Stocks Finish Mixed as Strength in Healthcare, Tech, Education, Airline and Homebuilding Stocks Offset Weakness in Commodity and Financial Shares

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Stocks Slightly Higher into Final Hour on Healthcare Reform Troubles, Tech Sector Optimism

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Biotech longs, Medical longs and Commodity/Emerging Market shorts. I covered all my (IWM)/(QQQQ) hedges this morning and then added them back this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is heavy. Investor anxiety is very high. Today’s overall market action is mildly bullish. The VIX is falling 4.77% and is very high at 31.12. The ISE Sentiment Index is low at 101.0 and the total put/call is very high at 1.14. Finally, the NYSE Arms has been running very high most of the day, hitting 2.56 at its intraday peak, and is currently 1.55. The Euro Financial Sector Credit Default Swap Index is rising 5.42% today to 115.0 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 6.22% to 142.51 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 1.15% to 44 basis points. The TED spread is now down 420 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 3.59% to 43.31 basis points. The Libor-OIS spread is falling 4.04% to 38 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis points to 1.77%, which is down 87 basis points since July 7th. The 3-month T-Bill is yielding .16%, which is unch. today. The most economically sensitive stocks are underperforming substantially again today. Breadth has been relatively poor throughout the day. Market-leading stocks are mostly weaker. Healthcare-related stocks are substantially outperforming on the hopes of scaled-back government reform. The total put/call hit an extraordinarily elevated 1.41 this morning, the highest level since Dec. 15^th, which is also a positive. “Growth” stocks are substantially outperforming “value” stocks again. Tomorrow’s economic data could surprise on the downside. Nikkei futures indicate a -30 open in Japan and DAX futures indicate an +14 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:

- The U.S. government’s AAA credit rating isn’t likely to change in the “near term” as steps are taken to revive the economy and counter record deficits, Standard & Poor’s said. “Despite significant weakening in the near-term economic outlook, projected fiscal deficits, and the high fiscal costs of government support of the U.S. financial sector, we still believe that the U.S. government’s credit strengths continue to outweigh its weaknesses,” wrote Nikola Swann, an analyst at S&P in New York. The long- and short-term ratings and the outlook on the rankings are stable, S&P said.

- The Senate Finance Committee may delay consideration of a health-care overhaul until July as lawmakers work to bring the cost below $1 trillion and reach a bipartisan compromise, panel Chairman Max Baucus said.

- JPMorgan Chase & Co.(JPM) and four of the nation’s largest banks repaid $54.7 billion to the U.S. Treasury’s bailout fund in a step toward ridding themselves of government restrictions on lending and pay. JPMorgan repaid $25 billion, and New York-based Morgan Stanley and Goldman Sachs Group Inc. each gave back $10 billion. U.S. Bancorp, with its headquarters in Minneapolis, refunded $6.6 billion and Winston-Salem, North Carolina-based BB&T Corp. paid $3.1 billion, the banks said today in separate statements.

- Yields on Fannie Mae and Freddie Mac mortgage securities declined for a fifth day, tracking a drop in rates on benchmark U.S. Treasuries and suggesting further declines in borrowing costs for new home loans. Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds fell 0.06 percentage point to 4.52 percent as of 10:55 a.m. in New York, the lowest since May 29, according to data compiled by Bloomberg. Treasuries and so-called agency mortgage bonds rallied after a government report showed the cost of living rose less than forecast in May. The mortgage-bond yields are down from 5.07 percent on June 10, the highest level since the Federal Reserve announced plans to buy home-loan bonds in November. “There is a large feeling that we hit the highs in yield last week because of supply,” said Adam Brown, a managing director and Treasury trader at primary dealer Barclays Capital Inc. in New York, referring to government notes.

- Cantillon Capital Management LLC, a $4.5 billion asset-management firm run by William von Mueffling, is closing its two hedge funds to focus on traditional investing, according to people familiar with the matter. The firm plans to return money to clients of its $2.7 billion Cantillon World fund and $800 million Cantillon European fund by the end of September.

- Federal Reserve officials are considering whether to use next week’s policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year. While policy makers have signaled they accept an increase in longer-term Treasury yields as the economy improves, some are concerned at any premature anticipation of rate rises. Fed staff have examined the Bank of Canada’s public intention of foregoing an increase until 2010, according to a person familiar with the matter, without concluding the statement has proven effective.

