Stocks Sharply Lower into Final Hour on Credit, Housing Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Semi longs and Retail longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, almost every sector is declining and volume is below average. My intraday gauge of investor angst is back to elevated levels. The Case-Shiller Home Price Index fell more than estimates, but to put the home price decline into perspective, home prices are still 50.4% higher over the last five years and up 120.1% over the last 10. The Fed Aug. 7 minutes were just released. They said that growth estimates by staff economists had been cut and that strains in financial markets jeopardized the expansion. Further turmoil might require a response, they said. For the present, they said that the most likely outcome for the economy was continued moderate growth and that the upside risks to inflation remained the most significant policy concern. The Fed also said mortgage loans remained available to most potential borrowers and that the supply of credit to finance real investment did not appear significantly diminished. The market's initial reaction to these comments was slightly negative. I view them as a bit more constructive than anticipated. With the 10-year yield approaching 4.5%, the odds of an imminent rate cut are likely increasing rapidly. The Fed has a lot of firepower available. Recent Fed actions meaningfully improved credit anxieties. I think a fed funds rate cut would help even more. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- The global economy is “very healthy” and losses from the US subprime mortgage slump have “almost passed,” said Mark Mobius, who oversees $30 billion at Templeton Asset Management Ltd in Singapore.
- Gold and silver are falling for a second day on concern that a slump in global equity markets will reduce investment demand for the precious metals.
- OPEC doesn’t need to increase crude oil production because market supplies are sufficient, OPEC Secretary General Abdulla El-Badri said today.

Wall Street Journal:
- Rich Alumni Stiff Elite Alma Maters, Give to Needier Colleges.

AP:
- Pennsylvania’s welfare rolls have declined to below 1960s levels as job-training and child-care programs allowed more people to enter the workforce.

Financial Times:
- A private bank has seen an increase, since the start of the stock market upheaval, in the number of senior executives wanting to take out “jumbo loans” to buy shares or make investments.

Reuters:
- The Fed acknowledged at its last regular meeting that a policy response might be necessary if financial market conditions worsened, show minutes of its August 7 meeting.

Daily Telegraph:
- Taking cheap drugs designed to lower cholesterol could reduce the risk of developing Alzheimer’s by 80%, scientists say.

Consumer Confidence Falls Less Than Expected

- Consumer Confidence for August fell to 105.0 versus estimates of 104.0 and 111.9 in July.

BOTTOM LINE: Consumer Confidence fell less than economists expected in August, Bloomberg reported. Consumer Confidence is now back to levels seen in June, but still up from 100.2 hit in August of last year. The Present Conditions component of the index fell to 130.3 from 138.3 the prior month. Present Conditions are still well above the long-term average of 113.2. The Expectations component fell to 88.2 versus 94.4 in July. I still expect confidence to move back to cycle highs over the intermediate-term as the job market remains healthy, incomes continue to outpace inflation, inflation decelerates further, interest rates remain historically low, energy prices decline further, housing fears subside and stocks resume their major uptrend.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Volatility on currency options fell further from the eight-year high touched this month as concern eases that a US housing slump is spreading.
- Billionaire investor Warren Buffett’s Berkshire Hathaway(BRK/A) boosted its stake in Burlington Northern Santa Fe Corp.(BNI), the second-largest US railroad, by 24%.
- Asustek Computer shares rose the most in a month after the Taiwan computer-parts maker more than doubled its second-quarter profit on laptop orders.
- A new international university aims to improve technology education in North Korea as tensions appear to be easing between the reclusive communist country and the rest of the world.

MarketWatch.com:
- This bull’s pawing the ground. Commentary: Band sees market rising as much as 30% by November 2008.

USAToday.com:
- Gas prices hit 5-month low heading into holiday weekend.

NY Times:
- Late to Web Retailing? There’s Still Money There.
- Bigger Than Las Vegas? That’s Macao’s Bet.

UPI:
- End in Sight for US Subprime Crisis?

Financial Times:
- Renaissance Technologies, the $30 billion hedge fund run by billionaire mathematician James Simons, is considering selling a minority stake to a big outside investor or group of investors in coming weeks.
- The number of foreign students accepted by US graduate schools has risen for a third consecutive year, according to a survey to be released on Tuesday.

Times of India:
- Dr. Reddy’s Laboratories Ltd., India’s biggest drugmaker, may buy US-based Bradley Pharmaceuticals(BDY) for as much as $300 million.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SYY), target $39.

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 futures -.07%.
NASDAQ 100 futures +.01%.

