Stocks Finish Mixed as Gains in Defense, Steel and Internet Shares Offset Losses in Semi, Bank and Energy Stocks

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Stocks Mixed into Final Hour as Falling Credit Angst, Short-Covering, Less Economic Fear Offset Rising Long-Term Rates, More Hawkish Fed Commentary

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Defense longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, most sectors are declining and volume is heavy. Investor anxiety is high. Today’s overall market action is mildly bearish. The VIX is falling 2.29% and is very high at 29.54. The ISE Sentiment Index is below average at 128.0 and the total put/call is slightly below average at .78. Finally, the NYSE Arms has been running high most of the day, hitting 1.56 at its intraday peak, and is currently 1.17. The Euro Financial Sector Credit Default Swap Index is falling 4.04% today to 101.67 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 falling 4.88% to 117.34 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 6.58% to 46 basis points. The TED spread is now down 417 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 8.49% to 49.36 basis points. The Libor-OIS spread is falling 5.06% to 39 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 9 basis point to 2.02%, which is down 62 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is up 4 basis points today. Considering recent stock gains, the rise is long-term rates, rising Fed rate hike odds and today’s Fed commentary, the market is proving very resilient. However, stocks are likely to trade mixed in the short-run until rates and energy prices stabilize. Nikkei futures indicate an +77 open in Japan and DAX futures indicate a -7 open in Germany on Monday. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, falling credit market angst, less economic fear and investment manager performance anxiety.

Today's Headlines

Bloomberg:

- Treasury-note traders for the first time in months are pricing in chances that the Federal Reserve may lift interest rates this year as the recession abates. Yields on two-year Treasury notes jumped to the highest level since November and money-market futures surged today as a report showed U.S. employers cut the fewest jobs in eight months during May, stoking speculation the central bank may have to increase rates or rein in liquidity this year.

- Treasuries tumbled, driving two-year yields to an eight-month high, as traders began speculating the Federal Reserve will raise interest rates later this year after a government report showed smaller-than-expected job losses.

- The Baltic Dry Index, a measure of shipping costs for commodities, slid the most in almost eight months on speculation demand for iron-ore carriers will weaken. Current rents for capsize ships will plunge 55% on average during the third quarter as panamax vessel rates slide 40%, according to forward freight agreements, bets on future rates. The index fell 284 points, or 6.9%, to 3,809 points, according to the Baltic Exchange today.

- The US dollar advanced the most against the euro since April and rose to a three-week high versus the yen after a U.S. government report showed employers cut fewer jobs last month than economists forecast. The greenback climbed against almost all of the other major currencies as a slower deterioration of the labor market supported bets dollar-denominated assets will gain as the U.S. leads the global economy out of a recession. “We may be moving to a situation where stronger economic numbers are actually good for the dollar,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “It may be just a hint that the pessimism on the dollar has been overdone and we’re moving to a dollar that is not necessarily stronger but perhaps more consistent with the recent improvement in the U.S. economic data.”

- The U.S. lost fewer jobs than forecast in May, reinforcing signs that the deepest recession in half a century is starting to abate. Payrolls fell by 345,000, the least in eight months, after a revised 504,000 loss in April, the Labor Department said today in Washington. The jobless rate increased to 9.4 percent, the highest since 1983, in part as more people joined the labor force to look for work.

- While the U.S. economy is showing signs of stabilizing from a recession that started in December 2007, it’s “way too early” to say the contraction is over, said the head of the group that officially makes the call. Gross domestic product estimated on a monthly basis “had a trough earlier this year, but it is way too early to say that it is a true trough rather than a pause in a longer decline,” said Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee.

- Lawmakers who attended a dinner with Treasury Secretary Timothy Geithner came away convinced he won’t push to merge the Securities and Exchange Commission and Commodity Futures Trading Commission, a proposal that already faces resistance on Capitol Hill, people briefed on the discussion said.

- General Motors Corp., before filing bankruptcy this week, paid financial advisers AlixPartners LLP $38.1 million and Evercore Partners Inc. $24.1 million in fees. The automaker, based in Detroit, will owe investment boutique Evercore another $13 million if it closes the planned sale of most of its assets to an entity controlled by the U.S. Treasury, according to a declaration by Evercore Managing Director J. Stephen Worth filed yesterday in U.S. Bankruptcy Court in New York.

