Stocks Finish Slightly Higher, Boosted by Airline, Road & Rail, Education, Gaming, Homebuilding, Hospital, Semi, Oil Service and Defense Shares

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Stocks Slightly Higher into Final Hour on Lower Energy Prices, Less Economic Pessimism, Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Technology longs, Defense longs and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is below average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling 1.90% and is high at 25.81. The ISE Sentiment Index is low at 93.0 and the total put/call is slightly below average at .79. Finally, the NYSE Arms has been running about average most of the day, hitting 1.13 at its intraday peak, and is currently 1.0. The Euro Financial Sector Credit Default Swap Index is falling 3.14% today to 108.98 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 falling 3.05% to 139.99 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 1.12% to 34 basis points. The TED spread is now down 432 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is falling 4.01% to 44.88 basis points. The Libor-OIS spread is rising 1.52% to 32 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 10 basis points to 1.63%, which is down 101 basis points since July 7th. The 3-month T-Bill is yielding .17%, which is unch. today. Today’s overall action bodes well for further near-term US stock gains. Small-cap and cyclical shares are outperforming today. Gaming, Road & Rail, Education, Homebuilding, Hospital, Semi, Oil Service, Airline and Defense stocks are posting meaningful gains. (XLF) appears to be consolidating yesterday’s sharp gains in an orderly fashion and is holding slightly above its 200-day moving average for the first time in a long time. The Euro Financial Sector CDS Index remains subdued, which is also a big positive. Oil remains “heavy” despite a number of potential positive catalysts, which is a negative for the commodity. Nikkei futures indicate an +114 open in Japan and DAX futures indicate an +3 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, lower energy prices, short-covering and less economic pessimism.

Bear Radar

Style Underperformer:
Large-cap Value (+.02%)

Sector Underperformers:
HMOs (-2.15%), Coal (-1.26%) and Insurance (-1.25%)

Stocks Falling on Unusual Volume:
HNT, DELL, HUM, AGNC, ULTA, SYNA, SPWRB and SBR

Stocks With Unusual Put Option Activity:
1) HUM 2) SYNA 3) MT 4) AGO 5) ECA

Bull Radar

Style Outperformer:
Small-cap Value (+.83%)

Sector Outperformers:
Gaming (+3.18%), Road & Rail (+3.13%) and Homebuilders (+1.88%)

Stocks Rising on Unusual Volume:
ME, CTCM, UNT, COF, CMC, SU, VIP, PTI, DRIV, EFII, NOVN, HITK, ININ, FUQI, POOL, RNOW, CEDC, SXCI, KLAC, EBIX, NILE, ATHR, CHIC, VSEA, PENN, OVTI, EXPO, BIDU, ATE, HAR, ENI, PVR and WBD

Stocks With Unusual Call Option Activity:
1) LXK 2) RVBD 3) RSH 4) SYMC 5) DELL

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- Barclays Plc strategist Barry Knapp raised his 2009 projection for the Standard & Poor’s 500 Index by 23 percent to 930, saying shares are poised for a “recovery rally” as the world’s largest economy improves. Knapp, head of U.S. equity strategy at Barclays in New York, boosted his S&P 500 target from 757, previously the most bearish call among 10 firms tracked by Bloomberg. He cited the bank’s projections for faster economic growth in the second half of 2009. Knapp was alone among the biggest Wall Street firms in predicting at the start of the year that the S&P 500 would decline to its lowest level in more than a decade. He also called the March comeback in the S&P 500.

- Barton Biggs, who runs New York-based hedge fund Traxis Partners LP, said the U.S. economy is rebounding and technology shares are attractive because concerns about sluggish growth are “misplaced.” The Standard & Poor’s 500 Index may climb 11 percent to 1,000 or higher this year, he added. “Tech in the U.S. is a good buy and some of the Asian markets are still attractive,” including China and Hong Kong, Biggs, the former chief global strategist for Morgan Stanley, said in an interview with Bloomberg Television. (video)

- Leon Black’s Apollo Global Management LLC plans to raise $600 million in a public offering of shares in its only commercial property investment fund. Apollo Commercial Real Estate Finance Inc., organized as a real estate investment trust, will focus on properties in major cities, according to documents filed July 10 with the U.S. Securities and Exchange Commission. The New York-based fund will also buy commercial mortgage-backed securities.

