Stocks Finish at Session Lows, Weighed Down by Financial, Commodity and Tobacco Shares

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Stocks Lower into Final Hour on Rising Economic Worries, China Trade Tensions, More Shorting, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs and Biotech longs. I took profits in my (URBN) long and added to another long this morning, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is below average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising 4.71% and is very high at 32.27. The ISE Sentiment Index is below average at 111.0 and the total put/call is above average at .99. Finally, the NYSE Arms has been running high most of the day, hitting 1.79 at its intraday peak, and is currently 1.44. The Euro Financial Sector Credit Default Swap Index is rising 5.20% today to 111.0 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 3.73% to 134.16 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 3.11% to 45 basis points. The TED spread is now down 418 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 4.67% to 42.06 basis points. The Libor-OIS spread is falling 1.55% to 40 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.83%, which is down 81 basis points since July 7th. The 3-month T-Bill is yielding .16%, which is down 1 basis point today. The most economically sensitive stocks are underperforming again today. Weekly retail sales showed deterioration for the second consecutive week. Various credit default swaps indices continue their recent surge higher. As well, China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program, which could become a large negative. On the positive side, the market is holding up relatively well, considering today’s news. Market leading tech stocks are especially strong. Moreover, education, airline, road & rail, hmo, drug, biotech, medical and computer services stocks are all higher on the day. I plan to maintain my current market exposure barring a closing swoon. Nikkei futures indicate a -7 open in Japan and DAX futures indicate a -30 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, china trade barrier concerns, rising credit market angst and greater financial sector pessimism.

Today's Headlines

Bloomberg:

- JPMorgan Chase & Co.(JPM) and seven other banks will spend about $3.88 billion in the second quarter related to dividend and interest costs to repay government bailout funds, Rochdale Securities analyst Richard Bove said.

- Philip J. Baker, managing director of the collapsed Chicago hedge fund Lake Shore Asset Management Ltd., was indicted by a U.S. grand jury for allegedly operating a $300 million fraud scheme. The 27-count indictment was unsealed yesterday, Chicago U.S. Attorney Patrick J. Fitzgerald said in a statement today. While an arrest warrant has been issued for Baker, 44, his whereabouts are unknown, the prosecutor said. The U.S. Commodity Futures Trading Commission last year accused Baker in a civil enforcement suit of having defrauded at least 700 investors by hiding trading losses.

- The cost of protecting U.S. corporate bonds from default rose to the highest since May 29 as economic data released yesterday contrasted with the market’s “very optimistic outlook.” Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 12 rose 5 basis points to 134 basis points at 9:49 a.m. in New York, signaling a deterioration in the perception of credit quality, according to Phoenix Partners Group. Contracts have gained almost 13.5 basis points since reaching a one-year low on June 5, according to CMA DataVision. Contracts on the Markit iTraxx Crossover Index of 45 companies with mostly high-risk, high-yield credit ratings rose 11 basis points to 728 basis points, the highest since May 29, according to JPMorgan Chase & Co. prices in London.

- Kim Jong Il’s third son, the likely successor to North Korea’s leader, made a secret visit to China this month to meet President Hu Jintao, the Asahi newspaper said.

- Two US reporters detained and sentenced to 12 years hard labor this month by North Korea planned a “smear campaign” against the communist country’s human-rights policies, North Korea said today.

- Arvind Raghunathan, former head of Deutsche Bank AG’s global arbitrage business, will open his new hedge-fund firm next month with more than $1 billion, a sign that investors are trickling back after record losses last year. Roc Capital Management LP’s assets will include $500 million in a separate account from Deutsche Bank, according to people familiar with the New York-based firm.

- Slumping demand for commodities is spurring traders to use their raw-material stockpiles as collateral in financing agreements, said Jeremy East, head of global commodity derivatives at Standard Chartered Plc. “We see the stocks remaining very, very high for awhile. There’s still a lot of aluminum that’s in warehouses but not shown on the LME.”

- Rubber dropped to a three-week low as oil fell, boosting the appeal of its synthetic alternative, and a decline in global equities raised concern that raw materials demand may be slow to recover. Futures in Tokyo lost as much as 2 percent to the lowest since May 26 as crude oil slipped below $70 a barrel, reducing the cost of rival synthetic rubber.