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Earnings of Note
Company/EPS Estimate
- (ARUN)/.00
- (BGP)/-.33
- (CMED)/.25
- (COCO)/.03
- (DY)/.32
- (MCRS)/.70
- (NX)/1.00
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- (SMTC)/.15
- (NCTY)/.36

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Economic Releases
10:00 am EST
- Consumer Confidence for August is estimated to fall to 104.0 versus 112.6 in July.

2:00 pm EST
- Minutes of August 7 FOMC Meeting.

Other Potential Market Movers
- The Case-Shiller 2Q Home Price Index, Richmond Fed Manufacturing Index, weekly retail sales reports and (NLC) Annual Investor Day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and technology stocks 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.

Stocks Finish Mildly Lower on Low Volume

Indices
S&P 500 1,466.79 -.85%
DJIA 13,322.13 -.42%
NASDAQ 2,561.25 -.60%
Russell 2000 789.45 -1.19%
Wilshire 5000 14,726.63 -.87%
Russell 1000 Growth 587.22 -.72%
Russell 1000 Value 824.88 -.99%
Morgan Stanley Consumer 714.60 -.63%
Morgan Stanley Cyclical 1,024.25 -.74%
Morgan Stanley Technology 625.69 -.64%
Transports 4,866.97 -1.0%
Utilities 482.81 -3.21%
MSCI Emerging Markets 130.71 +.85%

Sentiment/Internals
Total Put/Call .95 -11.21%
NYSE Arms 1.37 +120.89%
Volatility(VIX) 22.72 +9.65%
ISE Sentiment 133.0 +15.65%

Futures Spot Prices
Crude Oil 72.05 +1.35%
Reformulated Gasoline 203.93 +2.92%
Natural Gas 5.42 -1.86%
Heating Oil 201.15 +.72%
Gold 676.30 -.18%
Base Metals 233.95 unch.
Copper 337.0 +.60%

Economy
10-year US Treasury Yield 4.57% -5 basis points
US Dollar 80.76 +.12%
CRB Index 305.59 -.02%

Leading Sectors
Defense -.13%
Internet -.14%
Medical Equipment -.25%

Lagging Sectors
Coal -2.30%
Homebuilders -2.90%
Utilities -3.21%

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Afternoon Recommendations
CSFB:
- Rated (CYH) and (UHS) Outperform.
- Rated (HMA) and (THC) Underperform.

William Blair:
- Rated (CELG) Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Tiffany & Co.(TIF) rose the most in six weeks after Goldman(GS) and Bear(BSC) recommended the largest US luxury retailers on an undervalued stock price and expectations of growing demand for luxury goods.
- Mark Amberson, who runs the $5.7 billion Russell Money Market Fund at Russell Investment Group sees the asset-backed commercial paper market is “improving.”
- Chinese stocks trading in the US rallied the most in 3 ½ years on optimism the country’s economic growth with propel earnings.
- Sony Corp.’s(SNE) “Superbad” pushed Hollywood’s US summer box-office sales to a record $4 billion this past weekend, surpassing the industry’s previous high established in 2004.
- Crude oil in NY rose to the highest since Aug. 15 on speculation that US gasoline supplies declined for a fourth week as refiners curtailed production again.
- US options prices rose for the first time in seven days amid reduced speculation that the Fed will lower its benchmark lending rate.

Reuters:
- NYSE Euronext(NYX) and Australia’s ASX Ltd. may be considering purchasing part of Nasdaq Stock Market’s(NDAQ) stake in London Stock Exchange Plc.

BOTTOM LINE: The Portfolio finished lower today on losses in my Retail longs, Computer longs and Semi longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly negative today as the advance/decline line finished modestly lower, most sectors fell and volume was light. Measures of investor anxiety were above-average into the close. Today's overall market action was just slightly bearish. Considering recent gains, financial industry estimate cuts and today's nonstop scary housing rhetoric, today's performance wasn't too bad. The 10-year yield is at session lows at 4.57% and is testing levels seen during the peak of credit fears on Aug. 16. The 10-year is trading as if a break below 4.5% is coming soon, which will greatly increase the odds of a Fed rate cut, in my opinion. The weakness in utilities today was notable, especially considering another drop in interest rates. As well, energy shares were under pressure despite the reversal higher in energy prices. The release of the Case-Shiller Home Price Index and Consumer Confidence reading for August will likely make for more gloomy headlines early tomorrow. I still expect stocks to finish the week on a more positive note.