- Potash Corp. of Saskatchewan Inc.(POT) and competing crop-nutrient providers tumbled after the Canadian company trimmed output, bringing cuts this year to almost half its production capacity, and a European producer lowered prices. Potash Corp., the world’s largest producer of its namesake fertilizer, tumbled C$11.56, or 9.6 percent, to C$109.44 at 1:30 p.m. in Toronto Stock Exchange trading. Earlier, the shares dropped to C$109.29, the biggest intraday decline since March 2.

- Tens of thousands of supporters of Mir Hossein Mousavi, the defeated main challenger in the disputed Iranian presidential election, rallied in central Tehran, video on Iranian state television showed, after the biggest protest in 30 years led to as many as 15 deaths.

- Eastern Bay Investment Management’s James Zhong is selling China’s small-cap stocks after the steepest rally worldwide pushed valuations to the highest level since the shares peaked in January 2008. “We’re seeing a bubble in small-cap stocks,” said Zhong, who helps oversee $220 million in Hong Kong. Zhong predicts the CSI 500 Index, a benchmark for China’s 2.1 trillion-yuan ($307 billion) market for small-cap equities, will slide as much as 30 percent “in the near future” because he expects companies will report first-half results that disappoint investors.

- Rallies in commodity prices and mining company shares stem from a “bubble of belief” in China’s economy that is likely to burst, according to Albert Edwards, a strategist at Societe Generale. “I believe we will look back on the Chinese economic miracle as the sickest joke yet played on investors,” Edwards wrote in a report. He cited falling earnings at the country’s industrial companies. “The bullish group-think on China is just as vulnerable to massive disappointment as any other extreme example of bubble-nonsense I have seen over the last two decades,” his report said. “The fall to earth will be equally as shocking.”

- When Patricia McArdle volunteered for Barack Obama’s presidential campaign, her duties and goals were clear. Now she’s devoting her time to his health-care plan and says she’s confused and frustrated. Obama, who enlisted a 13 million-member grassroots army to help him win the White House, is trying to remobilize those people to build support for his proposed overhaul. That goal may prove elusive.

Wall Street Journal:

- President Barack Obama on Wednesday proposed sweeping changes to the way the U.S. government oversees financial markets and will push Congress to grant new powers to the Federal Reserve to oversee the economy. Mr. Obama detailed the reform proposals the White House says are necessary to avoid another financial crisis. The president blamed the turmoil on "a culture of irresponsibility" that he said had taken root from Wall Street to Washington. He attributed much of the country's current problem to "a cascade of mistakes and missed opportunities" that occurred over decades.

- The President yesterday denounced the "extent of the fraud" and the "shocking" and "brutal" response of the Iranian regime to public demonstrations in Tehran these past four days. "These elections are an atrocity," he said. "If [Mahmoud] Ahmadinejad had made such progress since the last elections, if he won two-thirds of the vote, why such violence?" The statement named the regime as the cause of the outrage in Iran and, without meddling or picking favorites, stood up for Iranian democracy. The President who spoke those words was France's Nicolas Sarkozy.

- Julius Genachowski, the man nominated to head the Federal Communications Commission, said Tuesday he favors using $7 billion of stimulus money to extend broadband Internet service to consumers who lack access now, a view backed by big telecommunications and cable companies. Mr. Genachowski also told a Senate committee he doesn't support reinstatement of the Fairness Doctrine, an FCC rule abandoned during the Reagan administration that required broadcasters to air both sides of an issue. He said he doesn't believe the FCC should be in the business of censoring political speech.

- Asustek Computer Inc. is launching a Disney-branded netbook aimed at children as the pioneering Taiwan computer maker seeks to expand its offerings of the low-priced machines.

IBD:

- Video killed the radio star, as the old song goes. Now, online video could make a killing for network gear makers over the next few years. When IBD recently asked Cisco Systems (CSCO) CEO John Chambers to offer some predictions about the future of technology, the networking pioneer didn't mince words.

NY Times:

- MLB.com, which sells the popular At Bat application for the iPhone and iPod Touch, said it will add live feeds of some games for no additional charge, at least for now.