- Wheat production in Australia, the world’s fourth-largest exporter, may reach the highest in four years, according to data from the nation’s commodity forecaster. Output may be about 22 million metric tons in 2009-2010, the Canberra-based Australian Bureau of Agricultural and Resource Economics said today in a statement. That compares with its March forecast of 22.1 million tons and last year’s crop of 21.4 million tons. Wheat in Chicago has dropped 9.7 percent this month as favorable weather helped improve prospects for the winter crop in the U.S., the world’s biggest exporter. Recent rainfall across growing regions in Australia has provided optimism for planting, the bureau said.

- Iran restricted the reporting of unauthorized events and “illegal protests” by foreign media after four days of demonstrations following the re-election of President Mahmoud Ahmadinejad in a June 12 ballot. “No reporting activities should take place without coordination and permission of this office,” the Culture Ministry’s office for the foreign media said today in a faxed statement in Tehran. “Reporters should not take part in news events that have not been announced by this office.” Reporters should avoid being present at or covering “illegal protests” without the permission of the Interior Ministry, it added.

- Morgan Stanley(MS), which won clearance to repay $10 billion to the U.S. Treasury last week, said today it will also cease issuing new debt that carries a guarantee from the Federal Deposit Insurance Corp. “Morgan Stanley does not plan nor expect to issue any more debt under the FDIC guaranteed debt program,” said Mark Lake, a spokesman for the New York-based bank.

- A Brooklyn-born economist who gave up teaching at the University of California at Berkeley in 1973 to trade the first Treasury-bond futures is getting his way with the biggest change in U.S. environmental policy in 20 years. And he has an unwitting ally from Chicago. Legislation to let polluters buy and sell carbon-dioxide emissions like pork bellies is the outgrowth of Richard L. Sandor, founder of the Chicago-based network of people trading pollution permits from Beijing to Brussels known as Climate Exchange. It doesn’t hurt that the six-year-old market got $1.1 million of seed money from the city’s Joyce Foundation, whose board included a little-known state senator named Barack Obama. Now the 44th president is determined to enact America’s first limits on greenhouse gases.

- The House is considering imposing a $37 billion tax on drugmakers by denying deductions for advertising of prescription drugs, Ways and Means Committee Chairman Charles Rangel said.

- Europe’s inflation rate dropped to zero in May as energy costs retreated and the global economic slump forced companies to lower prices. Inflation in the economy of the 16 euro-area nations is at the lowest level since the data were first compiled in 1996 and is down from 0.6 percent in April, the European Union statistics office in Luxembourg said today, confirming an initial estimate published on May 29.

- Research In Motion Ltd.(RIMM), the maker of the BlackBerry phone, will release a Tour model that’s compatible with networks abroad, layering on features to lure customers away from Apple Inc.’s latest iPhone. The BlackBerry Tour 9630, which has a sharper screen than its predecessors, will run on third-generation networks, RIM co- Chief Executive Officer Jim Balsillie said in a phone interview yesterday. Sprint Nextel Corp. plans to sell the device for $199.99 with a two-year contract, after rebates.

- Russian industrial production declined at a record pace in May as the government’s 3 trillion- ruble ($96 billion) stimulus package failed to boost orders during the country’s worst economic crisis in a decade. Output slid an annual 17.1 percent, the seventh consecutive decrease, compared with a drop of 16.9 percent in April, the Federal Statistics Service in Moscow said in an e-mailed statement today. That was the biggest contraction since the service moved to a new methodology in 2003. The median estimate in a Bloomberg survey of 16 economists was for production to shrink 15.9 percent.

- Gasoline futures topped $2.11 a gallon for the first time since Oct. 7 as refinery outages increased speculation supplies can’t meet demand and as the dollar weakened against the euro.

- Best Buy Co.(BBY), the world’s largest electronics retailer, said first-quarter profit fell 15 percent as sagging consumer demand drove down sales at older stores. The shares fell 3 percent in New York trading.

