Stocks Lower into Final Hour on Hedge Fund Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my I-Banking longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is negative and volume is above average. The NYSE reported that short interest on the exchange, from mid-May through mid-June, rose from 11.747 trillion shares to 12.747 billion shares, which is yet another all-time high. Moreover, this 8.51% increase leaves NYSE short interest up an astounding 30% since mid-February, the largest four-month percentage jump since at least 1991 when Bloomberg began tracking. This is even more shocking considering the S&P 500 rose about 6% during that period as the DJIA was hitting one record after another. The largest overall short on the NYSE remains the iShares Russell 2000 Index (IWM) at 290,557,518 shares, up from 237,133,225 shares the prior month. Moreover, short interest on the American Stock Exchange has exploded a mind-boggling 46% over the last four months. This is just more evidence that the many US stock market bears remain stunningly complacent and continue to party like it's 2000-2003, despite the S&P 500's 104% gain from that periods' lows. I continue to believe the current "U.S. negativity bubble" will eventually burst, thus spurring the "mother of all short-covering rallies."

Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-May through mid-June:

1. Citadel Broadcasting Corporation (CDL) +32.9%
2. Total System Services (TSS) +21.3%
3. National Semiconductor (NSM) +13.8%
4. Greenhill & Company (GHL) +11.8%
5. Cal Dive International (DVR) +11.8%
6. TOUSA (TOA) +10.8%
7. Mueller Water Products (MWA) +10.4%
8. The Great Atlantic & Pacific Tea Company (GAP) +10.1%
9. American Oriental Bioengineering (AOB) +9.2%
10. Federal Agricultural Mortgage (AGM) +9.2%
11. Luminent Mortgage Capital (LUM) +8.5%
12. CNA Financial (CNA) +8.4%
13. Nymex Holdings (NMX) +7.3%
14. eFunds (EFD) +7.0%
15. LeapFrog Enterprises (LF) +7.0%
16. Under Armour (UA) +6.7%
17. Medifast (MED) +6.6%
18. Retail Ventures (RVI) +6.1%
19. CACI International (CAI) +6.0%
20. SWS Group (SWS) +5.6%
21. Pinnacle West Capital (PNW) +5.6%
22. Live Nation (LYV) +5.0%
23. Diamond Offshore Drilling (DO) +4.9%
24. RadioShack (RSH) +4.8%
25. Navigant Consulting (NCI) +4.8%

I expect US stocks to trade modestly higher into the close from current levels on lower long-term rates, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Venezuelan President Hugo Chavez said that he will discuss the purchase of eight Russian submarines when he meets President Vladimir Putin this week.
- The US natural gas market lacks sufficient oversight and Congress needs to close a federal loophole that allowed Amaranth Advisors LLC to evade regulators in the biggest-ever hedge fund collapse, Senator Carl Levin said.
- Coffee fell 3.7%, the most since October, in NY as mild temperatures and dry weather ease concern that crops may be damaged in Brazil, the world’s largest producer.
- Corn is falling another 2.7% and is breaking below its 200-day moving average for the first time since 1Q 2006.
- General Motors(GM) shares rose as much as 3.9% after Goldman Sachs(GS) rated the stock a “buy,” saying the United Auto Workers union may offer larger concessions than expected to the biggest US automaker.
- Robert Zoellick, a former US trade representative, was approved as president of the World Bank to replace Paul Wolfowitz, who resigned last month.
- Bear Stearns(BSC) may have to salvage the second of its two teetering hedge funds after offering $3.2 billion last week to bail out the first one, Merrill Lynch said.
- Berkshire Hathaway(BRK/A) Chairman Warren Buffett, the billionaire investor who pledged most of his fortune to charity last year, predicted the world will become increasingly philanthropic as the wealthy donate more of their assets.
- The 10-year yield is falling another 6 basis points as investors buy US treasuries on lingering worries over the subprime mortgage market and falling commodity prices.
- Emerging-market stocks aren’t worth the risk as the shares become expensive and the returns associated with owning the more volatile assets fade, according to Lehman Brothers(LEH).

Wall Street Journal:
- The European Union may offer China designation as a “market economy” to gain concessions it believes are needed to balance their trading relationship. The status would be a declaration that the country has limited state aid and banned monopolies.
- Dobson Communications(DCEL), an Oklahoma City-based mobile-phone company, is considering options including a sale.
- Tyson Foods(TSN) and Syntroleum Corp.(SYNM) may say today that they’ll build a $150 million plant to take fat from Tyson’s agricultural processing activities and turn it into liquid fuel.
- US hospitals want to hire managers with factory experience, to raise efficiency as they grow bigger and harder to run.

