Stocks Lower into Final Hour on Government Worries, Rising Economic Angst, More Shorting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs, Medical longs, Index hedges and Commodity/Emerging Market shorts. I added (IWM)/(QQQQ) hedges this morning and then covered them, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, most sectors are declining and volume is above average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 4.15% and is very high at 32.13. The ISE Sentiment Index is low at 105.0 and the total put/call is high at 1.11. Finally, the NYSE Arms has been running high most of the day, hitting 2.27 at its intraday peak, and is currently 1.44. The Euro Financial Sector Credit Default Swap Index is rising 3.49% today to 106.67 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 2.65% to 145.45 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.36% to 35 basis points. The TED spread is now down 429 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 3.15% to 36.25 basis points. The Libor-OIS spread is down 3.74% to 32 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 10 basis points to 1.52%, which is down 112 basis points since July 7th. The 3-month T-Bill is yielding .18%, which is unch. today. Small-cap and the most economically sensitive shares are under meaningful pressure again today. As well, (XLF) has been heavy throughout the day. However, the bears have been unable to gain downside traction in the broad market. Defense, coal, oil service, software, biotech, drug, retail and restaurant shares are all higher on the day. Moreover, a number of market leaders have been firm throughout the day. Investor angst is pretty high, which is also a positive. If energy prices/long-term rates remain subdued and the odds for draconian healthcare reform and a cap and trade scheme fall, stocks should resume their recent uptrend. Nikkei futures indicate a -100 open in Japan and DAX futures indicate an +6 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower energy prices, lower long-term rates, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:

- Goldman Sachs Group Inc.(GS) and Morgan Stanley(MS) may never have the same leeway in commodities as they did when oil reached a record $147 a barrel last year. The Commodities Futures Trading Commission will consider greater regulation of oil, gas and other energy markets at hearings this month. It plans to review exemptions to trading limits that since the 1990s allowed Goldman and Morgan to build multibillion-dollar ventures in futures, swaps and over-the- counter markets. “They’re very significant swaps participants, and they’re very significant dealers for over-the-counter swaps in the commodities market,” said Dan Waldman, former general counsel of the CFTC and a senior partner at Arnold & Porter LLP in Washington. “If their ability to do some of that business was limited, they’d have to find other ways to reduce their risk or reduce the size of their commodity swaps books.” Goldman Sachs and Morgan Stanley accounted for about half of the $15 billion in revenue that the world’s 10 largest investment banks generated from commodities in 2007, Ethan Ravage, a financial-services industry consultant in San Francisco, estimated last year, as energy prices neared records. “A lot of what we’ve seen in recent years has nothing to do with the underlying fundamentals of the market,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “Something has to be done to reduce some of the speculation, no doubt about it.” “It sounds like unless you’re a true hedger like Southwest Airlines, unless you are a producer in Texas, you’re going to lose your status to have nearly unlimited position size,” said James Cordier, portfolio manager and founder of OptionSellers.com in Tampa, Florida. “Right now, you can hold as many contracts as you like. You simply need to report them.” “The CFTC doesn’t want to see these wild swings occur,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “I don’t think a lot of people in the industry would argue against imposing strict limits on investment funds.” “I think it’s pretty hard to argue there wasn’t some effect on markets last year” when index fund money flowed into commodities markets that were setting records, he said in an interview yesterday in Washington. Peterson’s committee passed a bill in February that limited positions a trader could hold. The big remaining question is whether the CFTC should have authority to impose position limits on energy speculators across all markets, so-called aggregate limits, he said. “These possible CFTC limitations are going to be a huge factor for prices for a lot of commodities,” said Matthew Zeman, a trader at LaSalle Futures Group in Chicago. “Speculators are being driven out of the market now as they get nervous about what limitations might be put in.” Entities like Goldman Sachs and JPMorgan “are the market makers,” said Michael Lewis, a partner in the Washington law office of Paul, Hastings, Janofsky & Walker LLP in a telephone interview. “Those are the entities that have the huge positions,” he said. “If the financial players, the banks, the hedge funds, et cetera, are limited to the number of trades they can take, it will lead to less trading.

- The summit meeting of the Group of Eight nations that starts today in Italy must reaffirm commitment to free trade and reject the protectionism many politicians are advocating, said William Rhodes, the senior vice chairman of Citigroup Inc. Writing in the Financial Times, he said protectionism can take insidious forms, such as trade provisions inserted by the U.S. House of Representatives in the economic stimulus package and in the climate change and energy conservation bill; other nations are adopting similar measures, such as requiring purchases from home industry and limiting work visas. Governments have responded to the financial crisis by imposing inward-oriented rules on financial-services companies, such as making them curb foreign lending and increase domestic credit; such steps penalize developing countries, raise the cost of trade finance and hurt foreign direct investment, Rhodes said. Unless the tide is reversed, the recession will last longer than it need have done, he concluded.

- Crude oil is in a downtrend that may lead to prices falling as low as $50 a barrel, according to Schork Group Inc. “Oil has indeed entered a bear channel,” said Stephen Schork, president of the Villanova, Pennsylvania-based consultant. “The market gapped lower, therefore that gap - in between $66.26 and $65.65 - is now the top of resistance.”

