Stocks Finish Near Highs as Long-Term Interest Rates Fall and Earnings Exceed Estimates

Indices
S&P 500 1,243.72 +.56%
DJIA 10,705.55 +.64%
NASDAQ 2,198.44 +.56%
Russell 2000 683.04 +1.21%
DJ Wilshire 5000 12,415.86 +.66%
S&P Barra Growth 597.02 +.57%
S&P Barra Value 642.24 +.55%
Morgan Stanley Consumer 592.82 +.92%
Morgan Stanley Cyclical 767.51 +.92%
Morgan Stanley Technology 504.61 +.15%
Transports 3,817.06 +1.47%
Utilities 397.26 +.84%
Put/Call .78 -1.27%
NYSE Arms 1.01 +14.91%
Volatility(VIX) 10.52 +1.54%
ISE Sentiment 148.00 -16.85%
US Dollar 89.34 -.43%
CRB 310.53 +1.12%

Futures Spot Prices
Crude Oil 60.09 +1.66%
Unleaded Gasoline 173.28 +.99%
Natural Gas 7.73 +1.82%
Heating Oil 164.50 +1.72%
Gold 433.60 +.07%
Base Metals 126.02 +.42%
Copper 164.65 -.15%
10-year US Treasury Yield 4.18% -1.53%

Leading Sectors
HMOs +3.45%
Gaming +2.58%
Homebuilders +2.36%

Lagging Sectors
Software +.08%
Hospitals +.01%
Computer Hardware -.36%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on PCO, SYMC, MERQ, MSFT and STN.
- Reiterated Underperform on UST, CNA and UALAQ.

Banc of America:
- Downgraded MOT to Neutral.

Afternoon/Evening Headlines
Bloomberg:
-

Financial Times:
- Cnooc’s executives and directors met yesterday to consider whether to raise the company’s offer for Unocal to about $20 billion.
- US Treasuries rose on speculation yields near three-month highs are excessive given the outlook for tame inflation.

CNet News.com:
- Microsoft won contracts to supply the UK government’s HM Revenue & Customs agency and Department for Works and Pensions with Windows XP Software.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Medical, Medical Information Systems and Retail 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 slightly above average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was positive. The AAII % Bulls rose to 57.52% this week from 41.18% the prior week; this is back near the above-average levels seen two weeks ago. Likewise, the % Bears fell to 17.65% from 27.45% the prior week; this is back to below-average levels. I believe sentiment will remain mostly elevated through year-end.

Stocks Higher Mid-day as Long-Term Rates Decline

Indices
S&P 500 1,243.50 +.54%
DJIA 10,693.61 +.53%
NASDAQ 2,195.69 +.43%
Russell 2000 679.45 +.68%
DJ Wilshire 5000 12,404.05 +.56%
S&P Barra Growth 596.73 +.52%
S&P Barra Value 641.99 +.51%
Morgan Stanley Consumer 593.00 +.95%
Morgan Stanley Cyclical 766.37 +.77%
Morgan Stanley Technology 504.54 +.14%
Transports 3,804.11 +1.12%
Utilities 396.65 +.68%
Put/Call .77 -2.53%
NYSE Arms .90 +1.48%
Volatility(VIX) 10.42 +.58%
ISE Sentiment 145.00 -18.54%
US Dollar 89.29 -.49%
CRB 309.72 +.85%

Futures Spot Prices
Crude Oil 59.30 +.32%
Unleaded Gasoline 171.50 -.05%
Natural Gas 7.60 +.17%
Heating Oil 162.30 +.36%
Gold 433.60 +.70%
Base Metals 126.02 +.42%
Copper 164.90 +1.35%
10-year US Treasury Yield 4.19% -1.30%

Leading Sectors
HMOs +3.55%
Gaming +2.35%
Homebuilders +2.13%

Lagging Sectors
Energy -.10%
Gold & Silver -.26%
Oil Service -.35%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Semiconductor, Medical and Medical Information Systems longs. I added to my RIG short and AUO long this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is about average. Measures of investor anxiety are mostly higher. Today’s overall market action is positive considering the rise in energy prices. The fact that long-term rates are falling ahead of what will likely be a very good GDP report is a big positive and is the main catalyst for today's move higher in stocks.