Alpha:
- Europe’s 50 biggest hedge funds manage more than $300 billion, an increase of more than 50% on September 2005, according to a ranking of the region’s top hedge fund managers.

NY Times:
- Hollywood movie studios are looking for ways to take advantage of Apple Inc.’s(AAPL) introduction of the iPhone, as it could create a larger market for videos playable on mobile devices.
- National Lampoon Inc. will release its first film in 18 years as the company tries to revitalize frat-boy humor through its college cable television network.

Philadelphia Inquirer:
- Donald Trump, chairman and president of Trump Entertainment Resorts(TRMP), may announce this week he is selling the casino company.

USA Today:
- The number of US Roman Catholics increased to 64.6 million last year from 63.9 million in 2005, citing the newest Official Catholic Directory.

Broadcasting & Cable:
- US television networks completed negotiations for the September season with advertising sales of about $9.1 billion, an increase of about 1% from last year.

Financial Times:
- Reforms to corporate governance that increase shareholder rights threaten to destroy value for bond investors, citing a report by Moody’s(MCO) Investors Service.

AFP:
- Michel Gaudin, who overseas security and the police in Paris, told a town council meeting today that the capital city is on the “front line” for terrorism risks and is “vastly under-equipped.”

Handelsblatt:
- Sony Corp.’s(SNE) Sony Pictures will consider buying an Internet company if a “good opportunity” arises, citing Sony Pictures CEO Lynton.

El Universal:
- Mexico’s government fired all of its 34 federal police state chiefs to fight corruption.

The Standard:
- The China Banking Regulatory Commission will ease restrictions on investing overseas.

Existing Home Sales Better-Than-Expected

- Existing Home Sales for May fell to 5.99M versus estimates of 5.97M and an upwardly revised 6.01M in April.

BOTTOM LINE: Sales of previously owned homes in the US fell less-than-expected in May and April sales were revised slightly higher, Bloomberg reported. The supply of existing homes at the current sales pace rose to 8.9 months’ worth versus 8.4 months’ worth at the end of the prior month. The median price of an existing home fell slightly to $223,700. Sales of condos and co-ops rose 2.6%. Overall, purchases fell 3.4% in the South and .8% in the West. Sales rose 5.8% in the Northeast and .7% in the Midwest. The Fed’s Bernanke recently reiterated his view that the US economy was poised for a moderate rate of growth despite ongoing softness in housing. I continue to believe home sales are stabilizing at relatively high levels by historic standards. However, construction activity will continue to remain muted as homebuilders work down inventories.

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Monday Watch

Weekend Headlines
Bloomberg:
- Istithmar PJSC, the Dubai-owned investment company that last week agreed to buy Jones Apparel Group’s Barneys New York chain for $825 million, plans to buy 3% of London-based hedge fund manager GLG Partners LP.
- US gasoline at the pump fell 11 cents during the past two weeks to an average $3 a gallon, Trilby Lundberg said, citing her survey of 7,000 filling stations nationwide.
- European government bonds rallied this week after a report showed business confidence in Germany, the region’s largest economy, fell more than expected in June.
- Chinese central bank Governor Zhou Xiaochuan said he can’t rule out further interest rate increases after inflation accelerated.
- Merck’s(MRK) drug Januvia significantly improves diabetes control when given in combination with the older drug metformin, researchers said.
- Venezuelan President Hugo Chavez dismissed European press reports that he would sign an agreement with Iran to develop nuclear weapons when he visits the Central Asian country next week.
- Bristol-Myers Squibb’s(BMY) experimental diabetes drug controls blood sugar whether combined with an older medicine or take alone, researchers said.
- Crude oil is falling in NY after a strike in Nigeria was settled, easing concerns about supply disruptions from Africa’s biggest oil producer.
- The unexpected surge in US government tax receipts may pare the budget deficit by 39% to $150 billion this fiscal year, causing a relative scarcity of four-week, three-month and six-month treasury bills.
- France and the US agreed today there is no reason to restore contacts with Syria because of its continued interference in Lebanon and its failure to show signs of wanting to make peace with Israel.
- Ali Hassan al-Majid, known as “Chemical Ali” for this role in using chemical weapons to murder 180,000 Iraqi Kurds in the Anfal campaign, was sentenced to death by Iraq’s High Tribunal yesterday.
- Is the five-year stock market rally threatened by the highest bond yields since 2002? Some of the world’s biggest investors say no.
- Renault SA and Nissan Motor will push for “clean” vehicles that use the most cost-effective technologies to meet new emission standards, CEO Ghosn said.
- Shares of ethanol producers gained Friday, after the US Senate passed legislation that would quadruple the use of alternative fuels, such as the grain-based additive.
- Nintendo Co. surpassed Sony Corp.(SNE) in market value as its Wii home console outsells the rival PlayStation 3.