- Treasuries rose as investors seeking a refuge amid concern the economic recovery may take longer than anticipated led to higher-than-forecast demand at today’s auction of $19 billion of 10-year notes. Yields on the securities touched the lowest level since May 22 after the auction drew a yield of 3.365 percent, and attracted the most demand from a group of investors that includes foreign central banks since May 2007. The note sale is the third of four this week totaling $73 billion.

- Group of Eight leaders failed to bridge differences over combating the steepest recession since World War II, letting each country decide when to stop infusing money into the economy. President Barack Obama pressed for the door to remain open to more stimulus measures as a renewed stock-market drop stirred concern that $2 trillion spent worldwide so far hasn’t jolted consumers and businesses back to life.

- Morgan Stanley(MS) plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

- BlackRock Inc., Invesco Ltd. and Wellington Management Co. were selected to take part in the U.S. government’s program to spur the purchase of mortgage-backed securities from banks, people familiar with the matter said. The companies are among the eight to 10 asset managers the U.S. Treasury is set to announce this week for the Public- Private Investment Program, according to the people, who asked not to be named because the information isn’t public. Other probable winners include Pacific Investment Management Co. and a partnership of General Electric Co.’s finance arm and Angelo Gordon & Co. Officials at the firms declined to comment.

- U.S. apartment vacancies rose to their highest in 22 years in the second quarter as job losses cut tenant demand and more units came to market. Vacancies climbed to 7.5 percent from 6.1 percent a year earlier, New York-based real estate research firm Reis Inc. said today.

- OPEC says the world will need less crude oil from the group in 2013 than it did last year as the lingering impact of recession crimps demand and rising biofuels supply makes up for shrinking production elsewhere. The Organization of Petroleum Exporting Countries, whose members supply about 40 percent of the world’s oil, slashed its forecast for global oil consumption in 2013 by 5.7 million barrels to 87.9 million barrels a day. OPEC will have to produce 31 million barrels of crude daily in 2013 to satisfy demand, compared with 31.2 million barrels last year, it predicted in an annual report today. The group sees spare production capacity in member countries rising to “comfortable” levels of more than 6 million barrels a day in 2013. Non-conventional fuel supplies are expected to rise by 1 million barrels a day from 2009 to 2013, mainly attributable to rising biofuels production in the U.S., Brazil and China, according to OPEC. NGLs production will increase 0.4 million barrels a day, the group estimates. Additionally, OPEC predicts that its own production of natural gas liquids and gas-to-liquids fuel will rise 1 million barrels a day to 5.7 million barrels a day in 2013, further reducing the call on OPEC crude. OPEC also cut its forecast for oil demand in 2030 to 105.9 million barrels a day from its estimate last year of 113.3 million barrels a day because of increased efficiency and lower than forecast economic growth.

- Iran will put on trial some 500 people who were arrested during protests over the June 12 re- election of President Mahmoud Ahmadinejad, state-run Press TV said, citing the country’s prosecutor general.

- Hedge funds would have to report short selling to both national regulators and to the market under rules across Europe that were proposed today by the Committee of European Securities Regulators. Short sales of .1% or more of any company’s outstanding share capital would be privately reported to national regulators, under CESR’s plans. If a further threshold of .5% was reached, public disclosure would be needed under the two-tier system, which CESR is pushing to be imposed across the European Economic Area. “Imposing a requirement for shot positions to be disclosed publicly to the market as a whole will provide a potential constraint on aggressive large-scale short selling,” said Kurt Pribil, CESR’s chairman.

- Mortgage applications in the U.S. rose last week as refinancing jumped by the most since March and purchases climbed to the highest level in three months. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 11 percent to 493.1 in the week ended July 3, from 444.8 in the prior week. The group’s refinancing gauge surged 15 percent, while the index of purchases gained 6.7 percent.

- The cost of protecting corporate bonds in the U.S. from default jumped to the highest in six weeks on concern that a slump in company earnings will stifle a recovery from the longest recession since the 1930s. Credit-default swaps on Alcoa Inc. rose to the highest since May 21 as analysts forecast the largest U.S. aluminum producer will post its third consecutive loss. Contracts on a benchmark U.S. index climbed to the highest since May 27, while a European high-yield gauge reached a seven-week peak. Credit-default swaps on the Markit iTraxx Crossover Index of 45 companies with mostly high-yield credit ratings increased 28 basis points to 788 basis points, the highest since May 18, according to JPMorgan Chase & Co. The cost of protecting European bank bonds from default also increased, with the Markit iTraxx Financial index of 25 European banks and insurers rising 4 basis points to 118 basis points and the subordinated index up 7 basis points at 216 basis points.

Wall Street Journal:

- The U.S. government stimulus package passed in February promised to reinvigorate the renewable-energy industry with new capital and programs, but the prospect of large flows of government money to the industry is holding up private-sector investment. New incentive programs haven't yet been defined, and uncertainty about program rules has deterred investors from backing companies that also may get government money. At the same time, companies are holding off from accepting private capital because of the possibility of getting it more cheaply from the government. "It artificially slowed the recovery," Matt Cheney, chief executive of Renewable Ventures, the U.S. subsidiary of Fotowatio SL, a Spanish developer of renewable-energy projects, said of the stimulus plan. Three new stimulus programs were hailed by analysts as likely to have the biggest effect in boosting renewable energy: a cash incentive from the U.S. Treasury for 30% of the cost of a renewable energy project, loan guarantees for renewable energy projects, and loan guarantees for renewable energy manufacturing. None of these incentives has yet been defined with specific rules and none of the programs are yet accepting applications.

