DJIA Soaring to Another All-Time High into Final Hour on Positive Earnings Reports

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs, Telecom longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially lower, almost every sector is rising and volume is heavy. Google (GOOG) is rising 3.2% after handily beating its estimates. I am actually shocked the stock isn't up more. Considering the market's modest forward P/E of 15.9, the fact that "growth" stocks are the cheapest relative to "value" in at least 30 years, Google's undervaluation relative to its Internet peers and the company's stellar fundamentals, I view the shares as egregiously undervalued at current levels and expect the stock to easily surpass $600 before year-end. The stock remains my largest long position. Intuitive Surgical (ISRG) also posted an excellent quarter and is surging 8.8%, as a result. I still believe this stock has the potential to be one of the greatest growth stocks over the next 10 years. The relatively few analysts that cover the company continue to significantly underestimate its potential. I remain long ISRG. Short interest on the NYSE surged 4.6%, to nearly 11 billion shares, from mid-March through mid-April, hitting another all-time high, despite the DJIA surging back near a record. Moreover, the last two months have seen NYSE short interest soar 14.6%, the largest two-month percentage increase since Bloomberg began tracking in 1991. The iShares Russell 2000 Index (IWM) is now the most heavily shorted security on the NYSE at over 218.5 million shares. Moreover, I am very surprised by the heavy concentration of new shorting in housing-related stocks, considering how much they are down, how much bad news is already out and how high their short interest already was. I continue to believe the many U.S. stock market bears are exaggerating, in every media outlet possible, the overall impact of housing on the economy in hopes of scaring investors, consumers and the government into a panicked state, thus making the problems worse than would otherwise be the case.

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

1. DCT Industrial Trust (DCT), +44.8%
1. Beazer Homes U.S.A. (BZH), +15.5%
2. Technical Olympic U.S.A. (TOA), +14.5%
3. IndyMac Bancorp (NDE), +13.3%
4. Wendy's (WEN), +13.0%
5. Novastar Financial (NFI), +10.6%
6. Hovnanian (HOV), +10.0%
7. Cal Dive International (DVR), +9.2%
8. Valhi (VHI), +8.9%
9. WR Grace & Co. (GRA), +7.0%
10. Nautilus (NLS), +7.0%
12. KB Home (KBH), +6.9%
13. Meritage Homes (MTH), +6.9%
14. Downey Financial (DSL), +6.9%
15. Alpharma (ALO), +6.6%
16. Impac Mortgage Holdings (IMH), +6.5%
17. Willis Group Holdings (WSH), +6.4%
18. Fremont General Corporation (FMT), +6.2%
19. Under Armour (UA), +5.8%
20. Halliburton (HAL), +5.4%

I expect US stocks to trade mixed-to-higher into the close on stable long-term rates, positive earnings reports, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- The DJIA is hitting another all-time high today as the US stock market continued the best April rally in four years after earnings from some of the biggest industrial and technology companies topped estimates.
- US Treasury Secretary Henry Paulson said today that US subprime mortgage risk will remain contained and that all the signs he looks at lead him to conclude housing is near or at the bottom.
- Hedge funds will be urged to disclose more information about their strategies and the risks they involve, according to a report commissioned by central bankers and finance ministers from the Group of Seven leading industrial nations.
- Foot Locker(FL) made an unsolicited $1.2 billion bid for Genesco Inc.(GCO) to gain the Journeys and Johnston & Murphy footwear chains.
- H&R Block(HRB) said it found a buyer for its money-losing subprime mortgage unit after a six-month search and will sell the business for about 40% less than it sought.
- Church bells tolled in Virginia today as the state remembered victims of America’s deadliest shooting rampage, a crime parents of slain students say has been glorified by news networks airing the gunman’s boasts.
- Uranium prices, which have almost tripled in a year, are “illogical” and caused by investment fund speculation, the head of Kazakhstan’s state-owned producer of the metal said. “The financial speculators did something else yesterday, are trading uranium today and will do something else again tomorrow,” he said.
- New Jersey’s pension system approved $1.15 billion of new investments in hedge funds, buyout firms and real estate funds today.
- Schlumberger Ltd.(SLB), the world’s largest oilfield-services provider, said first-quarter profit rose 63% to a record as oil and gas producers ramped up spending on exploration.
- Corn futures in Chicago fell for a third straight session this week before the onset of warmer, drier weather in the Midwest firms muddy soils for farm machinery and planting of what will be the most acres since 1944.
- Duke Energy(DUK), the fifth largest US utility owner, is seeking proposals for supplies of electricity fueled by sun, wind or other renewable sources to limit pollution as the company adds needed power capacity.
- Libya, Africa’s second-largest crude oil producer, increased its recoverable oil reserves last year by 1 billion barrels, state-owned National Oil Corp. said.
- Crude oil is rising on speculation that tomorrow’s presidential election in Nigeria, Africa’s biggest oil producer, may result in a disruption of shipments.