Houston Chronicle:

- The oil and gas industry’s trade group has teamed up with 15 labor unions to lobby Washington for job creation through increased access to U.S. oil and gas reserves and discourage tax increases that could chill growth in activity. “Today is the first time the oil and natural gas industry and labor unions have agreed to work together to promote job growth and advance the economic future of America,” Jack Gerard, president of the American Petroleum Institute, said today. He said increased oil and gas exploration could add 160,000 jobs and $1.7 trillion in government revenues from royalties and leases through 2030.

Washington Post:

- President Obama's plan to expand health coverage to the uninsured is likely to dig the nation deeper into debt unless policymakers adopt politically painful controls on spending, such as sharp reductions in payments to doctors, hospitals and other providers, congressional budget analysts said yesterday. While popular measures such as increasing preventive care, expanding the use of electronic medical records and rewarding doctors for choosing more effective treatments have the potential to lower costs, "little reliable evidence exists about exactly how to implement those types of changes," Congressional Budget Office Director Douglas W. Elmendorf said in a letter to Senate budget leaders. "Without meaningful reforms, the substantial costs of many current proposals . . . would be much more likely to worsen the long-run budget outlook than to improve it," he said. The pronouncement from the influential budget office is likely to complicate the arduous task of enacting comprehensive changes this year. Cutting costs will require "real action," said Sen. Judd Gregg (R-N.H.), the senior Republican on the Senate Budget Committee. The CBO report "strips away the political posturing and gets down to the basic fact that it will require alternatives that are generally unacceptable to the people who have been putting forward health-care plans." Key Democrats in the Senate, including Finance Committee Chairman Max Baucus (D-Mont.), are advocating a new tax on the most generous employer-sponsored health benefits. But the White House is opposed to the idea, which has the potential to ensnare the middle-class workers Obama vowed to protect from tax increases. Senate aides said Baucus had been looking at options that could push the price past $1.6 trillion over 10 years, a figure that startled some Democrats on the Senate Finance Committee, who met yesterday to discuss their options. "It is clear there have got to be changes made to make the whole package affordable," Conrad said.

Housingwire.com:

- Foreclosure sales in California rose 31.9% in May after jumping 35% the month before, according to a survey by ForeclosureRadar. The service, which tracks each foreclosure in the state, noted 30% fewer foreclosures went to sale at auction from the same time last year.

Rassmussen:

- Forty-eight percent (48%) of U.S. voters say it is too easy to sue a doctor for medical malpractice in the United States today. The latest Rasmussen Reports national telephone survey finds that just 19% say it is too hard to sue for medical malpractice, while 18% believe the current legal situation is about right.

Politico:

- Angered by White House decisions on everything from greenhouse gases to car dealerships, congressional Democrats from rural districts are threatening to revolt against parts of President Barack Obama’s ambitious first-year agenda. “They don’t get rural America,” said Rep. Dennis Cardoza, a Democrat who represents California’s agriculture-rich Central Valley. “They form their views of the world in large cities.” Cardoza’s critique was aimed at Obama’s Environmental Protection Agency, but it echoes complaints rural-district Democrats have about a number of Obama administration decisions. “I wouldn’t say it’s a complete strikeout, but they’ve just got a few more bases to it when it comes to the rural community,” said Louisiana Democratic Sen. Mary Landrieu. A rural revolt could hamper the administration’s ability to pass climate change and health care legislation before the August recess.

Chicagotribune.com:

- Federal prosecutors have unsealed a wide-ranging indictment against Philip J. Baker, accusing the head of Chicago-based hedge fund Lake Shore Asset Management Ltd. of defrauding hundreds of investors out of roughly $312 million. U.S. Atty. Patrick Fitzgerald announced the 27-count indictment Tuesday and said it "was unsealed to facilitate international efforts to apprehend Baker." Baker is a 44-year-old Canadian citizen last spotted living in Hamburg, Germany, whose location is unknown, prosecutors said. The charges include fraud, obstruction of justice and criminal contempt.

Cleveland.com:

- Politicians for months have talked about green energy -- including wind and solar energy -- in Ohio. Time to shift the focus: Duke Energy on Thursday is expected to announce plans to build a nuclear power plant in Piketon, The Plain Dealer has learned. The southern Ohio region is economically depressed, needs jobs and, most importantly, is comfortable with handling uranium products.