- Senate Democrats are increasingly resistant to proposals to tax some employer-provided health benefits, threatening already fragile bipartisan negotiations over legislation to overhaul the U.S. health-care system. Sen. Kent Conrad, D-N.D., said that public polls conducted over the July 4 congressional recess and reviewed by senators are causing lawmakers to have second thoughts about limiting the tax exclusion for employer health plans. "It remains a significant option, but we're looking at other options," Conrad told reporters Tuesday. "When you go out and ask people across the country, their initial reaction is, they don't like it." According to a Senate Democratic aide, a "compilation of polls" has caused discomfort with taxing health benefits among Senate Democrats. The aide said that following a meeting of Senate Democratic leaders Tuesday, a message was conveyed to Senate Finance Chairman Max Baucus, D-Mont., that the idea of taxing health benefits has seen opposition within the Democratic caucus.

- Beijing Automotive Industry Holding Co. outlined its main reason for wanting General Motors Corp.'s European unit Adam Opel GmbH: It wants to get its hands on the U.S. auto maker's engine technologies.

- The amount of capital raised by U.S. venture capital firms plunged in the first half of 2009, as cash-strapped investors stopped committing to the private equity asset class. These firms raised $5.1 billion across 52 funds, down 63% from the $13.6 brought in by 115 funds last year. Across all asset classes, U.S.-based private equity firms raised $54.9 billion across 173 funds, a 64% drop from the $152.7 billion raised by 261 funds in the year-earlier period, according to data from Private Equity Analyst.

- The Obama administration said Wednesday it would move forward with a Bush-era program aimed at cracking down on illegal-immigrant workers and their employers, just as Republicans in the Senate are pushing legislation that would mandate a similar move. The Department of Homeland Security said it would implement a regulation requiring federal contractors and subcontractors to ensure that their employees are legally authorized to work inside the U.S. The Obama administration had delayed implementation of that program, saying it was under review. As of Sept. 8, taxpayer-funded contractors will have to use the government's so-called E-verify system, an Internet-based network that enables employers to compare the names and Social Security numbers of new employees against a government database. The rule would also cover those who receive funds through the federal economic stimulus program, which was dubbed the American Recovery and Reinvestment Act.

- The ongoing riots and protests in western China’s Xinjiang region have led to some extraordinary restrictions on communications in China: Internet service and mobile-phone access around Urumqi have been curtailed, while social-networking sites such as Facebook, Twitter and Fanfou (a homegrown version of Twitter) are suddenly inaccessible to users around the country. More familiar tactics, such as the removal of online discussions, photos and videos of the violence, are also being employed.

AP:
- Oil prices sank below $61 per barrel Wednesday as the government reported unused gasoline held in storage surged yet again. Retail gas prices have fallen every day for more than two weeks. In just over one week, oil prices have fallen more than 17 percent. International Monetary Fund on Wednesday lowered its global economic forecast, the latest that would not support high energy prices. The Organization of Petroleum Exporting Countries predicted Wednesday that demand for crude has fallen so sharply, it will take another four years to recover to 2008 levels. Americans are driving billions fewer miles than they had in recent years with millions losing their jobs. Even though refiners have been slashing production, gasoline continues to pile up. The Department of Energy reported Wednesday that gasoline supplies grew by another 1.9 million barrels last week, the fifth straight week that storage levels have grown. Retail gasoline prices dropped again overnight, the 16th straight day, to a new national average of $2.593 per gallon.

Morningstar:

- The global financial crisis has had no visible effect on the dollar's preeminence in international financial markets, the European Central Bank said in a survey published Wednesday.

NY Post:

- Peter Thiel, the PayPal co-founder who was also an angel investor in social-networking titan Facebook, could himself use an angel to help his struggling hedge fund firm, Clarium Capital Management. After falling from hedge-fund stardom in the second half of 2008, Thiel's fund continues to struggle nearly one year later with poor performance and bailing investors. In June, the fund fell another 4.4 percent, bringing total returns this year down 6 percent, according to data obtained by The Post. What's worse, Clarium's assets under management have plummeted to just $1.9 billion -- a far cry from the end of June 2008, when the fund had swelled to $7.8 billion from $4 billion at the start of 2008. Clarium spokesman Jim O'Neil declined to comment on the fund's performance, but people familiar with the firm said Clarium continues to struggle with bets on inflation and the direction of the US dollar. The unrelenting losses also raise questions about how long Clarium can continue.

- A meeting called by Federal Deposit Insurance Corp. chief Sheila Bair this week with several banking and private-equity bigwigs suggests the regulator has made her mind up when it comes to PE firms buying banks: Thanks, but no thanks. That was the conclusion of one participant in Monday's meeting, who described the sit-down with top-tier financial players as a way for Bair to learn about how to help bank executives step up and buy fallen banks. While the source described the meeting as friendly, this person noted that several of the people in the five-hour meeting at the FDIC's Washington office were banking executives, including JPMorgan Chase's retail banking boss Charlie Scharf. Meanwhile, just three of the meeting's participants were from the private-equity world -- Wilbur Ross, Kohlberg Kravis Roberts' Deryck Maughan and Warburg Pincus' Michael Martin -- even though PE firms have been the most active buyers of banks that have gone into receivership. Others present included hedge-fund king John Paulson, as well as lawyers and officials from public pensions and mutual funds.

