Stocks Finish Lower, Weighed Down by Defense, Commodity, Financial and Gaming Shares

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Stocks Lower into Final Hour on Financial Sector Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Software longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly bearish as the advance/decline line is lower, most sectors are declining and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is rising 1.92% and remains above average at 20.2. The ISE Sentiment Index is low at 110.0 and the total put/call is above average at 1.14. Finally, the NYSE Arms has been running above average most of the day and is currently 1.06. The (XLF) is only down .12% today, notwithstanding rising worries about Lehman(LEH). The European Financial Sector Credit Default Swap Index is increasing another 2.1% today to 72.44 basis points. As well, the TED spread is falling 2.3% today to .83. The 10-year TIPS spread, a good gauge of inflation expectations, is declining to 2.45% on the fall in commodity prices, which is down from 2.59% nine days ago. The decline in commodity prices is a major US broad market positive, however further declines are likely necessary before investors begin to anticipate these positives. A number of sectors are rising today, despite the losses in the major averages. Tech stocks are relatively strong again. One of my longs, (GILD), made a new all-time high today and is up 20.2% year-to-date. This company remains my favorite biotech and the sector should do well going forward given the macro backdrop. Nikkei futures indicate a +6 open in Japan and DAX futures indicate a -28 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Lehman Brothers(LEH) may report its first quarterly loss since going public in 1994, increasing pressure on the company to raise more capital, according to analysts.
- Intercontinental Exchange Inc.(ICE) agreed to buy Creditex Group for $625 million in a deal it says will help to improve processing in the market for credit derivatives.
- Banks in Europe are lagging behind US lenders in disclosing risk, damaging investor confidence, according to Svein Andresen, secretary general of the Financial Stability Forum.
- The US dollar rose to a two-week high against the euro and increased versus the yen after Fed Chairman Bernanke said the central bank is “attentive” to the implications of the currency’s decline. ``It could be a turning point for the dollar,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodial bank, with more than $20 trillion in assets under administration. ``It's very unusual for a sitting Fed chairman to talk about the dollar explicitly.''
- North Dakota Oil Fields of Saudi-Sized Reserves Make Farmers Oil Drillers.
- Crude oil is falling more than $3/bbl. on signs that the US will stop cutting interest rates to bolster the US dollar and worries over a potential bursting of the oil bubble intensified.
- Copper fell for a second session on speculation that consumption may cool in China, the world’s biggest user of the metal. Stockpiles of the metal monitored by the Shanghai Futures Exchange have surged 85% this year.
- Corn fell for the first time in three sessions on speculation that a government investigation of US futures trading may result in rule changes that will halt the surge in commodity investment. ``The investigation into the commodity index-fund investments is going to reduce buying interest today,'' said Don Roose, president of U.S. Commodities Inc. in West Des Moines, Iowa. ``Commodities have been dominated by increased index-fund buying that might be at risk.''
- US gasoline demand fell 4.7% during the Memorial Day holiday last week, a sign that motorists are cutting consumption because of record prices, MasterCard(MA) said. Demand for the motor fuel fell 3.6% from the previous week. Consumption nationwide is down 1.8% year-to-date. Demand based on the four-week average dropped 6% from a year earlier, indicating “Americans are changing driving habits,” the credit-card company said.
- Ford Motor(F) said May sales fell 16% as gasoline near $4 a gallon steered US consumers from pickups and sport-utility vehicles.

Wall Street Journal:
- We Don’t Need a Climate Tax on the Poor. With average gas prices across the country approaching $4 a gallon, it may be hard to believe, but the US Senate is considering legislation this week that will further drive up the cost at the pump. The Senate is debating a global warming bill that will create the largest expansion of the federal government since FDR’s New Deal, complete with a brand new, unelected bureaucracy.