Wall Street Journal:
- The US Commodity Futures Trading Commission plans to improve a rule to ensure that records are kept by those holding or controlling a futures or option position in energy markets.
- Banks backing Cerberus Capital Management’s purchase of Chrysler Group and Chrysler Financial will begin a “roadshow” next week to raise funds.
- Clear Channel Communications(CCU) will use Arbitron’s new electronic radio-ratings system as part of a multiyear agreement.
- Haggling 2.0. With more Web retailers willing to bargain, clothing shoppers are leaning to wheel and deal.

NY Times:
- The International Code Council approved recommendations for new high-rise buildings taller than 420 feet that would require a third stairwell and a strengthened elevator for firefighters.
- Rupert Murdoch’s News Corp.(NWS/A) and advisers representing Dow Jones(DJ) and its controlling Bancroft family are near an agreement to protect the Wall Street Journal’s editorial independence in the even Murdoch buys the financial news organization.
- The Iranian government has focused on labor leaders, universities, the media and Iranian-Americans in a recent crackdown on dissent inside the country. Young men were paraded through the capital of Tehran’s streets by uniformed police officers for wearing T-shirts that were too tight or sporting haircuts deemed to be too Western.
- Florsheim shoes, a unit of Weyco Group Inc.(WEYS), is profiting from younger consumers who have shown a preference for older brand names in the $25 billion domestic footwear industry.

San Jose Mercury News:
- The Silicon Valley’s wealthiest residents made the most since 2000 in 2005.

Business Week:
- Private Equity Squeezes the Shorts. Short-sellers once profited off troubled companies, but private equity’s expansion is crimping investment opportunities and boosting risks.

Rocky Mountain News:
- Moosehead Breweries, Canada’s third-largest brewer, will build its new US headquarters in Boulder, Colorado.

AP:
- North Korea agreed to close down its Yongbyon atomic reactor within three weeks, citing US nuclear negotiator.
- A 35-year-old Oklahoma woman died from a combination of cocaine and a high level of stress, and not from chocks delivered by a Taser(TASR) stun gun, citing the state medical examiner’s office.

Financial Times:
- News Corp.(NWS/A) CEO Rupert Murdoch wants to buy Internet-related companies.
- Sweden hired US investment bank Morgan Stanley(MS) to advise it on the planned $6 billion sale of Absolut vodka maker Vin & Sprit AB.
- A US congressional report to be issued today claims that Amaranth Advisors LLC and energy trader Brian Hunter accumulated such big positions in the US natural gas derivatives markets last year that they caused “abnormally” high gas prices for consumers across the US.

Observer:
- Pearson Plc should sell the Financial Times for $1.4 billion and avoid competing with a Rupert Murdoch-owned Wall Street Journal, citing analyst Lorna Tilbian and unidentified investors.

Nikkei:
- Toyota Motor Corp.(TM) will start selling a new hybrid car that is larger than its Prius model from 2009.
- Hino Motors Ltd. will build a new assembly plant in West Virginia this year as North American sales rise.

Commercial Times:
- Taiwan Semiconductor Manufacturing may report record sales in June and the third quarter because of demand for chips used in mobile phones with more advanced features.

Sing Tao Daily:
- Lee Shau-kee, billionaire chairman of Henderson Land Development Co., said it’s time to sell Hong Kong stocks, because valuations are too high. Lee is the second-richest man in China, Hong Kong and Taiwan with a net worth of $17 billion.

Yediot Aharonot:
- Israeli Prime Minister Ehud Olmert is preparing a package of peace incentives to offer Palestinian Authority President Mahmoud Abbas when they meet in Egypt tomorrow.

Weekend Recommendations
Barron's:
- Made positive comments on (LUM), (YHOO), (STT) and (CFC).
- Made negative comments on (BX), (CROX) and (CRM).

Citigroup:
- Reiterated Buy (GPN), target $50.

Night Trading
Asian indices are -.75% to +.50% on average.
S&P 500 indicated +.09%.
NASDAQ 100 indicated +.18%.

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Company/Estimate
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Economic Releases
10:00 am EST
- Existing Home Sales for May are estimated to fall to 5.97M versus 5.99M in April.

Other Potential Market Movers
- The Wachovia CEO Summit could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and real estate shares in the region. I expect US stocks to open modestly lower and to rally into the afternoon finishing modestly higher. The Portfolio is 100% net long heading into the week.

***Alert***

Blogging will remain light through the weekend due to a scheduling conflict.