Wall Street Journal:

- On Monday President Barack Obama's Council of Economic Advisers released a report called "The Economic Case for Health Care Reform." The report argues that Americans must curb their consumption of medical care in order to avoid soaring federal deficits, unsustainable burdens on family budgets, and damage to the economy. All of these claims are untrue.

- Picture a freight train roaring down the tracks. Picture House Speaker Nancy Pelosi positioning her party on the rails. Picture a growing stream of nervous souls diving for the weeds. Picture all this, and you've got a sense of the Democrats' earmark-corruption problem. This particular choo-choo has the name John Murtha emblazoned on the side, and with each chug is proving that those who ignore history are doomed to repeat it. Republicans got tossed in 2006 in part for failing to police the earmarks at the center of the Jack Abramoff and other corruption scandals. Mrs. Pelosi is today leaving her members exposed to an earmark mess that might make Abramoff look junior varsity.

- A top Federal Reserve official on Friday signaled a note of dismay over rising bond yields. Federal Reserve Bank of San Francisco President Janet Yellen said if the increase in Treasury and mortgage yields is being fueled by rising inflation fears - worries she considers unfounded - it would be "disconcerting."

NY Times:

- After mending fences with the Muslim world in Cairo on Thursday, President Obama might want to keep his diplomatic tools handy for his stopover here, to repair his increasingly strained relationship with Chancellor Angela Merkel. A rift has quietly opened up between Germany and the United States, marked by official statements of harmony and private grumbling. It is not an outright crisis in relations, but there are underlying tensions and disagreements on matters ranging from the global economic crisis to the future of inmates held at Guantánamo Bay. On a more basic level, there is a sense that the Obama administration is ignoring the needs and counsel of longtime allies.

Market News International:

- Increasing purchases of long-term US Treasuries is “certainly an option,” Federal Reserve Bank of Atlanta President Dennis Lockhart said. “My own personal view is that I am not overly concerned about the inflation threat,” Lockhart said. The economy is likely to operate below its potential growth rate “for quite a period of time going into next year and perhaps the year after, and so my sense is that we need to manage the package of (monetary) stimulus to be supportive of a recovery.”

Washington Post:

- Firms Tied to Murtha Have Troubled Past. Inside the LBK Ranch, a private game preserve on a scenic hilltop here, guests mingle at a stone lodge after hunting deer and wild boar. Signs posted at intervals along the fence warn: "No Trespassing: U.S. Govt. Testing Facility." Defense firm owner Bill Kuchera and his wife, Lena, the owners of the 161-acre property, live in an upscale log home within the preserve and go to extensive efforts to keep out strangers. There are no visible signs of government testing, but behind the 10-foot fence and electronic gate lies the answer to a politically sensitive question now under federal scrutiny: whether Kuchera's companies padded their Pentagon billings and diverted taxpayer money to their own pet projects.

Boston Globe:

- Drivers are snatching up an increasingly limited supply of used vehicles at some of the highest prices in years, even as auto dealers struggle to unload new cars. Americans purchased nearly 4 million used cars in May, jumping 23 percent over the previous month, according to CNW Research. That comes as sales of new cars have plunged roughly 34 percent, despite sweetened incentives and cash-back offers. Meanwhile, the average transaction price for a used car hit $10,156 in April, the highest price since 2005, CNW Research reported this week.

Rassmussen:

- The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 34% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. Thirty-four percent (34%) Strongly Disapprove giving Obama a Presidential Approval Index rating of 0. That’s the highest level of strong disapproval and the lowest overall rating yet recorded (see trends).

- Eighty-three percent (83%) of U.S. voters say America’s legal system should apply the law equally to all Americans rather than using the law to help those who have less power and influence. A new Rasmussen Reports national telephone survey shows that just 8% disagree.

The Detroit News:

- The state took another hard shot Thursday when the Michigan Department of Transportation announced it has canceled more than 137 road and bridge projects -- totaling $740 million -- due to Michigan's inability to match federal dollars. Michigan's portion of the federal match for road construction will now go to other states.

