Wednesday Watch

Late-Night Headlines
Bloomberg:
- Crude oil is rising $.97/bbl. in NY on investment fund speculation of a confrontation in the Persian Gulf between US or British forces and Iran. US military and State Department officials said they had no information about a naval incident between Iran and the US. There is no US military activity in the Gulf outside of previously scheduled exercises, US Navy Commander Kevin Aandahl, a spokesman for the Fifth Fleet in Bahrain, said. “I’ve seen this happen before where there’s a totally unsubstantiated rumor” that has an effect on world markets, he said.
- China’s failure to curb investment may lead to overcapacity and falling prices, turning its expansion into a “curse,” the Asian Development Bank said.
- The yen strengthened on speculation Japanese investors are bringing funds back before the financial year ends on March 30. Gains may prove short-lived on speculation newly established mutual funds will buy higher-yielding overseas assets when the financial year begins next week.
- Kevin Bannon, who helps oversee $120 billion as chief investment officer at Bank of New York, see US economic growth of 2.5% and says stocks look cheap.

San Francisco Chronicle:
- San Francisco became the first US city to ban Walgreen Co.(WAG), Rite Aid Corp.(RAD) and other chains from using petroleum-based plastic checkout bags. The city’s board of supervisors voted 10-1 today to require that the stores use biodegradable plastic or recyclable paper bags starting in about six months for 50 large supermarkets and in a year for chain drugstores.

London-based Times:
- General Motors(GM) will not take part in the first round of bids for Chrysler. Canadia auto-parts supplier Magna Intl., Cerberus Capital Management LP and a group led by Blackstrone Group LP and Centerbridge Capital Partners LLC may submit bids in the first round.

AFP:
- Germany, which holds the presidency of the European Union, has told Iran it must give the UK consular access to the 15 British sailors and marines it has been holding since March 23.

Late Buy/Sell Recommendations
Citigroup:
- Commentary on overall handset demand has been constructive thus far. Brightpoint(CELL) expects global volumes for 1Q07 to decline around 10% Q-Q, at the high end of its 10%-15% Q-Q decline forecast. They noted that February turned out better than January(A surprise given the sluggish start to the month) and March looks good industry-wide.

CSFB:
- Reiterated Outperform on (GS), raised target to $225-$235.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated -.27%.
NASDAQ 100 indicated -.33%.

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Company/EPS Estimate
- (PAYX)/.35
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Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Durable Goods Orders for February are estimated to rise 3.5% versus a -8.7% decline in January.
- Durables Ex Transportation for February are estimated to rise 1.8% versus a -4.0% decline in January.

10:30 am EST
Bloomberg consensus estimates call for a weekly crude oil build of 2,025,000 barrels versus a 3,924,000 barrel increase the prior week. Gasoline supplies are expected to fall by -2,050,000 barrels versus a -3,450,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,500,000 barrels versus a -1,710,000 barrel decrease the prior week. Refinery Utilization is expected to rise by .5% versus a .74% increase the prior week.

BOTTOM LINE: Asian indices are mixed as slight gains in energy shares are offsetting slight losses in automaker shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Lower on Economic Concerns and Profit-taking

Indices
S&P 500 1,428.61 -.62%
DJIA 12,397.29 -.58%
NASDAQ 2,437.43 -.74%
Russell 2000 802.36 -.81%
Wilshire 5000 14,420.19 -.61%
Russell 1000 Growth 561.76 -.73%
Russell 1000 Value 826.67 -.48%
Morgan Stanley Consumer 702.25 -.96%
Morgan Stanley Cyclical 958.28 -.89%
Morgan Stanley Technology 562.65 -.38%
Transports 4,852.60 -1.15%
Utilities 501.63 -.23%
MSCI Emerging Markets 115.80 -.49%

Sentiment/Internals
Total Put/Call .95 -4.04%
NYSE Arms 1.20 +24.73%
Volatility(VIX) 13.48 +2.43%
ISE Sentiment 131.0 -14.94%

Futures Spot Prices
Crude Oil 63.01 +.16%
Reformulated Gasoline 207.20 +.26%
Natural Gas 7.50 +3.39%
Heating Oil 178.91 +.73%
Gold 662.40 -.23%
Base Metals 246.74 -.04%
Copper 304.55 -2.96%

Economy
10-year US Treasury Yield 4.61% +1 basis point
US Dollar 82.97 -.13%
CRB Index 311.85 -.13%

Leading Sectors
Biotech +.59%
Telecom +.24%
Alternative Energy +.08%

Lagging Sectors
Homebuilders -1.04%
Airlines -1.10%
Gold -1.28%

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Afternoon Recommendations
Oppenheimer:
- Rated (TWC) Buy, target $47.

