Wednesday, March 07, 2007

Stocks Slightly Higher into Final Hour as Sub-prime, Emerging Market Concerns Subside

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mixed as the advance/decline line is neutral, sector performance is mixed and volume is above average. Tractor Supply (TSCO) is breaking to a five-month high today. The stock is a play on the benefits related to rising ethanol production, an increase in auto production later this year and improving housing construction next year. Management has been very conservative in its forward guidance. Its valuation is below its historical average. It isn't too late to buy, in my opinion. I remain long the stock. Despite the apocalyptic projections for flash memory and recent market turbulence, SanDisk (SNDK) continues to display relative strength. It is rising .6% today, recouping all its recent losses. I am not long the stock, but its recent strength is very interesting and could bode well for the semi sector.I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Take-Two Interactive Software(TTWO) shareholders formed a group to replace the board and overthrow management of the video-game maker after four quarters of losses. Shares of Take-Two surged 19% after investors including Steven Cohen’s SAC Capital Advisors LLC and David Shaw’s DE Shaw hedge funds announced the plan today in a regulatory filing. 43% of the float is short.
- Fremont General and New Century Financial shares rose as mortgage-lending stocks rebounded for a second day, buoyed by a report showing an increase in home-loan refinancing and rising prospects for takeovers.
- Hedge funds run by Man Group Plc, Winton Capital Management and Transtrend BV were among those battered during last week’s global equity market decline.
- Nat gas futures are falling in NY on forecasts showing much warmer weather is on the horizon.
- Oil is rising $1.10/bbl. after a US government report showed supplies fell more than estimates.
- Coffee prices in NY fell to a four-month low after Brazil, the largest grower, reported exports jumped 14% in February, more than analysts forecast.
- Exxon Mobil(XOM) plans to spend almost $21 billion exploring for oil and expanding refineries this year. The company plans to begin pumping oil or gas from 20 projects in the next three years after seven start-ups in 2006.

Wall Street Journal:
- Dieter Zetsche, DaimlerChrysler’s(DCX) CEO, confirmed that the company is in talks with General Motors(GM) about sharing development costs of sport-utility vehicles.
- A Wal-Mart Stores Inc.(WMT) program to get employees to adopt one product as their favorite for the year and give it special shelf space has helped improve marketing.
- A group of media activists is blocking proposals by the FCC and media companies to ease rules on how many properties media companies can control in a local market.

NY Times:
- Some US companies are trying to develop a method to convert algae into fuel, with one California start-up, LiveFuels Inc., aiming to annually produce 20,000 gallons of fuel per acre of algae. The company is among a large group of alternative energy start-ups seeking backing from venture capitalists. Investments in clean energy by venture capitalists more than doubled to $2.4 billion in 2006.
- Sony Corp.(SNE) plans to introduce today an upgraded online service for its PlayStation game consoles in the US.
- Sirius Satellite Radio(SIRI) and XM Satellite Radio(XMSR) must persuade the FCC that prices wouldn’t increase if the companies merged.

LA Times:
- Sam Zell, the Chicago billionaire and real estate investor, is a “strong contender” to buy Tribune Co.(TRB).

Reuters:
- Former Fed Chairman Greenspan said the decline in US home sales has reached a bottom, citing a speech at a technology conference in NY.

Dow Jones:
- Hiroshi Watanabe, Japan’s vice finance minister for international affairs, said the yen’s weakness before its recent rally didn’t result from the carry trade.

Chronicle of Higher Education:
- Women have earned more science and engineering undergraduate degrees than men since 2000, and the number awarded to women has increased every year since 1966.

InformationWeek:
- A US Federal Aviation Administration official is considering choosing Google Inc.(GOOG) online applications instead of Microsoft Corp.’s Windows Vista operating system.

Financial Times:
- The rate of corporate defaults is unlikely to rise until mid-2008 because companies can refinance their way out of trouble, citing a presentation by Ernst & Young LLP in London. The annual default rate on mezzanine debt, which ranks after senior lenders in a default, was less than 2% in the final quarter last year.

Economic Releases

- None of note

Links of Interest

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Tuesday, March 06, 2007

Wednesday Watch

Late-Night Headlines
Bloomberg:
- The US and North Korea are on the “right track” for normalizing relations, Assistant Secretary of State Christopher Hill said after completing eight hours of talks with North Korean Vice Foreign Minister Kim Kye Gwan.
- Australia’s central bank today kept its benchmark interest rate unchanged at a six-year high amid signs inflation and the global economy are slowing.
- Rio Tinto Group(ETP), the world’s second-largest miner by market value, signaled to analysts it was in “no rush” to acquire assets, Credit Suisse Group analysts said.
- Australia’s economy grew 1% from the third quarter, when it expanded .3%. Estimates were for a .5% gain.
- The perceived risk of owning low-rated sub-prime mortgage bonds decreased for a fourth straight day. An index of credit-default swaps on 20 securities rated BBB- and created in the second half of 2006 rose about 3% to 71.14 yesterday, according to Markit Group Ltd. The index hit a low of 62.25 five days ago.