Reuters:
- General Motors Corp has reached a preliminary agreement to sell its Saturn brand to Penske Automotive Group in a deal that could preserve more than 350 dealerships and 13,000 jobs, the companies said on Friday.

- Wal-Mart Stores Inc's(WMT) announced a new $15 billion share repurchase plan on Friday and said market share gains it has made amid the recession are permanent as a "new normal" emerges in which consumers seek to save money.

Financial Times:
- All of a sudden it seems to be a sellers’ market for financial assets.Usually knowledgeable sources indicated on Friday that Barclays(BCS) is now very close to completing the sale of its entire asset management arm, Barclays Global Investors, to American rival Blackrock(BLK). A statement was being prepared for release in New York after the market close, although sources warned that a formal announcement could be delayed by last minute haggling over price.

- Nicolas Sarkozy will warn Barack Obama on Saturday that tough new sanctions against Iran may be necessary this autumn after France’s latest attempt to open up a dialogue with Tehran backfired badly. Iran’s nuclear program will be at the top of the agenda of talks between the French and US presidents in Caen, Normandy, where the two leaders are also attending the 65th anniversary of the D-Day landings. Mr Sarkozy will tell Mr Obama that a meeting between the French president and Manouchehr Mottaki, Iranian foreign minister, on Wednesday produced no breakthrough in efforts to kickstart negotiations over Tehran’s nuclear program. Indeed, the meeting left the French president fuming about Iranian negotiating tactics. Mr Sarkozy took the unusual diplomatic step of receiving Mr Mottaki in the Elysée palace on Wednesday for the most high-level talks between a European leader and the Iranian regime for some years. Mr Sarkozy believed it was worth staging the talks to see whether Iran was prepared to negotiate over its uranium enrichment program, which is opposed by the UN Security Council. Paris had hoped that the meeting could open up a channel of communication with Ayatollah Ali Khamenei, Iran’s supreme leader. However, Mr Mottaki gave no indication in Wednesday’s meeting that Iran was prepared to compromise. Moreover, in what Mr Sarkozy took as a direct snub, his arrival in Paris coincided with a speech by Mahmoud Ahmadi-Nejad, Iranian president, in which he again denied the Holocaust.

Guardian:

- Labour suffered heavy losses to both the Conservatives and the Liberal Democrats as the first results from the local elections saw them almost wiped out in former strongholds. Twenty-seven county councils and seven unitary councils across England held elections yesterday, and there were three mayoral votes. The results announced so far have confirmed expectations of a Labour drubbing and piled pressure on Gordon Brown, who was conducting a reshuffle after the surprise resignation of the work and pensions secretary, James Purnell. Purnell's departure was followed by that of defence secretary, John Hutton, who quit the government today and announced he would also stand down from parliament at the next election for family reasons. While Labour did badly, the Conservatives also caused a surprise as early results presented a mixed picture.

Bear Radar

Style Underperformer:
Large-cap Value (-.28%)

Sector Underperformers:
Gold (-3.52%), Semis (-1.89%) and Banks (-1.43%)

Stocks Falling on Unusual Volume:
PALM, SAP, WTFC, UBS, KGC, NEM, HBC, CLMT, HANS, ALOG, PICO, BRLI, FFIN, GOLD, ATHN, VLCM, CHCO, ARST, VLCCF, SSRI, IPCM, MIDD, LRCX, CEPH, PAAS, AMAT, CAE, BXP, PTI, ZNH and DD

Stocks With Unusual Put Option Activity:
1) HANS 2) RTP 3) EP 4) BA 5) TEX

Bull Radar

Style Outperformer:
Small-cap Growth (+.27%)

Sector Outperformers:
Defense (+2.71%), Steel (+2.36%) and Computer Services (+1.48%)

Stocks Rising on Unusual Volume:
RTP, TIE, FLIR, ITT, CAJ, IRE, NTY, PRXL, PMTI, ULTA, KNXA, AMWD, CDZI, OGXI, CAVM, CMCO, JOYG, TITN, IPCR, PRXL, ZOLT, GMCR, MYRG, BIDU, BOOM, SPWRA, GES, RTI, ABM and BBL

Stocks With Unusual Call Option Activity:
1) SOL 2) HANS 3) BIIB 4) WNR 5) GES

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