge funds after losing almost 29 percent since the start of 2007. Pallotta, based in Boston, is little changed this year after falling 20 percent in 2008 and almost 9 percent in 2007, requiring him to gain about 37 percent before charging fees on clients who had been in the fund in those years. He’ll take a few months off to develop a new investment strategy, he said in a letter yesterday to clients.

- JPMorgan Chase & Co.(JPM) is disbanding an investment-banking unit that wagers the company’s money on hedge funds, leveraged buyouts and real estate, two people familiar with the plan said. The second-largest U.S. bank by assets will shut the principal investment management group’s hedge-fund business and its private-equity division, except for a team that focuses on Asia, said the people, who asked not to be named because the decision hasn’t been publicly disclosed.

- Microsoft Corp.(MSFT) Chief Executive Officer Steven Ballmer said the world’s largest software company would move some employees offshore if Congress enacts President Barack Obama’s plans to impose higher taxes on U.S. companies’ foreign profits.

“It makes U.S. jobs more expensive,” Ballmer said in an interview. “We’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.” Obama on May 4 proposed outlawing or restricting about $190 billion in tax breaks for offshore companies over the next decade. Such business groups as the National Foreign Trade Council, the U.S. Chamber of Commerce and the Business Roundtable have denounced the proposed overhaul.

- American Express Co.(AXP) Chief Executive Officer Kenneth Chenault said the credit-card company, the biggest in the U.S. by purchases, has met federal terms for repaying funds to the Troubled Asset Relief Program.

- Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

- President Barack Obama says he plans to stay out of car-company decisions even though taxpayers will own a majority of General Motors Corp. Congress has other ideas. Senator Carl Levin of Michigan said he will lobby GM to keep a plant in his state open. Representative Steve LaTourette of Ohio said he wants a congressional review of company and government decisions on automakers. Senator Jay Rockefeller of West Virginia is holding a hearing on dealership closings today. “There’s ample opportunity for Congress to get involved,” said Daniel Ikenson, an economist at the Cato Institute, a Washington group promoting free markets. “Plants are going to be closed and lots of dealerships are going to be closed, and those plants and dealerships are in congressional districts.”

- Russian stocks slumped the most in almost four months as Citigroup Inc. advised investors to sell shares after the market doubled in three months.

- China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump. The foundations for an economic recovery aren’t solid, the State Council said in a statement on a government Web site today. Trade faces “unprecedented difficulties,” Vice Commerce Minister Zhong Shan said separately. “Rising unemployment, if not properly addressed, could be a time-bomb in China’s economy,” said Tao Dong, Hong Kong-based chief Asia economist at Credit Suisse Group AG.

- NYSE Euronext Chief Executive Officer Duncan Niederauer said he’s “a lot more confident” the three- month rally in equities is sustainable as trading volume increases. “At the end of March I was apprehensive because I thought the market had gone up so much so quickly that it didn’t feel like a fundamentally driven rally to me.” Niederauer said in an interview in Amsterdam today. “I was nervous that the fundamentals hadn’t really changed and we hadn’t seen enough volume.”

Wall Street Journal:

- Unions, uncertain about the outcome of their push for Congress to overhaul national labor law, are counting on President Barack Obama's new appointees to the National Labor Relations Board to reverse Bush-era rulings they say hamper their efforts to organize workers. The five-member board, which supervises union elections and referees disputes between private-sector employers and employees, has a new chairman and Mr. Obama has nominated two new members with union backgrounds. Law firms are advising corporate clients to be on alert. If confirmed by the Senate, the two new board nominees -- labor-side lawyers Craig Becker and Mark Pearce -- would join longtime member and chairman Wilma Liebman to create "a majority bloc distinctly in favor of expanding the rights of unions and workers," law firm McKenna Long & Aldridge LLP said in a report addressing issues likely to be revisited by the NLRB.

- The accidental disclosure of a report that gives detailed information about the nation's civilian nuclear sites and programs is "of great concern," and U.S. officials intend to closely examine whether it has jeopardized national security, Energy Secretary Steven Chu said Wednesday.

CNBC:

- NetJets Inc. CEO Richard Santulli said hours flown this year by the plane-leasing company are down about 26% form the same period in 2008. NetJets is owned by Warren Buffett’s Berkshire Hathaway.

NY Times:

- On Tuesday, Google Inc.(GOOG) unveiled YouTube.com/XL, a revamped version of YouTube.com/TV that works on any Web browser that can be connected to a TV, whether it is a game console, a PC or another device. It is intended to be viewed on a television set or on a large PC screen. It can be controlled not only with a keyboard, but also with some remote controls. And it can be made to display a series of clips continuously, a bit like photos on a digital photo frame. The viewing experience is especially striking for high-definition videos watched in full-screen mode on a TV set. YouTube’s move is the latest in a string of developments that aim to bring Internet content to television screens and to allow users to interact with that content from their couch.

- Brookstone Partners, the private equity firm that targets middle-market deals, is branching out into the investment advisory business, amid a downturn for the buyout industry. The company is launching Brookstone Partners Asset Management, an independent asset management arm which will aim to limit risk and earn above-market returns for investors, the company said.