Rassmussen:

- The Rasmussen Reports daily Presidential Tracking Poll for Wednesday shows that 32% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. Thirty-seven percent (37%) Strongly Disapprove giving Obama a Presidential Approval Index rating of –5. The number who strongly disapprove inched up another point to the highest level measured to date and the overall Approval Index is at the lowest level yet for Obama (see trends).

Politico:

- Vice President Joe Biden is invading House Minority Leader John Boehner’s back yard tomorrow to tout the success of the stimulus package, but Boehner is redoubling his attacks, accusing the vice president of lying about the economy. “I found it ... interesting over the last couple of days to hear Vice President Biden and the president mention the fact that they didn’t realize how difficult an economic circumstance we were in,” Boehner said. “Now this is the greatest fabrication I have seen since I’ve been in Congress.” “I’ve sat in meetings in the White House with the vice president and the president. There’s not one person that sat in those rooms that didn’t understand how serious our economic crisis was,” Boehner said. Boehner also took a shot at the idea of a second stimulus – something Biden said he was open to last week. “All of this talk of a second stimulus bill, I think, is an admission on the part of the administration that their stimulus plan is not working,” Boehner said.

Reuters:
- Lenny Dykstra, the former star center fielder for the New York Mets and Philadelphia Phillies Major League Baseball teams, has filed for Chapter 11 bankruptcy protection, court records show. The 46-year-old has no more than $50,000 of assets and between $10 million and $50 million of liabilities, according to a petition filed Tuesday with the U.S. Bankruptcy Court in the Central District of California. Dykstra's filing comes in the wake of some 20 lawsuits he faces tied to his activities as a financial entrepreneur, including The Players Club, a glossy magazine he had helped launch, according to published reports.

- The Obama administration plans to detail as soon as this week new measures to clamp down on potential conflicts of interest between compensation consultants and corporate executives, sources familiar with the administration's thinking told Reuters on Wednesday. The administration is considering language that would prohibit a consulting firm from providing compensation advice and other human resources work for the same company, said two sources, who requested anonymity because the legislative language could change.

- A group of wealthy clients who invested $50 million with two hedge funds felled by last year's credit crisis are accusing Highland Capital Management's partners of having lied about key facts. LV Highland Credit Feeder Fund LLC, an investment vehicle managed by Long Vue Advisors in Boston, and several charitable foundations and wealthy individuals filed the lawsuit on Wednesday in a U.S. district court in Dallas.

Financial Times:
- All About Alpha recently spotted a Hedge Fund Implosion Predictor buried away in the last Financial Stability Review from the ECB. Might come in handy for Hectors Sants and colleagues in E14, now that Alistair Darling wants to give the FSA special powers to deal with big hedge fund problems. Basically, the Predictor relies on “empirical panel logit analysis” — applied to the Lipper TASS hedgie database — to arrive at a set of variables that might point to the likely liquidation of a hedge fund - something, the ECB notes, that might also be useful in comparing hedge funds with other business entities. The detailed table of variables is available here.

Bear Radar

Style Underperformer:
Small-cap Value (-1.47%)

Sector Underperformers:
Oil Tankers (-5.36%), Gold (-4.23%) and HMOs (-4.22%)

Stocks Falling on Unusual Volume:
RTP, IBN, CLF, BAC, PBR, XNPT, DNDN, ACL, WBSN, SYNO, EQIX, SCBT, ZBRA, NVEC, FUQI, CHTT, AMAG, CME, SYNA, ANEN, ASTE, CECO, PEGA, ARST, CETV, STFC, CYOU, RFV, ICE, MTH, HOT and CME

Stocks With Unusual Put Option Activity:
1) DHI 2) EXPE 3) LEN 4) CIEN 5) ICE

Bull Radar

Style Outperformer:
Large-cap Growth (+.09%)

Sector Outperformers:
Biotech (+1.73%), Drugs (+1.70%) and Defense (+1.02%)

Stocks Rising on Unusual Volume:
AMGN, FDO, NRG, AAP, CHU, WFR, SAP, TSCO, MDCI, DLTR, WFMI, ORLY, PTRY, IBKC, LORL and DCP

Stocks With Unusual Call Option Activity:
1) DISH 2) FDO 3) GPS 4) AET 5) YRCW

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Wednesday Watch

Late-Night Headlines
Bloomberg:

- Crude oil fell to a six-week low on speculation that a government report will show U.S. fuel supplies gained as the recession cut demand. “Market sentiment has changed 180 degrees in one week,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “Any price drop was seen as a time to buy and send the market higher. That all changed after last week’s employment report.” Prices extended losses in electronic trading after the American Petroleum Institute reported that U.S. gasoline supplies rose 767,000 barrels to 212.4 million and stockpiles of distillate fuel, a category that includes heating oil and diesel, climbed 3.42 million barrels to 158 million, the highest since 1985. Futures were down $1.73, or 2.7 percent, at $62.32 a barrel at 4:53 p.m. Total daily fuel demand in the U.S. averaged over the four weeks ended June 26 was down 5.8 percent from a year earlier, the department said last week. “It’s hard to be bullish right now,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “The driving season is almost over as far as refiners are concerned and the economy has yet to recover.”