Wall Street Journal:
- The US United Auto Workers Union is considering buying a majority interest in the Chrysler Group.
- World Bank staff opposition to expense cuts, tighter corporate governance and concern over the possible exposure of corruption are behind much of the campaign to force Bank President Paul Wolfowitz from office, Robert Holland wrote.

NY Times:
- NYC Mayor Bloomberg plans to disclose Sunday his proposals to cut air pollution, ease congestion, improve public transportation and develop industrial sites in the city.
- Law firms such as Schulte Roth & Zabel LLP and Akin Gump Strauss Hauer & Feld LLP are benefiting from more hedge funds becoming activity company shareholders.
- Senate Democratic leader Harry Reid told reporters yesterday that “this war is lost,” an assessment that was seized on by Republicans as a remark that would demoralize and endanger troops fighting in Iraq.
- Former Democratic North Carolina Senator John Edwards, who is running for president, said he reimbursed his campaign for two $400 haircuts by a hair stylists in Beverly Hills, California.

San Francisco Chronicle:
- Lawmakers in the California Senate approved an increase of almost 40% in the number of slot machines at the state’s Indian-run casinos.

Philadelphia Inquirer:
- The Atlantic City Hilton Casino Resort, the smallest casino on the city’s boardwalk, plans to double in size at a cost of more than $1 billion.

Washington Post:
- The US National Rifle Association is working with Congress on legislation that may include barring the mentally ill from buying guns.

Chronicle of Higher Education:
- The National Science Advisory Board said scientists should police themselves before publishing research that might be beneficial to terrorists.

Financial Times:
- Pep Boys(PBY) is in talks with investment banks about exploring its options, which may include a possible sale.

London Times:
- Airbus SAS has cut the price of its A350 airplane by half and is offering other inducements in an effort to compete with Boing’s(BA) successful 787 Dreamliner.

Globe and Mail:
- Ivanhoe Energy Inc., a Vancouver-based oil and gas firm, said it signed a deal with Inpex Corp. of Japan to develop a heavy oil field in north-central Iraq, near Iraqi Kurdistan, citing Ivanhoe Deputy Chairman Leon Daniel.

Reforma:
- Mexico’s government may lower its forecast for economic growth this year because demand for vehicle exports is slowing, citing Deputy Finance Minister Alejandro Werner.

Economic Releases

- None of note

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Friday Watch

Late-Night Headlines
Bloomberg:
- China may raise interest rates twice this year and order banks to set aside more money to slow lending after economic growth accelerated to 11.1% in the first three months of the year, a survey showed.
- President Bush warned of a possible nuclear arms race in the Middle East if the US pulls out of Iraq too quickly and lets Iran, which has an atomic development program, extend its influence.
- Cutting back on salt, a practice known to prevent hypertension, may also stop heart attacks and strokes, a study in the British Medical Journal found.
- China’s construction stocks have become the most expensive in Asia on record spending for roads and bridges, just as the government is taking steps to slow economic growth.
- Merrill Lynch(MER) said its newly acquired First Franklin unit made record numbers of subprime home loans in January and February and added staff, even as a surge in defaults forced rival mortgage lenders into bankruptcy. “We were able to build on our platform, actually hire talented people from competition, as some of our competitors fell away,” Merrill CFO Edwards said. “Our underwriting was up despite efforts to improve underwriting standards of ongoing products and eliminate products we felt were poorly performing.”
- Crude oil may fall further next week on speculation US refiners will increase production of gasoline, suggesting adequate stockpiles to meet demand this summer, according to a Bloomberg survey.
- The US Centers for Disease Control and Prevention expects to have at least 127 million flu vaccinations available this year to help prevent the illness that kills about 36,000 people in the US each season.
- China’s production of non-ferrous metals, including aluminum, copper and zinc, rose in the first three months of this year from the same period a year ago, the National Bureau of Statistics said.

Steelweek:
- Evraz Group SA, Russian’s second-biggest steelmaker, has decided not to bid for Ipsco Inc.(IPS) because a takeover would be too expensive.

Yomiuri:
- The Bank of Japan will lower its estimate for consumer-price inflation for the current fiscal year in a semiannual report on April 27.

