Non-Manufacturing Remains Strong, Home Sales Moderating

- ISM Non-Manufacturing for June rose to 62.2 versus estimates of 58.7 and a reading of 58.5 in May.
- Pending Home Sales for May fell 2.0% versus estimates of a .5% increase and a downwardly revised 3.1% gain in April.

BOTTOM LINE: The ISM Non-Manufacturing Index, a measure of the health of service companies which compose the largest part of the US economy, exceeded estimates and a measure of hiring accelerated. The employment component of the index rose to 57.4, the highest in 4 months. The export orders component of the index fell to 50 from 62. The prices paid index rose slightly to 59.8 from 57.9. This bodes well for a continuation of recent healthy economic data.

Contracts to buy previously owned US homes fell in May for the first time in four months while remaining close to a record. The May number was the third highest in history. The level of pending re-sales suggests rising prices may be discouraging some prospective buyers, however home buying remains very strong by historic standards. I continue to believe a period of stagnation is near with respect to home price increases. However, a significant decline in prices is unlikely.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- CNOOC Chairman and CEO Fu Chengy said he would try to keep most Unocal employees on the payroll.

Washington Post:
- The US House of Representatives may not pass the Central American Free Trade Agreement because of declining support among Democrats.

China Securities Journal:
- The Chinese government will inject capital into a batch of domestic securities companies in the third quarter to help bolster the stock market.

China Daily:
- Demand for code division multiple access handsets in China is growing at a slower pace than Nokia Oyj expected.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MDT.

Banc of America:
- Upgraded SERO to Buy.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated unch.

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Economic Releases
10:00 am EST:
- ISM Non-Manufacturing for June is estimated to rise to 58.7 versus 58.5 in May.
- Pending Home Sales for May are estimated to rise .5% versus a 3.6% increase in April.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and technology shares in the region. I expect US equities to open mixed as stronger economic data offsets worries over higher energy prices. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs, Led by Energy and Retail

Indices
S&P 500 1,204.99 +.88%
DJIA 10,371.80 +.66%
NASDAQ 2,078.75 +1.04%
Russell 2000 653.23 +1.58%
DJ Wilshire 5000 12,006.90 +.93%
S&P Barra Growth 574.51 +.95%
S&P Barra Value 626.36 +.82%
Morgan Stanley Consumer 572.82 +.43%
Morgan Stanley Cyclical 720.74 +.83%
Morgan Stanley Technology 476.10 +.73%
Transports 3,534.81 +.75%
Utilities 390.33 -.01%
Put/Call .67 -32.32%
NYSE Arms .81 -21.0%
Volatility(VIX) 11.68 +2.46%
ISE Sentiment 124.00 -41.23%
US Dollar 90.40 -.07%
CRB 309.76 +1.94%

Futures Spot Prices
Crude Oil 59.78 +.32%
Unleaded Gasoline 168.80 +.37%
Natural Gas 7.53 +.74%
Heating Oil 173.80 +.32%
Gold 424.90 +.24%
Base Metals 118.88 +.47%
Copper 151.40 +.33%
10-year US Treasury Yield 4.10% +1.72%

Leading Sectors
Oil Service +3.37%
Energy +3.05%
Retail +2.23%

Lagging Sectors
Tobacco -.23%
Airlines -1.04%
Gold & Silver -2.62%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on AMR and UTX.

Afternoon/Evening Headlines
Bloomberg:
- US investors should put all of their money into stocks, according to Prudential Equity Group’s Ed Keon, the most bullish call since Bloomberg News began surveying strategists in 1996.
- US 10-year T-notes tumbled for a second day in NY as the government said factory orders in May increased by the most in a year, reinforcing views the economy is withstanding higher Federal Reserve interest rates.
- Ford Motor matched GM in offering all buyers the same discounts to employees after the incentives helped GM record its best sales month in 18 years in June.

Wall Street Journal:
- American International Group hired former SEC Chairman Arthur Levitt as a board adviser.

Washington Post:
- The Chinese Foreign Ministry criticized the US Congress for demanding a government review of CNOOC’s $18.5 billion bid for Unocal Corp.

Financial Times:
- Small US mutual fund companies are seeking sales or mergers due to increased regulatory and compliance costs and a slowdown in industry growth.
- Maytag Corp. may cut short takeover talks with a group led by China’s Haier Group, a move that may ease concern that a rival bidder Ripplewood Holdings may withdraw its offer and seek a break-up fee.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Internet, Retail, Networking and Medical longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was below average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was positive. Small-caps outperformed throughout the day, and the Russell 2000 is five points away from an all-time high. I expect the ISM Non-Manufacturing Index to exceed expectations tomorrow. The energy inventory data release was postponed until Thursday due to the holiday.

Stocks Higher Mid-day, Led by Small-Caps

Indices
S&P 500 1,203.61 +.77%
DJIA 10,361.36 +.56%
NASDAQ 2,076.20 +.91%
Russell 2000 650.48 +1.16%
DJ Wilshire 5000 11,991.01 +.79%
S&P Barra Growth 573.81 +.83%
S&P Barra Value 625.85 +.74%
Morgan Stanley Consumer 572.65 +.41%
Morgan Stanley Cyclical 719.23 +.62%
Morgan Stanley Technology 475.85 +.68%
Transports 3,533.98 +.72%
Utilities 391.35 +.26%
Put/Call .68 -31.31%
NYSE Arms .77 -25.72%
Volatility(VIX) 11.68 +2.46%
ISE Sentiment 103.00 -51.18%
US Dollar 90.49 +.03%
CRB 310.08 +2.05%

Futures Spot Prices
Crude Oil 59.65 +1.53%
Unleaded Gasoline 170.00 +3.12%
Natural Gas 7.41 +3.33%
Heating Oil 175.30 +2.45%
Gold 423.60 -1.33%
Base Metals 118.88 +.47%
Copper 150.90 +2.34%
10-year US Treasury Yield 4.09% +1.34%

Leading Sectors
Oil Service +2.52%
Energy +2.27%
Retail +1.95%

Lagging Sectors
Tobacco -.50%
Airlines -1.12%
Gold & Silver -2.63%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet, Retail and Medical longs. I trimmed existing shorts today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is very light. Measures of investor anxiety are mixed. Today’s overall market action is positive as small-caps are once again outperforming on US dollar strength and healthy economic data. I expect US stocks to trade mixed-to-higher into the close as short-covering and bargain hunting more than offsets higher energy prices.