- A 23-year-old man charged with killing one soldier and seriously wounding another in a shooting outside an Army recruiting office in Little Rock, Ark., was once detained in Yemen for possessing a fake Somali passport and other counterfeit documents, law enforcement officials said Tuesday. The episode in Yemen prompted a preliminary inquiry by the Federal Bureau of Investigation and other American law enforcement agencies into whether the man, Abdulhakim Mujahid Muhammad, had ties to extremist groups, the officials said. But that investigation was inconclusive, they said, leaving the bureau with insufficient evidence to wiretap his phone or put him under surveillance.

Washington Times:

- U.S. counterterrorism officials have authenticated a video by an al Qaeda recruiter threatening to smuggle a biological weapon into the United States via tunnels under the Mexico border, the latest sign of the terrorist group's determination to stage another mass-casualty attack on the U.S. homeland.

Reuters:
- Asia's richest central banks would likely shrug off portfolio losses from a U.S. sovereign credit rating downgrade and keep buying U.S. Treasuries to help maintain market stability, officials and other people with direct knowledge of policymaking say. A U.S. rating cut would weaken the dollar and wreak havoc on investments around the world benchmarked against Treasuries, but the sources said it would not cause China, Japan, India and South Korea to change their reserve policies because there are no alternatives to the liquidity afforded by the dollar. Those four countries control about half of the world's foreign exchange reserves.

- Concerns about counterparty risk of large banks has fallen to the lowest levels since Lehman Brothers failed in September as successful bank capital raising efforts assuaged investor fears, according to a credit default swap index. The CDR Counterparty Risk Index, which measures the average credit spread of the 14 largest credit derivative dealers, fell 10 percent this week to close at 135 basis points on Tuesday, according to Credit Derivatives Research, which manages the index. This is the tightest level since September 10, 2008, which was 6 days before Lehman filed for bankruptcy. "As US banks continue to take advantage of the unprecedented strength in equity and credit markets to raise both equity and debt capital, investors marked down their default risk significantly," Tim Backshall, chief strategist at Credit Derivatives Research said in a release on Wednesday.

Financial Times:
- The hedge fund industry’s worldwide assets will fall by 60% to about $750 billion this year from a peak of $1.9 trillion after many funds forgot “what hedging was about,” David Smith, chief investment officer of fund of hedge funds GAM, wrote. GAM, a unit of Julius Baer Holdings AG, manages about $38.5 billion in hedge fund investments.

APA:

- European Central Bank council member Ewald Nowotny said the economy will contract “massively” this year and new ECB economic forecasts to be unveiled tomorrow won’t be very good. Growth next year will be around zero, he said. Fears of a hyperinflation “are far-fetched,” Nowotny said. The inflation rate will go negative for some months, he said.

Boerse-Online:

- Solarworld AG will be able to reach a revenue target of 1 billion euros this year as demand is picking up again, CEO Frank Asbeck said. Demand is picking up strongly again and short work hours are “out of the question,” he said.

Xinhua News Agency:

- Power generation in China decreased 3.5% in May compared with a year earlier, citing China State Grid Corp. Generation in China has fallen since late last year, signaling the country’s economy is slowing amid a global economic downturn.

Jerusalem Post:
- President Barack Obama’s criticism of Israeli Prime Minister Benjamin Netanyahu’s policies has crossed the line into interference in internal politics, senior members of Netanyahu’s Likud party said. Kadima officials responded to the allegations by disagreeing that the US was meddling but expressing concern that such a perception by the Israeli public would harm their party and end up strengthening the prime minister. They accused Netanyahu's associates of portraying Obama as an enemy of Israel in order to unite the public behind him.

Sudanese Media Centre:
- Sudan plans to double oil production to 1 million barrels a day within five years, citing Salah Wahby, chairman of the Sudan National Oil Co., or Sudapet.

Bear Radar

Style Underperformer:
Mid-cap Value (-2.95%)

Sector Underperformers:
Steel (-7.32%), Oil Service (-6.77%) and Gold (-6.58%)

Stocks Falling on Unusual Volume:
DDS, VLO, WNR, MBT, VIP, SU, FUQI, ACGY, BOOM, SSRI, COST, APWR, DISH, LEAP, GOLD, CAH, BVF, CHU, SLV, MTA, AET, MXI and HES

Stocks With Unusual Put Option Activity:
1) JDSU 2) DDUP 3) EMR 4) VLO 5) AET

Bull Radar

Style Outperformer:
Small-cap Growth (-.83%)

Sector Outperformers:
Biotech (+1.57%), Restaurants (+.50%) and Software (+.08%)

Stocks Rising on Unusual Volume:
BOBE, RYAAY, CPA, WMT, BMA, SKM, TIVO, DDUP, TSRA, APSG, OGXI, HUBG, CLDX, DGIT, SNDA, ULTI, CEPH, HWCC and XBI

Stocks With Unusual Call Option Activity:
1) DISH 2) CAH 3) PAY 4) TIVO 5) WNR

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