Lehman Brothers:
- Rated (BSC) and (MER) Overweight.

AG Edwards:
- Rated (GOOG), (AQNT), (MNST), (YHOO), (VCLK) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Goldman Sachs’(GS) sixth buyout fund may top $20 billion, CEO Blankfein told shareholders at today’s annual meeting.
- Accenture Ltd.(ACN), the world’s second-biggest consulting firm, said profit soared. The shares rose $1 to $77.22 in after-hours trading.
- US imports of finished steel products fell 10% in February from a month earlier after rising inventories led customers to hold off placing new orders.
- Petroleo Brasileiro SA(PBR), Brazil’s state-controlled oil company, may help upgrade two Brazilian rivers to transport sugar cane-based ethanol from the country’s agricultural frontier to export markets.
- Merck’s(MRK) Vioxx painkiller didn’t contribute to an Illinois woman’s fatal heart attack in 2003, an Illinois jury decided, giving the company its 10th victory in a trial involving the drug.

Business Week:
- Beazer Homes USA(BZH), the ninth largest US homebuilder by revenue, is the target of a federal investigation into its lending and financial practices. Beazer’s mortgage arm is being probed for possible mortgage fraud by a group including the FBI, Justice Dept., Inspector General of Housing and Urban Development and IRS. The stock is falling 14% in after-hours trading.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Retail longs and Technology longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was about average. Measures of investor anxiety were above-average into the close. Today's overall market action was mildly bearish as the major averages and breadth finished lower, but off session lows. While breadth was weak today, I had an abnormal number of stocks on my monitor pages that rose. Biotech was a standout sector today, rising about 0.59%, with a number of small/mid-cap biotechs breaking out on volume. The Homebuilding Index finished 1.04% lower; however, Lennar (LEN) finished near session highs. As well, the Case-Shiller August housing futures ticked higher today to $214,400 from $214,000. The 10-year yield was stable throughout the day at 4.61%. The U.S. Dollar Index was also stable. The underlying action today was more constructive than the major averages suggest. My intraday gauge of investor angst finished at an above-average level. I suspect we will see some more short-covering and bargain-hunting into the last few days of the quarter, considering the extent to which massive hedges were put in place earlier this month.

Stocks Lower into Final Hour on Economic Concerns and Profit-taking

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs and Technology longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are lower and volume is about average. Johnson Redbook weekly retail sales surged 3.9% last week vs. a 3.7% gain the prior week and 2.4% during this week last year. This is well above the long-term average and the highest weekly increase since the last week of September last year. Weekly retail sales have gained 3.4%, 3.7% and 3.9% over the last three weeks vs. weekly gains of around 2.75% the prior 3 months. In my opinion, this shows that while consumers are more concerned about the future, they feel better about their present situation, which is what this morning's confidence report showed. Anecdotally, I went to one of the largest malls in the country over the weekend. It was sunny and 75 degrees, yet the mall was packed and people were carrying bags. I continue to believe monthly retail sales are bouncing back sharply into the spring. Last week, I posted about the new all-time high in NYSE short interest. Last night, the Nasdaq reported that short interest also jumped to an all-time record. From mid February through mid March, short interest on the Nasdaq rose 12.1% to 7,890,000,000 shares. This was the largest monthly percentage increase since Bloomberg began tracking short interest in 1991. This is just more evidence of the very high wall of worry that was created earlier this month.

Here are the 20 Nasdaq stocks with the largest percentage increase in their short interest relative to their float from mid February through mid March:

1. LEND +34.8%
2. BLDR +23.2%
3. HCBK +22.8%
4. TTWO +18.8%
5. PRGX +16.7%
6. CPSL +16.1%
7. POSH +12.1%
8. NTRI +9.7%
9. NETL +9.2%
10. LJPC +8.7%
11. MALL +8.2%
12. VNDA+8.0%
13. ANDE +7.8%
14. ORBC +7.7%
15. PFCB +7.7%
16. CHCI +7.7%
17. BKUNA +7.5%
18. SFLY +7.4%
19. CAKE +7.1%
20. CBRL +7.0%