- A new poll found that President Barack Obama’s approval rating has dropped by 13 percentage points from two months ago in Ohio, traditionally a critical swing state in presidential elections. The survey by Quinnipiac University released today showed 49 percent of Ohio voters approved of Obama’s job performance, down from 62 percent in a May 6 poll. The disapproval figure for Obama in the new poll was 44 percent, up from 31 percent in the May survey. The pollsters termed Obama’s ratings “lackluster” in a release, and said the numbers were his lowest marks “in any national or statewide Quinnipiac University poll since he was inaugurated.” The White House announced late today that Vice President Joe Biden will travel to Cincinnati on July 9, where he will tout progress being made by the $787 billion economic stimulus Measure passed in February. “The economy in Ohio is as bad as anywhere in America,” said Peter Brown, assistant director of the Quinnipiac University Polling Institute. The poll numbers “indicate that for the first time voters have decided that President Barack Obama bears some responsibility for their problems.” In the poll, 48 percent said they disapproved of Obama’s handling of the economy, while 46 percent approved. In the May survey, 57 percent approved of the president’s efforts on the economic front, while 36 percent disapproved. The independent survey of 1,259 Ohio voters was conducted between June 26 and July 1 and has an error margin of plus-or- minus 2.8 percentage points.

- The New York Yankees agreed not to restrict spectators’ movements during the playing of “God Bless America” at its new stadium to end a suit brought by a man who was thrown out last year for trying to use the restroom. The stipulation that the Major League Baseball team has no such policy was signed July 1 by U.S. District Judge Jed Rakoff in New York and entered into the case docket yesterday. The City of New York will pay the plaintiff, Bradford Campeau-Laurion, $10,001 and $12,000 to his lawyers in legal fees and costs. “This settlement ensures that the new Yankee Stadium will be a place for baseball, not compelled patriotism,” Donna Lieberman, executive director of the New York Civil Liberties Union, said in a statement.

- AlphaShares LLC, the fund manager co- founded by Princeton University economist Burton Malkiel, has introduced an index similar to the VIX that uses options prices to track stock market volatility in China and Hong Kong. The AlphaShares Chinese Volatility Index, or CHIX, tracks the implied volatility of options on the Hang Seng Index, the benchmark for Hong Kong stocks, and the FTSE/Xinhua China 25 Index, which tracks China’s 25 largest companies by market value, AlphaShares said in a statement. “Investors turn to the VIX to see how fear and uncertainty are driving markets here in the United States,” Jonathan Masse, who helps oversee about $150 million as senior portfolio manager at AlphaShares in Walnut Creek, California, said in an interview. “This is a new tool that international investors can use for China.”

- The House’s second-ranking Democrat left open the possibility of a second U.S. economic stimulus program, while Senate leaders and an aide to President Barack Obama questioned the need for one. The administration is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest level in almost 26 years. Unemployment increased to 9.5 percent in June, the highest since August 1983. Senate Republican leader Mitch McConnell of Kentucky said in a floor speech today that Democratic proponents of the stimulus program “over-promised on results and now their predictions are coming back to them.” McConnell mocked the idea of another stimulus plan. He called it “mind-boggling” and a worse idea than the previous one, which he said “has been demonstrably proven to have failed.” He added, “There is no education in the second kick of a mule.” The Senate’s second-ranking Democrat, Dick Durbin of Illinois, said he would leave any decision on the need for a fiscal stimulus to “the president’s evaluation.” “I’m not sure how you would do it” during a congressional session dominated by debates on health-care overhaul and climate-change legislation, he told reporters.

- China threatens to derail climate treaty talks as U.S. and European leaders lay the groundwork for a new accord to fight global warming, Italy’s Prime Minister Silvio Berlusconi said today. “There are some problems,” Berlusconi said at a news conference in Rome. World leaders will gather tomorrow in Italy to discuss issues including how to craft a global climate accord by the end of this year. “There is very strong resistance from the Chinese president,” the Italian leader said. China and India are balking at terms outlined in a draft document ahead of the July 9 “major economies forum” on climate change to be headed by U.S. President Barack Obama, according to Tobias Muenchmeyer, an adviser to the environmental group Greenpeace. Developed countries have to bear “historic responsibility” for climate change, India’s Prime Minister Manmohan Singh said today before leaving for the Group of Eight economic summit in L’Aquila, Italy. “What we are witnessing today is the consequence of over two centuries of industrial activity and high-consumption lifestyles in the developed world,” Singh said in a statement. Friction before the leaders hold the talks about climate change may mar Obama’s first major role as president in international climate treaty deliberations. “This could cause embarrassment for the U.S.,” Muenchmeyer said, referring to the possibility that countries won’t be able to reach substantive agreements at this week’s meetings, which are intended to help lay the groundwork for success at United Nations-led climate negotiations in Copenhagen in December.

- Members of the Senate Finance Committee may abandon a plan to impose new taxes on employer- provided health benefits because of overwhelming public opposition to the idea, a senior Democrat on the panel said. Senator Kent Conrad of North Dakota said that, while the proposal hasn’t been dropped yet, senators working on health- care legislation believe it may be too hard to sell the idea to the public and that they must start examining alternative ways to offset the $1 trillion cost of revamping the system. Panel members have been considering ending a current income tax exclusion for employer-provided health-care benefits. Conrad, who also heads the Budget Committee, said senators were informed of three opinion polls taken last week that examined public sentiment on health-care reform, and found the tax plan was opposed by some 70 percent of the American people. Conrad didn’t provide details about other tax options that are under consideration. He said they include taxes on the health-care industry and broader changes to the tax code.

