Stocks Finish Sharply Lower, Weighed Down by Commodity, Transportation, REIT and Alt Energy Shares

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Stocks Lower into Final Hour on Rising Economic Concerns, More Shorting, Profit-Taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Financial longs, Technology longs and Medical longs. I added (IWM)/(QQQQ) hedges and added (EEM) short 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, every sector is declining and volume is about average. Investor anxiety is high. Today’s overall market action is very bearish. The VIX is rising 9.91% and is very high at 30.93. The ISE Sentiment Index is below average at 117.0 and the total put/call is slightly below average at .77. Finally, the NYSE Arms has been running very high most of the day, hitting 3.68 at its intraday peak, and is currently 2.44. The Euro Financial Sector Credit Default Swap Index is rising 6.22% today to 109.67 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 rising 3.89% to 129.33 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising .47% 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 falling 6.90% to 39.63 basis points. The Libor-OIS spread is falling 1.83% to 40 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.88%, which is down 76 basis points since July 7th. The 3-month T-Bill is yielding .15%, which is down 2 basis points today. The most economically sensitive stocks are underperforming today on rising worries over credit availability throughout Europe, potential currency devaluations in Eastern Europe and some weaker-than-expected US economic data. The recent rise in energy prices and mortgage rates are likely to continue to negatively impact US economic data over the coming weeks. I continue to believe the crowded "reflation" trade will underperform over the intermediate-term. It is also a negative to see such a big jump in the euro financial sector credit default swap index. On the positive side, volume is relatively light and the NYSE Arms is soaring today. Moreover, the ISE Sentiment Index hit an extraordinarily depressed reading of 38.0 this morning, which is a positive. Nikkei futures indicate a -139 open in Japan and DAX futures indicate an +2 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, rising economic worries and greater financial sector pessimism.

Today's Headlines

Bloomberg:

- Yields on Fannie Mae and Freddie Mac mortgage securities fell for a third day from the highest level since the Federal Reserve said it would buy home-loan bonds, suggesting a further decline in home-loan interest rates. Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds dropped 0.17 percentage point to 4.75 percent as of 11:35 a.m. in New York, the low since June 3, data compiled by Bloomberg show. While that’s down from a six- month high of 5.07 percent on June 10, it’s still up from 3.94 percent on May 20.

- Commercial banks in the 16-nation euro region may lose a further $283 billion by the end of next year as the financial crisis forces them to write off bad loans, the European Central Bank said. “Hard-to-value assets have remained on bank balance sheets and the marked deterioration in the economic outlook has created concerns about the potential for sizeable loan losses,” the Frankfurt-based ECB said in its June Financial Stability Report today.

- North Korea’s May 25 nuclear explosion resulted in a blast of a “few kilotons,” the Office of the Director of National Intelligence said.

- The US dollar rose to a three-week high against the euro as Russia’s Finance Minister Alexei Kudrin said his nation has full confidence in the U.S. currency. The greenback advanced versus all of its 16 major counterparts except the yen after Kudrin said in an interview following the Group of Eight meeting that it was too early to speak of an alternative to the world’s main reserve currency. The euro fell versus the dollar after the European Central Bank said commercial banks in the 16-nation euro region may lose a further $283 billion by the end of next year. “The dollar is still the global reserve currency and most likely to remain the reserve currency for the foreseeable future,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Certainly there’s no basis for seeing a major shift away from the dollar by global central banks.”

- Confidence among U.S. homebuilders fell unexpectedly in June, indicating that a recovery from the housing slump will be slow to develop. The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 15 this month from 16 in May, the Washington-based NAHB said today.

- UBS AG’s long-term debt and deposit ratings were put on review for possible downgrade by Moody’s Investors Service because of potential losses in its investment banking unit and declining customer confidence in its wealth management unit.

- Hundreds of thousands of people defied an Iranian government ban on a rally in Tehran to protest President Mahmoud Ahmadinejad’s re-election, as the supreme leader said allegations of vote-rigging should be investigated. A pro-government militia fired at opposition protesters, killing at least one person, the Associated Press reported, citing one of its photographers.

- International purchases of American financial assets grew more slowly in April as China, Japan and Russia pared demand for Treasuries, underscoring the danger of U.S. reliance on foreigners to finance its fiscal deficit.

- Companies may be encouraged to seek protection from creditors as the stigma of bankruptcy diminishes and some bond investors are comforted by holdings of credit-default swaps, according to BNP Paribas SA. Creditors that are hedged in the default swap market may make more money from a so-called credit event triggered by bankruptcy than from a debt restructuring, said Andrea Cicione, a credit strategist at BNP.