- Democrats who control California’s Legislature said tax increases are needed to help close a $24 billion deficit, setting up a battle with Republicans that may leave the state short of cash next month. Speaker of the Assembly Karen Bass, a Los Angeles Democrat, said higher taxes and fees are needed instead of all $16 billion in cuts proposed by Republican Governor Arnold Schwarzenegger. Democrats yesterday proposed a $15 automobile license fee and said they may consider a 9.9 percent per-barrel levy on oil produced in the state.

- Zicam nasal sprays and swabs may cause permanent loss of smell and taste and consumers should stop using them, U.S. regulators warned today, sending shares of manufacturer Matrixx Initiatives Inc. down the most ever. Matrixx, based in Scottsdale, Arizona, fell $10.68, or 56 percent, to $8.56 before Nasdaq Stock Market trading was halted.

- Former President Jimmy Carter urged the Gaza Strip’s Hamas leadership to join Middle East peace efforts and condemned Israel’s blockade of the territory, saying Palestinians are being treated like animals. “Tragically, the international community too often ignores the cries for help and the citizens of Palestine are treated more like animals than like human beings,” Carter, 84, said in a speech to graduates of a United Nations school in Gaza. “We are pushing towards the dream of having our independent state with Jerusalem as its capital,” Haniya said, standing beside Carter at a press conference. Carter said earlier in the day that he almost cried when he saw the wreckage of the American School in the Gaza Strip and felt guilty because Israel used U.S.-made war planes to bomb the campus. The American school, a private institution that is not affiliated with the U.S. government, was destroyed in a Jan. 3 air strike that killed a guard. The Israeli army said it targeted the campus because Palestinians were using the site to fire rockets at Israel’s southern towns and cities.

- Vaclav Havel, the Czech who led his country’s “Velvet Revolution” 20 years ago, described Iran’s President Mahmoud Ahmadinejad as a man possessed and warned he could “damage a lot of people.” “The Iranian president does not represent any religious nor national or other ideas,” Havel, 72, said in a Bloomberg News interview in Prague today. “In my eyes he is a man possessed. Unfortunately we are living at a time when a man possessed could easily inflict damage to a lot of people, due to modern technology.”

- Health insurers led by Cigna Corp.(CI) and Aetna Inc.(AET) rose in NY trading after the Congressional Budget Office said an overhaul plan of the US medical system would cost $1 trillion and still not cover all Americans. A plan proposed by Senator Edward Kennedy would leave about 30 million people uninsured, short of President Obama’s goal of covering everyone in the country, the budget office said. The report gives a stronger hand to Republicans fighting measures the industry opposes such as a government-backed insurance program, said Ana Gupte, a Sanford C. Bernstein analyst in NY. “The call people are making is that it will likely give the Republicans a bargaining chip,” Gupte said. “It could make the legislation less onerous or left-leaning as far as the plans are concerned.”

- Home prices in the U.S. may fall another 14 percent before reaching a bottom as an increase in unemployment offsets lower prices, Deutsche Bank said. “Affordability is no longer the driving issue in the housing market, and we believe prices still have a ways to fall in many areas before home prices reach their trough,” Deutsche Bank analysts led by Karen Weaver, wrote in a report yesterday.

Wall Street Journal:

- The head of Russian oil firm OAO Lukoil Holdings will lead a delegation to Iraq on Wednesday to continue talks on reviving a $3.4 billion oil deal from the Saddam Hussein era, a Lukoil official said.

- President Obama swept to office on the promise of a new kind of politics, but then how do you explain last week's dismissal of federal Inspector General Gerald Walpin for the crime of trying to protect taxpayer dollars? This is a case that smells of political favoritism and Chicago rules.

- Oklahoma Republican Sen. Tom Coburn, a fiscal conservative and earmark foe, has released a report detailing $5.5 billion in projects included in the $787 billion economic stimulus package that he considers wasteful or at least a questionable use of taxpayer dollars. The 45-page report “100 Stimulus Projects: A Second Opinion” includes a “Top 10” list of projects singled out by Coburn, as well as a breakdown by region.Among the top 10 are funds for repairing bridges in rural Wisconsin, including $840,000 for a small bridge that carries just 260 vehicles daily. It also lists $800,000 for the John Murtha Airport in Johnstown/Cambria County in Pennsylvania “despite the fact that virtually no one uses the airport.” Click here for The Wall Street Journal story on the report.