- Amgen Inc.(AMGN) rose 14 percent in extended trading after saying its drug denosumab helped slow bone complications in patients with advanced breast cancer. Denosumab did a better job in a clinical trial than Novartis AG’s Zometa delaying fractures and other complications in breast cancer patients whose illness had spread to their bones, Amgen said today in a statement. Amgen rose to $7.13, or 14 percent, to $59.36 at 6:24 p.m. New York time in Nasdaq Stock Market extended trading.

- Baker & McKenzie LLP, the world’s second-largest law firm by revenue, plans to eliminate 11 percent of its lawyers and professional staff in Hong Kong and China because of the “very challenging” economic climate. “These difficult measures are necessary to ensure our ongoing financial health in an increasingly competitive environment,” the Chicago-based firm said in an e-mailed statement today. A comparable number of secretarial and support staff will be leaving, according to the statement. “The current economic climate is proving very challenging for most businesses, including many of our clients,” Baker said in its statement. “It is difficult to predict the timing and pace of the recovery of the markets in which we operate in Asia.”

- Chinese stocks may be headed for a “sizeable correction” after a so-called momentum indicator for the Shanghai Composite Index advanced to the highest in at least five months. The 14-day relative strength index, or RSI, for the Shanghai Composite climbed to 83 this week. Above the 70 threshold that signals to technical analysts an asset or market is poised to fall. “The RSI shows that the market is in a pretty overbought situation,” said Barole Shiu, a Hong Kong-based technical analyst at UOB-Kay Hian Ltd. “If history repeats itself, there’s a very strong chance we’ll see a sizeable correction.” At the stock measure’s peak in October 2007, its RSI reached 79.6. The Shanghai Composite plunged 72% in the following 12 months before rebounding, according to Bloomberg.

- Japanese machine orders unexpectedly fell for a third month and the current-account surplus narrowed because of plunging exports, stoking concern that the economy will struggle to emerge from its worst postwar recession. Orders, an indicator of spending by companies in the next three to six months, declined 3 percent in May from April, the Cabinet Office said today in Tokyo.

- John Meriwether plans to shut the hedge fund he started after the collapse of his Long-Term Capital Management LP in 1998 roiled global markets, according to a person familiar with the matter. Long-Term Capital lost more than 90 percent of its $4.8 billion of assets in the weeks following Russia’s currency devaluation and bond default. The Federal Reserve orchestrated a $3.6 billion bailout by the fund’s 14 banks to calm fears that the firm’s lenders and trading partners would be dragged down. The decline of Meriwether’s current firm, JWM Partners LLC, played out over months, with its main fund losing 44 percent from September 2007 to February 2009. Long-Term Capital relied on borrowed money to enhance returns. The average leverage at the beginning of 1998 was about $28 for every $1 of net assets. JWM Partners was more conservative, aiming to produce returns of 15 percent a year and borrowing $15 or less for every dollar of net assets.

Wall Street Journal:

- Mexico is increasing oil exploration in a group of states south of the Gulf of Mexico to book reserves and offset declining output at existing wells. State-run oil company Petroleos Mexicanos is seeking companies to design oil wells and oversee exploratory drilling starting in November under a two-year contract, according to a tender notice published on Compranet, the state procurement Web site. "The southern region currently has a large amount of drilling activity, with the goal of discovering new reservoirs and developing existing ones," said Pemex in the notice. Pemex plans 18 exploration wells in the southern district this year and in 2010, compared to just three in 2008, according to a drilling map included in the notice. Pemex drilled a total of 65 exploration wells in 2008, 33% more than the year earlier. Over the past year, Pemex increased production in the southern district by 10%, to 492,717 barrels a day in May, or 19% of total production.

- The Obama administration said Tuesday it may continue to imprison non-U.S. citizens indefinitely even if they have been acquitted of terrorism charges by a U.S. military commission. Jeh Johnson, the Defense Department's chief lawyer, told the Senate Armed Services Committee that releasing a detainee who has been tried and found not guilty was a policy decision officials would make based on their estimate of whether the prisoner posed a future threat. The Bush administration took the same position, but its legality was never tested. Also at the hearing, Obama administration officials differed with the Navy's senior uniformed lawyer over whether coerced statements could be used to obtain convictions before military commissions. David Kris, head of the Justice Department's National Security Division, told the committee that federal courts might reverse convictions if they were based on coerced statements. Military judges could consider "battlefield realities" when weighing whether to admit statements, he said, but the ultimate question was whether an admission was forced. Vice Adm. Bruce MacDonald, the Navy's judge advocate general, testified that the standard should be whether a statement was "reliable," rather than whether it was coerced. He suggested that a coerced statement might be less likely to be reliable but that coercion should be only one factor examined in the "totality of the circumstances." The question could be central to whether military-commission convictions stand up. Military prosecutors have said that involuntary statements make up the lion's share of evidence against detainees.