Late Buy/Sell Recommendations
Citgroup:
- Reiterated Buy on (EBAY), target $39.
- A number of homebuilders presented at out industrial manufacturing conference. Overall, the builders did in fact indicate that cancellation rates have dropped in recent months, which is an encouraging sign. Hovnanian(HOV), Beazer(BZH) and MDC Holdings(MDC) indicated that they have started to see signs of stabilization in their home prices net of all incentives. Intriguingly, Beazer also indicated that it was attempting to implement modest price increases in several locations and was finding that doing so helped to create a sense of urgency on the part of home buyers. Finally, Meritage Homes(MTH) expects cancellation rates to drop “dramatically” in 1Q07, based on data from the first two months of the year.

Night Trading
Asian Indices are +1.0% to +1.50% on average.
S&P 500 indicated -.10%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
- (AEOS)/.66
- (BJ)/.66
- (FLML)/-.38
- (FL)/.68
- (GCO)/1.31
- (HDL)/.64
- (MATK)/.12
- (MW)/.77
- (MIK)/1.10
- (SKS)/.22
- (TLB)/.00
- (TIVO)/-.36

Upcoming Splits
- None of note

Economic Releases
8:15 am EST
- ADP Employment Change for December is estimated at 100,000 versus 126K in January.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,800,000 barrels versus a 1,421,000 barrel build the prior week. Gasoline supplies are expected to fall by -1,500,000 barrels versus a -1,940,000 barrel decline the prior week. Distillate inventories are estimated to fall by -2,750,000 barrels versus a -3,787,000 barrel drawdown the prior week. Finally, Refinery Utilization is expected to fall by -.30% versus a .76% increase the prior week.

2:00 pm EST
- The Fed’s Beige Book

3:00 pm EST
- Consumer Credit for January is estimated at $7.0 billion versus $6.0 billion in December.

BOTTOM LINE: Asian indices are higher, boosted by technology and metal shares 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 Rise Most Since July on Heavy Volume

Indices
S&P 500 1,395.41 +1.55%
DJIA 12,207.59 +1.30%
NASDAQ 2,385.14 +1.90%
Russell 2000 778.88 +2.48%
Wilshire 5000 14,067.03 +1.63%
Russell 1000 Growth 550.68 +1.51%
Russell 1000 Value 804.08 +1.62%
Morgan Stanley Consumer 687.59 +1.05%
Morgan Stanley Cyclical 929.77 +1.55%
Morgan Stanley Technology 557.87 +1.94%
Transports 4,768.37 +.97%
Utilities 474.77 +1.29%
MSCI Emerging Markets 108.94 +2.40%

Sentiment/Internals
Total Put/Call 1.22 -27.38%
NYSE Arms .32 -85.70%
Volatility(VIX) 15.96 -18.70%
ISE Sentiment 95.0 +4.40

Futures Spot Prices
Crude Oil 60.69 +1.03%
Reformulated Gasoline 185.03 +.30%
Natural Gas 7.47 +2.98%
Heating Oil 174.80 +1.35%
Gold 649.20 +1.56%
Base Metals 234.16 +2.63%
Copper 274.40 +2.75%

Economy
10-year US Treasury Yield 4.52% + 2 basis points
US Dollar 84.03 -.17%
CRB Index 306.90 +.69%

Leading Sectors
Steel +3.84%
REITs +3.49%
I-Banks +2.59%

Lagging Sectors
Insurance +.88%
Foods +.71%
Hospitals +.49%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US stocks broke a weeklong slump and posted their biggest gains since July after Treasury Secretary Henry Paulson eased concern that rising mortgage defaults will undermine the economy.
- Comerica Inc.(CMA), a financial services company with roots stretching back more than 150 years in Detroit and strong ties to the city’s slumping auto industry, will move its headquarters and about 200 jobs to Dallas.
- Soybean and corn prices in Chicago fell, erasing earlier gains, on speculation record crops in South America will reduce overseas demand for supplies in the US, the world’s largest grower and exporter.

Financial Times:
- Google Inc.(GOOG) said rivals’ criticism of it over copyright are being made “in the context of a business negotiation,” citing CEO Eric Schmidt. “I have learned that as part of being a player in the media industry, the way one negotiates is everything is leaked and you’re sued to death,” Schmidt said. So lawsuits “appear to be in the course of doing normal business.”

Nikkei English News:
- Sony Corp.(SNE) will delay reporting its earnings for the fiscal year ending March 31 because tougher US accounting rules require non-US companies to complete more paperwork.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical longs, Internet longs, Retail longs and Telecom longs. I covered the remainder of my (IWM)/(QQQQ) hedges and took some profits in my (EEM) short in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive as the advance/decline line finished substantially higher, every sector rose and volume was heavy. Measures of investor anxiety were mixed into the close. Today's overall market action was very bullish. The Fed's Plosser spoke to reporters after his speech. He said that he doesn't see sub-prime problems spilling over to the rest of the economy. He reiterated that the Fed is monitoring the situation carefully. Finally, he said he doesn't see the signs of a liquidity crisis developing. My intraday gauge of investor angst finished at relatively high levels given today’s sharp rally. Nikkei futures are indicating about an 81-point move higher on the open in Japan. The gains in the Broker/Dealer Index today were a big positive, given their exposure to sub-prime and emerging markets, as the stocks finished near session highs. Moreover, the upside trading collars were in effect for most of the final hour of trading. I suspect we could see more strength in the U.S. tomorrow morning from further gains in Asia and short-covering.