Stocks Finish Slightly Lower, Weighed Down by Commodity, Homebuilding, HMO, Bank, Telecom and Alt Energy Shares

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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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