NY Times:
- Regulators of the nation’s commodity markets will demand more information about investors to determine whether they are evading market limits on speculation and artificially driving up world food prices. Billions of dollars have poured into the commodity futures market – from pension funds, endowments and a host of other institutional investors – through the new conduit of commodity index funds. They believe this flood of new money from swaps and index funds is undermining confidence in the market’s role in setting prices and managing risk. The commission will start requiring more information about index funds and, more significantly, about the clients on the other side of the unregulated swaps deals that are being hedged on the regulated futures exchanges. The swaps market has traditionally been seen as off limits for federal commodity regulators, but the commission clearly is responding to concern that investors may be using swaps dealers to evade rules that limit the size of their speculative role in regulated markets. The commission is also putting brakes on granting waivers that have exempted some commodity index funds from speculative limits. In recent years, more than a dozen commodity index fund companies have been granted individual waivers.
- Putin Critics Disappear From Television, Talk Shows.
- US Senator Joseph Lieberman is creating a bill to make investments in commodity markets by institutional investors taxable. The bill would amend the ERISA Act.

AP:
- AP tally: Obama clinches Democratic nomination.

PCMag.com:
- Sanford C. Bernstein analyst Jeffrey Lindsay argues in a new 310-page report that Google Inc.(GOOG) and Amazon.com(AMZN) will be long-term winners, while Yahoo(YHOO) and IAC InterActiveCorp(IACI) fall by the wayside and eBay(EBAY) becomes a merger target.

Earth2tech:
- 11 Companies Racing to Build US Cellulosic Ethanol Plants. The plants will be built all over the US and will churn out biofuels made from waste, plant byproducts and woody energy crops.

FINalternatives:
- According to a Goldman Sachs analysis of 755 hedge funds, with $833 billion of long equity positions, hedge funds now appear net short financials compared with 14% net long at year-end and 26% at the end of the third quarter. Long holdings in financials fell by $20 billion in the first quarter, and hedge fund short positions rose by an estimated $7 billion, suggesting funds were 9% net short the sector.

Financial Times:
- Billionaire investors George Soros is to tell US lawmakers on Tuesday that “a bubbe in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors. “I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” Soros will say. "In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash." "Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions."

Bear Radar

Style Underperformer:

Large-cap Value -.39%

Sector Underperformers:

Gamingirlind (-2.13%), Defense (-1.62%) and Banks (-1.42%)

Stocks Falling on Unusual Volume:

MDCI, CHU, CHA, GR, WB, MIND, LAYN, AVAN, LULU, RECN, BEXP, GYMB and LEH

Stocks With Unusual Put Option Activity:

1) MVL 2) RHT 3) NSM 4) NMX 5) AMT

Factory Orders Jump

- Factory Orders for April rose 1.1% versus estimates of a .1% decline and an upwardly revised 1.5% gain in March.

BOTTOM LINE: Orders to US manufacturers unexpectedly jumped in April, Bloomberg reported. Bookings excluding cars and airplanes, surged 2.6% for a second month. Bookings for non-defense capital goods excluding aircraft, a gauge of future business spending, jumped 4% in April. Shipments of those goods, which are used to compute GDP, rose .2% after a .8% increase in March. Total shipments in April rose 2.2%, the most since December 2006. That left the amount of goods on hand at 1.23 months’ worth at the current sales pace versus 1.26 months in March. Federal Reserve Chairman Bernanke said today that rates are “well positioned” to promote growth and stable prices, and that policy makers are “attentive” to the impact of the falling dollar. The second quarter is “likely to be relatively weak,” he said, omitting his mention in the April speech of a possible contraction. The second half may have “somewhat better economic conditions,” and growth may pick up further in 2009, Bernanke said. The US Dollar Index is jumping .52% and the 10-year yield is rising 4 basis points to 4.0% on today’s news. I expect Factory Orders to trend higher through year-end.

Bull Radar

Style Outperformer:

Mid-cap Growth (+.64%)

Sector Outperformers:

Airlines (+2.22%), Disk Drives (+1.36%) and Computer Hardware (+1.29%)

Stocks Rising on Unusual Volume:

WNR, MDRX, BPHX, TXCO, MON, SQM, PKX, DELL, RACK, UBS, CCJ, UCBI, AREX, ACOR, RRGB, GPOR, VRAD, VNUS, LQDT, NVEC, GMKT, ICGE, KNDL, CWEI, OSIP, TESO, AGYS, GRMN, WHQ, NCS and CRR

Stocks With Unusual Call Option Activity:

1) NSM 2) UTSI 3) AMT 4) DRIV 5) WSM