Stocks Higher into Final Hour on Falling Energy Prices, Diminishing Credit Angst

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Computer longs, Internet longs and Commodity shorts. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is higher, sector performance is mostly positive and volume is below average. Investor anxiety is above average. Today’s overall market action is bullish. The VIX is rising .9% and remains above average at 19.71. The ISE Sentiment Index is about average at 158.0 and the total put/call is above average at .96. Finally, the NYSE Arms has been running above average most of the day and is currently 1.08. Market leading “growth” stocks are substantially outperforming the broad market again today. I suspect we will finally start seeing significant p/e multiple expansion in true growth stocks over the intermediate-term as investors come to grips with slower global growth. The TED spread is falling another 4 basis points today to .76, which is down from 2.05 in March of this year and the lowest since right before the credit crisis began to intensify in August of last year. The Citigroup US Economic Surprise Index is rising to -13.9 today, up from -100.0 in March. As well, the EU Index and Japanese Index are now below the US at -21.0 and -23.0, respectively. I continue to believe the commodity bubble has been the driving force behind the current “US negativity bubble” and that a bursting of the commodity bubble would be a much greater positive for the broad US stock market than commonly perceived. I also think that the recent parabolic rise in oil has been pressuring the US dollar. The dollar should see further strength on a continuation of recent oil weakness. While overall, insiders continue to exhibit bullish behavior, commodity-related stock insider selling picked up noticeably last week, according to Bloomberg. The Energy sector saw the largest amount of insider selling at $307,667,211 worth. The Industrial sector was second last week in insider selling at $144,329,741. XOM, SLB, DE, MON, MUR, FCX, CAM, APA, NBL, OXY, ESV, CVX and COP all saw meaningful insider selling last week. The Financial sector saw the greatest amount of insider buying last week at $265,026,347 worth. SOV, HD, CPB, ERTS, MVL, GBE, LAB, JEF, NEU, GLG, FBC, LOGI and MBI all saw notable insider buying. Nikkei futures indicate a +87 open in Japan and DAX futures indicate a +52 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower energy prices, less economic pessimism and diminishing credit market angst.

Today's Headlines

Bloomberg:
- Crude oil fell almost $4/bbl. in NY on signs that US fuel consumption is dropping because of a slowing economy and record energy prices. Russia’s oil production may rise to 12 million barrels a day after Prime Minister Putin’s government eases taxes, billionaire Chalva Tchigirinski said. Putin yesterday approved a tax-cut plan to stimulate oil output that may be sent to lawmakers this week. Russian oil production fell to 9.72 million barrels a day in April, the lowest in 18 months. “The news from Russia is significant,” said Tom Bentz, a broker at BNP Paribas in NY. US motorists were forecast to make 1% fewer automobile journeys of at least 50 miles during last weekend’s holiday than a year ago, the AAA said. US fuel consumption averaged 20.3 million barrels a day in the four weeks ended May 16, down 1.3% from a year earlier.
- Rice futures tumbled by their daily limit for the second session as producers eased export bans, alleviating concerns that global supplies will fail to meet demand.
- Nickel extended a decline into its fifth week in London as high oil costs threaten to damp world economic growth, further weakening demand for the metal used to make stainless steel.
- Housing demand in California, where one out of every eight US residents lives, is reviving as bargain hunters buy foreclosed properties, reversing a two-year decline in home sales. Sales in the state increased 2.5% in April, following 30 consecutive declines.
- Wheat prices, at their lowest in almost nine months, may tumble further as farmers start to bring in a forecast record crop, US Wheat Assoc. IP Vincent Peterson said.

Wall Street Journal:
- Investors last year craved international exposure thanks to the double-digit gains of many overseas markets. Now, it looks like the sweet spot may be in the US as domestic stocks, if not the broader economy, show signs of recovery.
- Bush’s Shift in Rhetoric Almost Lost War, Feith Says. On television and radio, in print and on the Internet, day after day they repeated the claim that the undiscovered stockpiles were the sum and substance of why the U.S. went to war against Saddam.
- Agriculture’s Last Frontier. African Farmers, US Companies Try to Create Another Breadbasket With Hybrids.
- Violence in Iraq has decreased to levels see about four years ago. The drop in violence follows recent Iraqi-led military campaigns in Basra in the south, Baghdad’s Sadr City and Mosul in the north. Al-Qaeda in Iraq is in a “confused state” after the attacks in Mosul, said Iraqi Defense Ministry spokesman Major General Mohammed al-Askari.

NY Times:
- US Truckers Sell Vehicles as Fuel Prices Rise.

Women’s Wear Daily:
- Sears Holdings Corp.(SHLD) signed rap singer LL Cool J to start an apparel brand for the retailer.