- Gold fell to a three-week low in New York and London as a stronger dollar eroded demand for the metal as an alternative investment. The U.S. Dollar Index, a six-currency gauge of the greenback’s value, gained after Russian Finance Minister Alexei Kudrin said the nation had full confidence in the U.S. currency. Gold, which typically moves inversely to the dollar, has slipped 4.5 percent this month as the dollar index added 2.1 percent. “Stronger dollar sentiment has put gold under further pressure,” James Moore, an analyst at TheBullionDesk.com in London, said today in a note. “The metal could extend lower as a result.” “We would not be surprised to see further short-term declines especially in the absence of any material jewelry, physical investment or ETF demand,” John Reade, UBS AG’s head metals strategist in London, said today in a report.

- Natural gas futures gained the most in two weeks on speculation the price for the industrial and power-plant fuel is set to advance after trading near six-year lows in recent weeks. Gas has fallen 70 percent since July as declining demand and bulging stockpiles weighed on futures prices. The fuel has lagged behind a rebound in other energy commodities, including crude oil, which has risen 59 percent this year. The move in crude widened the ratio between the two fuels to about double the five-year average of the price relationship. “On a relative value to crude oil, we’ve been at ratios we’ve never seen,” said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. “The worst has already been baked in the cake for gas. The divergence between oil and gas will create switching demand from the industrial and utility side.”

- Singapore’s retail sales fell the most in more than ten years in April as rising unemployment and the nation’s deepest economic slump in more than four decades led consumers to buy fewer cars and household equipment. The retail sales index dropped 11.7 percent from a year earlier, after sliding a revised 7.2 percent in March, the Statistics Department said today. The median estimate of 11 economists surveyed by Bloomberg News was for an 8.1 percent decline.

- A Latvian currency devaluation would lead to a “swift contagion” in the neighboring Baltic states of Lithuania and Estonia, Fitch Ratings said. Nordic banks, with Swedish lenders dominating in the Baltic region, would see loan losses “crystallize much quicker,” if Latvia abandons its euro peg, Fitch credit analyst Alexandre Birry said today at a seminar in Copenhagen.

- The International Monetary Fund, which has rescued economies from Pakistan to Iceland in the past year, raised its outlook for the U.S. and called for steps to reduce concern about rising public debt and inflation.

Wall Street Journal:

- The euro zone's financial sector is likely to face a new round of tests as more corporate defaults, deteriorating credit conditions and falling asset prices add stress, the European Central Bank said in its biannual stability review Monday. Market participants and policy makers should be "especially alert in the period ahead," the ECB said, and mustn't be lulled by massive state interventions to rescue banks and insurers, or by lower central bank interest rates. "There is no room for complacency because the risks for financial stability remain high, especially since the credit cycle has not yet reached a trough," the ECB said. The profitability of large banks in the euro zone has been eroded further since the beginning of the year and the prospects for an imminent turnaround are bleak, the report said. Further pressure could soon materialize, the ECB said. It called corporate defaults a "likely" source of more stress, adding to ongoing asset write-downs and deleveraging of balance sheets.

- Research In Motion Ltd.(RIMM) doesn't normally comment on the competition, but the BlackBerry maker may hint this week at strategy changes to meet the dual challenges of a $99 iPhone from Apple Inc.(AAPL) and Palm Inc.'s Pre(PALM). RIM reports results Thursday for its fiscal first quarter, which ended May 30, before the competition unveiled its new offerings.

- The Russell Global Index will have an increased U.S. presence when it is reconstituted in two weeks, with the country set to have a net 121 additions in the index of more than 10,000 stocks. Meanwhile, emerging markets will also add to their lots as other developed countries - led by the U.K. - will have a smaller presence in the global index, said Russell Investments.

- Gunmen fired on opposition protesters at a massive march over alleged election fraud. An Associated Press photographer saw one person who appeared to have been shot dead and several others who appeared seriously wounded in Tehran's Azadi Square. The shooting came from a compound for volunteer militia linked to Iran's powerful Revolutionary Guard. The gunfire Monday came after more than 100,000 opponents of President Mahmoud Ahmadinejad streamed through Tehran. They were largely not challenged by security forces despite an earlier ban on rallies for reformist leader Mir Hossein Mousavi.