- The cost to protect against a default by New York Times Co.(NYT) may almost double as the newspaper publisher fails to pull out of a “nosedive” in revenue, according to Credit Derivatives Research LLC. Investors should buy credit-default swaps on the publisher of the New York Times and Boston Globe in a bet that its second- quarter earnings report will spark an increase in the derivatives, used to speculate on creditworthiness or to hedge against losses, analyst Byron Douglass said in a July 10 note to clients. The contracts, trading at about 580 basis points, or the equivalent of $580,000 a year for every $10 million of debt protected, may climb to 1,000 basis points, he wrote.

- CIT Group Inc.(CIT), the century-old lender, may receive assistance from the U.S. government to prevent a collapse that could hurt hundreds of thousands of corporate borrowers, the Wall Street Journal reported. U.S. officials are “in advanced talks” about aid for New York-based CIT Group, the newspaper said today, citing people familiar with the matter. No final deal was yet reached and the cost of any rescue isn’t known, the Journal reported.

- Dubai office rentals are likely to drop further this year as landlords compete for tenants in the second most expensive market across the Middle East, Africa and Europe, CB Richard Ellis Group Inc. said. “With a significant portion of supply still to enter the market this year, we are likely to see further rental reductions as landlords compete to secure tenants,” Matthew Green, head of United Arab Emirates research at CB Richard Ellis, wrote in a report today. The worst financial crisis since the 1930s weakened the U.A.E. property market as banks curtailed mortgage lending and speculators sold assets. Job losses have cut office occupancy rates and property sales and refinancing have stagnated under tighter bank-lending standards. Dubai’s annual prime office rents, which fell 18 percent in the first quarter, stand at 995 euros ($1,389) a square meter. Demand has “weakened considerably” in Dubai since the beginning of the year, while new supply continues to come online. Newly built projects in Dubai such as Jumeirah Lakes Towers and TECOM C were most hit, the report says.

- Dell Inc.(DELL), the second-largest maker of personal computers, said its profitability may suffer this quarter because it’s paying more for parts and isn’t passing on those costs to customers. The shares fell 3.6 percent. Competitive pricing and the higher cost of components will cause a “modest decline” in second-quarter gross margin, the company said today. Demand has stabilized and sales probably rose from the first quarter, Dell said. Separately, Michael Dell said he may buy other companies to bolster growth. “I would think about a portfolio of acquisitions for Dell,” he said today at a meeting with analysts and reporters in Austin, Texas.

- American Jewish leaders told President Barack Obama today they worry his administration’s focus on an Israeli settlement freeze on the West Bank is drowning out his messages on what the Palestinians and Arab states need to do to promote peace. Obama met with leaders of 16 American Jewish organizations today at the White House for 45 minutes, his first meeting of its kind since he took office in January. In his June 4 speech in Cairo directed at the Muslim world, Obama said the U.S. doesn’t accept the legitimacy of continued Israeli settlements and said construction undermines peace efforts.

- The US dollar’s decline against the yen may stall before it reaches so-called support at 91.30, Standard Chartered Plc said, citing trading patterns. “The dollar-yen breakdown is expected to be short-lived ahead of 91.30 support,” Callum Henderson, global head of currency strategy at Standard Chartered in Singapore, wrote in a research note. “Clients should close short dollar-yen positions and look to buy into this dip ahead of 91.30.” “Look for a push back above 95 to follow,” Henderson wrote. Should the greenback rise beyond “congestive resistance” at 95 yen, the dollar may extend its rally to 99 and then to 101.45 or higher, he said.

