Stocks Strong Mid-day, Boosted by Earnings Optimism in Tech

Indices
S&P 500 1,226.34 +.44%
DJIA 10,629.68 +.52%
NASDAQ 2,168.02 +1.09%
Russell 2000 666.99 +1.28%
DJ Wilshire 5000 12,235.16 +.57%
S&P Barra Growth 588.52 +.64%
S&P Barra Value 634.02 +.31%
Morgan Stanley Consumer 584.54 +.15%
Morgan Stanley Cyclical 752.18 +1.25%
Morgan Stanley Technology 504.36 +1.43%
Transports 3,637.05 +.12%
Utilities 393.49 +.37%
Put/Call .78 -24.27%
NYSE Arms 1.04 -21.60%
Volatility(VIX) 10.50 -2.51%
ISE Sentiment 193.00 +18.40%
US Dollar 89.89 +.28%
CRB 303.74 -1.04%

Futures Spot Prices
Crude Oil 57.05 -.47%
Unleaded Gasoline 165.10 +.22%
Natural Gas 7.54 -1.46%
Heating Oil 163.10 -.04%
Gold 420.40 -.14%
Base Metals 122.83 -.28%
Copper 158.65 +1.28%
10-year US Treasury Yield 4.19% -.74%

Leading Sectors
Papers +4.62%
Steel +3.49%
Oil Service +2.08%

Lagging Sectors
Drugs -.37%
Oil Tankers -.74%
HMOs -1.61%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet, Semiconductor, Networking and Homebuilding longs. I exited my SPY short this morning and added AAPL long, thus leaving the Portfolio 100% net long. I am using a $40 stop-loss on this new position. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Measures of investor anxiety are lower. Today’s overall market action is positive considering the market’s overbought state and the outperformance by Tech stocks. The Johnson Redbook Same-store-sales Index rose 4.2% year-over-year last week vs. a 4.2% rise the prior week. This is the first time weekly sales have exceeded 4.0% for three consecutive weeks since June 2004. This week’s gain is also up from a 1.5% increase in late April and the eleventh week in a row the index has exceeded 3%. I expect stocks to trade mixed-to-higher into the afternoon on short-covering and a decline in long-term rates.

Today's Headlines

Bloomberg:
- The US dollar rose the most in a week against the euro and climbed to the highest in more than a year versus the yen on speculation rising interest rates will attract foreign investors to US assets.

Wall Street Journal:
- The world’s steel industry has quickly turned from supply shortages to overproduction, leading to a flood of mergers and acquisitions.
- FCC chairman Kevin Martin says his top goal is to broaden access to high-speed Internet services.
- The US Congress may extend daylight-savings time for two months, starting it earlier in the year, and ending it later in order to save energy.
- Starbucks became a competitor in the music business since it started selling selected music.
- Trading of convertible bonds has gone through its worst six-month spell in 15 years.

NY Times:
- President Bush is moving faster than expected on his selection process for a Supreme Court nominee and may make an announcement “within the next few days.”
- Fruit and vegetables will have their identifying details tattooed on with lasers, eliminating the need for stickers.

Washington Post:
- The Bush administration wants to introduce performance-based compensation for the 1.8 million civilian federal employees by 2010.

NY Post:
- McDonald’s will introduce three premium chicken sandwiches today, reflecting a leaner American diet.
- Federated’s Macy’s is expanding the American Rag brand to 300 stores in an effort to lure teenagers from Abercrombie & Fitch and American Eagle Oufitters.

Reuters:
- Federal Reserve Bank of St. Louis President William Poole said it’s reasonable for financial markets to expect policy makers will lift interest rates further.

Interfax:
- Russian GDP probably expanded 5.6% in the first half of the year, slower than 7.9% in the same period last year.

Housing Backlogs at 26-year High

- Housing Starts for June were 2004K versus estimates of 2050K and 2004K in May.
- Building Permits for June were 2111K versus estimates of 2085K and 2062K in May.

BOTTOM LINE: US housing starts were unchanged in June, suggesting builders may have paused to finish homes already under construction, Bloomberg reported. Backlogs jumped to a 26-year high, while permits rose. Backlogs rose 7.8% to 241,000 units at an annual rate, up 19% from June 2004. Housing starts will likely increase near-term as builders try to work off the record backlog amid an all-time high home sales pace in the first half. I continue to believe housing will remain strong by historic standards with price appreciation moderating but not plunging.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Lester Crawford won confirmation today as permanent commissioner of the FDA.
- The NY Merc, the world's biggest energy market, may have a second bidder for a stake in the company.
- The US dollar may strengthen in Asia after the interest-rate gap between 10-year US and German bonds widened to the most in five years.
- Hurricane Emily moved into the Gulf of Mexico today after pounding the island of Cozumel and the Yucatan peninsula and forcing the evacuation of thousands of people on the Mexican mainland.

Financial Times:
- Reducing information technology costs may cost companies more money due to increased maintenance and repair expenses, citing an Accenture Ltd. survey.
- China will this week announce its new policy on the steel industry, as it tries to curb overcapacity.
- Colombia will ask President Bush to commit to a long-term extension of a drug eradication program in the country.

Daily Yomiuri:
- Japan wants North Korea to abandon all nuclear development, including reactors used to generate electricity, and will ask the US, China, South Korea, and Russia next week to back a blanket ban.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on BAC, MMM and PKG.
- Reiterated Underperform on BA, FHN and AVB.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated +.18%.
NASDAQ 100 indicated +.19%.

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Earnings of Note
Company/EPS Estimate
ADTN/.25
ASD/.86
AMGN/.72
AVP/.66
BSX/.48
CDWC/.75
F/.33
GILD/.36
FSL/.24
FCX/.87
FRX/.50
INTC/.32
JNJ/.91
JNPR/.17
MER/1.08
MOT/.25
NVLS/.21
RSH/.33
STT/.68
WB/1.05
WFC/1.12
YHOO/.13

Upcoming Splits
None of note

Economic Releases
8:30 am EST
- Housing Starts for June are estimated to rise to 2050K versus 2009K in May.
- Building Permits for June are estimated to rise to 2085K versus 2050K in May.

BOTTOM LINE: Asian indices are mostly higher, as Korean shares approach a 10-year high. I expect US equities to open modestly higher, led by tech shares. The Portfolio is 75% net long heading into the day.

Stocks Finish Near Lows on Light Volume

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BOTTOM LINE: The Portfolio finished lower today on losses in my Networking, Semiconductor and Medical longs. I took profits in a long in the afternoon and added SPY short, thus leaving the Portfolio 75% net long. Today's action wasn't too bad considering recent gains, but the move higher in long-rates and earnings releases may cause some turbulence near-term. I am posting an abbreviated version of the closing report due to a scheduling conflict.