- Merrill Lynch & Co. spent decades building one of Wall Street's premier investment banks. Undoing that work has taken just months. Merrill has lost at least 18 veteran investment bankers since the firm agreed to sell itself to Bank of America Corp. in September, thinning its senior ranks.

- The top U.S. military officer warned that the "window is closing" for preventing Iran from acquiring a nuclear weapon, highlighting the difficult choices facing the Obama administration in the wake of last month's disputed elections. Mullen told a Washington think tank that Iran was likely just one to three years away from successfully building a nuclear weapon, which means that the U.S. and its allies are running out of time to persuade Iran to abandon its nuclear program. "Iran is very focused on developing this capability," he said at the Center for Strategic and International Studies. "The clock is ticking and that's why I'm as concerned as I am."

- Thousands of angry ethnic Han Chinese wielding clubs and machetes roamed this capital city of Xinjiang territory and engaged in sporadic revenge attacks against Uighurs after deadly riots Sunday. The fresh unrest prompted Chinese President Hu Jintao to fly home early Wednesday from Italy, where he had been scheduled to attend the meeting of the Group of Eight leading nations. His departure from such a high-profile international event underlined the severity of the challenge the Xinjiang violence presents to China's leadership.

- Does Obama Want to Own the Airlines? Welcome to government for the benefit of government officials and their hangers-on.

- Policy makers on both sides of the Atlantic launched an effort to crack down on what they called speculation in oil markets, underscoring concerns that a sharp rise in oil prices could worsen the global economic downturn. In Washington, the Commodity Futures Trading Commission, the main U.S. futures-market regulator, said it is considering tougher regulation of oil-futures markets. The proposed rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a time. In an opinion piece submitted to The Wall Street Journal, meanwhile, U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy wrote that governments need to act to curb a "dangerously volatile" oil price that defies "the accepted rules of economics" and "could undermine confidence just as we are pushing for recovery." The moves come at a time when the hotly debated idea that speculative investors are driving up prices is gaining credence, and political momentum is building to stop them. On Tuesday, Sen. Byron Dorgan (D., N.D.), a backer of an antispeculation bill last year, called the CFTC's action "a positive first step" to curbing "oil speculators looking for a quick buck at the expense of American consumers." The price of oil recently bounced back to some $73 a barrel from a 2009 low of nearly $34, despite a slump in demand, bulging supplies and a world economy in the doldrums. Crude, which closed at $62.93 Tuesday, reached $145 a barrel last summer. Higher prices could affect the prospects for economic recovery: A sustained 10% rise in the price of oil can knock as much as 0.4 percentage point off global economic growth over the subsequent 12 months, estimates Jim O'Neill, chief economist at Goldman Sachs. In recent years, big noncommercial traders such as hedge funds and investment banks have poured money into oil and other commodities. Such investors typically put their money in indexes that track the value of futures contracts, in which investors promise to pay a certain amount in the future for oil and other commodities. As of last July, financial investors had about $300 billion riding on such indexes, roughly four times the level in January 2006, according to the International Energy Agency, a Paris-based watchdog. Money drained from oil and other commodity markets during the second half of 2008, but investments have since surged, partly as a hedge against inflation and a weaker dollar: J.P. Morgan Chase analysts estimate that a net $25 billion has poured into commodities in the first half of 2009. In Congress, though, there is growing consensus that investors may be distorting prices. A recent report from the Senate Permanent Subcommittee on Investigations blamed speculators for driving up wheat prices, and recommended the CFTC enforce position limits on index traders in the wheat market. In a statement, CFTC Chairman Gary Gensler said the agency will hold public hearings to gather views from consumers, businesses and market participants on whether it should propose limits on trading in energy-future contracts. The CFTC also plans to require swap dealers and hedge funds to report holdings, including those traded at overseas exchanges, in a separate and routine way.

MarketWatch.com:
- It took an epic economic and financial death-spiral to make believers out of everyone, but the event you've been waiting for has finally happened -- the Goldman Sachs(GS) conspiracy is sharing the spotlight with the Jonas Brothers. It all happened right in front of our faces. The press covered it. The government knew about it. The question Rolling Stone should be asking isn't about whether there's a Goldman conspiracy, but whether it's still a conspiracy if everyone is in on it.

CNBC.com:
- Without further regulation, Cramer told viewers on Tuesday, manipulation of the energy futures market is virtually inevitable. Right now traders can use near-unlimited credit to swing prices in either direction, and that’s causing false valuations of oil and natural gas. “The oil futures market? It’s a total farce,” Cramer said, adding that he was “stunned and outraged” by the speculation and Washington’s seeming inability so far to curb it. The Mad Money host named margin requirements as the big issue. Those requirements need to be increased, he continued, if the manipulation is to end. Cramer said that people denying the effects of speculation have a “vested financial interest in maintaining the status quo,” or they are academics with no real-world trading experience. While the government finally seems to understand the severity of the problem, as the Commodity Futures Trading Commission on Tuesday announced it would consider limiting trader positions on commodities with finite supply, Cramer doubted the CFTC could fight off the industry’s powerful lobby.

- Provident Royalties and three founders were charged with securities fraud for allegedly bilking thousands of oil and natural gas investors in a $485 million Ponzi scheme, the Securities and Exchange Commission said on Tuesday.

IBD:

- American Medical Systems (AMMD) is a major player in the more delicate second area: restoring pelvic health to men and women.