- Crude oil in NY may fall below $45 a barrel by the end of August as the global recession stalls a recovery in fuel consumption in the US, the world’s biggest energy user, BNP Paribas said. “There’s no summer gasoline demand season this year in the US,” Harry Tchilinguirian, a senior oil analyst at France’s largest bank, said in an interview yesterday in Tokyo. “It can test the low $40s, and again our average is relatively weak at $58 a barrel for the third quarter.” Total oil products supplied in the US over the four weeks ended July 3 averaged 18.4 million barrels a day, down 5.9% compared with the similar period last year, according to the Energy Department.

- Aetna Inc.(AET), UnitedHealth Group Inc.(UNH) and closely held TriWest Healthcare Alliance Corp. were awarded contracts with a value of as much as $55.5 billion to provide managed care for the U.S. Defense Department. Humana Inc. and Health Net Inc. lost contracts. Aetna won a base period of 10-months and five one-year options with a value of as much as $16.7 billion, the Pentagon said today on its Web site. UnitedHealth gained a similar contract with a value of as much as $21.8 billion, and TriWest won as much as $17 billion.

- China’s central bank can keep inflation in check without harming the economy by making clear it plans to rein in lending, said Xia Bin, the head of financial research at the State Council Development Research Center. “The People’s Bank of China needs to manage inflation expectations by giving signals of a more stable money-supply growth,” said Xia, who attended a meeting hosted by Premier Wen Jiabao last week. “The government’s appropriately loose monetary policy shouldn’t be without limits.” Policy makers pledged this week to do more to guide loan expansion as record growth in credit adds to the risks of asset bubbles and bad debts. New loans rose almost fivefold in June.

- University of Michigan Study Shows SEQUENOM's(SQNM) MassARRAY Technology Identifies HPV Infections Missed by Standard Hybridization Test New Study Uncovers Significant Proportion of Potential False Negatives in Widely Used HPV DNA Test which could lead to Cervical Cancer.

- Steven Rattner, the Wall Street executive who helped the government guide General Motors Co. and Chrysler Group LLC out of bankruptcy, is stepping down, the Treasury Department said. Ron Bloom, a former United Steelworkers union adviser and Lazard Ltd. vice president, will take over the leadership role in advising the Obama administration’s auto task force, the statement said.

Wall Street Journal:

- The New York Attorney General's office in recent weeks has intensified its scrutiny of the private equity firm Quadrangle Group and its co-founder Steven Rattner as part of its so-called pay-to-play pension investigation, according to a person familiar with the matter.

- The U.S. federal budget deficit broke through the $1 trillion mark in June, potentially complicating the Obama administration's efforts to revive the economy and enact its longer-term policy agenda. The U.S. Treasury Department on Monday said the government's annual deficit reached almost $1.1 trillion by the end of June, a once-unthinkable level that could threaten any nascent economic recovery by undermining the dollar and driving up interest rates. Surging deficits could also tie the administration's hands in responding to the economy's problems, by eroding support among voters and making Congress leery of adopting policies -- such as an overhaul of the health-care system -- that the administration believes are necessary for sustainable growth. It could be hard to win congressional approval for another round of fiscal stimulus, if that was seen as necessary, even as the economy continues to lag and the unemployment rate continues to rise, hitting 9.5% in June.

- The effort to pass a health-care overhaul is being frustrated by divisions among Democrats over a wide range of issues, from how to pay for the measure to its impacts on small business and rural areas. A House bill is expected to be released Tuesday, but concerns voiced by moderate Democrats prompted party leaders to delay release of details over the weekend and have spurred a round of high-level meetings on Capitol Hill to corral the restive members. With few Republicans, if any, expected to support the legislation, Democrats, who control the chamber with a 255-178 majority, can't afford major defections in their ranks. They need 218 votes to ensure passage.

- As the Obama administration implements a new U.S. strategy toward the United Nations, it's working with a U.N. secretary-general, Ban Ki-moon, who is struggling to prove himself on the world stage.

- For the last four years, Henry Markram has been building a biologically accurate artificial brain. Powered by a supercomputer, his software model closely mimics the activity of a vital section of a rat's gray matter.