- Even sham elections can sometimes produce real results. That was the lesson of the Philippines in 1986 and of Ukraine in 2004. And though Friday's election in Iran is unlikely to yield a similar democratic outcome anytime soon, the poll matters for having again revealed the nature of mullah rule -- to the Iranians who cast ballots expecting they'd be counted, and to a world that finds its illusions about Iranian democracy shattered. The election was a sham thrice over. Though elected by popular vote, Iran's president is subservient to an unelected Supreme Leader, Ayatollah Ali Khamenei. The four candidates whose names made it on the presidential ballot this year were pre-screened by an unelected Guardian Council composed mostly of Islamic clerics, which also disqualified more than 400 others.

CNBC:

- Gold and other commodities may have seen their highs as interest in the dollar is unlikely to wane significantly, two experts said on CNBC.

- Risk aversion has eased, while inventory rebuilding and new business spending bode well for an economic recovery that could provide a dramatic surge in corporate profits by year end, Goldman Sachs senior investment strategist Abby Joseph Cohen said Monday.

NY Times:

- The Managed Funds Association, a major trade group for the hedge fund industry, has hired the powerhouse K Street lobbying firm Brownstein Hyatt Farber Schreck to press its interests on Capitol Hill, according to a document filed this week with the Senate Office of Public Records. It is no surprise that the association wants a louder voice in Washington: The financial crisis has created a movement to regulate the financial industry more tightly, and hedge funds want to make sure they do not get bound up in new rules. The group’s new lobbying team has some notable members, including Carmencita Whonder, who as recently as 2007 was a banking adviser to Senator Charles E. Schumer, the New York Democrat who sits on the Senate banking and finance committees. Brownstein Hyatt will also be lobbying on the Prevent Excessive Speculation Act, the document said. Sponsored in February by Mr. Levin, the bill is aimed at curbing abuses in the energy trading arena that helped inflate the oil bubble last year and may be contributing to the recent spike in oil prices, which have about doubled since February. The group also plans to lobby on bills in the House, including the Derivatives Markets Transparency and Accountability Act of 2009, which would increase the power of the Commodities Future Trading Commission in regulating futures and the opaque over-the-counter trading market; the Hedge Fund Adviser Registration Act of 2009, which would require hedge funds to register with the S.E.C., and a bill that would aim to tax partnerships at normal income tax rates instead of reduced capital gains rates — also known as carried interest. All of the bills are in the beginning stages of the legislative process and have yet to move from the committee and on to the floor for a vote. But Brownstein Hyatt, along with its former legislative insider, Ms. Whonder, will be working very hard to make sure the hedge fund industry has considerable say on those bills.

Washington Post:

- With the leveraged-buyout business on life support, major private-equity firms such as the Carlyle Group are taking a closer look at the battered banking sector as a way to make money for their clients.

NY Post:

- Broadcast television appears to like the financial buzz it is starting to get from liquor advertising. This year, with network advertising revenue off about $250 million, or 4.2 percent, in the first quarter compared to last year, local affiliates are not only accepting hard liquor ads -- they are actively courting the $451 million distilled-spirits advertising business. "With the economy and what's happening to corporations, more and more people are accepting liquor advertising," said Matt Carroll, the chief marketing officer at Patron, a maker of tequila and rum.

- A former official in the George H.W. Bush White House estimates that the bloated public and private debt in the US works out to $250,000 for every man, woman and child in the country. David Walker, the former US Comptroller General, says that the federal debt level is approaching $55 trillion and if you add in the what is owed on the state and local levels -- plus personal household debt -- it adds up to $75 trillion in obligations. Walker, who now heads the Peter G. Peterson Foundation, named for the co-founder of the Blackstone Group, warned that without fiscal restraint, Uncle Sam may be guaranteeing that our future is not as prosperous as our past. At the $75 trillion deficit level a family of four owes $1 million, he said. Earlier this year Walker wrote on Politico.com: "Social Security and Medicare alone are already underfunded by about $44 trillion, or $146,000 per American, in today's dollars, and this number is growing on auto pilot every year by about $2 trillion, or $6,600 per American."

Pensions&Investments:

- Assets under management by the most institutional of hedge fund-of-funds managers dropped 37% — a whopping $172 billion — in the nine months ended March 31. All but two of the 25 largest managers of hedge funds of funds for institutional investors saw double-digit drops in assets under management as of March 31 or their most recent date available —compared with June 30, 2008. In fact, 16 managers experienced asset declines of more than 25%.

Politico:

- Sen. John McCain (R-Ariz.) on Monday called the recent reelection of Iranian President Mahmoud Ahmadinejad a “sham” and criticized President Barack Obama’s administration for not voicing strong opposition to the election’s result.