Economic Daily News:
- Taiwan Semiconductor Manufacturing(TSM) is considering building a chip factory that may cost about $10 billion.

Late Buy/Sell Recommendations
Citigroup:
- Rated (POZN) Buy, target $28.
- Rated (ZGEN) Sell, target $12.

Business Week:
- Cardiac Science Corp.(CSCX), a maker of automated external defibrillators, is benefiting from demand from areas such as airports, sports arenas and government agencies. The shares could rise 18% in 2007, citing Dalton Chandler of Needham & Co. Jonathan Block of SunTrust Robinson Humphrey says the stock could reach $12 in the next year.

Night Trading
Asian Indices are +.50% to +1.50% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated +.07%.

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Earnings of Note
Company/EPS Estimate
- (BXS)/.38
- (CAT)/1.07
- (HON)/.62
- (JCI)/1.06
- (MAN)/.61
- (MCD)/.61
- (SLB)/.90
- (XRX)/.21

Upcoming Splits
- None of note

Economic Releases
- None of note

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker stocks in the region. I expect US equities to open modestly higher and to build on gains into the afternoon. The Portfolio is 100% net long heading into the day.

DJIA Hits Another Record High after Early Morning Weakness

Indices

S&P 500 1,470.73 -.12%

DJIA 12,808.63 +.04%

NASDAQ 2,505.35 -.21%

Russell 2000 819.32 -.61%

Wilshire 5000 14,827.03 -.21%

Russell 1000 Growth 579.78 -.11%

Russell 1000 Value 848.31 -.21%

Morgan Stanley Consumer 728.65 +.34%

Morgan Stanley Cyclical 986.66 +.05%

Morgan Stanley Technology 580.91 -.34%

Transports 5,165.59 +.06%

Utilities 515.56 -.38%

MSCI Emerging Markets 121.27 -1.13%

Sentiment/Internals

Total Put/Call .92 +16.5%

NYSE Arms .84 -.14%

Volatility(VIX) 12.54 +.97%

ISE Sentiment 124.0 -6.06%

Futures Spot Prices

Crude Oil 61.93 -1.90%

Reformulated Gasoline 208.65 +.15%

Natural Gas 7.49 unch.

Heating Oil 180.58 -.04%

Gold 687.0 -.91%

Base Metals 270.69 -1.18%

Copper 359.70 -.73%

Economy

10-year US Treasury Yield 4.66% +1 basis point

US Dollar 81.62 -.15%

CRB Index 310.38 -.76%

Leading Sectors
Road & Rail +1.67%
Drugs +.87%
Semis +.70%

Lagging Sectors
Airlines -2.15%
Oil Tankers -2.50%
Gold -2.79%

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Afternoon Recommendations
SunTrust Robinson Humphrey:

- Rated (PNRA) Buy, target $65.

Afternoon/Evening Headlines
Bloomberg:
- Merrill Lynch(MER) led a $1 billion financing deal for a new movie company called Summit Entertainment LLC.
- Advanced Micro Devices(AMD) reported a first-quarter loss of $611 million after it cut prices in a bid to keep market share won from Intel Corp.(INTC). The stock is +.30 to $14.55 in after-hours trading.
- Google(GOOG) said first-quarter profit rose 69% as it increased advertising sales worldwide and took more market share from Yahoo! Inc.(YHOO). The stock is $13 higher to $485 in after-hours trading.
- Intuitive Surgical(ISRG), the industry leader in surgical robotics, reported first quarter revenues surged 48% to $114.2 million, beating analysts’ estimates. The stock rose $4 to $125.50 in after-hours trading.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Biotech longs, I-Banking longs and Energy-related shorts. I didn’t trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was above average. Measures of investor anxiety were slightly above average into the close. Today's overall market action was mildly bullish. I say "mildly bullish" due to the fact that there were a number of potential negative catalysts, yet the bears failed to gain any downside traction. Foods, road and rail, insurance, drugs, wireless, telecom, semis, computer hardware and steel all finished higher today. The S&P 500 is 4.3% higher year-to-date and is ahead of where I would have expected at this point in the year. While the bears tried their very best to raise expectations for Google's (GOOG) report tonight, the company delivered once again. Moreover, the stock is the cheapest it has ever been as a publicly traded company by most metrics, which should provide an ample cushion going forward. I plan to add to my core long on any knee-jerk substantial weakness after hours or in the morning, as I would view it as the last chance to get in before a substantial push higher through year-end. I still expect the stock to exceed $600 before the end of the year. The stock is currently +13 from the close, in after-hours trading. The Nikkei is still indicated up 90 on the open tonight in Asia.