USA Today:

- Overhauling the nation's health care system won't easily lead to the long-term budget savings that President Obama hopes to achieve, the director of the Congressional Budget Office says. Obama has said that "health care reform is entitlement reform," but he plans to use savings from Medicare and Medicaid over 10 years to extend health insurance coverage to millions of people. In an interview Monday with USA TODAY, CBO Director Douglas Elmendorf said the cost to insure those people will continue to rise, and savings from efforts to curb health care spending may be elusive. That's because some of the best ways to reduce costs — slashing Medicare payments to doctors and hospitals or limiting tax breaks for employer-provided health benefits — are politically difficult, Elmendorf said. Savings from changes sought by Obama and his allies in Congress — cutting costs in high-spending regions, expanding best practices and bundling services — won't be easy to achieve. Elmendorf's non-partisan agency will estimate the cost of every health care proposal. On Monday, it said insurance expansion proposed by Sen. Edward Kennedy, D-Mass., would cost $1 trillion and leave 37 million people uninsured. Top Republicans on the congressional budget panels, who are opposed to Obama's health care overhaul, said Elmendorf is being an honest broker. "The CBO has put up a lot of red flags about the whole approach to the health care reform effort," said Sen. Judd Gregg, R-N.H. "We're creating an entitlement here that could easily rival the size of Medicare," said Rep. Paul Ryan, R-Wis. "History shows the pay-fors evaporate, but the expenditures continue."

Reuters:
- The economy is closer to recovery as governments have taken steps to address the financial crisis, the chief financial officer of aircraft parts maker Goodrich Corp (GR) said on Wednesday. "The signs are there that at some point pretty soon we're going to get to the point where we have an upturn," Scott Kuechle told Reuters in an interview at the Paris Air Show. "It's hard to tell exactly when that is. I think we're past the biggest threat."

- Package delivery giant and U.S. economic bellwether FedEx Corp said the next two quarters will be "extremely difficult" as the recession and higher fuel prices bite into its bottom line, but said the pace of economic decline appears to be slowing.

- The benchmark S&P 500 index .SPX should surge back to its October 2007 record above 1,500 by the end of 2012, provided the U.S. economy sees a V-shaped recovery, JPMorgan Chase Chief U.S. Equity Strategist Thomas Lee said on Wednesday. "The global economy is in the midst of a synchronized recovery," Lee said at the Reuters Investment Outlook Summit. "If we end up with a V-shaped recovery, we could go back to our record high of 1,500 in 2011-2012," he added, referring to the S&P 500.

Financial Times:
- Hedge funds have used their most prominent annual gathering – the GAIM conference in Monaco – to speak out against ”disastrous” new regulatory proposals from the European Union. After a turbulent end to 2008 and an unhealthy start to 2009, managers and their investors are rallying round to fight off the new draft rules outlined in late April by the EU commission. The EU commission’s draft directive on alternative investment fund managers controversially proposes limits on fund leverage and would require funds to be registered in EU countries in which they have investors.

BBC:

- The head of the International Atomic Energy Agency says he believes Iran is mastering nuclear technology and it wants the option of a nuclear weapon.

Emirates Business 24/7:
- Dubai’s office vacancy rate is estimated at about 22%, citing Robin Pugh, Director of Agency Services at Jones Lang LaSalle.

Bear Radar

Style Underperformer:
Mid-cap Value (-.20%)

Sector Underperformers:
Coal (-2.70%), Oil Service (-2.48%) and Papers (-2.32%)

Stocks Falling on Unusual Volume:
WLL, HES, SFY, RTP, MDR, TCB, PCU, PCZ, CSIQ, VIP, FUQI, AAUK, PTEN, OKS, POT, ELP, TRP and GLP

Stocks With Unusual Put Option Activity:
1) ETFC 2) IPI 3) STSI 4) CIT 5) KMP

Bull Radar

Style Outperformer:
Large-cap Growth (+.18%)

Sector Outperformers:
Education (+5.67%), Medical Equipment (+1.83%) and Biotech (+1.78%)

Stocks Rising on Unusual Volume:
GENZ, BCR, ABT, BMY, PEP, UBSI, SVNT, CENT, TNDM, NFLX, BRLI, CPLA, BIDU, AMGN, QCOM, STRA, GWR, ATU, WPI, FSF and OMI

Stocks With Unusual Call Option Activity:
1) CI 2) HUM 3) MCK 4) ADBE 5) ANF

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