- As President Barack Obama tried to sell the American Medical Association today on his health care overhaul, the top Senate Republicans launched a familiar line of attack. They warned of rationed medical care, lack of patient control and government bureaucracy. “The American people will not stand for rationed health care,” Senate Minority Whip Jon Kyl said Monday. “We believe that a one size fits all approach is the wrong approach. "Senate Majority Leader Mitch McConnell, in a floor speech scheduled for this afternoon warned that what Americans "don’t want is a Washington takeover of health care along the lines of what we’ve already seen with banks, insurance companies, and the auto industry. Americans don’t want a government-run system that puts bureaucrats between bureaucrats between patients and doctors."

Investment International:

- Patric de Gentile-Williams, COO at FRM Capital Advisors (FCA), stated on 8 June that the environment for hedge fund seeders has changed dramatically over the last 12 months. “There are now fewer seeders in the market, and even established funds are looking for seed capital after redemptions have hit their funds. “Some start ups have suffered as their original seeders have withdrawn from the market. Investors are more stringent than ever before on issues such as corporate governance, use of third party administrators and transparency.”

Reuters:
- Hedge funds face redemption risks from investors who have not yet unwound their investments while the industry's leverage level is set to increase as markets recover, the European Central Bank said on Monday. In its half-yearly Financial Stability Review, the ECB said investor redemptions reached record levels in the last quarter of 2008 and bleak investment returns in the first quarter of 2009 were not supportive in halting them. The ECB cited estimates that the amount of investor capital managed by single manager hedge funds might halve close to $1 trillion by mid-2009 from the mid-2008 peak of nearly $2 trillion, although the pace of withdrawals seemed to be slowing down in the first three months of this year. "It is noteworthy that default time-weighted returns do not take into account the timing of investors' flows and, in relation to money-weighted returns, may underestimate looming redemption risk stemming from investors who invested at the wrong point in time," the ECB said. "All in all, the average level of leverage in the hedge fund sector seems to have bottomed out. It could start increasing as soon as financial markets recover," it said.

- Ford Motor Co (F) has found advantages in going without the federal emergency aid that supports its domestic rivals, although the long-term implications of the government intervention are unclear, Ford Chairman Bill Ford said on Monday. "We don't know what the implications are going to be, but one thing is for sure, I like our position," Ford told reporters on the sidelines of the National Summit in Detroit.

Spiegel:

- German companies are increasingly hurt by tightening credit conditions, citing a survey conducted by the DIHK Association for Industry and Commerce. The share of companies with over 1,000 employees facing worsening credit conditions rose 10 percentage points to 36% from the beginning of this year, citing a DIHK survey among more than 20,000 companies. 23% of all companies surveyed reported worsening credit conditions, up 3 percentage points.

Die Welt:

- European companies are increasingly hurt by tight credit conditions and the worst of the crisis isn’t over yet, European Union Industry Commissioner Guenter Verheugen said. “The credit crunch is still a problem and the longer it lasts, the more difficult it becomes for companies,” Verheugen, who is also vice president of the European Commission, said. “That’s a threat.” “I don’t see any light at the end of the tunnel yet,” he said. Verheugen also called on European leaders to find a joint solution on banks’ toxic assets. “Without a solution on high-risk assets, we won’t overcome the deep economic crisis,” he said.

Les Echos:

- France will next week increase its 2009 budget deficit forecast for a third time after a collapse in company taxation receipts. Cash garnered from company taxation tumbled 91% in the first four months of the year.

Bear Radar

Style Underperformer:
Small-cap Value (-3.59%)

Sector Underperformers:
Steel (-6.17%), Alt Energy (-5.75%) and Road & Rail (-5.56%)

Stocks Falling on Unusual Volume:
CMC, IPCS, CHDX, COLB, SNDA, HOGS, GENZ, VECO, WSBC, TNDM, PTNR, FUQI, HRBN, KNDL, VRSN, ZEUS, CETV, BOOM, ODC, MXI, DEP, MFW, IXC, CXG, CUK, SLV and AMN

Stocks With Unusual Put Option Activity:
1) GENZ 2) ATHR 3) HNT 4) HBAN 5) ADS

Bull Radar

Style Outperformer:
Large-cap Value (-2.08%)

Sector Outperformers:
Computer Services (-1.14%), Telecom (-1.34%) and Banks (-1.84%)

Stocks Rising on Unusual Volume:
CALM, SHLM, NTT, RMBS, MAPP, NTGR, ACOR, SLXP, TKG and KUB

Stocks With Unusual Call Option Activity:
1) HBAN 2) WYN 3) GENZ 4) AMP 5) S

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