Tex Report:
- Baosteel Group and Taiyuan Iron & Steel Group will cut stainless steel output 30% each next month because of a decline in prices. Four stainless steel producers in China lowered production by 50% so far this month. Prices in the Wuxi market have declined $290 a ton for cold-rolled stainless steel sheets this month because of a fall in nickel prices.

FinancialWeek:
- Panic of ’07 stirs up mix at top money managers. Last year’s schizoid second half sent trillions of institutional dollars into alternative assets, international equities. Big winners: TIPS, hedge funds and private equity.

Financial Times:
- Oil has reached a turning point by Dan Yergin of Cambridge Energy Research. Oil prices at this level take us into a new world – “Break Point” – where the question is not only “how high can the price go?”, but also “what will be the response?” Is this the point at which oil begins to lose its almost total domination in transport?

Europa:
- The European Commission has launched a number of actions today to promote energy efficient driving habits among European car users.

Frankfurter Allgemeine Zeitung:
- Google Inc.(GOOG) said within a few years mobile advertising will generate more sales than ads addressing personal-computer users via the Internet, citing CEO Eric Schmidt. There are no limits for search engine marketing and the mobile Internet is “the next big wave,” he said.

DigiTimes:
- The global market for large-sized LCD panels appears to be shrugging off economic concerns this year, with rising demand for monitor, notebook-PC and television panels expected to generate a 17.7% increase in unit shipments in 2008, according to market research firm iSuppli.

Xinhua:
- China aftershocks may continue for months.

O Globo:
- Petrobras(PBR), Brazil’s state-controlled oil company, has more natural gas than industry and power producers are demanding, citing the director of gas and energy. At present, 58 million cubic meters a day of natural gas supply is available, which current demand is 56 million cubic meters a day.

Bear Radar

Style Underperformer:

Large-cap Value -.31%

Sector Underperformers:

Goldirlind (-2.95%), Coal (-1.73%) and Steel (-1.42%)

Stocks Falling on Unusual Volume:

WBD, ADM, UBS, CHL, RIO, STO, CGV, SU, SFSF, DRYS, ESLR, TBSI, CSUN, FEED and PDX

Stocks With Unusual Put Option Activity:

1) LRCX 2) PXP 3) RHT 4) JCG 5) UPS

Consumer Confidence Depressed, New Home Sales Rise

- Consumer Confidence for May fell to 57.2 versus estimates of 60.0 and a reading of 62.8 in April.

- New Home Sales for April rose to 526K versus estimates of 520K and 509K in March.

BOTTOM LINE: Confidence among US consumers fell to the lowest level in more than 15 years, Bloomberg reported. The Present Conditions component fell to 74.4 from 81.9 in April. The Expectations component fell to 45.7 from 50.0 the prior month. The average price of regular unleaded gasoline rose to a record $3.94 a gallon yesterday, according to data from AAA. Those planning to purchase a large appliance remained at 32.10, the same as April. Confidence in the northern part of the country continues to skew the overall gauge. Confidence in the Northeast Central region, where most media outlets and hedge funds are headquartered, fell another 16% to an extraordinarily depressed 34.80. I still think the current “US negativity bubble” will lose some air over the coming months as energy prices fall, credit turmoil ends, housing fears subside, the job market improves, stocks rise, election uncertainty ends, fiscal/monetary stimuli take hold, the US dollar rises, inflation decelerates and interest rates remain low.

New Home Sales in the US unexpectedly rose in April, Bloomberg reported. Sales rose 3.3% to an annual pace of 526,000 from a 509,000 rate the prior month. The median sales price last month rose 1.5% from April 2007 to $246,100. The supply of homes at the current sales pace fell to 10.6 months’ worth from 11.1 months in March. The number of houses completed and waiting to be sold fell to 181,000, the fewest since July of last year. Purchases soared 42% in the Northeast, rose 8.3% in the West and gained 5.8% in the Midwest. They fell 2.4% in the South. According to BankRate.com, the average 30-year fixed mortgage rate is currently 5.81%, down from 6.12% in March and down from 6.43% in June of last year. The Homebuyer Affordability Index is currently 130.20, which is up from a low of 99.6 in July 2006 and at the best level since April 2004. I think it is very likely home sales have now seen their lows and will trend modestly higher through year-end.

Bull Radar

Style Outperformer:

Small-cap Growth (-.89%)

Sector Outperformers:

Semis (+2.67%), Airlines (+2.16%) and Networking (+1.52%)

Stocks Rising on Unusual Volume:

TZOO, CNSL, KTC, WNR, IXYS, VLCCF, CEDC, ASIA, HIBB, NDSN, LRCX, SNHY, KELYA, EXBD, DDUP, CAKE, CBRL, AMSC, UTHR, ALGT, LQDT, PWRD, PENN, SR, SXI, TGI, BCE and FLO

Stocks With Unusual Call Option Activity:

1) BIIB 2) SFD 3) NSM 4) SPF 5) IMCL

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