Forbes:

- A week after China was granted a license to develop Iraq’s largest known oilfield, the three largest Chinese oil companies are already gearing up to bid for 11 other oil and gas field contracts in Iraq that will be auctioned off later this year.

Politico:

- President Barack Obama says there’s “nothing” he “would have done differently” about his economic stimulus plan, but one of his top outside economic advisers says the plan was “a bit too small.” Democratic Sen. Claire McCaskill of Missouri says the idea of a second stimulus is a “non-starter,” but Democratic Sen. Sheldon Whitehouse of Rhode Island says it “should be on the table.” Senate Majority Leader Harry Reid (D-Nev.) says there’s “no showing that a second stimulus is needed,” but House Majority Leader Steny Hoyer (D-Md.) says Congress needs to be “open to whether we need additional action.” Democrats are all over the map on the stimulus and the possibility of a sequel, and it’s not hard to see why: When it comes to a second stimulus, they may be damned if they do and damned if they don’t.

Washington Post:

- A former executive of a Pennsylvania defense firm with close ties to Rep. John P. Murtha (D-Pa.) has agreed to plead guilty to taking bribes from a partner defense company and is cooperating in a federal investigation of Pentagon contracting, records show.

The Business Insider:

- At long last, Michael Lewis’s article on the destruction of AIG is online. One of the most striking things about the article is that there was no secret quantitative formula at work behind AIG’s credit default swap sales. In fact, the guys running AIG don’t seem to have understood how much subprime insurance they were selling at all. And they only discovered it by accident, when it was too late. Lewis explains how Joe Cassano the head of AIG’s Financial Products group wanted to hire a fellow named Gene Park to be the sales ambassador to Wall Street’s securitization desks. Park decided that before he took the job he’d better look into how the business was working. One of the things he discovered is that no one was watching the shop.

Google Blog:

- It's been an exciting nine months since we launched the Google(GOOG) Chrome browser. Already, over 30 million people use it regularly. We designed Google Chrome for people who live on the web — searching for information, checking email, catching up on the news, shopping or just staying in touch with friends. However, the operating systems that browsers run on were designed in an era where there was no web. So today, we're announcing a new project that's a natural extension of Google Chrome — the Google Chrome Operating System. It's our attempt to re-think what operating systems should be.

Financial Times:

- How Obama could introduce a petrol tax.

- The adoption of tough European restrictions on hedge funds would provoke a transatlantic regulatory war, one of the sector’s leading figures has warned. Stanley Fink, the former chief executive of Man Group known as the “godfather” of the British hedge fund industry, said that the European Commission’s proposed regulation would be “very restrictive” for non-EU funds and some styles of investing. “That could, and probably would, lead to retaliatory action whereby European hedge funds will be stopped from marketing in other jurisdictions [such as the US] – and that could be very bad for the industry,” he told the Financial Times in a video interview. Asked if the restrictions could spark an international hedge fund war, he said: “I think that could be one of the unintended consequences.”

Telegraph:

- This directive, which seeks to shackle legitimate financial freedoms, will eventually hit us all, not just managers of hedge funds. But it will also damage our economy. London has become home to the world's largest pool of assets under management precisely because we operate under the world's most sensible and sane rules, a rare regulatory success story. But as we report today, the EU is already planning to change its voting rules to strengthen its position and leave us even more emasculated. We simply won't have the power to change policies, such as the draft directive on hedge funds, as regulations will be voted through by simple majority, making blocking minorities nearly impossible to engineer. Labour conveniently signed up to the EU's new triple-headed dog of supra-national regulation last month. With these new voting rules, that dog will not only bark but will have a rabid bite as well.

Daily Yomiuri Online:

- Japan, US agree to hold official talks on nuclear umbrella.

DEBKAfile:

- Western anti-terror agencies have warned that a large group of 15-20 al Qaeda terrorists, trained in Pakistan and Algeria to hijack and blow up airliners, deployed secretly in at least six European and Middle East countries in early July. They are standing ready to carry out multiple terrorist attacks.

Late Buy/Sell Recommendations
Citigroup:

- Reiterated Buy on (AMGN), boosted estimates, raised target to $69.

Night Trading
Asian Indices are -2.0% to -.50% on average.

Asia Ex-Japan Inv Grade CDS Index +2.3%.
S&P 500 futures -.26%.
NASDAQ 100 futures -.18%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Global Commentary
WSJ Intl Markets Performance
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Top 25 Stories
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Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Earnings Calendar

Conference Calendar

Who’s Speaking?
Upgrades/Downgrades
Rasmussen Business/Economy Polling

Earnings of Note
Company/EPS Estimate
- (FDO)/.59

- (PBG)/.73

- (AA)/-.38

Economic Releases

10:30 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory drawdown of -2,800,000 barrels versus a -3,660,000 barrel decline the prior week. Gasoline supplies are expected to rise by +900,000 barrels versus a +2,333,000 barrel gain the prior week. Distillate inventories are estimated to rise by +1,825,000 barrels versus a +2,896,000 barrel increase the prior week. Finally, Refinery Utilization is expected unch. versus a -.06% decline the prior week.

3:00 pm EST

- Consumer Credit for May is estimated at -$8.8B versus -$15.7B in April.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, G8 Annual Summit, the Fed’s Evans speaking and the Morgan Stanley Deepwater Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and financial shares in the region. I expect US equities to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.