CNBC:

- Small business has led the economy out of all past recessions and will do so again, Steve Odland, chairman and CEO of Office Depot told CNBC. “Small businesses are so important to our economy—they create all the jobs, they lead through these kinds of different slowdowns and right now, all eyes are on small business,” Odland said in a live interview from the National Summit in Detroit.

Fox News:

- Hedge-fund liquidations continued at a breakneck pace during the first three months of 2009, but cooled off from the record number of collapses seen during the market meltdown at the end of last year. According to new data released Tuesday by Hedge Fund Research, 376 hedge funds closed during the first quarter, bringing the total number of funds that have disappeared since mid-2008 to nearly 1,200. However, the 376 funds closed last quarter is down 50% from the record level set during the previous quarter amid the height of the credit crisis. Still, the first quarter’s attrition rate of 4.05% is the second-highest rate ever, exceeded only by the previous quarter’s 7.77% rate.

MarketWatch:
- Funds of hedge funds, which allocate billions of dollars to managers in the $1.4 trillion industry, shut down at a record pace during the first quarter as investors questioned the value of the niche in the wake of the financial crisis and the Bernard Madoff scandal, according to data released Tuesday by Hedge Fund Research. Almost 200 funds of hedge funds liquidated in the first quarter. That represents an attrition rate of more than 8%, nearly double the previous record set in the fourth quarter of 2008, HFR said. Liquidations of funds of hedge funds accounted for more than half of the 376 funds that shut down across the industry in the first quarter, HFR reported.

FXStreet.com:

- National chain store sales fell 4.5% in the first two weeks of June versus the previous month, according to Redbook Research's latest indicator of national retail sales released Tuesday. The latest numbers are starkly different from recent weeks because they don't include Wal-Mart Stores Inc. (WMT), which said last month it would no longer provide monthly sales figures. Redbook said retailers faced unfavorable comparisons to a year earlier in men's apparel because the prior-year results were boosted by stimulus checks on Father's Day. It added household basics "held up well" and said sales of seasonal merchandise have been driven by sale pricing.

LA Times:

- As the immigration reform debate begins to heat up again, some observers expect that one of the biggest and most controversial new elements will be a proposed national worker identification card for all Americans. A "forgery-proof" worker ID card, secured with biometric data such as fingerprints, is an idea favored by Sen. Charles E. Schumer (D-N.Y), the new chairman of the immigration subcommittee. Schumer, who will lead the effort to craft the Senate's comprehensive immigration overhaul legislation, called the card the best way to ensure that all workers were authorized.

Politico:

- America’s big-city mayors are steaming over what they view as “a very dangerous precedent” set by the Obama administration in its decision to shun the U.S. Conference of Mayors annual meeting in Providence, R.I., this week. In its attempt to honor the picket line of a local firefighters union involved in a labor dispute with the city, the administration has inadvertently angered some of its staunchest supporters in urban America, who argue that by declining to send an official contingent to the three-day mayors’ conference, the administration is caving in to labor and snubbing local governments at a time of economic strife.

USA Today:

- The Air Force will train more drone operators than fighter and bomber pilots combined for the first time this year, signaling a fundamental shift for the 61-year-old service, records and interviews with top officials show. The growing ranks of drone operators mark a turning point for the Air Force as it looks to a future that relies increasingly on unmanned aircraft. Over the next few decades, the Air Force plans to develop drones that would serve as fighters, bombers and tankers, the heart of its manned fleet, according to its Unmanned System Update.

Reuters:
- Derivatives exchange Eurex will offer hurricane futures on wind damage as it expands its product offering to catastrophe derivatives, the platform operated by Deutsche Boerse said on Tuesday.Eurex said the new contracts, designed in cooperation with market participants, will be available from June 29, making Eurex the first European exchange to offer hurricane futures.

- A top Federal Reserve official warned on Tuesday not to take recent gains in a range of asset prices as proof that the U.S. economy is on the verge of a strong recovery. "The panic's hasty retreat should not be confused with robust recovery," Federal Reserve Board Governor Kevin Warsh said in remarks prepared for a speech to the Institute of International Bankers annual meeting in New York.

