Stocks Finish Slightly Lower, Weighed Down by Homebuilding, Bank, REIT and Oil Service Shares

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Stocks Mixed into Final Hour as Lower Long-Term Rates and Tech Sector Strength Offset Rising Financial Sector Pessimism, China Bubble Fears

BOTTOM LINE: The Portfolio is slightly higher the final hour on gains in my Technology longs and Biotech longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is neutral as the advance/decline line is about even, sector performance is mixed and volume is about average. Investor anxiety is high. Today’s overall market action is mixed. The VIX is falling 2.09% and is very high at 28.53. The ISE Sentiment Index is around average at 139.0 and the total put/call is slightly above average at .89. Finally, the NYSE Arms has been running above average most of the day, hitting 2.44 at its intraday peak, and is currently .68. The Euro Financial Sector Credit Default Swap Index is rising 6.21% today to 90.0 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 rising 1.66% to 122.79 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2.62% to 20 basis points. The TED spread is now down 446 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is down 9.25% to 34.94 basis points. The Libor-OIS spread is falling 1.19% to 15 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to 1.61%, which is down 105 basis points since July 7th. The 3-month T-Bill is yielding .13%, which is unch. today. Considering the worse-than-expected economic data today and yesterday’s swoon, today’s action is a bit more constructive. The bears were unable to capitalize on morning weakness and market leading stocks are substantially outperforming. Moreover, the tech sector trades pretty well. On the negative side, the Euro financial sector cds index is surging and (XLF), (IYR) and (XHB) trade “heavy,” despite yesterday’s heavy losses. Oil has been unable to bounce today despite a weaker US dollar and better inventory data. As well, the ongoing strength in bonds could become a concern. Tomorrow’s economic data could also further boost bonds. Nikkei futures indicate a -25 open in Japan and DAX futures indicate a -11 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, profit-taking, rising financial sector pessimism, technical selling and China bubble worries.

Bear Radar

Style Underperformer:
Small-Cap Value (-.69%)

Sector Underperformers:
Homebuilders (-2.58%), Networking (-1.36%) and Banks (-1.21%)

Stocks Falling on Unusual Volume:
SII, NRG, CCJ, BKH, SYNO, APSG, CA, FELE, FIRE, JOYG, TRAK, JCOM, CFFN, BCRX, TOWN, LAMR, AMWD, TECH, MLNX, WFMI, DCI, CPY and CNH

Stocks With Unusual Put Option Activity:
1) GG 2) WDC 3) ABX 4) ORCL 5) MOT

Bull Radar

Style Outperformer:
Large-cap Growth (+.23%)

Sector Outperformers:
HMOs (+3.64%), Gaming (+.69%) and Computer Hardware (+.50%)

Stocks Rising on Unusual Volume:
SA, EGO, UNH, BP, KO, KB, STEC, JOSB, STAR, PAY, LPL and BF

Stocks With Unusual Call Option Activity:
1) IPI 2) BEAT 3) TTWO 4) GERN 5) BIIB

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Wednesday Watch

Late-Night Headlines
Bloomberg:

- Toyota Motor Corp.,Honda Motor Co. and Hyundai Motor Co., buoyed by the U.S. government’s “cash for clunkers” rebates, had their highest monthly sales this year and led Asian brands to their first combined sales gain in 15 months. Toyota, the world’s largest automaker, had a 6.4 percent increase, Tokyo-based Honda’s sales rose 9.9 percent and Hyundai’s surged 47 percent. Overall U.S. sales grew 1 percent to 1.26 million units, lifted by a 12 percent increase for Japanese and South Korean models. The gain for Asia-based brands was the first since May 2008 and gave them a record 52.3 percent share of the market, while that of U.S.-based competitors fell to a record 40.8 percent, according to Bloomberg and Autodata Corp. figures. “Cash for clunkers has clearly benefited the Toyotas and Hondas of the world,” said Joe Barker, an analyst at consultant CSM Worldwide Inc. in Northville, Michigan. “They had the right mix of product at the right time.”