I expect US stocks to trade mixed-to-higher into the close on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Gasoline futures are falling 1.4%, notwithstanding concerns over Iran and low US refinery utilization. Refineries in states including California and Texas are operating at reduced rates due to “recent unit failures and fires.” The margin, or crack spread, earned by refiners for turning crude oil into gasoline and heating oil is about 54% wider than a year ago.
- UK Prime Minister Tony Blair said that efforts to release 15 British sailors and Marines seized by Iran will enter a “different phase” if negotiations fail.
- US forces in Iraq arrested two men suspected of leading a terrorist cell responsible for car bombings that have killed about 900 civilians in Iraq.
- Mark Walton, head of the world’s largest animal cloning company, sees his biotech lab in Austin, Texas, as the next frontier in food production.
- Lennar Corp.(LEN), the largest US homebuilder by revenue, said earnings fell 73% during the fiscal first-quarter. The stock is near session highs, falling .7% on the report.
- White House Press Secretary Tony Snow has been diagnosed with recurrence of cancer and the disease has spread to his liver.
- Police in Belgium, France, Luxembourg and Italy raided about 30 offices and homes today in a corruption probe aimed at European Commission employees.
- K2 Advisors LLC, a Stamford, Connecticut-based investment firm with $5.5 billion in client money allocated to hedge funds, sold a minority stake of itself to buyout firm TA Associates.
- Luxury-home values in London, the world’s most expensive city, will probably increase 20% this year as wealthy buyers compete for a shrinking number of properties, real estate company Savills Plc said.
- US consumption of renewable fuels such as ethanol and biodiesel would increase under legislation introduced today in the Senate Energy and Natural Resources Committee. The bill would mandate that 8.5 billion gallons of renewable fuels be used to replace petroleum-based fuels by next year, rising to 36 billion gallons within 9 years. The bill has bipartisan support.
- Petroleo Brasileiro SA(PBR), Brazil’s state-controlled oil company, and Eni SpA, Europe’s fourth-largest oil company, agreed to share technology for crop-based fuels production.
- Canada and Russia, the only net crude-oil exporters in the Group of Eight nations, will seek ways to promote joint energy projects that may lead to a global supply network, ministers from both countries said.
- FuelCell Enegy’s(FCEL) shares soared 20% after the Connecticut Clean Energy Fund recommended that utilities buy power from six planned projects using the company’s fuel-cell technology.
- Libya, the holder of Africa’s largest oil reserves, is prepared to sell a majority stake in its oilfield-services company to a foreign partner such as Schlumberger Ltd.(SLB) or Halliburton(HAL), to increase exploration.

Wall Street Journal:
- The SEC is to review so-called 12b-1 fees, which mutual funds charge to pay for marketing services.

NY Times:
- Senator Hillary Clinton, the would-be Democratic nominee for the presidency, is cultivazting relationships with the military to avoid criticism her husband faced during his tenure in the office. The goal is to ease voter perceptions that associate her with her opposition to the Vietnam War, and criticism of President Bush’s current campaign to liberate Iraq.

Washington Post:
- Maryland’s state senate passed a bill to ban smoking in bars and restaurants.

Financial Times:
- Thomason Financial will start selling an international news service to clients in May as part of a plan to compete more widely with Bloomberg LP and Reuters Group Plc.

Handelsblatt:
- DaimlerChrysler AG(DCX) may complete a sale of its unprofitable Chrysler division by June, citing unidentified bankers.

Xinhua News Agency:
- Crude oil output at Shengli oilfield, China’s second largest, may rise 6% this year as the field’s operator expands exploration, citing the Shengli Petroleum Administrative Bureau. The field’s 2007 crude oil output may rise to 550,000 barrels per day.

Consumer Confidence Falls from 5-year Highs

- Consumer Confidence for March fell to 107.2 versus estimates of 108.5 and 111.2 the prior month.

BOTTOM LINE: Confidence among US consumers slid this month from a five-year high as fuel prices rose and concerns over housing rose, Bloomberg reported. However, more consumers said they saw jobs as plentiful than at any time in more than five years. The Jobs Are Plentiful component surged to 30.5% from 27.8% in February. Moreover, the present conditions component rose to 137.6, the highest since August 2001, versus 137.1 the prior month. The average price of regular gas rose to $2.58 as of March 25, the highest since last September. The Expectations component of the index fell to 86.9 from 93.8. The overall decline in consumer confidence was mostly a function of the decline in expectations, which isn’t surprising considering the media’s obsession with housing and the general lack of acknowledgment of the many positives in the current macro environment. As well, depressed Northeastern sentiment continues to skew the entire gauge, which is very interesting considering the states with the largest housing drags are not in the northeast. Here is a breakdown by region of the overall confidence readings:

Northeast Central 65.5
New England 90.6
Mid Atlantic 91.5
Northwest Central 105.80
South Atlantic 117.10
Pacific 121.50
Southeast Central 122.20
Southwest Central 130.0
Mountain 142.70

I continue to believe consumer confidence will break above recent cycle highs later this year as stocks continue to rise, housing sales stabilize at relatively high levels, interest rates remain low, inflation decelerates, gas prices fall and the job market remains healthy.

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