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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Earnings of Note
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SCHN/1.05

Upcoming Splits
None of note

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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In Play

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.

Today's Headlines

Bloomberg:
- Boston Scientific shares are rising today as analysts said the company gained legal bargaining power in patent disputes with Johnson & Johnson after a jury’s verdict on competing heart stents.
- Iraq’s Constitutional Drafting Committee today formally increased the number of Sunnis in the organization from two to 15, ending months of political infighting which threatened to delay the drafting process.
- GM extended its “employee-discount” promotion after the program led to the biggest sales month in 18 years, putting pressure on Ford Motor to match the incentive or risk losing more market share.
- US Treasuries are falling as a government report showed factory orders in May increased by the most in a year.
- Crude oil is rising, approaching $60/bbl., as Tropical Storm Cindy in the Gulf of Mexico disrupted the arrival of shipments to the US.

CNBC:
- The European Commission is considering whether to open an in-depth, four-month probe into plans by Procter & Gamble to buy Gillette.

Wall Street Journal:
- US satellite operator PanAmSat Holding aims to sign joint ventures and acquire spacecraft launched by smaller rivals to expand its capabilities in orbit.
- Dell is shaking up sales of computers in China by selling directly to consumers over the Internet.
- Career Launcher India Ltd. and a handful of other Indian companies are starting to offer online coaching in math and other subjects to US residents.
- Private-equity firms are raising billions of dollars to invest in Asia, but some investors say too much cash is chasing too few transactions.
- European Union ethics and disclosure laws are weak enough to let legislators influence debate without their connections to the companies involved being disclosed.
- IBM said it has started an industry organization to develop a plan for better ways of protecting data from hackers and mistakes.

NY Times:
- US airlines, whose domestic profit has been cut by fare competition and high oil prices, are benefiting from high demand and ticket prices for international flights.

Denver Post:
- Qwest Communications has introduced a Web site in Spanish as part of an effort to cater to the 5 million Hispanic consumers in its territory.

AdAge.com:
- McDonald’s may introduce more fashionable uniforms to build pride among its younger workers.

Factory Orders Rise on Commercial Aircraft Demand

- Factory Orders for May rose 2.9% versus estimates of a 3.0% gain and a downwardly revised .7% increase in April.

BOTTOM LINE: US factory orders rose by the largest amount in a year, due mainly to a surge in commercial aircraft orders. However, demand for business equipment declined for a third month in four. As well, orders for non-defense capital goods excluding aircraft, a measure of future business investment, fell 2.5% in May after gaining 1.7% in April. I continue to believe manufacturing will remain mixed-to-weaker over the near-term. However, strong consumer spending boost acitivity over the intermediate-term.

Links of Interest

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