- Russia’s grain exports may fall 43% to between 1.6 million metric tons and 1.8 million tons in September from a year earlier as global trade declines, said grain transporter ZAO Rusagrotrans.

- China, the world’s largest soybean importer, may purchase 2.6 million metric tons of the commodity this month, falling below 3 million tons for the second month, the China National Grain & Oils Information Center said.

- Copper for December delivery declined by as much as 3.6 percent to 47,600 yuan a metric ton on the Shanghai Futures Exchange, leading a drop in industrial metals. Aluminum fell 1.6 percent to 14,720 yuan and zinc dropped 2.1 percent to 14,775 yuan.

- China’s steel production growth will slow as tightening credit curbs building expenditure, the China Iron & Steel Association said today. Output would be annualized at 540 million metric tons this year given the average January-to-July production, Li Shijun, the chief analyst with the steel association, said at a conference in Shanghai today. “High levels of steel output can’t be sustainable if fixed-asset investment slows down because of tightening bank loans,” Li Shijun, the chief analyst with the association, said at a conference in Shanghai today.

- Progressive Corp. and Berkshire Hathaway Inc.’s Geico Corp. are among insurers that may benefit from the U.S. “cash for clunkers” program as drivers pay higher premiums to protect new cars. The government’s vehicle trade-in initiative could yield as much as $375 million in premiums, said Robert Hartwig, the president of the New York-based Insurance Information Institute. “When they buy that new vehicle, the insurance generally will cost more,” Hartwig said in an interview. “It’s a newer vehicle and people will normally take out full coverage of the car. Any auto insurer would stand to gain.”

- Central Intelligence Agency Director Leon Panetta plans to stay on as his agency undergoes a Justice Department inquiry into tactics used during interrogations of terror suspects, a top Senate Democrat said. “I spoke to Director Panetta yesterday,” said Senator Dianne Feinstein of California, chairwoman of the Senate Intelligence Committee, in a statement. “He has no intention of resigning, nor should he. I believe he has an important role to play.” ABC News and Newsweek reported last week that Panetta had threatened to resign as the Justice Department prepared to look into allegations in a 2004 CIA inspector general report.

- The FTSE/Xinhua China 25 Index, made up of the largest 25 Chinese companies based on market size, fell below the 50-day moving average for a second day, the first back-to-back drop since global equities tumbled in February. “China has led on the way up and now it’s broken a popular moving average,” said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati. “Without question, it’s a big concern.”

- Deutsche Bank AG said it will liquidate outstanding PowerShares DB Crude Oil Double Long Exchange Traded Notes and close the $426 million ETN because of regulatory position limitations. The move doesn’t affect other notes offered by the Frankfurt-based bank, including other energy and commodity funds, Deutsche Bank said today in a statement. The redemption value of the notes will be determined after formal notice is given on Sept. 9. The U.S. Commodity Futures Trading Commission has been tightening trading rules and pushing enforcement of position limits amid concern that speculation drove commodity prices to record highs last year. So far, new and anticipated limits have affected the largest agricultural, natural gas and broad-based commodity funds in the U.S. Deutsche Bank “needed a greater amount of access to the futures market,” said Tom Lydon, president and chief executive officer at Global Trends Investments in Newport Beach, California. “It appears to be handcuffed by the CFTC and had no option but to close its doors.” The double-long oil ETN is one of four ETNs and one exchange-traded fund that Deutsche Bank runs that require it to take positions in the oil market. The double-long notes have the biggest position in the oil market. Deutsche Bank manages 31 ETNs and ETFs. New York Mercantile Exchange trading limits have caused a “regulatory event,” according to today’s statement. Such an event can be triggered by “actions such as the refusal of an exchange or a government regulatory agency to allow Deutsche Bank to transact in commodity futures contracts consistent with current practice or the imposition of position limits on Deutsche Bank’s trading activities,” according to the fund’s prospectus on the bank’s Web site.