- A secret Central Intelligence Agency initiative axed by Director Leon Panetta examined how to assassinate members of al Qaeda with hit teams on the ground, according to current and former national-security officials familiar with the matter.

NY Times:

- On Tuesday, Exxon(XOM) plans to announce an investment of $600 million in producing liquid transportation fuels from algae — organisms in water that range from pond scum to seaweed. The biofuel effort involves a partnership with Synthetic Genomics, a biotechnology company founded by the genomics pioneer J. Craig Venter.

CNNMoney.com:

- 100 Best Places to Live.

NY Post:

- Mayor Bloomberg ripped into the State Department today for allowing foreign governments to not pay taxes on some diplomatic residences in the city. "They won't be paying taxes, but if you or I have a building [in the city], we pay taxes ... It is totally unfair." The Post reported in today's editions that Hillary Rodham Clinton has quietly reversed a longstanding policy requiring foreign governments to pay those property taxes. It is a shocking about-face by Secretary of State Clinton -- who repeatedly spoke in favor of the city's right to collect the taxes when she was New York's junior senator. Bloomberg has been an outspoken opponent of any foreign property-tax exemption.

Politico:

- Stoke the flames, but don’t burn down the house. Heading into Tuesday’s session, that’s shaping up as the Republican strategy for Supreme Court nominee Sonia Sotomayor’s confirmation hearings: Offer enough criticism to satisfy conservative activists and GOP stalwarts, but avoid an all-out conflagration that could draw the attention of moderates, women and Latino voters.

USA Today.com:

- Gasoline prices fell for the fourth week in a row, dropping to the lowest level in six weeks, the U.S. Energy Department said Monday, as cheaper crude oil costs were passed onto consumers at the pump. The national price for regular unleaded gasoline declined 8.4 cents over the last week to $2.53 gallon, down $1.59 from a year ago when gasoline stood at a record $4.11 a gallon, the department's Energy Information Administration said in its weekly survey of service stations. The latest pump price is the cheapest since June 1, and reflects falling crude oil prices that make up more than half the cost of making gasoline.

Reuters:

- California's fight against global warming will cost small businesses $183 billion per year in lost output, about 10 percent of state production, according to a study released on Monday. The study, funded by small business groups and written by a university dean, added fuel to a heated debate over the effects of California's efforts to curtail climate change and provoked criticism from environmentalists and a state agency. California, which has the largest population and economy of the 50 U.S. states, passed its climate change law in 2006. Since then, the state's economy has weakened dramatically, reinvigorating the arguments about whether the program makes financial sense, even as global warming has become a national concern and a top priority of U.S. President Barack Obama. "This is going to have a huge impact on the state's entrepreneurial spirit," said Sanjay Varshney, dean of the Business College at California State University, Sacramento, and the author of the study. In contrast, an analysis by California's Air Resources Board, which is responsible for implementing the climate change law, had found a slight net economic benefit to the plan. But that analysis was roundly criticized, including by the state's nonpartisan Legislative Analyst Office, which called it "inconsistent and incomplete." Supporters see California's moves, ahead of other states, as creating a vibrant green economy. But Varshney argued that businesses already struggling with an economic meltdown would flee and small enterprises would have to shut down as costs eclipsed their profits. Estimating 10 percent cost hikes for transportation, housing, fuel, food and utilities, the study forecast $63.9 billion in direct costs to small business would cause $182.6 billion in total loss of output, especially in professional services, manufacturing, arts, entertainment and recreation.

- President Barack Obama is mulling new ways to delay foreclosure for jobless homeowners who are unable to keep up with monthly payments, an administration official said on Monday. The official told Reuters it was reasonable for policymakers to consider options for loan forbearance -- allowing borrowers to delay, defer or skip payments -- that are more effective than those currently available in the private sector.