- The U.S. Treasury Department will not propose a new regulatory framework for the insurance industry when it outlines sweeping new rules for the financial services sector, sources familiar with the plans said on Tuesday. Rep. Barney Frank, chairman of the House Financial Services Committee, said on Tuesday that the Treasury Department is not ready to weigh in on the key question of an 'optional federal charter' for insurers, said industry sources who heard him speak.

- Investors say they are getting more promotional material from hedge funds than ever before, as funds seek to replenish assets withdrawn or lost because of negative performance during the financial crisis. Investors such as family trusts, pension funds and high net worth individuals say the sales drive intensified in the run-up to the GAIM hedge fund industry conference which began here on Tuesday.

Financial Times:
- China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world. In an edict released jointly by nine government departments, Beijing said government procurement must use only Chinese products or services unless they were not available within the country or could not be bought on reasonable commercial or legal terms. “From a domestic political perspective this makes some sense because local governments do tend to favor foreign products in some categories,” Dong Tao, chief China economist for Credit Suisse, said. “But given how important free trade is for China’s economy this is not the right message for them to be sending to the rest of the world right now.” Just a few months ago Beijing was raging against a proposed “Buy American” clause included in the US economic rescue package. “The whole world is dying to see China spread its orders around and save their economies,” said Mr Tao. “But what this policy reflects is heightened anxiety about these job pressures and the potential for social unrest.” China’s trade surplus rose 15.7 per cent to $88.8bn in the first five months from the same period a year earlier. “Any movement – overt or subtle – to discriminate against foreign products and services is protectionist and an inefficient use of stimulus funds,” said James Zimmerman, partner with the international law firm of Squire Sanders & Dempsey in Beijing.

El Economista:

- Petrobras SA(PBR) this year may overtake its Mexican counterpart Petroleos Mexicanos as Latin America’s biggest oil producer. Petrobras by the end of 2009 will be producing more than 2.6 million barrels a day of oil, the current production level of Petroleos Mexicanos.

Yonhap News:

- North Korea’s Defense Minister Kim Yong Chun arrived in Beijing at the weekend. Officials at South Korea’s embassy in Beijing witnessed “a high-ranking North Korean official” arriving on an Air Koryo flight from Pyongyang at the VIP lounge in the international airport in Beijing on June 13. A source identified the man as Kim, Minister of the People’s Armed Forces of the National Defense Commission. The defense minister may have been in Beijing to deliver a message from North Korean leader Kim Jong Il to Chinese officials, the report said.

Xinhua News Agency:

- China supports Russia's bid for membership of the World Trade Organization (WTO) and hopes for its accession into the alliance at an early date, a senior official of the Chinese Ministry of Commerce said here on Monday.

Bear Radar

Style Underperformer:
Small-cap Value (-1.73%)

Sector Underperformers:
REITs (-2.12%), Oil Service (-2.05%) and I-Banks (-2.04%)

Stocks Falling on Unusual Volume:
MXWL, WTI, INT, CLMT, UBS, RTP, CHU, FCX, PHI, GENZ, APWR, RMBS, FLIR, CSKI, HOGS, LPHI, FUQI, IPCM, ARST, IRIS, URBN, MWIV, ARRS, PMTI, MRTN, ITWO, DEP, OKS, BBY, AGO, GWR and HAR

Stocks With Unusual Put Option Activity:
1) URBN 2) WDC 3) TEL 4) ATHR 5) VNO

Bull Radar

Style Outperformer:
Small-cap Value (+.74%)

Sector Outperformers:
HMOs (+3.64%), Steel (+2.97%) and Airlines (+2.69%)

Stocks Rising on Unusual Volume:
PALM, GG, MSFT, STEC, MYRG, CASY, CSIQ, HMSY, STLD, SHPGY, SINA, FUQI, SNDA, CPSI, CETV, WYNN, SAIA, AMGN, RIMM, CALM, TPL, TKG, TEN, DEG and BT

Stocks With Unusual Call Option Activity:
1) GENZ 2) CBG 3) HOLX 4) BBY 5) AET

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