Wall Street Journal:

- China's property developers and their Wall Street backers are rushing to raise billions of dollars in initial public offerings, rescuing real-estate investments that just months ago were considered victims of the economic crisis. Mark Williams, head of equity capital markets at UBS AG, estimates that Chinese property companies will raise between $4 billion and $5 billion via IPOs before the end of this year in Hong Kong. "A huge amount of the lending related to China's economic stimulus has found its way into real estate," allowing developers to restart projects that were languishing as well as making it possible for potential home buyers to get mortgages, says Peter Churchouse, a property investor in Hong Kong.

- House Financial Services Committee staff are tentatively scheduling a vote Sept. 23 for a bill that would create a new agency to police mortgages, credit cards and other financial products marketed to consumers, people familiar with the panel's planning said. The creation of a Consumer Financial Protection Agency, a central element of the White House's broader effort to overhaul financial-market rules, has emerged as a flashpoint in the broader debate. The banking industry, many Republicans and several Democrats have questioned whether such an agency might actually make it harder for consumers to obtain credit and create too many levels of bureaucracy for banking.

- As European governments consider how to restart the market for residential mortgage-backed securities, rising mortgage defaults are causing the market to deteriorate further. The latest Fitch Ratings data on RMBS transactions show that the number of home mortgages in arrears -- those that have missed payments for three months -- continues to rise across Europe. The arrears index is a leading indicator of looming defaults. The worst-hit markets are the U.K. and Spain, which also have the largest amount of outstanding RMBS, about €605 billion ($867.4 billion) and €243 billion, respectively.

- As insurers American International Group Inc. and XL Capital Ltd. struggled last year to retain big customers, investment sage Warren Buffett offered to help, for a healthy price. Both insurers signed so-called cut-through endorsements with a subsidiary of Berkshire Hathaway Inc. to offer some policyholders a guarantee that if the insurers couldn't pay claims, Berkshire Hathaway would.

- The national mood on the Afghanistan war has soured fast, and it's not hard to see why. American combat deaths have exceeded 100 for the summer, the recent Afghan election was tainted by accusations of intimidation and fraud, and Joint Chiefs Chairman Mike Mullen says the security environment there is "deteriorating." Meanwhile, congressional leaders worry about the war's impact on the health-care debate and the Obama presidency more generally. Antiwar groups are starting to talk about "another Vietnam." Opposition is mounting to the current policy—to say nothing of possible requests for additional troops from the U.S. commander in Afghanistan, Gen. Stanley McChrystal. The questions and concerns being raised are legitimate. Clearly, the mission has not been going well. Problems with our basic strategy, especially on the economic and development side, still need immediate attention. Moreover, our Afghan friends have a crucial role to play in both security and development, and if they fail to do so the overall warfighting and state-building effort will not succeed. However, it is important to remember our assets, and not just our liabilities, in the coming debate over Afghanistan policy this fall. Democracies sometimes talk themselves out of keeping up the faith in tough situations, and we should avoid any such tendency towards defeatism, especially so early in the execution of the Obama administration's new military/civilian/economic strategy, which combines stronger and more widespread counterinsurgency measures with increased nation-building efforts. Indeed, the U.S., our NATO allies, and the future Afghan government—be it another Hamid Karzai presidency, or a new administration—have a number of major strengths in this mission. Consider:

- A small flurry of deal announcements and financings suggests that the mergers-and-acquisitions market -- moribund for 12 months -- may finally be bottoming. August was shaping up to be the worst month for deal making since 1995, according to data provider Dealogic. But the market was jolted Monday morning when Walt Disney Co. announced the $4 billion purchase of Marvel Entertainment Inc. and Baker Hughes Inc. purchased oil-field-services company BJ Services Co. for $5.5 billion. That was the busiest single day in U.S. deal making in nearly three months. And it pushed up total volume for the month up 40%.