Financial Times:

- Executives at Goldman Sachs(GS) sold almost $700m worth of stock following the collapse of Lehman Brothers last September, according to filings with the Securities and Exchange Commission. Most of the sales occurred during the period in which the investment bank enjoyed the support of $10bn from the troubled asset relief program. The surge in selling among Goldman partners, at a time when the US government had thrown a lifeline to Wall Street, is likely to draw criticism from lawmakers on Capitol Hill. For the eight-month period for which figures are available, Goldman partners sold more than $691m in company stock, even as the firm expanded its public float from 395m to 503m shares in several capital raises. Stock sales by partners have been a sensitive topic at Goldman Sachs, but never more so than since last September after the collapse of Lehman’s. According to a disclosure in Goldman’s most recent proxy statement in March, the bank took the unusual step of buying back investments in illiquid employee funds made by Jon Winkelried, former co-chief operating officer, and Gregory Palm, general counsel, for $19.7m and $38.3m respectively.

- From the salons of Mayfair to the sidelines of children’s baseball games in the fancier parts of town beloved of expats, the outrage in London is palpable. Mention the European Union’s new proposal to regulate alternative investment managers – as those who work in the hedge fund and private equity world are known – and out pours a torrent of angry complaints. The draft directive is, say industry figures, poorly drafted, ill conceived and anti-competitive. “A blatant attempt by the French and Germans to sock one to London,” fumes one Mayfair-based hedge fund manager. Veteran financiers worry proposals could prove to be as damaging to European hedge funds as the US’s 1963 tax on securities issued by non-US companies was to the overseas bond market there. The “Yankee bond” industry stopped dead; meanwhile in London bankers SG Warburg arranged the first “eurobond” for an Italian company later that year, giving the City a pre-eminence in bonds that it holds to this day. The ferment in the UK, where three-quarters of Europe’s hedge fund assets are managed, has boiled over into politics, with ministers and the mayor promising to fight the EU proposals tooth and nail.

South China Morning Post:

- Al-Qaeda has vowed to avenge the deaths of Muslims in Urumqi by targeting China's extensive workforce and projects across northwestern Africa, according to a private intelligence report obtained by the South China Morning Post.

The Standard:

- The rapid growth in lending over the first half in the mainland could strain the banking system, rating agency Standard and Poor's has warned. It also said there would be a sharp deterioration in the quality of banks' assets in the next two or three years if there is a protracted economic slowdown in China. "The Chinese banking system should have the strength to deal with the deterioration in asset quality, based on our economic outlook," Liao said. "But the credit profiles of banks are likely to diverge." Policy banks and rural credit cooperatives are expected to see significant losses on an already below-average earnings profile, Liao said. There was strong downward pressure on mainland banking stocks yesterday on concerns over policy.

Late Buy/Sell Recommendations
Citigroup:

- Upgraded (NILE) to Buy, target $50.

Night Trading
Asian Indices are +.75% to +2.25% on average.

Asia Ex-Japan Inv Grade CDS Index -3.83%.
S&P 500 futures +.10%.
NASDAQ 100 futures -.10%.

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Earnings of Note
Company/EPS Estimate
- (JNJ)/1.12

- (GS)/3.65

- (ALTR)/.16

- (YUM)/.43

- (INTC)/.09

Economic Releases

8:30 am EST

- The Producer Price Index for June is estimated to rise .9% versus a .2% increase in May.

- The PPI Ex Food & Energy for June is estimated to rise .1% versus a -.1% decline in May.

- Advance Retail Sales for June are estimated to rise .4% versus a .5% gain in May.

- Retail Sales Less Autos for June are estimated to rise .5% versus a .5% gain in May.

10:00 am EST

- Business Inventories or May are estimated to fall .8% versus a -1.1% decline in April.

Upcoming Splits
- None of note

Other Potential Market Movers
- Geithner Visiting Saudi Arabia, the IBD/TIPP Economic Optimism Index, weekly retail sales reports, ABC Consumer Confidence, (DELL) analyst meeting and the Oppenheimer Consumer/Gaming/Lodging/Leisure Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by financial and commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.