A clean instaill is a last resort for me as I can't risk that on my production system. However, I was finally able to find enough hard drive space to make a partition for a clean install of ML and a Photoshop CS5 install. I did this and also installed the latest Adobe updates for CS5. (PS install from the original install disk - no Migration Assistant) I can report that in the testing I did, the cursor does not disappear as often, but it does disappear enough times to still be a significant issue for me. However, I don't know exactly how it will perform on a daily basis... in other words, it could very well be just as bad as it is now with the standard install I did over Snow Leopard.
Here's what I have done so far without sucess:
1. The Java updates.
2. The PinPoint application. If you download from the developer's web site, you can get a free 7 day trail. (this might be true with the app store; I didn't try it) You might want to give it a try and see if you like what it does for this problem. It didn't work out for me.
3. Clean install of ML and a clean install of PS from the original install disk. What was interesting is that the first launch of PS after installing I got a message that said "To open PS, You need a Java SE 6 runtime. Would you like to install one now?". At least that proves PS needs Java. After seeing the cursor disappear during my testing, I did update to Java build 1.7.0_17 to be sure, which did no good.
The only solution I see at this point is to go back to Snow Leopard. Or, wait and hope this will be fixed soon. In the meantime, it would be great if everyone reading this thread write to Apple and Adobe about this issue.