- In the last few years, cancer mortality rates have begun to decline, especially among younger individuals.

- Unemployment rates in 372 U.S. metropolitan areas continued their upward climb in July, Labor Department figures released Tuesday show. Some 19 metros now have unemployment rates above 15%; eight are in California, hard-hit by the real-estate collapse, and five are in Michigan, suffering from the auto industry's downturn. El Centro, Calif., continues to have the nation's highest unemployment rate, rising to 30.2% in July. Yuma, Ariz., is next with 26.2%. The national average in July was 9.7%, not seasonally adjusted. Among the biggest cities with a million people or more, Detroit's unemployment rate was highest, at 17.7%, followed by Riverside-San Bernadino-Ontario, Calif., at 14.3% and Las Vegas at 13.1%. Oklahoma City, at 5.9%, and the Washington, D.C., metro area, at 6.2%, had the lowest unemployment rates among the nation's biggest cities in July.

- I spoke with thousands of voters at town-hall meetings this summer. What I gathered from them is that it's not just the proposed overhaul of health care that has them upset. Many also expressed a sense of betrayal. In spite of their hope for change, it still appears that the government in Washington is run for its own benefit and the benefit of special interests—not for the benefit of the American people. The folks I met with also don't trust politicians in Washington to address mounting long-term challenges to our economy. It's not just the attendees of town-halls meetings in Oklahoma. Voters across the country are telling Washington what's on their mind, if only more people inside the Beltway would listen. A Rasmussen poll released last month showed that 40% of voters said that cutting the deficit in half by 2012 should be President Barack Obama's top priority. Only 21% said health-care reform should be his No. 1 priority. Notwithstanding these polling results, the administration and Congress have responded by trying to win public support on the strength of an argument that's too clever to be true. They say that the key to saving money is spending money, a lot of money.

MarketWatch.com:
- China said it will raise fuel prices starting Wednesday, its fourth hike of the year, to reflect the sharp rally in crude-oil prices and help the nation's refiners offset rising raw-material costs. China's National Development and Reform Commission, the country's top economic planning agency, said on its Web site Tuesday that both gasoline and diesel prices will be raised by 300 yuan a ton, or about 12 U.S. cents per gallon for gasoline and 14 U.S. cents a gallon for diesel. In percentage terms, the government will raise gasoline prices by 4.6% to 6,810 yuan a metric ton, or about $2.78 a gallon. It will hike diesel prices by 5.2% to 6,070 a metric ton, or about $2.84 a gallon. Before Tuesday's decision, China had already raised fuel prices three times this year - for an overall increase of about 25% -- under a system introduced in late 2008 that keeps petroleum-product prices in line with global crude prices. The new Chinese prices top what many U.S. drivers are paying at the pump. In the U.S., retail gasoline prices averaged $2.607 a gallon Tuesday, and diesel prices averaged $2.694 a gallon, according to AAA.

CNNMoney.com:

- Fifty-two health and accident insurance companies have until Friday to turn over salary details on employees who make more than $500,000 a year. Last month, Rep. Henry Waxman, D-Calif., head of the House Energy and Commerce Committee, asked for the figures as part of a broader look at how health insurers operate.

Forbes:

- Once again Morgan Stanley(MS) is on the hiring path, looking to lure 300 to 400 new traders and sales staff globally. While this move may appear far removed from your bottom line, the actions of one of the few remaining Wall Street titans bears scrutiny. It not only means that the firm sees flusher times ahead, but that your trades could become cheaper and easier. Perhaps most importantly, though, it signals that Wall Street has regained its appetite for risk.

- With the right cars at the right time, Ford separates itself from its domestic rivals.

- Wall Street’s China Stock Gambit. What were Goldman Sachs and Citigroup doing selling something called ''I-Kill-You-Later''?

