Stocks Lower into Final Hour on North Korea Worries and Rising Long-term Rates

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semi longs and Retail longs. I added (IWM) and (QQQQ) shorts on the open and also added to my (TLT) long and a few existing shorts, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is lower and volume is below average. The rise in the 10-year yield and North Korea's missile tests are pressuring stocks. The market's reaction appears overdone to me. North Korea's missile test was widely expected. ADP's(ADP) projection that 368,000 new jobs were created in June vs. estimates of 160,000 is suspect, in my opinion. I will be very surprised, based on my analysis, if the job market is that strong. I expect US stocks to trade modestly higher into the close from current levels on short-covering, stabilizing long-term rates and bargain hunting.

Today's Headlines

Bloomberg:
- Yale University’s handling of federal grants has come under scrutiny from three government agencies who have subpoenaed school documents going back 10 years.
- Atlantic City’s casinos shut down for the first time in their 28-year history today, casualties of a budget impasse in New Jersey’s state capitol.
- US Treasury notes fell after a private report estimated that US companies added 368,000 jobs last month, the most since at least 2001.
- Use of mercury in vaccines doesn’t cause autism among school-aged children, a study says.
- Ken Lay, who built Enron Corp. into the world’s largest energy trader and was convicted of the fraud that led to its collapse, died today near Aspen, Colorado at the age of 64.
- Marvell Tech’s(MRVL) accounting is being examined by the SEC, and Quest Software(QSFT) will restate six years of results.
- Natural gas is falling another 5% in NY on ample inventories and reduced demand for the power-plant fuel.

Wall Street Journal:
- US labor unions are taking longer to renegotiate contracts as their bargaining power has weakened and employer resistance has increased.
- Citigroup(C), Wachovia Corp.(WB) and other US banks are turning to hybrid capital to raise funds for mergers and acquisitions or stock buybacks.
- Caterpillar(CAT) plans to double the size of its engine refurbishing unit over the next four years to ease its cyclical earnings pattern.

NY Post:
- NYC may allow falshier and more creative advertising on trash cans, taxis, subways and bus shelters under a contract with CBS Outdoor.

NY Times:
- The UN ban on exporting most wild caviar that was put in place this year, effectively taking beluga caviar off restaurant menus, has proved to be a boon to California sturgeon farms.
- A NYC gem lab hopes to persuade dealers to use certificates it issues to track sales of individual diamonds and guarantee buyers aren’t getting gems traded to support wars or terrorism.

Financial Times:
- Western banks may generate little or no profit by 2010 in credit cards in China, citing a study by Lafferty Group.

Factory Orders Rise More Than Estimates

- Factory Orders for May rose .7% versus estimates of a .1% increase and a 2.0% fall in April.

BOTTOM LINE: Factory orders in the US rose more than forecast in May, led by demand for business equipment that may keep the economy from slowing too much, Bloomberg reported. Excluding aircraft and other transportation equipment, orders gained 1.2%. Orders for capital goods excluding aircraft, a gauge of future business spending, rose .5% versus a 2.1% decline in April. The inventory-to-shipments ratio fell to 1.15 months, matching the record low set in December. I expect factory orders to continue to decelerate to average levels over the intermediate-term.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- North Korea fired at least six missiles over the Sea of Japan today, defying demands by the US, China, Japan, South Korea and Russia to refrain from such tests.
- The space shuttle Discovery blasted off with a roar to rival any fireworks show as NASA carried out its first-ever Independence Day launch.
- The yen fell to a record low versus the euro and dropped against the dollar after Japan said North Korea fired missiles over the Sea of Japan.
- Oracle Corp.(ORCL) plans to acquire companies in Asia to grab market share from SAP AG(SAP).

Financial Times:
- EBay Inc.(EBAY) is attempting to build software tools that help Internet bloggers insert product listing into their own Web sites.

Australian:
- Burma’s military junta has attempted to buy nuclear weapons technology from North Korea in an alliance that presents a new threat to regional security.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 indicated -.21%.
NASDAQ 100 indicated -.28%.

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Earnings of Note
Company/EPS Estimate
- None of note

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- (INTU) 2-for-1
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Economic Releases
10:00 am EST
- Factory Orders for May are estimated to rise .1% versus a 1.8% decline in April.

BOTTOM LINE: Asian indices are mostly lower, weighed down by exporting stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher on Bargain Hunting

Indices
S&P 500 1,280.19 +.79%
DJIA 11,228.02 +.70%
NASDAQ 2,190.43 +.84%
Russell 2000 730.80 +.85%
Wilshire 5000 12,906.50 +.76%
S&P Barra Growth 590.89 +.72%
S&P Barra Value 687.75 +.85%
Morgan Stanley Consumer 613.66 +.37%
Morgan Stanley Cyclical 831.85 +.34%
Morgan Stanley Technology 498.47 +.95%
Transports 4,974.91 +.93%
Utilities 418.46 +1.09%
Put/Call .89 -3.26%
NYSE Arms .97 -36.90%
Volatility(VIX) 13.05 -.23%
ISE Sentiment 66.00 -38.32%
US Dollar 85.14%
CRB 348.13 +.50%

Futures Spot Prices
Crude Oil 73.93 unch.
Unleaded Gasoline 221.88 unch.
Natural Gas 6.10 unch.
Heating Oil 202.86 unch.
Gold 616.00 unch.
Base Metals 216.69 -.44%
Copper 335.50 unch.
10-year US Treasury Yield 5.14% +.24%

Leading Sectors
Gold & Silver +4.07%
I-Banks +1.83%
REITs +1.30%

Lagging Sectors
Homebuilders -.03%
Gaming -.06%
Retail -.08%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- The US dollar climbed the most in a week against the yen.
- NASA workers spotted a small cavity in the foam insulation in the giant fuel tank of the space shuttle Discovery, but officials plan to go ahead with liftoff tomorrow.
- Renault SA and affiliate Nissan Motor authorized their chief executive officer, Carlos Ghosn, to begin “exploratory” talks with GM(GM) on a possible alliance.

BBC:
- Al-Qaeda sympathizers have attempted to infiltrate MI5, the UK’s internal security service, citing unidentified government sources.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Medical longs and Computer longs. I did not trade, thus leaving the Portfolio 100% net long. The tone of the market was positive as the advance/decline line finished higher, almost every sector rose and volume was light. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was bullish. The S&P 500 closed back above its 50-day moving average, which many had pointed to as a substantial point of resistance after last week's sharp gains. Moreover, the ISE Sentiment Index made another all-time low of 36.0 this morning, a very depressed level, which is a big positive. The 10-year also maintained last week's gains, which was also a positive. The main negative for today was the fact that commodity stocks paced the advance. However, a number of market-leading growth stocks finished with nice gains, as well. Have a great July 4th holiday! Thanks for reading.