Today's Headlines

Bloomberg:
- New money placed in hedge funds fell 60% in the second quarter as investment returns lagged the overall stock market, according to Hedge Fund Research.
- Italian Prime Minister Silvio Berlusconi said the euro has been a “ripoff” for consumers, sharpening his criticism of European policymakers.
- DaimlerChrysler AG CEO Schrempp will step down Dec. 31.
- NBC Universal may buy DreamWorks SKG.
- US Treasuries maturing in 10 years or more are rising on speculation yields near the high end of their three-month range are excessive given the outlook for tame inflation.
- The Irish Republican Army today said it will end its 36-year armed campaign and use political means to achieve the goal of a united Ireland.

Wall Street Journal:
- US and other overseas investors are pouring money into China, in the hope of capitalizing on Chinese demand for mobile phone-related and other products.
- The US energy bill nearing approval may spell goods news for the nuclear-power industry, as it contains $1.5 billion in subsidies for construction of nuclear plants.
- An Idaho county filed suit against several companies, claiming their hiring of illegal immigrants burdens the county’s social services system.
- The departure of two of the biggest unions from the AFL-CIO, the largest alliance of US labor unions, has left some members disillusioned with what they say is little difference between the leaders of the contending factions.

NY Post:
- Federated Department Stores may close as many as 65 stores to help win approval of its $11 billion purchase of May Department Stores, citing Banc of America.

Washington Post:
- US environmental regulators will be barred from using information that is gathered by exposing human volunteers to toxic chemicals until they come up with better practices.

Jobless Claims Remain Low

- Initial Jobless Claims for last week rose to 310K versus estimates of 318K and 305K the prior week.
- Continuing Claims rose to 2603K versus estimates of 2591K and 2571K prior.
- The Help Wanted Index for June rose to 38 versus estimates of 38 and a reading of 37 in May.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment rose to 310,000, suggesting employers are adding workers as manufacturing rebounds and retail remains strong. The four-week moving-average of claims fell to 318,250 from 318,500. The insured unemployment rate, which tracks the US jobless rate, stayed at 2.0%. Payroll gains have averaged 181,330 this year versus 183,000 for all of 2004.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- The US government announced it agreed on a "framework" for a partnership to address climate change with China, Australia and three other countries that will help companies find a "profitable way" to cut greenhouse gases.
- US negotiators will today begin drafting principles that may lead to an accord with North Korea over the destruction of the communist state's nuclear weapons, said a senior official.
- The US House of Representatives approved the Central American Free Trade Agreement, overcoming objections by unions, sugar producers and textiles makers in what became the most contentious trade fight in Congress in a decade.

London-based Times:
- A record number of hedge funds were started up in the first six months of 2005, attracting over $13 billion in new capital, citing a survey by data provider Eurohedge.
- Morgan Stanley CEO Mack plans to turn around the bank's Dean Witter brokerage arm by cutting jobs and pursuing wealthier clients.

Financial Times:
- Cnooc Ltd. is considering a pledge to sell all Unocal's US assets, including

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MUR, DO, MCK, MWV, SBUX and WLP.
- Reiterated Underperform on GM and APU.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 indicated -.02%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
Company/EPS Estimate
ATVI/-.02
AET/1.08
AMT/-.08
ABX/.08
BZH/2.05
CELG/.14
DOW/1.22
XOM/1.24
KLAC/.48
MRO/1.57
MFE/.25
MERQ/.33
MGM/.43
NOC/.88
PD/4.25
SYMC/.25
WFMI/.57
XMSR/-.70

Upcoming Splits
None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 318K versus 303K the prior week.
- Continuing Claims are estimated to rise to 2591K versus 2577K prior.

10:00 am EST
-The Help Wanted Index for June is estimated to rise to 38 versus a reading of 37 in May.

BOTTOM LINE: Asian indices are higher on more earnings optimism in the region. I expect US equities to open modestly higher on gains in Asia and strong earnings reports. The Portfolio is 100% net long heading into the day.