Politico:

- Aides to President Barack Obama are putting the final touches on a new strategy to help Democrats recover from a brutal August recess by specifying what Obama wants to see in a compromise health care deal and directly confronting other trouble spots, West Wing officials tell POLITICO. Obama is considering detailing his health-care demands in a major speech as soon as next week, when Congress returns from the August recess. And although House leaders have said their members will demand the inclusion of a public insurance option, Obama has no plans to insist on it himself, the officials said. “We’re entering a new season,” senior adviser David Axelrod said in a telephone interview. “It’s time to synthesize and harmonize these strands and get this done. We’re confident that we can do that. But obviously it is a different phase. We’re going to approach it in a different way. The president is going to be very active.”

Rasmussen:

- The latest Rasmussen Reports national telephone survey shows that 43% would vote for their district’s Republican congressional candidate while 36% would opt for his or her Democratic opponent. That represents the lowest level of support for Democrats in recent years, while Republicans have tied their highest level of support for the third straight week.

Business Spectator:

- Billionaire investor George Soros, long celebrated for his shrewd market picks, proved his acumen anew in the last year when his firm's assets surged 41 per cent while most rivals' assets tumbled. According to data compiled by AR, a new hedge fund magazine, Soros Fund Management oversaw $US24 billion ($A29 billion) in assets on July 1, 41.18 per cent more than the New York-based firm managed 12 months earlier. Bridgewater Associates, the biggest US hedge fund, lost 14.95 per cent in assets over the last 12 months, cutting its assets under management to $US37 billion, the magazine reported. Other prominent firms suffered even sharper declines in assets when investors punished managers for poor returns by pulling their money out and markets stumbled. Hedge fund firm Renaissance Technologies, for example, saw its assets under management shrink 41.38 per cent to $US17 billion, the magazine reported. Soros, who famously earned $US1 billion by betting against the British pound in 1992, had warned about last year's financial crisis before it happened and was able to benefit from it, people who know him said. His flagship Quantum Endowment fund gained nearly 10 per cent in 2008 when the average hedge fund lost 19 per cent. Last year, Soros, who often ranks among the hedge fund industry's best-paid managers, again made the top of the list when he took home $US1.1 billion.

Business Insider:

- Yep, Ray Dalio’s Bridgewater Associates is still the largest hedge fund around, with $37 billion in assets, and it’s also the highly rated by investors. Looks like it was a good idea to not participate in the PPIP after all. AR (the new mag that merged Alpha and Absolute Return) ranked the top 10 hedge funds and here it goes:

USA Today.com:

- A month-long plunge in the main Chinese stock market is raising questions about the outlook for China's economy. The Shanghai composite index sank 6.7% Monday, worrying global investors and capping an August bear market that has stripped more than 23% from share prices. The nerve-jarring drop prompted some — including the head of China's $298 billion state-run investment fund and a former top Morgan Stanley economist — to warn of a deflating asset bubble. "Some of us were over-optimistic about the ability of China to become the engine of growth for the region and the global economy," said Joshua Aizenman, professor of economics at the University of California-Santa Cruz and a former consultant to the Chinese government.

Reuters:

- China may have had 320 billion yuan of new loans in August, citing two people familiar with the figures. The August loan figure is the lowest this year. Industrial & Commercial Bank of China Ltd. posted a decline in new loans last month, the report said.

- The European Commission could decide to delay Oracle Corp's $7.4 billion acquisition of Sun Microsystems Inc with less than 48 hours to go before a deadline, two sources familiar with the situation said on Tuesday.

- The chairman of the Federal Deposit Insurance Corp said commercial real estate issues will increasingly drive U.S. bank failures. FDIC head Sheila Bair told CNBC Tuesday evening that commercial real estate loans remain a "looming problem" for banks' balance sheets and she expects the area to increasingly be a driver for bank failures during the remainder of this year and 2010.

Financial Times:

- Growing job losses will fuel protectionist pressures “for years to come” despite signs that the collapse in world trade may be bottoming out, warned Pascal Lamy, head of the World Trade Organization. Speaking to the Financial Times ahead of Wednesday’s meeting of trade ministers in New Delhi, Mr Lamy said reaching a deal in the Doha round of global trade talks was an essential part of the fight against protectionism.

- As the European parliament embarks today on its deliberations into the proposed  directive on hedge funds and private equity, the real battle is about to begin on the shape of the most important regulatory initiative to come out of Brussels since the onset of the global financial crisis. While the parliament thrashes out its own version of the proposal, European Union member states will also be stepping up their own efforts to agree on a way forward. So far, the debate has been marred by unseemly and strident exchanges between those afflicted by blind prejudice against hedge funds and the funds themselves, some of which have been guilty of unhelpful public tantrums. The debate must now become more serious and objective. The Alternative Investment Fund Managers Directive in fact covers much more than just hedge funds and private equity. It will also apply to property and commodity funds and investment companies, among others. It will set the tone for financial market regulation in the EU for a long time to come and its passage will thus be a defining moment. Investors such as insurance companies and pension funds are important arbiters. They are big users of the financial markets in their search for investments that will earn a return for the individuals who have entrusted their money to them. They need sensibly regulated markets which give them the choice to allocate assets efficiently, with a reasonable level of investor protection and a proportionate compliance cost. Unfortunately the proposed directive fails to meet any of these requirements. The restrictions on access to the European market that it would place on fund managers in “third countries” that do not adopt equivalent regulation are protectionist. The compliance burden is enormous and will stifle choice, while the purported protections are not particularly helpful to professional investors. Some of those managers the directive will hit are about as remote as you can get from the origins of the financial crisis.

- 3D technology looks set to hit the home consumer market next year, with Sony on Wednesday announcing plans to sell 3D televisions globally by the end of 2010. Sony’s decision to throw its weight behind the technology will be an important boost for the 3D industry, which has so far focused mainly on cinemas.

Ecuador Inmediato:
- Ecuadorean Finance Minister Maria Elsa Viteri said the government forecast average crude-oil prices of $61.20 per barrel next year.

Late Buy/Sell Recommendations

- None of note

Night Trading
Asian Indices are -2.0% to -.50% on average.

Asia Ex-Japan Inv Grade CDS Index 146.50 +7.50 basis points.
S&P 500 futures +.05%.
NASDAQ 100 futures +.05%.

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Earnings of Note
Company/EPS Estimate
- (JOYG)/.98

- (ZLC)/-.78

- (BF/B)/.63

- (MATK)/.27

- (NX)/.00

- (HOV)/-1.57

- (ABM)/.35

- (TSCM)/-.06

Economic Releases

8:15 am EST

- The ADP Employment Change for August is estimated at -250K versus -371K in July.

8:30 am EST:

- Final 2Q Non-farm Productivity is estimated to rise 6.4% versus a prior estimate of a 6.4% increase.

- Final 2Q Unit Labor Costs are estimated to fall 5.8% versus a prior estimate of a 5.8% decline.

10:00 am EST:

- Factory Orders for July are estimated to rise 2.2% versus a .4% increase inn June.

10:30 am EST:

- Bloomberg consensus estimates call for a weekly crude oil inventory drawdown of -900,000 barrels versus a +128,000 barrel increase the prior week. Gasoline supplies are expected to fall by -900,000 barrels versus a -1,700,000 barrel decline the prior week. Distillate inventories are estimated to rise by +775,000 barrels versus a +767,000 barrel gain the prior week. Finally, Refinery Utilization is expected unch. versus a .09% gain the prior week.

2:00 pm EST:

- Minutes of Aug. 12 FOMC Meeting.

Upcoming Splits
- (ABVT) 2-for-1

Other Potential Market Movers
- The Fed’s Lockhart speaking, Challenger Job Cuts report and the weekly MBA mortgage applications report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and retail shares in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 75% net long heading into the day.